Has the Government Legalized Secret Defense Spending?
By Matt Taibbi, Rolling Stone
19 January 19
While a noisy Supreme Court fight captivated America last fall, an obscure
federal accounting body quietly approved a system of classified money-moving
October 4th, 2018, was a busy news day. The fight over Brett Kavanuagh's
Supreme Court nomination dominated the cycle. The Trump White House received
a supplemental FBI report it said cleared its would-be nominee of
wrongdoing. Retired Justice John Paul Stevens meanwhile said Kavanaugh was
compromised enough that he was "unable to sit as a judge."
#NationalTacoDay trended on Twitter. Chris Evans told the world production
wrapped on Avengers 4.
The only thing that did not make the news was an announcement by a
little-known government body called the Federal Accounting Standards
Advisory Board - FASAB - that essentially legalized secret national security
spending. The new guidance, "SFFAS 56 - CLASSIFIED ACTIVITIES" permits
government agencies to "modify" public financial statements and move
expenditures from one line item to another. It also expressly allows federal
agencies to refrain from telling taxpayers if and when public financial
statements have been altered.
To Michigan State professor Mark Skidmore, who's been studying discrepancies
in defense expenditures for years, the new ruling -- and the lack of public
response to it - was a shock.
"From this point forward," he says, "the federal government will keep two
sets of books, one modified book for the public and one true book that is
hidden."
Steven Aftergood of the Federation of American Scientists' Project on
Government Secrecy was one of the few people across the country to pay
attention to the FASAB news release. He was alarmed.
"It diminishes the credibility of all public budget documents," he says.
I spent weeks trying to find a more harmless explanation for SFFAS 56, or at
least one that did not amount to a rule that allows federal officials to
fake public financial reports.
I couldn't find one. This new accounting guideline really does mean what it
appears to mean, and the details are more bizarre than the broad strokes.
The FASAB ruling adds a new and confusing wrinkle to what little we know
about levels of spending in the intelligence community. Officially, the
fiscal year 2019 appropriation is $81.1 billion, which breaks down to $59.9
billion for the National Intelligence Program, along with $21.2 billion for
the Military Intelligence Program.
This made a few headlines, as Trump's "black budget" request was described
as the largest in history. However, as Aftergood notes, even the high FY '19
numbers do not include spending for "classified DoD operations and
procurement." Add now the possibility of future "modifications," and the
real answer for how big a share of national spending belongs to the
intelligence community is probably "God only knows."
Given that the intelligence budget number the government admits to is
already larger than the annual defense budgets of all but two countries on
earth (our own and China's), it seems natural to ask: what are we getting
ourselves into?
The story of openly secret budgets really began in 1949, with the passage of
the Central Intelligence Agency Act. The law exempted the newly christened
spy agency from public financial disclosure.
The CIA Act was a radical departure from the Constitution, which is clear
about public accounting (emphasis mine):
"No Money shall be drawn from the Treasury, but in Consequence of
Appropriations made by Law; and a regular Statement and Account of the
Receipts and Expenditures of all public Money shall be published from time
to time."
The CIA Act created a blunt constitutional carve-out.
"The sums made available to the Agency may be expended without regard to the
provisions of law and regulations relating to the expenditure of Government
funds," the law read. "For objects of a confidential, extraordinary, or
emergency nature, such expenditures to be accounted for solely on the
certificate of the Director."
In other words, while other government agencies had to account for their
expenses, the word of the CIA director was good enough when it came to what
they'd spent and why.
In a few accidental disclosures in the Fifties, CIA expenses appeared as
Department of Defense line items, despite the fact that the CIA is not a
Defense agency.
No one much worried over this issue until the early Seventies. That's when a
series of scandals - from botched assassination attempts abroad to the
discovery of legally proscribed domestic spying programs - invited closer
scrutiny of the CIA. The most famous oversight effort came in the form of
Idaho Senator Frank Church's famed 1975 committee hearings scrutinizing
America's intelligence agencies.
At roughly the same time as the Church hearings, an insurance adjuster named
William Richardson got fed up and filed suit against the U.S. government.
Richardson wanted secret CIA budgets declared unconstitutional. He barely
made the news (his suit was a page 8 blip in the New York Times).
Nonetheless, he went all the way to the Supreme Court, and by a thin margin
(a 5-4 vote) the court ruled against Richardson, upholding the concept of
secret budgets.
Chief Justice Warren Burger wrote the majority opinion. Citing an earlier
ruling, he in essence said a random citizen whose only problem was that he
didn't know where his taxes were going did not have standing to waste the
high court's time.
"A taxpayer," Burger wrote, "may not 'employ a federal court as a forum in
which to air his generalized grievances about the conduct of government.'"
Fast-forward 16 years, when, in the second year of George H.W. Bush's
presidency, Congress passed the Chief Financial Officers Act of 1990.
This new law was aimed at curbing "billions of dollars" said to be "lost
each year through fraud, waste, abuse, and mismanagement" of public budgets.
It demanded that 23 major federal agencies - including the Departments of
Defense, Justice, Interior and many others - designate a CFO and file
regular reports.
These reports were to be in the form of "complete, reliable, timely and
consistent financial information for use by the executive branch."
To create a more uniform standard for this reporting, the government created
FASAB in that same year. The new "Accounting Standards" bureau was designed
to help make apples-to-apples comparisons between budgets of government
departments. With the passage of the CFO Act, the Pentagon was supposed to
begin delivering intelligible numbers about its expenditures. It did not.
Year after year passed without audits. Finally, Congress appropriated money
to hire outside auditors like Ernst & Young to do the work, which was to be
completed last year.
On November 15th, 2018, however, the Department of Defense failed its first
audit, which was conducted by 1,200 auditors. This was after 26 years of
what Sen. Chuck Grassley (R-IA) called "hard-core foot-dragging."
"We failed the audit, but we never expected to pass it," Deputy Secretary of
Defense Patrick Shanahan said at the time.
That the Pentagon failed its audit was no surprise. There had already been
significant hints that even the supposedly legal version of defense
budgeting was an indecipherable morass.
On the day before 9/11, for instance, then-Defense Secretary Donald Rumsfeld
announced that, according to some estimates, "we cannot track $2.3 trillion
in transactions." The following day's events obviously distracted the media
from that shock announcement.
In 2015, the Office of the Inspector General found the Army alone - which
had a budget of $122 billion that year - had $6.5 trillion in "yearend
adjustments" they could not "adequately support."
Skidmore recalls being dumbfounded by the numbers.
"When I saw that first report from 2015, with the $6.5 trillion, I thought,
'That's impossible, that can't be,'" he says.
2018 was to be the year when we finally got answers to questions about
defense spending. Early results were not encouraging. Outside auditors found
that just one Pentagon outfit, the Defense Logistics Agency, could not
account for over $800 million in construction transactions.
Later that year, the DoD flunked its audit, and little-known FASAB quietly
issued a new guidance that may make future disclosures even more remote. The
new rule appears to smooth the way for permanent classification of national
security expenditures.
Formal discussion of the new FASAB rule seems to have begun on August 30th,
2017, at a meeting of the FASAB board. In a staff briefing memo sent to
board members ahead of the meeting, a 1999 declaration from then-CIA
Director George Tenet argued against the disclosure of "topline budget
numbers" for things like the National Intelligence Program - you know, the
program that the was budgeted at $59.9 billion for 2019.
"Disclosure of the budget request reasonably could be expected to provide
foreign governments with the United States' own assessment of its
intelligence capabilities and weaknesses," Tenet said in 1999. "The
difference between the appropriation for one year and the Administration's
budget request for the next provides a measure of the Administration's
unique, critical assessment of its own intelligence programs."
In the briefing memo sent ahead of the meeting, it was suggested FASAB
"allow certain types of departures from other standards when needed."
However, these "departures" would be limited to public financial statements,
and in amounts that would "reconcile in aggregate" to schedules or other
documentation subject to review.
From there, the Board solicited comments from a series of federal agencies
and outside experts about the efficacy of allowing secret "modification[s]"
of public financial statements.
In reply came 17 comment letters, including from private accounting firms
like KPMG and Kearney & Company. Most of the federal agencies solicited
seemed more than happy with the idea of having the authority to "modify"
their public financial disclosures. Homeland Security gave a big thumbs-up.
"DHS agrees with the Board's overall proposed approach for protecting
classified information. Classified information should be protected," it
wrote, with redundant satisfaction.
This made sense, coming from Homeland Security. Why, however, was the
Department of Housing and Urban Development so thrilled? Ben Carson's agency
seemed actively pleased with the idea of allowing the government to move
accounting line items from one agency to another.
"If an entity's identification would disclose there is classified
information," HUD's comment letter read, "it makes sense to include that
organization in another entity."
I asked assistant director of FASAB Monica Valentine if such a thing could
happen under the new rule: "Could an expenditure be moved from [Department
of Defense] to HUD?"
"Because of the classified nature of this topic, I will not respond to
specific examples," Valentine replied.
However, another government source told me flat out that the new rule would
not involve moving line items between agencies. It's not clear, however, how
firm a line that is.
Late last year, for instance, we saw an incident in which two employees of
the National Reconnaissance Office and the NSA were arrested for procurement
fraud in Colorado in a case involving a classified signals intelligence
program. In that instance, the site turned out to be owned by the Department
of Health and Human Services.
In any case, not all of the comment letters FASAB solicited last year were
positive. Several expressed serious concerns. Perhaps the harshest reply
came from the office of the Inspector General for the Department of Defense,
which flatly disagreed with the proposed changes.
"This proposed guidance is a major shift in Federal accounting guidance,"
the agency wrote. It added, "This approach would likely make the financial
statements misleading to all but a select few individuals that are aware of
the Interpretation."
Others expressed concern that under the new rules, federal agencies would
not even be required to tell the public they've made a "modification."
KPMG, for instance, wrote, "We believe that component reporting entities
should be required to disclose that modifications of presentations and
omissions of disclosures were made."
Kearney & Co. didn't see the need for such a major change, and suggested
continuing the current practice of simply redacting sensitive information.
"Financial statements of classified entities should remain classified or
redacted like other classified documents before release to the public," they
wrote.
The firm added, "Allowing only select individuals to view and accept the
interpretations would limit due process and transparency."
Despite these and other objections, on October 4th of last year, FASAB
issued a news release about SFFAS 56. The text of the new rule strongly
resembled the original proposal. The money quote:
This Statement permits the following
- an entity to modify information required by other standards if the effect
of the modification does not change the net results of operations or net
position;
- a component reporting entity to be excluded from one reporting entity and
consolidated into another reporting entity
In plain English, the new guidance allowed federal agencies to "modify"
public financial statements, with essentially a two-book system. Public
statements would at best be unreliable, while the real books would be
audited in "classified environment[s]" by certain designated officials.
When I asked FASAB who would be doing the auditing in "classified
environment[s]," they answered:
"Please contact the federal entity's Office of the Inspector General for
questions pertaining to who does the auditing in a classified environment."
This new rule is not confined to a few spy agencies. It appears to allow a
stunningly long list of federal agencies to make use of new authority to
"modify" public financial statements.
The Treasury Department's definition of a "component reporting entity"
includes 154 different agencies and bodies, from the Smithsonian Foundation
to the CIA to the SEC to the Farm Credit Administration to the Railroad
Retirement Board. The notion that any of these agencies could now submit
altered public financial reports under the rubric of national security is
mind-boggling.
When asked why this authority extended to so many agencies and not just
those with national security mandates, FASAB replied:
"We use a standard scope paragraph in all of our standards. We have never
named specific reporting entities in the scope paragraph. Also - we cannot
anticipate what the name of a future entity might be. It is simply more
practical to make the standards broadly applicable."
In a strange twist, paragraph 8a of the new rule seems to insist that
modifications may only be made if it does not "change the net results of
operations." In conversations with federal officials, this was stressed to
me, that the new rule would not allow for changes to "total net cost" line
items on public financial disclosures.
However, paragraph 8c of the same rule reads:
"An entity may apply Interpretations of this Statement that allow other
modifications to information required by other standards, and the effect of
the modifications may change the net results of operations and/or net
position."
This directly contradicts 8a, and seems to allow in some cases for changes
even to total net position numbers. When asked on the record if 8c opened
the door for greater changes, FASAB answered, "We cannot speculate about the
changes."
One thing is certain: the taxpayer who opens up a federal financial
statement expecting to find correct numbers will no longer be sure of what
he or she is reading. Bluntly put, line items in public federal financial
statements may now legally be, for lack of a better word - wrong.
Moreover, the state is not required to include a disclaimer telling the
reader that modifications have been made.
"FASAB's answer would probably be they would use this authority responsibly
and only when necessary," says Mandy Smithberger of the Project on
Government Oversight. "Unfortunately, that goes against fifty years of
experience when it comes to national security spending."
"That's what makes this so crazy. The list of agencies is so long," says
Skidmore. "If you don't even know what's been modified, why bother reading a
summary for any of them?"
This obscure new accounting guideline should be understood in the context of
a longstanding debate about the need for budget transparency versus the need
to "protect" classified information.
The Brown-Aspin Commission, formed by Congress in the mid-Nineties to
examine a series of intelligence-related issues, was sharply critical of the
non-transparent accounting of intelligence programs.
"Information on intelligence programs has not been organized to facilitate
decision-making," the Brown-Aspin authors wrote, "or to provide outside
reviewers, such as [Office of Management and Budget], with an informed
view."
The commission was dismissive of the idea that publishing bulk amounts of
national security expenditures posed any kind of risk. The CATO Institute
reported at the time that three former CIA directors also agreed with the
assessment. Nonetheless, the commission's suggestions on this issue were not
implemented.
Other democracies, including nations with whom we share intelligence like
Australia, New Zealand, Canada and Britain, publish their intelligence
budgets.
Beyond these guidelines, the United States already admits very little detail
in its national security financial reports.
Despite what Tenet appears to have argued, it's hard to understand what
possible justification there could be in concealing from the public sheer
amounts of spending for agencies like the CIA, NSA or the Defense
Intelligence Agency.
"If this authority is used to obscure those top-line numbers," says POGO's
Smithberger, "that would suggest the potential for abuse."
Smithberger expressed hope that someone in Congress would make an official
effort to learn more about what the new ruling means, and how exactly it
will be implemented.
Given the government's track record in failing to force transparency out of
the Pentagon, it's hard to have a lot of confidence answers will be
forthcoming.
Catherine Austin Fitts was Assistant Secretary for Housing and Urban
Development during the George H.W. Bush administration. She's been working
with Skidmore on defense accounting issues for two years.
She was so alarmed about the new FASAB ruling she commissioned an in-depth
study of "Standard 56" for her site, the Solari Report. In the introduction,
the report writes bluntly that SFFAS 56 is:
".taking government accounting practices from laxly enforced reporting
standards to a new benchmark entirely-expressly approved obfuscation of
reporting and, in some cases, outright concealing financials."
Reached by email, Austin Fitts was pessimistic about the meaning of the new
rule.
"The White House and Congress just opened a pipeline into the back of the US
Treasury," she wrote, "and announced to every private army, mercenary and
thug in the world that we are open for business."
What the rule actually will mean in practice is not clear. But it's not hard
to imagine how it could be employed. A quick look in the historical rearview
mirror offers more than a few hints.
The Iran-Contra affair was, at its core, an accounting issue. In it, a group
of actors used proceeds of weapons sales to fund unauthorized support of
Nicaraguan rebels. Money was moved from one place to another, with the
public cut out of the loop.
Is it possible this new authority would make such behaviors, if not legal
exactly, at least legally invisible?
This would fall in line with the pattern of post-9/11 America. So much about
intelligence programs in the War on Terror era seems already beyond
oversight.
We've been told little-to-nothing about drone assassinations and warrantless
detention, and it took a high-profile whistleblower like Edward Snowden to
break the news of a vast new domestic surveillance program (something about
which former National Intelligence Director James Clapper was willing to lie
under oath).
A legalized dualistic system for public financial reporting would therefore
just be the latest blow to federal transparency, but it would be a big one.
It would be nice to get a few answers before paying taxes into a black box
becomes a permanent feature of American life.
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