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Testimony before the House Budget Committee on the FY 2002 Defense Budget
As Delivered by Deputy Secretary of Defense Paul Wolfowitz and Comptroller Dov Zakheim, Cannon House Office Building, Wednesday, July 11, 2001

REP. NUSSLE: Good morning. The Budget Committee will come to order. Today we are continuing a series of hearings reviewing the president's budget. Today there's a hearing on the Pentagon budget amendment, reviewing the administration's additional funding request for fiscal year 2002. Today we are honored with the presence of Paul Wolfowitz, deputy secretary of Defense, accompanied by Undersecretary of Defense Zakheim -- am I pronouncing that correctly?

MR. ZAKHEIM: Zakheim.

REP. NUSSLE: Zakheim, okay -- Zakheim, Zakheim -- I apologize. Thank you very much, both of you, for coming today.

Today's hearing will help us understand how a very vital component of the administration’s agenda, and a matter that is the government's first constitutional duty and responsibility, fits into the budget. After all, defense is half of all discretionary spending. At this point it is appropriate to review what the budget resolution provided for defense, and to place it in context, this latest request from the Department of Defense.

The budget resolution recognized that the United States military has suffered from nearly a decade of overdeployments, confused priorities and underfunding that under the previous administration the increases were needed to correct some very urgent problems. The resolution provided basically three things with regard to defense. First, it accommodated a $6.5 billion supplemental appropriation for fiscal year 2002, nearly all of which is to address the immediate defense readiness issues. The supplemental recently passed the House and of course is now currently in consideration in the Senate.

Secondly, it furnished a $14.5 billion defense increase for fiscal year 2002, consistent with the president's request. As described in the administration's initial budget submission, A Blueprint for New Beginnings, quote, "This funding increase will allow DOD to address its most pressing priorities. These include relieving some of the housing problems our military troops and their families are currently facing, addressing the need for increases military pay, and undertaking a thorough review of research and development programs to determine the most promising investments for the future," unquote.

Finally, the third provision in the budget accommodated the long- term modernization, funding the defense of the future. This would be based on the Pentagon strategic review, and again a Blueprint for a New Beginning said, quote, "The nation's defense strategy should drive decisions on defense resources, not the other way around." Let me repeat that, that "the nation's defense strategy should drive decisions on defense resources, not the other way around." I believe the president in his speech to the Congress suggested that the funding should follow the strategy, and not the other way around.

The budget resolution provided a reserve fund to accommodate these needs, and in the House the amount used for defense from that fund was to be determined by the chairman of this committee.

Having supported two of the Pentagon's funding requests, members of the Budget Committee might have expected the third to consist of start-up financing for the long-range defense modernization that was set as a goal and promised. But 75 percent of the administration's latest budget request for 2002, this latest amendment of $18.4 billion defense needs, is not for modernization but for current operations. A substantial part of the amendment funds items such as infrastructure, base operation support, depot maintenance -- things which ought to have been part of the original request, since the support ongoing operations rather than transformation strategy. And the administration's defense review, on which the modernization funding plan was to be based, is not complete, and will not be complete until the summer at the earliest, most likely this fall.

Even in isolation the $18.4 billion is a very significant sum. It is larger than the entire agricultural appropriations bill, as an example, and rightfully so -- more than twice of Canada's entire annual defense budget -- just this amendment itself. The need to review the request is clear. The budget resolution for 2002 created the reserve funds. Accordingly, the Budget Committee chairman I believe has the fiduciary responsibility to provide oversight in this area. I cannot simply open up reserve funds and disperse money without a rigorous justification and an orderly oversight process. Yet the Pentagon's request for new funds has come even before the supplemental is finished, not to mention its own strategic review.

Finally, there is a matter of future funding. Both the administration and Congress agree that the days of Africa financing are over. But fully understanding the needs of our nation's service men and women, and in complete agreement on the requirement of a transformation strategy, we must also have the assurance that our hard-won fiscal discipline will be maintained into the future in the context of the long-range budget plan. And today we look forward to that assurance from our witnesses.

Let me say finally a couple of things about what I view as some fairly harsh criticism on my part. Number one, I did it because I was encouraged by the president's goal, determining that the strategy would come first -- the review of the Pentagon and the review of our national defense needs would come first before additional funds would be requested, or before an additional budget request would be made, number one. Number two, at the same time, I knew it was going to be a very difficult -- I was about to say almost impossible -- task to do it within the timeframe set. The president suggested during a speech to the Congress – he looked down, as I recall, at the secretary of Defense, and suggested he needed to get that done within six months, which at that time counted to about today. At the time I think everyone thought, while it was a worthy goal, a very difficult one.

The witnesses that we have here today have been doing that work. One as I understand was not confirmed until March. The other was not confirmed until May. Try and do a six-month review when you're not even on the job. I am not suggesting that the task and the goal was one that was able to be completed within the timeframe allotted, given the circumstances that they found at the Pentagon, let alone given the timeframe after confirmation. But we need to know what the new process is going to be. If in fact a new deadline has been set, if in fact a new timetable is to be adhered to, we need to know that that is. There is a need, as I said in my opening statement, not only to put defense as a priority, but as our number one priority. It's our first constitutional responsibility. We don't have Medicare, we don't have Social Security, we don't have tax cuts, we don't have anything, if we can't defend our nation and we can't preserve freedom into the future. And so this is probably one of the most important topics that we can discuss.

I also understand why the secretary of Defense would not be here personally today to discuss this, having watched the hearing just yesterday over in the Senate where discussing the '02 budget request, it digressed into an almost half-day hearing on Vieques and the shelling of Puerto Rico. You can see that the macro decisions of our national defense and national security are mired in special topics, special projects, special district initiatives, state initiatives for particular senators and representatives.

That having been said, Congress has a responsibility in this as well. I am not suggesting that our national review, strategic review, is to be laid only at the feet of our administration. We in Congress have the first and foremost responsibility under Article 1 to make these decisions. And while the secretary is not prepared to come here today to either propose or defend what that new strategy would be, and I can understand that, I would suggest to you publicly for the record today that before the '03 request is made, before next year's budget is going to be enacted, the secretary needs to come forward and needs to give us an update on what that strategic review has accomplished, and how that has been incorporated into the administration's and the Department of Defense's '03 request.

That having been said, we have a lot of work to do today, a lot of questions I know from members discussing hopefully not Vieques, but hopefully talking about the macro issues of our national defense. As I said, it's half our budget -- it deserves the oversight and attention of this committee, and that's the reason for the hearing today.

At this time I would like to recognize friend and colleague John Spratt for any opening remarks he would make.

REP. JOHN SPRATT (R-SC): Thank you, Mr. Chairman. Thank you for your comments. And I will readily stipulate, if you wish, that we won't discuss Vieques today. I don't think we need to get into the minutiae of the defense budget, or even the major programs. We need to be talking mainly about the top line and how we fit it into the overall budget.

What the Defense Department has done is submit a request, first of all a placeholder request, for essentially the Clinton Cohen budget -- it's only about $100 million more than what Clinton and Cohen had provided, $310 billion for DOD -- another $13 billion for the Department of Energy for the nuclear program. Now the Pentagon has come forward with another request, which we anticipated at some point -- we didn't know how much it would be -- but it turns out it's $18.4 billion. That means if it is provided, about a 7 percent real increase, about 11 percent nominal increase, which is a substantial increase in the budget for next year.

Part of the problem I think we have got and I think you have got is that $18.4 billion is not really what you were seeking. You were seeking more and you expect to get more in the future. Every time, Mr. Wolfowitz, that we have met, I have presented you with a chart, and each time it's been a different chart, because the numbers won't sit still. But this is the predicament that we find ourselves in. The budget for this year is what's done thus far as shown in the first upper half of this chart that I have before you, and I have given you a copy of it so that you can see it. I can barely see what we have got on this chart from where I sit.

Basically, if you look across the bottom line, the so-called contingency reserve, the money left over after you account for all the puts and takes in the budget thus far -- the tax cut, backing out Social Security surplus, backing out the Medicare surplus -- this year -- next year, 2002, there will be a $25 billion bottom line according to the current estimates of revenues. If there is any deterioration in the bottom line along the lines of what Mr. Lindsey indicated just a couple of weeks ago, then that number too will evaporate. And the only reason it's there, as we all know, is that here is an artificial timing shift -- the corporate tax payment ordinarily due on September 15th will instead, under the budget resolution in the tax act, be due on October the 1st. Therefore it shifted into 2002.

But once you get beyond that gimmick, that tax shift, the bottom line is negative in '03, '04 -- it's a billion dollars in '05, $11 billion in '06, 21 in '07 -- you have got to get all the way out to 2008 before that bottom line, that so-called contingency reserve, is adequate to absorb the request that you have this year adjusted for inflation. Now, we are taking your calculation of outlays. Frankly, we suspect that CBO's will be a bit higher, but we are taking your numbers for outlays. And in every year, as you can see in the next subsection, subsequent action, in every year from '03 through '07 there is a deficit, which means that in those years, unless we make major adjustments in the outyear budget, you are spending Medicare trust fund money. And we have all agreed -- in the House I think, Democrats and Republicans -- that we are not going to do that. The administration suggested that this would be permissible for various reasons, and the chairman after hearing them say this repeatedly under our cross-examination took our position and said, No, we are not going to spend the Medicare trust fund money. If not, to fit your $18.4 billion into this budget, we have got to do some significant shimming, as we say in South Carolina.

Now, that's just for the $18.4 billion. When I first presented this chart to Mr. Rumsfeld over one of our breakfast meetings, it had a bigger number for defense, and we assumed basically that you would -- and this should come in with requests for $20 billion, and that each year that would staircase upwards by $5 billion until it reached $50 billion, and then it would increase with the rate of inflation. When I presented that to Mr. Rumsfeld, he shook his head vigorously and said, No, no, no, you are way too low. So I infer from that and other sort of body language and inferential indications I've gotten from you that the 18.4 (billion dollars) is for starters. You are really expecting something about twice that large.

Indeed, when Mr. Rumsfeld was asked how much more would you be seeking in '03 if your request for '02 is the 18.4 addition you are seeking now, how much more will you ask for in '03, he put the number at around $347 billion. You're at 329 here -- 347 would mean you would need another $18 billion. I don't know these numbers are correct where it is coming from. And if the top line deteriorates along the lines Dr. Lindsey indicated recently, we've got a problem, and that's why we are here today, because we are supposed to fit all of these big macro numbers into a budget that has a positive bottom line that stays out of the Medicare trust fund, stays out of the Social Security surplus trust funds as well.

There's an important point I think too for you. If you are not going to get, or unlikely to get, because of this budget scenario, the increment that you expect in '03, if the $18 billion you are getting now plus inflation is about all you can reasonably expect in the next few years, I think you probably need to rethink your budget request for '02, because there are major efforts started -- spending $3 billion more on ballistic missile defense, a near 6 percent increase -- that may not be sustainable in the outyears if that $18 billion addition on top of the $18 billion you are seeking this year can't be provided. It has implications for you as well as for us.

So this is a serious hearing, and we come here in good faith. I am a pro-defense Democrat. I want to see your $18 billion funded this year. But I have to tell you it's going to be hard to fit in this budget, and I don't know where the addition is coming from in the future.

REP. NUSSLE: I ask unanimous consent that all members be allowed to place in the record an opening statement at this point. Without objection, so ordered.

At this point we welcome to the committee Deputy Secretary of Defense Paul Wolfowitz, and we look forward to your testimony. Your written testimony will be in the record at this point, and you may proceed as you would like, summarizing your testimony. Again, as I said in my opening remarks, you have been asked to do a huge task, maybe on that is close to an impossible task. But I think we have the right person for the job. I've had a chance to review some of your background --had a chance to visit with you yesterday. This is your third tour of duty in a similar position. And so you have been there, done that. I think you have got two T-shirts now -- you are working on your third, as they say. And we welcome you before the committee to give us an update on the president's request for the defense budget for 2002.

MR. WOLFOWITZ: Thank you, Mr. Chairman, Congressman Spratt, members of this committee. I appreciate this opportunity to come here to discuss the president's '02 amended budget request. I have with me the undersecretary of Defense for comptroller, Mr. Dov Zakheim. And it's very nice to have some capable help, although I must say we wish we'd gotten him confirmed earlier than May.

I will submit my testimony for the record and just try to summarize it here briefly. But I do want to make a number of points, because I think it's important. You've raised some very important questions, Mr. Chairman. So have you, Mr. Spratt.

The U.S. armed forces today are the world's best-trained, best-equipped and most powerful in the world. However, we're not in such great shape. We spent much of the 1990s living off the investments of the 1980s. We allowed our military capabilities to be slowly degraded as we overused a shrinking and underfunded force.

And if I could just show you this chart, Mr. Chairman, which shows that over the decade of the 1990s, while the force came down in size by 30 percent, the average number of operations we sent them on on a monthly or yearly basis went up by 105 percent. Some of those operations have names that we all know, like Haiti and Kosovo and Bosnia and Iraq. Some of those will continue for a long time. There are many smaller ones that we don't even read about, maybe only temporary.

To their enormous credit, America's dedicated servicemen and women dutifully did more with less. Many in Congress and many on this committee worked hard to give those service people more resources. But notwithstanding those efforts, that policy of overusing and underfunding the force has begun to take its toll. It has harmed our readiness to meet current threats and it is undermining our ability to prepare for the threats of the future.

As you said, Mr. Chairman, when President Bush took office, he asked the Defense Department to undertake a comprehensive review of the condition and direction of America's armed forces. He asked us to engage our brains before we open the taxpayers' wallets. And so Secretary Rumsfeld initiated a broad strategy review soon after taking office.

We have completed the first stage of that strategy review, and that forms the basis for our '02 budget request. We are now starting the second stage, which we have merged into the congressionally- mandated quadrennial defense review. And that, Mr. Chairman, will form the basis for the '03 budget (and?) the new five-year defense plan.

Let me say just briefly a little bit about that second stage, which we are in the middle of right now, before I come back to the '02 budget. From the completion of the initial strategy review, we've drawn two conclusions. The first is that the security environment America will face in the decades ahead is likely to be much more dangerous than the one we faced in the decade just passed. The other is that the condition of our force today is even worse than we had previously expected.

On that chart that we've shown for you, Mr. Chairman, there's just one example of the kinds of things that happen when, year after year, you defer maintenance; you defer replacement of things. On the left-hand picture, you see a $500 -- (inaudible) -- that should have been fixed, would have cost us $500 to fix it. Instead, because it was broken, a valuable airplane crashed into it and we ended up with $165,000 to fix the plane.

(Break in audio from source.)

(In progress) -- my testimony, Mr. Spratt.

REP. SPRATT: You know, that's just reshuffling the same deck, it seems to me. I read this budget, and it's basically a meat-and- potatoes budget rather than a transformation budget.

MR. WOLFOWITZ: I think it's a mixture. And we do need meat and potatoes. You're not going to change the whole force overnight.

REP. SPRATT: I heartily agree. In fact, I would buy the meat and potatoes before I bought the creme brulee.

MR. WOLFOWITZ: Well, we're trying to do both. (Laughs.)

REP. SPRATT: And when I look for transformation, I go straight to the science-and-technology account. That's where your really fundamental leap-ahead technology gets funded. This year we're spending $9 billion on the science-and-technology account. Your budget asks for $8.8 billion. It actually cuts it $200 million.

MR. WOLFOWITZ: Some of that $9 billion includes things that have been added by the Congress in its wisdom that I think are probably good investments, but they're not, as I think you know, targeted precisely at military needs. I think we'd like to do better on the science-and-technology budget. There's no argument about that. Our research and development overall is up $7 billion, and that's a significant increase.

REP. SPRATT: Six-point-four billion dollars, and that's a substantial increase. The problem is, R&D doesn't put any weapons in the field. We have to produce those weapons and buy them with procurement dollars before you actually deploy them. And while you increase the R&D account by $6.4 billion, you cut the procurement account by $500 million.

Now, if you don't have the money in the procurement account proportional to the increase in the R&D account, you can't tech-out these new weapons that you're researching and developing. And you've got some significant procurement commitments coming down the pike -- F-22, joint strike fighter, more C-17s.

Your Navy budget, your ship-building budget, you keep repeating this replacement ratio for real estate. But if you look at ships on the line, warships and submarines, we're only buying enough to sustain a Navy two-thirds the size that is the objective force, 313 major combatants. And everybody acknowledges that you have to replace your 313-ship Navy at a rate of eight, nine, 10 ships a year, but we're only providing here for five, six, seven ships a year. We're well below the norm that's needed for replacement of a major element of our force structure.

So even though this is -- I don't find a lot of frothy, leap- ahead technology here. I look for it and don't see it. There's a little more money for digitization, a little more money for high- energy, directed-energy technologies. But I'm concerned about the fact that there's not enough provision -- barely enough provision here made for our meat-and-potatoes basic defense. And what happens if you don't get the $18 billion? I don't see this budget at this level funding the kind of transformation I think you have in mind. Am I correct?

MR. WOLFOWITZ: I think, for the -- let me say a couple of things. First of all, the crucial piece of information that we hope to get out of the QDR process are those that pertain particularly to the exact size of the forces that we need and the mix and makeup of those forces. And until you've done that work, it's hard to develop intelligent procurement plans because you don't know how big a force you're procuring for. And some of the estimates that one sees about DOD's modernization requirements simply calculate a fairly primitive one-for-one replacement.

REP. SPRATT: I understand that. But what I'm saying is you've got $330 billion, just shy of that, in this particular budget. And you're plusing up R&D by $5 billion or $6 billion. But eventually if R&D is going to prove useful, you've got to plus up procurement, too. And I don't see where the plus-up is coming from unless you get more money over and above the level of this particular defense budget.

MR. WOLFOWITZ: Or unless, Mr. Spratt, we're able to find significant savings. And we think we should be able to find significant savings.

REP. SPRATT: Well, look, I've been around here since the first BRAC, helped craft the language of it, and I've watched the results of it. The first BRAC, it took us five, six years before you could see any positive cash flow from it. So, I mean, BRACs won't fund near- term budget increases. We're not talking about big bucks anyway. You talk about a modification of Davis-Bacon. It's going to be politically problematic to get that done. You talk about implementing prospective payment rules for military health care. It'd be awfully difficult to get that implemented.

So I think some of these savings are illusory. In any event, they're not big-dollar items. And my basic first question is, can you fund transformation at or near this level? Are you telling me then that you can but next year, '03, you'll take it out of your hide, you'll pay for it out of your own accounts by reducing one account in order to fund the transformation account?

MR. WOLFOWITZ: I think at this stage I can't tell you with precision. I think we will probably have to find some ways to pay for it out of -- we need more; I think that's clear. We'll have to find some ways to pay for it, and some of those need to come from efficiencies in what we're doing. And the fact is, you know, if we could find 5 percent savings in our overall budget, that will pay for a heck of a lot of transformation.

REP. SPRATT: Well, you said in your testimony that you thought 3.5 percent of GDP was not an unreasonable amount of money to expect for defense.

MR. WOLFOWITZ: Historically it's not, sir.

REP. SPRATT: That would be $380 billion. And the secretary indicated in his testimony, as I recall it, that he would need $347 billion in '03 as a follow-up to the $330 billion he's asking for '02. Is that in the ballpark with what you think you'll need in '03 to sustain the basic budget and also to begin transformation?

MR. WOLFOWITZ: I think it's in the ballpark. But we really frankly do have ambitious hopes that our new management structure, our new service secretaries, with the very searching look that's being taken in the QDR process, that we will come up with some significant ways to pay for transformation out of what we're -- places where we're spending money today that we don't need to.

REP. SPRATT: Let me underscore one thing the chairman said for my side of the aisle, and that is, we have come too far and worked too hard to turn this budget around than to take the first step down the slippery slope and begin dipping into the Medicare and Social Security trust funds. So we stand together in saying, however this budget is finally put together, that's going to be one cardinal principle. We're simply not going to dip into those trust funds. They're sacrosanct.

We're not going to spend that money. We're not going to regress. Having worked so hard to get to where we are, we're not going to step backwards into those trust funds in order to fund it. And if that's true, you've seen my numbers. Wouldn't you agree we've got a pretty tough problem here to fit your budget this year and next year into this budget scenario?

MR. WOLFOWITZ: I'd certainly agree on that scenario, Mr. Spratt. I mean, I also know -- and I don't want to get too far on this, because I'm, for better and for worse, not an economist -- but I know those numbers sort of change with each new economic estimate. And we'll probably -- as you said yourself, we'll see new numbers.

REP. SPRATT: They could be worse. They're more likely --

MR. WOLFOWITZ: (Inaudible.)

REP. SPRATT: Let's hope they get better. But in the near term, I think they get worse before they get better. I mean, I hope the top line is sustained and we've got enough money to do all of these things. But we have to be -- we're the first people who watch the punch bowl, and when things get a little too excited, we take it away and say, "Let's stay realistic."

And the reality of the situation is now you're hearing Wall Street and the White House say, "It looks like there may be some revenue shortfalls." And if the top line deteriorates, the bottom line gets tougher than ever and makes it harder than ever to accommodate your budget.

I may have some further questions, but the other members here have questions as well. So let me yield.

REP. NUSSLE: Thank you, Mr. Spratt. Mr. Secretary, we have one vote now, and we're told that there is an additional vote that will come right after that. And so what we'll do is we'll recess and we'll come back as soon as that second vote is completed. So the hearing stands in recess subject to the call of the chair.

(Recess.)

REP. NUSSLE: This resumes the Budget Committee hearing on the Defense Department budget request for fiscal year 2002. Mr. Thornberry.

REP. MAC THORNBERRY (R-TX): Thank you, Mr. Chairman. Mr. Secretary, Mr. Zakheim, welcome.

I think, as the chairman discussed earlier, all of us have been struck by the difficult task which is before you, because whatever we may think of existing deployments and commitments, we can't just drop our apples and walk away from them unilaterally. We have certain responsibilities as a world power, and we have been under-funding those activities. But at the same time, the world is changing, and we can be attacked in more ways, by different actors, faster than ever before. And the thing that strikes me, Mr. Secretary, about the analogy you used with Korea is that we may not have time to re-gather ourselves and dust off our clothes and increase the defense budget, and prepare ourselves to meet -- to counter-attack. We may not have the opportunity we had after Pearl Harbor. It may be over by then. So preparations beforehand are even more important now, at a time when technology has taken warfare to new dimensions of speed.

And so, to prepare for the future, we have to make changes, and there are costs to those changes. And yet, as the chairman was talking, there is a reluctance for change in the services. There is reluctance among the contractors. There is reluctance on the Hill to make those changes. And yet I don't think any of us can stand by while, as some estimates, half of our defense budget goes for infrastructure and support. Less than half by most estimates, depending on what you include, goes for actual war fighting.

So, I think it is entirely appropriate to take some time out to study the situation. There's been criticism on both sides of the aisle in the past that we have had QDRs that are budget driven rather than strategy driven. So, this administration has taken some time to think about strategy before we get into the QDR and the rest of the -- and how much it costs to implement.

I guess what I'm most interested in is how you assess and balance this need to make up for deficiencies of the past and the demand that we prepare for the future. How do you -- how do you make those trade- offs? In some ways, we could spend all our defense -- or increased defense money, you know, fixing problems, like you showed us. If -- we're throwing away the future if we do that. On the other hand, we can't just ignore those problems and focus just on the future, because then we're going to lose our people. How do you -- how -- how do you balances those -- the commitments now and making up for the deficiencies verses preparing for the future?

SEC. WOLFOWITZ: That's an incredibly important question, and I guess it goes to the heart of the problem. It's not one for which there's any easy answer. I think the -- and it is true that a fundamental point which Secretary Rumsfeld has made many times is that even if you transform your force at a fairly high rate, you're still most -- for a very long time, going to be operating with the old force. You don't -- this isn't like -- this is not like turning some small vehicle on a dime. It's like turning a very big super-tanker that you begin to make changes and they really turn up in their full implementation only maybe a decade later.

I do think that it's very hard to get the kinds of new thinking and the kinds of changes that we need to have when chiefs of services, and commanders of divisions and air wings are dealing with some of these kinds of very basic problems that are driving the best people out of the service. And so, beginning to fix them is not only -- it's not only an investment in the present, it's also bringing up people to start thinking more ambitiously about the future.

And I guess I would say a final thing, and that is we need to find ways to allow the services to have more incentives for making those kinds of trade-offs themselves. Too often I think they're confronted with situations where, if they try to take some savings in order to make those kinds of investments in the future, what they find is the savings are taking away and the investments don't happen, and the end result is they're in terrible shape. I know that happened in a dramatic way to the Navy about five years ago, and we're still living with some of the psychological wounds from that.

So, I think establishing a certain degree of stable baseline is an essential step toward getting people to make those kinds of tough trade-offs.

REP. THORNBERRY: Thank you.

REP. NUSSLE: Mr. Bentsen.

REP. BENTSEN (D-TX): Thank you, Mr. Chairman. And Mr. Secretary, thank you for being here today. I had talked to Mr. Spratt, and I guess if we're not going to talk about Vieques, then we won't talk about Kennedy County, Texas either. And I noticed there were at least three Texans on the panel -- there are two right now who are here. But seriously, I do want to talk to you about your testimony.

Let me say at the outset that I agree with what the administration is doing with quadrennial review and trying to look at our force structure and how we plan for the next 20 years in trying to get away from how our defense posture has been structured for the last -- the previous 20 years -- and getting away from the Cold War structure, and even the sort of this interim post-Cold War structure. And I think that's the right approach.

What I am concerned about, though, and what I think this committee needs to be concerned about is the macro aspect of that and the cost. And it seems to me that at the same time the administration is proposing a plus-up in defense funding in the R&D accounts, in the strategic defense, or the ballistic missile defense accounts, you also are proposing what you call the repair -- or repairing the damage, if you will, as the administration likes to characterize it, from the previous ten years. And it seems to me at this point you are on two tracks. You are on a track for -- for rebuilding under the current force structure and defense posture, and somewhere you're on a track -- although we don't have the exact numbers on this quadrennial defense review and strategic review that the administration is taking.

And what concerns me is that rather than coming up with a singular approach with which this committee and the Congress can determine what the appropriate amount of tax dollars are to put to that, that we're going to be given a supplemental -- or we're going to be given two approaches that will have supplemental monies into it, and we'll be paying for the old system and the new system, and we will see these increases, which are at 11 percent, I guess, in real terms this year, and seeing those types of increases over the next ten-year period, far more than possibly this country can afford. And we may be buying more than what we really need to buy.

And I guess the bottom line is I am concerned, particularly given the fact that these numbers are coming in late, that we are going to be nickled and dimed to death for what is a very serious expenditure. And I think every member of this committee supports these expenditures in varying degrees. But I am just worried that -- that -- that it's, you know, 18.4 billion two weeks ago. Later this summer or in early fall when the strategic review is completed, we may get -- we know that, as you said, that will affect the '03 budget. But I'm worried what's going to be -- what you're going to come back with for an '02 supplemental in that regard.

And I realize that you all have not gotten your team in place yet, and you're trying to do all that, but it worries me that we are not taking a very strategic approach to budgeting, at the same time you're trying to take a strategic approach to defense posture, and we're going to end up over-committing and then we're going to find ourselves in some of the problems that we've found ourselves in the past.

So, I would -- I would hope that -- that as you come forward with -- with requests for more dollars -- and I truly believe you will -- that you are sincere and serious about the offsets that you are requesting. As one of our colleagues mentioned regarding the B-1 issue, you now have strong opposition because of parochial concerns of certain members of this body and members of the other body. And I think the administration has to be very serious that they are going to -- that they are going to pursue those offsets, even against strong political opposition.

The same is said for base closure. And I have some questions about your 192-year facilities replacement average, because that would -- that would indicated to me that you have, at least on the back end, properties that are in excess of 192 years, which I find -- you have some, but not too many, because we've only been around for about 225 years, but on top of that, you have to -- you are going to have to fight very hard on -- on -- on this base closure.

And so I -- I just hope that as the administration goes forward, that it will -- it will stand up for the offsets and not put offsets that are unrealistic, that won't see the light of day in Congress.

SEC. WOLFOWITZ: On -- small point on the 192 years -- that's not average age of facilities. That's the rate at which you would ultimately replace your infrastructure if you proceeded on the old budget level. Ninety-eight years is the rate at which you would replace everything if you proceed on the present budget level. Sixty- seven years is the replacement rate. That doesn't -- that's not going to be the average age -- different, different -- in fact, because a lot of these things were built in the build-ups of the 1960s and the 1980s, that's probably where the average age is going to lie. But what we've done for too long, when we needed to pay for things, like current operations and flying hours, and Bosnia and Haiti, was, well, let's just put off some maintenance for a year. We can find $1 billion, $2 billion, $3 billion in those maintenance accounts. And you can get away with that for a year. You can get away with it for two years. When you try to do it for 10 years, things start falling apart that shouldn't fall apart. People live in housing they shouldn't have to live in.

On the more general point which you raised -- I don't have a lot to add because I think you put it very well -- but I -- let me just say, I think there are two ways you can approach the sort of situation that this country faces, which is I think very real defense needs and lots of other needs. And as big as our budget is, and as big as our surplus is, we're talking about very difficult decisions. But clearly to my way of thinking, the wrong way of doing it is to say, well, we know what we really need, but we going to sort of pretend that we can get by with less. We're going to pretend that things don't cost what they do cost. We're going to come up with supplementals that really aren't supplementals because we really knew when we put in the original budget that we need to come and get it. And we're going to say we have a strategy, but gee, can't you find out a way to, you know, it really costs X, but can't you find a way to do it for X-minus $150 billion so we can save some money somewhere else.

I think what we have to do, the best we can, is to move forward with honest assessments of what our real needs are, and honest assessments of what it takes to carry out a national strategy. And if the conclusion of the country collectively, which means, most importantly, the president and the Congress, is that's more than we can afford because of all the other things in the budget, then let's not pretend we can carry out that strategy with $150 billion less. Let's figure out what in the strategy needs to change, what commitments need to change, whether we can really manage with a smaller force. But what Secretary Rumsfeld is trying very hard to do with this QDR process is to get those issues pushed up in a way that decision-makers can make those kinds of assessments of risk verses cost.

REP. BENTSEN: Thank you.

REP. NUSSLE: Let me report to the committee that the Secretary will be with us until 12:15, and so I would just ask that we be as efficient as we can. We appreciate the fact that you're with us today. Mr. Hoekstra.

REP. PETER HOEKSTRA (R-MI): Thank you. Welcome. It's good to have you here.

The -- I find it interesting, and we've done a lot of work on another committee that I sit on, taking a look at the Department of Education, which, for the last three years hasn't been able to get a clean audit. Then I understand that the Department of Defense shares many of the same problems that we have with the Department of Education. I think the IG just notes that in one of the audits that you went through of the 1999 financial statements included adjustments of $7.6 trillion -- that's trillion -- in account adjustments, of which 2.3 trillion were supported by un -- by reliable documents -- were unsupported by reliable documentation.

You know, we're talking about a lot of money here. We're talking about, you know, a Defense Department -- Defense spends $320 billion a year, and we're talking about 18 billion, or 14 billion, or six billion, but the bottom line is I just find it amazing that -- and I've got to believe that it has to be awful frustrating for you to be talking about these kinds of numbers that when you go back to the financial statements and the financial records of the Department of Defense, it has to be fairly difficult to actually calculate what something may cost, or what you're spending in different areas if you can't get clean financial records. I know that in the Department of Education, when you don't have the tight management controls in place that would enable you to get good financial records, you're also creating an environment that is ripe for waste, fraud and abuse. We have found a significant amount of waste and fraud within the Department of Education.

Where is the Department of Defense on correcting a long-standing problem, and in an issue that we know is inherited from previous administrations, but, you know, is this a priority, and can we expect the Department of Defense at any time in the near future to get clean financial records?

SEC. WOLFOWITZ: Well, it's a horrendous problem. When Senator Byrd asked Secretary Rumsfeld about this in his confirmation hearings, Secretary Rumsfeld said, "I'm beginning to think I should decline the nomination." I was -- it's that bad. It is a priority, and we're trying to get our hands around it.

Let me ask our comptroller, who has got the principle responsibility in this area, to tell you about where we are and what our hopes are.

MR. ZAKHEIM: First of all, I should say that very often, although the numbers seem large, it's not because we really don't know what happened with the transactions. The problem has tended to be that we just didn't record them properly. And I'm not making excuses at all. I spent 14 years in the private sector, and that's an inadequate response in the business I was in and in the business anyone else might be in.

We're doing a number of things, because indeed it is a very, very high priority.

REP. HOEKSTRA: Let me just -- I agree with your statement -- that is an inappropriate -- you couldn't get away with that in the private sector, saying we know where we spent it, we just didn't record it. Come on, give me a break.

MR. ZAKHEIM: That's absolutely right.

REP. HOEKSTRA: I hope that's not the attitude of this administration.

MR. ZAKHEIM: I sure hope not.

REP. HOEKSTRA: Okay.

MR. ZAKHEIM: Certainly it's not mine. As I said, anybody who would have told me that in my own business wouldn't have been around very long. The question is: What do you do when you have a situation where this has been ongoing for many years, where the priority has been to the extent you reported numbers at all, it was budget oriented as opposed to accounting of financial management oriented. And in addition, as you rightly say, what might be called the management information system, as you might see in private business, doesn't exist in the Defense Department that way.

What we have done -- and, again, in light of what all has been said about trade-offs -- you can see how important it was to do this. What we have done in this budget amendment is allocate $100 million toward fixing this problem. Now, this is only a small downpayment. I've heard estimates of a billion, maybe two billion in terms of structuring all the various systems so that they can talk to one another, so that you can track a voucher from one end of the system to the other, so that you can account for transactions. We have to find out exactly what that is. We are talking about building an architecture that will allow us to put together a system that does indeed come up with the numbers, and allows management to make decisions. Now, will that result in a clean audit immediately? No.

In fact, I would even argue that far more important than an immediate clean audit, and the comptroller general of GAO agrees with me on this -- far more important than that is to get the system in place so that indeed you can make decisions, you can track numbers.

There's a kind of financial responsibility that beings to resemble what we have in the private sector. That's what we are going for.

REP. HOEKSTRA: Well, thanks, because there is a reason they call that management information system -- there are just too many departments that don't have it, and that I really believe handicaps you in your ability to make the appropriate kinds of decisions, because you don't have the information. Thank you very much, Mr. Chairman.

REP. NUSSLE: Thank you. Ms. Hooley?

REP. HOOLEY: Thank you, Mr. Chairman. Thank you for making that opening statement about we all support defense. I appreciate that. Thank you for being here this morning. I have actually several questions. A couple of them have been asked. For example, I too am concerned about how do we close facilities and close bases. So I hope you have a plan worked out so that can happen. I also had some questions about financial accounting, which were asked. But I want to finish up with that question.

And what are you doing with contracting out? And when do you expect to have your financial house in order?

MR. WOLFOWITZ: We have a new senior executive council which consists of myself, the undersecretary of Defense for acquisition and the three service secretaries who are given the responsibility for looking at the various ways in which we might find savings and efficiencies. And contracting out is high on the list of those. In fact, you may have seen some press commentary on the fact that Secretary of the Army Tom White comes from a firm which had been in the business of trying to provide contracted utility services for our bases, and some people think that his experience there means he should recuse himself from that kind of activity.

My own very, very strong feeling from many conversations with Mr. White, as having been on the other end he understands what we need to do in order to make this contracting out process work effectively and efficiently, because there's -- everyone agrees a lot of taxpayer dollars could be saved in that.

On the question of getting our financial house in order, I guess I'd really just repeat what Comptroller Zakheim just said -- and Dov, do you want to add any more on that?

MR. ZAKHEIM: I think I made that reasonably clear. This is a very, very high priority for us. It will be critical if we are going to make the kinds of transformations in other areas that we are talking about. And I am certainly prepared to answer any detailed questions later or for the record.

And one other point. We want to work very closely with those members of Congress for whom this is a high priority. I've offered that to people in the other chamber, and anyone here who wants to work with us on that. We are glad for your advice and your support, and we'll work with you.

REP. HOOLEY: Yeah, and I'm just trying to get a sense of whether it's two years, five years, ten years, when you expect -- obviously I know you need some financial help to do that -- and there's -- you have a huge organization. You have a real mess. I mean, how long do you think it might take?

MR. ZAKHEIM: You know, it's -- for clean audits you mean?

REP. HOOLEY: I know it's not going -- yeah.

MR. ZAKHEIM: I can tell you it's not going to be a year. We have already some sections of the department that have received clean audits. The idea is to get the entire department to get this. All I want to do is to be on a positive slope, that every year at least one other element of the department gets a clean audit. So we're making progress.

REP. HOOLEY: You're making progress. And I want to clarify on contracting out my concern, at least according to the testimony that we heard last year on this committee, was that there are a lot of people who are not trained in contracting out. That's where a lot of problems have been in contracting out. And so that was, as opposed to saving money by contracting out, I was trying to figure out are we getting that whole situation under control where people know what they're doing, when they are contracting out, we are not overpaying contractors -- which seemed to be a huge problem. That was more the direction of my question, as opposed to using that as saving money. I think right now it is costing us a lot of money.

MR. ZAKHEIM: There are two ways to deal with that. One is the A-76 process. Actually there just was an A-76 competition that was won by the contractor.

The A-76 process, as you know, is cumbersome in many ways. But one thing it seems to do is to drive down the cost, no matter who is the winner.

A second element, you are quite right, in terms of training. We are working on that. Indeed, it would be very nice if the department had more flexibility regarding what kind of qualifications it demanded of its people. But we are limited in a variety of ways on that, and I believe there will be some action taken in that regard.

REP. HOOLEY: And where do you see your biggest savings coming from, what area? I mean, as you look at your priorities and you look at those things that have now changed in this world and that you need to change at the Defense Department. Where do you see some of those savings coming from?

MR. WOLFOWITZ: A range of things I would say. It includes the sort of better business practices kinds of things where we are doing things inefficiently in the military that, if contracted out properly -- and I take your point about if it's done improperly you'll end up just overpaying for something. But services that should be much more efficiently provided by the private sector. That's one large category where our new service secretaries believe strongly they can find efficiencies and overhead.

Another area which we are looking hard at right now -- sort of an obvious Cold War function, which is our offensive nuclear forces. We built them up to deal with a country that no longer exists. We brought them down some, but in the president's view and the secretary's view we still can bring them down a lot more. And in this budget in fact you will see not only the peacekeeper elimination but four Tridents converted from nuclear missions to conventional -- two to be converted to conventional missions and two to be simply removed. And the B-1 force changed from 90 bombers designed for the nuclear era to a smaller force, but conventionally capable. So that's an example of where you look for a function that you really don't need or need much less of and try to find savings by getting rid of things. And it's surprising that there are still a lot of those things around.

Where you least like to take it is in the what we call too at the end, and when I answered Congressman Bentsen's question earlier, and that's when all, at the end of the day, you have done your honest budgeting, you have done thing as efficiently as you can, you have made the investments you need. And if you are going to actually have to in order to pay for things take it out of the fighting element of the force, then we really need to lay out very clearly what the strategic implications of that are. That would be one last preference obviously.

REP. HOOLEY: It's time. Okay.

REP. NUSSLE: Mr. Schrock.

REP. SCHROCK: Thank you, Mr. Chairman. Thank you, Mr. Secretary, and Dr. Zakheim for being here. I was glad to hear the chairman say that defense is the number one priority. In my life it is, the people I represent it, I can assure you. And I'm really glad the review is being done. But, you know, I am as impatient as the last person, and I want it done today. But it just doesn't happen that way. It takes time. During my 24 years in the Navy, I spent several of that in what we affectionately call the "puzzle palace." And I know that sounds like an odd thing to say, but that's what it was then and that's what it is now. I was over there recently, and I thought, My God, the place hasn't changed since I was there a long time ago. So it is just going to take a long time to get this done and get it done right, and we just have to be very, very patient.

And, frankly, I think the Defense Department has been neglected for most of the last decade, and that certainly shows up in the condition of our ships, our tanks, our planes, because I see them. I see them every single day, and I talk to the commanders, and I know how badly they have been treated, and we just have to turn that around. Readiness and maintenance has just been absolutely deplorable, as you have shown by that little picture over there and the resulting cost of that. You know, a rust hole this big today costs $10 to fix -- twice as big tomorrow it will cost $10,000. And that's exactly what's happening. So we have to get -- maintenance money is so important, because if we are going to keep these things operating, we have got to make darn sure that stuff is in the budget. Quality of life issues absolutely vital -- that is probably number one. If we don't have good housing the troops aren't going to stay in, and that has been the case. That's the number one reason for people living the military because of that.

As an example, in the district I represent, an Army post there, Fort Storey (ph), has 168 units. Every single one has been condemned. The sergeant major of Fort Storey lived in a set of quarters that t the day after he moved out they bulldozed it. It was that bad. And none of them meet congressional standards. So we have to make sure we have proper housing. And that's something I have been screaming about down there. The Navy is doing a pretty good job. We just have to make sure the same thing occurs with all the services. And we have to understand too the last many years, the last administration had us deployed in more places around the world than all presidents since Franklin Delano Roosevelt combined, and that cost a lot of money. Rightly or wrongly, that cost money, and that came out of maintenance. That came out of housing and all those things. So we have to make sure that doesn't happen any more as well.

Retention -- we have got to have those. We have got to have the good quality to buy things or we're going to retain -- we are going to retain people. And of course I'm concerned about the Navy in particular -- I'm concerned about all the services. I'm privileged to represent every service, and with the new lines that we've redrawn I'm going to have two more major bases, which means I'll have eight major bases and 195 small commands. So all the services are important. But ship-building is real important too. As we are going now, we are fast approaching a 180-ship Navy. We can't handle -- we can't do the missions now that we have been tasked to do, let alone a 180-ship Navy. So the more money we can get into that to build more ships I think the better as well.

And transformation -- I understand what Mr. Spratt was saying -- it does look like a lot of it is just to maintain what we are doing now. But if we are going to keep this system afloat, we have to do that, and I think that approach is correct. But looking to the future I think the president is right not to build for today and tomorrow, but to build for the next 20 or 30 years. But we have to keep the system going now, and the people happy that we have got in there now.

Your testimony discussed the strategic environment and the current condition of our armed forces, and I appreciate that. And what global responsibilities do you see that will be jeopardized by a continued underresourcing of our armed services, and what do you see as risks associated with that underresourcing as you go into the outyears?

MR. WOLFOWITZ: I think the greatest risk that we face today is that we see in many places around the world countries investing in -- they realize that – they watched Desert Storm -- they realize the enormous technological capability of the United States, the enormous military capability of the United States. But they look for weaknesses, and they look for ways to engage in so-called asymmetric responses instead of meeting us head on where we are strong to find places that we are weak. One of those places is in fact in the area of ballistic missiles -- not just national missile defense, it's theater as well -- it's at all ranges. In fact the only Iraqi capability that we underestimated during the Gulf War was Saddam Hussein's Scud missile capability. We see heavy investments of that going on in a number of countries. And then I would say more broadly, and particularly in Asia, we see a concerted effort, but also by Iran in the Persian Gulf, to develop the capability to deny the United States access to exert our influence, the ability to keep our fleet away from shores, the ability to threaten bases that we would work for reinforcement. So those are the kinds of threats that we see as particularly dangerous emerging in the future. And if we are going to keep this powerful force of ours powerful, we have got to be able to deal with those attempts to undermine it through its weaknesses.

REP. SCHROCK: I agree with that. I think the perception is among the public that we are at peace in this world. Nothing could be further from the truth, because you have these terrorist and rogue nations out there getting ready to hit us. You know, it was 60 years ago this December that a terrible thing happened in Hawaii, and I pray to God that doesn't happen again, but if we are not careful it's going to. And the USS Cole should have been a wakeup call for us. It was for me, and I think it was for a lot of members of Congress. And we just have to make sure that we do everything we can to make sure that doesn't happen, and proper funding is going to solve a lot of that. Again, thanks for being here.

MR. WOLFOWITZ: I agree with you strongly. Thank you.

REP. NUSSLE: Ms. McCarthy.

REP. CAROLYN MCCARTHY (D-NY): Thank you, Mr. Chairman. And thank you, Secretary. I find the testimony very interesting. One of my colleagues talked about the Department of Education. And when we talk about our bases, all I can think of are the majority of my schools, which are over 50 years old also and in great need of repair. So we have a lot in common on that issue.

My concern is, and I'm sure it's the concern of everybody here, when we started working on the budget, you know, we kind of had a rosy outlook at the monies that were going to be taken in, and so we were kind of looking at that. Now we know, or we're going to know shortly, how much money are we actually going to have as far as the future of our planning.

We here -- and I think I can speak for almost every single one on this committee -- we care about our defense very much and we care about those that serve our country. And I'm a great believer in those that have served in our country and trying to find monies to take care of them on their health care issues. And my concerns also for the health care issues are men and women that are in the service today.

With the DOD's additional funding request -- and I know you're going under a strategic review -- what I'm concerned about, will this review take into account the monies that we might not have coming into the future? But to follow that up even, is the Department of Defense going to highlight the things that they want and then let us here in Congress determine how it fits in with a responsible budget? Because you have to understand where we are. We have our budget that we hopefully will all stay within, and we have to convince our colleagues on all the other appropriations that we have to stay within those budget guidelines.

And it's going to be hard, I think, for an awful lot of us because so many of us do care for those in the military that if we start to overspend here, are we going to take it out of -- you know, Social Security and Medicare has been there and we're talking about that, and I don't think anybody is going to do that. Is it going to come out of our health care system? Is it going to come out of our education system? That's going to be the tough part, I think, for all of us. Your job, I think, is going to be extremely difficult, to say the least.

But on the other end of it, I think that if we all try to work together and look at what is being done on all our bases, on trying to do the maintenance and everything else like that, I think that is really more accountability that has to come into play with that also. And I understand that our government, not just the defense but almost every department, we're way behind, way behind on the computer world and being able to track where money is going and everything else like that.

So hopefully -- I mean, it's amazing we get anything done; I'll be honest with you. But besides that, we have a long way to go, and hopefully we can go forward with that to do accountability for our citizens that we have to represent every time we take a vote. And that's our accountability. So hopefully we can follow up on that. But I am curious about that. When you come forward with your budget and what you want to do, are you going to leave it to all of us to make the decisions on where those monies are going to actually go? And how are we going to make those decisions?

MR. WOLFOWITZ: Well, first of all, let me say I very much appreciate the sentiments you expressed and so many other members of this committee have expressed of supporting national defense and supporting men and women who serve. And I think it's something we all have in common. And these are difficult trade-offs.

I think our job really in the Defense Department is to present the president with what we think are the realistic choices, what he can get for more money, what he will sacrifice if he has less money. He's the one in his own budget who has got to make the trade-offs among the different very important pressing national needs. And then, of course, that's the dialogue we have with the Congress.

What we've got to get away from is basing that dialogue on either dishonest budgeting, where we're kidding ourselves and kidding you, or, what's even worse -- and it's an almost inevitable outcome of the dishonest budgeting -- essentially doing it on the backs of servicemen and women. And if we can't afford to pay for 10 Army divisions and 12 aircraft carriers, but we want them because they meet our strategic needs and they allow us to exert influence around the world, so we end up having them but underfunding them, and the people who pay for that are the people who serve, and the risks that are run are run by the people who serve.

So what we're trying to do with this budget process and with this defense review is to make those choices consciously. If it turns out that it's going to cost a lot of money to have a capability that I think is important to deal with the threats that I was addressing to Congressman Schrock, I would argue strongly that should be high on the priority list.

In 1950, as I said, Dean Acheson gave a speech. Many people accused him, I think unfairly, of inviting a North Korean attack by saying that South Korea wasn't within the defense perimeter of the United States. But, in fact, it was the joint chiefs who had said, "We don't have the forces to defend South Korea." We didn't want to pay for them. Well, at least that issue was surfaced. People decided with some consciousness, "Okay, we're not going to pay for those forces." I think we paid terribly later. But what we can't do is fool ourselves or do it on the back of the people who serve this country so admirably.

REP. NUSSLE: Ms. Granger.

REP. KAY GRANGER (R-TX): (Off mike) -- questions. First of all, let me say, I applaud the process that you've said that you're taking. I think it's extremely important first that you assess the situation honestly and see where we are. But I would say to you, I would invite you certainly to keep us informed about what you're finding so that you will help -- we can be partners in assessing and also building a case for correct and appropriate funding.

And then, as you draw your plans for the future and see then what that future means and what it's going to cost, that's going to be very important. Part of that is the QDR. I would ask you how you're going to report to the Congress. Are you going to wait until the QDR is finalized and then report on a situation like this? Or are you going to tell us along the way and give us some information so we can keep making our plans?

And then the last thing I would say, the department has been criticized in reports about financial management. And I'm glad to hear you say that you're putting in the safeguards or the changes to correct that situation. But I'd also say, as you're putting in the process and equipment to report and to keep records, I would hope you would also be looking for savings, because we've got to look at what we're willing -- how we appropriately fund. But there are savings.

And I would go back to the first year that I was in the Congress when some of us came together and said, "We've got to find not only more money for defense, but also we've got to see how we're spending that money." In one of the meetings that occurred, we were told by primarily the defense contractors that in putting some safeguards in to see that we weren't having a $700 hammer, we're creating a $700 hammer because we're spending as much in shopping or in buying the equipment -- let's say a plane -- we spend as much to buy the plane as we do to build the plane. And so what can we do about that?

MR. WOLFOWITZ: On your last point, I think there's no question that we have some processes in the Defense Department that seem to make it take as long as possible and be as expensive as possible to produce things. And to be fair to us, I think some of those are responses to concerns that the Congress has expressed over the years. And not infrequently, I sort of have the feeling that if you excavate each layer of regulation or process that adds cost or adds time, and time is money, you'll find that there was somebody who misbehaved 15 years ago, and this was designed to keep anyone from doing that again.

We operate under a lot more restrictions and safeguards than any private-sector corporation does, and we certainly should. But we need to take a hard look at whether some of those are unnecessary. Some of them have outlived their usefulness. In a big bureaucracy, it's very easy to accept something. There must be – we know thousands of servicemen and women who know of things that could be done more efficiently, but they're told it has to be done that way because there's regulation X or Y. And in this big system of ours, they don't know how to get (those?) fixed. Hopefully we will get some of those things fixed.

On the question of keeping the Congress informed, we're trying to do that. In fact, I think we have 17 hearings with Defense Department witnesses this week alone; it's a particularly rich week, but this week alone. The preliminary results of the QDR should be briefed to the secretary for the end of July, beginning of August. And I presume that would open up the door for some conversations when you come back from Labor Day on where we think it's coming out before it's finally delivered.

And then there is still the sort of implementation stage, taking those results and translating them into budget-level detail in the '03 budget, which will be coming up here. So hopefully there'll be a lot of opportunity during the fall months to discuss these issues.

REP. NUSSLE: Mr. Price.

REP. DAVID PRICE (D-NC): Thank you, Mr. Chairman. Mr. Secretary, I'd like to add my welcome and my congratulations on your appointment and a welcome to the committee. Mr. Chairman, Paul Wolfowitz and I were colleagues 30 years ago of a decidedly junior status on the Yale University political science faculty. I don't expect either one of us would have anticipated that 30 years later we'd be facing each other across a hearing table. Certainly I wouldn't have anticipated that. But, hey, it's a great country and here we are. (Laughter.) And I certainly have followed Mr. Wolfowitz's career with great interest and satisfaction, and again want to congratulate him and thank him for appearing here today.

I'd like to return to some of the budget issues, some of which have been touched on, but I want to give it a particular slant in terms of the 200 increase and how final those numbers are or may not be in terms of what we can anticipate. As you know, Mr. Secretary, many independent analysts -- for example, William Dudley of Goldman Sachs, others -- believe that the 2002 revenues, in fact, are likely to be revised downward later this year, which could make the 2002 surplus as much as $50 billion to $75 billion less than is currently forecast.

In that case, then, this $18.4 billion increase that the administration has requested for Defense for '02 would require Congress to spend funds borrowed from Medicare receipts, would require dipping into the Medicare surplus. None of us, of course, want to do that. So this does raise the question, to what extent are these budget requests being formulated, being shaped by taking into account the availability of resources?

So let me just ask three related questions along these lines. In the first place, what about the $18.4 billion request? How does that compare with what DOD was initially seeking? Did you request substantially more than that? As you know, there have been reports to that effect. I wonder if you could comment on that. Did you request substantially more than that from OMB? How adequate is the request, to start with, and to what extent has OMB already taken into account the availability of resources?

Secondly, assuming that the original request was more than $18.4 billion, substantially more, can you give us assurances that this will be adequate? Or should we expect a supplemental down the road for 2002, a supplemental appropriation request?

And then, thirdly, in terms of the future of the strategic review, what constraints in terms of available resources are affecting that review as we speak? What kind of constraints are you anticipating? And how does that affect the proposals that come from the strategic review?

MR. WOLFOWITZ: Good questions; good friend from a long time ago. It's good to see you, Congressman Price, or David, if I may address you that way. (Laughs.)

First of all, we've certainly identified more needs than we're coming up here asking for. The president ultimately has to make the decision on what he thinks are the highest priorities. And we would emphasize we have gotten the largest real increase in defense expenditure in 15 years. It goes a long way toward starting to fix some of the serious problems that we identified in the first phase of the strategy review, and it has some $13 billion plus another $7 billion for missile defense; some $20 billion for addressing the needs of the next decade, the needs of the future.

So it's a very healthy investment. It's a start on this uphill path of both rebuilding the present force -- and I would emphasize, 10 years from now, 85 percent of the forces that we have today are going to be with us for 10 years more. I mean, that's the rate at which things change in (defenses?). So we think it's a good start on that path. Could we use more? Yes, we could use more. I suppose every department could tell you that.

But you asked then the second question of would this be adequate or does it mean we need a supplemental in '02? We will not be asking for a supplemental in '02, barring a genuine unforeseen emergency. Those things do happen. But what seems to have begun is a kind of dysfunctional process for the last five or six years as it became so easy to get supplemental appropriations that people planned on them. They weren't for emergencies. They created the emergency so they would get the funding.

We're not doing that. That's why we're fully funding the defense health care program, and that's an extra $5 billion over what it was last year, because we think that's what it's really going to cost. We're adding -- I think it's $2.4 billion for flying hours. I think I incorrectly earlier -- Mr. Spratt identified it as readiness as a whole -- $2.4 billion just for flying hours to realistically reflect what those costs are.

So, no, this is a budget that's built on the assumption of no supplementals. The services understand that and they've understood that that's how it will be done. That's why maybe there's more meat and potatoes in this than some people would like. But if you leave out the meat and potatoes and just serve dessert, people come back hungry in the middle of the year asking for a supplemental.

Your final question had to do with are we taking account of these projections? And I could be a little impertinent and turn the question around and say, how on earth can one take account of these projections when they change every month, when they go up and down? And the only thing you can say about them is they are almost invariably wrong. I don't mean to be flip about it, but we do leave that responsibility to OMB.

What we are trying to give to OMB and to the president is a clear, honest, realistic assessment of what they're going to get at different levels of defense expenditure. The question of what the country can afford, which is partly a matter of doing this magic of divining what the revenues will actually be, is even more a matter of balancing many important domestic priorities against important defense priorities, is something -- our contribution can be made to the president and the Congress by making the defense choices as clear and honest as we can make them. It's really, I hate to say it, up to you and OMB to (manage?) the result.

REP. PRICE: Thank you.

REP. NUSSLE: Mr. Collins.

REP. COLLINS: Thank you, Mr. Chairman. And thank you, Mr. Secretary, for being with us here this morning. You know, I heard you make the comment that, when you get into it, that the problem is bigger than you thought. I recall something very similar to that from the year 1993, when the administration took office and said, "The deficit is bigger than I thought." The result was a large tax increase.

Folks in my district, instead of having that tax increase, wanted to cut spending first. When this administration announced its Cabinet, its leadership, folks in that same district said, "Great to see the adults back in charge." Well, when Mr. Daniels appeared before us last week or two weeks ago and was talking about more spending, I'm afraid we're going to hear the same thing from home: "Cut spending first."

Now, Mr. Daniels is responsible for the entire budget, as I understand it, for the White House. You are here representing the Department of Defense, one segment of the budget, a very important segment and a very large segment. I understand that you've only been on board and confirmed in May. The six-month review was to be conducted by you and others. You haven't had six months. I don't think that you can sit before us today and give us a true, accurate statement that says, "This is an honest assessment," that this is justifiable.

We know there are problems. We visit the bases within our own districts. We know, too, that we're having to do more with less in other parts of the world, when, in fact, I'm going to one of those areas this weekend to visit the 48th brigade in Bosnia. We know there's been delayed repairs to infrastructure as well as equipment, delayed in preparation for readiness.

We also know that there's been a 40 percent reduction in our uniformed personnel but only a 20 percent reduction in the base alignment. We also know that there's a lot of inside politics in the Department of Defense. We hear the rumors. In fact, some of them are not even rumors anymore; they've actually been put on the table -- realignment of units. I think some of that is inside politics in preparation for maybe a possible, another possible round of base closures. Some of those people who are in the party, in the leadership, the four stars and whomever, have certain areas of interest to them that they may want to protect rather than let the chips fall where they may.

Mr. Secretary, I see far greater risks to our Department of Defense in the out years -- not our nation as a defense itself but the Department of Defense. And I go back to 1988, when we had a president, a candidate for president, who stood in New Orleans and said, "Read my lips." In 1990, he broke that promise, even though in 1991 he led us through the Gulf War and a display of a mighty Department of Defense -- one that I think helped bring down a lot of other things that are problems around the world. But I also heard this president, less than three hours ago, talk about budget discipline -- budget discipline. And I believe when he commented before the nation, he says four percent growth is enough.

What does this do to four percent growth? What does this due to the budget discipline? Is this going to cause a reaction from the people the same as it did with Bush 41 on "read my lips," a one-term president? I like this president. I like his ideas. I think he has backbone. But I question the rationale of coming back and asking for more money when we've made a promise, that four percent growth is enough. It's not your place, it's Mr. Daniel's place, budget director, to advise the president and come back here with rescissions that will give you the funds needed to prop up our Department of Defense, to make sure that we have adequate equipment, infrastructure, personnel.

And I'll end with this -- and I gave this same advice to the speaker of the House two years ago -- there's a saying in Georgia and other parts of this country, Mr. Secretary, money talks; BS walks. Don't let the four percent growth be BS, sir. Pay attention to the words of budget discipline and to the people of this country who say cut spending first.

Thank you, Mr. Chairman.

REP. NUSSLE: Thank you. We are at the point where I promised Mr. Wolfowitz that we would have you out of here. I have two more people that would like to ask questions. Could you -- if we make them brief, would you be willing --

SEC. WOLFOWITZ: I'll try to answer them briefly.

REP. NUSSLE: All right. Mr. Moore.

REP. DENNIS MOORE (D-KS): Thank you, Mr. Chairman. And Mr. Secretary, congratulations, and thanks for being here.

I certainly agree with the chair's -- the chairman's comments that every member of this committee is concerned about a strong national defense. And frankly, if we don't have a strong national defense for this country, almost nothing else matters. So, in that regard, I certainly support adequate pay, and housing, and medical care, and research and development for our Defense Department and for the people who serve in our defense.

I want to ask you some questions very briefly, though, about the submission that you made and the $7 billion for FY02 for national missile defense system. Can you tell me, is there anybody who knows right now what the estimated total cost of this so-called national missile defense system will be?

SEC. WOLFOWITZ: We don't have a system yet.

REP. MOORE: I understand.

SEC. WOLFOWITZ: We have essentially a program to develop technologies. And so, we can't do the kind of thing that you might total up -- take an architecture and cost out a whole architecture. Let me say that covers a wide range of capabilities, some of which are urgently needed in the theater today to deal with threats that aren't sort of out in the horizon, they're right there now.

REP. MOORE: Okay. Thank you. I have heard and read from other defense experts that they have very real concerns about the threat that a terrorist attack on this country with chemical or biological weapons might represent. In that regard, how would you assess that kind of threat relative to the threat of a missile attack from a rogue nation?

SEC. WOLFOWITZ: Basically I would say they are both very serious. We spend a lot of money -- some estimates are as much as $11 billion in countering terrorist threats, and I would spend more if I thought it could be spent usefully. I was in Israel during the Gulf War. Former President Bush sent me and Undersecretary of -- Deputy Secretary of State Lawrence Eagleburger, to persuade the Israelis to stay out of that war. I've been in a country under ballistic missile attack. It was ten years ago, Mr. Congressman, and ten years later we still don't have an effective defense against those primitive SCUD missiles that were landing on Israel. It's not what the United States does when we're serious. We didn't get to the moon that way. We didn't build Polaris submarines that way.

This is a real problem. It's not a future problem. We have got to get serious about it, in my view. And we have to be serious about both. You could even frame it this way: we lost -- I'm sorry I don't remember these terrible numbers -- I think we lost 19 people to a truck bomb in Khobar Towers in Saudi Arabia, yes. We lost 24 people to a SCUD missile in Dhahran in Saudi Arabia during the Gulf War. Those are both real threats. We need to work on both of them.

REP. MOORE: You indicated to the chairman a request -- in response to one of his questions, that you expected that this review that's being conducted at the Defense Department might be completed now in nine months instead of the six months, which is already come and gone. Is that realistic, say September-October time frame? And might we in this committee expect a report back in September or October about what this review top to bottom of the Defense Department shows?

SEC. WOLFOWITZ: First of all, let me emphasize that we have completed a substantial review in the six-month period, but the short answer to your question is yes. We think it's realistic. We have people working incredibly hard -- very, very hard, and long hours -- but we think we can get it done.

REP. MOORE: If you find in September or October that you can't get it done, will you let us know that and give us a new time frame?

SEC. WOLFOWITZ: I take the chairman's point -- if we find in August that we're not going to make it in September or October, we'll be up here and be discussing with you what's realistic. We won't leave it to the last minute.

REP. MOORE: Very good. One more question. And please, take this as it's intended. I've looked at your bio -- very, very impressive biography, resume. But my question to you is, and this is not intended as a slap at you at all, but my question to you is would Secretary Rumsfeld come here and talk to us at some point in the near future?

SEC. WOLFOWITZ: I will ask him. I would recommend that he do so.

REP. MOORE: We -- I know there are members of this committee who would like to have an opportunity to discuss some of these things with him. And again, you may be perfectly qualified to be the secretary, but you're the deputy secretary.

SEC. WOLFOWITZ: I'm the deputy secretary. I understand.

REP. MOORE: And that's the only reason I asked that question, so please take it that way. Thank you very much, Mr. Secretary.

REP. NUSSLE: Mr. Fletcher.

REP. ERNIE FLETCHER (R-KY): Thank you, Mr. Chairman. And Mr. Secretary, thank you for coming. Certainly I believe that the president has put together in the Department of Defense one of the most experienced and best teams we've seen there in a number of decades, so I thank you for your work and what you're doing. And also, I believe you're doing an excellent job. You've got a very difficult task. I laud you and the administration for setting very aggressive goals and commend you for pushing to meet those as much as possible. I know because of circumstances outside your control it was not entirely possible, but I commend you for getting the ball rolling and working very hard at looking at transforming our military and our defense.

SEC. WOLFOWITZ: Thank you.

REP. FLETCHER: For those who say that, you know, trying to pit defense spending against tax cuts and other things, it seems to be that no matter what happens up here, they sing they same tune, and they seem to be out of touch with the folks back home who are looking forward to getting some tax relief. And I think we can certainly maintain a very strong national defense and give some tax relief if we have fiscal discipline.

Now, I served back and remember the Carter days. It was much like the Clinton years when it comes to defense and support for our troops and their equipment. I can remember decreasing flying time. I can remember taxing out to the -- to fly out of Elmendorf, and having all three struts go flat. I remember being at Nellis (sp) in 1978 at Red Flag (?) and having a 50 percent delivery rate of F-15s at that time. We were cannibalizing aircraft. Crews were getting -- not getting and pilots were not getting the flight time they wanted and were bailing out, going to civilian jobs. I've got a lot of friends who went to airlines, some of which are still flying.

And so I want to thank you for putting in the money for more flying time. I think that's important. Nobody can understand the importance of that unless you've been there and know how important that is to keeping well-trained pilots, and so I commend you on. And the spare parts -- I think it's 2.6 billion for spares and other things.

I saw three of my colleagues killed because of equipment breakdown, because we weren't getting the spares. We were cannibalizing aircraft. We had old aircraft. And it's very difficult to watch your colleagues -- there's going to be accidents, it's a very dangerous profession -- but to see losses that didn't need to be there because Congress and the administration at that time would not support the Department of Defense as needed is very troubling. And I trust we will not make that same mistake.

Well, I just read also, Colonel Sam Johnson, who happened to be my wing commander is now in Homestead Air Force book "Captive Warriors," and I look at the things that happened during Vietnam, how that differs from what happened in Desert Storm and Bosnia, how technology has brought us to make sure that we preserve the lives of our pilots, that we're much more effective in our strikes. And so, again, I commend you for your effort in technology and transforming the military. It's not going to be easy. It's not going to be cheap. But it will save lives and it certainly will improve our national defense.

With that said, let me ask you a few questions. And -- do you -- I don't know if you all have right now what our delivery rate is or mission ready rate for our aircraft are at this time, for say F-15s, F-16s.

SEC. WOLFOWITZ: Do you have those figures --

REP. FLETCHER: That may be more specific than we need, but I had read that it was pretty low at least a year or two ago, and I haven't seen new update figures on that.

SEC. WOLFOWITZ: If you wouldn't mind, I'll get them for the record, but I certainly have a very clear picture of those charts that the Air Force is briefing us on, and it's -- there's been a very dangerous dip, on the order of 20 percentage point reduction in readiness rate.

REP. FLETCHER: If we don't get the kind of support and equipment and the kind of flying time, we're going to lose very skilled pilots. I was down at Langley a year-and-a-half -- (inaudible) -- 1st Tactical Fighter Wing there, and we've got some of the best trained pilots, some of the most skilled individuals in the world, and we're not going to be able to keep those if we continue to provide them equipment that's -- we can't deliver, cannibalizing aircraft and not offering the flight time. So, I commend you again on your request to support those troops. That's very important.

What are -- what are some of the impediments that you foresee to impair your ability to really modernize and transform our defense, that you can immediately see that really are major impediments to doing that?

SEC. WOLFOWITZ: Well, I think, first of all, the difficulties of operating efficiently in a variety of ways. I alluded to this earlier, the fact that there are so many things that you know ought to be more cheaply provided through civilian sectors that specialize in those capabilities and you can't do it. I think another thing which is sort of endemic to the way government does business is that people have inadequate incentives to say money. I mean, you have, and I'm not going to – every government official I know confronts at the end of the fiscal year, if they save money, some budget officer will come in and say "You've got to spend it, because if you don't spend it now, they'll cut our budget next year." We ought to find ways to do the opposite for people, to say, "Okay, I've got the savings. It's going to make me better next year rather than worse off."

REP. FLETCHER: And is there a way of rewarding folks in that situation, of turning over or having surplus, that could --

SEC. WOLFOWITZ: I think there is. And I think if I could make a pitch here for what we've tried to do with the B-1, I think we're taking 90 aircraft that have a 54 percent availability rate -- that's a number I do remember, which is shockingly low -- that are so vulnerable to air defense that we didn't fly them in the Gulf War and we only flew about three sorties in Kosovo before we decided that even there they were vulnerable -- that they were basically built to fly a nuclear mission against the Soviet Union. We're getting rid of 30 of those 90. We're using the savings -- the Air Force is going to use the savings to upgrade the 60, so they not only have advanced avionics and higher availability rates -- respectable availability rates -- but also have stand off attack capabilities so they can stay 160 miles outside of air defenses. That is my view of a real way to find some of the money to do some of the things we need.

And we're taking eight aircraft out of Kansas, and eight aircraft out of Georgia, and eight aircraft out of Idaho, and I understand the discomfort, to put it mildly, of the delegations from those states. I hate to say it -- I think there's going to have to be more of that in more states before we're finished. And the only think I can say is those saving are being put into much more productive uses, and the 60 aircraft crews that are left and the people supporting them will feel like they're doing a meaningful mission instead of a 54 percent availability rate for an aircraft that doesn't go into combat. That's the kind of thing -- I think there are a lot of opportunities around the department, and we're going to be looking for them. We're going to be looking for help from you and your colleagues in making those painful choices, which I -- they're painful at first, but I think like so many adjustments that this country makes, we do understand that we're an incredibly adaptable country, and the pain you take up front really does pay off in the long run.

REP. NUSSLE: Mr. Spratt.

REP. FLETCHER: Thank you, Mr. Secretary.

REP. JOHN SPRATT (D-SC): Dr. Wolfowitz, we don't do one-year budgets any more; we do 10-year budgets, precarious as that is. You do sort of a six-year budget of FYDP -- of F-Y-D-P. I wonder if we could have a copy of your latest FYDP, which incorporates that $18.4 billion request?

MR. ZAKHEIM: This year, as you know, Congressman Spratt, we simply have the '02 budget proposal. There is no five-year additional plan that goes with it. This is very similar to what happened in 1993, the same thing exactly occurred. With the '03 budget, there will be the follow-on out-years, as is normally the case.

REP. SPRATT: When -- when can we expect a FYDP, a truly updated, properly stated, future year defense plan?

MR. ZAKHEIM: Well, as I just said, sir, when we submit the '03 budget, which is normally the January-February time frame, as Dr. Wolfowitz said, there will be the out-years as well, the FYDP in its entirety. This year we have only submitted for '02. Again, that is not unusual. That is very, very common with the first year of a new administration.

REP. NUSSLE: Thank you to our witnesses. There are I am sure additional questions from members. We are far over the time that has been allotted, and I apologize to members who came late and are interested in asking questions. There will be I am sure additional opportunities. If you would agree to possibly answer some of those questions in writing, that would be helpful, number one. Number two, we will take you up on the offer -- I am sure members would appreciate a briefing. Some have taken advantage of that. Others may want to. We appreciate that.

And then, just in closing, I think you obviously have got the point, because I would suggest rule number one is plan your work and work your plan. And rule number two is if the plan changes, let us know. And we appreciate that. And we also appreciate the work that your staff does. We have a former graduate of the Budget Committee, Mary Beth, and she has done an excellent job here, and we appreciate -- we welcome her -- and Becky? Oh, yes, okay, Becky Schmitt (ph) also is a former Budget Committee graduate. You have got some goods folks working with you, and we welcome them back.

MR. WOLFOWITZ: You run a good school up here.

REP. NUSSLE: We try. We run it so well they go on to bigger and better things. So --

MR. WOLFOWITZ: I'd be happy to take any questions in writing, or if people want to do an oral question, I'll be happy to take a phone call. I'm sorry I've got to leave now.

REP. NUSSLE: We appreciate the time you've spent today. Thank you.

MR. WOLFOWITZ: Thank you.

REP. NUSSLE: With that the hearing is adjourned.

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