WASHINGTON -- The contractors for the recently canceled A-12 Stealth attack plane were experiencing cash shortages and financial losses on several military contracts when the Navy overpaid them last year for their work on the aircraft project, the Pentagon's procurement director told Congress yesterday.
Although the reason for the excess Navy payments remains under investigation, the official acknowledged that the Defense Department wants to keep the contractors solvent, even if it means backing off demands for the return of $1.35 billion in federal funds, or permitting them to bid on the next Navy attack plane contract.
The firms are McDonnell Douglas Corp. -- the nation's largest defense contractor for the past four years -- and General Dynamics Corp., which ranks second among companies doing business with the Pentagon.
Their work on the Navy's A-12 program led to multibillion-dollar cost overruns and schedule delays, prompting Defense Secretary Dick Cheney on Jan. 7 to cancel the $57 billion project and to declare the firms in default of a $4.8 billion development contract.
At a hearing of the House Government Operations national security subcommittee, Eleanor R. Spector, the procurement director, defended a Feb. 5 decision to postpone collecting $1.35 billion Pentagon auditors say the Navy overpaid the aircraft manufacturers for uncompleted work on the A-12. That amount does not include about $10 million a month in interest that began to accrue last month, according to other officials.
Members of the panel, led by the chairman, Representative John Conyers Jr., D-Mich., accused the Pentagon of handing the contractors a generous loan with lenient repayment terms -- a form of financial aid they said was often denied to farmers and small businesses. "The taxpayers do not want to pay taxes to loan over $1 billion to the largest two defense contractors in the world," Mr. Conyers said.
"The issue here was to create an environment where they could continue to get military contracts" and remain active in the commercial market, Mrs. Spector said. "I'm convinced one or more of these contractors would have filed for bankruptcy" if they were forced now to pay back the money, she said.
Audits and Pentagon documents show that the Navy's excess payments extended at least through July 23, 1990. The circumstances surrounding the payments are being examined by the U.S. Attorney's Office in St. Louis, where both firms are based; by the Defense Criminal Investigative Service; and by the Naval Investigative Service, documents show.
Mrs. Spector and Rear Adm. William R. Morris, a Navy contracting officer, said that the firms approached the Navy within days of the A-12 cancellation to dispute claims that they owed any money, but that if they did, they were unable to pay it back. The Navy's formal demand for the money, a protest letter and the joint agreement to defer collection were all exchanged on the same day to protect the firms from losing their lines of credit, they said.
They acknowledged that they prepared nothing in writing to analyze the corporate finances and urge other senior officials to endorse deferral of the $1.35 billion repayment. Mrs. Spector said she gave two oral briefings with slides containing a wide range of detailed, proprietary financial data from both companies, and Admiral Morris said he simply made an oral recommendation to his superiors.
Both Republican and Democratic lawmakers erupted angrily during the hearing, saying the Pentagon went to extraordinary lengths to "bail out" big corporations.
"You put your arm around them and said, 'Sure, you have a problem, but we'll make it easier for you,' " said Representative Frank Horton of New York, the ranking Republican. "You should have played a lot more hard-nosed with these people."
"Maybe we're down to the point where no matter how bad you screw up, Uncle Sam will help you," Representative Glenn English, D-Okla., told Mrs. Spector. "Is there a policy to keep them [defense contractors] afloat? We can't let them go broke?"
"That might be a consideration on a case-by-case basis," she replied.