STATEMENT BY
HONORABLE CHARLES S. ABELL
PRINCIPAL DEPUTY UNDER SECRETARY OF DEFENSE
(PERSONNEL AND READINESS)

BEFORE THE
COMMITTEE ON ARMED SERVICES
SUBCOMMITTEE ON TOTAL FORCE
U.S. HOUSE OF REPRESENTATIVES

MARCH 3, 2004

Mr. Chairman and members of the Total Force Subcommittee, I welcome the opportunity to appear before you to discuss the Department of Defense commissary, exchange and morale, welfare and recreation (MWR) programs. The resale benefits, MWR activities, and other community programs form the fabric of the military support structure in 300 military communities and 200 forward deployed locations around the world.

Our resale and MWR programs are sound. Today, the Defense Commissary Agency (DeCA) and the Armed Services Exchanges are delivering the commissary and exchange benefits by providing affordable goods and services, primarily through traditional store formats. The exchanges also provide health and comfort items for deployed personnel, make the benefit more accessible to authorized patrons through catalog and Internet services, and provide important financial support to our MWR programs. MWR programs provide a full spectrum of mission, community, recreational and leisure time activities to support and enrich the daily lives of our Service members and their families.

The commissary and exchange benefits are important non-pay compensation and are two of the many military community support services available to our men and women in uniform. The Department's leadership and the military personnel who are served by these programs value your advocacy and support for these benefits. You recognize, as do we, that commissary and exchange benefits and MWR programs are crucial to the quality of life of military members and military families.

Everywhere I go on my visits to military communities, I hear of the tremendous need for commissaries, exchanges, and MWR activities. These programs are one of the few benefits that may be exercised equally by all eligible beneficiaries - Active, Guard and Reserve members, retirees, and their family members. I applaud that the Subcommittee is hearing testimony from beneficiaries today. Our military community members provide the most persuasive testimonials to the importance of these programs and the effect that the resale benefits have on the family's choice whether or not to continue a military career.

In today's uncertain world, the commissary and exchange benefits are of paramount importance to the Active, Guard, and Reserve members and their families. Since I testified before the Total Force Subcommittee last April on resale activities, we have had a busy year in quality of life programs. I'd like to take some time to review our successes, our ongoing initiatives, and the challenges for the future.

We are directly serving our military engaged in the Global War on Terrorism and are supporting their families at home;
We are actively managing the commissary, exchange and MWR programs, funding, and capitalization;
We are fully engaged in transformation planning for BRAC 2005 and the Integrated Global Basing Strategy and implementing the Social Compact goals.

SUPPORT OF MOBILIZATION AND DEPLOYMENT

On the Front

Exchange and MWR personnel, including nearly 600 civilians, are serving with our troops at forward-deployed locations. These dedicated personnel are operating exchanges, ships stores, and recreational programs- often 24 hours a day, seven days a week -- in the Persian Gulf, the DMZ, the Gulf of Aden, Iraq, Tajikistan, to name a few. This endeavor is made possible thanks to the congressional appropriations, assistance from DeCA's distribution systems, strong support of our industry partners, and donations from the American people.

Donations. The American people have responded to Operating Enduring Freedom and Operation Iraqi Freedom with an outpouring of support for our troops and their families. Americans from every walk of life have extended a helping hand and generous spirit. Elementary school children are writing letters, Girl Scout troops are donating cookies, church groups are making quilts, and community service organizations are donating telephone calling cards and frequent flier miles. Corporate America donations are growing and helping to sponsor family reunions, special televised tributes, and celebrity entertainment. This support has been key to the continuing upbeat morale of our troops.

Morale, Welfare, and Recreation. Our Service members are performing tough duty in austere locations, while their families cope with the stress and anxiety associated with extended separations. The Services deserve credit in recognition of the fine job being done.

The Services continue to improve their capability to support troops in deployed locations, recognizing that recreation supports the military mission by sustaining morale and fostering unit cohesion. The Army has established 25 large and 17 small MWR sites in Iraq and 3 MWR support locations in Afghanistan. The MWR standard is now to provide fitness and sports equipment, reading materials and continuing education support, movies, video and board games, special events generated by the deployed staff, entertainment through Armed Forces Entertainment and the USO. There are computers at free, MWR-operated Internet cafes, to support e-mail communication, which are operating at 124 locations in Iraq with another 53 locations to be added by this summer.

In addition, the Services continue to send MWR specialists (military and civilian) to troop concentrations, to include large Navy vessels, to organize and manage MWR programs. Commanders recognize MWR programs and field exchanges are vital to sustaining morale during lengthy deployments where troops must remain aboard ship or on the installation to maintain adequate force protection. The assignment of personnel trained to manage these programs has dramatically improved the quality and sustainability of MWR in deployed locations.

Armed Forces Entertainment. Armed Forces Entertainment, in cooperation with the United Services Organization (USO), continues to provide much welcomed celebrity and professional entertainment to our forces engaged in the war on global terrorism. Robin Williams, Robert De Niro, Conan O'Brian, David Letterman, Drew Carey, Arnold Schwarzenegger, Gary Senise, Paul Rodriquez, George Gervin, Bruce Willis, Lee Ann Womack, Miss Universe, several NASCAR and WWF stars, and several NFL cheerleading squads are some of the many celebrities and entertainers who have generously donated their time to bring a taste of home to deployed forces.

Field Exchanges. There are 52 Tactical Field Exchanges, 69 exchange supported/unit run field exchanges, and 15 ships' stores in the Operation Enduring Freedom and Operation Iraqi Freedom theaters providing quality goods at a savings, and quality services necessary for day-to day living. Goods and services offered include phone call centers, satellite phones, internet cafes, video films, laundry and tailoring, photo development, health and beauty products, barber and beauty shops, vending and amusement machines, food and beverages, and name brand fast food operations. Goods and services vary by location based on troop strength and unit mission requirements.

Telecommunication. It is a longstanding Department of Defense practice for Service members to be able to make subsidized or free telephone calls home. The frequency and duration of Health, Morale, and Welfare calling using official phones are determined by the commander so as not to interfere with the mission.

The Fiscal Year 2004 NDAA requires that prepaid phone cards, or an equivalent telecommunications benefit, be provided without cost to Service members serving in Operation Enduring Freedom and Operation Iraqi Freedom. The telecommunications benefit may not exceed $40 or 120 calling minutes per month. The Secretary of Defense may accept gifts and donations in order to defray the costs of the program. The program terminates September 30, 2004.

On the average, 50,000 Health, Morale, and Welfare calls are made each day using the Defense Switched Network (DSN). The Health, Morale and Welfare calls provided at no cost to members serving in Operation Enduring Freedom and Operation Iraqi Freedom approximate $9.36 per member per month. The Military Departments report the value of donated calling cards approaches $1 million a month, or about $5.19 per member. In addition, we will consider the value of email and Internet communications services provided at no cost to the deployed personnel.

An average of 315,000 minutes of daily calling is made over "unofficial lines" at exchange operated calling centers ashore and afloat where members pay for the calls. The unofficial calling rates have dropped from $.375 to $.32 per minute at calling centers and from $.90 to $.76 per minute on satellite phones used in remote areas. Shipboard, calling rates are still $1.00 per minute. As we implement the Act, the exchanges continue efforts to reduce the cost of calls from the theater.

While theater conditions are not ideal to provide "calling anytime, anywhere," we are committed to expanding available service as infrastructure becomes available. We have mounted an information campaign to insure that members choose the most economic calling method available and are looking at more convenient ways for the American public to purchase and donate the best value of calling minutes to Service members.

On the Homefront

Military families are a top priority for the Department, especially those affected by deployment. The Department is sensitive to the hardships and challenges faced by military families when the Service member is away from home for a long period. Within the military community, the Army, Navy, Air Force and Marines have exceptional family support systems that help families cope with the demands of military life. In addition, MWR provides families with sources of recreation to ease the stress experienced by family members at home. Reserve families who live across America present a particular challenge. An aggressive effort to reach Reserve families is underway.

Family Assistance Centers. Family assistance centers have increased operations to unprecedented levels to meet family needs. Nearly 300 centers serve as the primary delivery system for military family support programs, including deployment support, return and reunion, and repatriation for active duty, Guard and Reserve members and their families. The Navy Exchange System Command has a well-established "pre-deployment" program partnership with the Navy and Marine family assistance centers to prepare members and their families for mobilization and deployments. The Army and Air Force Exchange Service recently launched a similar program designed to explain the exchange services, especially telecommunications, available to support deployed members and their families at home.

Reserve Family Readiness. Reserve Family Readiness remains a critical issue for the Department as we continue to draw upon the skills and capabilities resident in the Guard and Reserve to support the Global War on Terrorism. To assist the unit commander to support the unit members and their families, approximately 400 National Guard family assistance centers have been established to augment the family support system. These centers are established in communities where large densities of Guard and Reserve members have been mobilized.

A "Guide to Reserve Family Member Benefits" informs family members about military benefits and entitlements, including medical and dental care, commissary and exchange privileges, military pay and allowances, and reemployment rights of the Service member.

Children and Youth Programs. The military child development program continues to be a critical component in helping military parents fulfill their mission and focus on the job at hand and remains a high priority for the Department. Stabilizing a child care arrangement can present a major challenge for families of deployed troops. To support families during deployment, emergency supplemental funding of $8 million in 2003 and $13.5 million in 2004 has been used to provide child care for extended hours on nights and weekends; drop-in, respite, and mildly ill care; and extended services to the Guard and Reserve. Because deployment of a family member can adversely affect a child's behavior both academically and socially, the Department of Defense has developed several avenues to support children of military families, their parents, the staff who work with children, and the teachers who educate military children.

Installation Youth Centers provide computer labs with Internet connectivity to encourage communication between deployed parents and their children. In addition, tutoring programs are offered at Youth Centers to help children with their homework while their parents are absent. The Department reached out to public school districts to alert them to and engage them in addressing the unique needs children from families in which at least one parent was deployed. Many of our industry partners participate in commercial sponsorship and support private scholarship programs that directly support our military children and youth.

Communications. Support to family members is no less important during times of high operational tempo, both for the families of active duty and reserve Service members. Maintaining a connection between families and the Service member on deployment through morale calls and e-mail can ease anxiety and stress. To ease the financial burden, we are proposing to permit the American public to purchase telephone calling cards online for the purpose of sending them to deployed military members.

Information and Referral Services. Service members and families cope better with the demands of military life when they have easy access to accurate and timely information. The Military OneSource is an employee assistance-like program that provides individual information and referral services concerning support available on the installation or in the community. The 24/7/365 toll-free telephone, e-mail and web site services include information and referrals on parenting and child care, education, deployment and reunion, military life, health, financial, relocation, everyday issues (i.e. pet care, plumber), work and career, to name a few. Military OneSource is an augmentation, not a replacement, for the family centers that are cherished. Military OneSource is a joint project. Each of the Military Services will have fully implemented the service by the end of Fiscal Year 2004. The Marine Corps was first to stand-up the program and is enjoying positive feedback and results.

The new Military Homefront web-portal will become the central, trusted, up-to-date source for Service members and families to obtain information about all The Department of Defense Quality of Life programs and services, whether they are planning a permanent change of station move, dealing with deployments and family separations, or looking for the specials at the commissary and exchange stores. The site will contain not only breaking news, but also quick links to SITES4 (a comprehensive military community information database), to Military OneSource, and other sites supporting military families.

Dependent Schools. The Department of Defense Education Activity (DoDEA) has been an active partner in supporting students and families during the war. All schools within DoDEA have Crisis Management Teams to assist students and teachers during stressful times. Working in collaboration with military and civilian communities, they provide support before, during and after each deployment.

Financial Stability. The financial stability of military families is another initiative that the Department is addressing, particularly in light of large troop deployments and mobilization. To help families achieve financial stability, the Department has embarked on an initiative that combines educating Service members and their families on using their finances wisely with expanding employment opportunities for military spouses. The Department has emphasized financial well being through a Financial Readiness Campaign designed to enhance the education and awareness programs of the Military Services through the support of 26 Federal agencies and non-profit organizations. We have already begun to see positive changes in the self-reported assessment of financial condition of Service members.

The Armed Services Exchange Military Star Card credit program is designed to help members establish and maintain a good credit history at a favorable interest rate (currently 9 percent). During deployment, members have two options. Charging privileges may be suspended and no interest is charged or payments made to the account. Alternatively, charging privileges may be maintained and a 6 percent interest rate is accrued (the normal interest rate is 9 percent).

We are employing another collaborative approach to improve employment opportunities of military spouses by partnering with federal, state and local governments to address legislative and regulatory barriers that may inhibit financial stability and portability of jobs, and developing partnerships with government, non-profit and private sector organizations to increase the number of opportunities available to spouse to develop careers. Within our own family support structure, the commissary and exchange systems are the largest employers of family members - in fact, family members represent nearly a third of resale employees.

Through these initiatives the Department seeks to enhance financial stability by promoting consistent reliable sources of income and the ability to use it wisely to support quality of life needs and for attaining future life goals.

COMMISSARY OVERSIGHT

The commissary benefit is an essential component of the non-pay compensation for members. In Fiscal Year 2003, the commissaries sold over $5 billion in groceries, a 1.5% increase over Fiscal Year 2002. Since last year, the DeCA increased customer savings from 31.6% to 32.1%. Customers are responding favorably to operating changes geared to improving merchandise selection and customer service. Results of the latest Commissary Customer Service Survey (CCSS) confirm that DeCA continues to provide both low prices and improved customer service. On a scale of 1 (very poor) to 5 (very good), commissary patrons ranked service at 4.42.

I'd like to thank the Congress for enacting legislation to carry out our Social Compact promise to provide unlimited commissary benefits for Reserve and Guard members. The Department implemented the new authority the same day the President signed it into law.

Commissary Operating Board. The Under Secretary of Defense for Personnel and Readiness (USD(P&R)) seeks the regular advice of the senior military and civilian leadership to monitor the commissary operations and to work together to guarantee a viable commissary benefit well into the future. This role has been formalized through the establishment of the Commissary Operating Board (COB). Dr. Chu, USD(P&R), recently appointed Vice Admiral Charles W. Moore, Jr., Deputy Chief of Naval Operations, Fleet Readiness and Logistics, as Chairman, COB for a two-year term. We are meeting regularly with Vice Admiral Moore to obtain his counsel on the commissary benefit and DeCA operations.

Annual Assessment. Dr. Chu, Vice Admiral Moore, the senior military and civilian members of the COB, Major General Weidemer, Director, DeCA, and I, are working together to provide the commissary benefit in the most efficient and cost-effective manner to be able to guarantee that each dollar the Congress provides from the American taxpayer is well spent. To do so, means that commissaries that are no longer justified by their customer bases may close or be scaled back, while new stores may open where warranted and existing stores expand hours and stock assortment. In August 2003, I asked the Military Departments to more closely review 33 commissary operations. Based on their reports, there are no current plans to close those commissary stores. While this scrutiny may make some uncomfortable, this annual review of the commissary system will be increasingly important in view of the Global Posture Review and the Base Realignment and Closure (BRAC) Commission round scheduled for 2005.

Funding. DeCA is fully funded in the Fiscal Year 2005 budget. DeCA has made significant progress by doubling the surcharge capital investment in stores, improving customer service ratings, and increasing the savings for commissary customers. While the DeCA budget has increased moderately each year since Fiscal Year 2000, sales increases have not kept pace. Thus, the taxpayer cost of each unit sold continues to rise - from $.2198 in Fiscal Year 2000 to $.2253 in Fiscal Year 2005. We believe that controlling the taxpayer subsidy while sustaining customer savings and improving customer service are mutually compatible. Through comparison to commercial industry best practices and performance indicators, we believe we can deliver the benefit in the most efficient and effective manner possible.

Business Initiatives. In Fiscal Year 2003, DeCA realized $6 million in savings from produce acquisition efficiencies of the Defense Supply Center Philadelphia. Other areas of opportunity continue to be pursued in personnel management and case ready meat. Under competitive sourcing provisions, DeCA has competed 3,572 positions from Fiscal Year 2000 - Fiscal Year 2003, out of a Business Initiatives Council target of 6,392 to be competed by Fiscal Year 2009.

Fiscal Year 2003 commissary customer savings of 32.1 percent continue to exceed the 30 percent target. I stress that this level of savings is an average - in some locations savings approach 50 percent, while in other locales savings fall below 20 percent. Under the current pricing structure of "cost plus 5 percent," DeCA has limited management tools to more consistently deliver the desired level of savings at each commissary location. Dr. Chu asked DeCA to conduct a study to determine the feasibility of adopting variable pricing while sustaining an average 30 percent savings on all products. Research on industry best practice suggest that DeCA could possibly deliver the desired 30 percent savings more consistently to commissary customers by using variable pricing. In response to the General Accounting Office recommendations to consider a private label program, the study is also examining the potential for expanding DeCA's best value item program. A commercial study is underway and the results are expected in mid-March.

Capitalization. In response to reduced tobacco sales, increased customer savings resulting in lower prices, and more accurate projections of the long-term effect of September 11^th, DeCA does not expect sales growth to track with the grocery industry. With sluggish commissary sales forecast, DeCA expects surcharge collections to continue around $260 million. Although several planned surcharge projects will be deferred this year, DeCA is maintaining a robust capital investment program with 11 major construction projects totaling $106 million.

EXCHANGES

The three exchange systems, the Army and Air Force Exchange Service (AAFES), the Navy Exchange Service Command (NEXCOM), and the Marine Corps Exchange, continue to operate independently. Each Exchange Service provides two important non-pay compensation benefits for authorized patrons: selling quality goods and services at low prices and distributing earnings as dividends to support the Services MWR programs. Typically, the MWR programs use the exchange dividends to support their nonappropriated fund construction programs. The Armed Services oversee the operations under broad Department policy.

Funding. The exchanges and ships stores ended Fiscal Year 2003 with estimated sales of $10.5 billion and profits of $539.8 million. Sales increased $653 million (6.7 percent) over Fiscal Year 2002, but profits increased only $4.3 million (.8 percent) - falling from 5.46 to 5.16 percent of sales. The decline in operating efficiency is principally attributed to Operation Iraqi Freedom expenses that were not fully funded by appropriations, pension accounting, and charges for early retirement incentives. Fortunately, last year's projections by the exchanges of collapsing dividends and capital programs did not materialize due to hard work by each of the organizations.

The exchanges have identified $63 million in Fiscal Year 2004 appropriated fund requirements in support of Operation Enduring Freedom and Operation Iraqi Freedom. The Congress provided $55 million in response to the Department of Defense Fiscal Year 2004 supplemental wartime request. Even with this strong taxpayer support, we are experiencing stress on the resale systems, both in terms of supporting contingency operations and producing a steady flow of funding for capitalization and MWR dividends.

Exchange Dividends. On a combined basis, the projected Fiscal Year 2003 MWR dividends of $312.4 million represent 58 percent of exchange and ships stores profits. MWR dividends increased $2.3 million over last year. However, MWR dividends have not recovered to Fiscal Year 2001 levels of $342.7 million. In the meantime, the MWR programs are becoming increasingly dependent on exchange dividends and are reducing their MWR capitalization programs as appropriated funding is reduced, especially in the Army and Navy.

In order to recover the previous levels of MWR dividends and capitalization, without adversely affecting Exchange customer savings, customer satisfaction and capitalization programs, the exchanges must find ways to manage more efficiently. The three exchanges continue to work independently to reduce costs, especially at headquarters, and to raise customer satisfaction through improved business practices and information technology, often duplicating investments in systems and infrastructure.

Unified Exchange Task Force. As a means to rectify this situation, I formed the Unified Exchange Task Force in response to the decision by the Deputy Secretary of Defense to unify the three military exchanges into a single business entity. The task is to deliver an actionable plan within two years based on the principles of the President's Management Agenda and the Defense Transformation Plan. The integration process must sustain and enhance the current exchange benefit so that Service members, their families, and retirees continue to have access to quality goods at fair prices. Integration should help reduce costs by the elimination of redundancies and streamlining of processes. We should also realize greater economies of scale as the military and the retail environment continue to change.

The Task Force has developed a number of tools and processes to guide implementation planning. Two governance groups were established. The first, an intermediate level, comprised of current exchange commanders and the exchange chief operating officers and chaired by the Task Force Director, will monitor, review and approve various components of the implementation planning process itself. The second senior level of governance, composed of Joint Staff and Service three star leaders with exchange cognizance and Assistant Secretaries of the Military Departments for Manpower and Reserve Affairs and chaired by me, will resolve any contentious issues that may surface during planning and approve the draft implementation plan. Eight work teams, comprised of current exchange employees who are experts in their respective functional disciplines, have been chartered to develop the implementation plan. Two crosscutting work teams, also comprised of current exchange experts, will focus on end-to-end process integration and operating strategy development. The Task Force is collaborating with all teams providing analytic support, facilitators, and subject matter experts from the commercial retail community to assist in developing the plan.

The exchange commanders and their chief operating officers, and the exchange experts involved on the teams are working hard to meet deadlines and deliver a plan on schedule. I expect to deliver a detailed draft implementation plan to Deputy Secretary of Defense Wolfowitz and Congress in early 2005. The Department is keeping the Subcommittee members and staff apprised of our progress and look forward to responding to your questions as we move further down the planning path.

Merchandise Restrictions. Based on your guidance, future requests for relief from merchandise restrictions are to include surveys and assessments of the impact on the local community. The exchanges recently completed their report on the surveys conducted to assess the impact of lifting restrictions on televisions, diamonds, and furniture. The results are being reviewed in the Department. We will keep the Subcommittee advised of our progress.

We are aware of congressional interest in new business ventures, such as furniture outlets and optometry clinics, and the need for an open exchange of information. The Department policy is to fully vet such proposals with the local community and to provide the results of such reviews to the Congress.

Exchange Cooperative Efforts. While the integration planning is underway, it is essential that the Resale Commanders continue independent and cooperative efforts to improve operations and achieve common business philosophy and best business practices. The differences in information technology continue to be the greatest challenge to cooperative efforts. The Military Star Card Program and the Armed Services Exchange Catalog are two examples of longstanding, successful cooperative efforts.

The exchanges continue to expand the Exchange Select program, which replaces the Services individual private label programs and includes health and beauty care, baby products, vitamins, toiletries, and household products. Exchange Select provides patrons 450 quality products with average savings of approximately 48 percent compared to name brands. In 2003, the industry recognized the development of the "Exchange Select" program with the Private Label Manufacturers Association Salute to Excellence Award.

I am pleased to report that under the guidance of my Deputy Under Secretary of Defense for Military Communities and Family Policy, the exchanges completed an intensive effort to update the uniform chart of accounts and common financial reporting practices. As a result, revised financial statements were published for Fiscal Years 2001 and 2002. Some work remains to be done to establish common accounting practices for depreciation of assets. With a few exceptions that are fully disclosed in notes to the financial statements, differences in the exchange financial reports will be attributable to differences in management of programs and operating performance, not to different accounting practices. The practices will be reviewed and updated annually.

Work continues to benchmark capital investment and MWR dividends. Using the uniform exchange financial data, the history and projected dividends distributed to MWR programs is provided.

Armed Services Exchange Dividends
$(millions)

	Actual	Actual	Actual	Actual	Projected	Projected
	1999	2000	2001	2002	2003	2004
AAFES Dividend to:
Army MWR	$140.5	$149.4	$138.1	$123.0	117.4	$119.9
Army National Guard	$6.5	$7.9	$7.5	$9.0	12.9	$13.1
Navy MWR	$1.5	$1.6	$1.8	$0.9	0.4	$0.4
Air Force MWR	$88.9	$93.3	$86.4	$76.1	71.9	$73.5
Marine Corps MWR	$6.2	$8.2	$10.2	$11.1	13.6	$13.9
Total	$243.6	$260.4	$244.0	$220.1	$216.2	$220.8

NEXCOM Dividend to:
Navy MWR	$38.8	$53.3	$53.1	$39.9	$48.5	$41.3
Navy MWR (from Ships' Stores)	$16.4	$14.9	$15.7	$19.4	$17.2	$17.7
Total	$55.2	$68.2	$68.8	$59.3	$65.7	$59.0

MCX Dividend to:
Marine Corps MWR	$35.0	$32.5	$29.9	$30.7	30.5	$33.4
Total	$35.0	$32.5	$29.9	$30.7	$30.5	$33.4

Total Exchange Dividends	$333.8	$361.1	$342.7	$310.1	$312.4	$313.2

Sufficiency of MWR dividends is determined by the Armed Services, based on their requirements. Accordingly, we reviewed the exchange dividends distributed to each Armed Service MWR program. For comparative purposes, the exchange dividends are depicted on a per capita basis, using the authorized end strength:

Per Capita Dividends

		Actual	Actual			Actual	Actual		Projected		Projected
		1999	2000			2001	2002		2003		2004

Army Source of Dividends:
AAFES	$292.7			$311.3	$287.7			$256.3		$244.6		$248.5
Total	$292.7			$311.3	$287.7			$256.3		$244.6		$248.5

Navy Source of Dividends:
NEXCOM	$104.1			$143.2	$142.4			$106.1		$129.1		$110.5
Ships' Stores	$44.0			$40.0	$42.1			$51.6		$45.8		$47.4
AAFES	$4.0			$4.3	$4.8			$2.4		$1.1		$1.1
Total	$152.1			$187.5	$189.4			$160.1		$175.9		$158.9

Marine Corps Source of Dividends:
MCX	$203.3			$188.4	$173.2			$177.9		$174.3		$190.9
AAFES	$36.0			$47.5	$59.1			$64.3		$77.7		$79.4
Total	$239.3			$235.9	$232.3			$242.2		$252.0		$270.3

Air Force Source of Dividends:
AAFES	$239.7			$258.6	$242.0			$212.1		$200.3		$204.6
Total	$239.7			$258.6	$242.0			$212.1		$200.3		$204.6

MORALE, WELFARE AND RECREATION PROGRAM FUNDING

Each of the Service MWR programs is in sound financial condition, although nonappropriated fund operating results declined dramatically this year. The MWR programs attribute the decreased nonappropriated (NAF) operating performance to reduced exchange dividends, deployment, currency fluctuation, and higher NAF expenses to compensate for lower appropriated fund (APF) support. The continued vitality of the MWR program depends on sound management, a predictable stream of nonappropriated fund revenues, and also solid APF support of Category A and B activities.

Category A activities (fitness, libraries, recreation centers, single Service member programs, intramural sports, and unit activities) should be supported 100 percent by APF. The Department sets a minimum standard requiring at least 85 percent of total expenses being supported with APF. Since 1995, DoD has improved APF support to Category A from 83 percent to 91 percent in FY 2003. Category B activities (childcare, youth programs, outdoor recreation, crafts and hobby shops, and small bowling centers) should be supported with a minimum APF of 65 percent of total expense. Again since 1995, DoD has improved APF support to Category B from 57 percent to 67 percent in FY 2003. All of the Services, with the exception of the Marine Corps, have met minimum percentages of APF support for Categories A and B for FY 2003. The Marine Corps has made a commitment to meet these minimum percentages in FY 2004.

Preliminary estimates indicate FY 2005 APF budgets for Army and Navy MWR programs are expected to decline $140 million from FY 2003 levels. We are working with the Army and Navy to determine the impact of these reductions on troops and their families.

USO Audit. The GAO issued an audit on January 7, 2004, that was critical of DoD reimbursement of certain USO expenditures related to overseas entertainment. The GAO identified $86K in improper, $3K in questionable, and $344K in inadequately documented expenditures. This was out of a total of $12.1 million in DoD reimbursements to USO for Armed Forces Entertainment. The USO has agreed to reimburse DoD and the Department has issued new policies to better define authorized expenditures and required documentation. The new policy and procedures should prevent a repeat of these problems in the future.

MWR Force Protection Condition (FPCON) Funding: Some installations experienced a dramatic drop in income at revenue generating MWR activities as a result of increased force protection conditions (FPCON) subsequent to the September 11, 2001 attack. To ensure MWR activities can continue to support military communities, DoD established policy, which allows installation commanders to pay for limited expenses with appropriated funds to sustain Category C MWR operations during heightened security conditions. The Military Services used the policy to reimburse the MWR nonappropriated fund instrumentalities $4.3 million for the losses incurred during October through December 2001.

CHILD DEVELOPMENT SYSTEM

The Department views child care as a work force issue that directly impacts the effectiveness and readiness of the force. The Department of Defense has the largest employee-sponsored child care program in the country serving over 200,000 children (birth - 12 years of age) daily. The program consists of child development centers, family child care homes, school-age care programs and information and referral services. Through these delivery systems, the Department of Defense offers full-day, part-day and hourly care, before- and after- school programs and extended hour care for nights, weekends and shift work. Generally, military parents are young, often far from home, and without the support of families and neighbors. Child care for infants and toddlers is hard to find and expensive. Because 65 percent of military spouses are in the work force, quality, affordable child care is an economic necessity and quality of life issue for military families. By providing child care, we help military families balance the competing demands of the family, accomplish the military mission, and improve the economic viability of the family. We currently have child development programs at over 300 locations with over 900 child development centers and 9,000 family child care homes. There are 174,410 spaces with a calculated need for an additional 41,000 spaces. Military child development programs are nationally recognized as models by early childhood advocates and professional organizations.

YOUTH PROGRAM

Youth programs are offered in over 400 youth centers at 300 locations worldwide. Traditionally these programs have offered youth sports, recreation, classes and social activities such as dances. The emphasis has expanded to include programs focused on social-emotional development, character building, and community service and prevention programs.

Military life imposes unique demands on families. Military assignments often require families to be relocated far from family support networks and frequently require remote or temporary assignments. Relocation impacts all aspects of family life, spouse employment, family finances, a sense of belonging and security. On average, military families move twice as often as civilian families. During the adolescent years, relocating requires youth to re-establish peer support systems and friends at a very difficult stage of development. Further, adolescents tend to have little control over the circumstances surrounding a move and often suffer from inadequate communication or support from their parents who are also preoccupied by the demands of moving. In response, the Department developed an Internet website - "Military Teens on the Move" (MTOM), designed to provide relocation and outreach support to military adolescents ages 10 -18. The goal of MTOM is to help teens make positive connections in their new community. The Department of Defense worked hard to ensure it would be appealing to youth and included their perspective and reflection of their world as it relates to every aspect of relocation. MTOM was expanded to include a second site, designed for school-age children ages 6-10.

CAPITALIZATION PROGRAMS

Overall, capital investment in support of commissary, exchange, MWR and lodging programs is being maintained at about $1.1 billion each year, including the major construction programs. We appreciate the congressional approval to raise the minor construction threshold from $500,000 to $750,000 to coincide with the appropriated fund threshold.

The nonappropriated fund capitalization program, for both MWR and exchanges, is largely dependent on exchange profits. Last August we submitted and you have approved a Fiscal Year 2004 major construction program that included 66 nonappropriated fund projects for exchange, MWR and lodging activities totaling $307 million. Reductions in exchange dividends and appropriated fund support of MWR activities have resulted in a 21 percent decline in average nonappropriated fund capital investment for MWR programs, primarily in the Army and Navy. Military Construction appropriations for MWR, including child care, are also declining.

CITIZENSHIP

The Department is working closely with the Department of Homeland Security's Citizenship and Immigration Service to expedite citizenship applications for non-US citizen members of the Armed Forces. However, finalizing citizenship requirements for military members overseas has been problematic. We are working with the Citizenship and Immigration Service to expand authority for conducting naturalization interviews and swearing-in ceremonies overseas. In the mean time, the Department of Defense has established policy to authorize emergency leave for service members who need to finalize citizenship processing.

PERSONAL COMMERCIAL SOLICITATION

The Department received a lot of feedback from the insurance industry and members of Congress regarding DoD policies affecting personal commercial solicitation on DoD installations. The Department does not seek to constrain access to DoD installations by reputable businesses but must safeguard military personnel and their families from predatory or deceptive sales practices. The Department conducted a public forum in August 2003 to obtain comment on its current directive and will conduct a second public forum to seek comment on any proposed changes deemed necessary. The National Defense Authorization Act for Fiscal Year 2004 requires the Department to give Congress 90-days notification prior to implementing any changes to DoD Directive 1344.7, Personal Commercial Solicitation on DoD Installations, and we will certainly comply with the law.

ARMED FORCES RETIREMENT HOME

It has been 18-months since a Chief Operating Officer assumed responsibility for direction of the Armed Forces Retirement Home from the AFRH Board. In that short time, significant progress has been made to return the Home to a sound financial footing. Unused building space has been leased out, many support functions previously accomplished by AFRH staff have been contracted out, and the Home will soon provide Congressional notification to finalize the sale of 49-acres in excess property adjacent to the Washington Campus for $22,000,000. Some of the changes required have not been popular with all of the Home's residents and staff, but they have been necessary to ensure this historic institution is available to serve future generations of retired enlisted military personnel and disabled combat veterans.

TRANSFORMATION

Integrated Global Basing Strategy. The Department has started work on a new global rebasing strategy to better meet future national security strategy requirements. Although the operational dimensions are paramount, improving the quality of life of relocated forces and their families is also important. Therefore, the Department intends to consider quality of life in its rebasing strategy recommendations. These considerations will include schools, health care, housing, childcare, spouse employment, crime and safety. Overseas installations produce significant commissary surcharge funding and exchange profits. We will be closely evaluating the base restructuring initiatives to assess the impact on surcharge and nonappropriated capital investment programs.

BRAC 2005. At this juncture, we are not contemplating a moratorium on nonappropriated fund and commissary surcharge construction programs. Concerns have been raised regarding the degree to which the Department can continue to provide the MWR and resale benefits to authorized patrons. In preparation for BRAC 2005, we are evaluating the current policy and statute governing commissary and exchange operations on closed installations, to include combined store operations, to determine if modifications to statute or policy are needed.

Combined Stores. The concept of combined commissary and exchange store operations as a mechanism to continue commissary and exchange support at closed and realigned installations has not been successful. The Army and Air Force Exchange Service and Navy Exchange Service Command have operated combined stores at four locations for several years: Homestead ARB, FL; Fort McClellan, AL; NAS, Fort Worth, TX; and Orlando, FL. As required by statute, edible groceries are sold at cost plus five percent and the operations may receive appropriated funding up to 25 percent of the amount used by DeCA in the last year it operated the commissary. In our experience, the operating model results in losing grocery operations that require both appropriated funding from DeCA and nonappropriated funding from the exchanges, which effectively reduces the MWR dividend.

In two cases, Homestead ARB, FL and Fort McClellan, AL, insufficient usage by authorized patrons and operating losses resulted in the decision to close the stores by December 31, 2003. After providing the required ninety-day advance notification to the Congress, we delayed the closure date in order to respond to congressional concerns. Because of the limited number of Active duty personnel in the Orlando area, we propose to convert the combined store to an independent exchange operation and cease appropriated funding on July 1, 2004. Grocery items would continue to be available, but will be sold at exchange prices.

With over two-thirds of active duty families living off-base, more single parents, working spouses, deployments and operational tempo, there are special challenges in making sure that military families can and do take advantage of these important non-pay compensation benefits.

To this end, we need to begin to identify and evaluate a variety of operating formats and ways to deliver the benefits in those locations and situations where the traditional store format is not effective. Rather than viewing these options as a death knell for the benefits, we aim to encourage DeCA, the Armed Services Exchanges, and our industry partners to design new approaches that may better meet the demand for these important benefits.

Advertising. We plan to complete a new, cohesive marketing, merchandizing, and advertising strategy to deliver and communicate better the commissary and exchange benefits to all segments of the military population, including those who live off-base. DeCA and the exchanges have initiated awareness campaigns to make authorized patrons aware of these important benefits, targeting the E1 - E6 population and Reserve Component. As a joint effort, the Armed Services Exchanges and DeCA, in cooperation with industry and the Coast Guard, mailed a circular to 500,000 enlisted members (E1-E7) within 25 miles of active locations. The primary purpose was to provide information on the commissary and exchange benefits and to encourage use of those benefits through coupons and paid advertising, specifically tailored to goods and services available in the commissary and exchange.

Fitness Business Initiative Council (BIC). Fitness is vital to force readiness. However, sixty percent of DoD fitness centers currently do not meet DoD fitness center program standards for facilities, staffing, programs or equipment. In an effort to quickly improve DoD fitness program delivery, the Department has initiated a Fitness Business Initiative Council to seek public-private partnerships. We have accomplished contracted site surveys at four installations and have two more installations scheduled for study. These site visits will produce business case analyses and identify public-private venture strategies. Our goal is to test promising strategies at these six installations by June 2005. Public-private venture strategies that prove successful will be conveyed to the Services for their consideration to implement at other installations having a need to improve their fitness programs.

Social Compact. We have reconfirmed the Department's commitment to the commissary and exchange benefits as core elements of family support that provide valuable non-pay compensation to the military. Our aim is for all eligible customers to know the value of these benefits and to recognize them as measurable elements of compensation. We have set performance goals that should more consistently and effectively define, measure and communicate the commissary and exchange benefits.

Customer Satisfaction. The Social Compact identifies the need to consistently measure customer satisfaction. For the second year, the Department contracted with CFI Group to measure commissary and exchange customer satisfaction and provide comparison to industry using the American Customer Satisfaction Index (ACSI). The commissary and exchange goals are to meet the ACSI average customer satisfaction scores for the grocery and department/discount store industries. Although each of the resale activities routinely measures their own customer satisfaction, the ACSI survey provides an objective assessment that is benchmarked to industry. During the first three years of their participation in the ACSI survey, we agreed to keep the DeCA, NEXCOM, and MCX results confidential so a baseline could be created. I think it is appropriate to recognize that, after receiving their first scores last year, NEXCOM and the MCX developed special emphasis programs, using the ACSI survey results to tailor to the areas of greatest importance to their customers. I am told that their customers responded to these efforts with higher ratings during the most recent survey. Well done!

Customer Savings. Work continues to define and measure commissary and exchange market basket savings and to benchmark capital investment and MWR dividends. The Military Exchanges are developing a uniform market basket and methodology for measuring savings and will use the NEXCOM contract to conduct the surveys. At this time, NEXCOM and AAFES have completed their surveys and report average savings of 15.8 - 16.7% (excluding sales tax, alcohol and tobacco products). The MCX results should be available mid-year.

SUMMARY

When this Administration took office three years ago, the President charged us with a mission - to challenge the status quo, and prepare the Department of Defense to meet the new threats our nation will face as the 21^st century unfolds. As part of the transformation process, we are re-evaluating the reasoning for operating three independent exchange services and challenging the commissary system to examine best business practices. In fulfillment of our social compact with military members, the resale entities are working hard to economize and keep prices low and improve customer service in a highly competitive environment. The commissary and exchange programs must be positioned to change with the Global Posture Review and the Base Realignment and Closure (BRAC) Commission round scheduled for 2005. They will continue to perform mission essential support of our brave men and women prosecuting the Global War on Terrorism and serve our military families at home and abroad.

Each of these tasks represents a significant challenge in its own right, but each is critical to the future of these important elements of non-pay compensation. We appreciate and value the hard work of the thousands of managers and employees who labor each day to accomplish these critical tasks at once. It is an ambitious agenda, but we must prepare now for the tomorrow's challenges. We are confident in our capability to adjust the resale system to support America's fighting force and their families. Our military, civilian employees and industry partners are dedicated and determined to carrying out the MWR and resale mission at military locations at home and abroad.

House Armed Services Committee
2120 Rayburn House Office Building
Washington, D.C. 20515

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