Scott Hoolahan | To Secure the Military, End Price Gouging

SCV Voices: Guest Commentary
SCV Voices: Guest Commentary

Amid simultaneous wars in Europe and the Middle East and mounting tensions with China, calls to strengthen our nation’s defense have only grown louder on both sides of the aisle. In March, the Biden administration came out with the largest Pentagon budget request in American history, to the tune of an eye-popping $842 billion. 

Ranked third in the country among states receiving defense contracts, California’s defense contractors are about to get a big slice of the pie. As the birthplace of the defense industry, many of the world’s most influential defense corporations still reside and conduct business in the Golden State today. Northrop Grumman alone has six facilities in the Los Angeles area. There is no doubt this unprecedented defense budget will prove to be an adrenaline shot for California’s economy.

While the defense industry will surely benefit, our military and American taxpayers may wind up getting the short end of the stick.

This dynamic has persisted for decades, with defense companies routinely overcharging the government without consequence, abusing billions of American tax dollars in the process. In fact, roughly half of this year’s defense budget is already set to go to defense contractors, but the Pentagon’s contracting rulebook still doesn’t have sufficient safeguards in place against price-gouging. Over the past decades, the defense industry has amassed immense profits and power, to the detriment of our military preparedness.

How did the United States get to this point? Why is our government allowing this to happen?

The regulatory landscape of the defense industry first shifted in the 1980s when legislators, swayed by industry lobbyists, began to dismantle federal protections in the negotiation process. In 1993, the Pentagon encouraged a wave of mergers among defense firms, aiming to cut expenses. Contrary to its cost-saving intentions, however, this effort led to the creation of five massive defense conglomerates that now wield significant leverage in pricing and negotiation. 

From this point on, the cost of weapons and equipment for the Pentagon began to rise, soaring far beyond the pace of inflation.

One of the most consequential regulatory changes was to the mandatory disclosure threshold — the minimum value of a defense contract before defense corporations have to provide certified cost or pricing information. In 1994, this amount was $100,000, allowing the government to see in many cases if prices were on par with the market, and negotiate better deals by avoiding overcharges. 

Today, that threshold amount is $2 million, rendering the Pentagon incapable of determining if the military is getting a fair deal on any contracts that fall below this amount. Just two years ago, the Pentagon’s watchdog discovered that one defense company, TransDigm, had made $20.8 million entirely from “excess profits” by overcharging the Pentagon for spare parts. 

In fact, for one spare part, TransDigm reportedly charged as much as 3,850.6% above what would have been considered a fair and reasonable price. This was possible because the vast majority of their contracts fell below the $2 million threshold.

Although Congress asked TransDigm to refund their excess profits, the company refused. Legally speaking, everything TransDigm did was by the book — Congress created the rules, and now our national defense is forced to deal with the consequences. 

Even when a defense company is caught price-gouging, the Pentagon is no longer capable of demanding a refund because of how weak federal contracting laws have become. 

While the Truth in Negotiations Act (TINA), now called the Truthful Cost or Pricing Data Act, used to provide the ability to issue mandatory refunds to combat overpricing, that law has been gutted to the point where it is nearly impossible for it to be triggered. For decades, the Pentagon has essentially been negotiating with both hands tied behind its back.

As residents of a state dominated by the defense industry, we have a distinguished opportunity to stand up and press for defense reform from our California representatives. 

Nobody understands both sides of the military industry more than Rep. Mike Garcia, who served in the U.S. Navy and managed the development of the F-15EX fighter jet at Raytheon afterward. By representing most of northern Los Angeles County, where some of the largest defense contractors are stationed, and serving on the powerful House Defense Appropriations Subcommittee, Congressman Garcia has an outsized opportunity to champion reform in this area.

I urge Congressman Garcia to protect the American taxpayer’s dollars and ensure our military is prepared by addressing defense price gouging once and for all. 

By lowering the mandatory reporting threshold and supporting refunds for overcharging, Congress can provide strength and efficiency to our military at a critical moment. It can ensure that defense contractors conduct their business with the same integrity expected of our service members.

Rather than lining the pockets of defense corporations, Congress must ensure that every dollar spent on defense is a dollar spent toward a stronger, more secure America. As a respected voice in Congress and a trusted advocate for national defense, Congressman Garcia has the power to lead this effort.

Scott Hoolahan is the president of the Santa Clarita Valley Rotary Club.

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