MR. ZAKHEIM: In press ink that has been spilt over, some of the comments in the hearing yesterday regarding the concern -- and I think that was the word that the Chief of Staff of the Army used regarding the availability of funds beginning in the next fiscal year prior to our submitting a supplemental.
MR. ZAKHEIM: And so what I wanted to do was to clear this up. I’ve got one chart that I think will make this clear that we as comptroller officials and by the way, we share this opinion completely with OMB -- are not as concerned. The Chief of Staff rightly is concerned that he gets every dollar without having to worry about it. Our concern is: will every dollar be available. So our perspective is somewhat different, and we don't share that concern to the same degree at the same time frame.
What I'm showing you here -- and many of you are familiar with this -- is how much we cash flowed -- that is to say, how much money we took -- out of the defense budget baseline prior to getting a supplemental, which, of course, went into preparation funding for what became the Iraq conflict. And as you recall, we didn't know for sure whether we would go into a conflict or not, but we certainly knew that if we did, some preparatory activity had to be undertaken.
We spent nearly $26 billion prior to getting a supplemental. Now, we had to control that very carefully, and we did. We had to make sure that the money that we were taking was money that was not coming out of the kinds of operations we were funding. And so, what we did was we looked at funds that were likely to be spent in the fourth quarter of the fiscal year, funds for facilities or equipment maintenance, that could be delayed somewhat, and we spent those in the first and second quarters.
This underlies our belief that we can hold off -- indeed, many of us believe should hold off -- requesting any supplemental funds until the beginning of the calendar year 2005. There are just so many uncertainties and variables between now and then. For example, what will be the foreign troop contributions? We have Japanese troops in Iraq; something that, six months ago people wouldn't have dreamed of. We have the Koreans on a process that could well result in deploying troops to Iraq relatively soon. And in both cases we're not talking about a few hundred troops, we're talking about thousands of troops.
Subsequent to the 1st of July, there may be a further acceleration of foreign troop deployments. That, of course, will have a significant impact on our own costs. And it will also involve whether we are relying as heavily as we currently anticipate we might on reserves or less so -- since the actives are paid for anyway, but the reserves we have to pay as actives, and that drives up the costs. Conversely, we may have a situation that we certainly hope will not materialize, where things do not go as well as we think and we are forced to deploy more troops.
So the variance in terms of what a supplemental might look like is very, very large. And it's really impossible to predict. And we are funded through September 30th. So the question then becomes, would we not do better with some hindsight as we prepare the supplemental for fiscal year '05? We've concluded that we would do better with some hindsight. That will involve some degree of cash flowing into '05. This shows you that you can cash-flow a significant amount of money and still be able to do what you need to do when you get your supplemental, and to deal with your baseline accounts that you have drawn upon to fund prior to receiving a supplemental.
Now, why did I say that our perspective is somewhat different from the Army's? We know, historically, that we can do this. The year before we did it to a lesser extent. We know that we can cash-flow. Obviously, there are still uncertainties. We don't know exactly when Congress would pass the supplemental, for example. So from the perspective of the chief of staff of the Army, he's absolutely right to say, "I am concerned." On the other hand, from the perspective of those who have been managing the funds, we think that this is perfectly feasible, and we do not see the same degree of concern in the first quarter of the next fiscal year. That's really what I wanted to tell you all.
Q Even though you don't know -- even though you have all these uncertainties, don't you know what the minimum level of deployment of U.S. troops or expenses associated with Iraq will be, and therefore, couldn't you have, even if it were $10 billion, you know, put in a minimal request?
MR. ZAKHEIM: No. The reason is, first of all, we don't really know what that minimum would be because we don't know, for example, if indeed we were able to withdraw more troops from Iraq than might be anticipated right now, what the mix would be of those withdrawn. And it really is sensitive to whether we're talking active or reserves.
Secondly, it's not terribly wise to essentially say, look, we want money that we're not sure about now, but we'll come back to you for a supplemental later. The Secretary of Defense testified several times on the Hill that when we effectively did that, when we said, "Here's an amount of money for Afghanistan that we need" -- and by the way, those estimates proved pretty much on the mark -- Congress wasn't interested in doing it.
What you are effectively suggesting is let's just put in some block of money, call it a minimum, not identify it with a particular account, because we can't, and say to the Congress take it on faith. Congress has demonstrated they don't want to do that.
Q So, correct me if I'm wrong, what you're saying here is that you can flow cash here without in any way hurting operation -- you can take money out of operations or take money out of R&D without in any way slowing operations in other areas of the world in any way? And number two, you're saying that this has nothing to do with politics, this has nothing to do with the political calendar?
MR. ZAKHEIM: Well, let me deal with number one and then I'll deal with number two.
Number one, I'm saying is that up to a point, we can do what you just said; that is to say, up to a point, we can indeed draw upon other operations and maintenance accounts in order to support what might be required to operate and maintain our forces and pay for the military personnel account in Operations Enduring Freedom, Noble Eagle and Iraqi Freedom, up to some point. I mean, at some point it starts to choke.
I recall two years ago when we went to the Hill and we said, "Look, you're not giving us our supplemental." And we waited and we waited, and we were already talking about the third quarter of the fiscal year. And that's a very, very different thing.
But certainly, up to a point, if we're talking about cash flowing the first quarter, I'm reasonably confident, as one can be without knowing everything, without being totally certain -- I use the word "confident" as opposed to "certain" -- reasonably confident that that's doable.
As to the second question, about politics, I don't see that as an issue. I mean, having dealt with this -- this is -- I've already dealt with six supplementals. We don't think it of it in terms of politics. We think in terms of how do we manage the funds.
And this is a reasonable way, as I said, just as somebody who is in -- responsible to the taxpayer for managing taxpayer dollars, it seems to me that given the degree of uncertainty, the variances involved, in terms of the range of uncertainty and the variables involved in terms of what contributes to that uncertainty, I am more comfortable waiting and looking back. I mean, after all's said and done, I cannot predict -- and I have not met anybody else who can -- exactly what will happen after July 1st, nor can I predict what will happen in Afghanistan after the election there.
Q Are you saying that you're not going to ask for these funds from the White House until the beginning of the calendar year or that will you ask for the funds, and the White House simply will not ask Congress for the funds?
MR. ZAKHEIM: No, no, no. We will -- again, I mean, we're working with OMB on this. So let me be very clear. There's no daylight between us and OMB on this at all. The idea is that once we have some distance behind us relative to these changes that are going to take place this summer, we will be in a better position to formulate a supplemental request and do it -- we do these things jointly with OMB. It's not a matter of us sending some money up and then them sitting on it for months and months. I don't anticipate that at all.
Q You specifically mentioned the O&M accounts. Facilities and maintenance, I think, is an example.
MR. ZAKHEIM: Yeah. Equipment maintenance. Yeah.
Q Can you give us an idea of what impact that does have? I mean, obviously it doesn't impact operations, so to speak, but it's got to have some impact somewhere.
MR. ZAKHEIM: Well, it depends how long you delay it. I mean, if the Congress doesn't give us the level of supplementals that we ask for -- and by and large, they have, to a greater or lesser extent -- then we have a situation where, once again, we're delaying facilities maintenance.
Now this year, for example, we have put in our budget maintaining and sustaining 95 percent of our facilities. Well, by definition, if we don't get the money back from the Congress and we have to delay that, there will be some impact.
Now you know very well -- I mean, you can delay maintenance on your car a few months, and it won't matter. If you delay it a few years, it's going to matter a lot. You won't be able to move the car.
So it's the same thing with facilities and equipment maintenance. You can delay it up to a point. You cannot delay it indefinitely.
Q Was there any impact a couple of years ago, when you had mentioned that it did start -- (inaudible) -- into the third quarter?
MR. ZAKHEIM: We didn't see much material impact in terms of that, because we did get the supplementals.
Q You said up to a point. What is that point? Like, March? April?
MR. ZAKHEIM: I would say that if we do not -- presuming that we would send a supplemental up in January, if we did not hear from the Congress within a few months of that -- and again, it could be April 1st, it could be April 15th -- I mean, clearly here it was May -- but if we don't hear from Congress within a few months of that, we are going to get very, very nervous. And then I would be as nervous as the Chief of Staff was. But I think that we could allay his concerns if the supplemental went up in January and indeed Congress responded within a couple of months, as they tend to do.
So again, from his operational perspective, I can understand where he is coming from. But as a budgeteer, and with this background, we're reasonably certain that what Director Bolten has said, what we've said is accurate.
Q Just to make sure I understand: So the delay, I guess, in the late fall through December, that is -- until January when you ask for --
MR. ZAKHEIM: Well, until whenever the Congress passes the supplemental. So we're saying from October 1st until we get the supplemental funds, we will take those funds out of the basic O&M account, which, as you know, this year I believe is $127 billion. It's not like there's no money there.
Q Why is -- and January is the time to ask for it because you want time to figure out how much you'll need after --
MR. ZAKHEIM: Exactly. It's the right time for two reasons. One, we're sending up a budget, so it would be ideal to send the supplemental up together with the budget at the same time, if not a couple weeks sooner. I mean, that has to be worked out. Secondly, that gives you six months from these major changes, or five months -- I forget when the Afghan election is, but it's around the same time -- but certainly six months from July 1st. And you will have at that point had a pretty good sense of how that transition is going, of how others are contributing, of what the requirements are for this, of what the mix is going to be. You have a much better feel for the variables.
Q I came in late, so this might have been asked, but you're not going to be taking any money from procurement and R&D. That was your --
MR. ZAKHEIM: We normally don't.
Q Well, in the Clinton years that happened, but there was --
MR. ZAKHEIM: Well, we're not the Clinton years.
Q Categorically you can you say that you're not migrating funds from those accounts?
MR. ZAKHEIM: We haven't up to now. We didn't with this stuff, as I recall. J.R., correct me. This all came out of O&M.
MR. : Came out of O&M
MR. ZAKHEIM: Yeah.
Q And one quick follow-up, actually it's a separate question. Were you surprised at all by the questions and answers yesterday with the chiefs, or were you given a heads-up that this was going to happen and you needed to be prepared?
MR. ZAKHEIM: Well, one never knows what the Congress will ask. In terms of the chiefs' responses, as I said, they're perfectly understandable.
Q Did you know that they were going to be articulating those concerns? That's all I'm --
MR. ZAKHEIM: Well, you know, my experience in this business, which goes back longer than I want to admit now, is that the services always articulate concerns because they would like to be as certain as possible about the source of their funds. Clearly we can't offer them certainty. I can't tell the Chief of Staff of the Army you will get your money in March, as opposed to February, as opposed to April. So he has every right to be -- to express his concern if only to underline to the Congress, in my view, the importance of them acting quickly once the supplemental comes in. I don't want the Congress thinking, okay, you folks have given -- handed this supplemental in January; well, we can wait until May or June. I think the fact that the chief of staff of the Army said, Look, I am concerned about this, will energize the Congress next winter to move quickly when the sup comes in.
Q Given that there is an election this year, and, of course, this will be one of the weighty matters that the American people will be deciding, will you try to be somewhat transparent as the months go by on what you think the amounts needed for next will be?
MR. ZAKHEIM: Well, I mean, we always do try, actually, to be a lot more transparent than people give us credit for. Having said that, it's going to take some time.
For example, we are only now -- so here we are in February -- getting the monthly reports for November, I believe. November just came in. So there's a four-month delay. Now, why is that important? Every time I meet with you folks you say to me, how much are we spending a month? Okay? Well, I can tell you what we spent in November. By the way, what we spent in November -- it turned out this is maybe a fluke and we have to see how it plays out -- was roughly, hmm, something just above a third, a little more than a third of what we spent the previous month. The previous month, for some reason it was in the $7 billion range, and in November it was below $3 billion. It averages out in the region of $4 billion again, by the way.
Q That's spending for a year?
Q So that's Iraq and Afghanistan?
MR. ZAKHEIM: Iraq -- this is just for, you know, Iraq. Iraq. And so, it went up, and it came down. The month before, in September, it was below $4 billion. So November, it was below $3 billion. September, it shot up to the vicinity of 7 (billion). These are all four months ago -- five months ago, six months ago.
Q You mean October was 7 billion, right?
Q You mean October was 7?
MR. ZAKHEIM: No, no, no. I -- again, September, the number dropped below 4 billion. October, the number rose to the vicinity of 7 (billion). I don't have -- November, for the first time since the war, the number dropped to two-point -- I think seven, I think is the number. Okay?
Q Why? Why?
MR. ZAKHEIM: We're still trying to find that out. And that's why I'm answering this way. You have a number of things. You have a four-month delay, just in getting the numbers. And then you have to analyze why the numbers are fluctuating, what's behind them. That's why we need this time after this big handover and what happens out there to understand what the numbers will look like, and not only what they look like, but why they look like the way they do.
Q But there's no correlation there between the action on the ground, it seems, because in October there --
MR. ZAKHEIM: Look, there are other elements, okay, and we have to figure out what are all the variables. I mean one variable clearly is that we're just about done repaying that, okay? That -- so the question is, did that just have to do with obligation rates and so on, and was there a big bump up in October or not?
Another variable is the active - reserve mix. Another variable is, you know, are we spending more on transportation this particular month. I mean, there are a host of different variables. We do not know yet why that fluctuation took place. It is interesting that when you average it all out, you're still in the same vicinity that we were previously. But you know, and your monthly average may have gone from four-point-X to four-point-Y, but it's not a big change, but we have to understand that.
So again, given the major political changes on the ground in both countries and given the fact that we know we can cash flow, we want to do this right.
(To staff) I think I'm going to be able to take what, a couple more or something?
STAFF: Two more.
MR. ZAKHEIM: Two more. Okay.
Q You said that after -- that one of the possibilities after the transfer of sovereignty is that more foreign troops will come in.
MR. ZAKHEIM: Sure, yeah.
Q Is that based on some active planning? I mean, is that feasible at this point…
MR. ZAKHEIM: Oh, absolutely. We've, as you know, been in a lot of discussions with a lot of countries, and different ones have had different responses. I've traveled around sometimes with my Spanish counterpart, the deputy minister of the government of Spain -- Kingdom of Spain, to a number of countries that indicated they were quite interested, and several of them now serve in the Spanish brigade. There are some countries that remained reluctant for a while until they got the right wording out of U.N. resolutions, whatever they were. There are some countries that have indicated that they want to wait a little bit longer.
There is a mix of responses, and I think what's significant about the Japanese response is here you have a country that clearly is very, very carefully attuned to the U.N. and international opinion and now has troops out there. And again, the Korean process is the same. I don't think that process would have gone anywhere as far as it's gone so -- and it's gone very, very far -- had it not been for some kind of sense that this is the general direction of where things are going. So yes, based on our understanding, there could be more troops coming in.
Q But is there planning for, like, another multinational division, hopefully --
MR. ZAKHEIM: We could certainly accommodate that, yes.
Q About the actual construction of the supplemental itself. In past years, the Pentagon said it's supposed to be strictly O&M, you know, funding actual operations, but there's always a little bit of procurement and R&D dollars.
MR. ZAKHEIM: Not very much, no.
Q Do you expect to have very much procurement and R&D dollars this --
MR. ZAKHEIM: No. The approach to supplementals has been consistent since '01. These are wartime supplementals; we fund wartime activities. It has not changed.
Q All right.
MR. ZAKHEIM: Thank you very much.
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