[Congressional Record Volume 143, Number 146 (Monday, October 27, 1997)]
[Senate]
[Pages S11215-S11217]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                            MORNING BUSINESS

  The PRESIDING OFFICER. Under the previous order, there will now be a 
period for the transaction of morning

[[Page S11216]]

business for not to exceed beyond the hour of 1:30 p.m., with Senators 
permitted to speak therein for up to 10 minutes each.
  Mr. GRASSLEY addressed the Chair.
  The PRESIDING OFFICER. The Senator from Iowa.
                               F_________
                               

      THE DEPARTMENT OF DEFENSE'S ILLEGAL PROGRESS PAYMENT POLICY

  Mr. GRASSLEY. Mr. President, I would like to speak about the 
Department of Defense's illegal progress payment policy.
  I have spoken on this policy a number of times since the beginning of 
the year. Well, I thought we had finally laid the issue to rest. But 
how wrong I was. On July 22, DOD made a commitment to bring that policy 
into compliance with the law.
  The commitment was made by the nominee to be Deputy Secretary of 
Defense, Mr. John Hamre. At the time, he was the department's chief 
financial officer or CFO. He is now the Deputy Secretary of Defense.
  Mr. Hamre made the commitment in front of the leaders of the Armed 
Services Committee: Senator Strom Thurmond, chairman of the Armed 
Services Committee; Senator Carl Levin, ranking minority member of the 
committee; and The committee's ranking Republican, my friend from 
Virginia, Senator Warner; and the Senator from Iowa was also present.
  Mr. Hamre promised to put the new policy into effect on October 1, 
1997. But October 1 has come and gone. As of this moment, the illegal 
policy is still in operation. For over 6 years now, the inspector 
general; the IG, has been telling DOD to fix the policy. And DOD has 
repeatedly promised to fix it. Unfortunately, Mr. President, these were 
empty promises. They are broken promises.
  Mr. President, John Hamre gave me his word he would fix it this time. 
A man's word is like gold. You should be able to take it to the bank. 
He proposed to bring the policy into compliance with the law. And he 
did it in front of the leadership of the Armed Services Committee. I 
expect him to keep his word. And the IG is involved, as well. The IG 
made a commitment to verify compliance. And DOD is not in compliance. 
This is a bad situation. The basic agreement is outlined in the IG's 
letter of July 23. I placed a copy of that letter in the Record on July 
24. It can be found on page S8110.
  The July agreement started to unravel barely 1 month after being put 
together. It unraveled because of complaints from industry--mainly a 
group called the Council of Defense and Space Industry Associations--
that is CODSIA.
  The group sent a letter to DOD on August 27. Mr. President, I ask 
unanimous consent to have a copy of this letter printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                      Council of Defense and Space


                                        Industry Associations,

                                  Washington, DC, August 27, 1997.
     Hon. Alice C. Maroni,
     Acting Under Secretary of Defense (Comptroller), Pentagon, 
         Washington, DC.

     Mrs. Eleanor R. Spector,
     Director of Defense Procurement,
     Pentagon, Washington, DC.

     Mr. Gary W. Amlin,
     Acting Director, Defense Finance and Accounting Service, 
         Arlington, VA.
       Dear Mrs. Maroni, Mrs. Spector, and Mr. Amlin: The 
     undersigned members of the Council of Defense and Space 
     Industry Associations (CODSIA) are very concerned with DoD's 
     decision to implement the requirement to distribute contract 
     financing payments starting October 1, 1997, without allowing 
     final action on DFARS Case 97-D011 and without determining 
     the impact of such a decision on DoD and industry. This 
     change will increase significantly the administrative 
     workload and cost for all parties involved in the payment 
     process.
       The cost impact of this decision on industry is extremely 
     onerous. It will require major changes to accounting and 
     billing systems and to electronic commerce systems to meet 
     the new requirements. We estimate that the additional 
     staffing and administrative effort necessary to ensure 
     compliance with the required distribution in the billing 
     process will cost the industry about $1.3 billion in FY98.
       The $1.3 billion estimate does not include (1) the impact 
     on any contracts not paid from DFAS Columbus, (2) actual cost 
     accumulation by ACRN or CLIN/SLIN, (3) any additional 
     subcontractor cost, (4) progress payments on basic ordering 
     agreements, (5) the cost of breaking down contracts below the 
     ACRN level, (6) new billing system audits, and (7) higher 
     prices resulting from delayed payments.
       The October 1 implementation date does now allow time to 
     comply with the requirements of both the Regulatory 
     Flexibility Act and the Paperwork Reduction Act. The 
     statement in the proposed rule that it pertains primarily to 
     internal Government accounting procedures ignores the impact 
     of the rule on industry. It is our opinion that a regulatory 
     flexibility analysis is required and that industry should 
     have an opportunity to participate in that analysis. As to 
     the paperwork burden, the proposed rule will result in 
     significant new information collection requirements in order 
     for contractors to be paid. The statement that the proposed 
     rule will not impose any information collection requirements 
     that OMB must approve is inaccurate.
       Industry is not prepared to implement progress payments 
     distributions on October 1, 1997, and we believe that DFAS 
     will have great difficulty in doing so. Therefore, we urge 
     you to delay the implementation to allow time for a thorough 
     analysis of the impact of this decision.
       Whatever decision is made on implementation, the new 
     requirement should not apply to existing contracts. 
     Furthermore, if this decision is implemented, the progress 
     payment rate should be increased to eighty-five (85) percent 
     to compensate for slower payments.
       If the implementation date cannot be delayed, we urge the 
     following steps to reduce the administrative cost and 
     disruption of the progress payment process.
       Do not make progress payment distributions retroactive. The 
     decision to implement progress payment distributions on 
     existing contracts with five or less progress payments as of 
     October 1, 1997, will result in claims for equitable 
     adjustment. This applies to contracts that have been awarded 
     as well as to prospective contracts that are currently in a 
     solicitation or negotiation phase.
       Require DoD to simplify contracts to one ACRN by not using 
     multiple appropriations per contract and not assigning 
     multiple ACRNs per appropriation. This is the only way DoD 
     can comply with this requirement without creating a 
     significant problem for industry and DFAS.
       Distribute progress payments by ACRN rather than CLIN/SLIN.
       Continue the current DFAS procedure of reallocating payment 
     by ACRN when there are not enough funds in an ACRN to make 
     the payment.
       Take steps as detailed in Enclosure I to reduce 
     administrative effort.
       Further details of industry's concerns and an analysis of 
     the cost impact are contained in Enclosures I and II to this 
     letter.
       DFAS has made significant progress in making timely 
     payments on both progress payment and delivery invoices. The 
     implementation of progress payment distributions would be a 
     major setback for DFAS, and a setback for acquisition reform 
     and payment efficiency. We would be pleased to discuss this 
     matter with you. For further information, please contact Dave 
     Koonce of the Lockheed Martin Corporation at (301) 897-6657.
           Sincerely,
         Don Fuqua, President, Aerospace Industries Association; 
           Lorraine M. Lavet, Chief Operating Officer, American 
           Electronics Association; Gary D. Engebretson, 
           President, Contract Services Association; Kenneth 
           McLennan, President, Manufacturers Alliance for 
           Productivity and Innovation; Lawrence F. Skibbie, 
           President, American Defense Preparedness Association/
           National Security Industrial Association; Cynthia L. 
           Brown, President, American Shipbuilding Association; 
           Dan C. Heinemeier, Vice President, Electronic 
           Industries Association; Bert M. Concklin, President, 
           Professional Services Council; Penny L. Eastman, 
           President, Shipbuilders Council of America.

  Mr. GRASSLEY. Industry's complaint boils down to one key point: The 
new policy will cost $1.3 billion in the first year alone. This is 
pure, grade A Pentagon baloney. The IG says it is baloney.
  No one knows what the new policy would cost--if anything.
  Maybe it would save money.
  DOD is paying accounting firms like Coopers & Lybrand hundreds of 
millions of dollars to resolve accounting errors.
  These accounting errors are caused, in part, by the current policy.
  If payments were made according to law, all the money paid to Coopers 
& Lybrand could be saved. Surely these saving would offset any new 
costs. Let's face it, the thought of more cost makes industry lick its 
chops. More cost is not the issue.
  More money is the issue. What I am talking about here is the flow of 
funds.
  The new policy threatens to interrupt the money flow.
  That is what scares CODSIA.
  And I am not talking about not paying legitimate bills on time. Under 
law, DOD must pay its bills promptly.
  I am talking only about bills that cannot or should not be paid. I am

[[Page S11217]]

talking about overobligations and overpayments.
  DOD cannot write checks and pay bills with no money in the bank.
  Mr. President, this simple rule applies to most citizens in this 
country but not to entrenched bureaucrats in the Pentagon.
  They can dip into a bottomless well that is the $250 billion defense 
budget.
  This bottomless well allows DOD bureaucrats to merge and comingle 
appropriations.
  They do this to cover shortages--beyond the purview of Congress. Say 
a bill is submitted for payment, but the bureaucrats discover that 
there is insufficient money in the account to pay it.
  Under the current policy--that is Mr. Hamre's policy--the bureaucrat 
is authorized to arbitrarily and deliberately post it to another 
account--the wrong account--but one fat with cash.
  Mr. President, that is illegal. Yet that is exactly what CODSIA is 
asking DOD to keep doing. CODSIA refers to ACRN for accounting 
classification reference number. ACRN's identify appropriation 
accounts.
  I quote from CODSIA's letter to DOD:

       Continue the current DFAS [Defense Finance and Accounting 
     Service] procedure of reallocating payment by ACRN when there 
     are not enough funds in an ACRN to make the payment.

  In other words, CODSIA says: Keep charging the wrong account if there 
isn't enough money in the right account.
  Mr. President, that is a blatant violation of law.
  When an ACRN contains insufficient funds to pay a bill, the account 
is overdrawn. It is in the red. It is time for heads to roll.
  That is a violation of the Antideficiency Act--section 1341 of title 
31, and that carries criminal penalties. It's a felony.
  And when you arbitrarily reach into another account to get the money, 
as CODSIA suggests, you also violate sections 1301 and 1502 of title 
31.
  These laws are the sacred constitutional cornerstones of Congress' 
control over the purse strings.
  CODSIA shows no respect for these sacred constitutional principles.
  At least CODSIA is up-front about what it wants. It wants industry to 
get paid--even if it means breaking the law.
  There is another problem--overpayments. These are bills that should 
not be paid.
  DOD has a nasty habit of overpaying contractors and does it with 
great regularity.
  The bad part about it is DOD doesn't know when it happens. DOD 
doesn't have the controls in place to detect them.
  The only way DOD knows about an overpayment is when the contractor 
voluntarily returns the money.
  Well, Mr. President, guess what is causing overpayments?
  Answer: Mr. Hamre's current progress payment policy--the one he 
promised to terminate on October 1.
  A recent GAO report--No. 97-37, page 12--says this policy is ``the 
most frequent cause of DOD's overpayments.''
  The GAO report is entitled ``Fixing DOD's Payment Problem Is 
Imperative.''
  The new policy promised--but not delivered--by Mr. Hamre should put a 
lid on overpayments.
  Now if overpayments were stopped, who would suffer: CODSIA or the 
taxpayers?
  Mr. President, I think CODSIA has plenty of self-serving reasons for 
wanting to keep the current policy.
  CODSIA lost its credibility when it insisted that DOD break the law 
to keep the money spigot wide open.
  Mr. Fuqua's letter to Acting Comptroller Alice Maroni was followed by 
a similar letter to Mr. Hamre.
  This one was from the defense heavyweights: Boeing, Hughes, Lockheed 
Martin, Northrop Grumman, and Raytheon.
  The message was the same.
  Mr. President, I ask unanimous consent to have this letter printed in 
the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

         The Boeing Co., Hughes Aircraft Co., Lockheed Martin 
           Corp., Raytheon Co., Northrop Grumman Corp.,
                                               September 22, 1997.
     Hon. John Hamre,
     Deputy Secretary of Defense,
     Pentagon, Washington, DC.
       Dear Dr. Hamre: We are writing to convey our concern 
     regarding the Department's plan to implement new requirements 
     for progress payment distributions effective October 1. We 
     are particularly concerned that there has not been time to 
     ascertain fully the cost of compliance or the impact on 
     timeliness of payments. A quick cost impact estimate 
     conducted by industry indicates a minimum impact for Fiscal 
     Year 1998 of $1.3 billion (see enclosed CODSIA letter dated 
     August 27). These costs, plus those to be incurred by DOD for 
     implementing this requirement, will have to be borne by the 
     U.S. Government.
       We understand that the DOD Inspector General and the 
     General Accounting Office indicate the need for improvements 
     in the DFAS accounting system. However, until DOD and its 
     contractors can fully assess the cost and related impacts of 
     the policy change made in your two memoranda of July 23, 
     1997, we are not confident that this is the least expensive 
     means of ensuring the improvements. We should also explore 
     legislative action for the Fiscal Year 1999 authorization 
     cycle.
       In the meantime, we request that you delay the October 1, 
     1997, implementation date for the proposed progress payment 
     distribution policy change and that the change, when it does 
     become effective, be applied only prospectively and not to 
     any existing contracts. We respectfully request the 
     opportunity to meet with you to discuss the grave nature of 
     this issue and obtain your guidance on appropriate actions 
     industry can take to mitigate the associated cost impact and 
     delay.
       We appreciate your prompt attention to this matter and look 
     forward to your response. We remain confident that the 
     taxpayers' interest can be protected in a cost effective 
     manner.
           Sincerely,
         Scott E. Carson, Vice President, The Boeing Co.; Marcus 
           C. Bennett, Executive Vice President and Chief 
           Financial Officer, Lockheed Martin Corp.; Peter R. 
           D'Angelo, Executive Vice President and Chief Financial 
           Officer, Raytheon Co.; Charles S. Ream, Vice President 
           and Chief Financial Officer, Hughes Aircraft Co.; 
           Richard B. Waugh, Corporate Vice President and Chief 
           Financial Officer, Northrop Grumman Corp.

  Mr. GRASSLEY. Mr. Hamre buckled under all the pressure from industry.
  He responded with what I fear may be an open ended deferral of the 
new policy.
  In doing that, I am afraid he is breaking his word to me and the 
leadership of the Armed Services Committee.
  At this point, the future of the new policy is very much in doubt.
  Mr. President, I will have much more to say about this issue in the 
near future.
  The PRESIDING OFFICER. The Senator from Wyoming is recognized to 
speak for up to 30 minutes.
  Mr. THOMAS. Mr. President, I probably will not use 30 minutes.

                          ____________________