Pentagon seeks payback for jet, then backs down

WASHINGTON — WASHINGTON -- Barely a month after Defense Secretary Dick Cheney stunned the defense industry by canceling the troubled A-12 stealth attack plane, the Navy asked the builders to return $1.35 billion in excess payments that Pentagon auditors said shouldn't have been made.

When the companies balked and asked for a delay, both the Navy and Defense Department immediately acquiesced, saying the companies would not have to pay back a cent for almost two years, if not longer.


All of this occurred on Feb. 5, according to documents obtained by The Sun.

For several weeks, congressional and federal investigators have been delving into this little-publicized financial deal, which some believe was carefully orchestrated to soften the blow to the two firms responsible for the largest weapons program ever terminated by the Pentagon. Some investigators suspect that there was little, if any, analysis of company finances before the deal was closed.


Two congressional committees plan to hold public hearings on the agreement this week, and the General Accounting Office is expected to weigh in soon with a report and legal opinion.

The U.S. attorney in St. Louis already has a criminal probe under way into the excess payments that the Navy made to the companies -- McDonnell Douglas Corp. and General Dynamics Corp. -- for uncompleted work on the project.

Inquiries by the Defense Criminal Investigative Service and the Naval Investigative Service are also in progress, and the Securities and Exchange Commission has been reviewing the firms' accounting procedures and reported financial losses, Pentagon documents show.

"Taxpayers have been an unwilling lender," complained Representative John Conyers Jr., D-Mich., chairman of the House Committee on Government Operations. "We are talking about $1.35 billion in taxpayers' money that was given to McDonnell Douglas and General Dynamics for a plane that was never built."

Mr. Conyers, whose panel wants to quiz Navy and corporate financial officers at a hearing on Thursday, described the payments as the biggest direct corporate "bailout" in U.S. history. Compared to the controversial $1.5 billion federal loan guarantee obtained by the Chrysler Corp. in 1980, the aircraft manufacturers already have received "real, green money" without congressional approval, he said.

Representative Andy Ireland, R-Fla., one of the House Armed Services Committee's most vocal critics of Pentagon mismanagement, said considerable investigative work still needs to be done to discover "the full story of the A-12 debacle."

"That story must come out if we are to learn from these mistakes," he said.

His request to the Pentagon inspector general's office in June for a review of irregularities in the A-12 program helped set off a chain of events that included the firing and transfer of two admirals, the reprimand of the program manager and resignation of the Pentagon's procurement czar in December and Mr. Cheney's decision on Jan. 7 to cancel the $57 billion project.


Mr. Cheney accused McDonnell Douglas and General Dynamics of defaulting on a $4.8 billion full-scale development contract by failing to "design, develop, fabricate, assemble and test the A-12 aircraft within the contract schedule." Both St. Louis-based firms have denied being in default and have challenged the cancellation in court.

The A-12 Avenger, a radar-eluding replacement for the Navy's main carrier-based attack jet, the 30-year-old A-6 Intruder, was at least 18 months behind schedule and more than $2.7 billion over cost, defense officials said. Under the contract, awarded by the Navy in 1988, the firms were obligated to deliver eight planes for flight testing, beginning in June 1990.

As of January, not a single plane had been assembled.

Mr. Cheney reviewed the A-12 program last spring and trimmed the Navy's original order from 858 planes to 620. Although he told Congress last April that procurement costs would be pared from $74.3 billion to $57 billion, Mr. Cheney was embarrassed to learn weeks later that he had been misled about the aircraft's cost, schedule and technical problems.

By the end of the year, the price tag for each plane had ballooned to over $100 million, with total procurement costs approaching $92.7 billion, the Pentagon and GAO said.

Had he kept the project alive -- which the firms and the rest of the defense industry had expected -- aircraft development alone would have cost taxpayers as much as $17 billion, or more than three times the original price of the contract, a Pentagon cost analysis shows.


But Mr. Cheney declared a "termination by default," making the contractors liable for all the expenses for which the government received no goods or services. Pentagon auditors found last fall that the Navy had overpaid the firms for work performed during the course of the contract and urged officials to recover the money with accrued interest.

The overpayments were made during routine "progress payments" that were awarded to the contractors, ostensibly for completing different stages of A-12 development, two Defense Contract Audit Agency reports said. Pentagon Inspector General Susan J. Crawford said the auditors found that the firms %J received money for substantially unfinished work; she referred the matter to federal prosecutors.

On Feb. 5, a Navy contracting official wrote the companies to demand the return of $1.35 billion, but the firms exercised a legal option toseek a delay. Responding in writing the same day, the firms said the Pentagon was well aware that "repayment at this time is not practical . . . [because] such repayment would impair their continuing operations and more particularly those operations under national defense contracts."

Senior defense officials promptly approved the request, and Assistant Navy Secretary Robert McCormack signed an agreement to hold off collecting the money until all disputes with the A-12 contractors are resolved. The deferral would be reviewed in December 1992, but lawmakers and investigators doubt that the Pentagon will resolve all the legal issues surrounding the A-12 contract by that time.

"By giving the contractors a 'breathing space' until the contract is settled in court, the [defense] secretary has actually created a disincentive to settle," Mr. Conyers said. "If the contract cancellation is resolved, the contractors will have to pay the money back.

"This deferment is indicative of the troubled marriage between the Pentagon and its weapons builders, and promises yet another round of protracted court battles, stalling and lack of accountability," he said.


A Defense Department statement in February explained that the deferral was necessary "to avoid placing the contractors in a financial condition that would endanger essential defense programs."

Deputy Defense Secretary Donald J. Atwood added that the demand for immediate payment could drive the contractors into bankruptcy. "This is not a bailout," he said, emphasizing that the Pentagon had not released the firms from the obligation to pay back $1.35 billion plus interest.

Last week, spokesmen for McDonnell Douglas and General Dynamics said that the firms did not believe they owed any money, arguing that the A-12 contract was ended for the "convenience" of the Pentagon. This claim, if upheld by the courts, would legally require the government to absorb all project costs.

As a direct result of the A-12 cancellation, McDonnell Douglas laid off 5,000 workers and General Dynamics released 4,000 from its plant in Fort Worth, Texas.

General Dynamics told stockholders last week that it could face about $500 million more in pretax losses if found in default on the A-12, on top of the $700 million loss on the A-12 posted during 1990. McDonnell Douglas has already reported a $350 million loss on the program, saying it could face up to $850 million in additional losses.