The Cares Act, which Congress passed earlier this year, gave the Pentagon money to “prevent, prepare for, and respond to coronavirus.” But a few weeks later, the Defense Department began reshaping how it would award the money in a way that represented a major departure from Congress’s original intent.
The payments were made even though U.S. health officials believe there are still major funding gaps in responding to the pandemic. Robert Redfield, director of the Centers for Disease Control and Prevention, said in Senate testimony last week that states desperately need $6 billion to distribute vaccines to Americans early next year. There remains a severe shortage of N95 masks at numerous U.S. hospitals. These are the types of problems that the money was originally intended to address.
“This is part and parcel of whether we have budget priorities that actually serve our public safety or whether we have a government that is captured by special interests,” said Mandy Smithberger, a defense analyst at the Project on Government Oversight, a watchdog group.
The $1 billion fund is just a fraction of the $3 trillion in emergency spending that Congress approved earlier this year to deal with the pandemic. But it shows how the blizzard of bailout cash was — in some cases — redirected to firms that weren’t originally targeted for assistance. It also shows how difficult it has been for officials to track how money is spent and — in the case of Congress — intervene when changes are made. The Trump administration has done little to limit the defense firms from accessing multiple bailout funds at once and is not requiring the companies to refrain from layoffs as a condition of receiving the awards.
Some defense contractors were given the Pentagon money even though they had already dipped into another pot of bailout funds, the Paycheck Protection Program.
Congress, at Trump’s urging, is now debating whether to pass another massive stimulus package, and the Pentagon and defense contractors have called for another $11 billion to be directed toward their programs.
The $1 billion fund was allocated under the Defense Production Act, which allows President Trump to compel U.S. companies to manufacture products in the nation’s interest.
Trump has described the law as a “tremendous hammer” and boasted in August that he has “used the DPA more comprehensively than any president in history.” His administration was under intense pressure this spring to use the law to address dire shortages in medical-grade masks and other supplies.
But in the months after the stimulus package was passed, the Pentagon changed how the money would be used. It decided to give defense contractors hundreds of millions of dollars from the fund, mostly for projects that have little to do with the coronavirus response. Defense Department lawyers quickly determined that the funds could be used for defense production, a conclusion that Congress later disputed.
Among the awards: $183 million to firms including Rolls-Royce and ArcelorMittal to maintain the shipbuilding industry; tens of millions of dollars for satellite, drone and space surveillance technology; $80 million to a Kansas aircraft parts business suffering from the Boeing 737 Max grounding and the global slowdown in air travel; and $2 million for a domestic manufacturer of Army dress uniform fabric.
DOD officials contend that they have sought to strike a balance between boosting American medical production and supporting the defense industry, whose health they view as critical to national security. The Pentagon, which as of 2016 employed more than 156,000 people working in acquisitions alone, has also lent its expertise to the Department of Health and Human Services as it seeks to purchase billions of dollars in needed medical equipment.
Ellen Lord, undersecretary of defense for acquisition and sustainment, said her office has worked closely with Congress and federal agencies to meet the needs of both the medical and defense industries.
“We are thankful the Congress provided authorities and resources that enabled the [executive branch] to invest in domestic production of critical medical resources and protect key defense capabilities from the consequences of COVID,” Lord said in a statement. “We need to always remember that economic security and national security are very tightly interrelated and our industrial base is really the nexus of the two.”
The Democratic-controlled House Committee on Appropriations has made clear that the Defense Department’s decision to funnel the DPA funding to defense contractors went against its intent in that section of the Cares Act, which was to spur the manufacturing of personal protective equipment.
“The Committee’s expectation was that the Department would address the need for PPE industrial capacity rather than execute the funding for the DIB (defense industrial base),” the committee wrote in its report on the 2021 defense bill.
Pentagon officials counter that they have been fully transparent with both Democrats and Republicans in Congress on their plans for the funds.
Defense officials say the Pentagon’s funding priorities were influenced heavily by an industry study drawn up in 2018. The study, prompted by an early executive order from Trump and by economic adviser Peter Navarro and carried out in close consultation with defense industry associations, pointed to several hundred supply chain shortfalls that could hamper the U.S. military’s ability to compete with China.
The Pentagon receives funding under the Defense Production Act each year to shore up companies it deems critical, but in much smaller amounts — the 2020 allocation was about $64 million. The money is disbursed by the Pentagon’s industrial policy office under the law’s Title III, which gives the president broad authority to mobilize domestic industry.
The pandemic funding “became an opportunity for the Department to take what is almost a windfall and use it to try and fill what are some very critical industrial base needs … but that are only tangentially related to COVID,” said Bill Greenwalt, a visiting fellow with the conservative American Enterprise Institute who oversaw defense acquisitions in the George W. Bush administration.
The virus-related funding came at a time when U.S. military spending was already near all-time highs. The $686 billion defense budget for fiscal year 2019 is comparable to a typical year during the Cold War or the period shortly after 9/11, although it has declined somewhat as a percentage of the economy. Major defense contractors such as Lockheed Martin, General Dynamics and Northrop Grumman have remained financially healthy despite some pandemic-related disruption, and have continued paying stock dividends to investors.
Defense industry groups argue that the DOD awards are crucial to ensuring that important niche manufacturers don’t wither away during the economic shock caused by the pandemic. Companies that sell aircraft parts for both military and commercial jets, for example, have been financially wrecked by a global slowdown in air travel.
“As you lose some of these capabilities, some of them are gone forever, and it comes at a very high price to reconstitute them,” said Wes Hallman, vice president for policy at the National Defense Industrial Association, a trade group.
Over a third of the awards were for less than $5 million and went to smaller firms such as the American Woolen Company in Connecticut, which received $2 million to help make Army dress uniforms. Executives at the company did not return voice mails and emails. A batch of small awards went to companies working on drone technology.
“At the root of this was an enormous unprecedented crisis we were facing, and the need for government to move quickly, which it did,” said Eric Fanning, a former Army secretary who is president of the Aerospace Industry Association.
But hundreds of millions of dollars also flowed to several large, established companies, such as GE Aviation, a subsidiary of General Electric, which received two awards worth $75 million in June. A subsidiary of Rolls-Royce — a company best known for its luxury cars but that also has a lucrative line of business as a military supplier — received $22 million to upgrade a Mississippi plant.
Rolls-Royce did not respond to specific questions about the award.
“This funding pulled planned work on existing signed contracts between GE Aviation and the U.S. Government forward and is an important way to help ensure our engineering activities and supply chain, which includes many small and medium-sized companies, can continue to deliver for the Armed Forces, sustain jobs and support the economy,” said Perry Bradley, a GE Aviation spokesman.
Critics say it’s unclear why the defense industry should have gotten what amounts to a dedicated bailout fund when few other sectors of the economy got the same treatment.
And government data shows that at least 10 of the approximately 30 companies known to have received the Defense Department DPA funds also got loans through the Paycheck Protection Program, another relief package created by the Cares Act. That program, overseen by the Small Business Administration, offered millions of firms forgivable loans if they used the lion’s share on payroll.
For instance, Weber Metals, a California-based subsidiary of German firm Otto Fuchs, received between $5 million and $10 million through PPP in April to support 412 jobs, and then got an extra boost through a $25 million DOD relief award in June. Weber officials did not respond to requests for comment.
Defense Department spokeswoman Jessica Maxwell said the two bailout programs are not “in conflict or duplicative,” because a PPP loan does not make any directive with respect to supporting national defense.
ModalAI, a small California company that builds drone flight controllers and computing platforms, received $3 million through the Pentagon program for an 18-month effort to develop a new flight controller. In April, it received a PPP loan of between $150,000 and $350,000.
Chad Sweet, chief executive and co-founder of ModalAI, said the company’s proposal was long-planned — it started applying for the Pentagon funds last summer, several months before the pandemic hit. The process gained steam in March and April.
The Defense Department asked ModalAI for documentation on how its business was affected by the pandemic, as well as information on other relief funding it has received. The Pentagon then made the decision unilaterally that ModalAI’s award would come out of the Cares Act funding.
“I don’t know how they made that decision,” Sweet said. He said his firm has been able to hire about five to seven employees as a result of the DOD award.
The Pentagon did initially plan to spend the bulk of the $1 billion fund on medical supplies. In April, Lord told reporters that three-quarters would go toward medical resources, and the rest to defense contractors.
But in June, she told lawmakers during a congressional hearing that the department soon realized that defense contractors had “critical needs as well.”
So DOD lawyers approved an arrangement whereby some $17 billion in HHS funds would be used for the medical industry instead, freeing up more money for defense contractors.
“So it expands the pool, and allows us to use even more money while taking the balance of the $1 billion that came through for DPA Title III, and use a portion of that for the defense industrial base,” Lord said at the hearing. Ultimately, in the spending plan that the Pentagon presented to Congress in June, it set aside $688 million for the defense industry.
Thomas Spoehr, director of the Heritage Foundation’s Center for National Defense, said Pentagon officials contend they have thrown all the money they can at the effort to produce the medical supplies needed to combat the pandemic.
“Their belief is that any investment that could be made to increase the production of covid-19 items has been made,” he said.
One midsized company that benefited from the DOD awards was SolAero Technologies, an Albuquerque firm that makes satellite solar power systems and employs about 320 people.
When the pandemic hit, the firm was squeezed between the huge companies it supplies, which slowed down production, and the smaller, often cash-based businesses that make up its own suppliers, which it was trying to support, said chief executive Brad Clevenger.
Around March, the company heard from Lord’s office, which was reaching out to defense contractors to understand how the pandemic was affecting them. SolAero worked with the Pentagon to check if the company was eligible for other relief programs, which it was not, Clevenger said.
In late May, the Pentagon announced a $6 million award to SolAero to expand production. Clevenger praised the process, which he said involved multiple layers of review but still delivered needed help in a span of two months.
In its news release announcing the deal, the Defense Department said the funds would “enable SolAero to retain critical workforce capabilities throughout the disruption caused by COVID-19 and to restore some jobs lost because of the pandemic.” Clevenger estimated that the award saved the jobs of 25 SolAero employees.
But the Pentagon did not impose any requirement that SolAero refrain from layoffs as a condition of receiving the funds, only that it deliver on the agreed project, Clevenger said.
“How we do that, with what workforce, is up to us,” he said.