Pentagon may be wasting a billion dollars a year in erroneous payments to contractors

Introduction

The Pentagon has been paying hundreds of millions of tax dollars a year to people and companies that don’t deserve it, but its financial management shortcomings are so severe that it’s made little progress in halting the errors or even measuring their magnitude, according to a report released by a Senate committee Thursday.

Although the Defense Department reported making over $1.1 billion in overpayments in fiscal year 2011 to military personnel and retirees, civilian defense workers, contractors, and others, investigators from the Government Accountability Office said that figure is not credible due to missing invoices and other flawed paperwork, as well as errors in arithmetic.

The Pentagon is required by law to ferret out programs susceptible to significant payment errors and then use statistical sampling to estimate the size of those errors, so that Congress can determine the size of the problem. But GAO found defense finance officials didn’t have procedures in place to collect and maintain the data they need to come up with a credible estimate.

Even when the department could find and document mistaken payments, it frequently did not take cost-effective steps to recover the money, the GAO said. The U.S. Army Corps of Engineers, for example, has spent $256,000 since 2009 on an automated overpayment-detection program that has recovered just one improper payment of $20.79, GAO said.

The Pentagon’s payment system is so weak that sometimes it doesn’t pay what’s owed. By its own estimate, for example, the Pentagon made $238.2 million in overpayments and $48.4 million in underpayments related to travel alone during fiscal 2011, for a total of $286.6 million in incorrect payments.

But when pressed by GAO, defense finance officials were only able to identify $1.6 million, or less than 1 percent, of the program’s estimated overpayments as recoverable, explaining that they lacked supporting documentation for a significant portion of the total.

The Defense Department “is at risk of foregoing the detection and recovery of potentially substantial funds owed to the government,” the GAO report said.

Instead of conducting cost-effective audits to identify funds that can be recovered, GAO said the Pentagon relies on such methods as self-reporting by defense contractors and other recipients of the money, random sampling of payment records, and findings by the Defense Department inspector general or other auditors.

Members of the Senate Homeland Security and Governmental Affairs Committee, which released the GAO report, expressed anger and frustration over the findings. Several accused the Pentagon of failing to comply with a 2010 law requiring federal agencies to identify, prevent and recover payments made in error.

“The Department spends about a trillion dollars annually, but officials have no idea how much of that money it loses to waste and fraud. This is simply unacceptable,” said Committee Chairman Tom Carper, D-Del., who co-sponsored the law with Sen. Susan Collins, R-Maine, and others.

Sen. Tom Coburn, R-Okla., ranking member of the committee, cited the GAO’s conclusions while promising to reintroduce legislation requiring the Defense Department to conduct an accurate audit of its books, as required by federal rules the Department has repeatedly flouted.

“When our largest federal agency cannot produce a viable financial audit, it should be no surprise DOD cannot account for how much money it wastes on improper payments,” said Coburn, who vowed to use all the oversight tools at his disposal to expose and prevent defense finance abuses.

“Improper payments should be low-hanging fruit when it comes to eliminating government waste — but that clearly hasn’t been the case here,” said Sen. Claire McCaskill, D-Mo., who leads the panel’s Financial and Contracting Oversight subcommittee.

The problem is an old one at the Pentagon. Twenty years ago, GAO delivered a scathing report to the same Senate committee documenting a military payroll system that was so badly managed the Army had inadvertently paid $6 million to 2,269 troops who had already quit the service, were absent without leave or had deserted their units. In one case, a dead deserter was sent a paycheck.

A separate probe at the time revealed that managers at a defense finance and accounting center had miscalculated the pay of more than 201,000 Air Force retirees in 1986, giving them an extra dollar or two each month. It took nine years for managers to correct the error, which ended up costing taxpayers $16 million. Officials said they decided not to try to recover the money because the some of the retirees were probably dead, and the effort to collect would be too expensive.

In the report released Thursday, GAO said the Pentagon acknowledged overpayments in military pay and military retirement pay as part of the $1.1 billion in erroneous payments in fiscal 2011. In addition, the Pentagon made overpayments of military health benefits, civilian pay, travel pay, commercial pay to vendors and contractors and Army Corps of Engineers travel and contractor fees.

GAO faulted the Defense Department comptroller not only for these mistakes, but for doing a poor job of reporting on the issue to Congress. In one instance, the department claimed it would recover $67.6 million in improper military retirement payments while estimating that only $18.8 million in overpayments had actually occurred, GAO said.

Defense officials also failed to do “risk assessments” to determine what kind of corrective action is needed to reduce mistakes, GAO said. They failed to identify the “root causes” for errors, such as whether manual or automated controls were insufficient or even working.

In addition, GAO said the department did not comply with the 2010 law requiring “recovery audits” to evaluate the cost-effectiveness of procedures to recover money paid improperly to companies whose contracts have a total value exceeding $500 million in a fiscal year. According to GAO, defense officials said they were having a hard time tracing transactions and finding the original justifications for them, preventing them from conducting effective recovery audits.

If the Defense Department does not implement strategies to comply with federal improper payment laws, GAO warned, it will remain “at risk of continuing to make improper payments and wasting taxpayer funds.”

In a written statement released with the report, Robert F. Hale, the Defense Department’s comptroller, said the department is now developing risk assessments and corrective actions, reviewing its recovery efforts to ensure that they are cost effective, and working to ensure its reporting is complete and accurate.

“I continue to believe this program [to deal with overpayments] is fundamentally sound and I remain fully committed to comply in all respects with current statutory requirements,” Hale said.

Efforts to obtain further Pentagon comment Thursday were unsuccessful.