Proposed Air Force tanker purchase plan said to cost less than lease

A proposal by Senate Armed Services Committee Chairman John Warner, R-Va., and ranking member Carl Levin, D-Mich., to lease 25 Boeing 767 tankers and buy 75 others in the normal budgeting process would cost $4 billion-$5.1 billion less than the Pentagon's proposed plan to lease all 100 aircraft, according to a new Congressional Budget Office study.

In its analysis of possible tanker acquisition strategies, CBO reinforced its earlier assertions that a lease arrangement is significantly more costly than purchasing the planes through the normal appropriation and procurement process.

The least costly option, according to the study, is purchasing all 100 planes under a newly negotiated contract. This would allow the Pentagon, as a large buyer, to obtain the best price from Boeing-roughly $15 billion in current dollars and a savings of $6.7 billion compared to the current proposal-the study found.

The Warner-Levin proposal to lease 25 planes and purchase the remaining 75 under existing contracts would save about $4 billion in acquisition costs, compared to the original plan to lease all 100 planes. And if this option is pursued under two newly negotiated contracts, it could save as much as $5.1 billion, the study contends.

After reviewing the Pentagon's own analyses of these and other alternative strategies, CBO found the department's estimates understate potential savings. This is due to the fact that the Pentagon's savings estimate of only $2 billion is based on the original contract, "which includes terms and conditions that are unique to this lease arrangement and increase the costs of acquiring the tankers."

Still, the Pentagon has said all along that the benefits of the lease outweigh a direct purchase. Leasing the planes would allow the department to defer large payments into the future while providing timely delivery of the aircraft.

Direct purchase of the planes would require the Pentagon to pay more money upfront-most likely in fiscal 2006 and 2007-and delay acquisition of the aircraft in the process.

The study also finds that while the Pentagon continues to describe its proposed financing arrangement as a lease, CBO believes the transaction would in fact qualify as a federal government purchase of the tankers because the special purpose entity set up to buy the aircraft would be substantially controlled by, and act on behalf of, the federal government.

In addition, CBO says the proposal negotiated by the Air Force, or any option that might take advantage of leasing mechanisms, fails to meet the conditions for an operating lease specified in congressional and OMB scorekeeping guidelines, and that "recording such transactions as an operating lease would be at odds with standard government accounting principles."

The study adds, "We believe that, if recorded properly, the budget authority and outlays for the Air Force's leasing arrangement, or any hybrid lease and purchase proposal, would be similar to the amounts required for a direct purchase in both magnitude and timing."

Senate Commerce Committee Chairman John McCain, R-Ariz., will conduct a hearing Thursday to consider new information provided by CBO, GAO and others regarding the lease proposal.