Background Briefing Part II of II

Friday, January 30, 1998

(Budget Background Briefing by Senior Defense Official on Jan 30, 98, (part I of II)

Similarly, we're trying to reengineer our business practices. Going to paperless contracting from contract administration to contract closeout. We think we can do this without paper. We think this not only will save enormous amounts of money in terms of the structure that's required to support all that paper, but probably more importantly, you'll be able to track everything more closely.

A lot of the problems that come in terms of unmatched disbursements and the other problems we face come from the fact that we use paper and we are constantly rekeying everything into the computer. It inevitably leads to mistakes. By doing it all, by transferring databases, we hope to improve that.

On the next two I have backup charts. Let me go straight to those. Part of the QDR and carried into the Defense Reform Initiative was an effort to compete at least 150,000, we hope to push 200,000 positions. You're asking what's programmed and what's not, not all of the results of these competitions are yet programmed. We programmed the savings we expect, but we were more conservative. You can get savings either by the government entity winning the competition and doing it with reduced people, or you can get it by the private sector entity winning it and doing it in a more efficient manner. Either way you get savings.

We anticipated essentially, the current budget anticipates the government winning more of those competitions still with those savings than history would suggest. That was just being a little bit more prudent. But either way, these competitions, whoever wins, we should get on the order of 20-30 percent savings.

Next chart, please.

The Secretary will be pushing very hard on this. We're going to ask for two more base closure rounds -- obviously not '99, but '01 and '05. We've tried to separate them somewhat in response to some criticism that people think we need to be able to absorb the results of one before quickly going to another. So we've waited. We have programmed the money for the cost of those savings out in the out years. We think they'll produce over $3 billion in annual savings. This, as I said, we think is crucial to be able to afford the force structure and readiness we have over the long term, as well as fund that modernization program. These numbers should be relatively familiar to you from past BRAC rounds.

Let me just make one point, which is that we're getting results from the Inspector General who has audited I guess the '93 round at this point and they have come in and told us that we have been too conservative. That the BRAC round cost less than we projected and we saved more. So we think that's the start of an answer to those who would say the BRAC rounds cost too much and don't save enough. The IG, the Inspector General, independent outside look, said exactly the opposite.

Q: How much have you programmed for '02, '03?

A: I don't remember the exact number. It was $800 million and $1.4 billion.

Q: What has the IG calculated your savings and costs for the '93 round?

A: They were...

A2: The savings could be as high as $1.5 billion more than what we projected, and the savings... The savings would be $1.5 and the costs would be like $791 million.

A: This is still a draft report.

Q: The $3 billion annual savings starts when and goes to when?

A: The $3 billion in annual savings is not until the steady state, so it's basically 1.5 per round, but because we're doing two rounds, you don't get to the steady state until 2008 or 2009. That's also about when you'll see the Joint Strike Fighter, Comanche, Crusader, that next generation of modernization starts to really hit the ramp.

A final component of the strategy here is to prepare. Four elements. The modernization goals that I talked about, the $60 billion. What are we doing about a transformation strategy as well as asymmetrical threats? I want to talk about people as being as crucial in terms of this component of the strategy. This is often neglected and shouldn't be.

Next chart, please.

This is the chart we usually show you except it has a pitch fork, we don't hit the goal. This year we did. The goal for the QDR was 49, 54 and then 60 in '01. We're $300 million short in '99, and we've hit it or exceeded it in '00 and '01.

Q: How does that '99 figure of 48.7 compare to the current year? What's the current year?

A: The current year is about 45. It's 44-something. We'll get that.

A2: It's 45.1.

Q: 45.1 is the current?

A: Right.

Next chart, please.

Let me unpack this a little bit as to what's underneath it. Start with tactical aviation. I'll come back and answer questions on this, I just want people to have it. I'll point out one, there's been some talk about the wing drop problem with the F-18. The next decision on the F-18 is to put that money on contract, the '98 money on contract. The Secretary has been very clear, he's had an independent panel look at this problem. They think they're on the way to a solution, but he's been very clear. Until he gets a validated answer, this money won't go on contract. As I say, they have a panel, the panel thinks they've got a solution, they think they can do this, but this is going to be an event driven program.

I'll tick through these fairly quickly for you. This is pretty close to what you saw last year except the B-22 has been accelerated so that we'll hit 30, it used to be going up to 24 per year; by '04 it will be at 30 per year. I mentioned that we added equipment to the National Guard. Part of that equipment is build in here. You'll see 10 more Black Hawks per year built into the 860 line there. Those are intended for the National Guard.

Next chart. It shows the shipbuilding. I think the highlight here, Newport News and others, is the aircraft carrier moves from '02 to '01. Actually we moved it, it didn't move itself. (Laughter)

This addressed an issue that we had with last year's program which essentially was an industrial base problem. The carriers were too far apart between '95, the last one in '02 led to significant industrial base problems at Newport News. It's going to cost more, frankly, to build the carrier because you were going to take people out of the workforce, let them go for a year or two, then have to bring them back and retrain them. It's going to just cost you flat more money.

People have talked about incremental funding schemes to try and fix that problem, basically buying things ahead of need. We really don't like to set that example. What we really decided to do was move that aircraft carrier forward a year, deal with the industrial base problem at the core. The consequences, we have about $125 million in advanced procurement money in '99 to make sure that we can make that schedule.

Next chart, please.

We talked about the transformation strategy. This has been highlighted by the National Defense Panel. We agree with them. This is what you need to exploit the revolution in military affairs. This is our blueprint. This, of course, is going to change and evolve over time. This is not a static document In some ways I wish they didn't have the year on it because I think this is going to evolve over time. But these concepts are crucial -- dominant maneuver, precision engagement, full dimension protection, and focused logistics. I put down there some of the highlights of the programs, and these are basically QDR decisions where funding was changed.

Let me go to the next chart and show you at least the highlights of some of... Actually, I don't have the changes, but what the results of the changes were.

We've accelerated the Army program for digitization. The first division has been moved up two years. It will now occur in FY00. The first core has moved up two years as well, it will be in FY04. That was a major effort on the Army, I've forgotten now the amount of money that it took to make that move, but it was on the order of, I think, $1.5 billion to shift into those accounts.

These are the major precision guidance munitions. These are highlighted in the Deep Attack Weapons Mix Study where that study essentially concluded that we get enormous leverage from going more along this precision-guided munition line than buying something like buying additional B-2 bombers. So obviously we're going to get another study on that this year.

Finally in full dimension protection, in addition to the chem/bio defense, which I'll talk about on the next slide, you have the missile defense program, both the BMDO programs as well as the one major program that's outside BMDO in the Air Force, the airborne laser.

Q: Can you say how much money you added into this PGM account from the missile defense accounts to accommodate...?

A: I'll have to get that for you. I can't do it off the top of my head, I'm afraid. For the precision guided munitions, you're going to have to ask each of the services. The BMDO will be able to tell you what the BMDO number was.

Asymmetrical threats I mentioned, countering proliferation of weapons of mass destruction. In addition to the role of the National Guards and Reserve which I've already talked about that program for the ten teams and the FEMA regions, we increased chem/bio funding by a billion dollars, a billion dollars over the FYDP, resulted in that, about $200 million a year, each year '99 to '03.

There's also been a commission highlighting the need to protect critical infrastructure. By this bullet here I'm really talking about programs that are in DARPA, whether it's R&D programs, about $70 million of R&D programs to try and look at the technology that would be involved in protecting high value critical assets, power plants, financial systems and so on.

Also, at the core of protecting any critical infrastructure is protecting your information system, and we're reorganizing our information protection system into what's called the Defense Information Assurance Program with funding of about half a billion a year there.

Next chart, please.

I mentioned people. I use this chart, I hope it's not too simplistic for you, but just to stress that everybody in the acquisition community tells you about how long it takes to develop a new system, 22 years for a Comanche, at least 14-15 years for a ship; but it takes just as long and in many cases longer to develop the senior enlisted people and the pilots and the other people that make these systems work. Without the blue columns here, the new systems on the red aren't going to do us much good, so we need to be paying as much attention to this as we do to the systems as we look to prepare for the future.

That's why we have these quality of life programs. I mentioned the pay raise. It's actually this year about twice inflation, I want to say three percent, an enormous amount of money, but it will be higher than inflation.

An important initiative here, I think some of you have written about it. Let me explain it a little bit. We have taken the control and management of the commissary system and we're trying to return it to the services. This is not going to change the benefits, the most important thing. Indeed, we actually increased funding. But by putting the management of the system closer to the troops, we think we'll be more responsive to the needs they have. Sometimes there's desired changes in individual commissaries. It makes them operate more efficiently, be more responsive to the individual bases. So we're setting up a board of the services, that they will oversee DECA [Defense Commissary Agency] rather than doing it at the OSD level. This is, again, part of the Defense Reform Initiative to try and push the actual program management of systems out of OSD, make OSD an advisory group for the Secretary, and do the management of...

Q: Can you give a simple example of what would change?

A: If the Navy wanted to increase the hours of a commissary down at Norfolk, they would have the budget and the management control to be able to do that.

Q: Could the Air Force allow Guard and Reserve unlimited access?

A: That's a good question. The answer is yes.

Q: But DECA will remain?

A: DECA will remain. It's changing, the board of directors of DECA is what will change.

I have charts on medical and housing, let me quickly jump to those.

I mentioned the increase on medical. That's how it played out over the course of the FYDP. This, of course, doesn't include the $5 billion for medical costs that are direct military readiness costs.

Next chart, please.

A final issue, key on housing here we think is this number up here. We have 345,000 units. A lot of them are inadequate. John Hamre has set as a goal to eliminate all inadequate housing by 2010. In order to do that, we're not going to be able to do it within the budget constraints we have, unless we're able to leverage that just through cooperation with the private sector. What do I mean by leverage? I mean that instead of just building the housing, that we provide loan guarantees to a private organization. The loan guarantees multiplies the money and that we'd be able to get much more housing for the housing dollar. What we'd be able to trade for that is assurances of military people who would live in them. That gives the quid pro quo for the private sector.

Last chart.

These are basically the points I've made all the way through. The key element of the strategy here is that we balance between the near term, shape and respond in the near term as well as the longer term, prepare. We balance between weapon systems and people. We balance between maintaining the systems we need now, as well as trying to promote the technology for a transformation strategy in the future.

The point I've tried to stress with BRAC and other things, that over time we will not be able to afford all of this if we have to carry the extra weight of base structure and support structure. We are bragging about hitting the modernization target.

Joint Vision 2010 is the blueprint that we think is necessary for the revolution in military affairs. Again what I said at the end, we've got to treat people as the most important asset over anything else in the budget.

Q: For all the fancy footwork about a new strategy, strategy in the budget, you're still locked into the old Cold War paradigm that here's 30 percent for the Air Force, 30 percent for the Navy, 25 percent for the Army. What gives?

A: We think we built this budget based on prepare, respond, shape. The program we have is built on the legacy of past programs. We don't think everybody was all wrong in the past. So the changes you make are changes of emphasis. Changes of buying one platform over another. They amount to hundreds of millions. We shifted hundreds of millions, even billions of dollars between accounts over the past few years, but even billions don't lead necessarily to changes in those percentages. They become tenths of a percent in the kind of calculation you've done.

Q: A big picture and a small picture. On the big picture, what is the biggest threat to this blueprint you just laid out in your view? Is it that Congress will go through the habit of tinkering with it and pouring more money into reserves? Is it that you'll have to pay for procurement you don't like, like the B-2 bomber? What poses the biggest threat to that?

Then could you specific, a specific question, the billion dollars for chem/bio, what's going to eat up most of that, the extra billion?

A: On the first question, the biggest near term threat would be not approving the Bosnia supplemental. The biggest long term threat would be not approving BRAC. It's pretty straight forward.

On the chem/bio question, about two-thirds of the money went to passive defense -- JSLIST suits, bio detectors, chem detectors, the various passive defense means. And about one-quarter, one-third of the money was active defense and attack operations.

Q: This is all military, not civilian sources, right?

A: A lot of this was R&D. It's basically R&D and equipment. In other words, R&D for a bio detector and then money to buy it. I think it's O&M money that actually buys JSLIST suits, but that's...

Q: How much per year does the Air Force save by switching an active duty wing to a reserve wing? Why aren't the other services doing it if we're saving a lot of money by doing that?

A: I'm going to let you talk to the Air Force about the amount of money in terms of what the savings are. You don't start with the money to make that kind of decision, you have to start with the strategy and what's the mix of force structure in terms of active and reserves you need to support the strategy.

Q: Does it save significant money?

A: To the extent that people train less and spend less days in the military, of course it saves some money. In terms of the equipment, no, it wouldn't save much money at all.

Q: On readiness and the readiness issues, you figure sustaining those rates... Is there any savings from simulation? Are you putting any more money into that? Have you broken it down to that degree?

A: I think the simulation...

Q: As opposed to live exercise, that kind of thing.

A: There are some savings... I know in the Army budget there are some savings from simulation and they grow over time. What the exact numbers are you'd have to get. I'm sure the Air Force and the Navy, I'm less familiar with what they've done in terms of particularly flying, so you'd have to talk to them directly.

Q: One of the few things that congressional leaders on both sides of the aisle agree on is no more BRAC. What makes you think they're going to give you BRAC? Has Cohen heard from Senator Lott about warming or (inaudible) to that idea? What makes you think you're going to get it?

A: Obviously there's congressional opposition and we faced significant opposition last year to BRAC. We think we need it. We think we've got to have it in order to be able to afford the long term goals of the Department. Is this going to be hard with Congress? Absolutely.

Q: Isn't it dead on arrival? They've already said as much.

A: I don't think it's dead on arrival, but it's going to be a struggle.

Q: Has the Secretary been authorized to make any assurances to lawmakers that the next rounds will not be politicized as was the...

A: We don't believe the last rounds were politicized. (Laughter)

I think one of the ways that you deal with that charge is by having the BRAC round in 2001. You're going to be two Congresses and one President away, so it's going to be a different set of actors. To the extent that Congress thinks they want more assurances, they could legislate that in terms of how they did the BRAC legislation.

Q: How much savings do you get from DRI without base closures?

A: The bulk of the savings in DRI without base closures would be in the outsourcing which is about $2.5 billion. I think there are some odds and ends that might get it up to three.

Q: Over five years?

A: This is steady state after we've done it. I don't have the year by year in my head. But basically it was $6 billion. About half of that, though, was BRAC. The other half was the privatization that both the QDR and the DRI focused on. There were some additional savings from smaller items, but they're dwarfed by the BRAC and the privatization.

Q: It looks to me like the balanced budget agreement effectively locks in higher defense spending up through 02, a lot higher than you're budgeting for. I mean, it's raising... They're offering to spend more than...

A: It is the same... I may have confused you with the chart. The one chart is 050 which includes the defense programs and the Department of Energy. The next chart breaks... Not all of that 270 belongs to the Department of Defense. Some of it's in the Department of Energy, some of it's in the Department of Transportation. There's also some minor differences between the two charts, and that has to do with mandatory versus discretionary.

Q: Procurement, modernization. Next year you want to get to $54.1 billion from $48.7 this year. What has to play out over the next ten months to allow you to ramp up that quickly?

A: We need to continue the force reductions that are in train, we need to continue the outsourcing and the infrastructure reductions, and some of the... You need to continue the phasing of the R&D programs from development into production. The slippages in those programs, sometimes they'll stay in R&D and that will bring the procurement number. Those three are the key.

Q: How much of those savings have you assumed you're going to get as you're doing the 2000 POM right now? You're assuming you're going to get several billion dollars in savings already from things like outsourcing and infrastructure?

A: We have started to build in '00 some savings from outsourcing and infrastructure, but they'd be relatively modest in '00.

Q: A quick F-18E/F question. You said the Secretary's not going to release the money until a fix was certified. Can you play that out a little bit?

A: The Navy is going through its testing now. They've got working with them an independent panel headed by a gentleman whose name I can't remember who is from NASA. He wants them to be able to come back and show him what the fix is... and for them to be able to say with confidence that that's the fix. I don't have... You're looking for a process, and I...

Q: Yeah.

A: It's that the Secretary has confidence that the fix is there. There isn't a piece of paper or something that requires.

Q: I think it's an accounting trick that I missed here, but among the programs in these charts, the 1998 budget figures that you have for the specific programs is a little bit less than the appropriated amounts. It doesn't quite match up. It looks like about six percent less in each case.

A: I think those numbers -- correct me if I'm wrong -- but those numbers, the Congress appropriated an amount of money in each account and then they appropriated a series of across the board cuts in R&D and procurement in particular. So the numbers that you see are with those across the board cuts applied. In other words, Congress appropriated the full amount of money, but then took basically, amounting in some cases to six percent, took reductions in each and every program.

Q: So it's across the board cuts... Okay.

A: It was legislative.

Q: Can you elaborate, please, on the Defense Information Assurance Program? Describe it more fully?

A: Sure. It's a program. A lot of it is the National Security Agency. It's intended to focus attention on the kinds of tools we need to monitor and defeat attacks against our information systems. It involves vulnerability assessments, it involves research on better systems, it involves red team tests of the system. NSA is a piece of it and then each of the services and the Defense Information Systems Agency have a piece of it as well.

Q: Is that DARPA funded or...

A: No, primarily not in DARPA. I think DARPA has some individual research projects, but the bulk of it is not in DARPA.

Q: Are you satisfied you've really got a handle on the rising health care costs? I see that the numbers are going up quite substantially in the FYDP, even though end strength numbers are coming down.

A: I don't have all the numbers in front of me. At this point we're in a different period than we were at the end of the '80s and the early '90s where costs were going up 7, 8, 9 percent. It was both on the civilian side as well as us. We saw medical spending double as a percentage of the budget in a really short space of five or six years.

Since then the cost per member treated has remained relatively constant, moving up just two or three... moving up with normal inflation. The question that you're really asking... Let me go a step further. The reason that I think we're able to get a handle on that was largely the introduction of managed care. That's also what's happened on the civilian side. We're actually doing a little better than they are.

But the question that everybody has in mind, I think, the economists have in mind is, is that just a lull while we put managed care in, and should we expect to see the kind of technology and intensity driven increases in health care that we saw a decade ago? Or has the managed care system provided a stable basis and those systems will keep it at that constant level. I don't think we fully know the answer to that question.

Q: The Pentagon and the Navy, and particularly the QDR, still maintain that the Navy should have a 300-plus ship fleet. If you look at the budget, simple arithmetic says that that won't happen in the out years unless you build...

A: I don't think the QDR identified any goal -- correct me if I'm wrong -- for the total battle force...

Q: ...number, I don't think.

A: It more identified the pieces, which I think is the better way to look at it. We're going to keep 12 carrier battle groups; we're going to keep 116 combatants; 50 submarines. Those are the three... How many amphibious ships, 36? Thirty-six amphibious ships.

Now some of those numbers are lower than past numbers. For example the amphibious ships, they're going to have a bigger, more capable ship that will be able to do the job that a couple or three ships were doing before.

Q: Twelve ARGs.

A: But the number of ships to support 12 ARGs is going down. That doesn't necessarily mean that it's less capable. You still have the 12 ARGs. I'm not sure you should really... It's at least one-dimensional to focus just on the number of ships. I think you have to look at the capability of the ships and what they're trying to do.

Q: Why don't we have the 01 document that Congress required to be delivered?

A: What is the 01 document?

Q: It's the O&M...

A: Oh, the O&M document. Why don't we have the O&M document? (Laughter)

A2: It's on the way. Check's in the mail.

Q: In the briefing paper here it says that Operations & Maintenance Funding for FY99 is well above levels during 1980 (inaudible) lower end strength. But comparing that to each soldier, sailor, airman, and marine in FY99, how does that compare to (inaudible) back in 1980? In other words, how does Operations and Maintenance Funding compare now to what we had back in 1980?

A: You mean the absolute level as opposed to the dollars per soldier?

Q: Yes.

A: You'd have to multiply it out. I couldn't tell you off the top of my head what O&M spending was. Do you know what O&M spending, Chuck, was in the 1980s?

A2: I don't know the exact number.

A: I think you're asking the wrong question. I think the dollars per soldier, if you want to compare the '80s to the '90s, you have to take account of the change in end strength, so I actually think the dollars per soldier is a better metric, although we can get you the numbers.

Q: Can you point to any programs that were cut in the budget either because of the QDR recommendations or for any other reason?

A: Obviously we cut military personnel and civilian personnel, were the two biggest things that were cut.

Q: But no weapon systems?

A: I don't want to say no weapon systems, but in general we added $4 billion in procurement. Are there any major new cancellations? The arsenal ships.

Q: A scenario. You don't get your BRAC request, so what's Plan B and what takes the hit?

A: We haven't developed Plan B. We'll have to talk over the course of the next few months about what the implications are, but we don't yet have a Plan B. I understand the question suggests this is going to be hard, but we think it's essential and we're going to be pushing very hard for it.

Q: If you don't get a BRAC authorization this year, I presume you'll keep bringing it up every year up until 2001? Or what are you going to do?

A: Again, beyond pushing very hard this year for it, we haven't assumed failure, I guess. This is a success story in the program.

Q: On the A-76 competition, what led you to assume the government would win more of those...?

A: In terms of, the Army may want to discuss with...It varies... Let me go a little further on that. It actually varies by department. We authorize each of the departments to plan and program. They're closest to it and they can manage this best. The Air Force has programmed more of the reductions than either the Army or the Navy. It's a question of not so much whether they're going to happen but when you want to program them. They use different methodologies in terms of developing their program.

This is only in the out years of the program, and we're going to be looking at it... As we develop next year's program we've got a group to see whether we want to standardize this kind of format and tell them how to program this or whether we are going to continue with each service going on its own rules.

A2: What you're seeing is really a difference between how each service has programmed it.

Q: R&D is continuing to go down while procurement goes up. Why is that? A second question is regarding the supplemental, by when do you need it, and what service is affected most if you don't get it on time?

A: With regard to the first... R&D is actually, if you look at it as a percentage of the budget, is actually -- through the '90s including this year -- it's been consistently higher than it has been in the average Cold War years. What it was is during the early '90s while we were taking procurement down we protected R&D, we protected the next generation of systems, the F-18, the F-22, the B-22. What you're seeing now is those systems that we protected are starting to move from development to procurement. As they do that, that generation of systems takes money with them. As the F-22 moves from R&D to production, resources go with it.

Ultimately you'll see, this is a cyclical thing. You'll see, for example, Air Force and Navy R&D come back up as the Joint Strike Fighter's R&D budget increases.

Your other question. When do we need it? Why we need it is, we need it in '98 to prevent any impact on readiness. That means we need it as early in the spring as we can get it. Which service is most affected? It would be the Army.

Q: There's continuing discussion on the Hill about a pilot program to get military retirees or at least some, covered by FEHBP [Federal Employee Health Benefits Program]. Is there any money in this budget for that?

A: I think that's some legislation. I'm not sure that it requires money. I think they've legislated a pilot. I'm glad you raised that, though. The emphasis that we put, and it was on the slide, but I didn't talk to it and probably should have, is, we have a half a dozen Medicare subvention pilots. We think the solution... There is certainly an issue with how do you provide health care to over 65 when they lose some access to the medical treatment facilities. What we're trying to do is work with HCVA to try and get it so that the Medicare resources that they're entitled to can be used in military treatment facilities. That's the way we think we ought to go. The FEHBP is potentially a very expensive way, and we think we can... There is a need there and we're looking to that Medicare subvention as the way to meet that need.

Q: Do you have a fix for the reserve mobilization insurance that was a disaster?

A: We have two fixes. We have actually put the money in '99. It obviously didn't work the way we wanted it to, but people have signed up and we're going to make good on the promise that we have put, I think $37 million... Is in the '99 budget.

The problem with it being in the '99 budget is people won't get their money until the '99 budget is approved. So we are still looking at the possibility of reprogramming. We missed once on reprogramming, it got disapproved. We're still looking at the possibility of getting the money to them earlier by reprogramming.