Background Briefing

Friday, January 30, 1998 - 2:00 p.m.
Attributed to: Senior Defense Official

Colonel Bridges: Good afternoon, ladies and gentlemen, and welcome to our annual background briefing on the Department of Defense budget. This year we'll be discussing the Department's budget request for fiscal year 1999.

All of the information provided this afternoon is embargoed for use until 8:00 a.m. Monday, February 2nd. The terms of the embargo are spelled out in the information sheet provided with your packet of materials. If you do not have that piece of paper, please stop by our office to make sure that you understand the terms of the embargo.

We'll open the session with the Senior Defense Official. Following the Senior Defense Official's comments and your questions, the services, representatives of the Comptroller's office, and by popular demand, representatives of the Ballistic Missile Defense Office, will be available for additional information sessions.

Let me give you the locations of these particular sessions.

First, the Air Force location has moved from its originally announced room on the 5th Floor. It will now be in Room 3E752. That's one floor above us. The Army will be in Room 2E687. The Navy will be here in the DDI briefing room, right here where you are right now. And representatives from the Office of the Secretary of Defense, for those of you with DoD questions, will be across the hall in 2E776. Finally, the Ballistic Missile Defense Office public affairs representative will be available here following the Senior Defense Official's briefing to escort you down to their offices for a session that will start at 3:30 p.m. There ought to be enough for all of you to feed on this afternoon. So now I'd like to introduce the Senior Defense Official who will continue the briefing.

Briefer: We usually have to pay people in the Pentagon a lot of money to get this many people in to listen to me talk.

I want to dispel one illusion right at the start. I know John Hamre. John Hamre's a friend of mine. I'm no John Hamre. The jokes won't be nearly as good. In fact that was it.

What I'm going to do today is take you through a more detailed version of the brief the Secretary will give on Monday. This will be essentially the same brief I'll give on Monday so if you come again, you'll get to hear it twice. There won't be much news, I think, between now and then so it won't change.

What I'd like to do, there are a lot of people here and I know you want to ask questions. I'll try and move through it pretty quickly. I think the only questions I'd want to take as I go through it is if somebody doesn't understand what I've said, or a clarification or something on a chart. Then I'll get all the way through it and then take questions at the end, if that works for people.

The first chart... Start with the external variables that we face. These are really what we faced in building the Quadrennial Defense Review as well as the Defense Reform Initiative. Those are really the two underpinning pillars of the defense budget you'll see. Since you've all seen the QDR and the DRI, I would not expect a huge number of surprises, but we'll try and give you a couple.

Starting with the threats, obviously, the QDR focused I think on a broader range of threats than have been focused on in previous reviews. We took a close look at the possibility of two major theater wars in a near-concurrent state, obviously focusing on Southwest Asia, all the activity there now, as well as Northeast Asia. The possibility that those could at least be nearly simultaneous. That one adversary might take advantage of our engagement with the other. But we went well beyond that and looked at smaller scale contingencies, humanitarian operations, lower scale operations, non-combatant evacuations and so on. We also tried to look into the future and decided probably the largest threat in the future was the potential for asymmetric threats. Here we're talking largely about weapons of mass destruction as well as cyber threats, threats to our information systems, our critical infrastructure. But here, no threats could come even very close to home. Those wouldn't just be to overseas forces or allies.

That was the threat context that we started with. We also focused on how do we exploit the revolution in military affairs. The National Defense Panel, which I think was testifying up on the Hill just in the past couple of days, has, I think, put a great deal of emphasis which we think is appropriate on the need for a transformation strategy and the need to pull the future back to us and try and ride this revolution in military affairs to ensure that we maintain and increase that as a technological advantage we have over any adversary or set of adversaries.

Finally, an important point is the QDR and the budget that you see was constrained in terms of resources. We did not have an open-ended checkbook here. We had to stay within the constraints that the Congress and the White House has given us with the balanced budget agreement. That means that in our view this is very much a strategy-driven budget and I'll go into that before, but the strategy provides a blueprint for how you allocate those resources. I think that's a crucial point. The fact that it's resource constrained... Let me go to the next chart and show you a little bit more on resources here.

The point I want to make about this chart is, of course, we're here now where the budget is relatively flat. The normal pattern, if you went back further, you'd see it even more clearly, is an up and down cycle. Every five or six years the defense budget turns from going up to going down, or from going down to going up. That's very much the world that we've lived in until the mid '90s where we've now stabilized on a budget that's in about the $250 billion, $260 billion range for the Department of Defense, $270 for the whole 050 account and zero real growth off that amount. That provides an important challenge that I want to highlight here because it was at the core of the Quadrennial Defense Review. We highlight it with the numbers here on this chart.

As you can see, I know this is a little bit busy, but if you focus on the chart, the 51 percent increase during the early Reagan era, procurement went up twice as fast. During Gramm/Rudman when the top line came down, procurement went down twice as fast. That's a relatively normal pattern. Procurement is the thing that moves the most. It's the biggest variable in the budget. It's what defense planners tend to adjust when the top line is going up and going down.

The challenge we face is that the top line is not going up and we want the procurement number to go up and we want it to go up fairly substantially. That's a major challenge in this budget. It is not something that we really have much historical experience with. The QDR's answer to that challenge was some reductions in force, mostly out of support, headquarters and overheard, and a large focus on taking reductions out of infrastructure, out of civilian personnel, out of support functions. That was the whole Defense Reform Initiative.

That is the plan we have, and as I go through this I'll tell you to a degree how much success we've had.

We break down the numbers, at the last end of that chart there that you saw, these are the 050 numbers. This includes, in other words, the Department of Energy. The largest part, MARAD and a couple of other things are also included in the 050 numbers.

The point I was making, of course, is that's where we're constrained. Those are the defense numbers that we had to build our budget within, but there's two other points I want to make on this chart in addition to that. One is, we're in a zero sum world now. The last couple of years Congress has had significant additions to the defense budget that the Administration proposed. That gave them a fair amount of flexibility in terms of the priorities they had and how they set them and how they funded them. As we go into a balanced budget agreement world, they're not going to have that flexibility. We're going to be in a zero sum world. Any change that you want to add, any program that you want to add to the budget, you're going to have to find a corresponding decrease. This, I think, is going to be a real challenge. It's something we're going to have to work very closely with the Congress on.

The second major point, this is probably... I'm not sure how much this is out. This may be significantly new for you, is how did we fund Bosnia, or how do we propose to fund the extension of the Bosnian mission that the President has proposed. The answer is in this asterisk. It is not funded within the Defense top line. It is funded on a separate line in the defense budget, the allowance section which is the 920 section of the federal budget if you go to the OMB brief. In the 920 section there is an allowance for $3 billion and it's for three things. It's for the cost of extending Bosnia, for domestic emergencies, and I didn't put it on the chart, but the third item would be any unanticipated Y2K, year 2000 problems.

Bosnia has the first call on this money. So the costs of Bosnia are anticipated in this budget in '99, but they're anticipated not within the defense budget itself, but within this allowance line.

Let me stress one other point. We don't yet know what the costs of Bosnia are because NATO is doing the planning. We know what the costs have been up until this point, but they're relooking at the mission and the force to support that mission.

Our estimate of the cost is not $3 billion. That is the allowance that's there for Bosnia, plus domestic emergencies, plus Y2K. We know Bosnia will be less than that. How much less, we don't know until we finish the planning which we hope to have done, we hope to send this up to the Hill by mid March. We're hoping to have the NATO planning done that will have the supplemental request that we'll be able to then give the details to the Hill and have that considered.

Q: Does Congress have an add-on in '98, $2.4?

A: You're absolutely right, George, they did. But that was accommodated within the Balanced Budget Agreement. The Balanced Budget Agreement included that add. So the Balanced Budget Agreement came after the Administration... I should probably put an Administration proposal there. That's what I'm missing. If I'd done that, you're probably right. I should have an Administration proposal which would be plus $2.4, and leading to that number which was, though, part of the Balanced Budget Agreement. The bill terms '98 as a transition year.

Q: What department does that $3 billion come under?

A: It's in the allowance line so it's not inside any department.

Q: Congress has about a billion dollars of flexibility to add, the BBA is $271, is that about...

A: We don't know what the Bosnia number is. But our anticipation is there are always domestic emergencies. We have the Northeast with the freezing this year. So there's some anticipation of that. Whether that plus Bosnia equals three is just an estimate at that point.

Q: What can they add on this year, Congress '99? We're talking a minuscule amount if they wanted to add anything?

A: That was the zero sum point I'm making. If you hold to the Balanced Budget Agreement, unless you change the Balanced Budget Agreement -- which I don't think anybody, to my knowledge, is proposing at this point. But unless you change the Balanced Budget Agreement, that's the number. In '99 there are firewalls. After '99, the firewalls go away and then you just have the discretionary numbers.

Q: Can other agencies access the allowance, or is it just DoD...

A: All I know, you're going to have to check with OMB on that. I know Bosnia has first claim on that. The rest of it goes to the domestic agencies and I don't know how OMB is dealing with that.

Q: Do you have a rough idea of what the Y2K costs will be?

A: No. In fact the Y2K, by definition were... The anticipated Y2K costs are in the budget, so this is in the nature of an emergency as well. Unanticipated. Maybe I should have included that. The phrase, as I understand it, says domestic emergencies and unanticipated Y2K.

Let me move to the next chart. This then just breaks this down further. 051 as well as DOE and others. There's more than DOE in here, but DOE dominates. Essentially there's no real growth. There's some movement in individual years, but this is essentially a zero real growth budget, as I said.

The only point to put up here is people have started to ask what about inflation? There was an inflation savings. These are nominal numbers. The nominal numbers didn't change as per the Balanced Budget Agreement. The Balanced Budget Agreement was done in nominal dollars and we held to those dollars. So that meant that the savings from inflation, which was about $21 billion in buying power, where did that go?

I think the first way to look at it is that was essentially a fact of life change. Inflation came down, you were able to buy more program with the same dollars. We had facts of life changes that went in other direction, too. The pay raises went up, a significant bill in terms of pay raises. There were increases of about, I'll show you in a minute, of about half a billion a year in health care. One of the reasons I have the DOE budget here is there was a significant increase of about half a billion a year in the stockpile stewardship program which is crucial to the important initiative the President has to get the Comprehensive Test Ban Treaty. This is the program by which the labs will be able to validate the nuclear weapon stockpile without testing. So that went up. Costs of chemical demilitarization went up. Also because we gave emphasis to procurement, even where we pulled procurement dollars out, we pulled dollars out of the procurement program due to lower inflation, we put them back in to buy additional programs. We kept the procurement budget as it had been before, approximately. So we didn't take, essentially, any of the savings from the procurement line is I guess the way to say it.

Q: One clarification. What do you get [mean] by nominal dollars? Are these '98 dollars, or...

A: No. These are current year dollars. If they were in constant year dollars they would essentially start with the '98 number and move across, varying only by that much. You have the constant dollar for the 051. I don't have it for the others. It's done by that real growth.

Q: The inflation savings of $21 billion, is that from '99 to '03?

A: Yes. The question was were the inflation savings a five year number, and they are. They're smallest in the first year and they build.

Q: Just so I'm clear on that point. Is it a legitimate argument for someone to argue, if you save $21 billion in inflation and you said the $250 billion spendable dollars is enough for the national defense, should you not return that $21 billion to the Treasury? Clinton has said he wants to reduce the deficit, stabilize social security. What's the argument for the Pentagon pocketing the $21 billion in inflation savings if indeed you're on record as saying $250 billion is enough for national defense?

A: The argument is the one I prepositioned anticipating your question, George, is there are a whole series of facts of life. First I should say yes, it's a legitimate argument and people have it every time there's an inflation change. But changes in inflation are not the only changes that are effectively fact of life. They're not the only outside changes.

The pay raise this year is twice the inflation rate. Although inflation went down, pay went up. The cost of chemical demilitarization, stockpile stewardship, health care in particular, all went up. So there's a mix of these things. I don't think you can just look at inflation. If you really want to be as precise as you wanted, you'd try and figure out what are all the fact of life changes, how do they net out, and then take the remainder. That wasn't done, although these largely balance the inflation savings. The other driving thing was the balanced budget agreement, as most budget agreements are, was in the nominal dollars, in the out year, in the current dollars. To start changing that would open a whole series of... Would open a real challenge, I think to the Balanced Budget agreement which I think everybody would like to maintain. It's an important step forward. Obviously, we are getting to zero deficit with that Balanced Budget Agreement.

Q: Does it help you significantly to push up your procurement, or was it a significant effect?

A: It wasn't a significant... As I said, the change in procurement was largely a wash. You took dollars out of programs because of lower inflation and you put them back into different programs. The nominal dollars in procurement didn't change very much for that reason.

I don't want to start taking questions here. Let me...

Q: One more on that subject? Are you saying that without the $21 billion in inflation savings you probably would have had to cut procurement programs in order to fund all of those facts of life?

A: Yeah. I don't know whether we would have cut procurement or not, but we would have had to find sources for all of those fact of life changes. Absolutely. It would have been hard to insulate procurement from that. But we didn't do that.

Let me move to the next chart. The organization for this budget brief and the presentation the Secretary will make is, as I say, it's a strategy driven budget. It will focus on the elements of the budget that support the shape, the respond, the prepare. I think most of you are pretty familiar with how we laid that out in the QDR. What I'm going to try to do is show you how the budget supports each one of those components of the strategy. This really was the way we looked at the budget and this is how we would propose to present it.

Let me go to the next chart. Start with the shape... This is often the unsung hero of the budget. It is far and away the least amount of money in terms of the draw of the strategy component. Each of these items, as I'll show you on the next chart, involves really hundreds of millions. The deployments there, obviously, are much more substantial, and Bosnia I'll talk about. But most of these tend to be relatively small, they're shaping efforts, they're an effort to try and make the international environment more favorable to U.S. security interests, and they are highly leveraged. We're spending hundreds of millions of dollars now in the cooperative threat reduction to reduce a threat of nuclear weapons from the former Soviet Union that we used to spend tens of billions and more. So this is extremely important.

The NATO enlargement, which we can talk about more in a moment is, again, hundreds of millions of dollars. The strategic thinking is there, that will help bring stability to Central Europe where we fought two major wars in the last century.

Let me take you one step further and show you some highlights to the budget that support these. As I said, these are hundreds of millions. We're proposing an increase in the cooperative threat reduction. It has to do with the elimination of a chemical plant in the former Soviet Union as well as an acceleration of the deconstruction of Soviet missiles. We propose to maintain the Partnership for Peace program, the Warsaw Initiative, the counter-drug program is staying essentially at the rate that it's been for the last year. This accommodates the growth that you need from inflation. We'll be able to maintain and even start some new initiatives there.

I mentioned NATO enlargement. Let me stay for a second on that. The current NATO estimate for NATO enlargement for the common fund elements of the NATO enlargement is $1.5 billion. That's for ten years. The U.S. share is a little over 25 percent -- $400 million. That is budgeted. That is in the program. Indeed, we're probably a little high. There really aren't going to be any costs in '99 because the treaty doesn't take effect, it isn't even before the Senate yet, until late, middle to late in the year. So there may be a few costs that would be in the NATO infrastructure account, but the real costs for NATO enlargement will start in '00. We have budgeted, as you'll see in the budget, we have $100 million in '00, $150 in '01, and then $200 in each year after that.

That was obviously based on a previous estimate that we had that was somewhat higher. If this estimate holds, we'll be able to in the next program budget review, we'll probably take those numbers down to match this.

Now why was our previous estimate, which I don't know if some of you remember, $5 to $7 billion, was higher. Several things. One, that was a generic estimate. It was done based on not knowing which countries would be coming in. It was done with four countries, not three. Importantly, it was done assuming that the conditions, the facilities in those countries were very poor. It turns out the conditions are better than that. They're not great, but they're fair is I think how the NATO staff has characterized it. And third, NATO uses a stricter definition of what ought to be funded in the NATO common funds than was used in that analysis. We were a little bit more liberal. Those things led to a reduction in that cost, and that is the current estimate.

Q: Aren't you comparing apples and oranges, though? This refers to the current estimate, the spending that all NATO countries agreed to spend in general, and the estimate that the DoD gave back last February, I think, referred to... It was an estimation of overall costs for extending the alliance, right? Cost to the new members as well as Europe and U.S.

A: We gave an estimate. When we gave that $5 to $7 billion we gave an estimate of what the total cost... The $5 to $7 was just the NATO common infrastructure which is what equates to that. We gave an estimate, as well, of the two other elements I think you're referring to, which are what are the costs of other NATO allies to buy the kinds of forces they need to be able to project power into Central and Eastern Europe.

These are things, however, that, this is basically Germany, France and England. These are things that they already have planned to do for other reasons, for other NATO reasons. It gives them additional impetus. But those are other things, that's essentially being paid for by other NATO allies and they are being done for other reasons as well as NATO expansion. That element also included where you're going to go, also the cost of the new member countries and the increases they need in their defense budget.

Q: So what you're saying is you have no plans to spend $5 to $7 billion. The U.S. is only going to pay for the common budget costs.

A: What's budgeted here is the U.S. share of the NATO common budget cost, and that was the same assumption that was built into that earlier report, and it's also built into the CBO and the Rand reports. They have higher estimates of those numbers, of all the numbers, but they are still assuming the U.S. would pay what's here. They'd pay the U.S. share of the common NATO costs.

Next chart, please. Go to the second component of the strategy, of the response. As I said, we focused on a full spectrum of crises from the lower end of the spectrum all the way through a two concurrent or nearly simultaneous major theater wars. You need a fairly large force structure to deal with that full spectrum of crises, although I think one of the misconceptions is that the two MRC or the new phrase two MTW is the sole driver of force structure. That is not true. It drives some of the force structure. It does not drive anything near all of it. A lot of the force structure is driven by the PersTempo and OpTempo of the lower end of the spectrum.

A key element here I want to talk more in a second on is maintaining a high state of readiness. Obviously our tempo is higher than it's been, and that's a challenge, to maintain that readiness in that world. Then finally, the overriding point that the Secretary I think will stress is that to maintain an adequate force structure at a high state of readiness, we are going to have to streamline our support and base structure. That's what the Defense Reform Initiative was all about. Over the long haul, if we have to carry the extra weight of unneeded bases, of unneeded support, structures, we are not going to be able to make this work over the long haul. We are going to need a BRAC round, I'm going to talk about that; we are going to need an aggressive outsourcing policy, I'm going to talk about that.

Next chart, please. I think this is the force structure chart we have for the Secretary. Let me go to the next one. It will give you a little more detailed breakout of essentially the same numbers.

I'm not going to spend too much time on this except to say, as you can see, the force structure itself is not, there's not a huge change over the course of this program. We're shifting over the course of the FYDP. We'll be shifting an active wing into the reserves; a few surface combatants will be retired; some submarines also will be retired, though even that number looks larger than it is because actually the Bottom-Up Review anticipated most of those reductions, and there's just a pace because of the nuclear defueling that you can only go so fast with submarine retirements.

Go to the next chart. The core of the reductions that we have here in these numbers was not so much the force structure, although I have some of them, was to try and take support structure, headquarters structure, to try and maintain the combat force in a leaner way to increase tooth and to take any savings from tail.

As you can see from this line here, we have essentially hit the QDR totals with a couple of minor exceptions. The Air Force has some additional reductions that they'll program next year in terms of active end strength reductions. This reflects actually some minor policy changes.

This number here I want to explain. What this reflects is how we've actually programmed the results of these competitions. We think over time that the competitions will actually lead to getting those reductions, but until we get further in terms of laying the competitions out, we chose, particularly the Army and the Navy chose to be a little bit more conservative in how they program the actual reductions of civilian personnel. But the anticipation, and I'll show you a little bit more what the competition schedule is, is that over the next POM cycle we'd be looking to program. These are all well into the out years.

Q: Do you expect to handle any of these reductions with involuntary means, or is it all going to be through bonuses and buyouts, attrition?

A: On the active duty and the reserve personnel I don't think there are any plans at all for involuntary. There are no plans, actually, on any of them. I'm not sure in terms of the DRI reductions, in terms of civilian, what tools we need. We haven't asked for any involuntary. As far as I know, I don't think we've been forced to any RIFs. But I have to acknowledge this, in particular, is an aggressive ramp.

Q: The money you save for those reductions, they've already been in the FYDP or not?

A: The money... We've projected a savings, I think it's an annual savings by 2003 of $2.5 billion from that outsourcing.

Q: And that money's spent in this budget.

A: It's programmed in other places. That's absolutely right.

I want to emphasize also, obviously we're going to be going to Congress for relief from the end strength floors. All of the services need to go below those end strength floors. There are constraints this year which we're working with Congress. We'll be looking in the legislative package we send to Congress to repeal those floors. We think the QDR reductions are where we need to go.

Next chart, please.

I want to highlight the total force aspect of this. There's obviously been a lot written about the reserves and we've tried to take a lot of steps in three areas. I want to start with the first, which is maybe the most important, is that we need the reserve components to play a greater role, and we ask them to play a greater role in the budget process. I think they made the criticism which was probably fair, that they were too much outside the circle, and we have tried to pull them in. They are now members of the Defense Resource Board. They are in the major budget issue reviews. They're in all the major budget meetings with the Secretary. This is, frankly, a new step that we've taken. I think it's an important one. It also goes with the legislation, that the Chairman will have a Guard and Reserve general as two star advisors. They're in the process, I think, of going out to the Adjutant Generals for candidates at this point. We're moving forward actively on that.

We think these process steps are very important in terms of the long haul, in terms of better integrating the reserves into the total force.

They also made some difference in the short run. We have increased OpTempo funding by about $150 million for the National Guard. We've increased reserve component funding by over $200 million in '99. I think these are some substantial steps in terms of addressing some of the resource needs that have been advertised in prior months and years.

Finally, for the future, we're looking at new missions. We're looking at bringing the National Guard, because they're already at home, they're already in the domestic communities. We're looking at them to play a much greater role against the threat of weapons of mass destruction being used here in the United States -- whether it be a terror attack or some other kind of attack, we think in terms of managing the consequences of that kind of attack the National Guard is in the right place, and if we give them the equipment and the training, which is what we put $50 million in the budget to start down that road. This is an initial effort. We'll probably be building on it. But that will provide ten teams, one for each of the FEMA regions, and we'll be working through the next few months to develop that, but we'll be seeking the support of Congress to keep that moving.

Second initiative in terms of new mission, this came really last year and the year before with the Army. The Army is focused on moving some of the combat forces in the combat service support. When they've done their Total Army Analysis, their TAA analysis, they discovered they had serious shortfalls in terms of support troops. They think the Guards, the Reserves can play that role moving 12 brigades of Guards into that. This has been accelerated as a consequence of the QDR. The Army's made good on the Secretary's promise that all of the money that we'd save from any National Guard reduction would go to accelerate that. The Army has, indeed, accelerated that by several years. I can't remember what the exact year was, but it's been accelerated and I think that's an important initiative in terms of particularly shaping the Guard and Reserve components for the future.

Go to the next chart which is readiness. I break readiness down into three components -- people, training, equipment. With regard to people, it's less a money issue than it is a management issue. Obviously with the OpTempo/PersTempo we've been maintaining we have been stressing some units. The Joint Staff under the leadership of General Shelton and General Ralston have focused an enormous amount of attention on this, particularly with the Army and the Air Force. Navy and Marines, tempo requirements have gone up somewhat in the last few years, but their rotational deployments have followed largely the same pattern they had, so they had these kinds of PersTempo management systems in place already.

The Army and the Air Force did not have the same kind of PersTempo management systems, and we're working with them to try and put them in. They're becoming much more expeditionary in nature. They require these kinds of things. They're putting together management systems that focus attention, senior leadership attention, on units that break either the 120 or 180 day thresholds in terms of deployment.

We also are focusing on what are called these high demand, low density units. These are the units that are constantly called on. They're special operations units, they're military police battalions, Patriot battalions. The kinds of people in these lower level contingencies, civil affairs, these are the kinds of things that are called on constantly. They meet each other coming and going.

The Joint Staff has identified 33 of those, and they're focused on making sure that those are managed in a way that they go one, to the highest priority; and two, that they are managed in a way that we don't break them. We don't rip up the people. We don't break the people.

Let me go to the next two charts. It's easier to talk training and equipment. Training here, the point here is up at the top, the readiness levels have been sustained or in a couple of cases increased from prior years. We are putting the money against the OpTempo accounts to maintain the pace of operations that have gone on for the last several years.

Overall, as you're read and reported, there have been issues with spares and MC rates and cannibalization. We've tried to address that in this budget. We've added over a billion dollars a year in terms of OpTempo, spares, maintenance in this budget. It shows up here. I've done this graph to show you, you've got service O&M dollars per end strengths. In other words basically O&M dollars per soldier, sailor, airman. I've only done service dollars, so I've taken the defense-wide accounts like cooperative threat reduction, those kinds of things that don't really apply to operating the units.

What you see here, of course, is a steady increase -- one to two to three percent a year. The normal increase, I think you'll understand the causes. This is improved quality of life, child care centers, the like. It's also increasing technology. Technology requires more training. Training requires more structure. So you see that kind of Desert Storm blip and readiness problems here, but basically over time you see that increase.

Before the QDR we had this habit of magically assuming that that pattern would go away in the out years and we consistently underfunded depot maintenance, OpTempo, spares, and so on. We tried to correct that problem here, and that's why you see the relatively dramatic change from here to here. We've tried to deal with the O&M's migration problem by fully funding in the out years those kinds of needs. Have we got it all? Probably not. There will be some things we haven't anticipated. Have we improved it dramatically? I think so.

We've talked about Bosnia. I put Bosnia here because in our view all of what's on the previous chart starts to fall apart if we don't get the Bosnia funded the way we've proposed. We think Bosnia needs to be funded outside the money for defense as an allowance as we've proposed. We plan to submit that supplemental in mid-March, and we're hoping that that will meet with approval on Capitol Hill. I didn't mention, but what will also be part of the '98 portion of the supplemental, of course, will be, there's some increased costs from the current activity in Southwest Asia.

I can't give you numbers on any of these because they're all still moving, particularly the Southwest Asia portion, but we hope to have numbers up to the Hill by mid March.

The other point that I made in that opening chart on the response side was that equally important to maintaining readiness and force structure in the near term is to maintain it in the long term. To do that we need the Defense Reform Initiative.

The Defense Reform Initiative is our effort to try and eliminate excess overhead in order to get the resources over the long haul into the modernization/readiness force structure accounts where they need to be.

What have we done? The Secretary started at the top. He took his own staff of 3,000 people, and in 18 months that staff will be 2,000. He wants to do that

(continued in part 2)