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U.S. Department of Defense
Office of the Assistant Secretary of Defense (Public Affairs)
News Transcript

Presenter: Robert Hale, Under Secretary of Defense (Comptroller), and Lieutenant General Larry Spencer (USAF), Director, Force Structure, Resources and Assessment, Joint Staff (J8) February 13, 2012

DOD News Briefing by Under Secretary Hale and Lt. Gen. Spencer from the Pentagon on the Fiscal 2013 Budget Proposal

Go to here to view briefing slides associated with this transcript.

DOUG WILSON, ASSISTANT SECRETARY OF DEFENSE FOR PUBLIC AFFAIRS: OK, good afternoon. It's my pleasure to welcome back to our briefing room the department's comptroller, Mr. Bob Hale, and Air Force Lieutenant General Larry Spencer. General Spencer serves as the director of force structure, resources and assessment on the Joint Staff.

Together they will have some brief opening remarks. They will then take your questions, and I'll be fielding the questions.

I do want to make clear here that today's brief is specifically to provide details about the FY '13 defense budget proposal following the briefs that were provided in the last month or so on new defense strategic guidance and on major budget decisions. So that is -- will be the focus of the conference.

And with that, I will turn it over to them, Bob and Larry.

ROBERT HALE: Well, good afternoon. General Spencer and I are going to do a tag team match. I will start out by saying we're glad to be here to talk about the department's fiscal 2013 budget request. We put this request together in the face of considerable change. The Congress, of course, passed an act last year significantly reducing our resources. The Iraq war is over, we're beginning to wind down troop levels in Afghanistan, and yet we face a complex array of security challenges.

As we put all these together into a budget -- the next slide, please -- we were guided by a commitment by the president to make sure that our armed forces are the best trained, best led, best equipped fighting force in history.

To do that -- if I could get the next slide -- we followed some guiding principles, and I'm going to ask General Spencer if he would brief those.

LIEUTENANT GENERAL LARRY SPENCER: The chairman views this budget as the first installment in a series of budget submissions to shape the joint force the country needs in fiscal year 2020. During this process, everything was on the table. We continued the quest for more disciplined use of our funding, viewed force structure reductions through the lens of strategic guidance, kept faith with our troops, and fully supported deployed war fighters.

You've heard this before, but I'm going to foot-stomp it again. This budget was guided by the principles of our new defense strategy.

Next slide.

MR. HALE : I'm going to use these four categories to describe what we did. But first a few words on the budget numbers themselves, starting with our total Defense budget. By that, I mean our base budget, but also everything we spent on wartime spending, whether they're OCO [overseas contingency operations] funded or through supplementals in earlier years.

What you see on this slide is funding back to 1950 and projected out to 2017 in constant dollars. So we've factored out the effects of inflation.

Go to the peak year, in the Iraq-Afghanistan War, fiscal (20)'10. Compare it to fiscal '17, down about 21 percent. OCO could be even lower out in '17. We're using the budget placeholder; could be in mid-20s in terms of cuts.

I'll make two general points about these broad trends. One, they're not that different than past wartime drawdowns. And most importantly, this budget -- total Defense budget is coming down, and so it will free up resources for other national priorities.

That said, if I can get the next slide, the -- most of the focus is on our base budget. That's what's primarily controlled by the Budget Control Act. What you see at the top line here is what we had anticipated as a base budget last year in fiscal '13. In last year's plan, we were going to request $570.7 billion of discretionary budget authority. It's down 45.3 billion [dollars] in this plan, and 50 [billion dollars]to 55 [billion dollars]in the years beyond '13, and adds up to a total reductions, compared to last year's plan, 259 billion [dollars].

And that's a number I'll keep coming back to. That's the target we were shooting at to accommodate Title I of the Budget Control Act. Budget Control Act actually goes out 10 years. If you total up all the cuts compared to last year's, 487 billion [dollars].

When we made these cuts, we ended up asking Congress or will ask them or have asked them to appropriate 525.4 billion [dollars] in fiscal '13. Adjusted for inflation, that's down 2.5 percent, the third consecutive year of real decline in the Defense budget. And in the years beyond '13, the budget grows slightly, enough to keep up with inflation or perhaps a bit more.

Just one more word before I go on, and that is this budget does not accommodate the sequester in Title III of the Budget Control Act. We're following OMB [Office of Management and Budget] fiscal guidance, which was -- which did not anticipate the sequester.

So with those dollars in mind, how did we get there? Go to the next slide. The four principles we outlined before -- we -- I'll start -- I'll go through each of them -- starting with more disciplined use of our defense dollars. Next slide.

We made a number of proposals for more disciplined use, adding up to about $60 billion of savings. You see that in italics. That's a code in this briefing. That means it's five-year savings against last year's plan, so these are the numbers that are going to add toward the 259 billion [dollars] I mentioned.

We did the -- we made a number of proposals: reducing expenses in the Office of the Secretary of Defense and the defense agencies, by terminating lower-priority programs, by reductions in contract funding. I won't go through all of these. We re-phased military construction. I'm going to talk in a few moments about some force structure cuts. In some cases, that left us unsure where we need to make the MILCON investments, so we re-phased them.

Better buying practices. We're doing a number of things in that area, setting goals for weapons systems early in their development, like the SSBN-X and the bomber. More use of "should" costs as well as the "will" cost numbers based on history that we budget to. Better management of service contracts, a major area where we think we can do better. And finally, we'll try to improve financial information and achieve audit readiness.

Now, these are general plans and commitments at this point, same situation we were in last year when I stood at this podium and told you we had $150 billion of efficiencies. Over that last year we've turned those general plans into specific plans, especially for the '13 -- '12 and '13, people assigned to them, targets, a governance structure in the services, a governance structure in OSD [Office of the Secretary of Defense]. We will do the same thing with these fiscal '13 plans over the next year.

We understand that we need to make more disciplined use of our defense dollars.

Next slide.

But it won't get us all the way to the 259 [billion dollars]. It's only about a quarter of the savings we need. We will need to make reductions in our force structure, in our investment, and let me talk about those now. Those will be guided by our strategy, and there are -- if I can get the -- we have that slide on strategic goals, let me ask General Spencer if he would brief the strategic goals that we'll be using.

GEN. SPENCER: This budget creates a joint force that is lean, adaptable, ready, networked and technologically advanced. It will be capable across all domains and globally engaged.

Our strategy is rebalanced towards the Asia-Pacific and the broader Middle East, and builds on innovative partnerships and strong alliances.

We have heeded the lessons from 10 years of war, and protected and prioritized investments in areas such as cyber, special operations, and intelligence, surveillance and reconnaissance assets.

Above all, this force will be manned and led by the highest- quality professionals that can quickly confront and defeat aggression anywhere, any time.

MR. HALE: Let me go through each of those four goals and give you some examples of what we did.

Next slide.

We know that we need a force that's smaller and leaner. We've taken 103,000 active duty end strength out of this budget -- that's fiscal '17 compared to enacted fiscal '12 -- mostly in our ground forces -- the Army down to 490,000 [soldiers], the Marine Corps to 182,100 [Marines]-- and smaller reductions in the Navy and the Air Force.

We're also making reductions in reserve end strength, but proportionately smaller, mostly, in those case -- in the case of the reserves, in the Navy and the Air Force National Guard and Reserve -- relatively modest reductions in the ground force reserves.

Ground forces, especially on the active side, are reduced because we are no longer sizing these forces to accommodate large, prolonged stability operations. These kind of end strength cuts, if I could get the next slide, we need to reduce numbers of units.

We did so, saving roughly $50 billion over the FYDPs [future year defense plans]. That's an italic again, so that's working toward that $259 billion.

The Army will eliminate a minimum of eight brigade combat teams, out of a total of about 65 today, and do a study that may lead to reorganization and perhaps changes in that number. The Marine Corps: six combat battalions out of roughly 41; four tac air squadrons out of 20. The Air Force will eliminate seven tac air squadrons out of about 61, and reduce some mobility aircraft -- 27 C-5s, and you can see the numbers there.

When we make force structure cuts of this size, we need to consolidate our infrastructure. And so we will ask the Congress to provide authority for two rounds of Base Realignment and Closure actions, one in 2013 and one in 2015.

We want a force that's smaller and leaner, but also ready and agile. Readiness is a complex topic, not just influenced by the budget; but the budget side most associated with readiness does go up. The only major appropriation title to go up in this budget is operation and maintenance, most closely associated with readiness. It's up 6 percent from fiscal [year] '12 to [fiscal year] '13, while the overall budget is down 1 percent. And we'll preferentially retain agile forces, like our special ops forces, bombers, carriers, that essentially can self-deploy.

Next slide.

Another of our goals is to rebalance toward Asia-Pacific and toward the Middle East. We'll maintain some key capabilities critical to those areas: an aircraft carrier fleet at a long-term level of 11 ships, 10 wings. You can see there a big deck amphib fleet of nine ships, building after this -- shortly after this FYDP back to 10; current bomber fleet of 160; and make some selected investments in a new bomber. An Afloat Forward Staging Base, a new ship, a variant of the Mobile Landing Platform, that will provide us capability to handle people and equipment in smaller contingency operations.

Next slide.

We know we won't fight alone.

If we have to fight, we will fight with partners. So we need strong alliances and are taking a number of steps -- not large dollars, but large, I think, in importance -- the NATO Alliance Ground Surveillance System, unmanned aerial vehicles that we will buy and operate with NATO; the National Guard State Partnership Program; and the COCOM [combatant command] Exercise and Engagement Program to help in training and improving our allies.

Some organizational changes -- two of those eight brigade combat terms -- teams will come out of Europe. I'm not sure yet exactly the -- which ones and where, but they will. Nevertheless, the Europeans will probably see more of us, not less because many of the units now stationed in Europe are deployed to Afghanistan. As we wind down the troops there, there will be more of those units back in Europe. Same with the Special Ops forces; as we wind down in Afghanistan, we will have more of those who will be able to conduct activities.

Next slide.

We'll invest in some high-priority initiatives. Doesn't mean we'll spend as much as we did last year, given this budget and affordability issues, but they're important nonetheless. Our Special Ops forces actually continue to go up and, with base and OCO together -- it's the only number on this slide that includes OCOs -- we'll spend $10.4 billion on Special Ops. Three point eight on unmanned aerial systems. We will reduce the Predator -- Reaper production, I should say -- from 48 to 24, but keep our commitment to 65 combat air patrols. The only reason we're making the reduction is we need to give time for the personnel and training system to catch up so that we can effectively operate these systems. We'll spend 3.4 billion [dollars] on cyber, including some new activities there aimed at what we -- what we know is an important area for us.

Next slide.

But we've had to reprioritize. We're back to the italics again.

So these are changes that -- built towards that 259 billion [dollars]. We will reduce funding, 2013 through '17, for the Joint Strike Fighter by $15.1 billion compared to last year's plan. Take out 179 aircraft.

The JSF [Joint Strike Fighter] is consistent with our strategy. We are fully supportive of this plane, but it's too concurrent. In our view, we need to give more time for testing to be completed.

We are fully supportive of this plane. But it's too concurrent. In our view, we need to give more time for testing to be completed. And I might add that in fiscal '13 while we'll make -- we've made cuts, we're still requesting 8.9 billion [dollars] for the Joint Strike Fighter.

We'll reduce shipbuilding by 13.1 billion [dollars] over that five years, going from 57 ships in last year's plan to 41, but try to do it in a way consistent with our strategy. Many of those cuts are support vessels. Half of them, for example, are the Joint High Speed Vessel.

We'll delay the SSBN-X by two years -- mainly affordability -- to give the system time to mature. The Army Ground Combat Vehicle I cut due to contract reasons. And the three items in the bottom are three of the six terminations that we've proposed. I'll mention just one.

We'll terminate the Global Hawk Block 30 program. Global Hawk Block 30 has grown substantially in cost. We had envisioned it to be a replacement for the U-2. It's now simply not cost-effective in that role. We'll terminate that program but keep up the Block 40 program and a number of the variants that are being used.

Next slide.

So I talked about forces and investment. Let me go to full support for the all-volunteer force. We're doing a number of things for full support. If I could get the next slide, I'll ask General Spencer if he'll brief this slide.

GEN. SPENCER: Apart from the war itself, the Department has no greater priority than providing the highest-quality support to wounded, ill and injured soldiers, sailors, airmen and Marines and their families. This budget funds our health care system as well as family support programs such as DOD schools, commissaries, counseling and childcare.

The Transition Assistance Program connects transitioning service members and families to resources such as employment preparation and job search workshops. The Yellow Ribbon Program assists National Guard and Reserve members and families and their -- with their unique reintegration needs both during and after deployments.

Next slide.

MR. HALE: While we've -- we'll fully support the all-volunteer force, we also felt we needed to review military compensation.

It's up 90 percent since 2001 -- that's the pay and benefits -- and makes up about a third of our budget. That review was guided by some principles. We need our military compensation system to be commensurate with the stress in military life -- can't just copy the civilian system. We've got to be sure that we have a system that allows us to attract and retain the people we need. And we're committed to ensuring that no one's pay is cut. We will slow growth in pay, but there'll be no pay freezes and no pay cuts.

We felt we had to make some changes here in order to avoid overly large cuts in force structure and modernization. And so we -- I'm going to recommend -- and I'll talk -- we will recommend -- and I'll talk in a moment about the specifics -- changes that save $30 billion over the FYDP, again in italics, building toward that 259 [billion dollars]. That's about 10 percent of the total savings, a little bit more, out of roughly one-third of the budget, so by design, disproportionately small. Next slide.

We will find money in this budget for a pay raise in fiscal '13 for the military that is consistent with the Employment Cost Index, so consistent with private sector increases. Same in '14. But beyond fiscal '14 we will recommend smaller pay raises to get some control over personnel costs while also giving our members and their families time to plan. The combination of those lower raises and the fact that the overall economy is slow, so all the raises are lower, saved us $16.5 billion over the FYDP.

We'll propose some changes in military health care. Overall, we are committed to high quality in the TRICARE health care program and all of our health care activities, but we will propose increases -- continued increases in TRICARE enrollment fees, and we'll use a tiered approach, as was proposed by the 2007 Task Force on the Future of Military Medical Care. Tiered approach will require somewhat higher fees for more senior retirees who are earning more retired pay, lower increases in fees for more junior retirees earning lower retired pay.

That's for the TRICARE Prime. That's the HMO version. For the standard/extra, which is the fee for service, we'll ask Congress to enact a new enrollment fee and higher deductibles.

We will ask for a new enrollment fee in the TRICARE for Life program -- that's for retirees 65 and over -- again using this tiered approach. And we'll continue to increase pharmacy co-pays, aimed, as we did last year, at trying to provide more incentives for people to order by mail order and also to use generic-brand prescriptions.

For military retirement, we are not proposing any changes, but we are asking Congress to set up a Military Retirement Modernization Commission that will have the time and staff to look at this very complicated area of military compensation and make recommendations.

If Congress approves -- and we would ask that that commission operate under the procedures similar to the BRAC Commission. If they recommend that Congress approves any changes, the administration strongly supports full grandfathering. That is, they would only apply to new recruits coming in after the changes were made.

May I ask General Spencer if he'd comment on these initiatives from a military standpoint?

GEN. SPENCER: Now, some might -- some may ask, how do military leaders feel about these proposals on military compensation? Well, I can tell you that these proposals reflect the counsel of the chairman, the Joint Chiefs and our senior enlisted leaders.

The proposals were made carefully, represent a balanced approach to the overall budget reduction and, as Mr. Hale stated, are only 10 percent of the total reductions. Most important, in accordance with the principles that guided this budget, they honor our commitment to America's all-volunteer force and their families. Next slide.

MR. HALE: And the last topic I want to address is full support for our deployed war fighters. This is the OCO, overseas contingency ops budget. Next slide.

We will ask for $88.5 billion for OCO in fiscal year '13, down roughly commensurate with the troop reductions going on in Afghanistan -- almost all of the funding for Afghanistan. Two point nine billion dollars for Iraq, part of that. About half a billion supports the Office of Security Cooperation in Iraq. The rest of it pays for reset of equipment coming out of Iraq.

I'll mention only one point here about OCO, so that we can get on and hear your questions. We are assuming Afghan force levels continue throughout fiscal '13 at a level of 68,000. That does not mean there won't be later changes in Afghan troop levels. It does mean that we don't want to bind the hands of the president with budget limits. We instead want to let him hear the recommendations of his field commanders, based on conditions on the ground, and also, of course, the secretary of defense, before he makes any decisions about levels of troops in fiscal year '13.

Next slide.

So I'm going to spare you these slides, the next -- this one and the next one -- that are "only a comptroller would love" kind of slides. What they do is go through the 259 [billion dollars]over the five years and the 45 billion [dollars] that we took out in 2013, both in terms of the categories I've been discussing, the more disciplined use of resources and so forth, and then by appropriation.

And the next slide -- that you'll be largely spared -- gives you 12 enacted levels by appropriation, and also what we are requesting for appropriation in fiscal year '13.

Next slide.

So I want to end where I started, which is to say this is a budget based on strategy and good management, and it is a package of proposals that we have put together that we think work as a whole. And we very much hope that the Congress will enact this package just as that -- as a package -- and not start making changes, because once we do, I think we'll lose some of the synergies that make it a strong package.

Last slide.

So we're trying to cut down our printing costs, which means that we didn't give you as much stuff as we usually do. But it is all on our website, and you'll see the Web address there. And you're more than welcome, if you're not sleeping well tonight -- (laughter) -- to get any and all of these documents and take a look.

And with that, we'll stop and I'll turn it over to Doug, who's going to handle the -- teeing up questions.

Q: OCO question. You're requesting nearly half as much money for the Afghan National Security Forces. Last year it was 11.2 billion [dollars].

MR. HALE: Right.

Q: You're requesting 5.7 billion [dollars]. This is the U.S.'s exit strategy for Afghanistan. Why are you cutting it by so much?

MR. HALE: Because we've built up -- I mean, in the past several years, we've invested heavily in equipment and we are beginning to meet their equipment needs. I think, in fact, we're well along there. We've still got more to do in training, but we think that the 5.7 [billion dollars], based on the best judgment of our commanders over there, is adequate funding to fully support roughly 352,000 in the Afghan National Security Forces.

So don't take that reduction as any sign of a reduction in our commitment. We are fully committed to them.

Q: Quick follow-up on that. Did that come from ISAF or did that come from this building?

MR. HALE: It was their recommendation. They're quite comfortable with it. I mean, we had some interaction with them. They're very comfortable with it.

Q: Could I just follow on that? Secretary Panetta said recently that there was a lot of consideration to reducing, not building up, the Afghan security forces to the target of 350,000. Is that taking -- is this number taking that belief into account?

MR. HALE: No. In this budget we stay at 352,000. There are talks about long-run structure, but that would go beyond, I think, fiscal '13.

Q: (Off mic) - could I ask a question about the TRICARE fees? The ones for the most well-paid retirees, they're quite steep. There's a quadrupling over five years.

MR. HALE: Close, yeah.

Q: Yeah. And I noticed -- so it's -- most of the budget cuts for this next year, it's about 6 billion [dollars] if you -- right? So it looks like most of that money is coming from health costs, or health care.

MR. HALE: No, it won't be that much.

I don't have that number in my head, but there are a lot of things going on. There's a fair number of cuts in procurement and in overall military personnel, other than health care.

But let me go back to your point on health care. For the retirees in that upper tier, running $45,000 or more in retired pay -- it will all be officers -- the fees go from $527 --


MR. HALE: -- or $20 a year for TRICARE Prime to, after a four-year phase-in, $1,950. So --

Q: (Off mic.)

MR. HALE: Yeah, your number's about right.


MR. HALE: It roughly quadruples.

It would still be quite generous compared to typical private sector plans -- for example, the Aetna plan that we benchmark to or the Blue Cross plan in Federal Employees Health Benefit -- for family coverage, more like $4(,000) to $5,000 a year.

So we still think that it's generous, as it should be, but that we also feel we need to move in this direction to hold down our costs -- a lot less for the lower tiers. For example, those earning less than 22,000 [dollars], the fee goes from 520 [dollars] to 850 [dollars], a much smaller increase.


Q: Yes. I wanted to follow that up. Keeping faith with military folks -- you're keeping pay raises equal to private sector raises for the next two years. The prospect of troops still being fighting somewhere, and you actually capping their pay lower than the federal civilian -- I mean federal -- I mean the private sector pay -- how do you square that with keeping faith if you -- unless you think that the current pay levels are too generous?

MR. HALE: Well, we're looking at personnel -- control of personnel costs in the context of a congressional requirement that we take 259 billion [dollars] out of it. As I said, I think, had there not been that requirement, we probably wouldn't be making this recommendation.

In that context, if we choose to entirely exempt personnel, military pay and benefits, we're going to have to make much larger cuts in force structure, and we don't want to do that. We think it's not consistent with the strategy.

So this is a plan. These are out year plans. There's an old saying in the budget business: The out years never come, by which it means we'll keep reviewing it.

If it turns out that we don't believe we can attract and retain the people we need with those lower raises, we'll find a way to not do them in the out-years. At the moment, we think we can and therefore it's a reasonable proposal.

You want to add to that?

GEN. SPENCER: No, I agree with Mr. Hale. I think the big thing is there's no pay cuts and there's no pay freezes. So we're really just slowing the growth in the out years.

MR. WILSON: Elaine.

Q: You mentioned in the -- I should say, the Defense Department mentioned in the defense strategic guidance a few weeks ago that there would be a reduction in reliance on nuclear weapons and more of a movement to reliance on conventional weapons. Can you point to anything in the FY '13 budget request that actually implements that or moves in that direction?

MR. HALE: We fully support all three legs of the triad in this -- in this budget and making investments in all of them. The one major area where there are some reductions is the SSBN-X program, the follow-on for ballistic missile submarine. It slipped two years. And that one is largely an affordability. We'd like to let the program mature as well, but it's largely affordability. So I believe that we are continuing full support for the nuclear triad in this budget.

Q: (Off mic) -- there was -- there's not going to be a missile defense briefing provided for us today, so I'm curious if you can outline for us what was the decision behind the SBX being shelved. And can you outline --

MR. HALE: The which, I'm sorry?

Q: The Sea-Based X-Band Radar -- shelved?


Q: And also, can you outline for us -- (laughter) -- I guess that says it all.

MR. HALE: Yeah, I think -- well, I think maybe you already know the answer.

Q: And can you outline for us any --

MR. HALE: Certain services are coming later.

Q: Can you outline for us any other changes coming in missile defense and how much of the share of cuts the agency took on?

MR. HALE: We're spending $9.7 billion on missile defense. I don't have the share in my head.

Let me tell you the broad strategy, which was we will protect our investment in homeland missile defense and we will protect the European Phased Adaptive Approach. But we are cutting the TPY-2 radars; we're cutting back on THAAD batteries; we're cutting back on some of the missile buys in anticipation that other areas -- we will -- we'll slow the growth in missile defenses in those areas.

But the homeland defense and EPAA are protected.

Q: OK, and the SBX -- if you could articulate -- (inaudible) --

MR. HALE: I can't help you. (Laughter.)

FRANK KENDALL (acting undersecretary of defense for acquisition, technology and logistics): The services are going to be -- (inaudible) --

MR. HALE: You want to -- you want to say something about that, Frank?

MR. KENDALL: Yeah, I can say it.

MR. HALE: This is Frank Kendall, I think you know, our acting under secretary for AT&L.

MR. KENDALL: The SBX is a large X-band research development radar primarily. It's very expensive to keep and operate. And we thought we could get adequate for the testing that we're doing without that radar. So that's essentially the reason. It's largely an affordability issue where we have other centers that can -- that can fill in the gap.

Q: Thank you.

MR. HALE: Thank you.

MR. WILSON: Larry.

Q: Yes, if we could go back to the OCO thing, there was one number in there that sort of leaps out. With all the cuts, the number for Army end strength, which is -- the end strength, which is that 1.9 [billion dollars]for 2011 and 2012 jumps to 4.9 [billion dollars]over fiscal year 2013 at a time when we've been told to expect fewer troops in Afghanistan. Why is that number going up? Or is this just a shell game a play with money?

MR. HALE: Well, it's not a shell game. But first, I'm impressed that you're reading these tables so carefully. My staff would appreciate it. We've made a decision in this budget to fund in OCO the nonenduring ground strength -- end strength for ground forces. And by that, I mean all of the strength in the Army above the 490,000 that we're heading to by '17 and all of the strength from the Marine Corps above 182,100 that we're heading for.

Why are we doing that? We're doing it because this year we've made a decision to eliminate those forces. They are -- therefore they're primarily because of the Afghan war and that we thought it was reasonable -- and OMB agreed -- to fund them in OCO. And that's why the numbers are going up. It's about a total of 6 billion [dollars] between the Army and the Marine Corps in OCO for end strength in fiscal '13.

Q: If I could ask a follow-up to that, when the secretary and president were in this room unveiling the strategy for this budget, they described a more agile, more flexible force.

When you think of agile and flexible, you think of the Navy and the Air Force. But the Navy and Air Force budgets are going down, while the U.S. Army budget is going up. And if you look at this, it's going up by $3 billion more than even the table would suggest. Is that what some people would call institutional inertia? (Laughter.)

MR. HALE: So I like all your questions except the end.

No, I mean, the reason the Army's going up from '12 to '13 is a heavy investment in its O&M budget. It's up about 6 billion [dollars]. The Army will be able to say more, but there are two broad reasons for that. First, '13 or '12 -- I'm sorry -- was artificially depressed because the Congress put some Army O&M into OCO, and so we've got to get that back in '13.

And second, we need to increase Army O&M to ensure their readiness. And in some cases, because they're moving forces out of Iraq and back to the States, they've got to move the budgets from OCO back into the base budget and the Army can give you more details. That's the main reason that you see what's happening in '12 to '13.

If you look -- and I'm not sure you have them yet, but when you do -- at the '12 to '17 numbers -- or '13 to '17 numbers, you'll see a pattern that's probably more consistent with what you'd expect. Army budget shares go down a little bit, reflecting the fact that there's heavier reductions in the ground forces, less of a cut or a slight increase -- I can't remember the exact numbers in the Navy and the Air Force -- I think, more consistent with the strategy.

GEN. SPENCER: If I could add to that, I mean, because -- I think -- that was -- I'm really impressed; that was a really good question. The -- if you look at -- though, because we get that a lot around here, you know, about service shares and who should get what. And frankly, I mean, to be honest, we never looked at that when we developed this budget.

But if you go back to 2000 and go -- and trace that to 2017, through the FYDP, you'll find that the shares amongst the services grew from 2000 for the Army primarily, the buildup for Iraq and Afghanistan, now starting to trail down.

So it's sort of ironic that pre-9/11 budget shares are about the same as they are in 2017.


Q: Yeah. Is anyone in the department drawing up a contingency plan in the case of a sequester scenario? And if not, why not? Isn't that a pretty clear due-diligence task for you and your colleagues?

MR. HALE: The answer is no. I mean, we are not planning. And I know nobody believes this, but it's true. I think I'd know it if we were. (Laughter.) And the reason, I think, was put well in the overall federal budget today. This is not a good policy -- that is, sequester. It's not -- it was intended as a prod to -- first, the joint select committee -- which didn't work -- to get it to make deficit reductions.

Now what we need is the Congress as a whole to enact a balanced package of deficit reductions that the president can sign and that will replace sequester, and do it in a -- in a sensible way, rather than this kind of meat-axe approach that's represented there. So no, we are not planning.

Q: Is there a fear that if you talk -- (inaudible) --

MR. HALE: (Inaudible) --I’ll raise my right hand, we are not planning.

Q: Is there a fear that if you talk about it openly and publicly release some kind of contingency plan, that it makes it more likely?

MR. HALE: I actually don't think so. We did a letter last November -- it's a little bit out of date now, because this budget has superseded it -- but listed some of the -- what would happen, and it won't be pretty.

I mean, we'd have to take a -- we know the numbers. They're a little -- about a $54 billion additional cut in fiscal '13. And it would have to be done at equal-percentage terms at the level -- at least at the account level -- Army O&M, Navy SCN -- maybe at a lower level; we're not sure. That's a call that OMB hasn't made.

So it would be a sort of meat-axe approach, and it won't be nice. I mean, we would end up disrupting a lot of programs. We would probably be forced into a RIF [reduction in force] situation with regard to our civilians. We would certainly adversely affect readiness.

So I think the more we say, the less people would like it. We're hopeful that the Congress will -- as I say, they need to make a -- enact a package of changes to replace sequester.

Q: Just going --

Q: I'm sorry. Wait -- (inaudible).

Q: Oh, thank you. Mr. Hale, can you address some of the criticism about efficiencies being such a big percentage of the savings, $60 billion?

MR. HALE: I'm having trouble hearing you. Hearing's not my strong suit.

Q: Efficiencies, the efficiencies --

MR. HALE: Yeah.

Q: -- that you're budgeting $60 billion in savings, and some people are saying that's crazy, that's too much efficiency and that they're not realistic. Can you -- can you address -- (inaudible)?

MR. HALE: I mean, the best answer -- first off, we use the word "more disciplined use of resources." I like that better. At least from an economist's standpoint, these aren't true efficiencies in most cases -- that is, exactly the same output for less money. They are streamlining activities. They are cutting back on lower-priority programs.

And I think the best I can tell you is what I tried to say in my oral remarks. These are plans and commitments at this point for fiscal year '13 or '13 through '17. We're going to have to flesh them out, but I think that we did that with regard to the more than 150 that we recommended last year. We have done that now. I think we have specific plans -- as I said, people assigned to doing them, targets, a governance structure in each service -- and I invite you to ask the services about that as you hear from them, and the governance structure in OSD -- I co-lead reviews with the deputy chief management officer.

So I think we are going to get the majority of those efficiencies, and we'll do the same thing with these. It just -- they've got to give us a little time. We can't -- we can't have it all done with this budget.

Q: On pay raises, the pay raise will be 1.7 percent for fiscal year 2013 and 2014. After that, do you have any idea what that reduced rate would be? And what measure will you use to guide that?

MR. HALE: I can tell you what we're planning for right now. And I'd -- you know, I'd remind you of that statement that the out years never come, that we'll revisit this in lighter weather -- but we're planning right for a 0.5 percent pay raise in fiscal '15, 1 percent in '16 and 1 1/2 percent in fiscal '17.

So as I said, we'll revisit those in light of how the economy is doing, how we're doing at recruiting and retention.

Q: I'm sorry. So the first year is 0.05?

MR. HALE: Correct.

Q: I'm sorry --

MR. HALE: Fiscal '15 is 0.05 -- 0.5 --

Q: -- 2015. OK.

MR. HALE: -- one-point-oh percent in '16, and 1.5 percent in '17.

Q: OK. Got it. Thanks.

Q: Could you walk us through specifically how you're going to go about reducing the ground forces? That is, how much are you depending on retirements? And will any troops be forced to leave the Army and Marine Corps to get to those figures?

MR. HALE: I'm going to give you a general answer and then ask if you'd ask the Army for more detail. We will try to -- they will tighten up re-enlistment standards. They will certainly accept voluntary departures, where those occur. They'll tighten up re- enlistment standards; some cases, the standards associated with our officers can stay.

I think I'm going to let the Army say -- I don't think we can stand here and say there won't be any involuntary separation. We're just going to have to see how the economy recovers. We have very high retention right now, with the economy still fairly weak. If that changes, it would be easier; if that doesn't, it will be harder.

But I'd like you to address that question to the Army, and I think they can give you more detail.

Q: But as you're putting these numbers together, have you accounted for an estimate in terms of how much you think will come out of retirement and what -- how high involuntary reduction --

MR. HALE: You know, I think they have, and I don't have those numbers in my head. We've also -- we are looking at various incentives that we could provide to people and help for them as they leave the service. So we'll try to do this in as humane a way as we can.

MR. WILSON: Julian.

Q: Mr. Hale, if you could talk a little bit about how you came to the idea of a nine-year OCO plan and this sort of pool of money, rather than looking at it as a year-by-year for the -- why that makes good budgeting sense.

And General, you guys talked earlier about the Predator buys, slowing them down. If you could talk a little bit more, are those -- Reaper buys, I'm sorry. Are they going to be purchased in future years? Is this a slowing down or is this just a --

MR. HALE: Let me take the OCO question. Do you want to do the Reaper?


MR. HALE: On OCO, we do budget one year at a time on OCO in detail, and so the only detailed proposal we have is the 88.5 billion [dollars] in fiscal '13. The administration has proposed a cap on total OCO spending in fiscal '13 through fiscal '21, and the rationale is that they want to limit the ability of all of us, including the Congress, to move money from base into OCO. That cap is 450 billion [dollars] total for fiscal year '13 through '21. And under our current rough plans for Afghanistan, we think that's fine and so we're OK with it.

I don't know if that answers your question?

Q: Well, it sounds like it comes as more of a White House --

(Cross talk.)

Q: I mean, doesn't it (inaudible) with your idea of -- is there a tension between that idea and your idea of putting some of the Army costs and Marine costs into the OCO?

MR. HALE: No, I don't think so. I mean, we figured that out and I think -- what we most need is the ability to make a proposal each year that's consistent with the troops we expect to have there and the tempo of activity that we expect. And we think the 450 billion [dollars] gives s that latitude, and so I think I'm comfortable with it and I think Secretary Panetta is comfortable with it.

GEN. SPENCER: And on the -- on the UAVs you mentioned, the Air Force -- and I'll let them answer this in more detail, but they were on a path to buy 48 airplanes, which, frankly, was -- maxed out the production line. So when they did a review -- keep in mind they have a target of achieving 65 combat air patrols.

When they did a review, they found it wasn't the platforms themselves that was the limiting factor, but more the undertrained crews. So they -- when they did their review, they found that by lowering the amount of Reapers they buy down to 24, increasing the number of trained crews, that they could reach their surge -- their -- a surge capability of 65 crews in '14, non-surge by '16.

MR. WILSON: (Inaudible) , then Tony.

Q: How much are you expecting from each of the rounds of base closings? And do you remember off hand how the sums compare with the last BRACs? And what are you going to do if you don't get the BRAC from Congress?

MR. HALE: Three questions, is that fair? We have not budgeted either savings or cost for BRAC until we get authority to engage in it and until -- frankly, we also need to know some more detail that the services are working on -- exactly where the reductions in force structure will come, particularly with regard to the Army and the Marine Corps.

In terms of last plan, it was expensive. It was about $35 billion of up-front costs in the 2005 round. We'll save 5 billion [dollars] a year or so, so we will get a payback. And of course, as I like to remind people, these savings occur in perpetuity unless you change your mind and reopen the base. So it's still a good deal, even though, frankly, the costs were significantly higher.

And remind me of your third question? Oh, what are we going to do if we don't get them? Well, since we haven't budgeted for them -- we're OK.


Q: Yeah, a couple questions. One for General Spencer on the Global Hawk and one for you. A lot of defense companies are shaking their head today looking at 40 percent of your savings from '13 are going to be falling under the procurement accounts. That's about 35 [percent] to 36 percent of the 259 [billion dollars]. What happened to the balanced approach of not falling disproportionately on procurement, which is about 21 percent of the overall budget?

MR. HALE: Well, first off, as General Spencer said, we made these decisions on a -- on a -- by weapons-system basis in the case of procurement.

We didn't step back and say we want a certain proportion out of procurement or a certain proportion out of any other category.

I think it's common to see that procurement, in the early parts of a drawdown, is just -- is disproportionately cut, because frankly, it takes a while before we can make decisions about force structure cuts, get people out and realize the savings from them. So if you look at our plan, it's evener over the five years -- that is, procurement is more proportional -- and less so in fiscal '13. So that's --

Q: Right. On the Global Hawk, there's a lot of hemming and hawing about terminating the program, the Block 30. You've got 18 of these things already that are flying missions. What operational or budget sense does it make to retire, mothball, kick down the -- get rid of what you already have? It seems like a colossal waste of money. Can you justify this for the taxpayer, please?

GEN. SPENCER: Well, the Global Hawk Block 30 initially held a lot of promise. You know, it was going to replace the U-2, and we thought we could do so at a cheaper price. As the Global Hawk Block 30 matured, that just was no longer the case and it became too expensive.

As you're probably aware that the Global Hawk and the U-2 have basically two sensors, one for SIGINT and one for imagery. The two SIGINT sensors are roughly equal or roughly equivalent, but the imagery sensor on the U-2 is far superior to the one on -- to the Global Hawk Block 30, and it would be cost-prohibitive to try to -- to try to get the Global Hawk to be as capable as U-2.

So based on the cost of the Block 30 and the cost it would take us to maintain the U-2, it was essentially a business case decision and an operational decision.

Q: But to retire the ones you already have rather than keep them flying? That doesn't seem to make any sense.

GEN. SPENCER: Yeah, I'll have to refer the specifics of what's going to happen to the Global Hawk Block 30s -- you have the plan correct -- to the Air Force, when they come up. But that is the plan.

MR. WILSON: Kevin.

Q: Back on the OCO. This might be an expansion of Larry's --

MR. HALE: This is an OCO conference. (Chuckles.)

Q: -- earlier. Right. Well, but I'm just trying to match the numbers. So this slide shows a big drop from '13 to '14. So 613 [billion dollars]down --

MR. HALE: Right.

Q: -- to like 570 [billion dollars]range. But the next page, the base dollars, shows it going up. So if it's not coming out of base, does that mean that there's a huge drop in OCO expected?

MR. HALE: In the out-years beyond fiscal '13, it's a placeholder in the budget. It's $44.2 billion for OCO. It is just that. It's a placeholder. We will, a year from now, make a specific proposal for fiscal '14, and it may well be different than that. But since it is the budget number, we used it. And so you're getting a very sharp drop from the 88.5 [billion dollars]to this placeholder of 44.2 [billion dollars].

Q: But you've -- but half of this of -- so half of this year's OCO for next year. Is that a realistic assumption? I mean --

MR. HALE: I'll use the word again: placeholder. No, I think it's not necessarily realistic. We'll have to see about troops on the ground before we make that decision, but we are not constrained. I think there's full understanding we're not constrained to $44.2 billion. We're constrained to 450 [billion dollars]if Congress agrees to that cap over the '13 through '21 period. But we are allowed to come up with the money we need to support our troops in each year, and we will.

MR. WILSON: We're going to have time for just a few more questions. Jim.

Q: You know, Mr. Hale, you've listed about 2.8 billion [dollars] in investments that DOD says have to do with rebalancing towards Asia- Pacific and the Middle East. Can you give us a figure on what that will go to over the five-year plan? And what other investments fit into that category?

MR. HALE: You know, I think I can't because it's kind of squishy, I'll be honest.

I mean, we're picking investments that we think illustrate a commitment. But, in contrast to some other figures in here, there's not a -- an easy I-did-this-only-for-the-Pacific -- as you can imagine -- and I didn't do it for anywhere else. Almost everything we're doing in there would also provide benefits elsewhere.

So I'd be -- I'd be hesitant to be too precise. I think I'd be more anxious to point out that we are kind of shifting our resources and maybe our thinking more toward the Pacific and the Middle East, while still maintaining a global involvement. I mean, we're not by any means -- our best allies are in NATO, and we will definitely keep them in mind. So I don't have a five-year number.

Q: One other housekeeping matter. You've used the figure of 9.7 billion [dollars] for missile defense. What's the comparable figure from last year? And who do you expect to make up on some of those reduced purchases of missiles, THAAD systems, radar?

MR. HALE: I knew that. I think -- I want to say, last year -- that's total missile defense, MDA [Missile Defense Agency] and Patriot and others -- is maybe 10.8 [billion dollars]or 11 [billion dollars]. (inaudible) do you remember?

MR. KENDALL: 10.4 [billion dollars]-- (inaudible).

MR. HALE: What was that?

MR. KENDALL : 10.4 [billion dollars].

MR. KENDALL: 10.4 [billion dollars].

MR. HALE: 10.4 [billion dollars], OK.

Q: So it's 9.7 [billion dollars], down from 10.4 billion [dollars] --

MR. HALE: Yeah, and that was the '13 level of a year ago? Or that was --

MR. KENDALL : That was '12.

MR. HALE: That was '12, I'm sorry. OK, so '12 is 10.4 [billion dollars], down to 9.7 [billion dollars], total missile defense, MDA and others.

We're looking at a variety of other countries other than the homeland in the expenditures on the European phased adaptive array, as there could be other Middle Eastern countries that we hope will either step up themselves or we will have to slow down some of our actions to improve their missile defense system.

Q: How about Japan, South Korea?

MR. HALE: I think it could be widespread. I don't think that we've made a specific choice of where we're going to do this.

Q: Mr. Hale, you've talked about more disciplined use of defense dollars, but you're doing a lot of procurement delays, stretching programs out, which inevitably add to the unit costs.

How is that a more disciplined use of dollars?

MR. HALE: I mean, that's a fair point. If we had our way, we probably wouldn't have done it. But I'd start from the initial premise: Congress passed the Budget Control Act; we have to be consistent with Title I of that act. So we had to make these changes. We tried to do them in a way that minimized the adverse effects. But I think your point's well taken, and some of the stretch-outs will result in some higher unit costs.


Q: Thank you. The budget contains 400 million [dollars] for the Medium Extended Air Defense System. Do you intend to see that proof of principle phased through or not? There were some mixed messages recently -- (inaudible) --

MR. HALE: We're working on it now, on how to handle MEADS. It's -- we have asked for money in fiscal '13, which will be the last year of the program. We've also got some legal limitations on fiscal '12. I don't know that we've fully decided how to incorporate all those.

Frank, do you want to add to this?

MR. KENDALL : MEADS is a program that the U.S. decided not to procure a year ago, and we agreed to a two-year termination phase, if you will, proof-of-concept phase, which we would fund in '12 and '13.

We got some restrictive language in the NDAA in '12, which only allows us to spend 25 percent of the money before we submit a plan to the Congress. So we either terminate at the end of '12 or restructure it -- conclude the program at the end of '12. So our hands are a bit tied in terms of how we can execute '12. In keeping faith with our allies, we did request the money in '13, but the restriction that we have is going to make it very, very hard for us to execute that.

Q: Thanks.

MR. WILSON: Last question. Yeah.

Q: Hi, I believe that only $26 million was requested for the Okinawa-to-Guam realignment plan. Is that number accurate? And also, if you reach a new agreement with the Japanese government about how to carry out the realignment, will you be requesting supplemental funding for that for FY13?

MR. HALE: I think we have 51 million [dollars] in MILCON, if I remember right, as well as some socioeconomic funds in fiscal '13.

As you know, we've announced some discussions and results of discussions with the Japanese. I won't go through this; you're probably familiar with them. There are ongoing discussions. We don't yet have a specific plan. We need to both work with the Japanese and also consult with the Congress.

I think the answer is that we've come up with a plan, we will need to look again at our financial needs in fiscal '13, and, yes, we may have to adjust them.

Q: Thank you very much.


GEN. SPENCER: Thank you.


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