Monday, February 6, 1995, 8 a.m. (see note)

Attributed to a Senior Defense Official

Briefer: I want to talk about the contingency very briefly. I know everybody's familiar with it, and I just want to place the context of that, and then I'll spend the bulk of the time talking about our budget request. Then I want to spend a little bit of time, if there is time, about this new thing that's emerging: non-defense spending in the DoD budget. There was an article about this just the other day. I think there's a lot of confusion about that, not that any of you have created, of course. We've done more than our share to create it, and I'd like to try my best to clarify it, so I'll do it very briefly if there's time at the end. Hopefully I'll fill up the time so there are no questions.

These are our unfunded costs. As you can see, we're burning up about $200 million a month that is not in our budget. We do not budget for wars or contingencies in the Department. We never have. So, when something does come up, we have to borrow from our operating accounts to pay for it. And so all of this is coming from our O&M budget, and it's coming from the more flexible part of the O&M budget that really deals with readiness. So every bit of this right now we're borrowing from the end of the fiscal year.

Let me show you graphically what that means. This is why I think it's important to put it into context. The contingency operations, it's $2.6 billion, and it only represents one percent of our budget that's available in FY95. So, a lot of people say, "Why in the world can't you take care of this problem?"

First of all, and I won't go through this terrible, boring discussion about fiscal law, but there's a huge architecture of fiscal law that really ties our hands on what funding is available to use for these things. We can't use a single penny of FY94 funds to pay for a '95 contingency. We can't use a penny of procurement money to pay for an O&M bill. We can't use funds that are earmarked for something in the future to pay a bill today. There are all kinds of restrictions that tie our hands, and so for all practical purposes we have to use current year O&M dollars. So that $2.6 billion is only one percent of the total, and only three percent of the total O&M budget, but about half of the O&M budget, of course, there's no flexibility to use. It's the health program and other things. About another 20 percent is out of touch. We'd have to go back to the Congress for the reprogramming to get at it. So for all practical purposes, we're taking it out of that 30 percent of the O&M budget that is relatively flexible. That's the readiness part of the budget, and that's one out of every ten dollars at the start of the fiscal year. But since we're right now operating our regular training program, we're in essence borrowing from the 4th quarter. So we're borrowing from what's potentially 40 percent of all the dollars available in the last three months of the fiscal year. This is a crisis for us if we don't get a supplemental.

And let me say, I want to at least be clear on this. We are very appreciate of what the House Appropriations Committee has done to mark up a supplemental. We have been working closely, as has the Administration, and we do need help. I'm sorry that it's taken a bit of a partisan twinge here lately. They've been very responsive. We know we've been working with them and I think we're going to get help. But we really need it because of the scope of the problem is so big.

I'm going to quickly get on to the budget highlights. As I said, I was only joking about questions. I will get through this as quickly as possible and then turn it over to you, for what's interesting to you.

I very briefly just want to summarize again what the Bottom-Up Review, what our budget is doing. To make that point that with this fiscal year, the build-down will largely be behind us. And I'll show you that. I want to talk to you about readiness and what we've done and show you a lot of really boring charts about that; very briefly go into the quality of life initiative that the Secretary has launched; and then very briefly about recapitalization, which is becoming the buzz word right now for modernization -- for the Forces for the future.

Again, I'm not going to spend all of the time, I only want to make one point in referencing this. You've all see it before. The only point I want to make is that the Bottom-Up Review was much bigger than just the ability to fight two MRCs. The debate and the currency of the debate in Washington is, "Can you or can't you, should you or should not be able to fight two MRCs nearly simultaneously?" The Bottom-Up Review did a lot more than that. It talked about maintaining overseas presence. You'll remember from last year that was the criteria that really sized the carrier force structure, it wasn't the MRCs. Overseas contingency operations -- our ability to do that quickly. Readiness was a big element -- I'll talk about that in a moment. These initiatives to reduce the threat, the military cooperation programs, the cooperative threat reduction, ultimately Nunn/Lugar, things of that nature. These were all part of the Bottom-Up Review. It was a bigger story, so I'd ask you to keep that in mind during the year when people are talking to you about this.

I'm only going to show you two really boring budget briefing type charts. This is the first one, and a couple of points I'd like to make on it. You all know the difference here, this is all in budget function 050, which is all the defense function. The military piece is 051, and Department of Energy is the residual.

Note, first of all, that we have not yet hit the bottom. In real terms... This is the year when we, in nominal terms, hit the bottom -- or next year I should say; and in real terms, we're down ten percent over these two years. So we are still... This year has a lot of cutting in it.

This column here already includes the $2.6 billion for the supplemental that we're requesting. So the real decline is a little steeper here because the contingency costs are in here.

Note also that we have real growth in the last two years of the fiscal year. That was part of the $25 billion that we got from the White House in December, and $15 billion of that $25 billion showed up in the last two years of the fiscal year.

All of this, or the bulk of this, we're putting into modernization. You'll see in this budget we've got 50 percent real growth in our procurement budget over this five-year period. I've gotten more out of that chart that I know, so I'm going to stop.

I want to show this, the numbers aren't important. I want to talk about the basic shape. This chart shows you the basic shape of how we put together this budget. Note, first of all, that the personnel flattens out. We get down by '97 really to our bottom point. So our personnel structure comes down. At that stage we're simply holding that firm and paying for inflation and cost of living adjustments. So that piece levels out and goes up only with inflation. By getting the force structure out in this period, we are able to maintain readiness at a relatively stable level throughout the five-year period.

Note that there's an interesting change going on in R&D and procurement. R&D is going down and levels out. That's because the bulk of the major systems that are in high volume dollar development right now -- the F-22s and things like that -- are ending development and are shifting up to procurement, and you see the procurement growth. I'll show you more of this later, but we have 47 percent real growth. That's from there to there in real terms of 47 percent. Just to give you a general shape of what this five-year plan looks like.

Q: (Inaudible)

A: This is in certain receipts. I don't have a clue what that stuff is. (Laughter) There's one of those really smart guys back there who is grinning from ear to ear and says this is his last God-damn budget! He took early out, and he is now known as Benedict Flynn. But ask him, he'll know what that is. It's receipts and little junk like that. A billion here, a billion there. (Laughter)

Just to make the case about the drawdown and where we are, I'm going to show you a more useful chart, the next one. This base reflected 1988 and where we were. We were about 2.2 million individuals in the military. The base force... The previous Administration brought us down to that level and then we went down on the Bottom-Up Review to roughly 1.4 million.

Let me show you the shape of the yearly drawdown. What I'm showing you here are the reductions in these years. Let's pull the major things out of this. We'll talk first about the military side, and we'll talk about the civilian side.

We are, of course, right here in '95. We're almost halfway through '95. As of today, we're approximately 80 percent done in the drawdown, as of today. By the end of FY95, we'll be 85 percent done. By '96, the budget that we're submitting, by the time we're through that budget, we'll be 94 percent complete on a personnel thing. So as you can see, the drawdown is going to get be behind us once we through FY96.

That's not the story on civilians. We got a little slower start on the drawdown with civilians. Notice these huge spikes. We took advantage of the drawdown after Desert Storm. We do not have comparable in the civilian side, so we're not nearly... We're only about 20 percent through the drawdown on the civilian side. Note, we're now trying to get roughly the same percentages. This reflects a decision that the Secretary made this year to increase the drawdown of civilian end strength by four percent per year. That is qualitatively new this year compared to last year. That's why we have larger reductions out here and why we get to the same percentage. But as you can see, we still have a fair ways to go on the civilian drawdown side.

Where are there civilians? There are a small, very talented group of civilians here in the Pentagon, of course. But the bulk of our civilians are in depots, in supply centers, where cutting is painful. So this is not easy. A lot of people say well, it's easy to cut civilians. It is not easy to cut civilians.

This is an advertisement for how well I think this government works in a bipartisan basis on the military drawdown. We started the military drawdown four or five years ago with special authority that the Congress gave us, working hand in hand with the Department. And I think you've seen an astounding change. We have reduced over 400,000 people and we don't have revolts, we don't have rioting in the streets. Any other time in history where you had that kind of a drawdown over that period, it was extremely disruptive, and we've not had that here. Thankfully, that was because Congress took the lead in giving us special tools to manage that drawdown.

We have some of those tools for the civilian side, but it's a harder problem, to be perfectly honest. We probably started with the easier one.

Let me talk about the force structure. Again, to make roughly the same point. Once we get to FY96, the drawdown is largely behind us. The only two exceptions you'll see on this chart, comparing '96 against the goal -- this is the Bottom-Up Review goal. The only changes you see is here on the reserve component brigades, which are still coming down; and the battle force ships. We still have some reduction coming in the Navy. But other than that, with FY96, we're at the end of the drawdown.

Again, remember, if you go back to that early chart showing you the stream of dollars, that's the only way we can kind of hold readiness at this stage so that all the savings that come from infrastructure can now be swung over to the modernization account.

Let me shift and talk about readiness. This is just kind of the boring word charts that I have to put up here. I want to show you data that's more interesting.

This was the highest priority in terms of the percent of how we allocated the $2.5 billion. We do have... We've created a new institution here. It's called the Senior Readiness Oversight Council which consists of all of the Chiefs of Staffs, but as Service Chiefs; the Vice Chairman of the JCS and Secretary Deutch. They meet every month. We look at a lot of data every month. I'm going to show you a chart that we looked at just last month. We do have a supplemental and again, let me say, we very much appreciate the help we received from the Congress on moving the supplemental. We do have a crisis if we don't get that approved.

Also this new authority. I'm not going to spend any time talking about that unless somebody has a question.

In the '96 budget, and I want to explain this. This is one of those charts that the words don't mean anything unless I put a bit of a narrative to it. As you all know, we've got a defense guidance that is issued by the Secretary to direct planning for the year and telling the services what to do in this guidance. You'll protect readiness, you'll modernize the force, you'll brush your teeth every day, you'll get to sleep by 10 o'clock. It's really detailed kind of stuff. But what it says in there is the highest priority, and you can waive any other priority if it takes that in order to protect readiness. That's the first thing that the Secretary says, and directs the services to do that.

The second thing is, the services then came in with OpTempo budgets which we felt at the time were fully funded. We learned they weren't, and then we made some corrections. I want to tell you that when we got the $2.4 billion from the President in December -- that was how much we got of that $25 billion. We got $2.5 billion in '96. We went to JCS to help us develop the priorities for allocating those funds. This was the highest priority, and the first thing we did was have... We fully protected OpTempo -- and are there any spare part shortages that would otherwise affect OpTempo? So we resourced those first.

The second thing we went to was depot maintenance to make sure that there was no shortfall or backlog that would impact our ability to execute the two MRC strategy. Then finally, and it's not on the chart, was real property maintenance. We didn't do as well in that area. We didn't have as much money.

This chart, and this is a JCS chart that was... We used [it] in our last Readiness Oversight Council meeting. I'm just showing it to give you some sense of historical perspective of where we are with readiness for both forward deployed, as well as overall readiness of the Forces in the Army, Navy, Air Force, and Marine Corps. As I think you can see, it's a fairly stable picture.

There was a lot of talk about us falling apart in FY94. We didn't fall apart in '94. We had some problems. I think the services did a very responsible job. But we were running out of money in the summer, so they did a very responsible thing in the way they scaled back. But in terms of the aggregate indicator, it's a very ready Force.

I want to use that as context as I try to shift over and look at the resource inputs. We have no way to predict outcomes -- readiness outcomes. All we can really look at right now is inputs. A lot of people have spent their lifetimes trying to crate mathematical tools to predict outcomes. We haven't done that yet, at least on an aggregated basis. I'm going to talk about inputs, and I want to compare our OpTempo rates here to where we were in FY90. I'm using FY90 as the base. Obviously this is a Desert Storm spike, so that is not a meaningful bit of data for purposes of what I'm showing you here. This dip is meaningful, and I'll talk about that in a second.

Notice that through the FY90 base, and that's at 100, our vehicle OpTempo is above that and our air OpTempo. I'm averaging all the air OpTempos together, and I'll show the bar charts in just a minute. It's above it as well.

We are below on ship OpTempo. That reflected a conscious decision that the Navy and... We took last year to change the steaming hours. Ask XXX if you have any questions about that.

This is an important thing and I need to discuss it very briefly. Even had we not had the contingencies in '94, we would have had a dip in '94. Our FY94 underlying Army program was underfunded. It traces back to some assumptions that were made in my organization two or three years ago. I will say to people, the test of an assumption is not its accuracy, but it's utility. How useful is that assumption? We made some assumptions that were very useful at one time and they weren't right. One of the assumptions was that when we got out of Europe, we were going to sell back to the Germans all the stock in Europe and we were going to get $2.5 billion back and we'd get $1.2 billion in cash from Germany. That wasn't true. We never got that. But we built that into our budget, and we lowered the Army's budget by $1.2 billion.

Well, we weren't smart enough to catch that, so what we had was kind of an underfunded '94 program that would have showed up had we not had contingency problems. If we had not had a contingency, we would have had this kind of a problem, because the Army had to bleed off OpTempo dollars to pay for base operations, especially in Europe. You saw that with General Maddox's. So we would have had that problem anyway.

Last year we added $1.3 billion to fix this, so I don't think we have the problem in '95, and we added additional funding this year. But we would have had that problem anyway whether we had the contingencies or not.

Let me show you individual histograms that just back up this data, and I'm going to go through it very quickly. They're not terribly interesting otherwise. It's to say that we have resourced it stably across this period of time in the out years. This is for vehicles and ships. I'll show the air picture. Even though I averaged them together, you can see why. There's nothing terribly interesting in these out years. We have resourced the out years, the OpTempo, very stably.

Depot maintenance. As I say, these are inputs. Our goal here was to try to get down the backlog and hold it down. We do not feel we have a backlog that in any way would affect our ability to fight the Bottom-Up Review strategy. That's not to say we aren't going to have some backlogs, but they're administrative in nature.

Real property maintenance. This is a little deceiving, and I'm not trying to say I'm deceiving you. I want to be up front about it. This shows that we resourced an increase in real property maintenance for each of these years, but we have a growing backlog. Part of that is a product of a huge plant that we're still trying to contract. We didn't have quite enough money to go around to buy that problem down dramatically. Frankly, until we get through the last BRAC round and know how big the structure is going to be, we didn't know what's the measure of goodness in buying down a backlog in real property maintenance.

But I'm not going to try to put this up and give you the impression that we've fixed the backlog problem in real property maintenance, we have not.

Let me shift over quickly now to quality of life. This was Secretary Perry's very high priority this year. I want to show you what we've done in it. First, we have, and this is qualitatively different from the last two budgets. The last two years we have not resourced a full pay raise. We have a full pay raise for military personnel through the turn of the century.

For civilians we have that only for '96 and '97. From '98 on out, we still have that one percent below the legal limit, so 1.5 percentage points below ECI. Do you all know that difference? There's ECI, and by law we can't pay any more than half a percent below ECI. That's a problem we're going to have to address at some point, because it means you're potentially growing the differential between military personnel and civilian pay. We've got to come back and deal with it. That came in at a period of time when they were trying to get locality pay jump started on the Hill and they needed money. We need to address that at some point.

We had a problem where military retirees, the COLA date was flipped in a differential way so they had to wait longer for a cost of living adjustment than civilians. That happened two years ago in a budget reconciliation bill on the Hill. We've been struggling with it for the last two years. What we have done is we have restored that for FY96 only. We have not fixed it for '97, '98, but we have brought them back so that they have the same dates. We're going to have to turn to that next year. But we do not have that problem this year. Last year it was fixed, but it was fixed with discretionary spending.

In our view, the discretionary entitlement differential, and this is entitlement. We have very few entitlements in our budget. This was an entitlement and should have been funded there, and it was done correct this year.

The full commissary benefit is protected. The health program is protected. We have a billion dollars for transition benefits. Again, this is the way that we're fair to people when we ask them to leave before the time that they signed up. I think that's something that we owe them. It's the way we manage these very large drawdowns.

On the living side, this number I found out today is not right. We actually have 14 percent of our housing stock will be either replaced or upgraded in the five year period -- 14 percent, one out of seven. We're very pleased with that.

On the bachelor's quarters, I need to give you some sense of this, and I don't know how many of you have been out to a base recently and seen some of our bachelor's quarters. You would never send... If you ever drove up to a college and you were going to leave your kid in that dormitory, you'd drive away without unloading your car. It's pathetic where we are in some of our bachelor's quarters. We really need to do something about that.

This represents 30 percent of all the bachelor's quarters, where we have substandard housing. We're going to fix 30 percent of that in this five year plan, but we have a problem that goes out for 20 years in bachelor's quarters. That is something we're going to have to address. That's one of the things, by the way, that the Marsh panel, looking at quality of life, is going to be focusing on -- how to help us on that piece.

Another chart, this is just dollars flowing in, into these accounts. These dips are not meaningful. We simply brought forward every program we could execute because we met the design criteria.

Let me shift over quickly to the recapitalization issue, and to first say we are down sharply over the last ten years, very sharply over the last ten years. While we are turning up, I think what you're going to see from the charts is that we're going to need larger increases in the future if we're going to take care of long term recapitalization of our force.

Now there's a debate inside this building about what that should be. None of us believe that we need to replace item for item, so that every airplane that's out there now has to be replaced by a brand new thing just like it in the future. Nobody over here believes that. But you do have to replace things. Right now we have almost a year for year aging. We're not buying any fighters in the Air Force any longer. It's going to take us a couple of years before we get any real production. So we're going to get aging in our forces across the board. A lot of it we can live with through modifications and upgrades, and frankly, that's what the Army's doing in their digitization of the battlefield, is a dramatic improvement in warfighting capability without buying any tanks or a new fighting vehicle. But in the long run, we have to address this recapitalization. I think you're going to see that the Navy has done the best job of dealing with that.

Let me show you graphically what that looks like with 75 percent real decline. The reason these numbers look funny, 71 percent, 47 percent, is of course, they're all off the base. So a 71 percent decline off of that number is a very steep reduction, and we are sharply down. Of course the 47 percent increase is now off of a low base. I'm sure you don't get all that much that you're buying back.

I'll show you on the next chart, these are the seven largest items. As you can see, that's where all the growth is going in our budget.

These are the seven largest items. I just took them from the top, dollar items. We drew the line when we got to number seven. No magic, just chartsmanship, I guess. About where we get, that made up virtually all of the real growth that's in our investment account. You all know about all these things, and we can deal with any questions.

Of course this isn't all the money that's being spent. There's a development cost of the F-22. I'm just showing you the procurement funding here. As you can see, I think the Navy has done an excellent job on its recapitalization effort.

Now I want to make a point, and I want to be careful on how I introduce this because I don't want it to look like I'm trying to make an excuse for not having enough money going into equipment. I used this in a discussion two weeks ago in front of the House Judiciary Committee, and the issue was on the balanced budget amendment. Of course they were trying to draw a distinction between capital budgeting and expense budgeting. In states, where states have balanced budget amendments, they usually keep all of their highway construction off-line and do bonds and things like that. So it's a meaningful distinction at the state level.

I was asked, how about doing that in defense? We'll take all the weapon systems off-line and just budget for them in a capital budget format. I said that is not how we look at it in the Department. For us people are a capital investment. It's a capital asset. It takes us 22 years to get a qualified battalion command sergeant major. We have to invest in that every year to have one of them. You need a flow of them steadily over time. It took us only five years to win World War II, somebody said it only takes nine months to have a baby, it takes nine years to get an aircraft carrier, but it takes 16 years to get a flying squadron commander.

We invest in people. I heard General Barry McCaffrey, now CINCSOUTH, say three years ago, he said, "We could have used Iraq's equipment in Desert Storm and beaten them." It wasn't the equipment, it was the people that we put in the field. This is, for us, an investment, and I want to point that out. We have put our dollars behind the people.

Let me wrap up. This is the motherhood. This is where the Greek chorus in the back should be humming softly. We've taken care of people and readiness. We think the force structure is about right. I did not qualify that. We think it's clear that while we can live with it right now, we do have a longer term problem -- modernization.

I want to shift, if it's all right with you, to talk about this issue of non-defense spending in the DoD budget. I only want to try to give you a frame of reference for how we're looking at this. I think that a lot of confusion has emerged in the last half year over this. Frankly, big numbers, like $11 billion, have now taken on a political cogency in this debate in Washington, and let's talk about what's in that.

As you know, it kind of got started when the Congressional Research Service, CRS, was asked to identify non-traditional spending in the DoD budget. That then got picked up by people saying well, we really don't need to increase the defense budget so much if we'd stop spending it on things that defense shouldn't be doing. Now it's taken on a life of its own. I want to talk about that. These are some of the things that are frequently referenced. Sometimes called Nunn/Lugar, sometimes called cooperative threat reduction. That's the $400 million that we're spending in Russia to help with dismantlement. Environmental spending, dual use R&D. There's no common framework to understand and evaluate this problem. That's all I'm going to try to go through with you today.

Do we budget non-defense items? And how much, if we do? That's what I want to talk about.

This is a dichotomy, and I'm going to discuss each of these separately. I believe that these are in a priority sequence. The most defense going to the least defense. I believe that from here on up there are legitimate defense issues. They start getting a little fuzzier when you get toward the bottom, and we'll talk about that. I'll show you some examples of that.

I'm going to tell you, we've got some non-defense spending in the DoD budget. It isn't in there when we send the budget to the Hill. That's as close to the flame as I'm going to fly. (Laughter)

Corps military activities. Obviously, all military operations and contingency operations are military activities. The CRS study listed all contingencies in the category of being non-traditional. Now you can agree or not agree on whether we ought to go to Haiti, but invading another country has historically been a defense mission... (Laughter) I'm not getting in the policy of whether that's the right thing or the wrong thing to do, I'm just saying that's a defense mission.

Intelligence is a classic defense mission. Buying and developing new weapon systems. I want to say, these are traditional core military activities.

Now cooperative threat reduction is the term that's given to the program where we spend $400 million a year roughly to help dismantle weapons in the Soviet Union. Any time, when in history has a country had a chance to help the other guy take apart the weapons that are aimed at your country? That's a defense mission. We don't consider that non-defense.

Military liaison activities. The Partnership for Peace joint training exercises. We've done joint training exercises for the last 50 years. It's called something specific because we're dealing now with former countries in the old Warsaw Pact, but those are military activities. We don't think those are non-military.

Now I'll talk about these inherent management responsibilities. Some of these are obvious to you and will jump right up and say of course. We've done force management and leadership development, getting that qualified command sergeant major, we've done that for years and nobody argues about it. Acquisition management, nobody argues about it. Test and evaluation. Nobody argues about it.

Pollution prevention and environmental reclamation. Now people say that's non-defense spending. Congress has passed laws that say that anybody in this country, be it a private entity or a public entity, if you own the land and you cause the pollution, you've got to clean it up. Now you can change the law, and that's perfectly fine if people want to change the law. But until you change the law, it's a management responsibility that we have, and we have to budget for it, and we budget for our legally required or court-ordered cleanup bills. But it's an inherent management responsibility, and we don't agree that it isn't.

There are some things that, frankly, have been added. I want to highlight one especially, because I think, and this is a case, it's Kaho'olawe Island, this is out in Hawaii. I don't know how many of you know about this. Senator Inouye took a lot of gas on this for adding it to the budget last year. Kaho'olawe is a small island off of Maui, about seven miles off of Maui. It was uninhabited and in 1954, by Executive Order, it was given to the Navy, and they bombed the hell out of it. It became a bombing range. We shot torpedoes... It's a smaller island today. But we just did a number on this island. But the Executive Order said that when it reverts to the State of Hawaii, that we have to clean it up to human habitation standards. Oh, my God. I went out there in September, and you wouldn't believe... Walking around all the unexploded stuff that's laying around. The guy was kicking it. He was not a Marine. (Laughter) Only Marines are that brave. A congressional staffer is that stupid. That would have been me, okay? (Laughter)

But the requirement is to clean it up to human habitation standards for the entire island. That would break the budget. That would be over $1.2 billion, I think, is the bill that people were talking about. So Senator Inouye took the lead to negotiate with the State of Hawaii a compromise, created a trust fund, and appropriated the funds. It was added. This is one of those add-ons. But it was done for a very good purpose. It would have cost us a lot more if he hadn't done it. So I want to defend him. There are a lot of things that get added up on the Hill that are not bad. This was one of them.

But again, it fits in this category. If it hadn't been done, there was a court order... We were out there cleaning it up anyway because the court ordered us to start doing that 13 years ago. Believe me, this is a management function until you change the law. If somebody wants to change the law, then it's a different matter.

Q: How much money...

A: In Kaho'olawe? I don't think we've budgeted any more into the trust fund right now because they've been delayed in getting started. So I think there's about $110 million in it. Of course this is where we have some of those early separation benefits as we're trying to manage the drawdown of this force. These inherent management responsibilities. Why is it put in as non-defense spending? Well, I guess you say it, but we don't view it that way.

Dual use. The controversy all revolves around this item right here. We've done a lot of dual use, we've had a long history of doing dual use. The entire National Guard is dual use. It has a state mission as well as a federal mission. The Corps of Engineers... How many more dams do we need? But it's got a dual use, and we've been using them in this country for 200 years. Air traffic control. You probably don't know that more likely than not as you're flying around the country, one out of every four air traffic controllers is a military guy. We have an agreement with FAA. We've divided up the country, so that when our planes fly in certain areas, we're using a civilian air traffic controller, and in other places civilians are using military air traffic controllers. It's dual use. We've done it for years. We have a long history of doing that, and it's not a bad thing.

Now we get, all of a sudden it's controversial to have a thing called a technology reinvestment program. This was $500 million. It's designed to leverage R&D that's going on in the private sector. It was just targeted in the supplemental. There was a recession that went with it, and they whacked out all of the money that was appropriated in FY95 for that. We don't agree with that.

Of this $500 million that's in there, every penny of it can only be spent after whoever got it won a competitive award. You had to compete for that, and there were over $7 billion of projects that were competing in the last round, and you have to cost share. You have to provide 50 percent of the cost of the project from your own capital or some other consortium, to be part of it. We think that's pretty sensible. It makes more sense than some of the things that are added to the appropriation account, that are just put there. This you have to compete for it, an independent panel has to review it, and you have to cost share. We think that's all right.

General Motors spends $5 billion a year on R&D. If we can spend another $20 million with a project to turn something useful to us, that's good for us. So we're, forgive me if I sound defensive about it, but we think this story hasn't been properly told.

GPS. The private sector is using it more than we are.

Now there's this category of these broader citizenship responsibilities. As I said, we're going from central core defense things. I'm going to show you this chart. Dark, dark, dark, dark blue is getting lighter blue, and we're now getting to the area where it's probably arguably less of a central defense mission. But we have been given these assignments. Disaster assistance.

As you probably know, we have a standing legal arrangement with FEMA... As a matter of fact, when an emergency comes up, they call us with a fund cite and we already have a place to bill it. We bill it directly to FEMA.

Humanitarian assistance. When things like Hurricane Hugo hit. Community assistance for base closings. That was put on that list of non-traditional spending? Okay. We could, I guess, choose not to be good citizens when we're getting out of a base, but we've chosen not to do that. We've chosen to try to get the base up and running as quickly as possible with the civilians, with a new application, to get it back on the tax roles.

Q: (Inaudible)

A: Help me. Community assistance for base closings, do you have any idea what that is? We'll look. We'll get back to you. It's in the millions. We'll find out.

Drug interdiction. It wasn't something the Department sought, and we had a lot of reservations about getting involved in it, and we've been very careful about how we do it, all the posse comitatus kind of thing. But nonetheless, that's part of these broader citizenship responsibilities that we've been given, and we've signed up for that.

Now some of the specifics that were cited in that CRS study and others were things like the Olympics. Well, we have participated in each of the last three Olympics, providing security. I think ever since the Munich disaster with the Israeli athletes. We're going to do that, and I think that's appropriate.

Humanitarian mine clearing. We're training other countries' militaries how to de-mine so that we don't have lots of civilian casualties.

I'm just giving you this as a framework. That's all I'm talking about. I want you to evaluate it. You use your own judgment, but we're talking about these core military activities. The shading here is intentional. But these are things that we think are thoroughly appropriate for us to be doing. The management responsibilities, the environmental reclamation, etc. Transition benefits. Dual use. And I've got to tell you, we're now getting down here to the Other. I'm not going to give you a list of what's in Other. It's not that hard to find. Get the congressional committee reports and compare them to our budget request. A lot of them are in there that we would put here, I'll be honest with you. Like I put Kaho'olawe. I'd put Kaho'olawe up there, but there are things that I wouldn't put up there. And I certainly wouldn't... I do not believe at all that we've got $11 billion in this category. We do not.

Q: (Inaudible)

A: This is like beauty in the eye of the beholder. We're in the half a billion to a billion range, probably.

Q: Are a lot of those mandated by Congress as opposed to things that...

A: Yes.

Q: So you blame them.

A: No, I'm not blaming them. Look, I've sat up all night reading the Constitution and no place does the Comptroller appropriate money. We have to get our funds from the Congress. I'd love to have that authority, by the way. But since I don't have it, we have to get it from the Congress, and they give us their views on our whole budget. I think the test, frankly... And by the way, we're on the noise level here for our overall budget. We're not talking about the three/tenths of one percent against a budget that's $250 billion. It's small. For the bulk of our budget, it gets a hard rub, a hard scrutiny on the Hill, and it stands the test. So I don't want to take this out of context. But it is by no stretch of the imagination have we got $11 billion in our budget that you could cut out and not hurt the Department of Defense.

Can I answer any questions?

Q: Can you just give us a simple breakdown, of the $246 billion for '96, how much the Army, the Navy, the Air Force, the Marines are getting?

A: We'll have it to you. I need the service budgets against the top line. We'll have that before we get out of here. (Army: $59.3 b.; Navy: $75.6 b.; Air Force:$72.6 b.; and Defense-wide: $38.5 billion.)

Q: ...total value of the recisions you're sending with the supplemental and what...

A: Seven hundred million dollars. I do not yet have a list.

Let me tell you, there is nothing harder to do than build a recision list.

Q: Is that going up on Monday?

A: I don't believe a detailed list is going to go up on Monday. Where it stood was that we were going to send up a request for the Congress to give the Secretary the authority to find $700 million, and not spend. Now I don't think that has a big chance of succeeding on the Hill, so at some point in time we're going to have to work with the Congress to build a list. It's all controversial. I don't want to imply to you that there's any easy decision in any of that.

Q: How are you paying for that retiree COLA?

A: In the aggregate there are discretionary funds and then non-discretionary or entitlement funds. There are two different sets of scoring rules that apply. For discretionary funds, a very elaborate set of scoring rules that get negotiated and worked out. There are also caps. On the entitlement side there's a whole different thing called pay as you go rules. Pay-Go rules. I'm going to tell you my view of the world. You'll have to ask OMB their view of the world on this. But my view of the world is when they were working up to do the GATT, they had a huge Pay-Go problem with GATT, so they were collecting Pay-Go head room during the year. When they got down, they, I believe, used an exemption so as not to have to try to comply with the Pay-Go rules, and so they had a lot of head room left over. So we went in and said we needed it. We still had to fit it under the overall totals they were going to give the Department of Defense, but we paid for it internally so it came out of the Pay-Go head room. I think that's right. If it's not right, don't correct me in front of the public. (Laughter)

Q: What does that mean, though?

A: What it means is, last year... There are very, very few dollars in the DoD budget that are in the entitlement category. It's almost entirely discretionary. The bulk of our budget is under the discretionary scoring rules. Roughly half of the discretionary is defense, and the other half is non-defense. That is the only part of the budget that's under these caps.

Two years ago in a budget resolution, they wanted to get some money out of the entitlement side. We had very little to give. So what they did, they took it out of what qualified as cost of living adjustments for retirees, so they took it out of that account. Of course it created an incredible uproar when military retirees were getting paid, and nine months later the civilians got a cost of living adjustment.

So last year the Congress took money out of the discretionary side and applied it to that. We cried foul. As soon as you break down that barrier, all the entitlements are going to dip into the discretionary side and get funded. What happened is, there was, under the scoring rules there were available dollars in the mandatory side that we could use this year that we did not have last year. We were able to fix it. This is very arcane. This is budget weenie stuff. Don't dwell on this.

What it is is, we were able to resource it. We'll be able to fix it next year, but we weren't able to get it done this year. One step over the edge.

Q: Talk about the impact of the scaling back of the next BRAC round. I remember seeing, you save money up front for the closing costs, but I've never seen...

A: It costs money up front for the closing costs. Our savings are downstream.

Q: But I remember seeing a study last year, OMB, I think, on the long term impact on the civilian labor force if you don't close bases, and it had a big impact on your ability to drawdown civilians which you said were an important priority.

A: It is much easier to manage a civilian drawdown if you're closing a base, let's be honest. You get around a lot of problems. It's a lot harder to cut people out of a depot if a depot is staying open. Just the political reality of it.

As you know, the BRAC process, it is up to the services to build up their lists. They'll be coming to the Secretary shortly. The Secretary then has a period of time he looks through it, and it goes to the President. The President recommends it to the Commission, etc. We have, in our budget both the costs and the savings coming from the first three rounds of BRAC, and then we have the fourth round of BRAC which is in notional terms included. We have over the five year period, and Billy Passeur is my guy that knows this, but I think we have over $18 billion worth of savings over our five year plan that's coming from base closures.

I don't remember what our net up front costs were. About ten. So it costs you a lot of money up front on base closures. That's the dilemma, of course, I think everybody's looking at for the fourth round.

A year ago we were saying this was going to be bigger than all three combined. It's not clear that that's going to happen this time around. We don't know.

Q: Is the 18 mixed?

A: No. The 18 is a total savings, and there's about $10 billion of cost, so $8 billion roughly.

Q: Could you run through TRP, environmental cleanup and Nunn/Lugar and how the figures this year compare with...

A: In general terms, TRP is at $500 million, it was $503 last year. It will drop down to $400 next year.

Q: Say that again. You got me confused.

A: I apologize. That's only because I was confused.

We got $503 million appropriated in '95. We're budgeting $500 in '96. I think we drop down to $400 in '97, and each of the succeeding years. That's TRP.

For Nunn/Lugar, it was roughly $400 million... It's below $400 million. It's like $396 or something. We'll get it to you. But it's right around $400 million throughout the five year period.

For environmental, environmental is down this year. We are down somewhat on our environmental spending.

A2: Down $200 million. $5.2 in 1995, to $5.0 in '96.

A: Of course the environmental is in three different place. It's budgeted in the service O&M accounts. It's also budgeted in a thing called DERA, Defense Environmental Restoration Account. It's also budgeted in base closure.

Q: Do you have a program number for the counter-proliferation initiative?

A: I think that is in the $80 million range. This is in DERA. This is not all environmental funding because of the other two categories, but this is the Defense Environmental Restoration Account. As you see, this is where we were heading last year for these years, and this is where we are this year.

Q: In the last couple of years the (inaudible) has made a pretty big deal about TRP being a very important part of this conversion process. What's the rationale for cutting it in '97? Why are you going to be lowering it?

A: I think it's a buildup of execution. We wanted to make sure we could execute it more than anything. Our overall accounts are still coming down during this period. Overall R&D is still coming down. We've tried very much to hold tech base funding, but everything is under pressure, and that couldn't be exempt entirely from it.

Q: Why do you keep saying five years when...

A: Six years. I'm sorry, you're absolutely right.

Q: You said that the O&M OpTempo budgets maintain our overseas presence but at what rate? The Cold War rates, the recent rates, putting carriers on a tether? What kind of presence...

A: That's a much more sophisticated question than I can answer where I am. I'd ask you to talk to Admiral Hancock. Please talk to them about it. It is not the same. The 1990 OpTempo, while holding at that level, it's a different configuration out in the field. Fewer forces, some of them working harder. We are using our people hard right now.

Q: But somebody has those breakdowns.

A: Yes, Ron Davidson, back there. See him. He'll have all the data. Don't forget the DBOF breakout, you'll enjoy it. (Laughter)

Q: I have a question on the procurement program. Can you identify any major program where you put more money this year than you had planned last year to have?

A: I don't now. That's a good question. Ron Garrant is sitting back there and ask Ron, but I bet the answer to that is no. We cut a fair amount of money out of procurement this year. The Deutch Memo, for example, we took out about $12 billion altogether over the six year period of time.

Q: ...certain systems that in your development of them have ended up costing a lot more or a lot less than you had anticipated, and that would reflect those costs this year.

A: I don't think so, but ask Ron. If they are, they might be very small.

Q: The other question on procurement is, these all say unclassified. Is there any way... (Laughter) Is there any way of telling us what portion of the total budget for the given weapon systems do we actually see in the budget?

A: This is always a contentious thing. I remember from the days when I was working on the Hill. We have accounts, you'll see lines that will say special activities and things like that. I can't go into any of that and talk about the details. We do have programs in our budget for which the identity and the amount that we're spending on it is not widely...

Q: ...gross figure. You're not identifying any particular system or anything like that. If you were to take the gross spending in this book here...

A: There's some outfit that does that every year, that adds that book up and takes a look at our total, subtracts it and says there's a black budget of X. I honestly don't now, because I don't look at it that way. We also carry certain intelligence things in our budget, so it's a mixture.

Q: I was wondering if you had the top line numbers of the constant dollars or the inflation?

A: We have data on inflation and we have a top in constant. We'll get that to you. Roughly, we're running three percent a year, is the deflator, for purchases. The pay deflator is like 2.4 this year. I think it goes up to 3.1 in the succeeding year. There's a composite. The composite is about three percent. The fuel is a little high this year. It's like five percent this year. But we'll give you a constant dollar run as well. We can do that.

Q: You talked about the long term funding, recapitalization. Underfunding.

A: We're going to need more at some point. Right now we're not underfunded.

Q: That's looking out beyond 2001 then, right? How bad is that? GAO says you don't even have your...

A: GAO is talking about a very different problem, which I don't think is a problem. GAO is not criticizing us for not having as many things as we need to recapitalize the force. CBO has said that. GAO has said we're going to have cost overruns and we ought to budget for them up front.

If I put in every one of our procurement lines anticipated cost overruns, I wouldn't last 30 nanoseconds up on the Hill. (Laughter) And I wouldn't do it anyway, because I think people live up to expectations. (Laughter) But that's what GAO is doing, and that's just flat ass wrong.

Q: (Inaudible)

A: It's a very good question. Let me tell you why it's a very hard question to answer. That is because we don't plan on fighting the same way in the year 2000 as we do right now. Desert Storm we borrowed two JSTARS airplanes from a development program and used them. We're going to have a fleet of 20 at the turn of the century. We're going to fight in very different ways, which means you'll recapitalize in different ways. We don't necessarily have to buy a one-for-one replacement.

I used to work at CBO, but my problem with the CBO thing which is this kind of mechanistic comparison of investment to force structure during the '70s and '80s and carry it into the '90s, assumes that we don't have capital substitution for labor. Indeed, that's the history of the Department for the last 45 years.

We're going to do things very differently. We are going to accept aging in certain areas, but not entirely. It's a very complex question. It's a very good question. I'm sorry I don't have an answer and I can't give you one right now. But during the year we're working on that. That's part of what we're looking at this year about what should be the capitalization goals in the long run.

Q: One thing that Congress has said they wanted, they want to build up national missile defense, which you guys sort of reversed on last year. You said you were going to put more in theater missile defense. What I'm wondering is, are you coming around saying, knowing there's going to be a battle with Congress, have you done anything that...

A: We haven't. I appreciate your bringing it up. What have we done in our budget on ballistic missile defenses? We made a decision last year, part of the Bottom-Up Review, that we were going to resource that part that within the next five to seven years represented a real threat, and that was tactical ballistic missiles against our forward deployed forces. So that's what we're resourcing heavily in this budget. That's what FAAD is about, that's what PAC-3 is about, that's what the standard missile upgrade is about.

What we also have, then, is the national ballistic missile program which was the great big astrodome over the United States kind of stuff. People said that threat wasn't as likely, and therefore, we're not resourcing that as heavily, but we are resourcing the R&D effort that you can scale that so if you do see a threat emerging and you have to respond to it, you can do that.

There's nothing that's happened in the last year that leads us to think we need to change that, so we haven't. I think we're going to have a huge battle up on the Hill this year about that. And we're just going to tell people what we did and let people decide.

Q: From your conversations with people on the Hill, what sense do you get of how much is going to be added to the request?

A: People have been all over the map. I'm not predicting anything. I'm just doing this to help focus the discussion. All it's going to revolve around, frankly, I think, is the relationship of that number to that number. And also this.

On both the House and the Senate, the old Armed Services Committees, have roughly said that they want to hold this number in '96 in real terms. So you not only have to add the $6.6 billion here, but you've got to bring it up for the inflation loss because we're not covering real growth in the budget. So that's a $12 to $15 billion add. That's what the Armed Services Committee types have been talking about.

What others have been talking about is nominally holding it at this level, because that lets you say we have slowed the erosion of the defense budget. We've held the line on the defense budget cuts. So I think the debate is going to revolve around those numbers, but I've got to also tell you that you're going to bump up against the same people that say you've got $11 billion in non-defense spending in the DoD budget, and if you stop doing that, you don't need to add anything. You're all hearing that on the Hill already, right? That debate is going to be a rich, warm debate all year long.

But those are the numbers to keep your eye on. Stepping that number up by that percentage is, I think, the outer bounds. My guess is the outer bounds. The real problem is, I think people still want to stay on the line on the cap.

I don't know what they're going to do on the balanced budget amendment. You all know where we are on the balanced budget amendment. This Department would love to have balanced budgets, because no department has suffered more from deficits than has this Department over the last 10 years. But, if all you can agree on is you don't want to hurt social security and you still want balanced budgets, we're now in the range of $200 billion to $500 billion that could potentially come out, and we're very nervous about that.

I'm going to leave, because we've got much better key people ready to go. Stay. It's a good story. Ask for the handouts when they get done. Thank you.

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