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Background Briefing on the Fiscal 2004 Budget Submission

Presenter: Senior Defense Official
January 31, 2003 1:30 PM EDT

Voice: Ladies and gentlemen. This will be a background briefing. Everything you hear here will be attributed to a Senior Defense Official and is embargoed until Monday morning at 9:00 a.m.

Senior Defense Official: So here's your friendly senior defense official, again. It's good to see you all. I was reading about my briefing this morning. (Laughter.)

I thought it went pretty well, except it's not the entire briefing that I've got in front of me, but that's okay.

Let's move to the next slide and I'll walk you through the numbers.

Those of you who publish this number, this isn't of course the DoD number. It's the total national defense number. That includes Energy, this other includes things like Coast Guard -- most of you if not all of you know that. So the real number -- those of you that got it right this morning, is this one.

Q: While you're at it can you relate that to the 394 that Congress gave for last year?

Senior Defense Official: Yes, Sure. The 394 probably relates more closely to this one. Again, when I'm looking at our number you see here, 050 is 382, so it's not clear to me where that other 12 is.

When I look at things I focus on this number, so I see a 364 to 379, or a 365 to 379.9 increase, and I think about the fact that we're spending about a billion dollars a day or 42 million an hour. You can figure out how much a sneeze costs you. (Laughter.) So that number that you've got for me, [name deleted], you know I don't look at it that way. That may be some homeland security money. I'm not sure. If I don't know something I say I don't know it.

Q: That's the one the Authorization Committee used and that's kind of confused this thing. I thought there might be an apples and apples --

Senior Defense Official: I don't have one. Everybody, all my experts who are sort of pulling my strings here tell me they don't have one. So the puppet goes no. (Laughter.)

Next slide please.

The message here of course is 3.4 cents on the dollar as we fight a two-front war at home. Not a bad deal. The last time we fought a one-front war, but it was during the height of the Cold War, we were paying nine cents on the dollar. And the last time I was in this building we were paying six cents on the dollar, which was in the '80s. So we don't think this is an undue burden on the economy in any way, shape or form.

If you switch to the next slide which is the percentage of the federal budget, again, during the height of Vietnam we were paying nearly a half a dollar on the dollar for defense. During the height of the Cold War we were paying, not the height of the Cold War, the Reagan years, we were paying more than a quarter on the dollar. And now we're at 16.6 cents. Again, bear in mind that we are fighting a war as we speak.

Q: What are the two fronts?

Senior Defense Official: Home, and the worldwide war on terror. Half the folks are out in Afghanistan. That's the second front to me.

Next slide, please.

You reported on the firefight recently and I was out there three weeks ago now.

Q: -- Afghanistan and Iraq.

Senior Defense Official: Oh, no.

Q: The 379.9, does that relate to the 355.1 appropriation for '03 or is actually '03 higher because we have so many supplemental costs? Afghanistan, maybe the war in Iraq --

Senior Defense Official: No, no, no, the 364.6 -- This, these two are apples and apples. These are the various appropriations accounts and this is what we have as apples and apples. Is there anything added to that?

Q: So 355 does not include the military construction.

Senior Defense Official: Right, Remember you have, that's an important point to clarify in case you didn't hear it in the back. What you see the defense subcommittees appropriating are everything except military construction and family housing. That's why we have separate sets of hearings. There are two bills. There's a military construction/family housing appropriation; and then there's an everything else in defense appropriation.

So if you took out this, you're at about 354, give or take which I think is roughly where you were, {name deleted].

Q: Is this in constant dollars?

Senior Defense Official: No.

Q: All the way across?

Senior Defense Official: These are in current dollars. Then year dollars.

Let me put it this way. If '09 were in '04 dollars, then the '09 dollars would be quite a bit higher.

Q: One more time?

Senior Defense Official: When you say constant dollars you mean that everything is pegged to a specific year.

Q: Right.

Senior Defense Official: These are all constant. That means that this is '04 dollars, that's fine. This would then be in '04 dollars which means that in '05 you'd have to add inflation to that. We're using a factor of 1.5 percent. You'd have to add that. In fact it's already in there because it's in current dollars. These are not constant dollars.

Q: 483 includes inflation --

Senior Defense Official: 483 includes inflation.

Q: Can you tell us what the net increase would be minus the inflation? What you guys are looking at --

Senior Defense Official: You'd just have to back out a percent and a half a year and I haven't done the compound. You've got a little button on your calculator -- (Laughter.)

Next slide please.

Okay, here's the breakout by service. Defense health, which I'll get to, is in that, and if you backed out defense health then the increase for defense wide would be smaller, which is a reflection of the fact that we've really been pushing efficiencies on the defense-wide account.

The essential split between Army, Navy, Marine Corps and Air Force, roughly the same. No great tradeoffs among the services this year.

The next slide is one that is somewhat familiar to you. It's a little bit like one we showed last year. How did we get from there to here? Fact of life changes are things that in theory, at least the first line, are discretionary on our part but in fact are facts of life. You want to keep your people, you have pay raises, that's $3.7 billion. Inflation, that's straightforward. That's your $8 billion.

We have added money for the housing allowance account, basic allowance for housing. We're trying to get rid of the out of pocket costs by '05. Defense health program I mentioned, that's gone up some.

Shipbuilding is a big story, I'll come back to that. This is a significant increase that I think will be good news on the Hill and for the public generally.

Special Operations Forces. Many of you have already spoken to my colleague [another senior defense official] who has given you a feel for what we are changing there. I'll get back to that too, and to all of these actually.

So this is where some of the big additions were made, but we moved a lot of monies around and the net was another $4 billion. In other words, that allowed us $4 billion more to work with.

Now if you go to the next slide I'll show you some of those reallocations and some of you have spoken to me about this before.

We've terminated a whole bunch of systems. Those of you who want to know what ATACMS is, that's the missile that has the brilliant anti-tank munition. That's been canceled.

We were going to convert the MLRS to make it more survivable and make it more reliable. That's been terminated.

The Medium Tactical Vehicles, i.e. trucks, battle command systems, the JAVLIN system, we restructured those. And the ships, the largest component of those early retirements are the Spruance Class, the DD-963 destroyers which were built in the mid '70s and essentially were an operating sink. 259 older aircraft we're talking about, F-14s for example, and I think S-3s which are anti-submarine aircraft that we just don't need.

The end strength is reduced by 10,000 across the six-year plan. And the FYDP stands for future. Next year it will stand for five. We go back and forth from six to five but it's the same F, it's kind of interesting.

The end strength reductions, about 1800 people as I understand it.

With the Air Force, you know about this one. That came up last year so that's a continuation of that. And early retirement of a lot of older aircraft.

Bottom line is we're finding over $80 billion, and this is real money because these are things that are terminated, so we know how much we will not have to spend all the way out to '09.

Q: Why would (inaudible)? This seems to be common sense. Shouldn't this be done every year by the department to save money, of retiring older equipment?

Senior Defense Official: Well, what happens is this, and this I think is a key point about this whole exercise and I'll get back to it but it's a good time to jump in. Great straight man, [name deleted]. (Laughter.)

The basic point of this year's budget is that we have accepted near term risk in order to transform for the longer term. We've said over and over again this is the first real budget that we fully, fully controlled. You will see as I go through this, a lot of money for transformation. At the same time we've accepted near term risk. What does that mean?

It means that you are prepared to do away with systems -- I mean these aren't useless systems. They just marginally don't add enough to justify keeping them relative to the priority we wish to set for transformational systems.

Q: ATACMS though was canceled by Congress because it didn't work. So don't make it look like you're giving us budget reasons.

Senior Defense Official: Again, okay, but lots of things were canceled by Congress and they somehow come back. Lots of systems. I've been in this business about as long as you. There are phoenixes all over the defense system. The point is, stake through the heart, if I can mix my metaphors. (Laughter.)

Q: Are those Air Force fighters being retired, is that F-16s primarily or do you know?

Senior Defense Official: They're early F-16s is my understanding. There's some F-15s too, I believe, Mike. Mike Montalongo is our financial manager for the Air Force. Mike aren't there --

Voice: I think some of them are.

Senior Defense Official: And you'll be meeting with the service folks later on so by then you'll know exactly. They'll pick out some, identify them for you.

Moving along here.

Q: Can I ask one other thing? How do you know the out year figures are not soft like an Enron earnings statement?

Senior Defense Official: Okay. That's a loaded question. (Laughter.) Those of you that didn't hear it, he starts out by saying how do you know the out year figures aren't soft? Fine. But then he continues -- like an Enron earnings statement.

The answer is, unlike Enron we have a pretty good sense of what it costs to operate and maintain these systems. So you know year after year after year the factors that go into the operation estimates and the maintenance estimates and the cost to buy spares and how many spares you're going to buy. I mean obviously it's parametric in the sense that you don't know exactly, but it's like you take your car in every 5,000 miles, right? That's a parametric estimate. Unless you're leasing it and you don't bring it in and then they'll hit you afterwards for it.

But we have a pretty good sense of what it would take to operate and maintain these aircraft. By aircraft, by type. So that once you terminate that, you know exactly what you're going to save. The same with ships and so on.

Q: Is there any squishing into the 7.1 based on timing and terminations or anything? Is that --

Senior Defense Official: This is the best number we've got. Could it change? Absolutely. Absolutely. In fact I'll be honest with you, the $82 billion estimate changed three times, and depending on who I was seeing they got a different number. But that's the best number we have. This is the best number we've got.

Q: Have you talked to the Hill about this, the B-1 situation?

Senior Defense Official: Yes, we have. One of the things we've done, and as Casey Stengall used to say you can look it up, talk to the Hill folks. We have been briefing the Hill systematically as we've moved along to make these decisions. I've been doing it, but mostly [another senior defense official] been doing it because we had -- He's the program side, so he would brief, and as we moved closer and closer to this year's budget side I would brief. And we've jointly briefed them too, by the way. So they've had much more visibility into what we're up to.

And everybody understands that if you terminate something and it's in somebody's district they might be concerned, but that's part of the tradeoff. And we make our best choices based on our best information, and these are very tough choices, and the services, I have to commend all of them. And by the way, we've got I think two of the three service FM's here, [names deleted], and then several of the military programmers and budgeters. They've done a great job. This was not easy for them and we know there's politics involved. But nevertheless, we made our tough decisions. We've come up with the best balanced budget we can come up with for defense and now it's over to the Hill and they'll do their constitutional part.

Q: Do those reallocations stay within the services or did they get moved around?

Senior Defense Official: Well as you saw ultimately the service shares didn't change very much but we didn't focus on "gee", we're going to give the services back the money that they saved unless -- and this is very important. If they came up with savings themselves, we let them keep it. We had a basic ground rule, if the services found the savings they kept it, if we found the savings we allocated it however we felt it was best allocated. And that's an incentive.

If you just go to the services and say find the money and then the money's taken away from them what incentive do they have to find the money? Bill Owens some years back when he was the, I guess he was the N8, the Navy programmer, was asked could you find some money to reduce the Navy program? He saluted smartly and he did, expecting that the money would come back to the Navy. It never did. And it was a real task for us to convince the services that they could keep the money that they found. But you can check with them on that. I think we played in pretty good faith.

Q: You've got $7.1 billion in cuts, $4 billion in savings.

Senior Defense Official: It's net. It's a net cut of four. We added some stuff, we took out some stuff. This just gives you a sense of what we took out, and it's not the only things we took out.

Next slide please.

This is what I was talking about. We're balancing demand. We keep talking about different kinds of risk. What this budget addresses in particular is shifting the risk. Going for a somewhat higher although we feel tolerable short term risk to get a significantly lower long term risk. Minimizing the operational risk you'll see the O&M accounts. Doing some things to reduce management risk, I'll get to that too, although it's not purely budgetary. Essentially there's a philosophy here that if you're going to transform it's not just a matter of putting and taking weapon systems. It's a matter of a culture, it's a matter of outlook, it's a matter of strategy, and I'll get back to that as well. And when you take that as an umbrella, as it were, as an overarching concept of changing cultures, changing the way you think, changing the way you strategize, changing the way you operate on the battlefield. Then the systems fit into that. There's a cohesiveness here that we think really is there for the first time since we took over and maybe for the first time in 50 years.

Next, please.

Well, this is the number one demand. And I want to clarify some things to you here that get confused because for instance if you recall, when we got those $20 billion appropriations there were two sets of $20 billion and then there was 10 for the department and 10 for New York, and there's lots of 10's floating around and 20s floating around. And they're not single dollars either.

Last year right at the end of the budget cycle, in fact so late in the budget cycle that the monies were placed in our request in a defense emergency response fund which comes out of the operations and maintenance account, we put in $10 billion for three categories that you see up there. Mostly acquisition, some for the air patrols, and $700 million that came out of the study that [another senior defense official] led on the nuclear posture.

In addition to that another $10 billion was requested for the incremental operating costs of the war on terrorism. Now anybody can say look, you're asking for $380 billion this year, $365 billion last year, can't you finance a war out of that? The answer is if there were no war at all, if everyone were at peace and there was just the prospect of war -- we weren't in Afghanistan for example. We'd still have people. As long as we have 1.388 I guess is the number of people in uniform right now, we have to pay them, we have to give them benefits, we have to give them health care. As long as they're going to fight with weapon systems and they have weapon systems we've got to operate them and maintain them unless we get rid of them. Do we want to modernize their weapon systems? We've got to buy those. We have to do research and development in order to find out what's the best system to modernize with. We have to provide for logistics, we have to provide for intelligence. We even have to provide for the lawyers and inspectors and investigators.

That's where the money's going.

You then add on top of that the incremental operating cost of operating in an Afghanistan or elsewhere in the global war on terror. That is on top of it.

And so the first $10 billion, we actually got only seven so we were short three. And the $10 billion for operations, we're short $10. We're financing that out of our current operations accounts which are meant to be for normal peacetime operations.

What we do is we rob the fourth quarter of the year's operations, what we planned to spend in the fourth quarter -- that is from July to the end of September, and we pay it now. We're one-third into this fiscal year. In fact it's my estimate, and I've gone public on this, that I believe we'll be robbing the third quarter. Sometime this spring our services will not have money to conduct certain training operations. It just won't be there. They'll have to stand it down or they'll say fine, pull people back from Afghanistan. It has nothing to do with Iraq. Iraq is independent of that. If there's no Iraq, if Saddam dives into a hole and disappears, we still have this problem.

Q: Number one, it is costing you money to send these troops and these forces to the Gulf now. Number one are you going to ask for $10 billion or so again in this budget? And when are you going to ask for the supplemental?

Senior Defense Official: Well, as you know, OMB has said that at some point down the road there's going to be a supplemental. We haven't worked out the timing. We haven't worked out how much it's going to be. We're in discussions with OMB on that. But right now we know we're going to be choking. Last year when that happened OMB and we agreed on a number and we came back to the Congress and we will have to come back to the Congress. This has nothing to do with Iraq.

Q: Meanwhile are you going to ask for money in this budget, in the 2004 budget like you did before? Are you going to let -- Is this supposed to cover it?

Senior Defense Official: 2004, again, is a peacetime budget. It's just like 2003 in that regard. What it costs to field the people, to house them, to train them, to provide for their families, to give them the equipment, etc., etc., etc., ad inifitum. The education, the health, whatever. That's $379.9 billion. The only way you can bring that down is by doing a lot more of what we already did to the tune of $7 billion plus, retire systems, or cut back on training or cut back on people. Is this the right time to cut back on people? I don't think so. Is this the right time to plan on cutting back on training? I don't think so. Remember, we're talking about '04 which starts October 1st of '03.

How can we responsibly talk about serious cutbacks in any of these categories?

Q: I realize that you're talking about this is just the amount to keep the lights on, but the reality is --

Senior Defense Official: It's more than the lights on.

Q: But the reality is that you are sending troops right now and it's quite costly. What are your best projections on the cost of a war with Iraq?

Senior Defense Official: I've been asked this before. The last war cost $61 billion, and we --

Q: The last war being?

Senior Defense Official: The last Iraq war. Not Afghanistan.

The last time around the Saudis, Japanese, Kuwaitis, etc., etc., contributed about $50 billion so the net cost to us was about $11. I don't know what this war will cost. And not only that, this war is different because the President, if there's a war, has made it very clear that should there be a war, and I emphasize should, it's his decision. He hasn't made it. Should there be a war he has said that we will not be fighting the Iraqi people. He's made a commitment to reconstruction. I have no idea how much that will cost. It's not like Afghanistan.

On the one hand there is oil that may or may not be available. We don't know what will happen to oilfields if there's a war. You have a much more -- without in any way denigrating the Afghans, you have a much more educated middle class in Iraq, a large exile population that could come back. I don't know what that part, the post-war part will cost. And I don't know what the war will cost. Are we talking about a week, a month? Last time it was 100 hours. I don't know.

And anybody who gives you an estimate, the best they can do is the CBO will give you an estimate and they say we think we know how much it will cost by month. No they don't. No they don't. That's garbage, okay? Anybody who's an economist here will tell you it's garbage. And the reason it's garbage is because you don't know the intensity of the war, you don't know what the kind of the opposition is, you're making all kinds of assumptions about Saddam, about his people, about their fighting, about what we're going to do, about losses and so on. It's garbage. I'm sorry. Garbage.

Q: Nobody here is --

Senior Defense Official: I didn't say nobody here was making guesses. (Laughter.)

Q: You're making estimates, what's the range they're coming up with? You guys know what the intensity might be.

Senior Defense Official: Not really. I didn't say nobody was making estimates. I don't think we are at the stage of saying anything about coherent, scrubbed, careful estimates. No.

Q: Do you have a back of the envolope?

Senior Defense Official: You want an estimate? What good would it do? It will sell newspapers. It won't do anything else. (Laughter.)

Q: Just so I can understand the costing of the war on terrorism in '03, you asked for, it looks like you asked for a total of $20.1 billion in two different --

Senior Defense Official: Actually $19.4. And we got seven.

Q: $10.1 plus 10 --

Senior Defense Official: Minus the 700 for the nuclear part.

Q: And you got $7 billion, right?

Senior Defense Official: That's correct.

Q: You asked for $19.4 --

Senior Defense Official: [We're showing about 13].

Q: But you're not bundling similar chunks of money with the '04 request as you bundled them with the '03.

Senior Defense Official: No.

Q: Why not?

Senior Defense Official: Well, a couple of reasons. First, at the time we came in in '03 we were really in the middle of a hot war with Afghanistan and we needed money and we knew it. We're not in that kind of hot war today. I think that's probably your best answer.

Can I move on, guys?

Q: How much of this increase reflects realistic budgeting as opposed to, which started last year --

Senior Defense Official: Oh, yeah, we're doing that again. We haven't backed away.

How much of the increase reflects it? I'd have to get you that answer. We can get you an answer for that.

Essentially what we've done is continue with the policy we started last year which is there's the Cost Accounting Improvement Group, the CAIG as it's known. C-A-I-G, not K-E-G for those of you who are drinkers. (Laughter.)

And the practice had been to ask the CAIG to come up with an independent cost estimate and then kind of ignore it. The practice now is if we move off the CAIG estimate there has to be a real justification for it and the CAIG has to say yes, we can understand why you're moving off the estimate.

Pete Aldridge started this last year and we worked with him on that and we've continued that. That is the policy. There has to be the blessing of the independent estimators so that the numbers are realistically costed.

Q: Are you budgeting for the air patrols like you did last year? And what's the number you estimate?

Senior Defense Official: I don't think -- Are we budgeting for air patrols? I don't think so this year. We are? OK I stand corrected.

Voice: About $245 million.

Senior Defense Official: [name deleted] is my Deputy Comptroller says we're spending about $245 million on air patrols. There you are.

Q: '04?

Senior Defense Official: '04 CONUS. I'm going to move on so we can all get out of here at some point.

Military personnel. I talked a little bit about this. Pay raise ranges from two to 6.25 percent, rounded off to 6.3. If you're interested in the average it's 4.1 percent. If you want to know how that works out, we're going to submit pay tables to the Congress. The two percent is for the lowest, most junior, newest members of the military, and then we get increases that reflect seniority and also really demand. Who do we want to hang onto? Not that we don't want to hang onto the most junior ones, but they're the most junior so we don't really know. The other point is, people move out of that lowest enlisted rank very quickly. They're out of there so quickly that it really doesn't make that great a material difference.

Out of pocket costs, this is something we mentioned last year. We made a promise, we'd get it down in '05. We're on track. Nothing's been pushed to the right or to the out years.

By the way, I print up out year dollars. If you want I can give you a billion dollars any time. (Laughter.)

But we're serious about this.

This is simply accrual to finance future Medicare benefits. We estimate what we'll have to pay out and we put in for that and then we pay it out of a trust fund.

Active duty end strength, roughly the same selected reserve, roughly the same. It does not include possible reserve mobilizations, so the numbers you're seeing now, 70, 80, 90, that's not in there. That's again incremental.

Q: Is the 700 million equivalent to this year's cost of the two year zero legislation for TriCare for life?

Senior Defense Official: As I understand it this year's 700 is for the over 65s, isn't that correct?

Voice: -- over 65 and (inaudible) cost increases.

Senior Defense Official: It is not the under 65.

Next slide please, O&M.

The reason O&M hasn't jumped is because we really jumped last year. And the reason there's an asterisk next to the tank miles is that this metric may no longer be the best metric. We don't have a better one and we're meeting it. We're fully meeting all the goals. But maybe as we move to the Future Combat System and as we bring in Strykers, over 300 more this year, the fourth brigade being funded and so on, maybe there's a different metric than tank miles. We're working it. Mean time this is the metric. We're not trying to back away from it. We need it.

Next slide please. MilCon, family housing. Always of great interest to the Congress and to others.

So guys, why did you go up to 6.3 billion in MilCon and now you're down to 5 billion? Well, what traditionally happens with MilCon is that the Congress takes out year military construction and brings it forward. So they've essentially added to the priority or the urgency of projects that we felt could be deferred for some time. That's what they did. We're a little bit higher than last year. We are also funding sustainment. Those of you who have kicked around this place awhile remember the term BMAR. Backlog of maintenance and repair. The ultimate black hole of budgeteers. If you didn't know where to put your money but you wanted to hide it somewhere you put it in BMAR because no one ever know what the backlog really was. All right?

So the first thing they did was change the name. (Laughter.) Now it's sustainment. But what it really means is repairing broken down stuff. Broken down buildings.

Ninety-three percent is awfully good. It is close to perfect. A hundred percent is not perfect any more than zero unemployment is full employment. Economists will tell you, although they've changed a little bit in recent years, but for many many years four percent unemployment was full employment -- it may be a little lower now, but it's not zero. In the same way, probably 95 percent is perfect. Last year we were at 91, this year we're at 93. So we're sustaining a lot more than we have in the past.

On the family housing side, it looks like we've dropped but in practice we have added over $100 million for another 36,000 units. Every dollar that we invest through the privatization program leverages $8 because you've got the landlords, the developers kicking in to build the buildings. It is a highly leveraged, highly successful program.

So I would look at this at roughly $2.5 billion. If you're a businessman, that's how you would look at it. What it really tells you is that the old measure, the old think measure of how much am I putting into family housing is out the window. That's not how you do things. We're moving more and more -- that's over 60,000, 65,000 privatized units.

Next slide, please.

Here's something that I stole from [another senior defense official], you may have see this slide. It sums up what I was talking about earlier. We have done a lot of different things above and beyond simply buying new things and getting rid of some stuff. A completely new strategy. The alphabet soup -- National Security Strategy, Quadrennial Defense Review, Nuclear Posture Review, Contingency Planning Guidance, Defense Planning Guidance -- you like that, huh? And these other guidances. There's a Transformation Policy Guidance, there's a guidance that deals with security assistance and cooperation with foreign countries.

The idea is we've got a strategy that's different. For the first time since World War II we don't simply focus on two [canonical] wars as we did before. They're not equal as they were when we had two medium regional contingencies or whatever its predecessor terminology was. We basically say we can swiftly defeat -- that's the catch phrase, but we basically say we can give a serious bloody nose to anybody who is being aggressive and is threatening our interests. Beyond that, the President has the option in any one of those two -- because we can do those both simultaneously -- to go after somebody in their capital and basically dislodge them. Pay attention, Saddam. (Laughter.)

That is what this does. But it does more than that because it allows us also to have a flexible capability to do a large number of other military operations elsewhere, e.g. Afghanistan.

The old triad has been changed. Missile defense is part of our new triad posture. And of course we're looking at other long range strategic conventional capabilities.

So our old nuclear posture has changed. You have a completely different strategy.

We've also changed organizationally. Again this is in dollars in a narrow sense, although in the case of Special Operations Forces it will be. New unified command plan, a Northern Command, changing yet again the Joint Forces Command to make them essentially a transformation command to force transformation through the system through training, through experimentation.

We're going to have a new Under Secretary for Intelligence. We're going to have a new Assistant Secretary for Homeland Defense. The Joint Requirements Oversight Council that's run by the Joint Chiefs, the Vice Chairman of the Joint Chiefs chairs that, has an expanded and different mission. I mentioned already Joint Forces Command.

Again, you can just look down the list and what you're getting here is an overarching holistic approach to change. You then fit the systems, the budget into that. We've in a way gone back to the classical way of doing business which is what's your strategy, what are your objectives, what are your programs? We've changed the strategy, we've changed the objectives, we changed the goals, we've changed the organization, and then the programs come in.

Q: Why haven't there been changes, or reduces the force structure very much then if you have a sweeping change in strategy that seems less demanding than the old one and --

Senior Defense Official: Well, what we've done is put a lid on what other people thought might be a demand for increased forces. A lot of people have asked me the diametrically opposite question. Why haven't you added forces? The answer is this change has allowed us to get far greater economy of force. You'll see for instance when I get to the SOCOM slide, we're moving conventional forces into special forces -- 1800 or so this year.

Q: -- of the issues, force structure begets less -- gets smaller budgets quicker by cutting force structure, and you just implied the strategy is different but the force structure remains largely the same.

Senior Defense Official: Again, I think you have to look at it that the pressure for increased force structure is great and were there not this kind of a change I think we would have had to tolerate a much higher force structure.

Q: And the airplane programs, too. That was one of the drivers early on --

Senior Defense Official: Let me get to that a little later about the aircraft program.

Q: -- major cuts to --

Senior Defense Official: Yeah.

Next slide, please.

Senior Defense Official: Funding the transformation goals. You can see here about $24 billion for transformation. The first question will be my God, a $380 billion budget and only $24 billion for transformation. Again, look at what we are spending on elements that really are not terribly elastic. Military personnel, almost $100 billion. Take that out. It's not really discretionary in that sense, as long as you want to have the force levels you want. Operations and maintenance. If we were to cut back we would be having to apologize right now so that's another 115 give or take. So now we're at 215 out of that budget. Procurement and research and oh, Military construction and family housing, about another 11 and other programs includes the intelligence, defense health and so on, about another 18. Now we're at what, 215 and another 15 or so is 230 and another 11 is 240. Roughly $250 billion set aside.

So what do you have left? Research and development and procurement, together roughly $125 billion. You're not going to terminate a lot of your procurement programs. You're not going to end the F-18 line, for example. So there's a large chunk of procurement, and I don't know the exact number, so ask me and I'll tell you that. I don't know. But there's a large chunk that's ongoing and that you don't want to disrupt.

How much is truly discretionary? I would argue somewhere around $75 billion max. $25 billion roughly is going to transformation. That's how you have to look at it. Our commitment is roughly one cent out of three. Of discretionary procurement, we've chosen to give two of those three cents to ongoing things and one of those cents to the future, to the more distant future.

Just to give you some examples of these -- It is English, I'll grant you that but that's about all I can say about these phrases.

The first one is missile defense, is a good example. Protecting your bases of operations.

Projecting and sustaining forces, a good example of that is the new unmanned underwater vehicle program, for example, or the Army's Future Combat System or the Air Force's long range strike aircraft.

The third one, deny sanctuary. Things like the unmanned combat aerial vehicle will do that. Excaliber, the guided round that will go into the new artillery portion of the Future Combat System that the Army's fielding. The cruise missile submarine, the SSGN are examples of those.

Leveraging information technology. The Joint Tactical Radio System, for example. Or the Deployable Joint Command and Control System, gives you a sense or a feel of what we're talking about there.

Information operations, an aerospace operations center. These two, by the way, space operations of course is a lot of the space control systems and other elements many of which are classified. These two you can see -- this is the thin edge of the wedge. By the time you get out to you aggregate the six-year plan you're talking about considerable dollars there, but these are really cutting edge programs.

Next slide please. Let me walk you through the land, naval and air programs.

I think this is straightforward for most of you, in fact for all of you. A word about Stryker. There's been a lot of print spilled over what's happening to the fifth and sixth brigade. The answer is they are funded in the Future Year Defense Plan. The Secretary wants to be certain that the configuration and the firepower and the capabilities of those fifth and sixth, and indeed of the first four as well, particularly the fifth and sixth meet a certain standard that he is still determining, so the money is there but he will release it. It's a little bit different than just saying well go ahead and do what you're doing. Those fifth and sixth brigades will be a little bit different.

The others I think are straightforward. The V-22, by the way, that's the Marine one. There are two more this year for the Special Operating Forces.

Q: Those are the first two, for the Special Operating Forces?

Senior Defense Official: I believe they are. They tell me I'm right.

Next slide please.

This is probably one of our best news stories. Last year I was sitting next to the Secretary when he testified, many of you were there, and we got hammered over shipbuilding because we had five in last year's program and five in this year's program and the question was, well wait a minute, you just keep doing that you're going to be down to two something something ships if not 190 or whatever. The Secretary made a commitment he would plus it up this year. Two more ships, not including the SSGN conversion, by the way. We don't count that. $2.5 billion more. And in the box. Very very important.

A commitment of a billion dollars for a transformed Navy. Now this of course goes to that. But the carrier, the carrier's up here. The carrier is going to be something closer to the carrier we had originally projected for fiscal year 11 I believe it was. It will now be in '07. It will have three times the electrical generating power of its most recent predecessor. It will have electric catapults, electrical arresting gear which means it will be able to launch and retrieve aircraft far more efficiently. And it will have power to do things that start bringing you into Buck Rogers land to support electromagnetic guns or to support laser weapons.

Very often the great restriction is the lack of electrical generating power. This thing is going to have it. And again, this is from a ship that was consigned to the dust bin of naval history not all that long ago until it demonstrated in Afghanistan that it can even fight in a land-locked battle.

Q: Were you able to increase the shipbuilding account without using any alternative accounting?

Senior Defense Official: You mean like split funding and so on? This one is split funded, but if we go to the next slide, there's not really a lot of gamesmanship, quite frankly. We're just spending more on ships.

Now I have to tell you, you'll look at '09 to '14, in '08 and '09 you'll go oh my goodness, there's their spike. Back to the same games.

Point one, nothing's below seven, we're at seven this year. Point two, we are undertaking two major studies that my colleagues [another senior defense official] is going to lead, work with the Navy obviously. One is on underwater warfare, whether it's submarines or unmanned underwater vehicles. What do we need for the future? What are the demands out there? The second is on forcible entry, amphibious warfare. What kind of amphibious ships do we need?

In a sense '08 and '09 are placeholders. We don't know until we have this study what those answers are going to be. We will budget to those. The numbers may be higher, the numbers may be lower. But there's a serious commitment and this is first and foremost on the part of the Navy. The Navy's really restructured itself. It now talks about expeditionary strike forces, isn't that the term you guys use? That structures the Navy in a way that it can generate far more presence and firepower out of a smaller number of ships, and you can see here, we're going to go down to 291 in '06 and maybe depending on what that '08, '09 number is, we'll go up to - well actually it will be, depending on the earlier numbers, we'll definitely go up to 305 and then it could go up somewhat higher. The real issue is what are you doing with these systems? How do they fit in?

Unmanned underwater vehicles are off the curve entirely. So the Navy is, it started from the proposition we've got to be ready, our people have to be trained properly, our systems have to be fully maintained and operated. We don't want old, not junky systems, but old systems that are essentially sinks on the operations maintenance account.

Beginning with that base the Navy has said we're going to operate in a different way, we're looking at very different ships. This is a product of it.

Q: -- trying to build the first of their LCS ships in '07 and (inaudible) two ships in '07. Is that reflected in this number here?

Senior Defense Official: I forget how many ships we've got for the LCS in '07. Do you remember, Dino?

Voice: (inaudible), I'm not sure of the exact --

Senior Defense Official: It starts in '09, I see three in '09 and I think there's one in '07?

Voice: One in '07, one in '06, one in '05.

Senior Defense Official: [Navy official] says one in '05, one '06, one in '07 and three in '09 I believe is the right number. And you've got the R&D money today.

For those of you who don't know what an LCS is, littoral combat ship is essentially something than what other Navy's call a corvette. It is a ship that is meant to fight in inland waters or narrow waters, to do mine warfare, to deal with diesel submarines. Not to do the great bluewater job that was more of a Cold War challenge and therefore required all of the emphasis of the fleet. We can buy a lot more of these. Estimates of course are hard to come by, but equivalent ships, we're talking about ships that will displace less than 3,000 tons. Equivalent ships right now roughly $300, $400, $500 million, I mean we don't know exactly.

Voice: A very small charge. Let me correct that for the record. One in '05, one in '06, you've got a gap in '07, then three, and then four.

Senior Defense Official: One in '05, one in '06, three '07, four '09.

Voice: Three in '08.

Senior Defense Official: Will you correct me, please? [Navy offical], please stand up and tell us exactly what you've been reading.

Voice: One, one, zero, three, four.

Q: Starting in '05.

Senior Defense Official: One in '05, one in '06, zero in '07, three in '08, four in '09. I think that's what I said. We're on the same page aren't we? Way to go.

Q: Do you see the first DDX ship as the lead ship in a class of destroyers?

Senior Defense Official: Yes. It's not a class, it will be a family of systems.

Q: Because there's DGX and DDX. Do you think there will be both a group of future destroyers and a group of future cruisers?

Senior Defense Official: That's the way it's looking. Cruisers are larger and we're going to look for larger and smaller ships, both of which will be considerably larger than the LCS.

Q: Is one more important than the other? The destroyer in your view?

Senior Defense Official: I don't know. They have slightly different missions, they always have. We've always had both kinds. I don't know that one should be more important. I think they're both necessary.

Q: You know the Navy's had a bad history in the last few years of cost growth in a number of the programs. How confident are you now that they've got some bounding of --

Senior Defense Official: We hope so. There's less prior year shipbuilding money this year than there was in the past which already gives you an indication that we think we've broken the back of the problem. I think the combination of the Navy's own management attention and at the same time with [name deleted] trying to do realistic costing, it gives me a far greater degree of confidence about the backlog, the cost that has been haunting the Navy for decades.

Q: Is the department going to try again to get split funding, or is OMB just saying no?

Senior Defense Official: We got some on the carrier, so let's not trash OMB completely. (Laughter.)

We were looking at our program, we're comfortable with this program. OMB did a number of things this year. A number of our lead ships are being costed as R&D ships. We reached agreement with OMB on that. We reached agreement with OMB on split funding of the carrier. There's a constant dialogue. I can't really answer you because it depends very much on how the shipbuilding profile might change as a result of the studies but for the time being I think we're very comfortable with where we are. Probably more comfortable with shipbuilding than we've been in a number of years.

Q: When did [name deleted] begin the study that he mentioned to you, and what (inaudible) those results to --

Senior Defense Official: I think [another defense official] began the forcible entry study about a month or so ago. He's working with the Joint Staff, he's working with the Marines on this. The shipbuilding study I think he's just about starting now. So these are both geared to this upcoming POM.

Q: '06?

Senior Defense Official: POM '05. Don't go too fast. We're in '04 right now.

Moving on. Buy the budget. Let me define that for you folks. There's a $43 billion cap that Congress imposed on the F-22. Within that cap we are moving funds, the Air Force has felt it had to move funds back into research and development from the procurement account in order to deal with some of the outstanding development issues.

The current estimate for the total aircraft buy is 276. But by the budget means that as the Air Force manages this thing through and can get more for its money that number will go up, and they're convinced it will go up. So it's really almost discretionary management within the Air Force. They've got this cap and within that they're moving funds around.

Now [name deleted] has publicly said hey, if the thing doesn't work I'm going to recommend cancellation. I'm not going to wait to be told it will be canceled. But he has very high confidence that that's not going to be the case, and the latest reports we're getting in terms of some of the difficulties that were being encountered are that we're actually overcoming those at a faster rate than we anticipated.

So it is not an exaggeration to say that one could in fact anticipate that the number will be higher than 276.

Q: The number of planes?

Senior Defense Official: Number of aircraft for the program.

Q: What time period is this?

Senior Defense Official: This is through '09.

Q: Starting?

Senior Defense Official: It's already started.

Q: I'm sorry, I couldn't hear that question, but where's the --

Senior Defense Official: The question was how many planes are we talking about. It's 276 through '09 and the program has already started.

Q: Okay, but with the cost overrun, how did that affect the budgeting --

Senior Defense Official: Well, I mean the cost overrun is part of what the Air Force has to cope with. You recall originally that the number was well in excess of 300 and then it went down to 295. The Air Force is managing the program, moving monies back to research and development, dealing with the cost overruns, etc. Their current estimate is 276 as a result of that.

Q: But as you laid out the numbers for aircraft procurement in FY04, '05 and '06, how much was taken out of those accounts to put back into --

Senior Defense Official: That's what I'm trying to tell you. We did not move money out of any accounts at all. It stayed within the F-22 number. The Air Force, in other words there was an F-22 R&D account and there was an F-22 procurement account. And the Air Force has moved money or proposes to move money from procurement back to R&D. But other accounts outside of F-22 R&D or F-22 procurement are not affected. That's my point. So we're not say funding F-22s with money that would have gone to ships or money that would have gone to V-22s or something like that.

Q: So they're still on the same production schedule for the next few years then?

Senior Defense Official: No. They recognized that they will not be able to produce as many as they originally would have hoped for. This year I believe the number is about 20 for '03, 22 for '04, in the out years they had hoped to get as high as 56. They've re-estimated downwards but they may re-estimate upwards again is what I'm trying to tell you.

M[name deleted], do you want to add to that?

Voice: Out years will go to 36.

Senior Defense Official: It's not at 36.

Voice: Well, it will go to 36 in the out years.

Senior Defense Official: That's what I'm saying. The original estimate was higher than that, and the Air Force then had to ratchet it down and in theory it could ratchet it up again.

Q: (inaudible) for the 22 has bounced around a lot over the last few months. How firm is that number right now?

Senior Defense Official: That's the best we've got. That's the one we're going public with.

Q: Will this whole [$43] billion be (inaudible)?

Senior Defense Official: Well, that's an interesting question. The full 43 I think goes beyond '09 is my understanding. Isn't that right, Mike?

Voice: (inaudible)

Senior Defense Official: Yes. Total program.

Okay --

Q: I'm sorry, you said 76 through '09?

Senior Defense Official: 276 total program, I stand corrected. Good catch.

Next slide please. Missile defense.

Q: On the V-22, on your land forces slide --

Senior Defense Official: We have nine for the Marine Corps. You see --

Q: -- million dollars.

Senior Defense Official: Yeah. We have a disconnect on that.

Q: And this is 1.8.

Senior Defense Official: Does anybody have an explanation of that?

Voice: I didn't hear the question.

Senior Defense Official: The question is when we showed land forces we had $900 million for the nine Marine V-22s but when you added the two more you doubled the amount. There's a disconnect there on the briefing.

Voice: I assume the one number was just procurement and this includes R&D.

Senior Defense Official: That's probably it, it includes the R&D.

Q: On the F-18 is the G variant of the jammer going to be in this FYDP?

Senior Defense Official: Yes, sir. The F-18G is in the FYDP.

Q: When do you start that?

Senior Defense Official: Is it '05 or '06?

Voice: (inaudible)

Senior Defense Official: We'll get that for you. I think it may be '06 but I'm not sure.

Q: You also have, just like in the F-22 program, do you have a total program number on the V-22 over time?

Senior Defense Official: I don't have it yet. Do you know, [name deleted]?

Voice: We'll have to get it for you.

Senior Defense Official: We'll get it for you. You'll be getting the briefings right after this is done. I guess I'm in injury time already aren't I guys?

Let's move ahead here. I try to answer all the questions and it takes a little longer.

Missile defense program. The 9.1 includes funds from [NEADS] which is translated at the bottom of your screen, your chart. And PAC 3, if you took those out we would still be above last year. Why are we spending more? Well we've moved, as I've told a number of you, from the research side to the development side in a much bigger way. Once the ABM Treaty went away we could start doing more than just speculating about sea-based capabilities, for example. So we're going to field some development missiles, interceptors, that we couldn't have done. So we have seriously moved away from what was a research program towards the development program. Yes, there's obviously research elements, but this is on a continuum that leads to deployment.

Next slide please.

Q: Is there any particular reason you identify North Korea in there? Because during the December briefing on the deployment decision J.D. Crouch and Lieutenant General Kadish stayed away from identifying exactly (inaudible) system would be (inaudible) make any assumption.

Senior Defense Official: It does give you a capability against them. That doesn't mean we're going to use them against them. I don't think I mind if Kim Jung Il worries. (Laughter.) But the fact is and people should know that this does give you that kind of capability. Just an objective statement.

Next slide please.

Here's what I was talking about earlier. You've got a lot going on. This is important. They were always a supporting command, now other commands can support them as well, which is just a reflection of reality these days.

More on the planning capability. I said about 1800, it's closer than 1900. In terms of the billets that are transferred, most of those from the Army.

Low density/high demand as you all know simply means there's a shortage in English. And there is a shortage in some of these assets. CH-47 upgrades. That is going on alongside the Army's CH-47 upgrade program and makes UH 60 helicopter service life extension and increases in the MC-130 aircraft.

Q: I thought their budget was closer to 4.9 this year (inaudible)?

Senior Defense Official: It's closer to 4.5. Maybe you were reading the wrong newspapers.

Q: I was told it was --

Senior Defense Official: Don't believe what you're leaked. (Laughter.) This is the right number, 4.524.

Next slide please.

Last year when I spoke to you folks I said that we were getting really serious about unmanned aerial vehicles, and in fact this goes off of the culture. To think that the Air Force in particular would embrace UAVs to the extent it has, if I would have told you that four or five years ago you would have said I was smoking something. The fact that Predator has done so well, that Global Hawk is doing well underpins these other capabilities.

For example, the Shadow is the Army's system which is going to do reconnaissance, surveillance, target acquisition in real time. The unmanned underwater vehicle I've talked about. This one is an unmanned vehicle doing something like a P-3. The UCAV program is one that will essentially compete two different approaches to unmanned combat aerial vehicles.

So when you think again, let me talk a little bit to this old business of the bow wave. The bow wave doesn't account for this kind of stuff. Bow waves presuppose one-for-one replacements. I had to do this kind of analysis on contracts in the Defense Department. It was great. You knew they'd never get from here to there because nobody ever replaced one-for-one. But as long as that was the governing principle you had an "oh my God, the sky is falling" shortfall.

Once you move off the curve with these kinds of systems and you do some other things like the integration of Marine and Navy TACAIR, you have a completely different calculus. CBO, as you all know, said that if we just followed our '03 program, and this is I think a considerable advance on that, we would eliminate the bow wave. This tells you we'll eliminate it more quickly than even that.

Q: Does this program assume a joint UCAV program that was(inaudible)?

Senior Defense Official: Yes, it does.

Q: So are you saying that these systems could replace systems that are now on the drawing board?

Senior Defense Official: No. What these systems would do is replace a requirement for a lot more of the systems that are on the drawing board. In other words you no longer have the same requirement to replace everything that we have now one-for-one. It is a combination of both. The new systems that we have on the drawing board, new aircraft and so on, plus these.

Q: This doesn't take away from everything you're planning to buy right now.

Senior Defense Official: No, it's a coherent --

Q: How does that help with the bow wave?

Senior Defense Official: Because the bow wave presupposes - look, if I have X number of F-15s today and I buy Y number of F-22s, and there's a delta and the delta is downward, you'll tell me I've got a bow wave. But if I have X number of F-15s, Y number of F-22s and Z number of unmanned aerial vehicles, I'm arguing I won't have a bow wave.

I don't reduce my Y, but my Y plus my Z probably does better than my X. (Laughter.)

Q: Can we quote you by name on that? (Laughter.)

Q: (inaudible) eliminate the bow wave. If you have X number of F-15s, you have Y number of F-22s, and you're replacing those --

Senior Defense Official: In a less than one-for-one. Look. Let's take --

Q: They're always going to be replacing less than one-for-one.

Senior Defense Official: But the point is that -- The argument analysts have always made is you really should be replacing one-for-one. In other words, if I've got for example -- We have 750 F-15s roughly. If I'm buying less than 300 F-22s or even 300, and I say I've got to replace F-22s, that's my replacement for F-15s, the answer is my God, you've got a problem. You can't fund the replacements. Some people will say you can't even fund the 300 you're buying.

Now in the case of you can't fund the 300 you're buying, that's why we have realistic funding. But I still have a problem. I can't fund the force level.

My answer to that is, no. If I have my 300 or whatever the number is F-22s, and I have these other things, I don't have to go to 750.

Q: What you're saying is it's not that you're actually reducing it, you're reducing it from what could have been some hypothetical bigger number.

Senior Defense Official: That's all a bow wave is. I haven't bumped into one yet. (Laughter.)

Q: (inaudible) will reduce the need to do one-for-one replacement --

Senior Defense Official: Well, it depends --

Q: -- which aircraft, for instance?

Senior Defense Official: Well, you're talking here about reconnaissance, surveillance capabilities. This one you're talking about things that would reduce the so-called bow wave for fighters or attack planes, plus the attack planes. Here you're talking about helicopters probably. Here you may be talking about submarines.

Again, it's not that they are going to replace what we hope to build. It is that they will fill that notional gap that is called a bow wave. In practice, as I say, a bow wave is something that's more in an analyst's mind than in reality. In practice what they're really doing is incrementing our capability. It is another tool. It is why this force is being transformed. Something else to drive the enemy nuts.

Q: Do you have a number, if you're going to have roughly 300 F-22s plus other platforms, what will that total number be in comparison with the 750? Do you have a ballpark?

Senior Defense Official: I don't. I really don't. Because, these are produced in very different numbers. They have a lower survivability rate. So it's really an apple to an orange.

Q: Can you give us a production number on some of those?

Senior Defense Official: Not yet. They're in R&D.

Q: (inaudible)

Senior Defense Official: Global Hawk I can give you. We can get you those numbers on Global Hawk and Predator.

Q: You were somewhat flip about this bow wave --

Senior Defense Official: I'm not flip at all. I'm serious. The bow wave has been with us for the last how many years?

Q: Because Rumsfeld back in May when he was defending the Crusader decision was pretty strong. We've got a looming problem after '07. We have to take, I think it was significant action on major programs. Where does any of that show up in this plan?

Senior Defense Official: Again, the problem that we faced was this. You can always push the bow wave out. What we did instead was say okay, let's face the reality that there are shortfalls. What do we do about them? One way to do it was to build more ships. Another way to do it was to push these things. That's what we're talking about. That is how you come to grips with the real, if you will, shortfall as opposed to some massive bow wave out there. There are other things we've done. Integrating the TACAIR is going to save you tens of billions of dollars.

Q: Tens of billions?

Senior Defense Official: That's the estimate.

Q: How can that be? Smaller number of airplanes?

Voice: Fewer Joint Strike Fighters.

Senior Defense Official: 400 fewer Joint Strike Fighters.

Q: Tens of billions.

Senior Defense Official: Yep. We'll get you the estimate. I'm not exaggerating.

We're really over time. Let me move quickly to some of the others.

Q: Is this going to impact any of the (inaudible), any of the (inaudible) V-22s?

Senior Defense Official: No.

Q: There's not going to be any --

Senior Defense Official: No.

Q: -- from any of those. Global Hawks and Predators and --

Senior Defense Official: That's correct. This is additional.

Q: Okay.

Senior Defense Official: These are examples of command and control, and I really wasn't being flip about the bow wave, but the bow wave has been with us sort of like BMAR. So you have to look at it, just like you have to look at maintenance or repair, but you've got to look at it in a balanced kind of way which is I think what we've done.

Here are examples of how we're dealing with command, control, communications, computers, and so on. These are some of the highlights. I've mentioned them before.

This is the heart of transformation. The communications are key. The issue, the term that's used is bandwidth. How much can you use a Predator, how much can you link the Predator to the B-52 or Global Hawk? You're limited by how much information you can generate and receive. You need the bandwidth to do that. Laser satellite communications breaks the back of that problem. It becomes almost limitless. Which means that you're getting real-time information at unbelievable speeds, and we all know just by working on the internet and computers and so on what a difference it makes depending on how you link up.

Next slide please.

Science and technology, very briefly. Last time I saw you folks (inaudible) said my God, we're .01 higher than '02 and I got loads of questions. Gee, the Congress gave you more. Sure, Congress gives us more. They're not necessarily the projects that are our higher priority. And there's a difference between Congress giving us more in military construction which essentially simply takes programs that we're going to implement anyway and just brings them forward, and here where they fund a number of programs that we might not have funded at all.

The trajectory, though, three percent is the [canonical] number that they say industry invests in science and technology. We're still moving up another few hundred million dollars. More important, remember that S&T is the research side of the R&D continuum and we're emphasizing the development side. So we're putting more money into development. Go back to your slide that shows you it's in excess of $5 billion I believe for the R&D accounts. We're still putting somewhat more into science and technology. We're still moving in the right direction.

Q: Would you disagree with folks like the Defense Science Board and Pete Aldridge who have said that DoD should budget three percent for S&T?

Senior Defense Official: I've talked to Pete quite a bit about this. That is, until we find a better objective, that's the right objective. But we went through this very carefully with Pete and he felt that this was, this funded a representative number of technologies that we needed. Is it everything? No. But that's part of what you trade off. We put a greater emphasis on development, and again it's still an increase.

Q: In the FYDP what's the largest percentage and in what year?

Senior Defense Official: We get the three percent in I think, is it '08 or '09? We do get there in the FYDP.

Q: You said you'd been briefing Congress as you've been going along on these decisions. What are --

Senior Defense Official: Not decisions, just on how we were progressing.

Q: What are the heartburn issues to the congressional end of the telescope as near as you can figure out? Is it the quantity versus quality argument?

Senior Defense Official: Well on that one, why don't you go to the source? I'm running out of time. I mean seriously, I wouldn't want to characterize their heartburn. They're pretty good at doing that. (Laughter.)

Next slide please.

This is another [senior defense official] slide. It speaks for itself. Where we were, where we are, why we're proud of it.

I do want to move to the next slide because this one is straight forward. Here are things that we're going to want Congress to do and there are things that we need to do and we're doing those. This is one that -- These are all terribly important to the Secretary. This one has already begun. This one [another senior defense official] is working on [another senior defense official] and I worked out a budget program, budget process where the program budget decisions, on the one hand, and the decisions that were made in the program review were totally in sync so that we never revisited anything. And in fact at every step of the way my people and his people sat together so there were no disconnects at all.

One other thing we're doing this year is [another senior defense official], it was his suggestion, and the Secretary thought it was great and everybody signed up to it, that we not go through a full blown program review again. We have a six-year budget and then we have a five-year budget. So during that second year, the second part of the FYDP, we will essentially manage by exception. If someone wants to challenge the guidance or the program as it was approved in the previous year. So in '05 for instance it should reflect what we're saying now in '04. They'll have to show what has changed. They'll have to provide a rationale. So it will be an abbreviated process.

Q: And shorter budget briefings?

Senior Defense Official: It might. (Laughter.) Instead we're going to have an execution review. Not who we're executing, but -- (Laughter.) -- how the money's being spent. This is really important to me in my CFO hat. What is called everywhere else in the world the burn rate, how you're spending your money. How you're moving your money around. How are you executing. We owe that to the taxpayer, we owe that to the Congress, we're going to focus on that. We do that every year, but we're going to do it in a major way in the off years as it were.

Q: So there's been no change in the last jump forward.

Senior Defense Official: Correct. And the rest of it I think is pretty straightforward. Our people can give you some detail.

Help needed from Congress. We really need a civilian personnel system to shake up where we are these days. As you know our civilian personnel come under civil service rules, that creates all kinds of difficulties for us.

We are going in with a host of changes that we wish to make. The Secretary has waxed eloquent on that on numerous occasions. We want to have what homeland security just got. A fast track, once off change to the way we do business. We want to rationalize our confirmed positions, for example, we want to design leadership roles based on priorities, we've got a lot of things that are vestiges of a previous timeframe. Instead of coming in with bits and pieces we want to do it all in one.

We want to move non-military functions out. For example we're going to propose transferring the personnel security system totally over to OPM. Right now there are duplicate systems. I personally went through simultaneous OPM and DoD background investigations when I was a contractor, and I spoke to the investigators, pointed out that they had both made the same typo in my address, and told them to speak to their bosses and see whether it would save the government money to have one investigation since there was only one of me. They agreed. There was only one of me. The bosses said no, we have to conduct them separately. This is nuts. So we're going to transfer that out.

We're going to divest the DLA printing service. There is a competitive market in the private sector, we'd save about $80 million there.

The rest, again, are pretty straightforward.

The last slide is, hurray for us. (Laughter.) We think we've put together a well thought out, well balanced program that reflects the new world we're living in, that is geared not just for now but in the case of the carriers well past the middle of this century. That truly transforms the way we do our business, the way we think about doing our business and the way we organize doing our business.

Thanks for your patience. Over to those folks.

Q: One last question. Given the projection for huge budget deficits, what kind of confidence do you have that you'll get $20 billion increase each (inaudible)?

Senior Defense Official: Absolutely confident. I got 16 percent of the budget. I'm not worried about it. And by the way, the deficit has historically lowered the percentage of the total gross national defense product.

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