Thanks, Jim [McAleese] for the introduction.
It is a pleasure to be back. It would be even better if we didn’t have to deal with the double absurdity of sequestration and CR. As Will Rogers used to say, “I don’t make jokes. I just watch the government and report the facts.”
The truly needless and senseless effects of budget turbulence are not only regrettable in their own right, but they distract from the true strategic and managerial task we face in DoD today, which is to make the transition from the era dominated by the wars in Iraq and Afghanistan to the challenges that will define this country’s and the world’s security in the future.
I want to discuss both today, but I will begin by addressing what I know is on your mind and ours too: how the Department of Defense is implementing the sequester and operating within the limits imposed by the continuing resolution.
Secretary Hagel and I, and the entire DoD leadership, are committed to doing everything in our power under this deliberatively restrictive law to mitigate its harmful effects on national security.
We intend for this Department to manage these difficult and challenging circumstances in the most thoughtful and careful manner possible. That’s what our taxpayers expect and deserve.
And it’s what our troops deserve. After all, we are still at war in Afghanistan, focused on training the Afghan security forces as we begin the final drawdown of our forces toward the end of 2014.
And it’s what the nation needs for its security, and what our allies and friends around the world need for their security as well. The threats to the United States globally have not been sequestered, which include: North Korea, Iran, growing cyber threats, and al-Qaida and its affiliates in Afghanistan, the Middle East, and North Africa.
Despite our best efforts, sequester and the continuing resolution will lead in combination to many perverse, unsafe, and wasteful consequences that cannot be avoided, and some of these consequences will have secondary effects that last for some years into the future. I am, as you will see, especially concerned about readiness.
Therefore, we really need Congress to act. We need an appropriation that puts money in the right accounts, and legal authority to carry out activities for which we do have money. Right now, for example, we are in the absurd position that it is only lawful to build the ships we already built last year!
Next, we need the cloud of sequester dispelled, and not just moved to the horizon. Then we can continue the great strategic transition upon which we need to be embarked with certainty and stability.
While we are doing everything possible to minimize the effects of sequester and the CR on national defense, this will not be possible for reasons that require some explaining.
Remember, under the worst case, we have two problems:
First, abrupt and inflexible cuts imposed by sequester;
Second, a mismatch of funding and need under the current continuing resolution.
Sequester, as you all know, requires us to subtract from our budget for the remainder of FY13 $46 billion, and to do it in the worst way, managerially, namely to take equal shares or proportionate shares from each and every part of the budget.
The continuing resolution that we're operating under now creates a different kind of problem for us. The CR has enough money in it overall, but it’s in the wrong accounts. We have too many investment dollars, and far too few operating dollars.
You might ask, why does this turbulence hit so hard and so fast? Why does a 9 percent budget cut and a funding mismatch lead to a crisis in readiness, as the Joint Chiefs have aptly called it?
To understand this requires some explanation. First, in order to keep the country safe, and not break faith with our service members, there are certain missions and functions we must protect; and as a consequence funding shortfalls elsewhere in the budget are greater.
For example, the President used his authority under law to exempt military personnel accounts from sequestration.
We are also, out of necessity, exempting funding for Afghanistan and other ongoing operations. Our Afghanistan war costs have been higher than expected, in part because of increased transportation costs due to the extended closure of the Pakistan ground lines of communication.
We are exempting wounded warrior programs.
We are exempting our nuclear deterrent, missile defenses, critical portions of homeland defense, some Special Operations Forces, and other critical capabilities.
And we are exempting key other expenditures such as those, for example, that will allow school children in DoDEA schools to finish the school year in a way that can be fully accredited.
Next there are accounts we are preferentially protecting to the extent feasible:
First, key features of the new defense strategy.
Second, forces forward-deployed to the Asia-Pacific and the Persian Gulf for possible near-term contingencies, for example, the ability to “fight tonight” if there is aggression on the Korean Peninsula.
Third, family programs.
And fourth, acquisition efficiencies like multi-year contracts.
In order to protect all of these things, we have to find $46 billion in cuts called for by sequestration elsewhere in the budget. This problem is especially severe in the Operations and Maintenance accounts because these are the ones that are already short due to the CR.
Finally, we have only half the year left to make these cuts.
And that's why the readiness crisis is very real. And it builds as the year goes along, like a snowball gathering size as it rolls downhill.
The impact will be felt by all those who contribute to the defense of the nation: military, civilian, and industry, and their families and communities.
Let me take them in turn.
For our troops—for the force—the consequences are very real and very personal. As I mentioned, our troops are exempt from furloughs and other pay cuts, but they will feel the impacts of sequestration and the CR directly in other ways.
First and foremost, we will need to curtail training, which underlies military readiness.
Let me start with the Army. You'll see the Army beginning to curtail training at, for example, the National Training Center. By the end of FY13, two-thirds of Army active brigade combat teams, and most reserves, will be below acceptable readiness levels. Many of them are coming back from Afghanistan and are used to being at a higher state of readiness—to being trained and ready. And what motivates them and what should motivate them is mission. By the end of year, they won’t be training in the way their profession requires them to unless they are actually scheduled to deploy.
The Air Force is now beginning to limit flying hours except for named operations like Operation Enduring Freedom, for nuclear deterrence, and for some initial flight training of new pilots. That means that the cuts will fall more heavily on other parts of the combat Air Force. These parts will need to cease training, which means they won’t be ready for other conflicts, which is a serious impact.
The Navy and Marine Corps will be forced to cut back on readiness and fleet operations as well. That could include a reduction of one-third in operations of Navy ships and aircraft in the Asia-Pacific region and gaps in availability of Marine Amphibious Ready Groups. You've already seen the Navy begin to make adjustments in terms of how many ships are at sea and shortly at least four carrier air wings will cease flying (the first in early April), with two others going to sustaining levels.
Finally, there is the impact on mission and profession, which will undermine our efforts to recruit and retain talent.
Families will feel effects with regard to base support and family support programs.
Sequestration and the CR are affecting our civilian workforce as well.
Most services and defense agencies have civilian hiring freezes in place, with exceptions for mission-critical activities.
DoD hires between 1,500 and 2,000 people per week. It is important to note that this freeze will disproportionately affect veterans, who make up 44 percent of the DoD civilian workforce. Hiring freezes will also be felt across the nation, since 86 percent of DoD’s civilian jobs fall outside the Washington, D.C. metro area.
Most services and defense agencies have begun to lay off a significant portion of our 46,000 temporary and term employees, again with exceptions for mission-critical activities.
And now we are instituting a process of furloughing a substantial percentage of our civilian workforce, many of them for as many as 22 days between April 1st and the end of the year. In other words, a fifth of their paycheck will be gone.
Just as sequestration and the reductions in the discretionary caps will have devastating effects on the nation’s defense force, it will also be harmful to the defense industry upon which we depend.
The act of sequestration and longer-term budget cuts, and the prolongation of uncertainty, could limit capital market confidence in the defense industry, and companies may be less willing to make internal investments in their defense portfolio. The impact will be even greater on our subcontractors, who lack the capital structure to withstand turmoil and uncertainty. Of note, 60 to 70 percent of our defense dollars are subcontracted, and many of our subcontractors are small businesses.
Above all, sequester will cause a spike in program inefficiency by stretching out programs and driving up unit costs for the 2,500 individual programs affected.
And as with our DoD workforce, sequestration and the CR will make it more difficult for our industry partners to recruit and retain talent.
So for the force, military, civilian, and industry, the consequences are very direct and devastating.
While the turmoil of sequester and CR is harmful and dangerous, it is temporary. The arbitrary nature of sequestration only applies in 2013, and at worst the CR’s mismatches of funding to authorities will only last through the year.
The second order effects of the actions that I’ve been describing will last for some years to come.
As we manage carefully through the sad and needless turmoil of 2013, we must continue to look above and beyond this year to the future, to the great strategic transition that is before us, and to providing the country the defense it needs for the amount of money it has to spend.
This is a transition from a decade where our attentions were of necessity riveted upon two wars of a particular kind, and to assembling strong defenses against terrorism, all of which was accomplished with considerable success and ingenuity.
One of the wars, in Iraq, has ended; and the other, in Afghanistan, will wind down to an enduring presence over the next two years. Combatting terrorism will always be a priority duty for defense; but we have built many effective capabilities for this over the past decade.
Now it is time to turn the corner strategically and to focus our attention on the challenges and opportunities that will define our security future.
We know what many of those challenges and opportunities are:
The challenges of continued turmoil in the Middle East, enduring threats like WMD, and new threats like cyber.
And many opportunities: to shift the great weight of DoD, both intellectual and physical, that has been devoted to Iraq and Afghanistan, to the Asia-Pacific region where America will continue to play its seven-decade-old pivotal stabilizing role into the future; to the opportunity to develop surprising new capabilities from a vibrant defense technology effort; to the opportunity to capitalize on the lessons of the last decade on how to use forces innovatively, including special forces and the integration of intelligence and operations; to managing presence in new ways; to leveraging the Reserve and Guard components that have performed so superbly over the past decade; and to building the capacity of partners and allies so they can shoulder more of the burden.
In making this transition, we know we only deserve the amount of money we need and not the amount we have gotten used to. That is why, well before the current budget turmoil, we began making $487 billion in cuts to DoD’s budget over 10 years, using the President’s Strategic Guidance, which was to turn the strategic corner we needed to turn no matter what our budget was.
This $487 billion was on top of some $300 billion in cuts initiated by Secretary Gates, eliminating unneeded and underperforming programs. At the same time, the Overseas Contingency Operations – OCO – wartime funding has been decreasing. Taken together, these reductions compare in pace and magnitude to historical cycles in defense spending the nation has experienced in the past – after Vietnam, and after the Cold War.
Obviously there is some uncertainty about where an overall budget agreement, which is needed to end the current turmoil, will lead.
My point is that we intend to think and act ahead of today’s turmoil, and not only in reaction to it. We need to make what Secretary Hagel calls smart and strategic budget decisions.
We also need to continue a relentless effort to make every defense dollar count, in what Frank Kendall and I have called Better Buying Power in the acquisition arena but which elsewhere in the Department means making hard choices and persuading Congress to support even the very hardest of them.
This is important not only in its own right, but also to win the taxpayer’s confidence, that they are getting full value for the defense dollar – a confidence we will require to get the budget we can prove we need.
In all of this, I know that industry will also be turning a corner with us. You all know well enough what I believe: that the weapons and services provided by our industry, second only to our magnificent men and women in uniform, are what make our military great; that the technological vibrancy and financial success of you is therefore in the national interest; and that while we will bargain hard over this or that program or contract in the near-term, that’s “just business”: the interests of the long-term investor in the defense industry, and the long-term interests of the government, are aligned.
We are committed to partnering with you both in the current turmoil and, more importantly, in turning the strategic corner.
We understand and we expect that the strategic transition upon which we are embarked and many of you are in embarked will cause adjustments to the structure of our industry. This is normal. In the main, we will rely upon market forces to make the most economically efficient adjustments in the defense industry.
That is accordance with good economic theory and it will prevent the defense industry from becoming further distanced from the mainstreams of modern technology, commerce and industry, which would be dangerous for us.
But we will also act to avoid any excessive short-term perspectives of the kind that have affected other markets like housing and the financial industry.
We will continue to strive to protect the principal engine of productivity and value which is competition, or more generally, competitive strategies. Competition doesn't have to take and increasingly does not take the form of head-to-head competition between two primes, although we obviously value that.
We also understand that the defense industry, like industry everywhere, has to adjust to the forces of globalization, otherwise it will become a ghetto. Even as it is rare that we will fight alone, it is rare that we make things alone anymore. And we in the United States are committed to opening our markets while balancing security concerns.
We're also committed to promoting exports. Exports build the strength and power of our partners and allies, and they help build the strength of our industry.
We also will pay attention to all tiers of the defense industry, especially so-called lower- tier suppliers which, while lower in this sense, bring new technology and fresh faces to defense.
Next, few people understand that for us at least, half of our contract spend is for services, not for goods, for tanks, ships but for services.
Finally, we need to welcome new entrants into the defense industry.
So those are the principles upon which we're operating in as we turn this strategic corner to make sure that they health of the industry that supports us is protected as well.
I want to thank you in advance for partnering with us to look and act above and beyond the current fray, using these principles of our industry policy, and, above all, the skill and patriotism of your employees.
To the industry leaders in the room, please extend a word of thanks to them from us in the Department for being a part of the defense team. We don’t take it for granted. And I know that despite the dysfunction of Washington that they and their families experience, I hope they have the satisfaction of being a part of something larger than themselves: the defense of the country and even of much of the world.