Al­le­ga­tions, de­nials of fuel slush fund at Pen­tagon

The Washington Post Sunday - - FRONT PAGE - BY CRAIG WHITLOCK AND BOB WOOD­WARD

The Pen­tagon has gen­er­ated al­most $6 bil­lion over the past seven years by charg­ing the armed forces ex­ces­sive prices for fuel and has used the money — called the “bishop’s fund” by some crit­ics — to bol­ster mis­man­aged or un­der­funded mil­i­tary pro­grams, doc­u­ments show.

Since 2015, the De­fense De­part­ment has tapped sur­pluses from its fuel ac­counts for $80 mil­lion to train Syr­ian rebels, $450 mil­lion to shore up a pre­scrip­tion-drug pro­gram rid­dled with fraud and $1.4 bil­lion to cover unan­tic­i­pated ex­penses from the war in Afghanistan, ac­cord­ing to mil­i­tary ac­count­ing records.

The Pen­tagon has amassed the ex­tra cash by billing the armed forces for fuel at rates of­ten much higher — some­times $1 per gal­lon or more — than what com­mer­cial air­lines paid for jet fuel on the open mar­ket.

Un­der a bu­reau­cracy that dates to World War II, the De­fense De­part­ment pur­chases all of its fuel cen­trally and then re­sells it at a fixed price to the Air Force, Navy, Army, Marine Corps and other cus­tomers, who pay for it out of their own bud­gets. The sys­tem is in­tended to re­duce du­pli­ca­tion and pro­mote ef­fi­ciency.

The De­fense De­part­ment is the largest sin­gle con­sumer of fuel in the world. Each year, it buys about 100 mil­lion bar­rels, or 4.2 bil­lion gal­lons, of refined petroleum for its air­craft, war­ships, tanks and other ma­chines.

The prac­tice of ex­ploit­ing fuel rev­enue to plug un­re­lated gaps in the de­fense bud­get has es­ca­lated in re­cent years, prompt­ing al­le­ga­tions — and of­fi­cial de­nials — that the ac­counts are be­ing used as a slush fund.

Pen­tagon of­fi­cials de­fended the ar­range­ment.

Congress has rou­tinely ap­proved their re­quests to skim off the fuel-pur­chas­ing ac­counts as a straight­for­ward way to bal­ance the De­fense De­part­ment’s books. Law­mak­ers, how­ever, are in­creas­ingly ques­tion­ing the bud­get­ing meth­ods that have en­abled the Pen­tagon to ac­cu­mu­late large wind­falls from fuel sales in the first place.

The ob­scure ac­count­ing pol­icy ex­em­pli­fies the enor­mous scale and com­plex­ity of the U.S. mil­i­tary’s busi­ness op­er­a­tions, and how waste and in­ef­fi­ciency in the de­fense bu­reau­cracy can dwarf what Wash­ing­ton spends on other parts of the fed­eral gov­ern­ment.

In re­cent months, for ex­am­ple, the Pen­tagon has strug­gled to ex­plain to Congress why it buried an in­ter­nal study that

ex­posed $125 bil­lion in ad­min­is­tra­tive waste, in­clud­ing sky-high salaries for le­gions of de­fense contractors.

Such fis­cal prob­lems are deeply rooted. For the past quar­ter-cen­tury, the De­fense De­part­ment has failed to meet a con­gres­sional man­date to clean up its books so it can pass an au­dit — the only fed­eral agency that has failed to do so.

Mean­while, the Pen­tagon is pre­par­ing for a mil­i­tary buildup. Pres­i­dent Trump has said that he will ask Congress to add $54 bil­lion to next year’s de­fense bud­get, about a 10 per­cent spike over cur­rent spend­ing caps.

Some se­nior lead­ers with the armed forces ac­cused the Pen­tagon of in­ten­tion­ally over­billing the Air Force, Navy, Army and Marine Corps for fuel and pock­et­ing the dif­fer­ence to pay for other pri­or­i­ties.

“We’ve been com­plain­ing about this,” Ray Mabus, who served as Navy sec­re­tary for eight years dur­ing the Obama ad­min­is­tra­tion, said in an in­ter­view. “But if we do it too loudly, oh man, they come back on us re­ally hard.”

Of­fi­cials with the Navy, who have been the most vo­cal in their op­po­si­tion, said the pot of money de­rived from fuel sales is known as a bishop’s fund, an un­of­fi­cial re­serve ac­count con­trolled by the of­fice of the de­fense sec­re­tary.

“An­other word for it is ‘slush fund,’ ” said Mabus, who left of­fice in Jan­uary.

He and other of­fi­cials said ar­ti­fi­cially high fuel prices have left the Navy, at times, with less money for mil­i­tary train­ing, op­er­a­tions and maintenance. The Air Force and Army have not com­plained pub­licly about the ar­range­ment.

In a state­ment, the Pen­tagon ac­knowl­edged that it ac­cu­mu­lated $5.6 bil­lion in “en­ter­prise gains” from fuel pur­chases be­tween 2010 and 2016, but said the sur­plus was the re­sult of fall­ing oil prices in an in­her­ently volatile mar­ket.

“What has hap­pened in the last two years is we have been blessed by lower fuel prices,” Deputy De­fense Sec­re­tary Robert O. Work, the Pen­tagon’s sec­ond-rank­ing civil­ian of­fi­cial, said in an in­ter­view. “Some­times you over­es­ti­mate what the price will cost and you get an as­set, and some­times you un­der­es­ti­mate and you get a deficit.”

Work de­nied that the Pen­tagon had a bishop’s fund or a de­lib­er­ate strat­egy to in­flate the price of fuel. “I ve­he­mently dis­agree with that char­ac­ter­i­za­tion,” he said, adding an ex­ple­tive for em­pha­sis. Scru­tiny from Congress

John P. Roth, the Pen­tagon’s act­ing comptroller and chief fi­nan­cial of­fi­cer, said that it would be im­pos­si­ble to hide a multi­bil­lion-dol­lar slush fund from Congress. He said that the Pen­tagon must re­ceive ap­proval from four dif­fer­ent leg­isla­tive com­mit­tees when­ever it wants to spend money from fuel sav­ings on other pro­grams.

“I have an enor­mous num­ber of out­side peo­ple look­ing over my shoul­der,” Roth said in an in­ter­view. “The thought that I could some­how es­tab­lish some sort of re­serve in some man­ner, shape or form and hide it from ev­ery­one else just doesn’t make any sense.”

Congress has ap­proved the Pen­tagon’s re­quests to tap its fuel rev­enue to pay for short­falls in other pro­grams. Leg­isla­tive aides said they did not think that the De­fense De­part­ment was in­ten­tion­ally ma­nip­u­lat­ing fuel prices. At the same time, Congress has height­ened its scru­tiny of how the pool of ex­cess cash has ma­te­ri­al­ized.

In re­ports com­mis­sioned by Congress since 2014, the Gov­ern­ment Ac­count­abil­ity Of­fice has found that the Pen­tagon has done a poor job of pro­ject­ing its an­nual fuel bud­get and how much petroleum it would ac­tu­ally con­sume in a given year.

Law­mak­ers have also asked the Pen­tagon to give back some of the sur­plus. In 2015, they forced the De­fense De­part­ment to re­turn $1 bil­lion and re­duced the bud­gets for other mil­i­tary pro­grams by $2.6 bil­lion to re­flect lower-thanex­pected fuel costs.

And in ap­prov­ing a de­fense-au­tho­riza­tion bill last year, the Se­nate Armed Ser­vices Com­mit­tee con­cluded in a re­port that it was “con­cerned about the qual­ity and trans­parency” of the Pen­tagon’s method­ol­ogy for set­ting fuel prices.

The De­fense De­part­ment pur­chases all of its fuel cen­trally through the De­fense Lo­gis­tics Agency (DLA), which then re­sells it to the branches of the armed forces.

In­stead of op­er­at­ing like a neigh­bor­hood gas sta­tion and chang­ing its re­sale prices daily or weekly, how­ever, the De­fense Lo­gis­tics Agency charges a stan­dard price for fuel that is sup­posed to re­main fixed for an en­tire fis­cal year. The purpose is to make bud­get­ing eas­ier and to cush­ion the armed forces from wild swings in com­mod­ity mar­kets.

Gains and losses are ab­sorbed by the DLA in a re­volv­ing ac­count known as a work­ing-cap­i­tal fund. It is sup­posed to break even over time.

From 2001 un­til 2009, the sys­tem worked as in­tended, even when oil prices sky­rock­eted. The DLA’s en­ergy rev­enue and ex­penses largely bal­anced out. The armed forces bought fuel from the DLA at rates that roughly tracked what com­mer­cial air­lines were pay­ing for jet fuel on the open mar­ket, plus a mod­est markup — av­er­ag­ing around 11 cents a gal­lon — to cover over­head costs, ac­cord­ing to a Navy anal­y­sis of fuel data.

But start­ing in 2010, a large spread de­vel­oped. The DLA fixed its stan­dard fuel price at rates that were of­ten much higher than what the air­lines were pay­ing — some­times $1 or more a gal­lon.

All told, the DLA charged the armed forces about $23 bil­lion more for fuel be­tween 2010 and 2016 than what air­lines would have paid on the open mar­ket, ac­cord­ing to a re­view of Pen­tagon pur­chas­ing data.

Thomas W. Hicks, who served as the Navy’s deputy un­der­sec­re­tary for man­age­ment un­til Fe­bru­ary, said that Navy of­fi­cials be­gan raising ques­tions about the dis­crep­ancy in 2011 dur­ing meet­ings with the DLA and the of­fice of the de­fense sec­re­tary.

Those of­fi­cials re­sponded that the dif­fer­en­tial was nec­es­sary to up­grade dis­tri­bu­tion cen­ters and other in­fra­struc­ture, Hicks said. But when pressed for data to jus­tify the price hikes, their num­bers didn’t add up, ac­cord­ing to Navy of­fi­cials.

“They never gave us any­thing that was plau­si­ble,” Hicks said in an in­ter­view.

Pen­tagon of­fi­cials said the com­par­i­son be­tween what the armed forces and com­mer­cial air­lines paid for fuel was mis­lead­ing. They said about three-quar­ters of the $23 bil­lion dif­fer­ence paid for over­head ex­penses and spe­cial­ized mil­i­tary fuel re­quire­ments that air­lines do not have to worry about.

The of­fi­cials ac­knowl­edged that the re­main­der of the spread — about $5.6 bil­lion — amounted to a fuel-sav­ings wind­fall. They said that the sav­ings piled up be­cause en­ergy prices had dropped more than ex­pected and stayed low.

“These last cou­ple years have been a bit anoma­lous in that we’ve ac­tu­ally had fuel sav­ings, which we would con­sider for­tu­itous,” Roth, the Pen­tagon’s act­ing comptroller, said in an in­ter­view. “It is no ques­tion, the last two or three years, we’re rid­ing the same wave all of us do when we go get gas and it’s now cheaper than it was.” Price gy­ra­tions

The mil­i­tary’s stan­dard fuel price is set by the Pen­tagon’s comptroller in con­sul­ta­tion with the DLA and the White House Of­fice of Man­age­ment and Bud­get. Although it is sup­posed to re­main fixed for 12 months at a time, the price can be ad­justed if en­ergy mar­kets spike up or down.

The Pen­tagon, how­ever, has even tried to raise its fuel price when en­ergy mar­kets were flat or de­clin­ing, doc­u­ments show.

In April 2013, for ex­am­ple, Roth no­ti­fied the armed forces in a memo that the Pen­tagon’s comptroller would raise the stan­dard price of fuel the next month by 27 per­cent, from $3.73 to $4.72 per gal­lon.

The memo said the un­planned in­crease was nec­es­sary “to en­sure the con­tin­ued sol­vency” of the Pen­tagon’s work­ing-cap­i­tal fund for fuel.

But fuel prices on the open mar­ket had been go­ing in the op­po­site di­rec­tion. Com­mer­cial air­lines were pay­ing $3.05 a gal­lon in April 2013, down about 10 per­cent from a year ear­lier, ac­cord­ing to data from the fed­eral Bureau for Trans­porta­tion Sta­tis­tics.

The un­ex­pected price hike pro­voked an up­roar from the armed forces.

Two days later, Roth abruptly can­celed the price in­crease. A fol­low-up memo stated that the decision was made “in re­sponse to re­vised busi­ness and eco­nomic as­sump­tions,” but did not elab­o­rate.

In his in­ter­view with The Wash­ing­ton Post, Roth said that he did not re­call the memos or the ex­act cir­cum­stances of the 2013 price gy­ra­tions.

“We’d have to go back and look at it,” he said. “If we changed a decision that quickly, that didn’t re­flect par­tic­u­larly great decision-mak­ing.”

Although Roth’s memo sug­gested that the work­ing-cap­i­tal fund for fuel was in dan­ger of be­com­ing in­sol­vent, doc­u­ments show that, one year later, it had ac­tu­ally be­come overly flush with cash — even with­out the price hike.

In April 2014, af­ter notic­ing that the fund had an ex­ces­sive bal­ance, Congress or­dered the Pen­tagon to with­draw $347.5 mil­lion from the ac­count to pay for an ar­ray of un­re­lated op­er­a­tional ex­penses at the Na­tional Se­cu­rity Agency, the De­fense In­tel­li­gence Agency, the U.S. Spe­cial Op­er­a­tions Com­mand and other agen­cies.

In 2015, as petroleum prices on the open mar­ket were plung­ing, the work­ing-cap­i­tal fund amassed an even big­ger sur­plus.

That year, doc­u­ments show, the Pen­tagon dipped into the fund five times, trans­fer­ring a com­bined $1.2 bil­lion to other mil­i­tary ac­counts.

About $80 mil­lion went to but­tress a star-crossed De­fense De­part­ment ef­fort to train and equip a new Syr­ian army ded­i­cated to fight­ing the Is­lamic State, records show. The money was in­tended as a last-ditch boost for the pro­gram, which had al­ready cost $500 mil­lion and was de­signed to train 5,400 rebel forces but was strug­gling to pro­duce re­sults.

Six months later, de­spite the ex­tra money, the Pen­tagon scrapped the pro­gram. In the end, only 150 Syr­ian fight­ers were trained.

All but a hand­ful of those were cap­tured or killed by al-Qaeda, or de­serted.

Sep­a­rately in 2015, doc­u­ments show, the Pen­tagon trans­ferred $450 mil­lion from the fuel fund to the De­fense Health Pro­gram to help res­cue a pre­scrip­tion-drug plan for troops and their fam­i­lies.

The drug plan was deeply in the red. Of­fi­cials had been slow to re­spond to a flood of bo­gus claims for pain med­i­ca­tions sub­mit­ted by in­sur­ance scam­mers. By the time the Pen­tagon caught on, it was stuck with a bill for an es­ti­mated $1.7 bil­lion in fraud­u­lent claims, ac­cord­ing to de­fense au­di­tors.

In 2016, fuel prices on the open mar­ket plum­meted even more, en­abling the Pen­tagon to build an even big­ger sur­plus in the work­ing-cap­i­tal fund. That year, doc­u­ments show, the Pen­tagon dipped into the fund six times for a to­tal of $3 bil­lion.

Among other ex­penses, about $1.4 bil­lion went to cover fi­nan­cial short­falls from U.S. mil­i­tary op­er­a­tions in Afghanistan.

A resur­gence by the Tal­iban prompted the Obama ad­min­is­tra­tion to keep thou­sands of ad­di­tional U.S. troops in the war zone. Ex­tra money was also needed for am­mu­ni­tion, spare parts, drones and contractors, ac­cord­ing to the doc­u­ments.

All told, the Pen­tagon has with­drawn a to­tal of $5.9 bil­lion from the work­ing-cap­i­tal fund since 2011, ac­cord­ing to fig­ures pro­vided by the De­fense De­part­ment. Al­most all of the sur­plus was due to fuel sav­ings, de­fense of­fi­cials said.

Roth, the Pen­tagon’s act­ing comptroller, said it was com­mon prac­tice to trans­fer money among op­er­at­ing ac­counts to bal­ance out man­age­able short­falls and sur­pluses that in­vari­ably arise dur­ing a fis­cal year.

When fuel prices spike up­ward, he said, the Pen­tagon some­times must raid other ac­counts to pump more money into the work­ing-cap­i­tal fund for fuel. That hap­pened in 2012, when of­fi­cials cov­ered a $1 bil­lion fuel deficit by tap­ping sur­plus money bud­geted for Afghan se­cu­rity forces.

Congress “ex­pects us to solve most of our prob­lems our­selves with­out com­ing back and ask­ing them for more money,” he said. “Their de­fault po­si­tion is, ‘Hey, you’re big boys and big girls . . . . Somewhere in that en­ter­prise you must have some ex­tra money to pay for what­ever short­fall you have.’ ”

Roth said that the money trans­fers can work both ways.

While the armed forces may com­plain about hav­ing to pay too much for fuel, Roth said, ex­cess money in the fund is of­ten rerouted to other ac­counts that di­rectly ben­e­fit the mil­i­tary ser­vices.

In 2016, for ex­am­ple, the Pen­tagon used about $186 mil­lion in fuel sav­ings to cover short­falls in the Navy’s ship-maintenance pro­gram and the cost of an ex­tended mis­sion for the Harry S. Tru­man Car­rier Strike Group in the Mid­dle East, doc­u­ments show.

Roth de­nied that the Pen­tagon was in­ten­tion­ally ma­nip­u­lat­ing its fuel prices so it could build up a slush fund.

“It’s not a bishop’s fund and we don’t keep a bishop’s fund,” he said. “If I was that smart to pre­dict oil prices that far ahead of time, I wouldn’t have this job. I’d be out there mak­ing a hell of a lot more money.” Eve­lyn Duffy con­trib­uted to this re­port.

JONATHAN ERNST/REUTERS

Pres­i­dent Trump is ac­com­pa­nied by Saudi Ara­bia’s King Sal­man in Riyadh. An ebul­lient wel­come in­clud­ing a jet fly­over re­flected a king­dom ea­ger to rekin­dle its re­la­tion­ship with the United States and to de­clare and so­lid­ify its lead­er­ship role in the Mus­lim world.

AIR­MAN 1ST CLASS DANIEL SNY­DER/AIR FORCE 23RD WING PUB­LIC AF­FAIRS

TOP: At the Pen­tagon, a sur­plus of more than $6 bil­lion has been gen­er­ated over the past seven years by charg­ing the armed forces ex­ces­sive prices for fuel, doc­u­ments show, and some of that has bol­stered mis­man­aged pro­grams. ABOVE: Air Force per­son­nel re­fuel an A-10C Thun­der­bolt II at Moody Air Force Base near Val­dosta, Ga. The U.S. mil­i­tary is the sin­gle largest con­sumer of fuel in the world.

NICK KIRK­PATRICK/THE WASH­ING­TON POST

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