At the Pentagon, overpriced fuel sparks allegations - and denials - of a slush fund
By CRAIG WHITLOCK | The Washington Post | Published: May 20, 2017
WASHINGTON — 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 jetfuel 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 about100 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 Donald 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 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.
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John 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-than-expected 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 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."
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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-Qaida, 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."
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Evelyn Duffy contributed to this report.