Grassley On Price Gouging at the Pentagon

NOTE: Sen. Grassley this week sent a letter to Acting Secretary of Defense Patrick M. Shanahan seeking information about price gouging at the Pentagon. Grassley also published an op-ed on the topic.

 

Prepared Floor Remarks by U.S. Senator Chuck Grassley of Iowa

On Price Gouging at the Pentagon

Wednesday, May 15, 2019

  

I come to the floor today to shed light on yet another dark cloud that’s hanging over the Department of Defense. In fact, for decades, a dark cloud of fiscal mismanagement has loomed large over the Pentagon. During my very first term here in the United States Senate, I began my quest to bring fiscal accountability to the Pentagon. Four decades later, I’m still keeping tabs on the money trail.

 

Back then, it was a bit like David taking on Goliath. The United States of America has the strongest and mightiest military in the world. Our brave men and women who serve in the U.S. Armed Forces protect our shores – at home and abroad – to keep us safe and protect the blessings of liberty for our children and grandchildren.

 

That’s why it’s so important to keep check on the Pentagon’s ledgers. To help make sure every tax dollar assigned for the nation’s defense is spent effectively and not squandered to waste, fraud or abuse.

 

With the help of brave whistleblowers who stuck out their necks to “commit truth,” I stuck my neck out during the Reagan administration. That’s when I learned about the Pentagon’s little shop of price horrors. Of course, ripping off the taxpayer started in the Revolutionary War when contractors sold rotten meat to the Continental Army. And it continued during the Civil War when profiteers sold ammunition filled with sawdust and shoddy shoes and horses to the Union Army. And it continues to this day. Back in 1985, Americans will recall the Defense Department was shelling out vast amounts of taxpayer dollars for spare parts. Remember the $450 hammers and $640 toilet seats? That sounds like a bargain compared to more recent wasteful spending at the Pentagon, such as the $1,280 coffee mug and the $14,000 toilet seat lid. Obviously, the cost of waste is getting a whole lot more expensive to the taxpayer.

 

Back then, I fought to win a spending freeze on unchecked spending sprees. Misspending and overspending were riddling the defense budget, at the expense of the American taxpayer.

 

Military readiness drives the spending decisions that members of Congress make when we cast votes on the defense budget. Our constituents expect their elected representatives to make sure that the moms and dads, sons and daughters, and brothers and sisters who are serving our country in uniform are well-equipped with the best resources money can buy.

 

But they also expect elected representatives to make sure the hard-earned money that’s withheld from every paycheck – their tax dollars – aren’t being ripped off by greedy corporations, like TransDigm Group Inc., which I will speak about in a moment.

 

That’s why I conduct robust oversight of defense spending. As a taxpayer watchdog, it’s my responsibility to make sure every defense dollar is spent as effectively and efficiently as possible. Every dollar lost to waste, fraud or abuse harms military readiness and lines the pockets of somebody else at taxpayer expense.

 

Trimming the fat in a bloated bureaucracy won’t happen in the shadows. There’s no magic wand to wave either. If there’s one thing I’ve learned in my years of oversight, transparency matters. Transparency brings accountability.

 

Every time I come to the floor to talk about the fiscal mess at the Pentagon, I get a bit of déjà vu. Earlier, I said my fraud-fighting efforts in the mid-1980s could be compared to David vs. Goliath. Now, fast forward to 2019. I’m still here working as hard as ever to do away with wrongdoing and extract fiscal accountability at the Pentagon. Today, some might say that job is like the one performed by a famous character in Greek mythology, who is destined to roll a heavy boulder up the hill for eternity.

 

Congressional oversight can be extremely tedious and time consuming. But as I like to remind each of the other 534 members of Congress: It is essential to our Country that we exercise this system of checks and balances. Without it, the dark fiscal cloud looming over the Pentagon would swell bigger and bigger and bigger. Oversight work may feel like an uphill climb, but oversight is not futile. And that’s why I keep my shoulder to the wheel. To hold people at the Pentagon accountable. To protect taxpayers. And to strengthen military readiness.

 

So, I’m here today to share some new details about the broken record of fiscal mismanagement at the DoD. No matter how high I turn up the volume, the over-dogs at the Pentagon remain tone deaf to fiscal integrity.

 

Consider the recent report by the DoD’s Office of Inspector General. It’s called: “Review of Parts Purchased from Trans-Digm Group, Inc.” First, I want to commend Senator Warren and Representatives Ro Khanna and Tim Ryan for getting the ball rolling with their requests asking the IG to look into the contractor’s pricing structure. We need all hands on deck in Congress to conduct oversight. After digging into the details, I can only conclude the Pentagon is still, after all these years, stuck on auto-pilot. No one on board the Pentagon’s mothership seems bothered to steer its fiscal ship into shape. Fiscal integrity somehow got lost in the spare parts horror story I am about to tell.

 

In fact, I was more than dismayed with the response from the internal watchdogs at the DoD Inspector General’s office. Their team wrote the report. And yet, the IG leadership team showed no urgency whatsoever to fix the problem. This tells me I also need to keep a tight leash on the internal watchdogs leading the DoD’s Inspector General’s office.

 

Their February report exposes galactic price gouging, colossal rip-offs and out-of-this-world waste. It reads like a sequel to the same financial shenanigans that have turned the Pentagon into a taxpayer money pit. Change out the name of the contractor, inflate the charges, submit the invoice and voila’ – the American taxpayer is on the hook for another fixed-price, sole-source contract.

 

For this report, the IG examined one contractor: the TransDigm Group. In total, it analyzed 113 contracts, between January 2015 and January 2017. It reviewed 47 spare parts the DoD purchased from this contractor.

 

In just those two years, the IG found TransDigm overcharged the Pentagon by $16.1 million out of a total of $29.7 million in contracts. The reasonable profit threshold is considered to be 15 percent or below. The IG found that TransDigm earned excess profits on 46 of 47 parts sold to the Pentagon. On 17 of those parts, TransDigm earned more than a 1,000 percent profit. Remarkably, the highest profit percentage was 4,436 percent.

 

That’s what I call fleecing the American taxpayer. Pulling the wool over the eyes of Congress and the taxpayer will only stop with transparency. That’s why I’m here today.

 

Just think for a minute about the Big Picture. This report is just one snapshot of a much larger problem. It’s a spit in the ocean when you consider the enormous $716 billion defense budget. Just imagine the boatloads of bloat elsewhere in the bureaucracy.

 

The Department of Defense is obligated under federal law and regulations to uphold basic measures of fiscal integrity. So, where do we go from here?

 

The IG made a few paltry recommendations. For starters, it directed contracting officers to request voluntary refunds for the excess profits. Let me suggest, I wouldn’t advise taxpayers to hold their breath on a voluntary refund. The IG recommendations have no teeth. They are insufficient. And what’s worse, the IG leadership team claims no single DoD official is responsible for price gouging.

 

Let me repeat. The IG leadership team, the internal watchdog for fiscal integrity and compliance at the Department of Defense, is effectively saying: no one person at the Department of Defense can be held accountable for waste, fraud and abuse of taxpayer money. This illustrates the cavalier attitude towards taxpayer money that former Secretary of Defense James Mattis sought to extinguish.

 

The decades-long odyssey of misspending at the Pentagon keeps going around and around and around.

 

The way I see it, the DoD has a fundamental responsibility to uphold fiscal integrity. And after reviewing the IG report and meeting with its auditing team and the DoD pricing czar, I have reached three conclusions.

 

Number One: Fiscal controls at the DoD are AWOL. The Pentagon will never clean up its books if it can’t properly track the money trail and connect the dots. Consider why the DoD contracting officers were unable to even certify if a profit was “fair and reasonable.” It was because they could not obtain critical cost data from TransDigm. And in the most egregious case – the 4,436 percent profit margin for one spare part – the contracting officer certified the price was fair and reasonable. There is something very wrong about that procedure. A whopping 4,000 percent profit margin for a spare part doesn’t square with the Midwestern common sense standard.

 

Number two: The leadership team at the IG has exhibited an alarming hands-off approach towards stopping waste, fraud and abuse. The lack of urgency and failure to hold anyone accountable is especially revealing. It sends a signal throughout the chain of command: Keep signing the contracts. Keep ordering the spare parts. Keep up with business as usual. No one will be held accountable for price gouging.

 

Number three: The pattern of price-gouging by TransDigm and its subsidiaries has gone unimpeded for decades. It has amassed exclusive rights to sell these spare parts to the Pentagon. In fact, the Defense Department accounted for 34 percent of its sales in 2017. TransDigm exploited its business model and took advantage of its sole-source position to leverage higher prices. As the former chairman of the Senate Judiciary Committee, I have examined anti-competitive business practices over a long period of time, including those in the agriculture and pharmaceutical sectors of the economy. It’s very concerning to me when  contracting arrangements – like those between TransDigm and its 100 subsidiaries – are effectively a monopoly. It’s like an octopus with 100 arms putting the squeeze on the Pentagon. The Pentagon is at the mercy of TransDigm – who owns the intellectual property – to buy the spare parts it needs to build the nation’s critical weapons systems. That leaves the American taxpayer on the hook for exorbitant price gouging. The IG report found that TransDigm’s chokehold has added up to tens of millions of dollars overcharged to the taxpayer.

 

This is a good time to refresh people’s memories about my legislative and oversight work with anti-competitive business practices. Monopolies invite government regulation. If that’s the road TransDigm wants to continue following, I’m here to deliver a message. The jig is up on this cozy relationship. The buck stops here.

 

I’ve written a letter to acting Secretary Shanahan about these flawed contracts and failures to identify price gouging. I’ve asked him to make measurable recommendations on how to restore accountability and end price gouging. One thing is crystal clear. Transparency and competition are M.I.A. when the Pentagon buys spare parts from TransDigm and its subsidiaries.

 

I’m glad the House Oversight and Reform Committee called an oversight hearing this week to examine TransDigm and its price-gouging shenanigans. Congress has a constitutional duty of oversight to keep check on taxpayer money and hold government accountable. As I said earlier, we need all hands on deck to root out wasteful spending.

 

Once again, we are back at Square One. The Pentagon has flunked a fundamental benchmark of fiscal stewardship. It’s one of Washington’s worst kept secrets. Year after year Congress shovels more money into the Pentagon’s coffers to ensure we maintain the best military in the world. And year after year, the Pentagon squanders hundreds of millions of taxpayer dollars.

 

Some people at the Pentagon seem to think paying $16 million in excess profits is small potatoes. In my letter to the acting Defense Secretary, I made it clear I am not one of those people. I’ve asked him to answer a direct question. What specific steps is he going to take to stop profiteers from pilfering taxpayer money? Contracts – like I’ve described today between TransDigm and the Pentagon – are shortchanging the troops, fleecing the taxpayer and tarnishing its reputation.

 

As Justice Brandeis said, “Sunshine is the best of disinfectants.” And so I’m here today to pull back the curtains on the TransDigm audit. The American people need the sun to shine in on price gouging at the Pentagon so we can root out the wasteful spending here and elsewhere. Transparency is the best ammunition we have to chase away the dark fiscal cloud looming along the shores of the Potomac.