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Under Secretary Zakheim Briefs On the 2004 Defense Budget

Presenters: Dov Zakheim, Comptroller
February 03, 2003

(Briefing on the 2004 Defense Budget. Slides shown during this briefing can be found at http://www.defenselink.mil/news/Feb2003/g030203-D-9085M.html )

Q: Here we go.

Zakheim: Well, hello, everybody.

(Cross talk.)

Q: We had so much fun last time.

Zakheim: Well, you're just gluttons for punishment, I guess.

Q: Could you begin by telling us why you're doing it and not Secretary Rumsfeld?

Zakheim: Because the secretary is otherwise occupied at this particular moment. And, as you recall, last year he spoke briefly and then asked me to do it. So this time he simply asked me to brief you all.

Q: (Inaudible.)

Zakheim: Yes?

Q: From the briefing on Friday, can we take what you said on Friday and instead of attributing it -- put it in --

Zakheim: Yes. (Laughs.)

Q: -- against your name? (Laughter.)

Q: (Inaudible.) (Laughter.)

Zakheim: Suit yourself. (Laughter.)

Q: No kidding, though. I mean -- (inaudible.)

Zakheim: Yes, yes. I have to actually do something I don't like to do, which is leave possibly before you're all done. I'm told I have to leave here in about 55 minutes. I'm going to go through the slides. I would ask you to bear with me and then ask your questions.

And then one other thing, which is not scripted. I can't get up here and say nothing about what happened on Saturday. I think, once again, this country has taken it on the chin, and once again we'll get up off the floor. The people up there were people from multiple races, multiple creeds, sharing a common vision, and we all grieve for them and pray for their souls. And we just pray to the Lord that this is the last time for something like this.

Next slide, please. As you can see, our budget top line, as it's so called, total defense budget, is $379.9 billion. That is out of a grand total of nearly 400 billion, but that includes 053, which is a budget function on the Hill that addresses Department of Energy defense-related programs; 054 addressees some other defense-related programs in the Coast Guard, the FBI, the Selective Service. It jumps up because of the Homeland Security Department, which now will also get money for intelligence, and that of course was not in our '03 budget; there was no Homeland Security Department at that point.

Those of you who are interested, the inflation rate assumed throughout this top line future year defense plan is 1.5 percent.

Next slide, please. As you can see, the taxpayer is still doing exceedingly well out of its defense expenditures. We are spending roughly 3.4 cents on the taxpayer dollar to continue our operations worldwide, notably in Afghanistan, as well as to support the other front of our war on terrorism back home. You will see that relative to the past, this is not at all a large commitment on the part of the nation's economy or the nation generally. At the height of the Vietnam War, it was nearly 9 percent of our gross domestic product; and during the Reagan years, the peak spending of the Reagan years, it was about 6 percent. So we believe this is a very good deal for the taxpayer.

Next slide, please. Another way to measure this is to look at the federal budget as a whole. And you can see there that, again, 16.6 percent of the federal budget, or 16 cents on the federal budget dollar, are spent for defense, whereas in the late '60s, it was in excess of 40 cents on the dollar, and in the mid '80s, it was in excess of 25 cents on the dollar. These precise -- 43.4 in the late '60s; 27.3 in the mid '80s.

Next slide, please. This is the slide that shows you the service shares. Roughly speaking, the service shares have not changed. Defense-wide, which is everything other than the three service departments, has gone up; but if you take away the defense health program, which has gone up by several hundred millions of dollars, then that increase is actually lower than the Army's increase as well.

Next slide, please. This is the slide that tells you how we got here from last year's budget. A number of changes in what we call "fact of life." If you want to have a military and you want to have civilians, you have to pay them. The increases came to about $3.7 billion, of which approximately 2.7 was for the military; inflation, which as I mentioned, is about 1.5 percent -- it was $4.3 billion.

The quality-of-life increases -- again, terribly important for military morale and retention. The housing allowance -- we are reducing the out-of-pocket costs through '05, and we've increased that by $1.3 billion. And as I mentioned earlier, the defense health program increases by about 500 million.

Shipbuilding, special operations -- in fact, all of those items I will get to in detail later on.

Next slide, please. Now, what does this budget do? Fundamentally this budget makes a trade between near-term requirements and longer-term requirements. And essentially we've concluded that we can withstand a somewhat greater increase of risk in the near term, while at the same time winning the global war on terrorism, but also to minimize, or at least reduce, longer-term risk. In all cases, we have to have the best possible people with the highest morale, best quality, and we do that. That is a very high priority for us. But transforming the defense establishment essentially means getting us into the 21st century, because the systems we buy with monies today, and certainly those that we put research monies into, will be the systems that we operate in 2030, 2040 and in some cases 2050. So for that reason we felt -- the secretary of Defense felt -- and this is following on the president's lead, which he articulated as far back as his speech at the Citadel, that it is much more prudent to take certain risks now in order to find the funds to reduce those risks later. And as we go through this I will show you how we do that.

Let me talk a bit about -- next slide, please -- the global war on terrorism. Last year we requested, the president requested in his budget $10.1 billion for a variety of items, mostly acquisition, relating to the war on terrorism; over a billion dollars for the air patrols over the continental United States, and about $700 million for programs that arose out of our nuclear posture review, which has changed the entire nature of what we have always called the triad. Out of that $10.1 billion, we got about 7-, $7.1 billion from the Congress. We had also asked for $10 billion for an operations fund, primarily for Afghanistan, but generally for the global war on terrorism. We received nothing. And as a result of that, we are currently funding out of our operations and maintenance fund which should be going for regular peacetime training and operations -- taking that money and funding Afghanistan operations, which puts us in a very, very difficult bind, and will force us to request more money from the Congress at some point. If not, we simply will not be able to conduct training and other operations later this year. So we are in a very difficult situation there.

Our '04 budget, again, is a peacetime budget. You might say, Wow, 379.9 billion, and it's all in peacetime? But the answer of course is yes. We have 1.388 million soldiers, sailors, airmen, Marines in uniform. We have to pay them, we have to provide benefits for them for their families, house them and so on. We have to provide funds to operate and maintain the equipment we have. We have to develop new systems, and we have to procure them. Those are things that would go on whether or not we are in Afghanistan or anywhere else. That's what this money is going for.

The last bullet is terribly important. The department over the last year or so has been asked to provide funds to friends and allies around the world who are contributing to the global war on terrorism. We have done that from within our own resources, which has meant that every dollar we give to another country comes from usually our operations and maintenance accounts. This year we are going to the Congress up front and saying we anticipate more of this. We can't pinpoint which countries we're talking about, but experience has now shown that we will be spending money to train and equip forces of friendly states, and we would rather have that as additional funds as opposed to funds that we then have to move out of things for which we already had budgeted monies.

Next slide, please. This gives you an overview of our military personnel account. The pay raise ranges as you see up to 6.3. It's actually 6.25 percent. The lowest percentage is for our most junior of junior servicemen and women, that is to say the enlisted first level E-1. People don't tend to stay in that level terribly long. That's at 2 percent. The average overall is 4.1 percent. As you saw, and I mentioned earlier, out-of-pocket housing costs -- we're on a glide path to eliminate those to zero in fiscal '05, which is the fiscal year after this one. We've added money to finance the over 65 future Medicare-eligible health benefits. Active duty end-strength is roughly at that number. There's actually a very slight decrease that reflects the fact that we are retiring a whole lot of ships as part of this willingness to trade somewhat on current risks as opposed to reducing future risk.

Next slide, please. Here's the operation and maintenance accounts. You'll see that there's not that huge a jump, which is not the case in the past. That's because we have fully funded -- and last year we fully funded our readiness goals. And that is a fundamental change from what prevailed in this department during the last decade, where in fact we almost -- I wouldn't say deliberately, but there did seem to be a happy coincidence that there would constantly be shortfalls in operations and maintenance, which would then be filled by -- because you have to fill those shortfalls -- by funds from the procurement budget, resulting in what was called then a procurement holiday. The holiday is over for procurement, as you'll see momentarily, and operations and maintenance are being funded quite properly.

Army tank miles -- the reason there's an asterisk there is that everyone in business certainly knows that one has to measure things. And the more you measure, the secretary likes to say, the more likely you'll see progress.

In the case of flying hours and ship operating hours, it's pretty straightforward -- that is the best thing to measure. The Army is transforming itself. It is undertaking a major new system -- actually a family of systems, called the future combat system. It is procuring this year more of its new lighter vehicles called the Striker. So it's not obvious that tank miles are the best measure. In the meantime, that's what we've got. And as we study and look at possible new measures, we are simply showing that, given the measure we have, we have fully funded for it.

Next slide, please. Here you see the two accounts that are linked and actually show up in a different appropriation, military construction and family housing. You'll see that our request is lower than what was enacted but higher than what we requested last year. Traditionally the Congress has seen to taking future programs and accelerating them, funding next year's construction program this year. We of course are trying to move on a steady glide path, so we relate our increases to what we requested last year.

In terms of family housing, you'll see a slight decrease, but that's more than offset by the increase in funding for privatized units. As you can see, we've got a commitment that is on its way to a half a billion dollars. We've increased by more than 100 million since last year. Between the two years, last year and this year, we're privatizing 66-plus thousand units. And therefore we feel that when one looks at family housing, one should look at it as an integrated whole, because the person who lives in the new unit doesn't really care how it's funded, all that person cares about is whether that unit is modern and provides for his or her needs. For every dollar that we spend in a privatization program, we get $8 worth of value. That means that we are getting $2 1/2 billion worth of value in family housing, over and above the $4 billion that we are getting in a direct funding line.

Next slide, please.

These are our six transformation goals. As I said earlier, we have taken some risk right now in order to reduce our risk in the future. And these are the six areas of transformation that we've identified as major thrusts for us, and for which we are providing funding. Let me go through each of these with some examples, and then make a general point about the amount that we're putting in.

Protect bases of operation. A good example of that is missile defense.

Project and sustain forces. We're developing a long-range strike aircraft. We're developing unmanned underwater vehicles -- sort of like submarines but without people. We're developing a future combat system for the army that I've already mentioned.

Denying sanctuaries to adversaries. We are developing an unmanned -- actually two kinds of unmanned combat aerial vehicles, that is to say, pilotless planes that can go in and fire a missile or something else at a target. We're developing the smart Excalibur round that will go in our new artillery portion of the future combat system. It's a guided round. Artillery rounds traditionally have always been unguided. Of course, this means you'll have to fire fewer of them. It will hit its target far more quickly, if not at the first shot. A major transformation in the way artillery will be used. And we're developing and actually modifying our Trident submarines to carry cruise missiles, what's called the SSGN program.

Leveraging information technology. That includes, for instance, a new joint tactical radio system so that the radios can talk to each other on the same frequencies, regardless of which service uses them. A deployable joint command-and-control system. We are going to have standing joint task forces around the world to have a command-and-control system that is truly joint, that allows each service to talk to every other, is a major breakthrough for us and obviously will make us far more responsive on the battlefield.

Conducting effective information operations and space operations. Both do not consume much in the way of resources now, but as you can see, it ramps up quite sharply throughout the six-year future year defense program. An example of information operations and systems is the aerospace operations center. And there are a whole host of space operations systems that are lumped generally into what are called space control systems.

Next slide, please.

I've said quite a bit about the Army's future combat systems. I've highlighted the network indirect fires portion, because that relates to the cancellation of the Crusader. This is where our money is going to go to have a far more responsive 21st century indirect- fire capability. The Striker, the wheeled vehicle that is already in three brigades, will now -- we are approving a fourth brigade for Striker. We're putting money in our future year programs for the fifth and sixth brigades. There will be a total of six in all. As you can see, 300 vehicles at about $900 million this year.

Comanche is our next-generation helicopter. We've modified the program. Originally, it was in excess of 1,200 helicopters. The program now calls for about 650. And together with this helicopter, which will be state-of-the-art, we are planning -- the Army is planning to use the unmanned aerial vehicles as well as the Apache Long Bow attack helicopter.

And finally, you can see up there the V-22 program, $1.8 billion, which includes both buying them and developing them -- nine of them for the Marine Corps; two of them for the special operating forces. And while those two show up in the Air Force budget, in fact, special operating forces normally are seen as land forces with everything else as a kind of support, and that's what these systems are for. And in effect, the way Marines have aircraft as Marine support, these aircraft are Army support, for special operations land forces support, to be more accurate.

Shipbuilding. A very good news story here. Last year, as you can see, we had five ships in our shipbuilding program. And since ships last something over 30 years on average, that meant that eventually, if we kept on procuring five ships, we'd be down to far less than 200 ships. The plan last year provided for five ships in this year. And the secretary of defense assured the Congress that that would not be the case. We've made good on our promise. This year, we have seven ships in the program, not to include the conversion of the Trident submarine. We are going to -- we are putting money for research and development for the aircraft carrier. We have a Virginia-class submarine. We have two DDG-51 destroyers. We have an LPD-17 amphibious ship, a dry cargo ship, and -- excuse me three DDG-51 destroyers and two dry cargo ships. So that we have a total of seven. And as you can see, throughout the five-year period, we have at least seven.

Why does it jump up to nine and then 14? Because if you look at the last two years, those years will be years in which we are funding a significant number of a new kind of ship called the Littoral Combat Ship. The LCS is -- what it's normally referred to -- this ship is meant to be a smaller ship that is capable of conducting mine warfare operations, operating in narrower seas, operating against diesel submarines, which tend to be very quiet and hide sometimes in shallow waters. This ship, unlike our current surface ships, which can cost a billion dollars or more, this ship is estimated to cost considerably less than a half-a-billion dollars. We are programming as many as, I believe, three in fiscal year '08, and four of them in fiscal year '09, and that's what drives those numbers up.

Having said that, I'll also say that we are conducting, as I speak, two studies. One to look at what we call forcible entry, the amphibious assault capability, but not just amphibious assault, looking at what do we need in terms of new ships to carry our Marine Corps? What kinds of ships? Should they be maritime prepositioning ships of some kind? Should they be classic amphibious ships? We're looking at those.

We're also conducting a study to look at what do we need for undersea warfare? During the height of the Cold War, Admiral Rickover used to advocate a hundred submarines. Clearly that's not what's needed. The question is, what is needed, and what is needed in light of the fact that we will be developing new underwater vehicles that are unmanned? That could change those numbers in the last years of this program, but as you can see, there's clearly a commitment to ramp up beyond where we had been floundering in the previous years.

Next slide, please.

Tactical and mobility aircraft, by the budget -- that sounds like a term of the art, and that's exactly what it is. What it says in plain English is that the F-22 program is capped, that is, there's a ceiling at $43 billion for the entire program. The program can move monies around, and is moving monies around, from the procurement account to the research-and-development account, to make sure that the development program yields a plane that really works. As it happens, the avionics development testing over the last couple of months have shown some marked increases, but right now, with the movement of monies that the Air Force projects, we're talking about a program of about 276 aircraft. To the extent that the Air Force can manage this program and get more money out of its research program and development program to free up resources back for procurement, the Air Force will keep the money and the numbers will go up. So, 276 looks like a floor rather than a ceiling.

F-18 E and F production is stable. This, of course, is the Navy's premier attack aircraft, carrier-based attack and fighter aircraft right now. Later on in our future year defense plan, we will be converting into buying F-18 -- not F-18 -- I guess they're called F-18-Gs -- the G is simply the electronic aircraft version. Right now, we use EA-6s. These are actually '60s vintage, '70s and '80s upgraded, naval aircraft that are a variance of the old A-6 attack plane and are used for electronic warfare. They are old and they need to be replaced. And although they were originally Navy aircraft, the Air Force relies on them too. So, we're going to move toward the F-18 G as this program moves on.

Joint Strike Fighter development, approximately 2,450 aircraft, eight countries participating directly in the development program, special arrangements being worked out with Israel and Singapore. This is the highlight of international aircraft production now.

C-17, as you can see, there is $200 million for research and development for mobility improvements. Improvements also to the C-5, the large lifter, secondly only to the huge Russian lifter. Modernization and enhancements to the C-130, the propeller lifter -- it's used on battlefields. And finally, the V-22, which I mentioned earlier, two for the Air Force, but really for the special operating forces and appearing in the Air Force Budget, the rest for the Marines.

Precision munitions, I'll just point out that key ones include the laser-guided bomb and the joint direct-attack munition, which itself is simply a dumb bomb, as it were, an unguided bomb which now has a guided front end to it so that it can link up to the global positioning system. And what it therefore does is reduce the requirement for dropping bombs on any particular target. And this munition, we were buying several years ago at a rate of 700 a month; now we'll be buying it at the rate of 2,800 a month. So, there's a significant increase there. We've also increased the laser-guided bomb. We're buying those at about 75 a month.

Next slide, please.

The missile defense program. The two numbers you see at the top both presuppose the Patriot Advanced Capability-3, the PAC-3, which you've been reading about recently, and the MEADS, which is the Medium Extended Range Air Defense System that we're developing jointly with the Europeans. In practice, these two programs are now shifting over to the Army. If you took those out, but then you'd have to take them out of '03 to have an apples-and-apples comparison, but if you took those out, you would still be spending more in '04 on missile defense for the Missile Defense Agency than you did in '03 including those programs. You'd be at 7.7 billion. The range and the nature of that missile defense program has clearly expanded as a result of the abandonment of the Anti-ballistic Missile Treaty, and that's why we can talk about adding land-based interceptors and sea-based, in particular, interceptors, whereas before that was banned by the treaty.

Next slide, please.

Special operations forces. A major thrust, truly transformatory in this program. We are adding a billion-and-a-half over and above where we were in fiscal year '03. We are adding eight -- nearly 1,900 personnel, mostly out of the Army, to the special operations forces. We're upgrading their helicopters, CH-47s, $260 million to modify 10 of them into special purpose -- special purpose, special operation forces helicopters called MH-47-Gs, and we're buying spares and training for those. A service life extension for the MH-60 helicopter. We're converting C-130s, the ones I mentioned earlier, as cargo aircraft into special attack C-130s called the AC-130s, that saw some action in Afghanistan. That's going to cost about 262 billion -- million, rather.

And by the way, those -- those, as I said, as it's indicated there below, low-density, high-demand -- these systems are very much in demand. The low-density, high-demand, for those of you who don't speak Pentagonese, simply means we need them and we don't have enough of them.

Next slide, please.

Unmanned vehicles -- another major transformational thrust. Nothing new about purchasing unmanned vehicles or using them. What's new is the breadth of the program and the degree of budgetary commitment. Global Hawk, which has already seen action, well over a half-a-billion dollars. Predator, a quarter-billion. The unmanned combat aerial vehicle, I mentioned that earlier. We're developing a couple of competing ideas there -- again, over a quarter-billion.

Broad area maritime surveillance. Right now, we do that with an old design, a P-3 it's called, and we keep upgrading those. This will do something similar without people at all. The Shadow is the Army's most modern tactical unmanned aerial vehicle. It has an operating range of about 50 kilometers. It can go as far as 200 kilometers, and it's meant to be responsive to Army needs. By the way, that's not the only Army unmanned aerial vehicle program. They've got an unmanned program, for instance, for an unmanned helicopter, which, as you can imagine, is a -- is a tremendous tactical challenge -- technical challenge. And finally, I mentioned earlier the unmanned underwater vehicle, in effect, a submarine without people.

Next slide, please.

C4ISR -- stands for command, control, communications, computers, intelligence, surveillance, and reconnaissance. No wonder we call it C4ISR.

Highlights -- and by the way, this -- if anything is the centerpiece of transformation, it's this, and particularly with satellite and space systems, and particularly the laser satellite communications. What that will do is expand bandwidth, which in English simply means allow more systems and more people to talk to one another simultaneously, allow greater loads of information to be transmitted back and forth at the same time.

It's what underpinned that famous story of the Special Operations fellow on horseback who was able to call in a B-52 strike against the people who were chasing him on horseback in Afghanistan. That could not have happened without unmanned aerial vehicles, without improvements to the B-52, without satellite radios, without global positioning system, but most of all, if the bandwidth hadn't been there.

What we're trying to do is to expand that so that we don't have instances of this kind of communication capability but that it becomes endless. And literally, with laser communications, there is no limit. I mean, truly the sky is the limit. And that's where they are.

The next slide, please.

Science and technology. We are below the enacted request. What's interesting is how little below the request we are. Congress has, in its wisdom, added programs to our science-and-technology budget that really don't have an obvious connection to defense programs -- breast-cancer research, truly a highly-praised program, but the connection to Defense is a little bit of a stretch. And there are a number of those.

Our objective is to fund to 3 percent of our Defense budget for science and technology. And let me explain; science and technology includes the early stages of research and -- actually all the stages of research and the early stages of development.

So it includes the scientist in the lab who is doing some work that might relate to something to do with Defense but isn't really -- you know, it's materials technology; isn't really focused on whether this is a material that will be important for an aircraft or a tank or ship; just materials technology. It's terribly important; you need those kinds of breakthroughs. That is at the very basic end.

And science and technology includes some development, but only the early stages, things that are being put together in the laboratory. But, again, you're not really exactly sure how to play out into a program.

One of the reasons we're not moving more quickly, and there is a positive slope -- two years ago we funded 2.67 percent; now it's a hundredth of a percent higher. Last year it was a hundredth of a percent higher, and again this year. One of the reasons is, particularly on the missile-defense side, we have moved from a research program to a true development program.

Once you get into later stages of development, you're talking about fielding things. And you can see -- I mean, the interceptors that were in a previous slide, those are items that -- they're development items. They're not the final, fully blown product, but they're real. And we have emphasized development, not to penalize science and technology, but simply not to move as quickly with it as we might have hoped. As I say, Congress funds to a greater extent than we do, but not necessarily for the things that we would assign priorities to.

Next slide, please.

I've talked a lot about transformation. I want to talk a little bit about business transformation. This isn't really something that one ordinarily associates with the budget, but if you're going to manage properly, you've got to do the things that are on this chart.

We are overly bureaucratized. I mentioned Pentagonese before. We're so bureaucratized, we've developed our own language that no one understands except us. Our health care system -- we're suffering, like the rest of the country is, from health-care costs that are simply exploding. For instance, this year our defense health program is going to budget for 14 percent inflation in pharmaceuticals, 9 percent inflation in regular health care costs. Well, everybody knows that's the case. But how can we cope with that?

The only way we can is by signing new health-care contracts, which are very, very large, using our leverage that we have, because so many people are under those contracts, and driving the price down. And my colleague, David Chu, the undersecretary for personnel and readiness, is doing just that.

The program budget process, it has become highly cumbersome. It is not all that different from what Robert McNamara implemented in the 1960s. And I recently saw McNamara and I told him that and he couldn't believe me. And he's not exactly a youngster anymore, with the greatest respect to him.

It is really a system that needs to be restructured. We have begun that. We have combined what is called the putting together of the program with the assigning of the dollars for budget-side. We've combined those. And we are going to focus far more on how the money is spent, what's called execution. It's the least we owe to the taxpayer.

Performance-based budgeting -- again, we're going to look at what are the outcomes we want. How do we want to get something, as opposed to simply put money in? We are very input-oriented. We're going to try to be far more output-oriented. Officer education is straightforward. We're modernizing our financial management system.

We're trying to finally clean up all the instables that have piled up for 30 or more years. Our acquisition structure, again, terribly unwieldy. My colleague, Pete Aldridge, the undersecretary for acquisition, just issued a new acquisition directive that is a fraction of the size of what it originally was. What were hundreds and hundreds of pages of gobbledy-gook are now 36 pages of real English.

We're expanding our electronic payroll so there are fewer errors, so people get their pay in time. And we're transferring our security clearance investigations. We do security clearances. The Office of Personnel Management does security clearances. Sometimes they both do them at the same time for the same people.

I was one. I had investigators coming to see me within several days of each other. And they went to their bosses and said, "Why are we both wasting the government's money and the taxpayers' money interviewing the same guy? His address hasn't changed in two days." And the answer was, because you have to. We're trying to move that out to the Office of Personnel Management.

Next slide, please.

We cannot do it all by ourselves. We do need help from Congress. And we're finalizing proposals. We're talking to the OPM, the Office of Personnel Management, the OMB, the Office of Management & Budget, to change our personnel system.

Right now our military system is governed by us. Our civilian personnel system, on the other hand, is governed by everybody's rules. But we believe that we are in a unique situation. We have over 600,000, I believe, civilian employees. We need to have a much more different, much more responsive civilian personnel management system.

We want to reorganize. We want to eliminate a number of congressionally confirmed appointments, make some other changes. And we want to go even beyond what Homeland Security got when they went to the Congress with one package and said, "Please do it on a fast track." That's what we want, instead of coming in as we do every year with bits-and-pieces changes -- some things get done, most things don't, and then it just drags on year after year after year as bureaucracy piles upon bureaucracy.

Moving non-military functions -- I mentioned the security clearances already. We have a printing service, the Defense Logistics Agency. Why we should corner the market on printing is beyond anybody's imagination here, and we want to divest ourselves of that. It'll save us about a thousand people over the future of defense programs.

We want a two-year budget cycle. Why, if we've all agreed on a budget and we all know what next year's budget should be, why must we go through again, the second year, everything we did in the first year? How much has truly changed? Can't we manage by exception? We intend to do that internally in the department. We would like for the Congress to do the same.

We would like more authority for competitive sourcing. Competition works. When outside companies compete with the federal government for particular tasks, savings are at least 20 percent, sometimes higher. Just the fact of competition reduces the federal government's costs. Ask yourself why that is. I could imagine several answers. Why don't we farm out more? Why don't we save the taxpayer his or her money if we possibly can?

We have some issues with training ranges. There is a term of the art; it's called encroachment. For all kinds of reasons, it is becoming more and more difficult to train on the ranges we have. If we're going to fight a global war on terrorism, if we're going to meet the challenges that we know are going to face us over the next years, we have to somehow preserve our training ranges.

And finally, this is what we think we've done. We have a new strategy that no longer just focuses on two wars but recognizes, first of all, that even if we were involved in two wars, we might decide that in one war we wish to overthrow a government and in another war we simply wish to give them a bloody nose.

Moreover, we recognize that there will be other engagements that we have to be involved in at the same time. So, for example, we have two crises right now, but we're involved in Afghanistan. That kind of flexibility is new in the way the department is planned. It's driven by a capability.

We cannot predict where future wars might take place, or contingencies as we like to call them. But we know that we will have to be more responsive, more quickly, with better intelligence, with better firepower. And that calls for a capability rather than a force that is built against the predictable and predicted enemy, as we did during the Cold War.

We have been taking care of our military people and their families. Benefits, as I've already pointed out, have gone up. Pay has gone up. Out-of-pocket expenses have gone down. We feel that, with re-enlistment sometimes at record rates, with the quality of our people far better than it was -- I was speaking the other day to former Secretary Weinberger, my former boss, and I was telling him how, nowadays, so many of our military -- almost virtually all of our military people not only have high school diplomas, but they have one or two years of college. And he said, "My God, we were hoping for 80 percent having high school diplomas when I was pouring money into the Defense budget."

That's how far we've come. We are the best-educated military in the world, and we have to take care of these people. We're better able to deal with today's threats. We saw that in Afghanistan. I need say nothing more. You've seen how transformation is well on its way.

I mentioned earlier that we are spending a significant portion of our budget for transformation. If you were to take out the fact that we are spending monies for personnel, which we have to spend as long as we want to keep them, that we're spending monies for operations and maintenance that we have to spend in order to maintain our systems and keep them in a good state, that there are many programs that we have to continue to fund because we don't want to disrupt them, the amount of money that's then available that we can really not spend or spend on, discretionary money, probably is no more than $75 billion out of that $379 billion budget.

Out of that, we're spending $24 billion-plus in transformation. One out of every three true discretionary cents or one out of every three true discretionary dollars is being spent on transformation. That is a major, major commitment. We're improving our management in our organization. We have focused on missile defense.

We have a new strategic triad -- no longer bombers, missiles and submarine-launched missiles and ICBMs as the triad. That's old-think. The new way we're looking at it is we have nuclear and non-nuclear strategic offensive systems. That's one leg. The second leg is missile defense, a real leg. And the third leg is the infrastructure that underpins those. We call it the new triad. It is a new approach.

And finally, we believe our program is balanced. It's executable. We will be having an execution review to be sure it's executable. And we're proud of it.

Thank you.

Q: Dov, given the interest in UAVs, you promised to try to get us some figures, I believe, on Friday. Could you give us some totals on, say, the number of current Global Hawks and Predators and the production rate you're aiming at? Perhaps --

Zakheim: I don't have that at the top of my tongue. I did promise them to you and I will get them to you. But I do not have them --

Q: Comparison figures?

Zakheim: Excuse me?

Q: Do you have any comparison numbers?

Zakheim: Yeah, we'll get you those. We'll get you last year's and this year's. Yes. Sorry.

Q: I'm sorry. And current totals, maybe; not just production numbers but current totals.

Zakheim: What we have in the inventory.

Q: Yeah.

Zakheim: Yeah, okay.

Q: Maybe you will get back to us?

Zakheim: Yes, we will.

Q: Three points during your presentation. First, you had a one-and-a-half percent inflation rate. What happens if we go into Iraq and we get a major oil-price spike and it lasts for a good long while?

The second point: You mentioned that we're going to come up short, not just at the end of the year but we're going to be trading around money, robbing Peter to pay Paul for months. And the same thing happened last year. Is the Pentagon budget system broke? And, if so, how do we fix it?

And the final point is, you mentioned shipbuilding. Okay, we'll have some decline in the number of ships, but then we would have a rebound. American Shipbuilding Association, however, is concerned that everything gets better in the out years on shipbuilding. And the near-years are what you look at, and the near-years, their estimate is you go down to a 250-ship Navy. So those three items.

Zakheim: Sure. On the first one, the oil-price spike, the truth is we don't really know. If there's a spike, of course, then it becomes a question of how long the spike will be. And in that case, we would have to either -- we'd probably have to go to the Congress and request more funds or move monies around. This would not be the first time something like that has happened.

It's not at all obvious, though, that there will be an oil-price spike if we are to go into Iraq; I just don't know. Remember, Iraq may be the world's number two producer, but there are a lot of other producers. And the one that really controls the price is Saudi Arabia.

The Saudis, for their own internal reasons, have an interest in keeping oil stable, because if the price of oil jumps up and down, what it does is it totally disrupts their own internal budgets. It makes it difficult for them to provide services to their people. One year they're providing all kinds of things. The next year they're starved.

So they have an interest, and they've demonstrated this year after year after year, in preserving stability. Their ideal number, by the way, is $27 a barrel. That's their ideal. So we do have a common interest with them, for totally different reasons in some cases. But we have a common interest in preserving stability. And because the reserves are so great, they can mitigate, you know, whatever negative effects come out of a war, if there is indeed a war.

Robbing Peter to pay Paul, and is the budget broke -- I mean, look, you have a situation where we have operations that are ongoing. We can't get away from that. If the Congress, in its wisdom, did not give us the $10 billion we requested, we can't turn around to our people in the field and say, "Sorry, come home." I mean, we could, with disastrous consequences.

So, in fact, what we have to do is continue and then go back to the Congress and say, "We are in a difficult situation; please help us out now." Does that mean that the budget system is broke? The budget system certainly isn't broke because we identified a requirement.

The budget itself is not broke because we're managing. We could encounter and expect to encounter serious problems, particularly in the training accounts, by July of this year, if not sooner, if we don't get help. But we are being very open about it. We are warning about it, and we anticipate that the Congress will do the right thing.

You asked a third question, and now let me deal with all three, please. In terms of the outyears, the future years of ships, obviously shipbuilders would like to see every year in double digits. What counts is that we have finally turned the corner. We have gone from five ships to seven ships, which means that when we say seven ships throughout the program we really are credible -- that's number one. Number two is because we are moving into a host of new ship designs, and we are putting in excess of a billion dollars into research and development for those, that the littoral combat ship program is real, which means you will get a lot more ships; the DDX program is real -- we're putting money into that, that's the destroyer, the new destroyer, which is actually part of a family of ships, which includes littoral combat ship as well as the new cruiser.

So I think that while obviously the shipbuilders would like something tangible -- they'd like everything right now in the building ways, the fact is that the commitments we've made in terms of research and development and the change in the program that they are seeing for '04, is a demonstration that we are serious about turning the corner on shipbuilding.


Q: Yeah, on the robbing Peter to pay Paul question, why aren't you making a request for money for operating costs funding the war in Afghanistan? You did it last year -- didn't get it, but you tried last year. The Clinton administration did it as matter of course to fund operations in Kosovo. And you are telling us, and you are telling Congress that you are going to be coming back to them to do it later. Why not do it now?

Zakheim: Well, partly because the Congress is still involved in its appropriations for '03 that it hasn't finished -- that's number one. So you have an issue -- they have to deal with their unfinished business. Secondly, we are talking to OMB about timing of all of this. And as you well know, should we have an Iraq operation, there will be funding that we will need for that one too. So then the issue is: Do we combine them? What's the timing? We -- you know, the global war on terrorism minus Iraq -- which includes Afghanistan, which includes Noble Eagle in this country, which includes other efforts -- is a requirement whether or not there is an Iraq. But should there be an Iraq, then there is a second bill. And then the question becomes: Do we ask Congress to help us with both bills at once? Do we separate them? What's the timing? I mean, these are issues that we are working out with our colleagues at OMB, and they are questions that we really need to think through very carefully because, as I say, the Congress in any event is still working on its own appropriations for '03. So that's why we haven't done it the way you suggested.


Q: A question on the supplemental. One is year to date how much are you in the hole? And the second part being you know how long it takes to get a supplemental through -- how long can you wait before sending it over, discounting for a second, the Iraq contingency?

Zakheim: Well, on the first one we are spending in the region -- and this is very rough -- between one and a quarter and a billion and a half a month for the entire global war on terrorism. That's roughly.

On your second question about, you know, how long it takes Congress to get things through, well, your last proviso is part of the reason. I mean, if indeed there is a war in Iraq, Congress could move very quickly, just as it moved after 9/11. And that's part of this discussion that I just mentioned earlier, you know. We do not expect Congress to take its time, and I don't think Congress expects to take its time in the event of an Iraq conflict. So that is part of what we are thinking about, and it's a very complex calculation.


Q: Are you still holding to the $10 billion figure on Afghanistan, or would you come up with a different --

Zakheim: Well, but -- if you take a billion and a half a month, that comes to 18. If you take a billion and a quarter a month, it comes to 15. So, no, I am not holding to $10 billion. But, remember, it's not just Afghanistan. I have to be clear about this.

Q: Tell us what is included in that number, please.

Zakheim: It would include the operation -- Yeah -- I am told that I have to get going. So I will answer this last question. That includes the operation in Afghanistan, Enduring Freedom; it includes Noble Eagle, all the things we're doing in the States; and it includes other non-Iraq kinds of operations that support the operation in Afghanistan in different countries in the world.

Q: On the second one, you said additional funds to train forces of friendly states, do you have a ballpark on that?

Zakheim: Well, we're requesting 200 million (dollars) for that. And, yeah, I really do have to go, because otherwise I'm going to be in trouble. Yeah?

Q: The billion-five, you're saying none of those dollars are included in this budget document?

Zakheim: No, this budget document is a peacetime budget.

Q: What estimates have you come up with for how much the war in Iraq would cost if the war --

Zakheim: The war in Iraq -- I don't think there is a good estimate. It has to do with how long it will go on, its intensity, and what we might do afterwards.

Q: You knew that you were going to have these new 10,000 troops in Afghanistan. Why not budget and -- (inaudible) -- ?

Zakheim: Very simply. We knew we would have 10,000 troops right now. But we are talking about '04. I don't know what we'll have in '04. Thanks very much. And, sorry -- I normally don't break away like this, but I've been summoned. Thank you.


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