Pentagon Could Cover Weapons Makers’ Interest Payments

For the better part of a century, there was one thing even the U.S. government would not do to pad the profits of defense contractors.

Now, more than 80 years of precedent may be coming to an end.

On Thursday, lawmakers in the House approved a “pilot program” in the pending Pentagon budget bill that could eventually open the door to sending billions to big contractors, while providing what critics say would be little benefit to the military.

The provision, which appeared in the budget bill after a closed-door session overseen by top lawmakers, would allow contractors to claim reimbursement for the interest they pay on debt they take on to build weapons and other gadgets for the armed services.

“The fact that we are even exploring this question is a little crazy in terms of financial risk.”

The technical-sounding change has such serious implications for the budget that the Pentagon itself warned against it two years ago.

One big defense contractor alone, Lockheed Martin, reported having more than $17.8 billion in outstanding interest payments last year, said Julia Gledhill, an analyst at the nonprofit Stimson Center.

“The fact that we are even exploring this question is a little crazy in terms of financial risk for the government,” Gledhill said.

Gledhill said even some Capitol Hill staffers were “scandalized” to see the provision in the final bill, which will likely be approved by the Senate next week.

Pilot to Where?

For most companies, paying interest on a loan they take out from the bank is a cost of doing business. The pilot program buried in the budget bill, however, is one of many ways in which the federal government would give defense contractors special treatment.

Contractors can already receive reimbursements from the Defense Department for the cost of research and development. Under the terms of the legislation, they would also be allowed to receive reimbursements for “financing costs incurred for a covered activity.”

The legislation leaves it up to the Pentagon to design the program. While it’s billed as a pilot, there is no hard spending cap in the pending legislation. The total amount dedicated to the program would be determined by the House and Senate appropriations committees.

The bill tasks the Defense Department with releasing a report in February 2028 on how well the pilot program worked. As approved by Congress, however, the bill does not explain what metrics, if any, the Pentagon is supposed to use to evaluate the program.

“I don’t see any clear parameters for what success looks like,” Gledhill said. “Are there new entrants? Are we building weapons production capacity? Or are new entrants on the way?”

The chairs and ranking members of the House and Senate armed services committees who oversaw the closed-door conference process that produced the final draft of the National Defense Authorization Act did not respond to requests for comment.

In a document posted online, the committee leaders said that similar provisions were included in House and Senate drafts of the bill.

Big Spending at Stake

The switch to covering financing costs seems to be in line with a larger push this year to shake up the defense industry in light of lessons learned from Russia’s brutal war on Ukraine and fears of competition with China.

“The generous view of this provision is: Look, we have industrial capacity constraints and perhaps if we make borrowing essentially free, then maybe — big maybe — contractors will invest in capacity,” Gledhill said.

She is skeptical that will happen, and the Pentagon itself was dubious in a 2023 study conducted by the Office of the Under Secretary of Defense for Acquisition and Sustainment. The Pentagon found that policy change might even supercharge the phenomenon of big defense contractors using taxpayer dollars for stock buybacks instead of research and development.

“Higher interest rates or increased borrowing only increase Revenue and Profits further,” the report found. “This creates the real risk of a ‘moral hazard’ as it pertains to interest.”

The sums at stake are enormous. The “five primes” — the big defense contractors who claim the lion’s share of Pentagon contracts — each reported spending massive amounts of money on interest payments last year. The companies all disclose their debt loads in slightly different ways in their annual reports, but the scale is nonetheless massive in each case.

Lockheed Martin said it had $17.8 billion in outstanding interest payments.

RTX, formerly known as Raytheon, said it had $23.3 billion in future interest on long-term debt.

“I don’t think a single dollar should go toward interest payments for contractors.”

Northrop Grumman paid $475 million on interest payments in 2024, and General Dynamics, for its part, paid $385 million.

Meanwhile, Boeing said that it had $38.3 billion in long-term interest on debt. The company did not break down specifically how much of that debt related to its defense business, which accounted for 36.5 percent of its revenue in 2024.

Along with the “five primes,” Silicon Valley firms such as Anduril and Palantir are increasingly moving into defense contracting.

It’s unlikely that the contractors’ interest payments would ever be fully reimbursed by the Defense Department, Gledhill said, but even getting a fraction covered would amount to a huge giveaway.

She said, “I don’t think a single dollar should go toward interest payments for contractors.”