Pentagon denies overcharging branches for fuel, using surpluses for slush fund

Senior Airman Justin Smith, 23d Logistics Readiness Squadron fuels distribution operator, extends a fuel hose, Oct. 25, 2016, at Moody Air Force Base, Ga. Annually, the fuel distribution section pumps approximately 6.3 million gallons of fuel to an assortment of aircraft. (U.S. Air Force photo by Airman 1st Class Daniel Snider)

The Pentagon has generated almost $6 billion during 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 sustain mismanaged or underfunded military programs — a practice the Pentagon denies.

According to the Providence Journal, since 2015, the Defense Department has banked surpluses from its fuel accounts, and taken those profits to fund $80 million to train Syrian rebels, $450 million to shore up a prescription-drug program riddled with fraud and $1.4 billion to cover unexpected expenses from the war in Afghanistan, according to military accounting records.

The Journal says the Pentagon has amassed the extra money by charging the armed forces for fuel at rates often much higher — sometimes $1 per gallon or more — than what commercial airlines paid for jet fuel on the open market.

Under a financial structure purportedly dating back to World War II, the DoD 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, separate operating budget. The structure is intended to reduce duplication and promote efficiency, according to the Journal.

The Journal reports the DoD is the largest single consumer of fuel in the world.

Each year, it buys an estimated 100 million barrels, or 4.2 billion gallons, of refined petroleum for its aircraft, warships, tanks and other machines.

The ‘status quo’ practice of manipulating fuel revenue to plug unrelated gaps in the defense budget has escalated in recent years, prompting allegations — and official denials — the accounts are being used as a pseudo slush fund.

Reporting from the Journal suggests Congress routinely approves requests to skim off fuel funds as a straightforward way to balance the DoD’s books. Lawmakers, however, are increasingly questioning budgeting practices that enable the Pentagon to accumulate large windfalls from fuel sales in the first place.

The Journal reports the obscure accounting policy demonstrates 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.

The Journal takes a look behind the curtain and alleges the Pentagon is struggling to explain to Congress why it buried an internal study exposing $125 billion in administrative waste, including sky-high salaries for many defense contractors.

According to the Journal, the DoD, which is the only federal agency that has failed to balance its books, suffers from deeply rooted financial woes at a time when the president is asking to add $54 billion to next year’s defense budget, about a 10 percent spike over current spending caps.

One former senior leader is accusing 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, tells the Journal. “But if we do it too loudly, oh man, they come back on us really hard.”

The Journal says the financial surplus, called the bishop’s fund by insiders, is being used like petty cash.

“Another word for it is ‘slush fund,’” said Mabus, who left office in January.

In a statement to the Journal, the Pentagon acknowledged that it accumulated $5.6 billion in “enterprise gains” from fuel purchases between 2010 and 2016, but said the surplus is 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, tells the Journal. “Sometimes you overestimate what the price will cost and you get an asset, and sometimes you underestimate and you get a deficit.”

Work denies the Pentagon has a “bishop’s fund” or a deliberate scheme to inflate the fuel prices. “I vehemently disagree with that characterization.”

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