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Secretary Rumsfeld Briefs the Fiscal 2003 DoD Budget

Rumsfeld: What I'm going to do is to take a few minutes and make a comment or two about the budget and transformation, and then ask -- and maybe answer a couple of questions, like two, and then leave -- and let Dov come up here and explain the whole thing because he's the world's leading expert.

I do want to just emphasize that transformation, and the budget that supports it, is about an awful lot more than bombs and bullets and dollars and cents; it's about new approaches, it's about culture, it's about mindset and ways of thinking of things. If there's one thing that has become clear since September 11th and our activities in Afghanistan, it's that we clearly not only need to be able to win the war on terror today, but we also need to be prepared to win the wars of tomorrow. And to do that, we've got to assure that the U.S. armed forces have what they need to meet the threats and challenges of the 21st century. These threats and challenges are quite different from the ones we faced in the Cold War. They're even quite different from those we faced in the immediate post-Cold War period.

The budget you will be thinking about and hearing about from Dov really has come out of all of the work of last year, and it has been built during the past four or five months, indeed, many months before that, to some extent, but very directly in the last four or five months. If you think back, the Department of Defense in the year 2001 accomplished a number of things. We had the Quadrennial Defense Review and adopted a new capabilities-based strategy. That is reflected, to some extent, in this budget. We replaced the decade-old two-major-regional-war construct for force sizing and have adopted a new approach, which requires different capabilities and different arrangements. We adopted a new approach to balancing risks. We've all heard for years about war risks and requirements to keep those war risks at a moderate level.

But the fact is, in this process we have done our best to try to balance war risks against the risks of not properly funding people, and infrastructure against the risks of not properly modernizing, and against the risks of not properly transforming the force. And that is a very, very difficult thing to do. It's not easy. The machinery of this building, in this defense establishment, if you will, is designed to do one thing at a time. And it can compare apples to apples, war risks to war risks. It has a very difficult time comparing war risks to the risk of failing to transform, or of failing to modernize, or of failing to take proper care of your people.

Last year we also reorganized and revitalized the missile defense research and testing program, which, as you know, will be free of the constraints of the ABM Treaty sometime this summer. We have reorganized the department to better focus on our space capabilities. Through the Nuclear Posture Review we have adopted a new approach for strategic deterrence that we believe will increase our security while permitting us to make deep reductions in offensive strategic nuclear weapons. And within a matter of days we hope to be able to present to the president a new unified command plan which looks at how the command structure for the United States armed forces across the globe will be arranged, what the areas of responsibilities will be and how authorities and responsibilities will be allocated. And, of course, all of that and a number of other things were accomplished during a period when in the first part of the year we had relatively few people here, and during the latter portion of the year when we've been conducting a war on terrorism.

It seems to me that the department is frequently cited as being very difficult to change, as being resistant, as an institution that's tough and not willing to modernize or adapt. If one thinks about the year 2001 and all of those things that were accomplished, quite apart from bringing in 45 of some 48 presidential appointees and bringing in a new chief of staff of the Air Force, a new chairman and vice chairman of the Joint Chiefs of Staff, and a number of other senior military officials, it seems to me it suggests that this department is capable of change, and that the people here have a very good appreciation of the need for this institution to look to the future and see that we're arranged so that we can defend the American people and our friends and allies and our deployed forces against the kinds of threats that we're likely to face.

The budget that is presented is a budget that has come out of the intensive work that produced the accomplishments I've just cited. There have been literally hundreds and hundreds of hours where the senior officials of this department, civilian and the military, have spent time going over and probing and testing each of these major new approaches that I've cited and have come out of that room in almost every case unanimous -- and if not, near-unanimous -- with respect to the way forward. We spent so much time with each other that we could understand the perspectives of the different services, the perspectives of the different viewpoints, and were able to put on the table tough, very tough issues until we saw that there were, indeed, new paradigms. And we have moved forward and received presidential approval on each of the items except for the unified command panel, which is yet to be presented to the president. And it seems to me that the budget ought to be looked at in that context.

With respect to transformation, the president's budget seeks to meet some six goals that had been reflected in the Quadrennial Defense Review and in the defense guidance to protect the U.S. homeland and critical bases of operation, to deny enemies sanctuary, to project and sustain power in access-denied areas, to -- importantly, to leverage information technology, to improve and protect information operations, and to enhance space operations. There's no question but that since September 11th our country has been changed forever. And as the wounds heal and as we begin to put September 11th behind us and to deal with the problems it poses, we need to see that we do not return to the old way of doing things and the old way of thinking about things, because they are not appropriate for the future.


Q: Mr. Secretary?

Rumsfeld: Yes.

Q: If we can just clean up one small --

Rumsfeld: Where's Charlie?

Q: He's not here today. (Laughter.) One small piece of unfinished business, which you have addressed a number of times, and now there appear to be new developments. This has to do with the village that the U.S. raided two weeks ago. It now appears that American soldiers have returned to the village to look around and have expressed regret and apologies to the villagers for what happened there, and that $1,000 a head are being paid to the family members of those who were killed in the village. Do you know anything about either parts of this?

Rumsfeld: Well, what I know is this; there was a military raid on the village. I believe it involved Afghan as well as U.S. forces -- I know U.S. forces were involved, and I believe it involved some Afghan forces. As they approached the village, they were shot at and they returned fire. My information at the time, and subsequently, was that there were no women and children present; they were males, they were armed, and they fired.

I know that subsequently, the commander was advised that there was a statement being made by some leader in the area to the effect that some of his forces, some friendly forces, were in the compound when that raid took place and that some of them were killed. I know then that the U.S. commander announced that they would have an investigation, and I assume that -- I know that investigation is going forward, and I assume that part of that investigation involves the people you mention are now on the ground talking to people and trying to determine what actually took place.

I know that the person who expressed concern about it expressed it to Mr. Karzai, Mr. Karzai raised it with the commander, the commander then initiated the investigation. The investigation has not been completed.

The only thing I have said about it previous to today, that I can recall, I will repeat because I think it reflects the nature of the problem on the ground. I don't want to prejudge what the investigation will show, but I think it is entirely possible that everyone -- in a situation like this -- let me make it generic. In a situation like this, everyone can be correct; that is to say that they did go up there and they were shot at first and did not initiate the conflict.

Second, that when the dust settled and everyone looked around, that it may well turn out that in a situation like that, you will in fact have people who are friendly and people who are not friendly, and the people who are not friendly initiate the fire; the return fire then comes in and ends up, unfortunately, killing or wounding some individuals that might have been friendly.

In Afghanistan, people who are friendly and unfriendly are constantly meeting together. Indeed, sometimes the same people can be friendly and later unfriendly within a relatively short period of time. There are also people who can pretend they're friendly and who, in fact, are not very friendly, and who provide aid and comfort and assistance to the Taliban and Al Qaeda that are still in the country. It is not a neat, clean, tidy situation.

My instinct is to let CentCom continue their investigation and complete it in good order.

Q: Did soldiers go there and apologize, which the villagers say they have come back and apologized. And is money, at a thousand dollars a pop, being handed out to the family members of those who were killed?

Rumsfeld: I do know that U.S. soldiers have gone back into the area, I believe with Afghans, to try to determine the facts. I would hope that if in the course of that they discover that somebody was in fact killed who should not have been killed, and who was in an area where enemies were firing on our forces and we fired back and they, unfortunately, were killed, that American forces would express apologies. I can't say that I know that, but I would hope they would.

In terms of compensation, I know nothing about that, except that I do recall that in one conversation Mr. Karzai had with someone in CentCom, I believe, he said that in the event that it turns out that people were in fact killed who were friendly to the interim government, that would be unfortunate and it would be helpful if some way could be found to compensate them in some way. But I don't know anything about the details of that.

Q: You don't know if the Defense Department has provided --

Rumsfeld: I do not.

Q: -- the $100 bills which are now showing up in the village?

Rumsfeld: I do not. Do not.

Q: A budget question? Mr. Secretary?

Q: Mr. Secretary?

Rumsfeld: I'm going to take the second question there.

Q: I have a budget question here. Of all the systems on there on the upscale, which of those typifies your our scheme to transform the military the best? And why isn't the B-2 on either of those lists, since that's one of the more high-profile weapons programs?

Rumsfeld: Well, I don't know why it's not there; I didn't do the list. (Laughter.) Dov's going to be up here in a minute, and he certainly will have an answer.

Q: What's transformation of --

Rumsfeld: If I were to say what the single most important transformational thing that will take place, it is what I mentioned the other day at the National Defense University, when I said that it'll be the selection of the next six, eight, 10, 12 top four-stars for the major commands in the world: the new command for the north, the replacement for Pete Pace in the south, the replacement for General Ralston at the end of this year, the replacement for Dennis Blair in the Pacific. I think that probably -- the people that are selected for those eight or 10 jobs -- and there are a lot of them coming up in fairly rapid fire during the next 12 months -- will as much or more than anything else we do contribute to transformation.

Now, why do I say that? I say that because I think an awful lot of people have got it in their mind that transformation is a weapons system, or transformation is firing some person who is not transformational. And I've never believed that. I really haven't. This morning we were in a meeting, and Dov and others were trying to characterize how much transformation is in this budget. And by one definition of transformation they came out with a figure of $20 billion, and with another calculation and definition of transformation they came out with $50 billion out of the total budget. I said that I really didn't think that might -- it would probably be as misleading as it would be useful for people to think of it in dollars. I don't think of it in dollars. It can be simply in connectivity. It can be in interoperability. It can be in taking things that every single one of which exists presently and managing them, using them, connecting them, arraying them in a way that has a result that is transformational.

So I think that that -- that list ought not to be looked at and say, gee, what is transformational and what isn't? I really believe that the way I've just characterized it is probably a better way for us to think of it.

Q: Mr. Secretary, another -- one question --

Q: Mr. Secretary --

Rumsfeld: I'm -- I'm -- I'm going to -- ah! I'm going to break Torie's rule and take one last question.

Q: (Off mike) -- can you tell us --

Rumsfeld: Is this going to be a bad one?

Victoria Clarke, Assistant Secretary of Defense (Public Affairs): You'll regret it.

Rumsfeld: I'm not going to do it. That's it. The heck with it. (Groans, laughter.)

All right.

Q: Can you give us a sense of what your appeal to Congress will be about this? There's been some questioning of the $10 billion amount for the war.

Rumsfeld: Mm-hmm. Yeah.

Q: Have you got any hint of the reception on the Hill yet?

Rumsfeld: Well, we had a very nice lunch today with the chairman and ranking member of most of the major committees and subcommittees -- the eight -- all but, I think, one was there. The -- I can't, you know, say how they're -- what they're going to say. All I know -- it was very pleasant lunch. We had a very good discussion, had a number of interesting questions, one of which was that, and I'll come to that in one second.

But if I had to say how I think it will be received, I would say this: The -- there is a tendency on the part of some people to use the old phrase, "guns or butter" and try to get it into a context of Vietnam, which was the way it was cast back in those days, when I was a congressman. The -- the truth is that the American people want to be free. They want to be able to have opportunity, to have jobs and work and go to church and raise families and not be frightened, not have to live in a basement, not have to be fearful about going outside and not be fearful of their country being invaded or their country being attacked by terrorists or by ballistic missiles or by cruise missiles or by cyberattack.

And that which provides that stability and peace is the men and -- they are the men and women in the armed forces of the United States of America. The United States of America, at this moment in history, is the country that is capable of contributing to peace and stability on this globe in an enormously important way. And if one thinks about the economic loss that took place on September 11th in this country and elsewhere in the world in billions and billions of dollars, it is very clear that the defense budget is cheap when one compares it to putting our security at risk, our lives at risk, our country at risk, our freedoms at risk.

And it is the -- the wisdom of the American people and success of the administration to be willing to invest hard-earned tax dollars so that this country can contribute to peace and stability in the world. We did it through the Cold War. People say that fear is the only thing that focuses the mind in democracies -- that democracies tend to be lax, and they have to be fearful to do that. But the reality is that throughout the Cold War, for 50 years, the people of our country and other countries, through successive administrations of both political parties, were willing to invest. And they invested hard- earned dollars -- I used to come back when I was ambassador to NATO and testify in the Congress against the Mansfield amendment, which said, "Let's pull our troops out of Europe. It's been a long time since the end of World War II."

But each time it was defeated, and it was defeated because the American people knew that there was an expansionist Soviet Union that did pose a threat to the rest of the world, and it needed to be countered and constrained and contained. And our country and our NATO allies did that, and to their great credit they did that.

And we're faced with a situation today where I believe the American people -- in answer to your question -- will fully understand the fact that the president of the United States has made a decision that the priority should be homeland security and the capability of our country to contribute to peace and stability in the world. And that that means that necessarily there is a relatively low rate of growth in federal spending in the non-homeland security and the non- defense areas. And I think that the American people will recognize the wisdom of that, and I think the Congress will recognize the wisdom of that.

Q: And will they accept your idea about the $10 billion?

Rumsfeld: I suspect they will. The administration was faced with a choice. We could go up with a normal budget and pretend there isn't a war and leave a big goose egg there, notwithstanding the fact that the president has said this is going to take years, not months or weeks, notwithstanding the fact that we're still engaged in Afghanistan, and he could have said, "Well, we've left a zero there."

Now, the effect of that would have been for the Congress to say, "Well, we know you're in a war, and we know you said you're going to continue it. Why didn't you fund it? Is there something you know that we don't know?" And, of course, the answer is the president knows he's in a war that's going to last a period of time, therefore, he put a number in there and said depending on what level we're at, depending on how hot it is, how many precision munitions we're using or not using, depending on how many deployed forces, depending on how many more Guard and Reserves we have to call up -- we now have 60,000 of them, plus another 10,000 that we're holding in, over 70,000 Guard and Reserve -- it's not knowable how long we're going to have to have the combat air patrols over here, how long we're going to have to have the various uses of men and women in the armed forces, but it is knowable that we will be using them. And it's not knowable precisely where, precisely how, but we do know that this problem has not gone away. We have a very serious problem still in Afghanistan, we have problems in other countries, as the president's indicated.

And I -- so it seems to me the alternative would have been less attractive, less wise, less appropriate. And by going in, as he did, with a number and saying, obviously, if we don't spend it, we won't spend it -- the $10 billion contingency, but on the other hand, it's pretty clear that it is more likely to be too little than too much, given the path we're on.

And I'll ask Dr. Dov Zakheim, comptroller of the Department of Defense, to come up here, take over. And he's wired for sound so he can rove around like a wily panda. (Laughter.)

Zakheim: You're a tough act to follow, sir! Wily panda? (Laughter.) God!

Well, that was a pretty eloquent contextual setting for what I'm going to talk about. Someone has read this chart, and you will notice, if you add all of these together, you exceed 100 percent, and even our budget doesn't do that. So that should be 14.2 percent. So you get full marks. And now I'm going to ignore this thing.

Now, these numbers should work; 051 is the way the budget committees and the Congress have established budgetary categories for expenditures. And the DOD budget is part of a larger category called National Defense 050. As you can see, here's the $10 billion that the secretary was asked about and that he's addressed. And these are two other categories; one is the Department of Energy, those elements of the Energy Department that are listed as part of national security. It's the special national security -- National Nuclear Security Agency that was created not long ago. This includes $350 million for the Department of Transportation, the Coast Guard, for example.

So that the total, as the budget committees will look at it, Function 050, is $396.1 billion. This number is actually a "what if" number. Had we had a civilian accrual program -- and I will discuss the whole notion of accruals a little bit later on -- had we had a program, that we now have this year, that covers the health and retirement costs for civilians in an accrual manner, then this number would have existed. It is a non-existent number. This is actually what we received last year.

Next slide, please.

The secretary was just talking about this. This gives you a sense of the nation's commitment to defense relative to the nation's economic activity: 3.3 percent of the Gross Domestic Product, that is to say the goods and services produced by this country, is going -- it would be going to defense in fiscal year '03. By comparison, during the Gulf War, which is about here, it was considerably higher.

During the Reagan years it was higher. During the Carter years, so- called decade of neglect by some people, it was considerably higher. Of course, our gross domestic product was higher as well.

Next slide, please.

And this is our percentage of outlays as a percent of the federal budget. Again, lower historically. But remember, we are in a war right now, so that historically we've spent more on defense relative to other national priorities, we have spent more on defense relative to other economic activities in the country. This is not really the case right now.

Next slide, please.

What this does is give you a sense of how much of the new money -- you keep hearing about a $48 billion increase. And, of course, that's true -- but how much of that actually could go to other requirements. This is the number I pointed out earlier: $331.2 billion, the enacted budget, enacted by the Congress. This is inflation. These are what we call must-pay bills. They're not entitlements in the classic sense of Social Security, but for all intents and purposes they actually are. Congress enacted a law that the military over 65 was entitled to our defense program called TriCare. To set up the accrual accounts for that and an accrual fund, we had to add $8 billion. Civilian accrual funding, the same: $3.3 billion. Pay raises: 4.1 percent for the military, 2.6 percent for civilians. That, too, adds up to $2-1/2 to $3 billion. So that you have $14 billion of essentially what we must pay if we're continuing with the forces and civilians we have.

We made a commitment a year ago that we would not come back to the Congress for supplementals except in the event of war. Of course, when the commitment was made we were not at war. One of the fundamental causes of continuous requests for supplementals year after year was the predisposition to underfund the cost of weapons systems and then to come back and say well, we're wrong, we were short, we're going to fully fund them, now give us more money in a supplemental. What we did was do the best we could to fund those programs up front based on the estimates made by an office that I -- that is a part of my overall responsibility, the Cost Accounting Improvement Group. This group historically has been more often right than wrong in predicting the long-term cost of a weapons program. In the past their recommendations were not necessarily followed. We have followed them, accepting so far as they modified their own estimates based on further interaction with the services. That led to a bill of nearly $4 billion.

We have funded readiness and operational tempo year after year. Again, the services will go to the Congress and say, "We're terribly sorry. We simply cannot continue to fly our planes and run our tanks and steam our ships with the money we have. We need a supplemental."

One way to avoid that is funding that up front. We've done that. We've also added more money for repair and maintenance and depots. Those are federal government facilities that do repair maintenance, again, to avoid this problem of coming to the Congress with new requests for money in the middle of the congressional session. If you added all those up, you would come to $360 billion. Those are all new costs -- things that we would have to pay for that are not built into that 331.2 (billion dollars). I double-checked with my staff today to make sure that that was exactly correct, and they continue to nod that it is. Blame them, not me, if they're wrong.

The secretary this past year said that if we did these sorts of things, it would come to $350 billion. In fact, had we not made reductions -- and I'll talk some more about those later on -- it would've come to nearly 360 (billion dollars). Now you then add to that number -- that net number -- the cost of the war, the $10 billion that the secretary's already discussed with you and another 9.4 billion (dollars) that is an outgrowth of programs that we recognize cannot simply be terminated, now that we've initiated them, because of the war; or programs that we've accelerated as a result of our understanding of the war. And that adds another 9.4 (billion dollars), for a total of 369.5 (billion dollars.)

That leaves, for all new programs, under $10 billion. That's not to say that's all we did. As the secretary mentioned, for instance, depending on how you count transformation -- it could be 20 billion (dollars); it could be 50 (billion) -- obviously we make significant changes within the baseline itself. But going beyond that, to simply add funds for new programs, we have less than 10 billion (dollars) to do so.

Next slide, please.

And we make some trade-offs, as I just mentioned. On the left- hand side, it tells you what those were -- programs that were not in line with our strategy or not needing performance requirements, like the DD 21 destroyer; Navy Area Missile Defense, which had been an integral part of our missile defense program; a variety of Army programs -- "legacy programs" is just Pentagonese for "programs we've had for some time"; we just essentially inherited them -- and the Peacekeeper missile, that famous missile that was neither funded for life nor funded for retirement. When we took office, it was kind of hanging there. So we decided that we would fund it for retirement.

We also met some programs that simple were not meeting test hurdles. The V-22 has been restructured. That is the Marine aircraft that's half-helicopter.


Q: How much less is that program going to cost than it would have?

Zakheim: How much less would the V-22 cost than it would have?

Q: The 1.9 billion is here.

Zakheim: That's right. And I'm not sure if we -- I don't have a number off hand. I can get it to you. It probably wouldn't have been all that different. The problem was that the plane was having problems. And therefore, the real issue wasn't money-saving. The real issue was to develop a plane that would fly without accidents. And in order to do that, you had to extend the life of the program and to add to the test of -- specific kinds of tests. You may know there was commission that was organized to review this whole program, and their recommendation was, the plane and the program was fundamentally viable. The issue was that there were some elements of physics that simply had not adequately been tested. And what we did was, this was not so much a cost-saving thing as it was restructuring.

Q: (Off mike.)

Zakheim: Sorry?

Q: Are you spending more on it actually?

Zakheim: I don't think we're spending more. I think it's roughly the same amount of money, correct me if I'm wrong.

Roth: In the near-term, the mix between --

Zakheim: John, come on up here for the television cameras. John Roth is the new deputy comptroller. He is my in-house bearded one. And he will give you exactly the answer.

Roth: In the near-term, the mix between R&D and procurement was changed in order to come up with this more robust test program in order to fund some of the design changes that they're looking at. And so in the near term, the mix between the dollars were changed. In the long term, I think there's more R&D in the total program.

Q: But it would have been roughly 1.9 billion anyway?

Roth: Yes.

Zakheim: More or less.

Roth: Yes.

Zakheim: Yes.

Roth: There wasn't a concerted effort to either increase or decrease. It was just to get the program right.

Zakheim: I figured when I told -- since you have a beard, when I answered you, you wouldn't believe me, so I brought him up here to answer you. (Laughter.)

B-1 we talked about a year ago, or less than that actually, some six months ago, consolidating the B-1 force to support funding for modernization, and we accelerated the retirement of some older systems. Most of these are vintage 1970 systems. Here are areas that we had hoped we could find more money for. But as the secretary said, the issue is balancing risk. You have to balance near-term risk, the risk of dealing with the Saddam Husseins and Kim Jong Ils of this world, who basically field conventional kinds of forces, with longer- term risks, where there may be very different kinds of requirements, and of course now we've seen, even with the risks of fighting unconventional wars. That meant that we could not do all of the things we wanted to do in certain areas.

Ship-building: As you'll see later on, our shipbuilding program calls for five ships this year, as opposed to six last year, as opposed to the eight or nine that we really need over the long-term to maintain a force in excess of 300 ships. One mitigating factor is that the average age of our fleet right now is 16 years, which is relatively young. And therefore without allowing it to slip to off, and we don't -- within a few years, we're building 10 to 11 ships a year -- without allowing it to slip, we felt that, and the Navy felt that it could afford to build only five ships this year. There were other priorities, such as munitions, such as readiness that really more urgently needed funding.

Tactical aircraft: Here you have a situation somewhat different. Our tactical aviation is actually on the old side. We have money going in in research and development for the joint strike fighter, so over the longer term, the average age will go down.

We have a significant increase also in our F-22 force. We're going from 13 F-22s, which is the new fighter that is the most stealthy and can fly supersonic without going on afterburner, and it has lots of other capabilities, we're going from 13 to 23.

Another mitigating factor there is that we are spending about a billion dollars in unmanned piloted vehicles -- unmanned aerial vehicles, as they're called, of one sort of another. We definitely created an adjunct to our manned tactical air force with these unmanned vehicles. There is, for example, a program for an unmanned combat aerial vehicle, which will be essentially an attack plane without the pilot, from its inception.

Yes? Do I have to call up my bearded colleague again?

Q: On the F-22, is that 23 aircraft more or less than you envisioned buying a year ago?

Zakheim: The question about whether it's more or less, I'm not sure what the number was relative to a year ago. But I think what's really driving your question, as you know, we had this program for about 339 and it dropped a little bit. Most of those changes are really in future years. That's where the numbers get quite big. And if we had gone with the original 750 program, it wouldn't have made much difference up-front.

Q: Yeah, but wasn't it cut from 26 to 23 rather than -- I mean, so it's not true that you're adding 10 planes because --

Zakheim: Well, we are adding to the 13 we had bought last year.

Q: Well yeah, but that was in the plan already.

Zakheim: Well, I mean, everything is in a plan until it's out of a plan. So it -- you know, one has to deal with realistic numbers. We bought 13. We're buying 23. There are lots of what might have beens and could have beens and should have beens, and one can go round and round on those. The fact is that you're adding 10 aircraft to the program, that we're committed to that program.

Q: What's the total value, still 331 or --

Zakheim: It's still 331, that's correct. And again, the bulk of those will be beginning in fiscal year '07 and beyond, because till then, you're ramping up to that number.

There was another question. Yeah?

Q: On the elevated aircraft, not just tact air, but all aircraft in the Pentagon, I think President Bush in his Citadel speeches talked about reducing the average age, that being one of his goals to transform the military.

Zakheim: Yes.

Q: Did this budget help that, or are we going to see that in later years? And if it doesn't help that, what does it --

Zakheim: There is an effort to reduce the average age. It's going to take more than just this year to do it. And as I say, one of the things you do when you bring in unmanned aerial vehicles is you move off the curve entirely. I mean, a lot of the analysis that you've seen over the years, for instance, of how much procurement money we need, presupposes one-for-one replacement of the systems we have.

As soon as you develop something completely different, it's not longer on the same curve, and all those analyses fall by the wayside. So that even as you look at tactical aviation, bear in mind you've got this other element as well.


Q: Well, what about the issue of these aircraft -- say, for instance, the B-52. I mean, last week a defense official cited that as transformational simply because it has such powerful communications capabilities and precision weapons. So is that aircraft -- do you count that as a 40-year-old aircraft, or should you count it as a 20- year-old aircraft --

Zakheim: Well, I would suggest this. As I understand it, the B-52 is part of the story where a man was being -- one of our Special Forces was on horseback, he was being chased by the bad guys on horseback. He used his satellite phone to call in a B-52 to kind of transform the bad guys, which he did, which they did very well.

The B-52 may be a 40-year-old plane. But if it operates that way, it's completely different. And we've seen this, by the way, with aircraft carriers. There's another example -- when I started out in this business 25 years or so ago, the life, the expected life of an aircraft carrier was about 30 years. Okay? Now, we operate aircraft carriers 40 years and beyond. It's what you're doing with it. It's how you're modernizing it. If we hadn't have had aircraft carriers, I don't know how we would have brought in the kind of tactical aviation we needed in Afghanistan, when we didn't have the bases available for other short legged tactical aviation.

So it's not just a function of the age of a system, it's a function of what you do with it. Would we like to bring down the average age? Absolutely. How we do it, we're going to do it in a measured way, again because we're doing so many other things. And that's why I say part of it is, sure, we would have liked to have bought more tactical aviation. That by definition would have brought down the average age, and the Joint Strike Fighter, when we get that, will do so, and as we buy more F-22s will do so.

Here's another area that we would have liked to have done more of, and that's science and technology. Our objective is to fund science and technology to 3 percent of the overall defense budget. This year we're funding at 2.68 percent. If you take the original budget submission a year ago, it was at 2.65 percent; basically the same. Of course, the base line is larger, the budget's much larger. In absolute terms the science and technology numbers have grown as well. Would we have liked to have gone faster? Of course.

Recapitalization of legacy forces. As I say, there are forces that we need to fight the conventional forces that other people field. And our objective isn't parity, it's dominance. It's to beat them so badly that they don't even want to begin to think about fighting us. Obviously, in the past, the North Koreans, the Iraqis have thought about fighting us.

We want to dissuade them entirely. That means maintaining dominance in those areas as well. Could we have done more? Sure. At what expense? At the expense of the other priorities we chose. So it was a balancing act and, therefore, we didn't do as much as we would have liked there.

And this one, modernizing the infrastructure, there was a delay. And really this word should say: Rate slowed by delaying base closure dates. There were elements of the Congress, particularly the Senate Armed Services Committee, that really wanted to accelerate base closure. We had asked for a base closure program in this fiscal year, '03. We had the support of Senator Levin, we have the support of Senator Warner. Unfortunately, that didn't happen and there was a delay till fiscal year '05.

Now, that created a tremendous dilemma for us. We know that some 20 to 25 percent of all our bases are not really required, the force protection around them isn't required, modernizing them isn't required. We don't know which ones they are; we can't even identify which ones they are. We can't play favorites. So that it meant that the American taxpayer was going to watch as 20 to 25 cents on every taxpayer dollar was going to go into bases that weren't required. And we felt that instead of doing that, given what -- the reality of what Congress had done, it was better to lower the military construction rate only to fund, for instance, those bases that were desperately in need of facilities, desperately in need of modernization; that you simply couldn't let them go on that way, and to put more money into what's called sustainment, which is essentially repair.


Q: Feel free to go off this slide. Can you go back to the first category there -- DD-21?

Zakheim: Yes.

Q: What is it? What do we save by eliminating it? And the same for the Peacekeeper.

Zakheim: Okay, the DD-21 was a new destroyer, it was a new class of destroyers that, simply, the program was not functioning properly. Instead, we have decided to eliminate that and to use a new destroyer as a test bed for new technologies. The way we're going to fight surface warfare in the future is unlikely to be the way it's been fought until now. And that's called the DD-X program. It's essentially a test bed. So it's quite different from this DD-21.

The Peacekeeper, as I say, right now I'm not sure you're going to see much in the way of savings because of the retirement cost. The issue there is a different one. The issue was were you going to spend this money to keep the thing going so that ultimately you were going to retire it anyway, or were you going to retire it right now? And given the Nuclear Posture Review, given the fact that we're going down to 1,700 to 2,200 warheads from where we are today, it made sense to eliminate the Peacekeeper.

Q: (Off mike) -- I'm sorry, the cost -- so you're saying there's really no savings, particular savings from the Peacekeeper --

Zakheim: Now, there will be, of course, in the future: we're retiring it.

Q: Oh-three, I'm talking about.

Zakheim: Yeah.

Q: And the DD-21? What are we getting from that?

Zakheim: I'm not sure we have much in the way of savings there, either, because what you're doing there is simply re- structuring the program so that you create this testbed. Again, over the longer term there'll be savings. But that's a hard one to measure because over the longer term we need to build more ships.

Q: I mean, certainly -- can I just follow? I'm sorry. Surely by now you've heard the criticism from some of these, you know, defense analysts that are out there that this budget doesn't really eliminate any weapons systems and create any savings from doing that. We just -- it sounds like we just talked about a few --

Zakheim: Well --

Q: -- there in that situation. I see your next page here talked about savings of about 9.3. But, I mean, address that criticism. I don't see any weapons systems of any great cost savings being eliminated here, and reductions even at 9.3 billion are --

Zakheim: Okay. There are two ways to address the criticism. One is we did find $9.3 billion or so worth of savings. Those are not figments; those are real. Those are real programs that have been reduced, including 18 Army programs.

The argument that you are citing, of analysts saying we should get rid of programs, there's always been this tendency to pick out a program and say, for instance, well, we need to eliminate three tactical aviation programs. That's usually one of the favorite ones. Of course, when that argument was made, no one knew that you needed aviation on carriers in the way that we did in Afghanistan, number one. Number two, no one recognized that the F-22 program was, indeed, already being reduced, as it was, you know, from 750 to 331, less than half. Number three, the Joint Strike Fighter, everybody said was, you know, pretty much a figment, it wasn't a real program. It turns out to be a real program, and there's serious money behind it.

I think with each of these things, once you get beyond, you know, just the urge for, quote-unquote, "weapons systems kills", you have to start looking at what it is you're keeping, why you're keeping it, what are the alternatives, do you not want to have new aircraft, for example, that are stealthy, that can be much more, therefore, survivable, that are netted into other aircraft in a way that the current forces are not? Do you, in effect, want to stay far, far ahead of any other air force in the world? If the answer is yes -- and I think after what's happened on September 11th, I think across the board the answer is yes. I think the American public sees that the answer is yes -- then you're going to do things differently. I believe that many of the analyses that you're citing simply do not believe -- I mean, if you scratch the analysts hard enough, they did not believe a lot of this -- what they would always put in quotes -- "threats" to the United States. And again, as the secretary said, he said there was billions of dollars that the GDP has lost as a result of September 11th; actually it's closer to 675 and counting, billion dollars. By the time they finish doing all the sums, my guess is we'll be in excess of three quarters of a billion (dollars) for one incident.

I'd like to move ahead, and then we'll be happy to take more questions.

Next slide, please.

Well, here's the right one. So it isn't 42-point-whatever. It just still seems to be up here, and I'm sure somebody's going to take -- you can now watch me take this down. This is called "realistic budgeting." (Isolated laughter.)

And as you can see here, 10 percent of this program is for accrual and to send help; $38 billion is essentially entitlements. The other -- this gray area -- includes military construction, family housing and what are called revolving funds, which are essentially industrial-type funds that pay their own way.

Next slide, please.

Q: (Off mike.)

Zakheim: Yes.

Q: On that one --

Zakheim: Yeah, please back up.

Q: How come we're spending more money and getting less? In other words, if you do "apples and apples" in constant 2001 dollars, the Reagan budget package in '83 was 362 (billion dollars). You're going to cross for them in fiscal '06 for 430 billion (dollars). And you got one third less manpower, and you don't have that many ships. You don't have that many airplanes. What are the drivers? How come we're spending more and getting less?

Zakheim: That's a very good question. Well, one thing of course, is this area -- that 38 billion (dollars) right there. You have, for example, Congress enacting the TRICARE for Life program, which is a program that added $8.1 billion to our budget, so that the retired vet or retired military people over 65 would have access to the TRICARE defense health program. That's one answer.

Another is that you have many systems that are far more technology intensive -- nothing new about that. If you went back from the Reagan program -- back to, say, you know, the early '60s -- you would see the same thing. We have, over the years, consistently traded quantity for quality. And as you can see, as we've seen in Afghanistan, quality makes a difference.

Other areas don't -- don't really materialize as weapon systems per se. Look at all the money we're spending on communications. Look at all the money we're spending on intelligence. There's a buzzword -- which itself is a buzzword -- called "bandwidth" that has become a major sort of, as it is -- buzzword in the Pentagon. What "bandwidth" means, essentially, is the ability -- is to have enough of the spectrum to be able to allow the maximum number of systems to communicate with one another. That issue didn't even exist in the '60s.

So when you start doing one-for-one comparisons, you're missing the entire point of what the secretary said about transformation. We are fighting different kinds of wars. We didn't have e-wars in the '60s or in the '70s or, indeed, in the '80s.

Q: Can you, in one sentence say -- it used to be manpower that -- remember, all the previous secretaries said, "Oh manpower's eating us alive -- over 50 percent of the budget."

In one sentence, what are the big drivers that are pushing up this budget, even though manpower is going down?

Zakheim: Well, one of the drivers are the manpower benefits that continue to go up. Medical: I think I have a slide that'll show this to you, but I'll tell you right now, when you have a medical system which increases by 12 percent a year, you are doubling your medical costs every six years. When you have a -- when you pay pharmaceuticals at the rate of 15 percent growth a year, you'll double your pharmaceutical costs at less than six -- at less than five years actually. So you have this tremendous push in certain categories that keep driving the numbers up in significant ways. So that's one area.

Again, I think the cost of technology has gone up. The cost of particular kinds of technology has gone up. We are operating differently. We could not have fought Afghanistan with the kinds of forces -- I don't care how well modernized they were -- that we had, say, in the '70s or the '80s. The reliance on computers, the reliance on technology, the reliance on bandwidth, it's just completely different.

Next slide please.

What this does is compare what the Department of Defense was proposing to submit last year and never actually did so. So this number is a shadow number, to use a term economists use. It's not a real number. But given that this was an updated number from the previous forecast for Fiscal Year '02, we use that as a comparison with our budget just to give you a conservative sense of the growth in the budget, and you can see it's quite significant.

Next slide please.

This highlights some of the main areas. You mentioned analysts around town several times. They're going to have a lot of trouble with this one. The Defense Emergency Response Fund was the fund in which the $40 billion that Congress approved in Fiscal Year '01 and '02 in the aftermath of September 11th, that's where the funds went. And what this has done, particularly in the operations and maintenance account, is distort the trends, because you don't have a trend line anymore. You have special funding that went in and obviously created a bump here. So they'll have to factor that out in a certain way.

You can see that in every major category, even when that's factored out, you have significant increases over the five-year period. What you should also note is that it's not just promises, promises in the last years, but quite significant increases in the near term as well. This looks small, but as you'll see, the procurement number is actually quite large.

Next slide please.

This is how the money has been allocated by service. Here's that Defense Emergency Response Fund I was talking about. We received $17.3 billion from the Congress as part of the 40 (billion). But Congress voted it in two chunks. The first chunk was voted before October 1st, and therefore, went to the fiscal year '01 budget as an add-on. This chunk was the remainder, and that was voted after October 1st and, therefore, went to the fiscal year '02 budget.

The defense-wide category includes the Defense Health Program, which is in excess of $22 billion. Therefore, when you factor out the Defense Health Program elements -- and it has increased from '02 to '03 -- you'll see that the defense-wide generally, the non-service element of the Department of Defense budget has gone down.

Next slide, please.

So now I'll just walk you through some of the appropriations categories. Here's military personnel -- the pay raise that I mentioned. A targeted pay raise that goes beyond that. We focused, again, on the non-commissioned officers for raises that run anywhere from about 1.9 percent to about 2.6 percent. We've also focused on certain of the captains and majors -- not all of them; they have to be either on the promotion track or ahead of it -- to give them raises as well.

Basic allowance for housing. To give you a sense of where that was, before 2000 the basic allowance for housing was 18 percent. Which means this is out of pocket that people would have to fork out. It went down to 11.3; we're down to 7.5. By fiscal year '05, people will not have to fork out out-of-pocket costs as part of this basic allowance for housing program. It will not come out of their own pockets. Active duty and selected Reserve personnel end strength are virtually the same.

Next slide, please.

Operations and maintenance. The Defense Health Program, as I mentioned, is in there. Here's your Defense Emergency Response Fund (DERF). Here are the important points: We have funded the most realistic readiness and training requirements. The old saw of, "Gee, we have more tank miles but we can't fund them, we haven't been able to fund flying hours" -- gone. This is what they said they needed, and you can see here 89 percent of requirements, which is a significant jump from 84 percent. Same as '02. And I'll have another slide about that momentarily.

Next slide, please.

Health care. This I've talked about. This is one of your big cost drivers.

Next slide, please.

Military construction. I mentioned the delay. What we didn't cut back on is family housing. We've added two child care centers; we've added seven physical fitness centers -- that's a euphemism for gyms and the like; 46 new barracks. This number, the sustainment requirement -- again, sustainment means repair. So think about it. Here we are in February of '02, we're talking about a budget that doesn't come into effect until October '02 and runs till September '03. Now, how well can anybody predict repair costs over that period that's so far off from now? Ninety-one percent is about as good an estimate as you would want to have. If you fund it at 100 percent, you're probably over-funding.

Next slide, please.

The missile defense program. Virtually identical to last year's in terms of cost, but not in terms of content. We've terminated this program. This was one of the big ones that was terminated Navy-area- wide. The straight savings out of that went into other programs. We slipped the Space-Based Infrared Low System, SBIRS-Low, as it's called, for two years. We have increased Space-Based Boost programs, and we've also reorganized by creating the Missile Defense Agency under the undersecretary for Acquisition, Technology and Logistics, Pete Aldridge, my colleague. And also a joint national contracted team for system integration.

What's key here is that because of those program cuts, this number was actually higher.


Q: How does space-based laser integrated flight experiment fit in there? It was not funded by Congress this fiscal year?

Zakheim: We put space-based laser in there. And -- no, space-based radar we've put in, not space-based laser.

(To staff.) Have we put in the space-based laser? I don't think we have.

Staff: It was -- (off mike).

Zakheim: Not very much. So it's not a major element of that.

Q: Can you -- how much is that?

Zakheim: Forty million.

Q: Forty million.

Zakheim: Next slide, please.

I have some highlights in the transformation arena. You add all those up, you'll see it's about $9 billion. Those are simply the highlights. These aren't necessarily programs that didn't exist before, but they were given a major fill-up, a major push. We're converting four Trident submarines to cruise missile carriers; that is truly transformation. This really enhances our ability to go after fixed targets in a stealthy way. There's nothing still more stealthy than a submarine.

This is an ongoing transformation program. There's nothing wrong with it. There's no reason to cut it back. We moved it ahead.

Here are some of the communications and intelligence-related things that I was talking about. It's difficult to get into too much detail for the simply reason that you don't want the bad folks to know what you're doing. But the basic objective of all these capabilities in what is called C4ISR, a horrible acronym -- it's not even an acronym because you can't pronounce it -- Command and Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance. The point of those is to be able to know what the other person is doing, respond to what that person is doing without that person even knowing that you know, or that you're about to respond. So that when they find out, it's because something just blew up over them or on them.

Unmanned vehicles. A billion dollars, as I said, going to programs that were funded in the past to some extent, but never as seriously. The first time we really plussed it up was fiscal year '02, and now we're full steam ahead on these. This one is mine hunting-related. It is basically a new program. This one is, as I say, is the UCAV. Predators have been functioning well in Afghanistan, as you know. And we're arming the ones that we haven't yet procured. And so we're going to have upgraded Predators that can talk to just about everything. Again, bandwidth is the issue: how many of these things can talk to how many other things?

Q: So will all new Predators be armed?

Zakheim: No, I don't believe they all will be. There will be some that are armed and some that are not.


Q: This money for the advanced, extremely high frequency satellite system, is this to cover the new cost growth estimate that the contractor came in with?

Zakheim: Yes.

Q: This is part of that $3.7 billion --

Zakheim: Realistic costing. Yes, part of the realistic costing.

Q: We shouldn't highlight this, then, as accelerating the program as opposed to --

Zakheim: No, that was not acceleration, that is correct. But we're maintaining its integrity.


Q: Later on in the briefing, when it talks about developing a maritime version of the Global Hawk, is that replacing the Navy's cancelled Fire Scout program, or is that simply something new?

Zakheim: Well, I think it's something new. It is new.

That's great, though. You say "later in the briefing." I mean, nobody watching knows what you're talking about. (Laughter.)


Q: Is there an acceleration of the Joint Strike Fighter program? You talked about the need to --

Zakheim: There's no acceleration. What there is is we're funding it properly. You know a decision was made to go ahead with it. And so, you know, this is an R&D program. And again, one of the risks you run if you try to accelerate an R&D program is you run into the risk that the V-22 ran into; you don't test properly. So you have to balance here your desire to get something into -- whether it's the air fleet or the Navy or the land forces, the desire to get it in quickly, but the need, particularly when you're talking about manned systems, to test them properly.


Q: I'd like to ask you a question about that $3.7 billion that you added for more realistic cost-estimating. These are programs where the services did not realistically estimate them, so they under budgeted them, right? So you're adding $3.7 billion?

Zakheim: Yes.

Q: The good news there is now you have more realistic numbers in the budget. But isn't the bad news there that you're sending a signal to the programs that if you under budget, if you unrealistically estimate, we're going to respond by giving you more money --

Zakheim: No.

Q: -- except in a few cases like the LPD-17?

Zakheim: Well no, because what you're telling them is there were lots of other things they wanted to buy -- more aircraft, for example, more ships, for example. I mean, you ask a naval officer what he or she would prefer, more ships or realistic budgeting, okay? You ask a tactical aviation officer what they would prefer, more aircraft or realistic budgeting, and they'd say, "I'll worry about the realistic budgeting another way. Congress will fund me in a supplemental. I want to go in for more planes."

What we told them was, first you budget realistically and then we worry about your program level.

Q: Well, the Virginia Class Submarine program was one of the ones that was unrealistically budgeted. Instead of saying, "You don't get another sub," you said, "Here's the money, you get that sub."

Zakheim: But what we also said was you can't get more than one.

Next slide, please.

Q: What management tools are you using to make sure that --

Zakheim: Sorry?

Q: What management tools are you going to be using to make sure these program offices realistically budget, besides slapping them on the hand a couple of months later?

Zakheim: Oh, fine. One major management tool that Pete Aldridge has already used is Nunn-McCurdy. As you know, a 25 percent breach of the program, cost of a program, is supposed to trigger a report of certification from the Department of Defense, and specifically from the undersecretary for Acquisition.

The reason it's called Nunn-McCurdy is because Senator Nunn and Congressman McCurdy, who now are no longer in the Senate or the House, had initiated this legislation. So the game plan was, if something grew by more than 25 percent, the acquisition chief, our undersecretary, would have to certify not only that the program was in the national interest, but that it was -- and not only that they were fixing up the management problems, but that they would guarantee that there would be no more future management problems.

Senator Nunn has been out of the Senate for a few years. Congressman McCurdy even longer. Nunn-McCurdy is a product of the '80s. Okay? So this is not yesterday's legislation. Do you know how many programs were terminated on the basis of Nunn-McCurdy?

Q: Zero.

Zakheim: Zero, until Navy Area-wide. So here was a management tool, right?, that simply was not used. And you can imagine now the message that has gone out to program managers: "Buddy, if you let this stuff slip, and things breach Nunn-McCurdy, your program is dead, because the law says that unless the certification is there, the program dies."

Q: Can I pursue that, because the LPD-17 is going to be certified as breaching it by like 40 percent. Will that program be terminated?

Zakheim: Well, what they're going to say on that one is that they believe that they can control the management. I mean, this is the key. If the acquisition people believe that not only -- and SBIRS is another good example. What happened with SBIRS is that management -- SBIRS, most people believed, was less of a technical problem than a management problem. And if management -- if we believe that management can really get this thing under control, then Pete Aldridge will certify. He did not believe that management could get Navy Area- wide under control.

What you want ideally is for the management to get the program under control. If it's gone up 40 percent or whatever the percent is, and it is really a national security requirement, then ideally what you want to do is get this management under control and meet the national security requirement. You don't want to just kill programs for the sake of killing programs. But you have a hammer out there that if someone thinks, "Well, it's a national security requirement, and I'm just going to keep going my merry way. And yes, I will try to clean up my management act now so I get my certification, and then I don't have to worry about it again," the answer is uh-uh, that's not going to happen.

Q: Do you have an aggregate figure for all your projected increases between now and '07. Apparently there was some published figure of 325 billion. Is that --

Zakheim: We've handed out some numbers of the budget increases.

Q: Yeah, I've seen a lot of numbers, but I haven't seen this kind of number.

Zakheim: What increases in what category? Total budget?

Q: Total budget number, aggregate increase in --

Roth: We had a slide of that.

Zakheim: We had a slide.

Roth: Four-hundred and twenty-three billion.

Zakheim: Yeah, we do have a slide on that.

Roth: Four-hundred and twenty-three billion.

Zakheim: I think -- was it the first slide? I think it may be all the way back.

Roth: The line graph.

Zakheim: Okay, it's slide two or three. Slide seven. We'll show it to you. And it isn't 423 actually. Yes it is. John has it absolutely right. If you want to look back at line seven and -- chart seven, and I don't know if we need to flash it up, but -- I don't know if we can flash it up, but if you take a look at the bottom of chart seven, you'll see dollar change, FY' 02, FY '03; cumulative, 423 billion.

Q: Okay, thank you.

Zakheim: Okay, let's move along. Next slide, please.

Okay, here's procurement. Now --

Q: (Off mike) -- slide. Maybe you --

Zakheim: That's just the transformation highlight slide. That's just -- I figured that you're looking about the -- it's just a continuation slide, and you looked at both of them. Let's go back so that the viewers can focus on that --

Q: (Off mike) -- the DD-X --

Zakheim: There are a couple more, yeah.

Q: When you called that a testbed, there'll never be a ship produced out of that DD-X support ship?

Zakheim: Well, I'm not a president, but comptrollers never say never, either. I don't know. I do know that the plan is to use it as a testbed. I do know that there have been other ships that were used for testbeds that did not become ships that were deployed as classes of ships. But there have also been cases where sometimes they have been. So, you know, it's very difficult to say because it's a function of what technologies are coming up with and what you need.

Q: I'm just curious, what that does to the entire aging of the fleet as a result of not going with DD-21 and going with a testbed rather than a replacement --

Zakheim: Well, as I said, the fleet right now averages about 16 years of age, which means that it's relatively young, and you have a little bit of slack. Because the ship-building program is going to be built up to about 10 or 11 ships by fiscal year '07, we should be okay. They key is not to slip in that five-year program. If you -- if there are delays and we cannot meet what we're looking for next year and the year after and the year after that, then you start running into an aging problem. But one of the mitigating factors right now was the fact that we only have an average age of the fleet that's 16 years. So that gives you a little bit of flex. And it's true that by eliminating DD-21 you age the fleet somewhat. But right now you can cope with that.

Q: You need to buy DDG-51 throughout the fiscal year.

Zakheim: Right. DDG-51 is in the clear.


Q: Assuming you build the testbed, the DD-X testbed, what kind of criteria do you use to make the decision, or does the department use to make the decision on whether to pursue a new class of destroyers?

Zakheim: Well, actually, the first recommendation will be made by the Navy, and the Navy has a series of different requirements. So I can only be descriptive, I can't be prescriptive at this time. But, for example, there is the classic requirement for escorting carriers as part of a carrier task force, there's the classic requirement for escorting amphibious ships as part of an amphibious action group or an expeditionary group, there are other requirements that are emerging, such as littoral warfare requirements, not L-I-T-E- R-, but L-I-double T-O-R-A-L -- warfare requirements off the coasts of various places. So it's for the Navy to determine what are the most urgent surface warfare requirements, and my suspicion is that it'll be some combination of all of the above, and maybe some other things.

Another example that I should have mentioned as well: if missile defense involves surface forces, there's another requirement. Again, it's a big if. I don't want to go down that particular discussion route.

All I'm saying is, you asked me a hypothetical; there are, hypothetically, a series of different requirements for surface forces.

Q: Well, the Navy has three ships associated with DD-X right now in their plans. I think it's safe to say they have a hope and expectation there will be a new class of destroyers.

Zakheim: I think they want a new class of destroyers, but I don't know what it's going to look like.

Q: Yeah. The final question on this, is there a counterargument to be made against building a new set of destroyers? Do you feel there's a counterargument or --

Zakheim: I, personally, don't. I think we do need ships. I think the secretary has made it very, very clear we have to keep our fleet up in excess of 300 ships. What Afghanistan made clear in spades was what the Navy has been saying over and over again, that sometimes bases will not be available. We keep finding our ships in different parts of the world. You can't be in more than one place at one time. So we have requirements in the Mediterranean, where we still have forces in Southern Europe; we have requirements in the Indian Ocean; we have requirements in East Asia; we have requirements in Southeast Asia. The fleet is stretched thin. And so I would find it hard to imagine not having some future class or classes of surface warfare ships.

Next slide, please.

The analytical community has been saying for years we need to budget something in excess -- at the time it was $60 billion, which seemed an outrageous number, but more recently people are saying, the last year or so the studies have said, but something in excess of $70 billion for procurement. You can see here that if you take the money that was in the original budget, the money that simply was not allocated to procurement because we had locked the budget down, to use the terminology, we basically keyed it all into the computer and then we had this add-on that, therefore, wound up in the Defense Emergency Response Fund, that is clearly going for procurement, we have broken $70 billion for the first time. So we are now within the envelope of what the analytical community agrees we need to continue to procure and modernize our forces.

Special Operations Command, roughly a $3 billion budget all together; something over $500 million for modernization. The AC-130U gunships are kind of interesting. We took a C-130H cargo aircraft and we're converting them not only into gunships, but into highly communicable gunships that can communicate with just about anything. We've already seen how they worked well in Afghanistan. We're going to convert those.

Here's your shipbuilding force, as I said, and the F-22 production --

Q: What is in that $3.2 billion?

Zakheim: What? Sorry?

Q: What is in the $3.2 billion in the DERF?

Zakheim: We have some Special Operations Forces money. Let me see what else we have in there. I can get that to you. I don't have it all on the tip of my tongue.

Q: You seemed to say earlier that there's still a procurement mismatch between the program and the books and the amount of money you're setting aside for procurement here. Does the FYDP address that mismatch?

Zakheim: Yes. Yes.

Q: Does it go away by the end of the FYDP?

Zakheim: Does it go away? Well, it depends on what we believe we still need, and we're reevaluating requirements all the time. But clearly, for example, with respect to shipbuilding, we're going to get up to the level we think we need.

I'm going to have to break soon, so I want to at least finish my charts.

Next slide, please.

This is an area that, again, Pentagon terminology, what we're really talking about is things that the Pentagon believes it needs and didn't have enough of. One of the -- this whole area, by the way, we had a classic case of every year the services would be asked "What are your unfunded requirements?" These were not really on them, unmanned aerial vehicles, except it turned out in Afghanistan we desperately needed them. Requirements are changing as we are evaluating what Afghanistan needs. So these are some that we're dealing with right now.

Next slide, please.

Research goes up. It includes missile defense, and missile defense stayed flat. Science and technology, as I said, is 2.7 percent of the total.

Next slide, please.

And management improvement, we talked about realistic weapons system cost and financial performance, we have already done an inventory of all the major systems, whether financial or logistic or personnel, that interface with one another. There are in excess of 600. It's just too much. It allows for too many mistakes. We received a hundred million from the Congress last year and we're asking for roughly about the same this year in order to get our arms around the problem. We are restructuring and reducing headquarters staff, so we combined the program in budget review. That's basically what you might say is inside baseball. But in terms of management, it's the first time we have changed the way we look at the management of our budget since Melvin Laird was secretary of Defense.

I've got to go, so I'll take one last question. All right, quickly.

Q: (Off mike) -- question. How does outsourcing fit into your management operation? Is outsourcing still a big problem?

Zakheim: Yes, it is. There's been a lot of misleading commentary about that.

Basically, the primary vehicle for outsourcing had been the A-76 approach, which is a long-standing government program that essentially competes your government efforts against private efforts, but gives the government a 10 percent advantage. By the way, the British don't do that. They have the same competition, don't give their own people an advantage.

That is not the only way to deal with outsourcing. We're looking at creative ways. We are not eliminating A-76 by any stretch of the imagination. A-76, instead of being the only tool, is going to be one of several tools.

Q: Can you do one final one on the B-2? Can you from the podium address this notion that there's elements within the building that want to re-start the B-2 line? Is there any money in the FYDP to re-start the B-2 line?

Zakheim: There's money in the program for modernizing elements of the B-2. I'm not aware of any money to re-start the B-2 line. And as for elements in the building, it could be janitors, it could be anybody.

Thank you very much.

Q: Dov, is it true that you're going to be asking for a $10- $20 billion supplemental in the next month or two?

Zakheim: We will -- the question was about a supplemental. The secretary said he wants a supplemental; we have no idea of the size just now.



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