The Pentagon’s $1 Trillion Problem

by Scot Paltrow May 2008

The Defense Department has spent billions to fix its antiquated financial systems.
So why does the Pentagon still have no idea where its money goes?
On a winter afternoon in Indianapolis, Jessica Hilligoss, a young Defense Department worker, types long strings of numbers and letters into a computer, helping the United States armed forces transfer the billions of dollars it draws each week from the Federal Reserve to contractors, vendors, and military and civilian personnel.Her job is to review invoices for everything from construction projects to lawnmowing, and to approve payment. Within a few days, another computer system—behind locked doors in the building’s basement—deposits the money in the recipients’ bank accounts.

The size of nearly 28 football fields, with a facade of alternating red stucco and white cement tiles, the three-story operations center is the federal government’s third-largest office building, after the Pentagon and the Ronald Reagan Building, and the place where a big chunk of the Iraq war’s soaring price is paid. The center doles out more than $104 billion annually, making it Defense’s largest disburser.

Theoretically, when Hilligoss authorizes a payment, the department should be able to instantly track where the money goes and which program it was spent on, in order to make sure the right amounts are paid to the right recipients at the right times. But it doesn’t work that way.

Since 2004, the Pentagon has spent roughly $16 billion annually to maintain and modernize the military’s business systems, but most are as unreliable as ever—even as the surge in defense spending is creating more room for error. The basic defense budget for 2007 was $439.3 billion, up 48 percent from 2001, excluding the vast additional sums appropriated for the wars in Iraq and Afghanistan. According to federal regulators and current and former Pentagon officials, the accounting process is so obsolete and error prone that it’s virtually impossible to tell where much of this money ends up. While the department’s brass has made a few patchwork improvements, billions are still unaccounted for. The problem is so deeply rooted that, 18 years after Congress required major federal agencies to be audited, the Pentagon still can’t be. (Read a chronology of efforts to modernize the military’s financial systems.)

For the first three quarters of 2007, $1.1 trillion in Army accounting entries hadn’t been properly reviewed and substantiated, according to the Department of Defense’s inspector general. In 2006, $258.2 billion of recorded withdrawals and payments from the Army’s main account were unsupported. It’s as if the Army had submitted multibillion-dollar expense reports without any receipts.

Preoccupied with protecting their turf, the Army, Navy, Air Force, and Marines continue to maintain separate, increasingly outdated systems that can’t talk to each other, trace disbursements, or detect overbilling by contractors. At the Indianapolis facility, as at the Defense Department’s four other main U.S. centers for financial operations, accounting programs under the same roof can’t share information without extensive jury-rigging, as though contracts, payments, and accounting had nothing to do with one another.

“In the Defense Department, what you have now are material weaknesses that are in every single area, in every part of the department, so deep and so wide you do not really have any way of figuring out where money is being spent,” says Linda Bilmes, a federal budget expert at Harvard’s Kennedy School of Government.Every year, the Pentagon tries to justify its budget request to Congress by submitting three years of financial data: “actual” performance for the past fiscal year plus projections for the current year and the next. But because of the lack of reliable accounting, these totals are largely fictional. That, in turn, raises major questions about whether the government will be able to meet skyrocketing commitments for future spending on ships, planes, and high-tech ground weapons, especially given the expected growth in spending on Social Security and Medicare, and the impact of tax cuts.

According to David Walker, who recently left his post as head of the Government Accountability Office, the failure of the Pentagon’s outdated and incompatible systems to keep tabs on expenditures—even as the wars in Iraq and Afghanistan eat up an ever-bigger chunk of the federal budget—puts several Defense Department agencies high on the G.A.O.’s list of federal programs that are mismanaged and prone to fraud, waste, and abuse.

John Evans, a retired Pentagon official who oversaw more than half of the defense budget, says that all this just encourages the military branches to conceal spending. “If you want to know how much one of the services is paying, you have to ask them,” he says. “They say, ‘Why do you want to know?'” When Evans did a formal review to see if spending was on track, he says “it was like a C.S.I. crime drama to find out where the services spent money and where they squirreled it away.”

To enter the Indianapolis center is to pass through a time warp, to a place where the most critical software programs date from the dawn of the computer age. They run on old-style I.B.M. mainframes and rely on Cobol, the ancient Sumerian of computer languages. “This was a bunch of systems patched together,” says Greg Bitz, a former director of the center. “I never went home at night without worrying about one of them crashing.” Bitz predicts a crisis as older programmers retire. “Try to find somebody today who knows Cobol,” he says.

Hilligoss and other clerks sit in long rows of identical cubicles and enter endless sequences of numbers and letters by hand. The strings signify contract terms, identifying information, due dates, and accounting and appropriations codes. Even if the workers input all the information accurately, they can’t prevent mistakes and miscommunications down the line. Indeed, the moment they authorize payment, triggering the transfer of money, any ability to reliably trace it disappears.

Since the scandal in 1985, which revealed that the Navy paid Lockheed $640 each for airplane toilet seats, Congress, military leaders, and regulators have agreed that the Defense Department’s internal accounting system is in shambles. What’s startling is the scope of the problem and the government’s seeming inability to fix it. Over the past two decades, the Pentagon has repeatedly tried to design new computer systems to replace the antiquated ones. Even today, new incompatible financial systems continue to proliferate within the services, contrary to directives from the secretary of Defense’s office.

In a September 10, 2001, speech, Secretary of Defense Donald Rumsfeld pressed for a top-to-bottom overhaul of Pentagon financial systems, which he later estimated would save the department as much as $25 billion a year. “It is not, in the end, about business practices, nor is the goal to improve figures on the bottom line. It’s really about the security of the United States of America,” Rumsfeld said, arguing that waste, mismanagement, and overspending on bureaucracy were taking resources away from weapons and troops.

The next day’s terrorist attacks diverted his attention. Although the Pentagon took some initiative, including paying I.B.M.$250 million to help streamline business processes, it wasn’t until 2005 that the Defense Department launched another major financial reform, and that one was just as problematic as its predecessors. Since 9/11, weaknesses in Pentagon financial systems have become more glaring as defense spending has climbed to record highs, with a request for $481.4 billion pending for 2008. In addition, the White House pushed through emergency defense appropriations—supplemental funds that don’t undergo the usual congressional review—totaling $287.2 billion in 2006 and 2007.The Indianapolis center and other back offices are supposed to comply with a congressional mandate to track how much of each year’s emergency appropriations are spent on the Bush administration’s declared global war on terrorism. But a former senior official from the Indianapolis center, who requested anonymity, says that its outmoded systems can’t be tweaked to produce such data. Instead, it’s done offline by workers combing through computer data and pulling out what they think should be attributed to the war on terrorism. Their guesswork, the source says, is probably way off.

The dysfunction stems in part from the traditional independence of the military branches. Over several decades, they have cobbled together separate processes for identical functions, resulting in the uncontrolled growth of more than 4,000 accounting, financial, and inventory systems. Their names form an acronym soup: CAPS, Stanfins, IAPS, Somards, Samms, Mocas, HQARS, Stars. The department’s primary system for handling weapons contracts and payments dates from 1958; a costly attempt to replace it was abandoned in 2002 as a failure. The Army’s notoriously inaccurate main accounting system was created in 1966.

In 1990, Congress enacted legislation requiring all federal agencies to pass independent audits. Every year, the Defense inspector general dispatched dozens of auditors to the military’s financial and accounting centers. Every year, they reported back that the job couldn’t be done. Defense Department records were in such disarray and were so lacking in documentation that any attempt would be futile. In 2000, the inspector general told Congress that his auditors stopped counting after finding $2.3 trillion in unsupported entries made to force financial data to agree.

In 2002, Congress relented. Until the Pentagon can get its records in order, no comprehensive audit is required. Instead, the department writes each year to the inspector general certifying that “material amounts” in its financial reports can’t be substantiated.

That it can’t be audited “goes to the heart of the department’s credibility,” says Dov Zakheim, who was Defense Department chief financial officer and comptroller under Rumsfeld. “Nobody would trust even a half-million-dollar enterprise if its books weren’t clean.”

The Pentagon has repeatedly assured Congress that it is working toward an audit. Yet the projected date continues to slip further away. In 1995, Pentagon officials testified that it could be audited by 2000. In 2006, an audit wasn’t envisioned until 2016.

Without an audit, anecdotal evidence suggests, contractor fraud is likely to go undetected for years. Two South Carolina sisters who supplied small parts to the military bilked it of more than $20 million by charging wildly inflated shipping costs for low-priced items, like $998,798 for shipping two 19-cent washers to an Army base in Texas. The scheme lasted six years before they were caught in 2006.

Since 2005, the Pentagon has been carrying out what it says is the most comprehensive reform ever. Undersecretary of Defense Tina Jonas, who is now the comptroller and chief financial officer, is heading up an elaborate effort—once again—to develop compatible systems to share information seamlessly. A 2007 department report foresees the Pentagon becoming “as nimble, adaptive, flexible, and accountable as any organization in the world.”Unfortunately, flawed planning and internal resistance have hampered the current reform effort. Far from being nimble, the bureaucracy set up by Jonas and her staff seems nearly as convoluted as the financial systems that it’s supposed to streamline. Beginning at the top, there is the Defense Business Systems Management Committee, which oversees a committee of principal staff assistants, and under that, the Business Transformation Agency, which is made up of eight separate directorates.

Early initiatives have done little to inspire confidence. For example, the Army is introducing an overall accounting system for its general fund that is expected to be fully operational in 2011. “By all the measures one can usually rely on to predict success, this one is doing fine,” the Army’s acting undersecretary, Nelson Ford, said in a November interview. Just weeks later, though, the Defense inspector general found that the new system was “at high risk for incurring schedule delays, exceeding planned costs, and not meeting program objectives.”

Overburdened by wars in Iraq and Afghanistan, the individual services remain reluctant to commit staff members and money to Jonas’ financial-reform effort. The Navy stymied Jonas’ plan to create a single Defense Department system for military pay. While the Army is already converting to this common pay process, Navy Secretary Donald Winter says the new system doesn’t meet his service’s particular needs. The Navy will eventually adopt it, he says, but only after it has been thoroughly tested and debugged. At the same time, the Army and the Defense Logistics Agency—a separate branch of the Pentagon—are each going ahead with costly new systems for tracking billions of dollars’ worth of supplies and replacement parts from purchase to their ultimate delivery to military units, even though government auditors say neither one yields reliable data. Together, the two systems cost about $2 billion.

Jonas says that her approach is working and that eight small Pentagon branches, like the Army Corps of Engineers, have now passed audits. “I think we’re making good progress,” she says.

Nevertheless, the four military services still can’t be audited, and Jonas declines to predict when the entire Defense Department will finally pass an audit. “We don’t know what we don’t know,” she says.




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