New Questions Follow Deal With McDonnell : Defense: Critics say a $237-million Pentagon settlement over the C-17 is unfair to taxpayers. Some say the pact was not reached legally.

Only a year after the Pentagon rebuked three Air Force generals for secretly bailing out McDonnell Douglas Corp., new evidence is prompting questions about whether the firm is again receiving unusual financial assistance from the U.S. government.

Sen. Charles Grassley (R-Iowa) has charged that the Pentagon’s recent settlement with the firm on its troubled C-17 cargo jet program was a “back-door bailout operation” and said the Pentagon may even lack legal authority to consummate the multimillion-dollar deal.

The company contends the agreement is proper.

“This is no bailout,” McDonnell spokesman Larry McCracken said. “There were compromises made by everyone. It is a tough settlement, but you have to negotiate any settlement.”

Grassley bases his charges on two key documents that show senior Pentagon officials agreed to pay $237 million to McDonnell, mainly to cover a claim that had already been ruled legally invalid only a month earlier.

The entire settlement was branded a “lousy deal” for taxpayers by General Accounting Office analysts last week, but the existence of the documents raise added questions about whether the settlement was agreed to legally.

McDonnell, saying the government was at fault for many of the plane’s problems, had filed $450 million in claims and was preparing to file for another $1.25 billion, McCracken noted. The $237-million settlement was not tied to any specific item or claim, according to McCracken and a Pentagon spokesman.

“It is a reasonable settlement in the best interests of taxpayers,” the Pentagon spokesman said. “We are making a comprehensive business settlement on a large group of claims.”

The complex issue is reminiscent of the political furor that erupted in 1993 when former Defense Secretary Les Aspin fired an Air Force general and reprimanded two others for their involvement in a $500-million plan to bail out McDonnell Douglas, which is building the C-17 in Long Beach.

The new documents cited by Grassley were unearthed by the GAO, the investigative arm of Congress, only in the past two weeks in their examination of the huge C-17 settlement.

Under the direction of Deputy Defense Secretary John Deutch, a panel of exerts recommended a comprehensive program to put C-17 production back on track. McDonnell is expected to lose $1.4 billion on the program and the plane has been unable to meet the Air Force’s performance requirements, forcing the service to downgrade its specifications several times.

The Deutch plan was announced Dec. 15. It included paying McDonnell $234 million to settle a claim involving production of the C-17 wing and $3 million to settle several smaller claims, according to internal working papers of the Deutch panel. Grassley’s staff says the documents refute the Pentagon’s explanation that the payment was for no specific claim.

The complex saga began in July, 1993, when McDonnell Douglas claimed that Congress had used political pressure in the 1980s to spread some of the financial benefits of the C-17 program beyond California.

McDonnell claimed that the Air Force, bowing to congressional demands, leaned on the company to transfer production of the C-17 wing from Long Beach in violation of the contract. After considering various bids, McDonnell agreed to move the wing production to Lockheed Corp.’s plant in Marietta, Ga.

But Lockheed experienced technical problems, a huge cost overrun and a nasty private dispute with McDonnell. Ultimately, McDonnell fired Lockheed as a subcontractor and transferred wing production back to Long Beach, but said the mess had cost $234 million. It blamed the government.

The Air Force considered McDonnell’s claim for four months and concluded that it had no merit. The decision was made by James C. David, a contracting officer for the Air Force who had sole legal authority to make the decision.

David’s decision, a copy of which was provided to The Times, ruled that the Air Force had never forced McDonnell to move wing production to Lockheed. But even more important, David found that McDonnell originally claimed that the move would save $76.5 million, which the Air Force allowed McDonnell to keep in exchange for releasing the government from any future claims.

“We let them pocket $76.5 million so they couldn’t later try to up the price on us,” one Air Force critic said. “And now Deutch is going to pay them another $234 million on the same thing.”

But McCracken, the McDonnell spokesman, said it wasn’t surprising that an Air Force official would reject a claim against the service. He said the firm filed an appeal of the decision with the department’s Board of Contract Appeals.

Meanwhile, Deutch’s working group, which included retired aerospace industry executives, senior military officers and defense officials, ruled that the wing claim seemed reasonable.

“After analysis and discussion, the senior level review group decided the government should pay 100% of the cost,” according to an issue paper by the group.

However, Michele Mackin, a GAO senior evaluator, said Deutch’s working group reached the decision “without any legal or financial analysis or audit.”

Congress must now consider whether to allow the settlement. Four congressional committees, which will meet in secret, will consider a Pentagon request to “reprogram” existing funds to cover this year’s portion of the deal.

Under the rules of armed services and appropriations committees, the full Congress will never get a chance to vote on the action involving the nation’s largest defense firm, according to Grassley’s staff.

“This is more mounting evidence that the culture in the Defense Department and in the military stinks,” said Grassley, a longtime Pentagon critic. “This all adds up to business as usual.”