4-20-03
by Elena Steier
My husband says I just can't just send out the article about the Air Force attempting to lease airplanes by using an Enron style special purpose entity without some sort of analysis. I told him I thought the article was self evident, then he pointed out that nobody thinks quite like me.
I feel like the entire Bush administration needs a translator. Anyhow, if Rumsfeld okays this arrangement, no doubt it will be followed by many more. The use of the special purpose entity will cost the United State billions of dollars which will be neatly be kept off the books as the leasing costs are listed as "maintenance" and the structure of the arrangement leaves payment to the future. Theoretically, by keeping costs off the books, the United States can cut taxes and cut federal programs, as well as fund unsavory programs, simply by doing an Enron type sleight of hand.
When I was jumping up and down in the kitchen explaining this to my husband, I blurted out "And that's why Thomas White is Secretary of the Army." To which my husband pointed out that this is a proposed Air Force deal.
Theoretically, there's nothing to stop the Army from cooking up similar deals if this particular Air Force deal gets okayed by Rumsfeld. As brigadier general as well as Enron guy, who could have been more perfect for the job when it comes to Army purchases?
There's a curious side to Rumsfeld. I'm glad he's so old, because a younger man with his intelligence and ambition would be our first emperor. He still may be our first emperor. He has a security apparatus which he himself has compared to the FBI and the CIA. DARPA and TIA are under his jurisdiction, after all. He has argued for being the guy in charge of Iraq, and just in general, whenever he sees a chance to add turf to his DoD fiefdom, he makes sure it's turf the size of Iraq, at the very least.
Anyhow, I have a feeling that the blueprint for this administration has been in existence long before any election. I think war with Iraq was part of the blueprint, and I think that fancy special purpose entities to fund military pork barrel and other projects was part of it, too. Unfortunately, Enron collapsed early into the implementation of the plan, just a few months after Enron Energy Services CEO Thomas White had been named Secretary of the Army. This means that when the plan actually made it into the government books, people such as me would look at this thing in shock rather than the awe with which Enron was regarded by business pundits for so many years.
Unfortunately, I don't think the administration has any other economic plan.
I don't know why ordinary conservatives would support Bush. When he's done with this country, it's going to be a shell, a third world country. I read this article and I imagined a pair of Boeing vampire fangs lodged in poor Uncle Sam's jugular. And on his legs...Bechtel fangs...and on his elbows, Halliburton fangs...and on his chest, HCA fangs...Moreover, it made me nostalgic for old fashioned pork barrel, which may not have been helpful to the federal budget, but it kept locals happy, and it was on the books.
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http://nytimes.com/2003/04/20/business/yourmoney/20TANK.html
April 20, 2003
Creative Deal or Highflying Pork?
By LESLIE WAYNE
HOUGH Iraq is preoccupying Defense Secretary Donald H. Rumsfeld, he faces some crucial decisions on the next Pentagon budget, among them an extraordinary aircraft-leasing proposal pushed by the Boeing Company, the ailing aircraft maker.
The plan — in which Boeing and the Air Force propose to employ the kind of off-the-books financing made infamous by the Enron scandal — could provide Boeing up to $30 billion in fresh military contracts.
The proposal would lease 100 planes — Boeing 767 airborne refueling tankers — to the Air Force. To critics, it is a perfect example not only of creative accounting but also of the political pork that has crept into government spending since the terrorist attacks of Sept. 11, 2001.
Senator John McCain, Republican of Arizona and an influential member of the Senate Armed Services Committee, has called the Boeing proposal "cockamamie" and has vowed "to do everything I can to see the taxpayers of America are protected from this military-industrial rip-off."
But what is a rip-off to Senator McCain, who has thrown one roadblock after another in front of the proposal, is portrayed by Boeing and the Air Force as a cost-effective way to provide a new link in the military supply chain as the Air Force begins to face the issue of replacing aging air refueling tankers. Some of the tankers date back to the Eisenhower administration, and many are now in use refueling Air Force military jets over Iraq and Afghanistan.
"New tankers are a critical need," said Marvin R. Sambur, assistant secretary of the Air Force for acquisitions. "But we don't have that money to put out front." The lease proposal, he said, "gives us the ability to leverage the total amount of money the Air Force has. It's a super lease deal."
But studies from the General Accounting Office, the Office of Management and Budget and the Congressional Budget Office, some ordered by Senator McCain, conclude that the Boeing-Air Force lease option is more costly than buying the planes outright. The studies also say the lease plan is far more expensive than simply overhauling the existing tanker fleet, an option the Air Force calls unrealistic, given the fleet's age.
Now Mr. Rumsfeld must choose between the two sides. At a news conference last month, he declined to tip his hand as the Pentagon budget begins to move through Congress. He said that the issue was complex and that he had asked for more information. "And it's something that I guess I'll decide when I decide," he said. "But I don't need to set arbitrary deadlines as to when that might be."
MANY people in Washington wonder if this deal would fit with Mr. Rumsfeld's notion of a "transformational" Pentagon budget, in which new ways of doing business are welcome, or whether the deal might go the way of the Crusader, an $11 billion Army artillery system that Mr. Rumsfeld killed last May despite heavy lobbying on its behalf.
"Mr. Rumsfeld has said he favors innovative market-based approaches," said Loren B. Thompson, a military analyst at the Lexington Institute, a nonprofit group in Washington. "He's been briefed repeatedly on this and still has not come to a conclusion."
By any calculation, the Boeing plan — which will die if Mr. Rumsfeld rejects it and will go to Congress if he approves it — is far different from the way the Pentagon normally does business. For starters, there are hardly any examples of Pentagon leasing of major military equipment; typically, the Air Force and all branches of the military buy and own their hardware outright.
The Boeing-Air Force plan to finance the tankers has an Enron-style twist. A special-purpose entity, to be set up by a Wall Street firm, would own the planes and lease them to the Air Force for six years. The new entity would finance the deal by selling bonds backed by the Air Force lease payments.
At the end of the lease, the Air Force would have the option of buying the aircraft at a prenegotiated price, pending Congressional approval. If not, the special-purpose entity would still own the planes.
Citigroup Global Markets, which is developing the plan, declined to comment on any aspect of the deal, including potential buyers of the new entity's debt.
Whether Congress views this as accounting gimmickry or smart financing remains to be seen. But the tarnished reputation of special-purpose entities can hardly help Boeing and the Air Force on the Hill.
"It's an image issue," said Christopher H. Mecray, a military industry analyst at Deutsche Bank Securities. "When you talk about special-purpose entities, that's difficult to avoid. This decision is politically driven, and at the moment there seems to be intense but narrow opposition in Congress."
Boeing is structuring the deal as a special-purpose entity to keep it off the books of both Boeing and the government. For the Air Force, the deal is a way to acquire the planes seemingly on the cheap — in much the same way a person might lease a car for $200 a month rather than pay $20,000 for it up front.
This way, the 100 air tankers, with a price of up to $120 million each if bought new, are not included in the Air Force's procurement budget, where they would have to compete for limited funds with multibillion-dollar Air Force pet projects like the F/A-22 fighter jet and the C-17 transport carrier. The annual tanker lease payments would come from the Air Force's operations and maintenance budget, which has traditionally paid for continuing costs and not military hardware.
For Boeing, which is happy to receive aircraft orders in the face of a global slump in the airline industry, the special-purpose entity is a way to keep the debt associated with the tanker leases off its balance sheet and thereby preserve its credit rating. Moreover, the tanker deal would keep alive the company's 767 production line, which has only a small backlog of orders and could face closure without the deal.
"Special-purpose entities are not common in government," said Steven L. Schwarcz, a law professor at Duke University and an expert in off-balance-sheet partnerships. "I can't think of any government unit using one."
ONCE the Air Force orders the tankers — basically passenger 767 airplanes reconfigured to transport jet fuel — Boeing expects that the military of other countries might follow suit. Its own Web site estimates the global 767 tanker market at $100 billion, and Japan, Italy and Britain have already expressed interest.
"This is a great piece of business for Boeing," said Cai von Rumohr, an analyst for SG Cowen Securities. "It's strategically important for the company, and there is a fairly good argument for replacing the old tankers. But Congress doesn't like open-ended deals like this. It makes for more of a hidden cost. And, as a policy matter, it sets an important precedent. If we are going to lease tankers, why not fighter jets?"
Boeing is not talking about the deal, other than issuing a statement saying the tankers are an "essential asset" for fighting wars and provide "fair value to the American taxpayer." Still, with an annual lobbying budget of $8 million and nearly two scores of lobbyists on its payroll, Boeing can remain in the background and still gain Congressional support. One of the biggest proponents is Representative Norm Dicks, Democrat of Washington, who has been pressing the Boeing case in Congress and even at the White House. Boeing's main production facility is in his state.
"I had a meeting with the president on another matter and I raised this issue to impress on him the need to get it done," Mr. Dicks said in an interview. "He said, `I support it' and turned to Andy Card and said, `Andy, you get it done.' " Andrew H. Card Jr. is the White House chief of staff.
Whether Mr. Bush carries through remains to be seen, but Mr. Dicks says he is continuing his fight, adding, "This is one of the most difficult things I've seen."
Additional help comes from Boeing's unions, among them the International Federation of Professional and Technical Engineers, with 22,000 members. Matthew Biggs, legislative director of the union, has been papering members of Congress with letters and sending rank-and-file members to lobby on Capitol Hill. Union officials have also met with Pentagon leaders.
"We've been encouraging everyone we know to weigh in with Rumsfeld with their support," said Mr. Biggs, who has also written to him. "Before, we were pretty satisfied that this would just roll through. But now, the ball is in Rumsfeld's court."
ON the other side are a number of government watchdog groups, Senator McCain and a paper trail of government studies questioning both the costs of the lease as well as the need for new tankers in general. Opponents say that if the tankers were so important to the Air Force, they should have been included either in the Air Force's procurement budget or in the lists of Air Force priorities that do not make it into the Pentagon's budget request but are later presented to Congress.
"It's an expensive unnecessity," said Thomas A. Schatz, president of Citizens Against Government Waste, a Washington nonprofit group. "There are a lot of military and financial reasons not to go ahead with the deal. But Boeing and the Air Force see an opportunity here since Congress is predisposed to give more to the military."
A report by the General Accounting Office estimated that the cost of the lease would be $26 billion to $30 billion and concluded that a long-term lease of these tankers would be "significantly" more expensive than a direct purchase of them. Moreover, the G.A.O. said that while the existing fleet of 545 KC-135 air tankers is old, their hours of use are relatively low: some planes fly as little as 200 or 300 hours a year.
According to the G.A.O., the quickest and cheapest way to upgrade the Air Force tanker fleet is to modernize existing tankers, which would cost the government only about $3.2 billion. Moreover, the Boeing proposal would leave the Air Force with a smaller tanker fleet over all because the leased tankers would have to be returned after six years.
In a letter to Senator McCain, the Office of Management and Budget also criticized the lease option, calculating that leasing the 767's and then, as currently planned, reconverting them to commercial use at the end of the lease would ultimately cost $26 billion, compared with $18 billion if the airplanes were bought outright. The higher overall lease costs arise from higher borrowing costs under the lease, according to the office.
In addition, the office pointed out that because the 767's have less capacity than the existing KC-135's, the Air Force's air-fueling abilities would decline with every replacement of an older plane with a 767.
While such reports have led Senator McCain to call the deal a "Boeing bailout," the Air Force is working hard to show that the new tankers are needed. The Air Force says its own calculations show that it would be cheaper to lease the tankers than buy them — by up to $800 million, according to Mr. Sambur, the Air Force assistant secretary. While he declined to specify the Air Force estimate of the overall lease costs, he said leasing would allow the Air Force to get more replacement planes more quickly than if it had to buy them one by one.
Moreover, Mr. Sambur dismissed the notion that the old KC-135's could be overhauled. He said the planes' wings, in particular, have been showing signs of serious corrosion, even if their air hours remain relatively low.
"This is just not a viable option," Mr. Sambur said of the overhaul proposals. Still, he knows that if the Air Force wants the lease deal, it has to convince Mr. Rumsfeld, who has ordered up his own cost analysis.
"We have confidence in the office of the secretary of defense," said Mr. Sambur. "Mr. Rumsfeld is a good businessman and he has a lot of expertise to put his own views on it. We've been involved in a good debate with his office. We're all focused on getting a good deal."
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