Friday, February 4, 2000 - 2:30 p.m. (EST)
Subject: DoD Fiscal Year 2000 Budget
Presenter: Attributable to Department of Defense Senior Officials
(Slides for this presentation can be found at http://www.defenselink.mil/news/Feb2000/g000204-D-0000K.html)
P.J. CROWLEY (Principal Deputy Assistant Secretary of Defense for Public Affairs): Welcome to our Budget 101 background briefing -- or, I guess, Budget 2001 background briefing. All of the materials that you have received this afternoon, and the comments that are being made here, are embargoed until Monday morning, February 7th, at 8:00 a.m., in conjunction with the release of the president's budget. You received the conditions of the embargo with your budget package.
We have with us a well known -- you know, our professor of Defense economics, ****** (name of briefer deleted). And he's with his adjunct faculty from his office and the other services that will be at your disposal this afternoon. When the embargo is lifted on Monday morning, you can attribute his remarks to a "senior defense official."
After this session, the services will have presentations on their specific programs. Each will be available in rooms in the OSD Conference Center, which is downstairs in 1E-801. That's where we've used the -- those facilities in the past. We'll have OSD budget representatives who will be able to answer any questions on DOD-wide programs, but they will not have another presentation for you.
But you've received a sheet with the room locations. The Air Force is in Room 1, the Navy in Room 4, the Army in Room 7, the Ballistic Missile Defense Organization in Room 6, and others for personnel issues and et cetera will be in Room 5. But just go down the hall here, downstairs, et cetera. You've all been there before, or you can follow the crowd as they surge, after this is over.
So without further ado, (briefer's name and title deleted).
SR. DEFENSE OFFICIAL: Thanks, P.J. It's a bigger crowd than usual, I think. Expecting more than I'm going to deliver here.
QIt's just 'cause it's snowing outside.
SR. DEFENSE OFFICIAL: (Laughs.) Yeah, nobody could get home, I see!
SR. DEFENSE OFFICIAL: What I'd propose to do is I have -- I think you have in your hands a briefing of 30-or-so charts, and what I propose to do is I'll go through that at a relatively rapid clip. I'd prefer to hold questions -- unless you're dying for a clarification, I'd prefer to hold questions until the end so that I can get all the way through this. Once we start going into questions, we won't make it through, and I'd like to cover this material for you to give you a grounding of what we think we're doing, and then handle all your questions until I run out of answers, and then I'll turn you over to the services.
(To staff) If you could go ahead and put up the first chart.
Let me start where we left you off last year. I am sure this is all your favorite chart. We had a $112 billion increase in defense spending that the president proposed last year. As we said at every opportunity, it was the first and largest increase since the end of the Cold War. And we have continued that this year, and indeed we have built on it a couple of different ways:
One, we have added funding here for some unanticipated requirements, primarily the Kosovo contingency, as well as the rise in fuel costs.
Two, there were again inflation adjustments within this program. And again as happened, the inflation went down. So there were some savings due to inflation, and we have kept those and reapplied those to fix issues in the program.
Finally, we have a supplemental in '00.
Let me turn to the next chart, which gives you the numbers behind this chart in a little bit more detail:
The first point to make of this chart; as you can see, there is a $13.5 billion increase between the congressionally enacted level in FY '00 and the presidentially proposed level for FY '01. This is a somewhat higher increase than we had originally planned. That was the number we said last year we would like to propose. This is $4.8 billion higher. That $4.8 billion is divided here into three pieces, the biggest piece of which -- nearly half of it is for contingencies, which is largely the new Kosovo contingency, which wasn't anticipated back when we built last year's budget.
Also, make the point here there was an issue last year about fuel costs; we anticipated savings from fuel prices going down to historic lows. Unfortunately, they are now back at a very high level, and that has caused us to add $3.5 billion over the FYDP, the bulk of it in FY '01. And that is to make up for the increased fuel costs both in FY '01, as well as '00. So we should be making the budget whole in that regard.
The other increases are a variety of things: There's some intelligence programs that were increased. There were some additions to science and technology spending, as well as some other things.
To take you in a different direction now on the FY '00 budget, we also are proposing an increase there. To this year's budget, we are proposing an increase of $2.3 billion in a supplemental. It consists of primarily -- this is the 2.3 -- consists of primarily three pieces, the biggest of which, dominating the supplemental, is contingency costs. Again, when we built the FY '00 budget, we did not anticipate the operations in Kosovo. They cost just north of $2 billion, and that is covered here as well as some costs for East Timor.
The Colombian supplemental I think you are all familiar with. DOD has a piece of that. This is our piece in the FY '00 column, $137 million. Consists principally of two things: about $98 million goes for training and equipment for Colombian counter-drug battalions. The other piece is for counter-drug operations to develop new forward operating locations in Ecuador, Costa Rica and Aruba to replace the operations that have been run heretofore out of Howard Air Force base in Panama. With Howard now closing, we need to run those operations elsewhere in Central America and part of this money is to build those locations.
Finally, there's a domestic supplemental for storm damage due to Hurricane Floyd. We have about $27 million in damages to various buildings and other property that we're covering as part of that storm damage supp.
Let me turn then to the -- I talked about the financing of some of those contingencies. Let me go back up a step and talk about how much the contingencies have been costing in each of the last three budgets. Three major contingencies: in Southwest Asia, we continue to run operations at a high level in Southern and Northern Watch against Saddam Hussein, and that is costing on the order of $1.1 billion a year. In Bosnia, you'll see a drop here from $1.6 (billion) to $1.4 (billion). That reflects the change in the makeup of the force. We are going down from 6,900 troops in Bosnia to 4,600. That change is planned for April. There will also be greater National Guard involvement, but that is the reason for that reduction.
Finally, in Kosovo, as I said, these are the new costs for Kosovo. This was the cost of the Kosovo air operation as well as the establishment of the peacekeeping force, and then this is the cost of operating that peacekeeping force in the subsequent years.
Those are the numbers. Let me turn to the strategy. The strategy since the QDR has been based on a shape-respond-prepare concept, trying to balance current needs of shaping the international environment and responding to any conflict or challenges we face, with the future needs of preparing against future threats, against future adversaries, trying to balance in budget terms by focusing on these five pillars: readiness; quality of life; modernization; reshaping the force; finally, the Defense Reform Initiative.
What I'll do is take you through four or five charts on each of those five pillars and lay out the budget in that fashion, starting with readiness. We've again, as we have over the past three years, increased our funding for readiness, and that's reflected primarily in the Operations and Maintenance account. In FY '01, you'll see this number is up at $109 billion. That includes the contingencies, by the way. The $4 billion for contingencies is built into that number. That's an increase of about $5 billion over the FY '00 budget. It's also an increase across all the years over what we had anticipated in last year's budget. This happened last year and it happened again the year before that.
Let me take a moment and talk about why that might be happening, or why that is happening. The next chart.
This takes that same data, that operations and maintenance funding, but it gives just a little bit better historical look, takes you all the way back to 1980, and I've now divided it by the number of service members, by the number of active duty troops. So what you're getting in this chart, rather than total O&M spending, you're getting O&M dollars per soldier, effectively. That's important because it shows you how -- what's happening to O&M costs. If you take out Desert Storm and Kosovo and just look at normal peacetime operations, you see a line that's going up at 1 to 2 to 3 percent per year. That is, every year, it costs us more dollars per soldier just to operate the force, holding the number of soldiers out as a constant.
That is being driven by several things. It changes year to year, but there are always these things there:
Quality of life improvement -- commissary benefits, child-care centers, so on.
It's driven by higher training costs. As you get more complex computers, electronics, and so on, it costs more and takes longer to train forces.
You also have seen recently over different periods in the past -- certainly recently, and even in the late '80s and early '90s -- dramatic increases in medical costs. Those would be within that.
And finally, as the force itself ages, it takes more depot maintenance, it takes more maintenance hours to keep the force in the field.
All of those things -- the exact emphasis vary year to year -- drive this 1 to 3 percent real increase.
The bottom line is that if we stand still in O&M funding, we will lose ground in readiness. So, consequently, we have been increasing O&M funding, and I think we can expect that to continue.
(To staff.) Next chart, please.
What that funding yields is a number of things. This is one of them. It yields operating tempo and training times that have been at high peacetime levels in terms of tank miles, flying hours, ship steaming days. All of these we have been maintaining -- in some cases, increasing, but in general maintaining -- at a relatively high peacetime level, so that we have the force that we need, that's able to confront whatever unexpected contingencies may come about.
(To staff.) Next chart, please.
Readiness, though, is a total force issue. And this is the kind of money we're putting against the National Guard and other Reserve component units, in order to maintain their readiness. This is something we started last year in terms of a pattern -- is we have now started to increase the funding for the operating accounts, even against the congressionally enacted levels. If you'll remember, what's happened in the past is we'd offer a low number, Congress would increase it, we'd come back the next year and offer the same low number, and Congress would increase it, and so on.
This year we've tried to change that pattern. The last couple of years we've changed that pattern. I think it reflects a much stronger partnership between the active and the Reserve components as they tackle these problems together. I think in particular the Army deserves enormous credit, first under General Reimer and then General Shinseki, for building on this partnership.
What that yields is much higher op tempos. Force package one and three -- one through three are at 100 percent of their op tempo requirements. Force package four -- those are our last deployers -- they're at about 68 percent, although at the individual crew and squad level, which is actually the guidance for those late deployers, where those two are at 100 percent.
And finally, we're trying to bring the Guard and Reserve into new missions. We have, with congressional assistance, set up now 27 WMD civil support teams. Those of you here last year will remember they were RAID teams. We have changed the name because I can't remember what "RAID" stands for. (Laughter.) But -- the next chart please.
Turning to quality of life, there are four pillars that the last two chairmen of the Joint Chiefs of Staff have identified: housing, pay, retirement, medical. We are trying to tackle each of one of those in succession. We focused last year on pay and retirement. This year we have continued that, but we have focused in addition on housing. And let me turn to the housing chart.
On housing, we have a major initiative the secretary announced last month to put $3 billion into additional housing allowances with the intent of driving what's called the absorption rate -- that is, the out-of-pocket expenses that the troops retain -- drive that to zero by the end of the FYDP.
Right now, the service members absorb about 19 percent of their own housing costs when they live off-base. We have increased them for '01; that will be 15 percent on average in '01 and, as I say, go to zero by the end of the FYDP.
That has three benefits we have laid out here: First, it puts dollars -- and that's tax-free dollars -- in the hands of military families. A very important benefit; it builds on that increase in compensation we were able to have last year.
But it does -- goes beyond that. By equalizing the cost of on-base and off-base housing, we'll make it more attractive to live off-base, making on-base housing demand lower. That means that with the same housing budget -- we haven't reduced the housing budget for this -- so with that same housing budget, we'll come better -- we'll be able to meet the demand.
And finally, as I'll show you on the next chart, we are stressing privatization as a means of improving our housing.
Private developers use the housing allowance as a measure of their cost flow. By increasing the housing allowance, we are increasing their prospective cash flow from these privatization projects and making them more attractive for them to come in and join with us in this partnership. Let me talk a little bit more about that partnership and about family housing, in general.
As I said, the family housing budget is essentially remaining constant. That buys 6(000), 7000, up to 9,000 units a year. That is not enough. We have an inadequate -- we have a housing inventory two-thirds of which is labeled as currently "inadequate"; that's 200,000 units that are being labeled as "inadequate housing." If we try and replace or upgrade those units at the rate of 6,000 or 7,000 a year, we will never get there. We need to go much faster, and that's the purpose of this privatization.
By going into a partnership with private developers, we're much better able to leverage our own money, using loan guarantees, leveraging-off of those housing allowances. We can get up to 20,000 units, we think perhaps even higher. But even at that level of 20,000 units a year, you can see you're much better able to attack a 200,000 inadequate-unit housing inventory, if you could get that over 10 years, a much more reasonable period of time.
This authority -- the reason we have asterisks out here is this authority, five-year authority Congress provided in '96, it runs out next year in '01. We will be proposing a new extension, because as I say, we think that is the key to solving this housing issue that we have.
Let me just take a brief moment on military construction. There you see a small drop from the congressionally-enacted level, about $200 million, from 4.8 to 4.6 (billion dollars). This is not the most satisfactory part of the budget, but the issue here is broader. As you'll see later, we're going to propose again base closure rounds. Until we're able to accomplish those base closures, we are spreading too few dollars over too many bases, and we're never going to get to an adequate level of military construction funding until we can get to the optimal level of base structure.
Let me turn to the second pillar in quality of life -- pay. As I said last year, we had a very large pay increase, the largest pay increase since the early 1980s. It was a-half-a-percent above civilian wage levels as you measure them in the Employment Cost Index. We would again propose that they be a half point above that civilian wage level -- ECI plus a half. This is what Congress has legislated, it's what we're proposing. And it gives us, for the third straight year, substantial increases over the cost of living, as measured by the Consumer Price Index. So in other words, we're putting not just cost-of-living money into soldiers' families' pockets, we're putting real increases into their salaries.
The third piece to quality of life is retirement. As you know, last year we proposed to shift the retirement system back to 50 percent of base pay at a 20-year retirement vice 40 percent. Congress enacted that with some changes; they put up a stronger cost of living adjustment, and they offered service members at the 15-year point an option of staying at 40 percent, but taking a $30,000 lump-sum payment. These cost some money. We have paid for those in this budget, so this program -- our proposal, as amended by Congress, is now fully funded within this budget.
Medical care -- the final element of quality of life. This, frankly, is still a story in progress. We've done some things, but there are some issues that are going to remain here.
First of all, what have we done? We've added $80 million to address some access issues for service member families, two in particular. One, people who are stationed in remote locations away from military medical facilities did not have an adequate HMO benefit, TRICARE Prime. We will provide that now. And this is for the families. The active duty member him- or herself had that benefit, but their families didn't. They will now.
Secondly, we had an equity issue. This is not a huge dollar issue; we're talking about co-pays of $6 or $12, but military service members who went to the military treatment facility but couldn't be treated there and were sent downtown had to pay co-pays, while those who were treated at the military medical facilities didn't. That was an equity issue. We fixed that. Now, whether you're treated -- if you're in TRICARE Prime, whether you're treated at the military facility or a downtown facility, no co-pay.
Second issue is the overall adequacy of funding. Like the civilian medical sector, we've had some real cost drivers here, starting with the pharmacy benefit. Pharmacy benefit here has cost us much more than we anticipated when we put it in and those costs are continuing to rise.
Second, our managed care support contract, that is, our TRICARE support contracts, are going up higher than the predicted medical inflation rate. Those costs are coming back to us, and we need to pay them.
Finally, Congress enacted some new benefits without the money to pay for them. In particular, a custodial care benefit where we became the first payer by Medicaid. That's going to cost $20 (million) to $100 million a year. We're not far enough along to know exactly how much, but the combination of these three has caused us to add about $370 million -- $369 million -- in FY 2000 and nearly $350 (million) in FY 2001 to cover all of these costs. The money in '00 will have to be -- was done -- about $120 million is done inside the Defense health program itself, and the other $250 million will be a reprogramming that we'll be sending up with the budget to pay these costs.
Unfortunately, it doesn't end here. We still have two issues out there. One is we have not yet identified and paid all of the contractor claims for increased cost. We'll need to definitize those claims and we need to make sure the budget can accommodate them. We'll be working on that over the next several months. This was not an issue we could handle in the budget, because we don't know the amount of those claims or the ones that will be approved.
Second and even bigger, as you've been reading and watching, there is a growing issue over what is adequate health care coverage for over-65 retirees. This group in particular is being pressed because the benefits they had from their military service in the past has been space-available in military treatment facilities. They're being squeezed out of that as our medical structure is downsized and as the retiree population has increased. So there's growing dissatisfaction with that benefit. There's a lot of proposals on the table right now. General Shelton is working very hard on this. The secretary is reviewing options. There's a number of bills on the Hill. There's talk about FEBHP, the Federal Employee Benefit Health Plan, there's talk about a pharmacy benefit, there's talk about Medigap, a whole series of issues.
There are two things that you need to know, though, in the end. One, there's a very big issue here, the question of equity and keeping faith with retirees, and second, there is a very big bill with any of the proposals I just mentioned. We're talking three, four, five billion dollars a year, a major bill. This is an issue we're going to have to tackle and come to grips with both what is the appropriate benefit and how do we pay for it.
Let me turn now to modernization. We -- as I guess was in one paper this morning -- we have hit the $60 billion level, albeit it barely, but we got there. Sixty billion was the procurement level that Secretary Cohen laid out in the QDR. It was the one General Shalikashvili endorsed in the mid-1990s. It is an important milestone on the road to recapitalization, and we're very proud we've hit it, but it is not the end of the road, as you can see. We need to continue to increase procurement to be able to fully recapitalize the force.
Let me give you an idea as to what we think we've accomplished and what we think the remaining challenges are. This is a busy chart. You're suffering from the fact that I used to be the head of PA&E, and this is the kind of thing we used then. Let me explain the chart and then tell you what message I'd propose you get off of it.
First, what you have here are the major end items in the department, at least four of them -- ships, helicopters, armored vehicles and tactical aircraft. The bars here are the procurement level for each of the years. The red up here, the steady state range, is the level we think -- the band of procurement we think we need to turn the force over over its lifetime. The simplest example here is to use ships. We have a 300-ship Navy. On average, ships last or have a lifetime of about 35 years. If you divide 35 years into 300, you'll get eight and a half.
You can vary the range -- 30 years, 35 years, 40 years. That's what gives you a range here of eight to 10 ships -- is what you need to support a 300-ship Navy.
Do similar calculations for the number of aircraft, helicopters, and so on.
So where do we stand? In the FYDP, the Navy is at the bottom end of that range. They are going to -- starting with this budget, they will be procuring eight ships a year, which is close to what is needed to maintain a 300-ship Navy.
Helicopter, by the middle of the decade, will also be up close to and into that range that we need to hit to recapitalize the force.
Tac air -- we are not there, nor, frankly, did we expect to be there in this time frame, because in order to recapitalize the tac air fleet, the tactical aircraft fleet, we need two things. We need additional procurement dollars for sure in the out years, but we also need to complete development and begin production of the Joint Strike aircraft, Joint Strike Fighter. Until we've got the JSF on line, which comes right after this in the post-05 period, we won't be able to get into that steady state range as we need to.
Armored vehicles is even a little bit more a complicated story, because there we need to decide what the requirement is. As I'll show you in a few charts, the Army is reevaluating and developing a new vision that focuses around, in the interim, a medium armored vehicle, but we're going to need to continue at some rate the current level of armored vehicles. But you wouldn't necessarily -- as you're transitioning to the medium armored vehicle, necessarily want to continue steady state production of the M-1 and the M-2. You need some production, and it's a challenge now for the Army to decide exactly how much and what the balance is between medium armored vehicles and the current generation of armored vehicles.
So the bottom line on that chart is, we've achieved a lot with $60 billion, and we're going to have to look to get even higher to finish the job that we've started of recapitalization.
And the next four or five charts basically break down each of those areas by what's in the FYDP, starting with shipbuilding.
The shipbuilding plan has the carrier in '01 -- this will be the last of the conventional Nimitz carriers, as the Navy moves in a two-step process to the CVNX. It has -- despite some earlier reports that we would have a gap here, there is no gap in submarine production. It means we have one per year.
Let me come back to the destroyers in a second.
It also buys out the LPD-17s and the ADCXs, the fast-attack -- fast combat support ships. The requirements for those are bought out in this FYDP.
Going back to the destroyers, the DD-21 -- if you look at last year's plan, you'll see the DD-21 plan has flipped a year due to an increased requirement to do more development. And this has to do with -- Secretary Danzig was here a few weeks ago, talking about the introduction of electric drive into the DD-21. That's going to require some additional monies and some additional time, both of which are provided in this budget.
The consequence of moving DD-21 from '04 to '05 meant that we had to stretch the DDG-51 to maintain the industrial base. So the six destroyers that were in '02 and '03 are now stretched across '02, '03 and '04. And one has been added to '05, to try and ensure the health of that industrial base, as we move to the next-generation surface combatant.
Turning to aircraft, we have both airlift here, the two major airlift aircraft, as well as the three tactical aviation programs. Point out a couple of issues:
We have moved three C-17s from '01 to '03. This is not intended to break the multiyear, and we don't think it will. The Air Force is confident it won't. What this is intended to do is to allow a British buy in this time frame. We are not yet certain of that British buy, but we decided to propose a budget that would allow it because we most definitely want to encourage our closest allies to assist in the lift mission as we go forward.
Second, we have pulled the C-130 procurement forward. This was frankly a dilemma in this budget. If we continued with gaps in production, we would face a shutdown of this line. When the Marine Corps needs C-130s immediately, and the Air Force will need them eventually, we would then face a $6(00 million) to $700 million restart bill. Rather than shutting down the line and restarting it again, we have chosen to produce at at least four per year, to keep the line open and to buy those aircraft without a shutdown cost.
QThose are "C" models, right?
SR. DEFENSE OFFICIAL: Those are C-130-Js.
The three aviation programs -- despite the controversy over the F-22 last year, this is the same profile, as you saw. Five hundred million (dollars) of these six aircraft is now in the '01 column. That has been paid. That's because these -- part of the agreement with Congress last year, these became development aircraft. This is now the first production lot. That meant they were funded in the R&D column, which moved $500 million there. That is funded. Other than that, there are some minor adjustments in terms of the profile, but basically this is close to the same program we showed last year.
The next chart? Thank you.
Rotary-wing aircraft: As I noted on the other chart, we are moving into full-rate production on each of these major programs. The CH-60, both Navy and Army, are on this chart. The Apache Longbow and the B-22 are all moving into full-rate production by the middle of the FYDP. Next chart, please.
Land forces, as we talked about on the other chart, the bar chart, we're continuing production of the current generation of Bradley and M-1 upgrades. The key issue goes to medium armored vehicles. I'll come back to that. The Marine Corps, by the end of the FYDP is beginning low-rate production of the AAAV, which will replace the venerable AA-7 beginning in the middle of this decade. Next chart, please.
Missile defense. Issue here was a more robust level of funding. We've added $2.3 billion to the National Missile Defense line. That is fundamentally to have a more robust force of missiles, have 100 missiles (at ?) the NMD site, vice '20, plus some radar upgrades and some additional costs were put into this. Essentially what you have here is a fully funded program awaiting a presidential decision on deployment to come some time this summer.
With the upper-tier program we followed congressional direction and slipped them out. They were in one line last year, in an inherent competition. Some of the competition remains, but we had put a separate line of funding for these two programs, for the THAAD program -- THAAD program, that will get you a -- that funding is designed to deliver an FY '07-'08 first unit equip date. The first units come on by the end of '07, the beginning of '08. Navy theater-wide is somewhat behind that, probably about FY '10. However, there's a decision point -- this is the tension I talked about -- there's a decision point in the '02, '03 time frame where if we added funds here we could pull that first unit equip for the Navy forward to '08 as well.
So as we go through and see the relative levels of success in terms of testing, the other factors to be considered, we might want to adjust Navy theater-wide later on down and we have hedged against that.
Finally, airborne laser is the other one I'll mention. As has been reported, we have slipped that program. The first shot will now be '05 vice '03. The Air Force remains committed to bringing that on, but it will come a bit slower than had been planned in last year's program. But overall, you're seeing -- in terms of BMDO's budget, we're seeing a three-plus billion-dollar increase in the FYDP for missile defense, versus what we had last year, and that increase is spread -- two-thirds of it is in NMD and the rest is spread across a whole series of programs.
Let me sum up the investment programs with this chart. I want to make two points off of this chart. It's a historical look at investment programs starting back in the '80s. So you see the Reagan build-up here. The points I wanted to make, though, were, one, you can see we did not fund the procurement increase by cutting the R&D account. The R&D account is remaining relatively constant as we continue to develop the next generations of weapon systems, and that has not been the bill payer for procurement.
The S&T program is the other one I wanted to comment on. Here there is a reduction in S&T relative to the congressional level of last year. Last year Congress added a billion dollars in science and technology to the defense program we submitted. We have added $250 million to what we're submitting in '01, but that does not match that congressional increase. Certain areas that we just don't match them. And so whereas we're seeing an S&T program that, in historical terms, is at 2.5 percent of the budget -- that's higher than it ever was during the 1980s -- but, however, it does not match the recent congressional increases.
QAre these comparable dollars adjusted for inflation, or are they just --
SR. DEFENSE OFFICIAL: This is current dollars. I have the constant dollar one, if you want to see that.
(To staff) Why don't you throw up the constant dollar?
We're back and forth as to which one. The whole budget presentation is in current dollars, so sometimes it confuses people. But what you see in constant dollars is the same kind of increase and the relatively steady progress of the other.
QBut R&D goes down; right?
SR. DEFENSE OFFICIAL: There's one drop at the end of '05. In the '01 to '04 period, it's constant; about $38 billion.
QThirty-eight billion in constant dollars or --
SR. DEFENSE OFFICIAL: Thirty-eight is -- it revolves around -- it's 38 (billion dollars) in '01, and it goes up a little in the subsequent years.
QBut just a couple hundred million?
SR. DEFENSE OFFICIAL: Somewhere in your material you'll have the -- by title.
(To staff) Next chart, please.
I want to shift and talk not just about the dollars in modernization, but what they're doing. And I want to talk about four elements of reshaping that I think are starting to take a much more concrete form as we go into this budget.
(To staff.) If you can go to the next one -- the first one -- I know we'll have the report in the next week or so for you on the Kosovo lessons learned.
I want to tell you about the programmatics here. It was $2 billion in the '99 supplemental that we requested and Congress approved. This is not for Kosovo operations; this is for either weapons systems or other enhancements related to Kosovo.
And we did our own program -- during the program review, we elected to fund another 1.66 billion over the course of the next five years. That funding is three major areas:
Weapons systems, upgrading, and resupplying cruise missile inventories, Tomahawk and CALCMs, plus accelerating production of JDAM and some other weapons systems.
Second, increases in electronic warfare, the new squadron of the A-6B, as well as some upgrades.
And then, third, improvements to the intelligence, surveillance, and reconnaissance, the ISR programs. Those include accelerating the Global Hawk unmanned aerial vehicle, as well as procuring an additional -- that would be the 15th JSTARS.
Now finally, there's one thing that's not on this chart, which also a lesson of Kosovo, which is TPED. That's the analytic back end of our intelligence platforms. What we found out of Kosovo is that we don't have enough capability to analyze the images and the other raw material we get. We're proposing a $1.5 billion increase in that -- in those programs, largely focused around NIMA, the National Imagery and --
STAFF: Mapping Agency.
SR. DEFENSE OFFICIAL: -- Mapping Agency.
That increase is not, however, built into that $3.6 billion, because, frankly, although it is a lesson of Kosovo, it's a lesson we had learned prior to Kosovo, and we were already moving in that direction before the Kosovo operation.
QWhat does TPED stand for?
QTasking, Processing, Exploitation, and Dissemination.
QTactical Processing, Exploitation, and Dissemination.
SR. DEFENSE OFFICIAL: Did everybody hear that?
SR. DEFENSE OFFICIAL: Just stand up and yell. (Laughter.)
STAFF: It's Tactical Processing, Exploitation, and Dissemination. TPED, T-P-E-D.
QWas this money added because Congressman Lewis and Porter Goss threatened to cut the -- (inaudible) -- contract over this TPED issue?
SR. DEFENSE OFFICIAL: That's not the way I would phrase it.
SR. DEFENSE OFFICIAL: We entered into discussion with our colleagues in Congress, and came out with a resolution that included a $1.5 billion increase. (Laughter.)
Did you like that better? (Laughter.)
QI still -- (inaudible.) (Laughter.)
SR. DEFENSE OFFICIAL: I should follow that up.
We think there is a serious need here. We are not challenging the need. There is always a discussion over how many dollars you need to meet that need. And we had that discussion, and $1.5 billion is the answer.
And that is actually a fraction of the full need. We are going to have to continue this beyond the FYDP. This is a longer-term program with the intelligence community.
QAnd that's just for '01?
SR. DEFENSE OFFICIAL: No, no. One point five billion (dollars) is '01 to '05.
QIs that less than what NIMA recommended in its modernization plan -- (inaudible)?
SR. DEFENSE OFFICIAL: I am sure it is. It is a part of what is needed. This is the start of a longer-term program. It's obviously -- $1.5 billion is a lot of money, even for this department, but it is not the full requirement. And we'll have to work that through over the years, after the FYDP.
SR. DEFENSE OFFICIAL: Let me switch to the Army. You have all heard of -- all heard or hopefully heard directly or heard of -- General Shinseki and Secretary Caldera have been talking about a "new vision" for the Army. The Army has met that vision with cold hard cash. There is over $7 billion in the Army plan to execute the start of that vision.
The bulk of the money is to develop and procure a medium armored vehicle at the rate of about one brigade a year, over the course of the FYDP. At the same time, the Army will be doing science and technology and development for a series of other systems that will populate that objective, force of the future; particularly future combat vehicle, UAVs, as well as some lighter but more lethal anti-tank and artillery systems.
QHow many vehicles are involved in the one brigade a year?
SR. DEFENSE OFFICIAL: I don't think we have a number yet.
(ARMY OFFICIAL): Approximately 320.
SR. DEFENSE OFFICIAL: We do it all. (Laughter.)
SR. DEFENSE OFFICIAL: The next chart, please?
Turning to the Navy: I mentioned the DD-21 Program. The key bullet here is, as Secretary Danzig talked to, when he was here a couple of weeks ago, electric drive is the enabling technology. There are other technologies, but this enables lower manning. It enables different types of weapons systems, as you put more power on the ship. And finally, it even changes the potential shape of the ship, away from conventional ships.
To fund this program, this line -- if you compare this to last year's budget, you'll see this is higher by $1.8 billion. This is, I think, a substantial commitment to trying to develop truly revolutionary technology for the next generation surface combatant ship.
Finally, with regard to the Air Force, the Air Force's thinking on the next generation force extends beyond technology, although they have a great deal on that, but they've also changed the way the organizational concept works. Starting this past fall, we now have on station aerospace and expeditionary forces. I believe two of them are now in the Persian Gulf. This is an organizational concept that pulls together all of the Air Force capabilities, as you see in the center of that chart, into a rotation pattern that goes over 15 months, in which they will be on call for three of those months, the deployment, preparing and coming off the deployment for the other months.
This does a number of things. It provides a great deal more predictability for the airmen and the airwomen in the force so that they can deal with the demands on their families in a more coherent, predictable way. It also allows the Air Force to resource those demands. Things like security policemen were being run ragged under the old system, or the garrison system. This, by moving to a more expeditionary system, should allow the Air Force to resource additional areas where they need to.
The final area of the budget is the reform initiative, the DRI, three main parts of that. We're continuing the reengineering of our positions. We've already studied more than 100,000 positions for A-76. Even though the military end strength itself is relatively stable at just under 1.4 million, we still plan a reduction of more than 10 percent in our civilian supporting force. This is an attempt to continue to streamline that force, to attempt to do a better job and to free up more resources for the pointy end of the spear.
We're also trying to reengineer our processes. We have a new travel system that we're hoping to bring on in the next year. We've been using the purchase card rather than getting entangled in our own accounting systems, moving, as with the commercial world, moving to paper-free processes at a very high rate.
And finally -- the next chart, please -- as I indicated, we are proposing again a BRAC round. We've changed the proposal. It's no longer possible to do a BRAC round in FY '01, we're too close, but we are proposing in '03 and '05 to do two rounds. This is funded in the FYDP. There's $700 million in FY '04, and $1.4 billion in FY '05, which is about -- it's an estimate of the amount of money that would be needed to do BRAC rounds on the scale of the rounds that we did in the early 1990s.
This is crucial in that we think this will bring the department $3 billion in savings, and we think it's necessary because we have a force structure that is larger than is needed to support the -- excuse me; we have a base structure that is larger than is needed to support the current force structure, and that gap is substantial.
QCan I ask when you when you'll see those savings?
SR. DEFENSE OFFICIAL: Yes, they come three to four years after the round -- it's varied historically, but three, four years is the most recent round.
QHow much do you expect to save from outsourcing and privatization?
SR. DEFENSE OFFICIAL: Outsourcing and privatization, I think the savings were north of $10 billion in the FYDP.
QA couple of quickies --
SR. DEFENSE OFFICIAL: Let me just get through these. I have two more charts, and then I'll just go to questions here.
Let me just sum it up. These are the -- the 051 is the Defense function. Those are the numbers I gave you at the start. But the full national defense function here -- the Department of Defense is 051. The full national defense function includes the weapons programs at the Department of Energy, as well as some other programs, FEMA and some others. When you add that up, you get $291 billion, or a little over $14 billion increase in that total -- $14.4 billion -- in the total national defense function between '00 and '01, plus a $2.3 billion increase in '00 itself.
I've been asked -- (to staff) -- go ahead to the next chart -- (returning) -- how does that compare to last year's congressional budget resolution? I emphasize this is last year's congressional budget resolution. We obviously don't know yet how Congress will do it this year. But first of all, we're about $1.8 billion over the congressional budget resolution in '01. That is a consequence of the fact that, as I said at the beginning of the briefing, we added $4.8 billion -- fuel, contingencies, some other requirements. That took us from just under the congressional budget resolution to just over it.
During the rest of the FYDP, we're essentially at about the same place; some years we're a little bit above, other years we're a little bit below. Although when you get to the end of the FYDP, Congress goes on essentially a zero nominal-growth path, whereas we're proposing that you need to continue real growth in the Defense Department to be able to execute the modernization program, to maintain readiness, and so on. That gap becomes quite substantial as you get into the out years; a $90 billion difference.
That was the last chart, so I'm happy to take any questions.
QWhat happened to Senator Lott's helicopter carrier?
SR. DEFENSE OFFICIAL: It's in FY '05, as it was last year.
QAnd secondly, was there a debate over cancelling the Crusader because you wanted to make the Army lighter, or was that not on the table?
SR. DEFENSE OFFICIAL: A whole series of things -- actually, that's a good point. I should have mentioned that as I went through. Part of the way the Army financed the $7 billion you saw a number of different ways was some inflation savings, as I mentioned, some money was added to the top line, and the Army changed some of the heavy systems. The Grizzly and the Wolverine have been cancelled and the Crusader has been restructured. The Crusader has not been cancelled, but it's been restructured. It's delayed a bit, and more substantially, the production run will be cut, I think -- (to staff) -- almost in half, isn't it? Yeah.
QWhy are you asking for less money for the missiles, cruise missiles -- (inaudible)?
SR. DEFENSE OFFICIAL: Why are we asking for less --
QYeah. I read it right -- (Audio break.)
SR. DEFENSE OFFICIAL: I'm not sure I -- I'm not sure where you're going there.
STAFF: I think the cruise missiles, what you see in the book is the supplemental last year that replaced the missiles that were used in Kosovo.
SR. DEFENSE OFFICIAL: Last year's budget includes the big replacement cost of Kosovo. We didn't cut back on any of those programs. Indeed, we continued to accelerate them, but there's a big bump in last year's column because of that Kosovo supplemental.
QHow confident are you that Congress is going to approve a new round of base closings? (Laughter.)
SR. DEFENSE OFFICIAL: That's not a fair question.
Q (Inaudible.) (Laughter.)
SR. DEFENSE OFFICIAL: To be fair here, this is a very difficult issue for Congress. Congress deserves enormous credit for passing the Base Closure Rounds they did in the late '80s and late '90s. This is clearly a very difficult issue with important ramifications for the constituencies. We recognize that it's uphill. We think the case for the base closures in terms of the overall national welfare is compelling, and we're hoping that will be seen. But it's clearly a challenge.
QIs there any move to change the discretionary budget caps?
SR. DEFENSE OFFICIAL: You need to check with OMB on that, but I think the -- what will be guiding this year for the president's budget is to not go beyond the on-budget surplus. I know, in fact, there continues -- between the domestic proposals and the defense proposals, as well as some proposals on Medicare, we still retain an on-budget surplus this year, and I think you'll see, as you saw Congress do last summer, I think the equation is shifting away from the caps and on, really, to focus on protecting the Social Security surplus, and so you're being guided by staying within the on-budget surplus.
QEnergy Department defense funding jumped about 8 percent; quite a big jump.
SR. DEFENSE OFFICIAL: You're in the wrong briefing. I don't know.
QI mean, is that --
SR. DEFENSE OFFICIAL: It's the weapons programs and the environmental programs, but I don't have the details of that.
QCorrect me if I'm wrong, but you had $500 million for the F-22 shifted from R&D to procurement and you had --
SR. DEFENSE OFFICIAL: From '00 to '01.
QOkay. And you had 500 million for the C-130J advanced. Without those two items, you won't just get the 60 billion in procurement. Is that right?
SR. DEFENSE OFFICIAL: No, because we would have -- I mean, those are the systems we chose to procure. Obviously, if we hadn't procured those systems, we could have procured other systems. I mean, the money is in procurement. We thought that the priorities were those.
I'm not sure -- I think -- actually, I think you've mixed two things. The C-130 money is procurement money, so it contributes to the $60 billion. The F-22 money, because it's shifted from procurement to R&D, actually came out of procurement, even though it's still -- it's still procuring aircraft, but it's procuring now development aircraft, so it doesn't count against the procurement total.
QBefore we -- this $60 billion figure -- last year your budget proposed hitting 61.8 billion in '01 for procurement --
SR. DEFENSE OFFICIAL: That's right.
Q-- 1.5 billion less. So instead of congratulating the department on hitting it, why didn't you reach your goal from last year? Where did that money migrate to?
SR. DEFENSE OFFICIAL: Two places. One, as we've always said, readiness remains the highest priority. We've tried to balance that by ensuring that we recapitalize the force. But that's why I showed that O&M dollars per soldier. Readiness requires more money each and every year, and it required more money again this year. And we did shift money into O&M.
And the other answer comes from the previous gentlemen. We did shift 500 million of F-22 money out of procurement into R&D. So there were some shifts.
You're right. We were not able to keep all of the money in procurement that we had last year, but we were still able to hit the $60 billion goal.
QOn recapitalization, these steady state ranges you give us -- shouldn't they be going up? I mean, every year you fall below your steady state, it's that much harder to get to it, isn't it? So shouldn't that be climbing in ships and tac air and armored vehicles for every year you're below the current steady state?
SR. DEFENSE OFFICIAL: The steady state doesn't go up, but you're right. If you don't hit the steady state each and every year, you need to be higher in --
Q (Off mike.)
SR. DEFENSE OFFICIAL: Yes, you'd have to -- you have to catch up in some years. And if you looked, for example, at the production rates of the Joint Strike Fighter in '07, '08, '09, '10, you'd see that actually it jumps above that steady state rate.
As the Joint Strike Fighter comes on, it will be procured at higher than the steady state rates.
QTwo questions, quick ones. Are you proposing any new multiyears, and what's your oil price assumption?
SR. DEFENSE OFFICIAL: (To colleague.) Are we proposing any new multiyears?
STAFF: There's three new multiyears in the budget. There's a Bradley multiyear, there is a follow-on DDG-51 multiyear, and there is a follow-on H-60 helicopter multiyear.
SR. DEFENSE OFFICIAL: Right.
SR. DEFENSE OFFICIAL: In terms of oil prices, they are looking in the book. But basically OMB sets the oil prices. I think they are 40 percent higher in '01 than we had anticipated, and we funded to that increase. I can't remember though, the per-barrel price.
QOn the housing initiative, the extra $3 billion that is going to be pumped in over the FYDP for that, I believe the secretary said that's not -- the new spending authority is coming out of -- it's going to be reprogramming, is that correct?
SR. DEFENSE OFFICIAL: I think what he is really saying -- I mean, as I said, there were savings from inflation. So I mean, in other words, it wasn't at --
SR. DEFENSE OFFICIAL: Well -- I mean, you make a whole series of changes in the budget de facto, you know: Testing programs don't hit their milestones; money changes. But the biggest change we had in this budget was due to inflation, the biggest positive change.
QHow can you predict what kind of savings you would see from BRAC closings, if you don't know what types of facilities or which assets will be targeted for closing?
SR. DEFENSE OFFICIAL: Good question.
We specifically avoid making assumptions about what the bases will be so as not to prejudge the whole commission process, which is what we would propose again.
What we did to calculate those numbers was just look at the past two BRAC rounds and what the cost profile was for those. And we just followed those and the assumption that it would be roughly the same size. But we have to -- what that does is you become roughly right; you have enough resources there to be roughly right. If we actually get those rounds approved, we would have to adjust that funding.
Q (Inaudible) -- the FY '01 savings seen in FY '04 and '05 then? Would that --
SR. DEFENSE OFFICIAL: No. What you see is -- you would make closures as a result of commission action in '03. You would pay the cost in '04, '05 and '06, maybe '07, and you would start to see the savings after that.
QBut the savings would be in FY '01 dollars, wouldn't they?
SR. DEFENSE OFFICIAL: The $3 billion is in FY '01 dollars. But again, that $3-billion-a-year estimate of savings is a constant-dollar estimate. And it, too, is based on the kinds of savings we achieved in prior rounds.
QIn the budget increase for this year, "other" increases -- slash/ technology/intelligence, can you describe that in a little more detail?
SR. DEFENSE OFFICIAL: Oh, in the "other" column? I can't get into the -- the largest piece of that was intelligence, and I can't get into the details on that both because I don't want to and I am not allowed to. The S&T increase, I said was $250 million. That's the other big increase. I don't know --
STAFF: Silicon, next generation silicon, nano technology --
SR. DEFENSE OFFICIAL: That's the content of the S&T increase.
QI'm sorry, what?
SR. DEFENSE OFFICIAL: Nano technology --
STAFF: Next generation silicon, the Army's future combat vehicle is in there.
QTwo questions. First, given that you now had to cough up $4 billion for oil price changes, are you going to keep doing that kind of accounting, where you're anticipating savings in advance and getting them and then getting smacked with bills for it later because your anticipations were not realized? Number one.
SR. DEFENSE OFFICIAL: Probably. (Laughter.) Well, no -- no -- let me -- you have to, I mean, you have to build a budget based on the most current economic assumptions. I mean, you don't build a budget based on last year's economic assumptions. So whether they go up or down -- and most of these assumptions come from OMB and you build them government-wide -- but whatever happens, whatever the current inflation rate is from what's called the "troika," which is OMB and Treasury and the chairman of the Council of Economic Advisers, they set their best estimate of an inflation rate. If that yields savings, as it did with inflation, we reapply those savings to the program and are able to fix some other things. If they yield costs, what we found is we had to add funds.
But it wasn't unique to last year. It was highlighted last year because of the $112 billion. But every year we adjust our program, either up or down, based on economic assumptions.
QI remember last year you all proposed to do something kind of tricky with mil con funding and taking some of that and shifting it. Did Congress finally allow you to do that? And if they did, did you shift all the money you said you were going to shift back into it this year? You said you were going to make it up.
SR. DEFENSE OFFICIAL: We didn't -- we did have it -- well, let me put it -- I guess the place to start is, no, Congress did not approve it. Congress funded the military construction budget in the conventional way, so that there was no split funding and there was no tail in '01, with one exception; the BRAC funding was -- they did allow the split funding. I think that was about $200 million. And yes, we did make that up in '01.
QOn the airborne laser program, what was the total amount that you cut in the FYDP, and what's the rationale behind that? Was that program not as mature as some of its supporters have said?
SR. DEFENSE OFFICIAL: I think the number was $900 million. It's an aggressive program and a challenging technology, but I think the issue largely revolved around affordability.
QA question about the R&D and the procurement funding. These are not mixed? Because in the F-22 you've got slightly under $2 billion in '00, and about $3.5 billion in '01, if you add the funds. Are any of those funds mixed together?
SR. DEFENSE OFFICIAL: We --
STAFF: You're looking under either the R one or the P one. You're looking at either R&D or --
QBoth. I'm looking at both.
STAFF: It's not like in the same books --
STAFF: Of course, it's not in same books.
QNo, in different books.
QBut the slide was edited?
SR. DEFENSE OFFICIAL: The slide was --
QIt was mixing those funds?
SR. DEFENSE OFFICIAL: On my slide there is -- in the actual budget proposal that we present to Congress, there is not. I'm -- just in terms of giving you an overview, I think we did mix the funds that --
QSo in R&D, the books break them out --
SR. DEFENSE OFFICIAL: The books break it out. And the request going to Congress will have -- will be segregated.
QOn the military pay reform, last year there was predicted a 3.9 percent pay raise for this year. It's down to 3.7 because of the indexes you mentioned. Any thought of doing the 3.9 (percent) just to wipe out the pay gaps in this?
SR. DEFENSE OFFICIAL: We could have the pay -- that one is outside of our control. As I think they announced a couple of days ago, this is government-wide pay increase. OMB sets the overall pay, and military and civilian pay has been linked. So it wasn't an option.
QTo what extent did industrial base concerns shape this budget? The C-130J seems to be one example of that.
SR. DEFENSE OFFICIAL: I think we're conscious in a number of areas of the industrial base, but the C-130 issue was more discrete than that. The C-130 was a choice between holding off on buying the aircraft now and buying them later, but paying a penalty of $6(00 million) to $700 million to restart the line, or buying them now and avoiding that penalty. And you have to roll into the fact that the -- in particular the Marine Corps's aircraft -- I'll let the Marines talk to that, but they're, I think, 35 to 40 years old, and the need there, although it's a smaller number of aircraft, is relatively urgent.
QDo you have an '01 figure -- what you spent there?
SR. DEFENSE OFFICIAL: My memory would say it's in the $150 million range, but --
Q (Off mike.)
SR. DEFENSE OFFICIAL: It builds up over time. I'd say 150 million, but we need to try and get that for you.
QHow much money are you talking about in order to move the fielding date of Navy theater-wide from 2010 to 2008?
SR. DEFENSE OFFICIAL: It's a good question. I don't have the -- the BMDO people will have that answer. I know it exists -- I've seen the briefing -- but I just can't pull it back up.
QWhat's your confidence level on these F-22 costs? I mean, you're talking about buying three and a half times as many airplanes in '05 as you will in '01, for less money. Is that realistic?
SR. DEFENSE OFFICIAL: Well, you always -- in the first year of production, you're always paying a lot of facility costs.
But that said, there has been -- and I -- (inaudible) -- the budget that there has been an ongoing disagreement between the independent costing at the Air Force as to what these aircraft are going to pay. Frankly, we hope the Air Force is right.
MR. CROWLEY: Two more questions.
QOn the submarine construction rate, there is a recent Joint Staff report that recommended a higher submarine level, which you would need a higher build rate than what this plan says. It says one per year. In order to increase the Navy's submarine force, you are going to have to build more than one sub per year.
SR. DEFENSE OFFICIAL: Yes.
QSo is this plan a rejection of that recommendation?
SR. DEFENSE OFFICIAL: Nope.
You'd need a higher build rate actually whatever -- the original number in the QDR was 50 attack submarines. The number in the study you are referring to, I think, is 55 to 68. The build rate over the long haul would have to be close to between one and two for either number -- for 30 -- I mean, again, just doing the math, a 30-year life on a submarine, you only get 30 if you build one per year.
So, yes, whichever number you take, you are going to have to increase the submarine build rate. You don't have to do it now because we have got a lot of life left in the 688 submarines. The Navy plans to go to two per year towards the middle end of the next decade, which is when you need to do it to maintain either 50 or 55.
In a more immediate sense though, we have addressed the issue that you're talking about in a little bit different way. We have added funding this year to refuel more of those 688 submarines than we originally planned so that we'll be at the 55 number. We are at 55 now. But we will -- 55 in '01, regardless of what we did. But we have added refuelings in '02 and out so that we stay at 55 through the FYDP as well, rather than drop to the 50 level as had been originally planned.
There is also a -- not a complication but an additional issue in that submarine -- there is a question of do you want those submarines to be conventional 688 submarines and refuel those, or do you want to look at a new capability, which would be to take the Trident submarines that are coming off line -- there's four Tridents that will be coming off line in the next several years. You could conceivably make those cruise-missile carriers. You'd pay somewhat more than for the refuelings, but they'd last longer. So it works out in terms of comparable value.
And it's a different type of capability. And I know the secretary of the Navy and the Navy Department is exploring that option. And what we have done is put money in in a wedge in '02 through '05, to protect either option. And there's $35 million in '01 to explore this Trident conversion option so that in the '02 budget we'll need to make a decision of do we want to refuel 688s, or do we want to convert Trident submarines.
QDo you know what the wedge figure is on the chart?
SR. DEFENSE OFFICIAL: The wedge is 1.1 billion between '02 and '05.
QWhat happened to the health care initiative for older retirees? The chairman talked about it. I think the secretary referred to it. And the budget doesn't come up with anything for it.
SR. DEFENSE OFFICIAL: I thought I referred to that. Those are still, as I say, a work in progress. That's a discussion going on right now. There are bills in Congress. The chairman is reviewing some proposals, has been for the last several weeks. Really actually toward the end, almost after the budget is closed, is when he really went into a concentrated effort on that. And I think that is something that is going to come to fruition as we go through the debate. There's also a broader medical care debate, as you saw in the State of the Union. The president is talking about some additional retiree, or over-65 health care benefits, particularly in the pharmacy area, which is, frankly, the -- I think you see generally the biggest area of need, at least in the over-65 area, the biggest benefit that people feel they lack.
MR. CROWLEY: Thank you very much.
Just a reminder. The secretary will be here Monday afternoon at 3 p.m. to do his on-the-record budget briefing. And once again a reminder, this is embargoed until 8:00 on Monday, and attributable to a "senior defense official."
Thank you very much.
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