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Transcript:

December 19, 2008

BILL MOYERS: In his WALL STREET JOURNAL column this week, the historian Thomas Frank, who wrote the important, recent book THE WRECKING CREW, looks at the Blagojevich scandal in Illinois as the latest revelation of what's wrong with American politics. The problem, he says is "the conception of the state as a business in which every public function is for sale." He says, "The rot is structural; it is trans-partisan; and it stinks to high heaven".

When President George W. Bush announced that "Government should be market-based," writes Thomas Frank, "he was merely applying an ideological gloss to this ancient and supremely bad idea." So we've had one government service after another being turned over to private business for a profit. The Bush administration has outsourced at least $400 billion dollars of government work.

In an investigative series published by the "Seattle Post-Intelligencer", reporter Eric Nalder revealed what happens when one private contractor drops the ball. Here's the latest from our colleagues at expose, narrated by Sylvia Chase.

SYLVIA CHASE: Jacksonville, Arkansas, Little Rock Air Force Base. On the flight line, military precision is on display. But the impressive sight of the C-130 transport aircraft stands in stark contrast to another scene just a mile away within base gates. A military exercise gone awry. The remnants of a battle waged against an unexpected foe. A private contractor hired to build and manage 468 new military family homes at the base, a job it never finished.

GENERAL SCHATZ: This is what I call Jurassic Park, we've got concrete slabs to partial houses built, the homes were just stopped in various stages of construction, as the different contractors walked off the jobs because they weren't being paid. It's just as if you turned the light off back in April of 2007, and nothing has changed since then.

SYLVIA CHASE: The private housing company is called American Eagle Communities. In 2004 it came with the lowest bid not only to build the new homes, but to renovate and manage more than 700 more at the Little Rock base. At the time, the deal was estimated to be worth 500 million dollars. But after building only 25 of the 468 new homes American Eagle left town.

GENERAL SCHATZ: So we still have airmen and their families that are living in housing that was built in the 1950s. They were promised nice new houses, and that's what I was upset about.

SYLVIA CHASE: Seattle, Washington: known for rain, software and aircraft manufacturing. It is also home to a large military community: 80,000 Navy, Air Force and Army personnel, living and working at seven different bases. And in February 2005, even as project delays were beginning back in little rock, American Eagle landed another military housing contract here. John Jack oversaw that contract.

JOHN JACK: I started with American Eagle in March of '05. My job was to administer the contractual agreements between the General Contractor and American Eagle Communities. As well as administer the budget controls.

SYLVIA CHASE: He didn't like what he saw. He says he wanted to do the right thing. He became a whistleblower. But he'd gotten nowhere spending two years of his life trying to convince authorities that the project had gone awry. Now he called a reporter at the "Seattle Post-Intelligencer", Eric Nalder.

ERIC NALDER: He said right away that he was quite nervous. He said he had never called anyone like this before. Right away he told me that it involved a large military project. But he said to me and I remember the words, were, he said something like, you wouldn't believe the fraud. John had a ton of information; it was a very complicated story that he was telling me, much more full clinically detailed information than full of anger.

JOHN JACK: American Eagle was a newly formed company. They told me that the project consisted of 605 new homes with associated amenities package. On the surface it looked great. It appeared to me there was more than enough money there. To construct the homes that was originally designed.

SYLVIA CHASE: In 1996 Congress enacted a law that put military housing in private hands. Companies would compete for building and managing 180,000 new homes across the country replacing housing dating to the 1950s. The law required public-private ventures, with each military branch given the job of overseeing their new housing partners. The program grew slowly at first, but soon it took off.

ERIC NALDER: In the Bush administration you have a wish to turn over to private industry the business of government. In turning over of government to private industry, to release them from oversight. There is a lot of logic behind the idea, one of the logics is that, if only government were to operate like private industry, then government would be a more efficient operation. But if you think about it, what if they spent money like the executives of Lehman Brothers and Enron? Do we really want our governments operating like that?

SYLVIA CHASE: Soon a bevy of companies started competing for housing contracts, one was American Eagle. It won contracts in Florida, Georgia, Arkansas, Massachusetts and Missouri. But its biggest deal was to build homes in the Seattle area at three Navy bases: Kitsap-Bangor, the Whidbey naval station, and Everett naval air station.

It was a lucrative contract that would total $3.2 billion over its life. The contract worked like this: American Eagle would form a partnership with the Navy, each putting in some investment money - for American Eagle it was $5.5 million. Then the partnership borrowed hundreds of millions more to build military homes. As part of the deal, American Eagle also gained the right to become a landlord - collecting rents on some 3,000 Navy homes in the Seattle region for 50 years.

ERIC NALDER: It's a very good deal, because you get homes for free to manage, and to collect rents on, you get up front money from the taxpayer and the rents are provided by the taxpayer because those are in the form of housing allowances given to military personnel. They are going to control that property for 50 years.

SYLVIA CHASE: Military officials say the industry that has risen out of the 1996 law is comprised of reputable companies and individuals. Eric Nalder discovered troubling facts. However, about some of American Eagle's principal players.

ERIC NALDER: Simply looking at the court records, the Navy, Army and the Air Force would have realized that they were dealing with two of the three major players in this company, that they were dealing with people that they might have second, third or fifteenth thoughts about.

SYLVIA CHASE: Nalder found that Kathryn Thompson, American Eagle's managing director, had led a developer in California which defaulted on a multi-million dollar public housing project and then was sued by Orange County, the suit was ongoing when American Eagle got the contract in Seattle.

ERIC NALDER: Another thing is that in the early part of this decade she went into bankruptcy proceedings, and during those bankruptcy proceedings it was revealed that she owed millions of dollars to the IRS.

SYLVIA CHASE: Then there was Carabetta Enterprises, a low income housing developer in Connecticut, and one of American Eagle's owners. Nalder would learn that Carabetta had a past problem with the U.S. Department of Housing and Urban Development - HUD.

ERIC NALDER: It was a big problem. Carabetta Enterprises, Inc had violated scores of HUD regulations and steered money the way they were not supposed to steer money in a HUD project, so badly did they do so that they were banned from HUD projects for quite a while.

SYLVIA CHASE: Then why would the military partner with American Eagle? Pouring through civil lawsuit records, Nalder found a potential clue: Carabetta appeared to have agreed to pay retired four-star Air Force General Merrill McPeak $200,000 to help American Eagle with its first military contract.

ERIC NALDER: He was well connected in the Pentagon and Carabetta had hired him to help American Eagle get their first contract. Which was very important because once they got that first contract, that was the doorway to the remainder of those contracts.

SYLVIA CHASE: Overseeing American Eagle's $230 million Navy contract in Seattle, John Jack saw that it was not going according to plan.

JOHN JACK: The original per square foot cost was 66 dollars a square foot, when I received the work package, it was 76 dollars a square foot, there's 1.1, almost 1.2 million square feet of new home to be built and you're 10 dollars a square foot over you're 12 million dollars over right out of the chute.

SYLVIA CHASE: There was more. John Jack says that executives at American Eagle okayed the use of sub-standard building materials in the new houses.

JOHN JACK: The reason a 50-year roof is spec'd out, is because this is a 50-year contract. Makes sense. They installed a 30-year roof, which is half the cost. They went from copper piping to PEX piping. They went from solid core doors to hollow core doors. So very substandard products than what was originally spec'd. So not only did they bill for $76 a square foot, but they're also putting inferior products in the home.

SYLVIA CHASE: More shocking to Jack was the response he said he got when he told his bosses at American Eagle.

JOHN JACK: I started putting together letters and, you know, cost analysis and I was submitting them to my boss, and they were being overlooked. At this time the Navy is clueless. The Navy doesn't know what's going on, you know, they see homes. They, you know, we're right out of the chute of construction. My bosses are telling me to be quiet. You know don't talk about this.

SYLVIA CHASE: As the months progressed John Jack says he kept detailed records. By that point his estimates were showing that if allowed to progress, cost overruns for the Seattle project would amount to $28 million. Jack says his continual attempts to get his superiors at American Eagle to listen were ignored. Then in February 2006, while still employed by American Eagle, he decided to take a new tack: He called the Navy. Surely, he believed, they would want to put a stop to the overruns.

JOHN JACK: I called my counterpart in the Navy. We met middle of February over at the new model home. We were sitting in my truck and I just handed her some documents that showed what my company was up to. And she asked me point blank how do we stop this? And I said you need to hold American Eagle to the terms and conditions originally agreed to.

ERIC NALDER: This moment in February of 2006, is a very key step for John Jack. He went from being an American Eagle director of a project to being a whistle blower within American Eagle. Going to the Navy and telling them that money was being wasted or, who knows what was happening to the money, and that the project was in trouble. When he reported this to the Navy, you would expect them to immediately halt everything on this project and, and turn every stone. They didn't really do that.

SYLVIA CHASE: In a subsequent meeting, Jack says, his Navy contact told him, she had spoken with American Eagle, and she had news.

JOHN JACK: So we went downstairs in their cafeteria and she bought me a sandwich and she says that 'They're firing you in two weeks.'

SYLVIA CHASE: But before he was fired, he started gathering documents.

JOHN JACK: I made copies of every document that I had and I started taking them with me, all my emails, all the letters, all the change orders, tens of thousands of different correspondence, here and there.

SYLVIA CHASE: He filed a federal whistleblower lawsuit against American Eagle. He also turned his information over to the U.S. Justice Department hoping to convince them to join him in suing on behalf of the Navy. The charge: American Eagle had illegally over billed the Navy.

Under the law if the suit was a success, John Jack would receive a percentage of any financial settlement. And then for a year and a half he went silent - the result of a court gag order, as the Justice Department investigated his claims. After Eric Nalder got that first phone call from John Jack in April 2008 about the Seattle contract he decided to check out American Eagle's other deals.

ERIC NALDER: It became apparent, very quickly, that this was not an isolated example, that this was not an isolated problem.

SYLVIA CHASE: Nalder found that in one job after another - from Patrick Air Force Base in Florida to Fort Leonard Wood Army Base in Missouri - American Eagle's military home building projects had fallen behind schedule. In Jacksonville, Arkansas, home of Little Rock Air Force Base. Local journalist John Hofheimer reported that civilians were suffering from American Eagle's actions, as well.

JOHN HOFHEIMER: The first indication we had that there were any problems occurred when we heard rumors that some of the contractors were being paid late, or perhaps not being paid at all. That's when we started making phone calls. American Eagle was, perhaps, months behind on paying them, and they had, you know, they had their own crews to pay, and they had materials to pay for, and some of these are very small companies, and this was really putting them in a bind.

SYLVIA CHASE: John Hofheimer reported that at least one subcontractor filed for bankruptcy; dozens of others had to settle for small percentages of what they were owed. One hold-out though is Tommy Austin, whose cement business was contracted to pour the foundations of more than 200 houses for American Eagle.

TOMMY AUSTIN: We didn't get near that number before the project was come to a halt. We really ran hard on that project for approximately six months.

SYLVIA CHASE: His lawyers are still trying to get all the money he says he was promised.

TOMMY AUSTIN: I have an investment up front every day. When I load a load of concrete and ship it out of here, I've invested in somebody's project, whether they pay for it or not. You know, my money went out the gate in that truck. If they don't pay me, then I'm stiffed. We're still owed on the air base project in excess of $70,000. That doesn't account for the attorneys' fees and filing fees that we've been out. That's money we'll never recover.

SYLVIA CHASE: Contractor complaints about American Eagle made it all the way to Arkansas Senator Mark Pryor.

SENATOR. MARK PRYOR: I do consider them as a rogue company. I mean, they maybe underbid this contract in order to get it. They maybe had good intentions, it's hard to tell. My preference is that they never be allowed to do any government contracting in the future. And the Air Force actually bears some of the responsibility here, because they did not have tight controls over this process.

They also, in my opinion, should have never given this contract to American Eagle in the first place. There were some red flags there, some previous business dealings with the federal government, with other contracts they'd had, and I just feel like if the Air Force is doing its due diligence, you wouldn't have had this problem in the first place.

SYLVIA CHASE: Back in Seattle it took the Navy more than a year after receiving inside information from John Jack to do anything about American Eagle - even as the company fell behind in building houses.

GENERAL SCHLESINGER: American Eagle was having performance issues, and their reputation had been sullied somewhat. Some of their paperwork was way behind. They were also behind schedule as a combination of excusable and inexcusable delays and ultimately the Navy assessed damages against American Eagle for late performance.

SYLVIA CHASE: That penalty cost American Eagle $500,000. But it would be a fraction of what the Navy was willing ultimately to overlook. Soon it would issue what is called a "change order" forgiving American Eagle $13.8 million in cost overruns, overruns said to be mainly due to weather delays. To John Jack, that amounted to pure profit.

JOHN JACK: On August 3rd, 2007, the Navy forgave American Eagle Communities through this single change order, and not only did they forgive them but they paid them thirteen point eight million dollars to do it.

ERIC NALDER: The financial problems were being, at the very least, obfuscated, and John Jack would say were being covered up, by the Navy forgiving the cost overruns and the delays.

SYLVIA CHASE: American Eagle was supposed to have built 605 homes in the Seattle area. It left town with 421 unbuilt. Of those, 141 were to have had their grand opening on this site.

JOHN JACK: We have an undeveloped site that has no construction activity so far. And this lot was slotted to be done and the end of October 2008, which was six days ago.

SYLVIA CHASE: In April 2008, it had appeared John Jack would finally be vindicated. He says he was told the Justice Department's whistleblower investigation supported his allegations. However as Nalder would report, the Navy's forgiveness of that $13.8 million in cost overruns had weakened the Justice Department's case for prosecuting on the Navy's behalf. "If the Navy was going to be its client," he would write, "the client had waved the white flag."

Subsequently, Jack's complaint against American Eagle on behalf of the Navy was dismissed, but it was quote, "dismissed without prejudice." Which means Jack and/or the Justice Department could still bring suit again.

As for American Eagle, Nalder would report it had sold its share of the Seattle housing project to another developer for over 25 million dollars. That's some 20 million more than American Eagle had originally invested.

JOHN JACK: So they made a net gain just by selling the project. That is a lot of money to do the wrong thing. So what's in it, to do the right thing, when the wrong thing pays?

BILL MOYERS: A post script about this story: American Eagle's Kathryn Thompson told journalist Eric Nalder that the millions of dollars she owed owes the IRS were irrelevant to the awarding of military contracts. And a Carabetta Industries lawyer told Nalder the company regrets that base houses haven't been completed, but claimed the air force refused repeated offers to finish the job as planned.

There is some good news to report: Senator Mark Pryor from Arkansas got legislation passed this year that beefs up government oversight and the accountability of those private contractors hired to build military homes. And the company that bought out American Eagle's contract is working hard to get those military families into new houses as soon as possible.

That's it for the JOURNAL. I'm Bill Moyers and we'll see you next week with a remarkable documentary called BEYOND OUR DIFFERENCES, don't miss it.

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