A REVIEW OF THE REPORT AND HEARINGS BY A SUBCOMMITTEE OF THE HOUSE ARMED SERVICES COMMITTEE ON THE AEROSPACE CORPORATION

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP80B01676R000500110005-2
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 5
• Document Creation Date: December 12, 2016
• Document Release Date: May 30, 2002
• Sequence Number: 5
• Publication Date: August 28, 1965
• Content Type: MF

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26AUG1965
MEMORANDUM FOR THE RECORD
SUBJECT: A Review of the Report and Hearings by a Subcommittee of the
House Armed Services Committee on the Aerospace Corporation
1. Aerospace Corporation, a nonprofit corporation created by the
United States Air Force as a key technical adviser for advanced missile and
space programs, was incorporated under the laws of the State of California
on 3 June 1960. It now has 4, 306 employees, of which 1, 752 are technical
staff members, and 2, 554 are administrative and support personnel. It is
the 45th largest defense contractor.
2. The Aerospace Corporation has undergone a study of fiscal and
management policy and control by the Subcommittee on Special Investigations
of the House Committee on Armed Services, chaired by Representative
Porter Hardy, Jr. The inquiry was limited to the management policies and
fiscal controls both as exercised by Aerospace Corporation itself and by the
Air Force in regard to Aerospace. It did not attempt to assess the technical
competence of Aerospace personnel nor the achievements of the corporation.
The Subcommittee has had a continuing interest both in the operations of
Aerospace Corporation and the related policy decisions of the Air Force.
The Subcommittee made a review in 1964 of the cost of morale and recrea-
tion benefits for defense contractor employees and found slipshod control
of certain expenditures in Aerospace and, therefore, decided that a further
examination of management and fiscal control was needed. The Subcommittee
also felt an investigation was necessary because of the attitude of Aerospace
management, that although the corporation is a wholly Government supported
nonprofit corporation created by a Government Agency, neither the Air Force
nor the Congress's auditing agency, the General Accounting Office, had a
right to audit all of its expenditures.
3. Initial working capital of the corporation was provided under an
"advance payment pool agreement" between the Air Force and Aerospace.
Aerospace has received over $309 million in Air Force contracts and $16
million in fees. The corporation operates under a cost-plus-fixed-fee contract,
which is negotiated annually. One of the main difficulties the Subcommittee
found was a conflict in the philosophies of Aerospace Corporation and the
Air Force on the payment and use of fees. The corporation believes its fees
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should be based on "worth of task" as provided by the Armed Services Procure-
ment Regulations for commercial firms. Under this method, the contractor
and the contracting officer establish the relative importance of various tasks
to be performed by the firm and adjudicate a fee accordingly. The Air Force,
on the other hand, has stated that the fee should be based on "need. " This is
official Air Force policy for its nonprofit corporations. The theory is that a
nonprofit corporation has none of the risk and profit requirements of a private
company. A private company requires fee for taxes, payment of dividends,
capital improvements, continuing operating capital, etc. Air Force policy
recognizes that a nonprofit organization might be said to need fee for inde-
pendent research, working capital, and acquisition of facilities. Although the
Subcommittee does not take a final position with regard to the method for
setting fees, it is clear from its report that the Subcommittee feels that all
of the needs of a nonprofit corporation could be met through a combination
of reimbursement and an advance pool arrangement.
4. The Subcommittee took issue with Aerospace Corporation over
its purchase of land and facilities financed by fees and borrowed capital,
especially since existing Government owned land and facilities were avail-
able, and needed only minor modification and refurbishing. The Subcommittee
felt that the articles of incorporation did not adequately protect the Govern-
ment in obtaining title to the land and facilities.
5. In its investigation of Aerospace, the Subcommittee found that
Aerospace's management wanted the benefits and prerogatives of private
industry without any of the risks plus the protection and security of Govern-
ment services without any of the restrictions. The investi ation al,.o.found
that Aerospace used its fees__in many questionable ways; for
high salarie._.s,..... an ~ Pa:-?ng..unusually
_ .. m.y questionable fri
i
m
t
n, ee could obtain any from Aerospace concerning the expenditures made by the corporation from
x
ge enefits, .,,.o erly liberal education
costs too elaborate and frequent entertaining, the use of a public..relations
firm at a ver hl h retainer rate to advise an over staffed public information
component of the corPoration, and the use of a consulting psychologist for
-- i
serv~ces~of dublou_s, vaiu.,e.,, _Wheneve.r.._Such..items. were..-disallowed-by the Air
Force contracting officer from reimbursable funds,, the were paid through
the use of monies from fees by the corporation. Throughout the investigation
and the negotiations with Aerospace, the Subcommittee found that neither the
contracting officer nor representatives from the General Accounting Office
and even investigators of the Subco
t
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fee. This lack of cooperation by Aerospace was based apparently upon the
decision of its Board that this information was privileged and that the cor-
poration need not reveal the details of fee expenditures.
6. The Subcommittee found also that Aerospace had a number of
personnel problems with potential security implications and that Aerospace
handled these matters with an extraordinary measure of forebearance for the
employees involved and did not always conform to security procedures and
regulations, even to the point of not informing the Air Force about the cases.
It complained about the hiring of a private detective firm to conduct certain
investigations into the conduct of employees.
7. The .Subcommittee also found that the Air-, orce-must share in
the responsibili for_inadeguate fiscal controls. The Subcommittee pointed
out that there were sufficient laws, regulations, and policy directives avail-
able which could have prevented many of the reprehensible practices that
occurred. The Subcommittee was told by the Air Force that "the technical
contributions of the Aerospace Corporation have far outweighed the dollars
we have invested, " but the Subcommittee did not consider this responsive
and stated: "No amount of technical perfection on one side of the ledger can
ciencvLLonthe other side."
balance waste and ineffi
8. The Subcommittee concludes that if Aerospace is going to function
within the terms of its charter and within the scope of Air Force policy, some
changes will be in order. First, title to facilities should be vested in the
Government of the United States, rather than the corporation. Second, there
is no real necessity for fee but if the fee system per se is not abolished, at
the very minimum, Aerospace should be required to make complete and
detailed disclosures to the Air Force of its fee expenditures. Third, the
Secretary of the Air Force should take such steps as are required to insure
the prudent control of public funds expended through Aerospace Corporation.
Fourth, the Office of the Secretary of Defense should revise the procedure
for contractor employee security clearance to discontinue the present prac-
tice of transferring employees' "secret" clearances from one contracting
firm to another. Fifth, the Air Force should review the adequacy of security
procedures at Aerospace. Sixth, the Air Force should require a complete
review of salary and personnel practices at Aerospace to prevent recurrences
of past abuses. Sixth, the Air Force should support its contracting and audit-
ing personnel in such steps as are necessary to enforce reasonable manage-
ment controls.
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9. The Subcommittee investigation gave rise to some questions which
may have a bearing on Agency operations. Is the concept of having a third
organization do a single-manager job on technical matters a necessity at
present, especially in systems technology? The Subcommittee suggested
that it may be worthwhile for the Air Force to compare the management
methods used by other Government agencies with extensive research and
development programs. It said that the Navy had managed 'its nuclear-age
research and development programs with outstanding successes such as the
nuclear submarine and the Polaris missile. The Subcommittee also raises
the question of the role of the nonprofit corporation in the conduct of the
Government's business, and makes itself clear that if such are established
by any Government agency, this does not excuse such agency from moral
responsibility for prudent control of public funds spent through the nonprofit
corporation.
10. Also, the Subcommittee feels that more thought should be given
to the impact of nonprofits on Government service, because as more and
more difficult tasks are thrown to nonprofit groups this may well run counter
to the Government's efforts to improve the quality and morale of its own
career service- -civilian and military.
11. The Subcommittee also voices what it calls a widely accepted
fact of life, and that is the practice of setting up nonprofit organizations to
get around Government salary restrictions, and asks if this doesn't set up
a ludicrous cycle in Federal pay comparisons since President Johnson
recently said that in making a study of Federal pay in comparison to private
enterprise, the salary rates of the nonprofit institutions, inter alia, would
give added assurance that Federal salary rates are kept in appropriate
relationship with salary rates throughout our economy.
Office of Legislative Counsel
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