ART - Leasing as a Strategic Financing Option: the Navy's Maritime Propositioned Ships Experience 2008

The document discusses the controversy surrounding the Navy's TAKX Program, which involved leasing cargo ships instead of purchasing them. The document highlights various legal and financial issues related to the program. The Government Accountability Office (GAO) raised concerns about the Navy over-encumbering the Navy Industrial Fund (NIF) by requiring it to cover lease payments and termination fees. The Navy sought Congressional action to proceed with the program, and the Supplemental Appropriations Act of 1983 authorized it to do so. The Defense Authorization Act of 1984 further addressed the program's analysis and authorization. The document also discusses the analysis conducted by the Joint Committee on Taxation (JCT), which contradicted the conclusion of the Arthur Andersen & Co. (AGL) report that leasing was more cost-effective than purchasing. The JCT argued that leasing was only cheaper if the lessor's borrowing cost was lower than the lessee's, and since the Federal Government had the lowest borrowing cost, the TAKX program compensated the lessors for higher financing costs. The JCT concluded that leasing each ship was $9.7 million more expensive than purchasing. The controversy surrounding the TAKX leases also involved allegations of subsidization and tax breaks. Senator Metzenbaum criticized the provision in the TAKX leases that allowed for rate increases if the IRS rejected any tax benefits, arguing that it amounted to the Navy paying the legal costs of private investors seeking to overrule the IRS. The Washington Post also raised concerns about the TAKX leases, likening them to tax advantages targeted by Congress in pending legislation. Congressional debate on the cost efficiency of the TAKX leases took place, with Chairman Charles Rangel holding hearings to question the Navy's circumvention of Congressional review and oversight. The Navy defended the use of "commercial standards" instead of "military standards" and argued that it saved $35 million per ship. Ultimately, Chairman Rangel's subcommittee acknowledged that they had no continuing objections to the TAKX Program. The document concludes by discussing the different analyses and policy positions on leasing arrangements for military assets. It emphasizes the importance of presenting an analytic base for policy positions and notes that the complex arguments surrounding the cost-effectiveness of the TAKX leases were designed to influence policy rather than advance understanding. The controversy surrounding the TAKX Program led to legislative actions aimed at increasing Congressional oversight and preventing similar leasing programs in the future.