[House Hearing, 112 Congress]
[From the U.S. Government Printing Office]
[H.A.S.C. No. 112-4]
HEARING
ON
NATIONAL DEFENSE AUTHORIZATION ACT
FOR FISCAL YEAR 2012
AND
OVERSIGHT OF PREVIOUSLY AUTHORIZED PROGRAMS
BEFORE THE
COMMITTEE ON ARMED SERVICES
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
SUBCOMMITTEE ON MILITARY PERSONNEL HEARING
ON
MILITARY RESALE PROGRAMS OVERVIEW
HEARING HELD
FEBRUARY 10, 2011
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SUBCOMMITTEE ON MILITARY PERSONNEL
JOE WILSON, South Carolina, Chairman
WALTER B. JONES, North Carolina SUSAN A. DAVIS, California
MIKE COFFMAN, Colorado ROBERT A. BRADY, Pennsylvania
TOM ROONEY, Florida MADELEINE Z. BORDALLO, Guam
JOE HECK, Nevada DAVE LOEBSACK, Iowa
ALLEN B. WEST, Florida NIKI TSONGAS, Massachusetts
AUSTIN SCOTT, Georgia CHELLIE PINGREE, Maine
VICKY HARTZLER, Missouri
Michael Higgins, Professional Staff Member
Debra Wada, Professional Staff Member
James Weiss, Staff Assistant
C O N T E N T S
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CHRONOLOGICAL LIST OF HEARINGS
2011
Page
Hearing:
Thursday, February 10, 2011, Military Resale Programs Overview... 1
Appendix:
Thursday, February 10, 2011...................................... 25
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THURSDAY, FEBRUARY 10, 2011
MILITARY RESALE PROGRAMS OVERVIEW
STATEMENTS PRESENTED BY MEMBERS OF CONGRESS
Davis, Hon. Susan A., a Representative from California, Ranking
Member, Subcommittee on Military Personnel..................... 2
Wilson, Hon. Joe, a Representative from South Carolina, Chairman,
Subcommittee on Military Personnel............................. 1
WITNESSES
Casella, MG Bruce A., USAR, Commander, Army and Air Force
Exchange Service............................................... 5
Gordon, Robert L., III, Deputy Assistant Secretary of Defense,
Military Community and Family Policy, Office of Under Secretary
of Defense for Personnel and Readinesss........................ 4
Gordy, Thomas T., President, Armed Forces Marketing Council...... 8
Jeu, Joseph H., Director and Chief Executive Officer, Defense
Commissary Agency.............................................. 6
Larsen, Timothy R., Director, Personal and Family Readiness
Division, Manpower and Reserve Affairs Department,
Headquarters, U.S. Marine Corps................................ 7
Nixon, Patrick B., President, American Logistics Association..... 8
Robillard, RADM (Select) Glenn C., USN, Commander, Navy Exchange
Service Command................................................ 5
APPENDIX
Prepared Statements:
Casella, MG Bruce A.......................................... 59
Davis, Hon. Susan A.......................................... 30
Gordon, Robert L., III....................................... 32
Gordy, Thomas T.............................................. 151
Jeu, Joseph H................................................ 93
Larsen, Timothy R............................................ 107
Nixon, Patrick B............................................. 124
Robillard, RADM (Select) Glenn C............................. 79
Wilson, Hon. Joe............................................. 29
Documents Submitted for the Record:
[There were no Documents submitted.]
Witness Responses to Questions Asked During the Hearing:
[There were no Questions submitted during the hearing.]
Questions Submitted by Members Post Hearing:
Mr. Wilson................................................... 177
MILITARY RESALE PROGRAMS OVERVIEW
----------
House of Representatives,
Committee on Armed Services,
Subcommittee on Military Personnel,
Washington, DC, Thursday, February 10, 2011.
The subcommittee met, pursuant to call, at 2:05 p.m., in
Room 2212, Rayburn House Office Building, Hon. Joe Wilson
[chairman of the subcommittee] presiding.
OPENING STATEMENT OF HON. JOE WILSON, A REPRESENTATIVE FROM
SOUTH CAROLINA, CHAIRMAN, SUBCOMMITTEE ON MILITARY PERSONNEL
Mr. Wilson. Ladies and gentlemen, I would like to welcome
everyone to the second meeting of the 112th Congress of the
Military Personnel Subcommittee. In particular, I am so
grateful that we have our freshman Representative here,
Congressman Austin Scott, and then yesterday of course he
participated, and I am very grateful today that we have
Congressman Mike Coffman, himself a veteran and has served in
Iraq, and I am so grateful for his service. And thank you,
Congressman, for being here today.
And then Congresswoman Chellie Pingree from the great State
of Maine, who has family in South Carolina. So we are very
grateful to have you here. And of course we couldn't meet if
Congresswoman Bordallo wasn't back and to be here with
Congresswoman Davis. But I would like to thank everyone for
being here today.
And today the Subcommittee on Military Personnel will
conduct its second hearing on nonappropriated fund activities
and will turn its attention to commissaries and exchanges, the
Department of Defense's [DOD] military resale operations.
And even as we begin, I want to indicate that I was really
hopeful that the votes that we will have today would have been
prior to the beginning of this hearing, but they could be any
moment. And then if we appear startled and run out the door, it
is because we are trying to live within the time frame of the
vote. But the good news it won't be that extended and so then
we shall return, and you can even figure out when we are coming
back now, which is a novelty.
I believe that the commissaries and exchanges are an
essential part of the health of the military community in
combat capability, as morale, welfare, and recreation [MWR]
programs that this subcommittee examined during yesterday's
hearing. Similarly, we also expect the exchange and commissary
systems to pursue efficiency during this era of increased
budget austerity, because we want these operations to provide
the best service and value to the service members and their
families.
However, it must be recognized that the exchanges are not
big consumers of appropriated dollars and calls for the
exchanges to save appropriated dollars should be answered with
factual justifications. There are analysts who are calling for
more reductions in appropriated funding from the commissary
system or have questioned the need for the military to operate
the commissaries at all.
I believe that the Defense Commissary Agency is a model of
efficiency in our government with a budget that is less than
what it was 10 years ago when inflation is considered. Service
member surveys consistently rate it as one of the most highly
valued benefits offered by the military that delivers over 30
percent in grocery savings to families, service members, and
veterans.
I believe if the Defense Commissary Agency were eliminated
that we would have to invent another benefit of equal impact on
retention and the chances are it would not be as effective or
as efficient.
In addition to learning more about the value of the
exchanges and commissaries and the need to prove they are
factually justified, the resale community has other challenges
that we also hope to learn more about today.
We intend to explore continuing concerns about, first, the
adequacy of funding for recapitalization; second, renewed
interest in pursuing exchange consolidation; and third, the
negative impact on vendors of the 3 percent tax withholding
imposed by the Tax Increase Prevention and Reconciliation Act
of 2005.
Representative Davis, do you have any opening remarks?
[The prepared statement of Mr. Wilson can be found in the
Appendix on page 29.]
STATEMENT OF HON. SUSAN A. DAVIS, A REPRESENTATIVE FROM
CALIFORNIA, RANKING MEMBER, SUBCOMMITTEE ON MILITARY PERSONNEL
Mrs. Davis. Thank you, Mr. Chairman, and I am delighted to
be with you again today, and I want to welcome our witnesses
here as well. We know that Mr. Gordon and Mr. Larsen joined us
yesterday, and thank you for being here once again. We
appreciate your willingness to do that, to come back a second
day. And General Casella, and Admiral Robillard, and Mr. Jeu,
Mr. Nixon, and Mr. Gordy, welcome to you as well.
Yesterday, as the chairman noticed, we mentioned we focused
on morale, welfare, and recreation programs, and today we will
look at the military resale community.
In thinking about our hearing yesterday, we talked about
military resale in the context of the support programs that are
provided to our men and women and their families in uniform.
And we talked about how important, how critical those were for
a variety of reasons, and I think that that was outlined really
quite well in that hearing. So we share concern that the future
of commissaries and exchanges may be being discussed in some
significant way and some changes, and we want to be part of
that conversation of course, but we also have to state very
strongly how important the nonappropriated funding [NAF] that
goes to our support services is.
Over the past several years the commissary and exchanges
have faced a number of significant challenges and you have all
been aware of them, including the transformation of services,
the personnel drawdowns, base closure and realignments, and
force structure changes and movements. And sometimes we
overlook those decisions about those functions really can
impact our men and women in a large variety of ways and
certainly impact our commissaries and exchanges as well. So we
want to be very mindful of that as we move forward.
Our military personnel and their families as well as our
MWR programs have relied on the accomplishments of the
commissary and exchanges. So we appreciate your leadership and
your partnership with our private sector partners to ensure
that we provide the best programs and the best products for our
men and women in uniform.
Thank you for supporting our service members. I know when I
have had a chance over the last few years to address your
organization I know how dedicated people are to being certain
that our men and women are well cared for, and I appreciate
that very much.
So with you, Mr. Chairman, I look forward to the hearing
and look forward to the remarks of our witnesses. Thank you.
[The prepared statement of Mrs. Davis can be found in the
Appendix on page 30.]
Mr. Wilson. Thank you very much. And we are grateful to
have an excellent panel of witnesses today. Mr. Robert L.
Gordon, the Deputy Assistant Secretary of Defense, Military
Community and Family Policy Office of the Under Secretary of
Defense for Personnel Readiness.
Major General Bruce A. Casella, USAR, Commander of the Army
and Air Force Exchange Service. And General, the subcommittee
is sadly aware of the recent passing of your wife Cathie. And
on behalf of the subcommittee members and staff please accept
our heartfelt condolences on your loss.
We are grateful to have Rear Admiral (Select) Glenn C.
Robillard, U.S. Navy, Commander, Navy Exchange Service Command
[NEXCOM]. And I appreciate last week the opportunity of touring
the command and seeing the first class professionals who work
there.
Mr. Joseph Jeu, the Director and Chief Executive Officer,
the Defense Commissary Agency.
Mr. Timothy R. Larsen, Director, Personal and Family
Readiness Division, Manpower and Reserve Affairs Department,
Headquarters, United States Marine Corps.
Mr. Patrick B. Nixon, President of the American Logistics
Association.
And also Mr. Thomas T. Gordy, who is the President of the
Armed Forces Marketing Council. And we welcome Tom back to
Capitol Hill. He had a distinguished record of service here on
Capitol Hill, and then I personally was very grateful for his
Navy Reserve service in Iraq. And he was my host when I was
there and made sure that we got to meet as many troops as
possible and thank them for their service, and we thank you for
your service in Iraq.
As was the case yesterday, many of our witnesses are
appearing before the subcommittee for the first time. General
Casella, Admiral Robillard, Mr. Jeu, Mr. Gordy. Welcome. Mr.
Nixon, you have testified before the subcommittee many times in
the past but not in your current role at the American Logistics
Association, and again you were previously director of the
Defense Commissary Agency. And as we hear good things about
that, we give you a lot of credit.
I want to welcome to the hearing at some time the gentleman
from California, Congressman Wally Herger, to the hearing. Mr.
Herger has asked to participate in the hearing, and I would ask
unanimous consent that he be permitted to do so following the
members of the subcommittee.
Without objection, so ordered.
And so we will begin right away with Mr. Robert L. Gordon.
STATEMENT OF ROBERT L. GORDON III, DEPUTY ASSISTANT SECRETARY
OF DEFENSE, MILITARY COMMUNITY AND FAMILY POLICY, OFFICE OF
UNDER SECRETARY OF DEFENSE FOR PERSONNEL AND READINESS
Mr. Gordon. Thank you, Chairman Wilson and members of the
subcommittee. I am delighted to testify before you again today.
As with MWR, I am grateful for this committee's support for the
Department's resale activities. Our industry partners here
today also play a key role in preserving the valuable exchange
and commissary benefit.
As the Exchange and DeCA [Defense Commissary Agency]
commanders will tell you, the state of military resale is
healthy. Through cooperative and independent efforts we are
improving the availability of services and lowering out-of-
pocket expenses for service members and taxpayers. Customer
satisfaction and customer savings are also healthy. In addition
to internal customer satisfaction surveys, external surveys are
conducted by the American Customer Satisfaction Index, or ACSI.
DeCA's 2010 score of 80 exceeded the ACSI commercial
supermarket industry average of 75.
Commissary savings on patrons' overall purchases is 31.5
percent. Exchange savings average 26 to 28 percent with tax
savings. The 2010 Exchange ACSI scores finished at or slightly
below the department and discount store industry average of 76,
with Marine Corps Exchange [MCX] at 75, Navy Exchange Service
Command at 75, and Army and Air Force Exchange Service at 73.
Each of the exchange services also conduct internal surveys to
evaluate and improve customer satisfaction.
The Department of Defense leadership is fully engaged in
the oversight of these important benefits. The Executive Resale
Board, with many of its members also serving on the DeCA and
Exchange boards is taking an active role to ensure
complimentary approaches where there are mutual interests.
My written testimony outlines our ongoing work in greater
detail. I look forward to working with this committee, and I
thank you for your support and look forward to your questions.
[The prepared statement of Mr. Gordon can be found in the
Appendix on page 32.]
Mr. Wilson. Thank you very much.
General Casella.
STATEMENT OF MG BRUCE A. CASELLA, USAR, COMMANDER, ARMY AND AIR
FORCE EXCHANGE SERVICE
General Casella. Mr. Chairman, members of the subcommittee,
I want to thank you for this opportunity to testify today. I am
eager to share with you how the Army and Air Force Exchange
Service [AAFES] is providing the exchange benefit to members of
the armed services and their families. First, I would like to
express my sincere gratitude for your commitment and our
dedication to protecting and enhancing this important benefit.
I would also be remiss if I did not thank the committee staff
for their professionalism and counsel. It is a credit this
committee.
I am here today to report to you that AAFES, Army and Air
Force Exchange Service, continues to succeed in a challenging
economy. As part of our strategic plan we have focused on
customer service, business and process efficiencies, and
investing in capital improvements. Despite the recession we
were able to generate over $8 billion in 2009 sales, and
increased sales by 1 percent over plan for 2010, coupled with
over $260 million of dividends returned to our MWR programs for
2009 and 2010.
What I am most proud of is the 4,500 volunteer AAFES
associates who have deployed in Southwest Asia since early
2000. Today we have an average of 400 associates deployed in
Southwest Asia who provide a touch of home to our service
members in harm's way. I am also proud of the support we
provide the military community to new facilities. In Germany,
Kaiserslautern Military Community Center opened in late 2009
and achieved more than a $1.2 million in sales on opening day.
In Japan, Kadena Air Force Base main store became our largest
exchange in the Pacific. At Fort Bliss, Texas, the 52 acre
recently opened Freedom Crossing lifestyle center, it supports
over 120,000 soldiers, families, and local retirees.
With these and other efforts discussed in the testimony I
have provided for the record, I believe AAFES is on the right
course to maintain a viable force in the lives of our customers
and the military community we serve.
Again, I want to thank this committee for its support of
AAFES and the entire military resale community as a whole, and
most importantly the brave men and women of our Armed Forces we
support. And I look forward to your questions.
[The prepared statement of General Casella can be found in
the Appendix on page 59.]
Mr. Wilson. Thank you very much. And it is interesting to
me as we serve on the committee to find out that shopping
centers have been superseded by lifestyle centers, but that is
really reflecting serving our families.
Admiral Robillard.
STATEMENT OF RADM (SELECT) GLENN C. ROBILLARD, USN, COMMANDER,
NAVY EXCHANGE SERVICE COMMAND
Admiral Robillard. Chairman Wilson, Ranking Member Davis,
distinguished members of panel, thank you for the opportunity
to appear before you today. It is my privilege to represent
Navy Exchange Service Command and our 14,000 associates
worldwide.
Navy is committed to military and family readiness, and the
Navy exchange programs are an important part of that
commitment. Everything we do is focused on our sailors and
their families. It starts with employing family members.
Twenty-six percent of our associates are military family
members. And we listen to our family members. Through surveys
and focus groups we have learned what is important to them. We
interact through social media, including Facebook and Twitter.
We have also developed customer segmentation to focus on the
differences of our shoppers, allowing us to target merchandise
assortments at each location.
Our military families see the Navy exchanges as more than
just a store. It is a place where they go for that sense of
military community, particularly for those families whose
sailor is deployed or those families serving overseas. We
provide the services they need, whether it is affordable
lodging when they transfer, telecommunications to keep in touch
when deployed, ship stores when they are at sea, barbershops,
gas stations, dry cleaning, and much more.
I would like to take this opportunity to thank our industry
partners who help us provide not only value and savings to our
families, but they support the many events that let the family
know how special they are. I would also like to thank the other
members of the military resale community here today. We are
committed to working together to improving the military
family's quality of life.
In closing, I would like to say how proud I am of the Navy
sailors who serve our country around the world every day. I am
also proud of our Navy exchange team who is dedicated to taking
care of sailors. Together with our industry and government
partners and the support of this subcommittee, we are able to
do more for the deserving families. On our sailors' behalf, I
thank you.
[The prepared statement of Admiral Robillard can be found
in the Appendix on page 79.]
Mr. Wilson. Admiral, thank you. We have been joined by
Congressman Brady, thank you for being here, from the
Commonwealth of Pennsylvania.
Mr. Brady. Thank you.
Mr. Wilson. Mr. Jeu.
STATEMENT OF JOSEPH H. JEU, DIRECTOR AND CHIEF EXECUTIVE
OFFICER, DEFENSE COMMISSARY AGENCY
Mr. Jeu. Mr. Chairman and members of the subcommittee, it
is my distinct honor to have been chosen to serve military
families and who continue to rate the commissary as one of
their most valued benefits. I would like to talk about the
value of commissary benefit.
Too frequently we have limited our definition to patron
savings, currently 31.5 percent. While savings are at the heart
of the benefit, there are many other factors that define as
real value. There are three facets that comprise the commissary
benefit--quality of life, military readiness, and cost
avoidance. The quality of life is most definitely measured by
the patron savings, which can generate $4,400 annually for a
family of four, which system-wide totaled $2.69 billion last
year.
Additionally, there are ancillary benefits provided by our
industry. They contributed $244 million last year to military
scholarships, commissary specific coupons and promotions, and
installation support programs.
I am pleased that 63 percent of DeCA's workforce is from
our military family.
The readiness facet allows our service members to
concentrate on their mission rather than wondering about the
well-being of their families.
The cost avoidance facet describes what the Department
saves in other areas such as reduced cost of living allowance,
or COLA rates, better shipping rates for overseas
transportation. These factors combined provide exceptional
value and added to the Nation's return on investment from the
commissary system.
In closing, I want to thank you for your steadfast support
of our military members and their families and the Defense
Commissary Agency. Thank you, sir.
[The prepared statement of Mr. Jeu can be found in the
Appendix on page 93.]
Mr. Wilson. Thank you very much. And Mr. Timothy R. Larsen.
STATEMENT OF TIMOTHY R. LARSEN, DIRECTOR, PERSONAL AND FAMILY
READINESS DIVISION, MANPOWER AND RESERVE AFFAIRS DEPARTMENT,
HEADQUARTERS, U.S. MARINE CORPS
Mr. Larsen. Chairman Wilson, Ranking Member Davis,
distinguished members of the subcommittee, thank you once again
for the opportunity to represent the Marine Corps and provide a
report on Marine Corps Exchange and Retail Programs. I thank
the Congress, especially this subcommittee, for your continued
support.
During 2009, we experienced one of the toughest retail
economic climates in recent history, yet we exceeded all
established performance measures. We are completing system-wide
initiatives that began about 5 years ago to centralize buying,
recapitalize our stores, and implement branding standards.
As part of our daily operations we constantly pursue
program efficiencies through cooperative efforts and
partnerships with our sister services. We will be focused on
improving our supply chain and management over the next several
years.
Without question, the Marine Corps Exchange is linked to
our mission of taking care of Marines and families. Our
operational success is measured on the program's value and
contribution to readiness and retention and our ability to
provide a high quality customer service, premier facilities,
and value goods and services at a savings.
On behalf of Marines and families, I thank you for your
oversight and continued support of these critical pieces of the
military and family community support system. I look forward to
your questions. Thank you.
[The prepared statement of Mr. Larsen can be found in the
Appendix on page 107.]
Mr. Wilson. Thank you very much. And Mr. Patrick B. Nixon.
STATEMENT OF PATRICK B. NIXON, PRESIDENT, AMERICAN LOGISTICS
ASSOCIATION
Mr. Nixon. Thank you, Mr. Chairman. It is once again an
honor to appear before this subcommittee representing the
members and board of directors of the American Logistics
Association. I want to take this opportunity to recognize the
leadership of the chairman and the distinguished ranking member
over the course of the last several years, in particular your
support for these vital benefits we will discuss today.
We have outlined our legislative agenda and issues in the
prepared statement provided to the committee. Major issues
where we seek the committee's support are: Full funding of
commissaries, exchanges, and MWR programs on quality of life
and retention and readiness grounds; relief from the 3 percent
withholding requirements of section 511 of the Tax Increase
Prevention and Reconciliation Act of 2005 in the form of full
repeal or exemption of MWR and resale programs when it affects
prices to our men and women in uniform and their families; and
finally a secure, affordable and expedient method of providing
access to installations and facilities for industry personnel.
I look forward to our discussions and I return the
remainder of my time for Mr. Gordy.
[The prepared statement of Mr. Nixon can be found in the
Appendix on page 124.]
Mr. Wilson. My goodness.
Mr. Gordy. I will take it.
Mr. Wilson. This is startling.
Mr. Thomas T. Gordy.
STATEMENT OF THOMAS T. GORDY, PRESIDENT, ARMED FORCES MARKETING
COUNCIL
Mr. Gordy. Good afternoon, Chairman Wilson. Thank you for
your kind comments earlier. It was certainly a pleasure to host
you over in Iraq as well as Mr. Coffman when you came over and
Ms. Bordallo when you came over, especially with the troops
from Guam, and we had a wonderful meal, didn't we, ma'am?
Ms. Bordallo. Yes, we did.
Mr. Gordy. Thank you for inviting me to be with you today
to offer comments on behalf of the Armed Forces Marketing
Council regarding the military resale services and the vital
role they serve in supporting the quality of life of service
members and their families.
As we begin the hearing today there are a few facts that I
believe should we noted first and kept in mind throughout our
discussion. DeCA continues to receive clean audit opinions,
demonstrating responsible stewardship of taxpayer dollars. All
systems continue to maintain or improve their customer
satisfaction index scores, showing that they are more in step
with customer needs. All systems continue to provide double
digit savings for military families. The exchanges continue to
post strong dividends in support of military quality of life
programs. All systems continue to recapitalize their stores and
modernize their systems, seeking to always provide military
families with a quality shopping environment and experience
while driving efficiencies whenever and wherever possible.
The military resale systems also provide expeditionary
support to the warfighter, particularly AAFES and MCX which
supports the needs of our warfighters on the front lines in
Iraq and Afghanistan, while NEXCOM supports our service members
in places like Guantanamo Bay and Djibouti. And all rapidly
deployed to support troops mobilized to respond to natural
disasters such as the devastating earthquake that struck Haiti
last year. The civilian employees of the exchanges who deploy
in support of contingencies are to be commended for their
commitment and dedication to serve our warfighters in these
difficult environments.
As our economy has struggled to regain momentum, we have
seen the value of food stamp usage among commissary patrons
triple since 2007. Thus, the benefit is as important as ever in
supporting the financial readiness and the health and well-
being of our service members and their families.
The view of the Armed Forces Marketing Council is that the
military resale benefit continues to work well. It is honest,
it is efficient, and it is responsive. Its success derives from
the unfailing commitment that the systems have made to the
customer service, patron savings and to continued process
improvements and efficiencies to keep costs and thus prices
low.
However, as we look to the future there are policies,
practices and proposals that we believe warrant Congress's
attention and action in order to prevent them from adversely
impacting the resale benefit.
And I will look forward to answering your questions
regarding these and other issues. Thank you.
[The prepared statement of Mr. Gordy can be found in the
Appendix on page 151.]
Mr. Wilson. Thank you very much. It is anticipated that we
will have three votes, one 15, two 5-minute, between 2:30 and
2:45, but we will proceed. But we will recess and proceed
quickly and come back.
At this time, again I would like to thank all of you for
being here today, and for Mr. Gordon a question I have, we all
understand more than ever base security is more important than
ever and the vulnerability of our bases. The Department of
Defense does not operate a uniform process for acquiring base
access credentials for employees of the companies that deliver
goods and services to the network of exchanges and commissions.
What is your perspective of government and private sector
efforts to provide vendors and brokers base access cards, and
what is the status of the Department of Defense's efforts to
address this problem?
Mr. Gordon. Thank you, Mr. Chairman. We did meet recently,
a month ago, about this very issue. It is very important of
course just in terms of both efficiency and effectiveness to
determine ways that we get our vendors on our posts and bases
across the world. And it is an issue because of course it bumps
up against the security requirements for our installations
within the wake of a new era where we have to pay attention to
security in much more important and measured ways. But we are
committed to finding an alternative and a solution. It is not
just about the Department of Defense, though. This is a whole
of government approach, whether we are talking about our other
agencies in terms of access to our facilities and our
installations. Yet at the same time we are committed to finding
a solution. We met recently about it. We are looking at ways
where we can bring together both the commercial sector and our
partners and our department and a whole of government approach
to making sure that vendors have some sort of identification
that they can get onto our facilities. So we will continue to
work it, and I would love to keep you up to date on it.
Mr. Wilson. Well, that is so important. In fact, Mr. Nixon
and Mr. Gordy actually brought it up. And both of you, Mr.
Nixon and Mr. Gordy, can you tell us about the secure vendor
identification system that has already been developed by the
private sector but hadn't been adopted, sadly, by DOD?
Mr. Nixon. Yes. Mr. Chairman, first of all I would like to
compliment Secretary Gordon for his transparency on this issue.
He has met with us as well as meeting with the Armed Forces
Marketing Council and Coalition of Military Distributors to
discuss this issue and have a better understanding of the
impact on industry.
We have been working this issue for 6 years now, and it
seems like it is one step forward and two steps backwards. We
have worked closely with the Department on a federated solution
that was actually initiated by the Department, and while that
appears to meet all the requirements of HSPD-12, which is a
controlling directive, the Department didn't recognize it as a
solution. In fact there are some folks within the Department
said a federated solution is not what they are looking for.
An alternative, we have a company who is a member of the
association, Eid Passport, has developed a system called
RAPIDgate that has been adopted by the Navy and the continental
United States for access to vendors. In a meeting with the
Department they told us that RAPIDgate did not comply with the
purported solution as well. So it appeared we ended up somehow
stuck between the Department arm wrestling with itself on what
is between the policy and the practices of what the right
answer is going to be.
In our written testimony is a little more gloom and doom
than I think actuality now. February 3rd, the White House has
issued a directive that all Federal agencies will comply with
HSPD-12 this year, and our goal is a single solution that
industry can use for all activities, and this appears to be
what we are looking for.
Now, there is a deadline of a date in March when the
policies and procedures for each agency must be submitted to
the OMB [Office of Management and Budget] and be certified that
they are going to comply. If not, it is OMB's intention to
withhold funding from agencies that do not comply with it. So
we are going to go to both of our credential providers, have
them certify that they meet these criteria, send that
certification to the Department, make sure it is validated. And
if this is in fact implemented as the White House says, then we
expect a solution to take place this year.
Mr. Wilson. Thank you. And Mr. Gordy.
Mr. Gordy. First of all, I just want to commend Mr. Nixon.
He has been really the champion on this issue for the industry
and he has been our subject matter expert. And I really don't
have anything to add to what he said other than from the Armed
Forces Marketing Council's perspective, what we are concerned
about is the interoperability of systems. As Mr. Nixon pointed
out there, having one system would work best, but if the Army
brings on one system, the Navy brings on another, and the other
services yet go to different agencies or have different
systems, it could mean that a vendor, one of the employees of
the vendors, has to have four different CAC [common access]
cards in order to access the different bases. That could lead
to potential fraud. It also is very expensive. In order to get
one of those cards then would you have to have a background
check for each one of those cards. So this becomes very
expensive for the vendor community, and we would hope that
whatever systems are adopted that they are interoperable so
that the vendor could have one card that would work at each
base regardless of which service operates that base.
Mr. Wilson. Well, thank you all. And thank you, Mr. Gordon,
for helping to spearhead. Ms. Davis.
Mrs. Davis. Thank you. Thank you, Mr. Chairman and again
for all of you being here.
We addressed this a little bit I think yesterday just in
talking about some concerns that we might have about the
exchange and commissary systems throughout our bases and our
communities. I wonder, Mr. Gordon, if you could address for us
whether there are any rumors, particularly as they would
address the consolidation of the exchange consolidation, that
would be helpful for people to hear. We know that there were
several years there between I think 2000 and 2006 where that
was a major area of discussion, and I was wondering if we have
a chance to examine that today.
Mr. Gordon. Thanks very much. I am not aware of any at this
point discussions in terms of considering a study once again to
consolidate our exchanges. You know, as we all know, this has
been studied many times, about six times, in the past 42 years.
What I am really excited about is the kind of efficiencies
first of all that the leaders have found working together
really in partnership because our services are different. They
are the same but different. They are the same in terms of
defending this country, but they have different slices of that
sort of defense. So if you take the demographics of our
services, they cater to those sorts of demographics.
It is interesting, I think, when you visit the headquarters
of our various resale activities how they have been very
thoughtful about the demographics and how they outreach
basically to their communities to provide the best benefit, but
also the best value.
I just want to note what Mr. Jeu said about the $244
million that our commercial partners offer in terms of
corporate social responsibility, you know, from scholarships to
coupons. That sort of innovation I believe occurs because we
have got different sorts of exchanges who participate with
collaborative programs, and we have done that, who think very
innovatively about how to outreach to their communities. So the
good news story is you continue to see both the benefit and
value go up with this system that we currently have, and the
kinds of innovation and creatively can continue to occur with
the kind of system we have.
Mrs. Davis. Thank you. Mr. Nixon or Mr. Gordy, would you
care to comments on that at all?
Mr. Nixon. I would just mirror the Secretary's comments
that this has been studied. If you were to look at the numerous
efficiencies that have been garnered by the exchanges'
cooperations to date, clearly they have partnered in many
initiatives, supply chain efficiencies, and I think to
undertake another study would be throwing good money after bad.
It has been looked at and it just doesn't work.
Mr. Gordy. Exactly. I mean I showed Mr. Wilson last week a
stack of studies that were this tall of all the studies that
have been done on exchange consolidation. And we know about the
$17 million that have gone behind this. Millions and millions
of dollars that have studied this and to go, you know, to any
discussion that could be put forward. And we are thankful that
it is not coming from the Department, but we are hearing it
more from outside the Department where people think that this
is a solution, but yet it is one of those items that it sounds
good, it looks wonderful on a PowerPoint presentation, it
briefs well, but when you start doing the studies and the
analysis you realize it does not deliver the efficiencies or
the savings that they promise.
Mrs. Davis. I wonder if General Casella, or Admiral
Robillard, or Mr. Larsen, what immediate challenges do you see
facing the exchange system as we look at that today, aside from
the fact that we are not perhaps looking at the consolidation,
but what challenges do you see?
General Casella. Great question. I think from our
perspective at AAFES some of the challenges that we see today
is probably trying to keep pace and be in a very competitive
mode with our counterparts on the commercial side of the house.
Today we are really getting into social media and to try to
work that. We are working our dot.com sites. The paradigms in
our community have changed over the years. We used to have 70
percent of our folks living on base and 30 percent off base.
And now that has flipped. So there is only 30 percent living on
base and 70 percent living off base. And then a lot of those
Guard, Reserve, and retirees are in the community not even near
a local base or garrison out there to receive those benefits.
So one of our challenges is how do we tap those and let
them tap into this benefit resource and take care for their
families and save money.
A couple of things that are a challenge for us is where we
have enhanced our dot.com sites to allow them to shop online
and get the same savings with free shipping for certain costs
you pay for certain goods. It is an excellent approach. It
allows us to tap into a whole host of commodities.
Our biggest store has 250,000 unique items in it, if you
went to a store. Online we have 18 million. So if you do the
math, you find out that if you want to tap into all the
products and resources out there, you want to touch your
community on the dot.com side.
We are also getting into innovations too with smartphones.
A lot of folks now are doing consumer shopping and comparison
shopping with their smartphones. And we are developing that
technology along with the other folks on the panel here to help
leverage that to provide our families and our warfighters out
there with those opportunities. So that is a challenge for us.
I think another challenge for us is the Army is in huge
transformation. The Air Force on our side of the house is
fairly stable, but the Army is in huge transformation. We have
large numbers of brigade combat teams consisting of 4,000 or
more folks each and large shuffling going on with BRAC [base
realignment and closure] moves, transformation, et cetera. With
that comes a lot of movement, change, construction, a lot of
effort that we have to be focused on. We are, we have a great
plan for that, but it is a lot of big muscle movements for us.
And I think, thirdly, for us is probably the OND [Operation
New Dawn], OEF [Operation Enduring Freedom] support that we do
overseas. We have got a great handle on that, a great process,
and we are trying to work that transformation as well in terms
of downsizing in OND and taking care of the requirements in
Afghanistan.
Mrs. Davis. Thank you.
Mr. Wilson. Thank you very much and we have been joined by
Congresswoman Hartzler of Missouri and Congressman Rooney of
Florida.
Our next question would be from Congressman Mike Coffman of
Colorado.
Mr. Coffman. Thank you, Mr. Chairman. I am not sure who
would answer this question, but I believe that in South Korea
where we currently have 28,500 military personnel and that now
there is a movement afoot to take that from an unaccompanied
tour to an accompanied tour, and to bring the dependents
forward, and that we have to develop the infrastructure for
that.
Do you have any idea of what the costs will be relative to
developing the exchange and commissary capability there to
support those dependents? And where would that money come from?
General Casella. Well, Congressman, now I guess my
challenge is--I am not sure I have the exact figures for you
for the cost data, but I will tell you that we are working in
consolidation with the folks here on the panel to come up with
a consolidated solutions at Camp Humphreys. Camp Humphreys
actually is the center of gravity for the transformation off
the DMZ [demilitarized zone]. And we figure about 40 percent of
our population will be collocated at Humphreys once that
installation is complete.
One of the things the Army and Air Force exchange system is
doing is we have already negotiated and already got the
agreement through the folks in Korea to do a new main exchange
at Camp Humphreys along with a relocation of the commissary as
well, the commissary can talk about that as well, to provide a
great resource for those families that are coming over.
The budget for this, the dollars that are associated with
this are in our program. We have programmed those, they are
part of our master planning process. We have gone through
several iterations of design to make sure we are on track. In
terms of what we have to put up to make this appropriate and
the Korean Government itself is also paying for certain funds
to allow this to take place, too.
Mr. Coffman. Do we already have the contracts in place in
terms of building those facilities or have they yet to be put
out?
General Casella. I think as we speak today those contracts
will have to be put out but they are part of our master plan.
We are in the design phase right now, requirements and design
phase. But it is definitely on the agenda to do. We have got
the milestone set. I don't see any--our biggest hurdle was to
get the final agreement, it just happened last month, to get
the final agreement of where we are going to put the
facilities. For us there is a little more challenge, because we
also have to consider our warehousing operations and our
bakery, it is also in the community. But those will come with a
master plan so I think we are on track and right now we are in
a design phase.
Mr. Coffman. Okay.
Mr. Nixon and Mr. Gordy, what would be the effect of a cut
in funding of 5 or 10 percent relative to commissary funding?
Mr. Nixon. Devastating, in a single word. The principal use
for the appropriation for commissaries is personnel. And
probably the next largest group is transportation. So any cut
of that magnitude would immediately evolve into either
reduction in days and hours of operation or closures of
commissaries which would simply just begin to spiral to devalue
the benefit.
The one thing that I think that the message that we
industry members like to pass is that savings is built into the
DNA of these organizations, these resale commands up here.
Because of the partnership with industry, every decision they
make is either about increasing savings to the patron or
savings to the patron or delivering dividends back to the
installations. And so they have been involved in savings for a
long time now. Defense Commissary Agency consolidation was
based on savings. And it saved over a billion dollars from that
consolidation in taking out cost of supply chain and
construction and other associated costs. So any reduction, 5
percent, 10 percent, immediately goes to personnel and
immediately reduces the benefit.
Mr. Gordy. I would add that if you take a look at DeCA's
budget even from last year, it has already been cut by $40
million and now we are looking at potential cuts again this
year. DeCA has been for the past decade trying to become as an
efficient organization as it can be. So if you look at DeCA in
context of what you have you done for me in the last year, that
is too short term of a view. You really have to look back over
the last 10 years and to see what DeCA has done to reduce its
costs in order to make this benefit as efficient and effective
as it possibly can be. Granted, are there areas for more
efficiency at DeCA? Potentially, yes. But when you start
talking about cuts at the level of 5 percent or above, now you
start talking about going beyond just efficiencies at the
headquarters level to actually reducing store personnel. If you
start reducing store personnel, you start having to reduce
hours, you start having to shutter stores. And when you get to
that point the military patron loses their benefit.
So our concern is that any of these cuts that go beyond
just achieving efficiencies at the headquarters level that
actually go towards reducing the benefit or going to cut store
hours or close stores, that starts effecting the military
patron and that is something that we are very concerned about.
Mr. Coffman. Thank you.
Mr. Wilson. Thank you very much. Congresswoman Madeleine
Bordallo of Guam.
Ms. Bordallo. Thank you very much, Mr. Chairman. I do have
a couple of questions here. And first of all, I want to thank
all of our witnesses and of course Mr. Gordon and Mr. Larsen
back again. Thank you for appearing today and providing us with
your testimonies. I do promise, gentlemen, to stay away from
the ever contentious issue of alcoholic beverage resale on
Guam. But just a reminder it is still on my future agenda.
The first question I have is for Secretary Gordon. In last
year's House passed defense authorization bill there is a
reporting requirement that I requested from the Department of
Defense on its efforts to locally procure fresh meat, poultry,
seafood, fish, and produce for commissary and exchange stores.
Now that report was due on May 1st, 2011. Can I get a
commitment that the Department will make every effort to get us
that report on time? And I think, Mr. Gordon, you would be the
one to answer that.
Mr. Gordon. I will definitely look into it and expedite it.
Ms. Bordallo. Okay. May 1st.
Mr. Gordon. May 1st.
Ms. Bordallo. 2011.
Mr. Gordon. I hear you.
Ms. Bordallo. I firmly believe in sustainability practices
when it comes to our commissaries and exchanges, and here in
the House we begin the greening of the Capitol initiative which
has led to fresher food products in the meals that we eat.
There are many benefits, including environmental cost savings,
and improved health quality which improves the health wellness
in the readiness of our men and women in uniform. So I would
like to hear, I guess first from you, Secretary Gordon, to what
extent is each of services and the Department as a whole
looking at sustainability practices for our commissaries and
exchanges?
Mr. Gordon. I think we look at that very much in terms of
sustainability. I think it is aligned also with once again this
notion of innovation because, as we know, in an austere,
fiscally austere environment you have to bring in partners to
ensure that sustainability of both the benefit and values. It
is not just about the benefit because the benefit as we know is
a value in terms of recruitment and retention and readiness.
But it is also the value proposition of what would bring a
service member and their family to our commissaries and
exchanges.
Some of that sustainability comes with systems, and I think
you would be very impressed if you go to the headquarters of
these facilities and see the kind of information technology
that they have now. Also the returns to scale by combining
certain sorts of operations, our military STAR Card is an
example of that. That begs the sustainability as well as we try
to streamline efforts to ensure that each service complements
one another in terms of finding ways of combining their efforts
to ensure a long-term benefit in value.
With that, let me turn it over to the AAFES Commander.
Ms. Bordallo. General Casella.
General Casella. Well, that is an excellent question for
the AAFES because we are heavily engaged with sustainability
and all the initiatives that go with that.
Specifically, we have kind of embedded this whole approach
in everything we do today. We have just been recognized I think
earlier this year from Department of Energy for some of the
great work we have been doing in water management, water and
energy conservation, and fleet management, because we actually
have our own fleet of vehicles as well. And that includes
consumption, gasoline consumption and how we do more
efficiently and operate on the highways. So we did get an award
there, that is a start for us, but it is not the end.
We also are involved in several LEED [leadership in
environmental and energy design] silver projects in terms of
what we do. And these LEED silver projects were already
introduced at Randolph Air Force Base, Fort Polk, Fort Bragg,
and Fort Bliss as well. And if you went to our new lifestyle
center in Fort Bliss, Texas, you would see that we have many
enhancements that we put not only there but in also our stores.
Some include energy saving lighting systems where if you walk
up to the counter they will turn on and if you leave they turn
off and save energy. We have 30 and 40 percent reductions in
basically water consumption for our bathrooms and some of the
things that we use for water consumption. Air conditioning, we
are using better air conditioning materials now. So in effect
we save energy there too as well as for some of the insulation
that we are using.
Flooring, flooring that we use in our facilities is huge.
We now have a flooring solution we use which allows us to give
a high polished approach to concrete and saves maintenance
costs tremendously. And we also use recyclable materials for
building our new facilities, which is a huge effort in terms of
our reusing those materials.
So we are incorporating that not only in our lifestyles,
but all of our image upgrades, too, that we are doing across
our infrastructure, and that is where the bulk of our efforts
are going to be.
Ms. Bordallo. Thank you, General. It sounds very good and
of course we will have to hear here from the Admiral now.
Admiral Robillard. Yes, ma'am. I just want to talk a little
bit about sustainability. One of the issues to be sustainable
you have to be relevant. So one of the issues we deal with
significantly is how do we deal with a new generation of
demographics and how are we going to continue to make sure that
they shop our exchanges and recognize the benefit we bring to
them. So the entire effort that we do with segmentation is
really about sustainability, to make sure we are relevant to
our future sailors.
When it comes to energy we do many of the same things as
General Casella. We partner and we actually use best practices.
I go to many of his stores as he does with ours to get an idea
of some of the things that we do. But LEED silver, any new
projects that we do today are built to a LEED silver standard.
In fact, Bethesda, which is being planned over the next year,
will be built to a green gold--LEED gold standard, and it will
have the first green roof. So when you go there you will see
you could actually put cows on the roof up there if it could
hold it.
When it comes to energy reductions, again that is
significant not only for us but our entire department. So
wherever there is a requirement for energy reduction we are
really leading that, because we do a lot of renovations. So
wherever we renovate we adhere to the latest energy savings as
possible.
Ms. Bordallo. Very good. Mr. Jeu, yes.
Mr. Jeu. Defense Commissary Agency is also committed to
sustainability. In fact, every major decision we make relating
to a facility we are always thinking about how can we conserve
our energy and environmental. And in fact we have created
environmental management system where all our major decisions
are processed through it. And some of the things we are doing,
the same thing as what AAFES and NEXCOM are working on.
As you know, when you look in grocery store we have all
these refrigeration units. They are heavy users of energy. So
now we go into all the refrigeration units with the doors so
that they will not lose energy efficiency. We are also into
recycling all the cardboard boxes, as a grocery store we
generate quite a bit of those, tons. And so just about
everything we do we think about sustainability.
Ms. Bordallo. Thank you. And just one last comment, Mr.
Larsen.
Mr. Larsen. Thank you, just one point that is just a little
different tack. I think we all do very similar things in most
of those areas, but one additional point is I think we need to
take a balanced approach. And there is a connection here to
exactly the question that Congresswoman Davis asked a few
minutes ago, and that is about the threat. And I think one of
the things we need to look at is the balance of appropriated
and nonappropriated funds. Those areas that are appropriate
appropriated fund requirements need to be funded. Because when
we don't then we take and we use NAF money to pay for those
expenses. We then either have to do two things, diminish the
dividend or we have to increase the prices. And when you do
that, that becomes a threat to the sustainment of all of our
facilities.
So just a little different slant on the issue.
Ms. Bordallo. Thank you. Thank you, Mr. Larsen. And I am
going to look forward to visiting some of these facilities very
soon.
Thank you, Mr. Chairman, and I yield back.
Mr. Wilson. Thank you, all. We will recess and return after
the vote.
[Recess.]
Mr. Wilson. Ladies and gentlemen, thank you for returning.
And we are delighted to proceed with the hearing. Congresswoman
Pingree.
Ms. Pingree. Thank you, Mr. Chair. I appreciate being
welcomed onto the committee. Thank you for that. And thank you
all of you for your testimony. I learned a lot today. And I am
glad to be here with all of you.
I have a couple of questions that are very specific to
Maine, so I hope you will indulge me. The first one is for Mr.
Gordon. Thank you for all of the testimony that you provided us
today. I imagine that you may know that the Brunswick Naval Air
Station, which is in my district, was selected for closure in
2005 during the BRAC process. And with it, the Navy has decided
to close both the commissary and exchange at the base, a
decision I must say I wholeheartedly disagree with. This
decision will negatively affect the military population that
should continue to be able to use these facilities, including a
significant population of retirees. There is a very large
Active Duty population in the immediate area, starting with the
Supervisor of Shipbuilding, part of NAVSEA [Naval Sea Systems
Command] that is stationed at BIW [Bath Iron Works], a mere 6
miles away from the stores. There is also a Marine Corps
Reserve battalion and an Army National Guard unit that are
moving onto main side in the coming months. Construction is
already underway. So I believe these sailors, soldiers, and
marines are entitled to the savings and quality of life that
you have all described so very well today.
I realize the decision to close those stores is because the
Navy decided to close Brunswick. But the Active Duty and
Reserve population I have just described have a mission
unrelated to the Brunswick Naval Air Station, and their mission
continues today.
So my question, you can imagine, is given the significant
Active Duty, Reserve, and retiree population that continues to
serve and reside in the mid-coast Maine area, is the Navy's
decision to close these stores consistent with DOD guidelines?
Mr. Gordon. Well, what we are trying to do is determine the
degree to which--and we haven't done this yet, of course,
because we are waiting for a GAO [Government Accountability
Office] review.
Ms. Pingree. Right.
Mr. Gordon. And once we are able to get that review, we are
going to take a very close look at it and determine the way
ahead. But we think it is important for the process to let
itself out in terms of review. And we are anticipating that as
a result of that, we will take a look at all the issues and
make a decision.
Ms. Pingree. Great. I appreciate your saying that. I know
we are all waiting for the GAO study.
Mr. Gordon. Yes.
Ms. Pingree. But we do believe that there is significant
business that would be done there.
Mr. Gordon. Yes.
Ms. Pingree. And for the many families who have served our
country and the many Active Duty personnel who are there, as
you have all said so well today, it is a very important
resource.
Mr. Gordon. Yes, it is.
Ms. Pingree. Particularly to an area that is being BRAC'd
and losing a lot of resources at the same time.
Mr. Gordon. Yes. I understand.
Ms. Pingree. Well, thank you. And thank you for your work.
Mr. Gordon. Thank you.
Ms. Pingree. I have one other Maine-specific question for
General Casella. And thank you, General, for your testimony
today and for your service. You probably know that the Maine
Air National Guard in my home State of Maine operates out of
the Bangor Air Force Base. The 101st Air Refueling Wing has
been running 24-7 operations since 9/11. Because of the
increased operations tempo, the Army and Air Force Exchange
Service--I guess you call it AAFES, I am trying to get those
things right--the AAFES BX [base exchange] has performed very
well. But as I am sure you know, Air National Guard exchanges
do not currently receive dividends from store profits like
their Active Duty Air Force counterparts. I understand Active
Duty stores send their dividends back to the MWR programs, and
the Air National Guard does not have MWR programs. However,
there are family readiness and support programs that could
benefit from these dividends.
Given the increased usage at the Air National Guard
exchanges like this one in Bangor, would you consider being
supportive of Air Force policy being changed to allow AAFES
dividends to be distributed to Air National Guard bases that
have exchanges that earn a profit? These dividends certainly
could really help the family readiness programs that our
Reserve Component relies on.
General Casella. That is a great question because you know,
dividends is very important to what we do. And we want to make
sure that all the families and warfighters out there are
supported. It turns out that we actually do give dividends to
Guard members. If you looked at our overall structure of
dividends, we give primarily to the Army. The Army gets the
bulk of those because of the Active Component of the Army. Then
the Air Force gets the bulk of those.
But then if you look at our Reserve elements, we actually
give to the Army National Guard, the Army Reserves, and the Air
Force and Marines and Navy, believe it or not, because we
support the Navy and Marines, too, in different locations. So
we have dividends that go to all those families.
And I have a breakout chart that I show everybody. It is a
small figure, but you have to--basically, the way the system
works is you can attack this two ways. One way is all those
elements that legitimately follow the rules and put in for unit
morale welfare funds, they can apply for those and set up a
unit account. I think it is called--it is a unit account,
basically. If they apply for those and get them, then they
become an eligible member to get the dividends. That is one
approach. That is a pretty small amount of money, but it is
appropriate and they can get that. And we do give that to a lot
of the Army units that apply for those. But you have to set up
an account, conduct minutes, have a meeting, figure out what
you are going to do with it, and get it authorized. And that is
one mechanism.
But then the other plan is actually to go back to the Air
Force and suggest, you know, can you really look at your
dividend policy? We don't set that policy. That is something
that we just adhere to. Whatever the Air Force policy is, along
with the Army policy, we distribute the dividends based on
their rules. So it is not for me to say, but definitely
something that can be brought up in those service channels.
Ms. Pingree. Great. Well, we will certainly follow up on
that and do that. Thank you both.
Mr. Wilson. Thank you very much. And what a great honor for
all of us to have you here today. And what I would like to do,
with the consent of all members, we would like to proceed with
a second round, but with a hard stop at 4 o'clock due to other
meetings.
And so a concern that I have, the Tax Increase Prevention
Reconciliation Act of 2005, TIPRA, threatens to impose a 3
percent withholding tax penalty on military resale vendors. Mr.
Gordon, General Casella, Admiral Robillard, Mr. Larsen, and Mr.
Jeu, do you see a challenge for your organizations and your
patrons with regard to the implementation of this law?
Mr. Gordon. I will turn this over to the resale commanders,
but absolutely, yes. I mean, at the end of the day, you know,
those increases will potentially be passed onto our consumers,
our patrons. So it is an issue. I will again let the commanders
elucidate, but we have literally 13,000 vendors and more, a lot
of those small businesses, where that tax will come out of
their bottom line up front, basically, and will challenge their
ability to be able to continue their services and the products
that they provide for our service members and their families.
So at the end of the day, it is costly, it will affect our
service members, it will affect our infrastructure, it will
affect our partners.
General Casella. From an AAFES perspective, I would like to
address this. This is a very important issue for us, and we are
very focused on this. We hired a consultant last year to
already start looking at the impacts of this, because we know
with the extension that it is going to be effective in January
of 2012. And so it turns out that the way things are rolling
now, we would have to commit and start actually committing
money to this approach about middle of this year in order to be
compliant, if it kept going the same path it is on.
We have looked at the impact of this, and it is huge.
Definitely it is going to have an impact on how we do business
with our vendors. These 13,000-plus vendors that AAFES has,
quite honestly, the 3 percent puts a burden on them. When I am
not in an Army uniform, I am a small business part owner
myself, because I am in the Reserves. But bottom line is that
it puts a huge burden on small businesses to have that
withholding, because they need that cash flow in order to keep
going. So that is a huge thing for them. We anticipate they
would in turn raise the cost of our products, or decide not to
do business with us, because the same constraints may not be on
their commercial counterparts they are working with.
So it is going to be a twofold impact for us. And
specifically for AAFES itself, for supplier cash flow, we have
estimated an annual loss due to reduced offsets to cost of
goods sold to be about $41 million because of this effort. On
top of that, we estimate that our estimated annual loss to the
vendor cash flow will be $125 million. Estimated annual cost
increase to the Exchange will probably be $23 million.
Internally, because of the modifications that we have to make
to account for all these changes, it is going to cost us
probably around half a million dollars. And we have to probably
hire more folks for reconciliations we have to do between the
contract works and the resetting those.
And also, then likewise as I said, the impact on small
business. It is going to have a huge impact across our--in
turn, all these will affect our dividends.
Mr. Wilson. Well, that information needs to be shared with
Members of Congress, and I will.
Admiral Robillard. Sir, we are certainly not as large as
AAFES, but I would like to tell you that we have very similar
concerns. Right now it is probably one of our number one
impacts that we have to worry about. Very soon we have to,
within again the next few months, we will have to start
spending money to implement this. And we think in our estimate
that it will be almost a million dollars to implement it, and
then a recurring cost of at least $200,000 a year just to work
those reconciliations.
Our biggest concern is really our vendors. We have a lot of
small vendors. We have 5,000 vendors that would fall under this
act. And a lot of those vendors, because they are already
providing us what we think is best pricing, because of their
sense of commitment to the military, are operating on very low
cash flows. And so what they will have to do is borrow money,
and, again if they have to borrow money to make themselves
viable, then they will have to pass that cost onto us. And so
really it is a reduction in benefits as a result of it. So
again, we feel very strongly, mostly because it is an impact to
our vendors, which again will impact our constituents as well.
Thank you, sir.
Mr. Wilson. Thank you.
Mr. Larsen. Mr. Chairman.
Mr. Wilson. Yes.
Mr. Larsen. Yes, sir. You know, we share the same concerns
that NEXCOM and AAFES have expressed for the Marine Corps
Exchange System, so there will be for us an impact on labor and
an impact on systems that we will have to cover those costs.
We have also heard that the Senate Finance Committee may be
considering a GAO study on this topic. And if that is the case,
you know, that would be a step in the right direction. But our
issue is we have to start putting things in place now if they
are going to implement this in January. So there is a timing
issue here that we need to get in alignment if we can. Thank
you.
Mr. Wilson. Thank you very much. And Mr. Jeu.
Mr. Jeu. Mr. Chairman, we at DeCA are also deeply concerned
with this law. The 3 percent withdrawal requirement would
adversely impact nearly all of our contractual agreements we
have with our vendors. And from discussion with the industry
members, this withholding cost will be passed on to our
customers. And in fact, one of our largest brokers estimated
that they would have to increase our cost of goods by between 4
to 5 percent, and that will be obviously passed onto customers.
So we are deeply concerned with the potential price increase.
Additionally, there will be significant administrative and
system costs, as others have mentioned.
Mr. Wilson. Well, I want to thank all of you. This is
somewhat startling to hear people who represent government
entities concerned about patrons and small businesses. This is
very refreshing. I now refer to Mrs. Davis.
Mrs. Davis. Thank you, Mr. Chairman. As you all know,
second destination transportation [SDT] funding is used to
subsidize the cost of goods sold overseas in exchanges and
commissaries to ensure that our service members, of course, and
their families are not penalized with those higher prices than
members who are serving here in the United States.
Mr. Gordon, could you share with us, does the Department
share the subcommittee's views that this funding is well
justified?
Mr. Gordon. Yes, it is. And we want to make sure, under the
auspices of fairness, that all of our service members and
families, regardless of where they are in the world, are
treated fairly, have the same access to goods and services. So
I would love for actually the services to elucidate on that,
please.
Mrs. Davis. Okay. Fine. And then also, Mr. Nixon and Mr.
Gordy, if you could give us your perspectives on that.
Mr. Nixon. Yes, ma'am; absolutely this is a very
significant appropriation. And there have been efforts along
the way in past years to take runs at this for other purposes
and think it is an easy target. Fortunately, this committee has
stepped in on several occasions and made that much more
difficult to do. As the Secretary said, this is an extremely
important additive that allows the price of goods overseas to
be sold at the same price as those in the continental United
States. It is a very important element. We should make sure
that it is protected at all costs.
Mr. Gordy. I come at this issue a little bit from more of a
personal perspective. Serving in Iraq it was great to be able
to go to Camp Liberty or to Camp Victory to the PX there on
base and be able to get a tube of toothpaste for $2 and change.
If the costs had to have been borne by AAFES in order to put
that toothpaste in there, and that cost would have been passed
on to me, there is no telling how much that toothpaste would
have cost. Or if my wife would have had to put it in a box and
mail it to me, we would have had the $10 cost of shipping and
it would have taken 2 weeks to get to where I was.
You think about that in terms of the amount of money that
we spend on SDT, the hundreds of millions, $200 million that we
spend. If that cost had to be borne by military families, that
means military families would be paying hundreds of millions of
dollars more for the products that they purchase. And so to me,
SDT is very important to help support the financial readiness
of our families, particularly those overseas.
Mrs. Davis. Anything else to add? General.
General Casella. Yes, Congresswoman. Three things. We are
good stewards of the money, too. I mean, we do understand the
need, and we do need to have that equity in our costs. We are
good stewards, though. We have used cube-container stacking
processes to save money and reduce containers that go over in
order to keep those moneys as low as possible.
Along with that, we have container stuffing costs that we
actually have a cost avoidance of $9.2 million just because of
the way we are handling our containers, and being able to stack
and rack and stack those for shipment. So we are saving $9.2
million there instead of just doing it on the cuff.
Likewise, for commercial air usage, we have actually had a
cost avoidance there of $27 million. So I think we are doing
our best at our level to take those funds that are given to us
and use them very wisely so we can have them go further for us.
Mrs. Davis. Thank you.
And Admiral, I know that I was going to come back to you on
the other question earlier about the consolidation, the
challenges with the exchanges. And if you want to just comment
on that briefly, and Mr. Larsen as well, quickly on this and
the other one.
Admiral Robillard. On this topic, I just wanted to mention
that we really do believe in equity of service overseas. In
many areas that we operate, and it is critical, and sometimes
it is not that perspective taken. In Gitmo [Guantanamo Bay,
Cuba] or Djibouti there really are no other alternatives. There
is no outside-the-gate shopping at all. So we are the only
source for that family or that sailor or that military member.
And the only way we can be competitive is to have that offset.
So thank you.
Mrs. Davis. Mr. Larsen.
Mr. Larsen. Yes, ma'am. The point on that is the same
point. And that is, there is a direct relationship with
reduction in appropriated costs and the impact on the dividend.
And that is also an issue that is closely linked to
consolidation. That is the way we all do business and our
business models, our service cultures. And how we approach
providing the services and the programs for marines and
families and other service members and families, that is
directly impacted. It has a direct impact and connection to our
ability to provide those programs that have--and they have a
direct impact on retention and readiness.
And so consolidation I think over time would have a huge
impact as you go from service to service on the types of family
programs and the services that are provided. So, you know, we
see that as a potential risk or challenge that we face. And
that is if we decide that we are going to again explore
consolidation, and we go down that road, there will be an
impact for a number of years significantly on the dividend and
on how we provide those programs to the service members and
their families.
Mrs. Davis. All right. Thank you. Thank you, Mr. Chairman.
Mr. Wilson. Thank you, Mrs. Davis. And thank you for asking
the questions about overseas availability.
And I share the same personal view of Mr. Gordy. And I have
had two sons serve in Iraq, another served in Egypt, and I have
a fourth that will be deployed one day. And so I know how
reassuring it is to our service members to be able to buy a
product without there being an excessive charge.
And so I want to thank all of you for being here today on
behalf of military service members, military families,
veterans, widows. And in particular as I think of the services
you provide, we know firsthand. And so thank you very much for
all of you being here today. And we are adjourned.
[Whereupon, at 3:54 p.m., the subcommittee was adjourned.]
======================================================================
A P P E N D I X
February 10, 2011
=======================================================================
PREPARED STATEMENTS SUBMITTED FOR THE RECORD
February 10, 2011
=======================================================================
[GRAPHIC(S)] [NOT AVAILABLE IN TIFF FORMAT]
=======================================================================
QUESTIONS SUBMITTED BY MEMBERS POST HEARING
February 10, 2011
=======================================================================
QUESTIONS SUBMITTED BY MR. WILSON
Mr. Wilson. Currently, Armed Services Exchange Regulations
authorize service members to purchase cars from exchanges overseas when
the car is U.S. name-plated manufactured in the United States or
foreign name-plated with at least 75 percent U.S. or Canadian content.
Advocates for an expanded policy that eliminates or reduces the 75
percent content requirement argue that the international nature of the
car industry and its parts suppliers and the impact of trade agreements
such as the North American Trade Agreement have confused the
manufacturing environment. Such advocates contend that the confusion
has made the car content argument and the 75 percent content rule
outdated and irrelevant in the context of the original objective to
promote American products.
Mr. Gordon, how valuable is this overseas car purchase benefit and
is DOD inclined to seek Congressional approval to change the
eligibility rules?
Mr. Gordon. The Exchange New Car Sales Program (ENCS) dates to
1961, when Congress recognized the need for Service Members and their
families to be able to purchase American made automobiles while on
overseas assignments. It is a valued program designed to enhance the
quality of life of our Service Members serving overseas. In
consultation with the congressional oversight committees, the current
policy in DoD Instruction 1330.21, ``Armed Services Exchange
Regulations,'' states that ``orders may be taken for U.S.-made
automobiles, foreign name-plated vehicles with at least 75 percent U.S.
or Canadian content, and motorcycles.'' DoD is considering
clarifications to the ENCS policy. Should the review determine that
modifications to the content requirement are necessary, we would
consult with the Committee.
Mr. Wilson. A simple review of the math suggests that the 5 percent
surcharge may not generate sufficient cash to support a facility
recapitalization program for the Defense Commissary Agency. Mr. Gordon,
what is the DOD perspective on the need to increase the surcharge?
Mr. Gordon. While the surcharge has been 5 percent since 1983, the
Department does not believe an increase in the rate is appropriate at
this time. As such, there are no plans to request an increase to the
surcharge rate above the 5 percent currently paid by commissary
customers.
Mr. Wilson. Are the services stepping up to pay for commissary new
construction and expansion when justified by base realignment and
closure or force restationing decisions?
Mr. Gordon. Yes, generally, the Services have been very supportive
in making BRAC and MILCON dollars available for commissary
construction. However, with the competition for these resources, they
are challenged in prioritizing funding requirements.
Mr. Wilson. The Subcommittee received complaints that MWR
activities were inappropriately engaged in providing personal
information services to service members when private sector vendors
were available to provide the services. Congress became aware of the
issue when the problem surfaced as a point of friction between the Army
and Air Force Exchange Service and Army MWR. Although Congress
subsequently placed restrictions on the ability of government agencies
to provide the services, the friction between the exchange and Army MWR
continued.
General Casella, we understand that the differences between Army
MWR and Army and Air Force Exchange Service over unofficial information
services has been resolved--are you satisfied with the results? Have
you agreed to a schedule to transfer contracts to AAFES and establish a
profit sharing plan?
General Casella. AAFES and FMWRC signed a Memorandum of
Understanding to create a telecom partnership on 23 Feb 2009, and the
partnership was activated in Apr 2009. The partnership creates a non-
competitive environment to provide common levels of Personal
Information Services (PIS), and allows us to grow the business
opportunity. These ``unofficial'' telecom services include for-fee
Internet, TV and Telephone. The partnership is managed by AAFES with
participation by and in coordination with FMWRC. This means AAFES will
manage the providers of for-fee Internet, TV and Telephone services on
Army installations worldwide, and continue to deliver these services
through contractual agreements with commercial providers consistent
with current regulations and legislative guidance.
We are pleased with how the partnership has progressed. The initial
action was the transfer of existing CONUS Army Recreation Machine
Program for-fee Internet locations to a contracted provider, which was
completed ahead of schedule prior to 31 December 2010. A European PIS
support model is currently being developed. AAFES has also assumed
responsibility for managing the Franchise Agreement process for the
provision of cable TV services on post.
Income from the partnership is distributed in accordance with the
current telecom dividend agreement; that is, 80% to the garrison, 10%
to Army MWR and 10% used to fund operations.
Mr. Wilson. General Casella, it appears that after the opening of
the Lifestyle Center at Ft Bliss that only 34 percent of the third
party floor space has been occupied. What is the status of the
lifestyle center at Fort Bliss and is AAFES moving forward with
lifestyle center options at other locations?
General Casella. It's important to remember that AAFES activities
occupy 62% of the Lifestyle Center's available space. This mitigates
risk for the project. AAFES activities and the leased third party space
brings the overall centers occupancy to 73%. We are on track to have
the third party space 50% leased by this summer (81% of the overall
center). We are on a leasing glide path consistent with commercial
industry in today's market. Tenants in the Lifestyle Center are
performing well. Even more encouraging is the success we are seeing
with the Lifestyle Center being the social gathering place for the Ft.
Bliss Community. The amenities and offerings have created a sense of
place that is positively impacting quality of life.
We are moving forward with design of our Lifestyle Centers at JBLM
and JBSA. JBLM is next in the queue and our intent is to seek approval
to proceed on that project later this summer.
Mr. Wilson. Currently, Armed Services Exchange Regulations
authorize service members to purchase cars from exchanges overseas when
the car is U.S. name-plated manufactured in the United States or
foreign name-plated with at least 75 percent U.S. or Canadian content.
Advocates for an expanded policy that eliminates or reduces the 75
percent content requirement argue that the international nature of the
car industry and its parts suppliers and the impact of trade agreements
such as the North American Trade Agreement have confused the
manufacturing environment. Such advocates contend that the confusion
has made the car content argument and the 75 percent content rule
outdated and irrelevant in the context of the original objective to
promote American products.
General Casella, what is your perspective on this issue?
General Casella. Army and Air Force Exchange Service agrees that
the car content of 75 percent is outdated and irrelevant based on the
globalization of the current automobile manufacturing environment. In
November 2010, we forwarded a request to change DoD policy to permit
AAFES to sell any automobile assembled in North America to authorized
patrons who are stationed or assigned overseas for 30 consecutive days
or more.
With globalization, the long standing terms U.S. name-plated, and
foreign name-plated, are less clear given the Committee focus on
American jobs. The current policy favored Canadian as well as U.S.
industry and their workers in its part content standard for ``foreign
name-plated vehicles''; and, the exchanges have been selling Canadian
made automobiles for decades. Thus, AAFES believes Canadian assembly of
automobiles, as well as Canadian assembly of parts, to be well within
the Committee's intent. In the past few years, final assembly of some
traditional U.S. brands has drifted to Mexico. Many of the most popular
models of U.S. specification automobiles that the Exchange patrons want
to buy are currently assembled in Canada and Mexico. Without adjustment
to policy wording, the Exchange New Car Sales Program could not offer
its patrons the following models: the Ford Edge and Flex, the Lincoln
MKX, and the Chrysler 300 and Challenger, which are assembled in
Canada, and the Ford Fusion and Fiesta, the Lincoln MKZ, and the
Chrysler Journey, which are assembled in Mexico. In addition, many
foreign plated brands have entered the U.S. market with manufacturing
plants creating jobs for the American workforce and we are currently
restricted by the part content from offering these vehicle models to
our patrons overseas. Our current contractors tell us that, if they
cannot offer our overseas patrons all of the popular models of U.S.
specification automobiles, the Exchange New Car Sales program will
likely lose financial viability.
In short, the program may collapse and the Exchange could no longer
provide its authorized patrons overseas the opportunity to purchase
quality automobiles with U.S. specifications at competitive prices.
Therefore, if the exchanges are to continue to provide this valuable
service to our service members and their families overseas, it is
essential that the program include all automobiles assembled in North
America--to include Canada, Mexico and the U.S.
Mr. Wilson. Currently, Armed Services Exchange Regulations
authorize service members to purchase cars from exchanges overseas when
the car is U.S. name-plated manufactured in the United States or
foreign name-plated with at least 75 percent U.S. or Canadian content.
Advocates for an expanded policy that eliminates or reduces the 75
percent content requirement argue that the international nature of the
car industry and its parts suppliers and the impact of trade agreements
such as the North American Trade Agreement have confused the
manufacturing environment. Such advocates contend that the confusion
has made the car content argument and the 75 percent content rule
outdated and irrelevant in the context of the original objective to
promote American products.
Admiral Robillard what is your perspective on this issue?
Admiral Robillard. NEXCOM supports expanding the program, as this
change would be beneficial to military members. The overseas car
purchase program is a good benefit for military members and their
families offered through our overseas Navy Exchanges and Ships Stores.
Mr. Wilson. Mr. Jeu, a simple review of the math suggests that the
5 percent surcharge may not generate sufficient cash to support a
facility recapitalization program for the Defense Commissary Agency.
Mr. Jeu. While the surcharge has been 5 percent since 1983, I do
not believe an increase in the rate is appropriate at this time. With
our Service Members and their families being asked to sacrifice so
much, the stress of which has been further adversely impacted by
today's economy, I fear the additional burden caused by even a slight
increase in the surcharge rate would send the wrong message as to the
value we place on their service. While the ten-year projection of
surcharge backlog was reported to be $549 million in 2008, a number of
economic and policy decisions have caused us to revise the estimated
commissary surcharge funding shortfall downward to $148 million. In my
opinion, that shortfall is manageable and I would not recommend an
increase in the commissary surcharge.
Mr. Wilson. Mr. Jeu, have we reached a point where we now can see
that the 5 percent surcharge on purchases will have to be increased to
ensure high quality stores?
Mr. Jeu. I do not believe so. While we have not eliminated the
surcharge shortfall, we are able to maintain a healthy surcharge
construction program. This is principally due to three factors.
The re-emphasis on the funding policy which called for
the use of appropriated funds to build the first commissary on an
installation and those that require the construction of new store or
significant expansion of an existing store because of BRAC or global
re-stationing decisions.
The change in scope of an information technology project
which made the appropriate source of funding the defense working
capital fund, rather than surcharge; and
In this economy, bids for new projects are showing
reduced construction costs.
Mr. Wilson. A recent review of products sold in commissaries
revealed that some brand name products are only sold in commissaries
and currently fail to meet the requirement to sell the same brand name
in the private sector. The Defense Commissary Agency (DeCA) has taken
action to have the vendors in question demonstrate that they meet the
requirements of the DeCA brand name rules. While most vendors are
complying with the DeCA rules, at least one has challenged the
requirement. DeCA fears that a break with the brand name standard will
threaten some of the advantages of a brand name system, to include: a
single pricing system throughout the world, a simplified low cost
acquisition system, and the popularity of brand name products with
military patrons.
Mr. Jeu. We are pleased that the vendor who ``challenged'' the
requirement was able to demonstrate that their products are carried in
the commercial market place. Consequently, their products continue to
qualify for sale in commissaries.
Mr. Wilson. Mr. Jeu, the subcommittee understands that there is a
challenge to the DeCA rule and the underlying law about only selling
brand name products that are also sold under that brand in private
sector markets. What is the status of negotiations with vendors that
are not inclined to comply with DeCA rules?
Mr. Jeu. All products currently carried in the commissary system
are in compliance with the special rule for brand name commercial items
contained in 10 U.S.C. Sec. 2484(f). We determined that there were a
total of 641 line items within DeCA's stock assortment for which we
could not positively determine that the items met the Title 10
requirements. In May of 2010, DeCA published a notice to industry--
complete with a list of the 641 items in question--requiring
manufacturers to demonstrate that their product were fully compliant
with the statutory requirements. We validated that 537 of the original
641 items are fully compliant or the vendor requested the item to be
phased out. The vendors for the 104 items that were phased-out on March
21, 2011, did not address the appropriateness of their product
remaining in the commissary system. There are no outstanding issues
regarding compliance with the statutory requirements.
Mr. Wilson. Currently, Armed Services Exchange Regulations
authorize service members to purchase cars from exchanges overseas when
the car is U.S. name-plated manufactured in the United States or
foreign name-plated with at least 75 percent U.S. or Canadian content.
Advocates for an expanded policy that eliminates or reduces the 75
percent content requirement argue that the international nature of the
car industry and its parts suppliers and the impact of trade agreements
such as the North American Trade Agreement have confused the
manufacturing environment. Such advocates contend that the confusion
has made the car content argument and the 75 percent content rule
outdated and irrelevant in the context of the original objective to
promote American products.
Mr. Larsen, what is your perspective on this issue?
Mr. Larsen. The Marine Corps supports eliminating the 75% content
requirement and a change to the policy that would delete ``U.S.-made''
and substitute ``North American-manufactured U.S. nameplate
automobiles.''
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