 Okay, ladies and gentlemen, we want to get started and I want to say thank you for coming out on a rainy Friday. Normally this would produce about seven people that are retired and don't have anything else to do and it's kind of the way they fill up their day by going to think tank events. But this looks like it's a 12-step recovery team that's been through this before and the question is, will we get it right or better this time? I'm John Hamery here at CSIS and I want to say welcome to all of you and thank you for coming. I feel like a little bit that Groundhog movie, you know, I mean, we're woken up again and here we are. This has been promised for several years but it looks like now we're there and the question is are we going to do it better this time than we did the last time? You know, and of course everybody says we won't do that again or are we going to make the same mistakes all over again? I mean, it isn't that people choose to make mistakes, it's that the dynamic that governs all of the complex actions that brings several hundred thousand people together to make choices produces outcomes. And the question is can we with thought and direction and intelligence supersede that? And we're at the front end of trying to think that through. We need to do that, thinking that through with all of you. We saw the first kind of details here yesterday, lots more yet to unfold. I think we're really just on the front end of this. We do see the large central direction, it's a large central direction where this is heading and it is grounded in a strategy that's that I think has fairly broad consensus in town and in the country but what all budgets, you know, they have to have a certain policy coherence at the top but then the details really matter, you know, really matter and that's where we're now starting to get to that deeper phase and we're going to try to under understand all of that. I would again like to say thank you to our friends at Rolls Royce that make it possible for us to offer this policy series to the defense community in Washington and let me turn it to you. David, are you going to are you in charge of this motley bunch that's going to guide us through this or more or less, a little less than more. But let me let me turn it over. Let me just say thank you again for coming. We look forward to having this is going to be an ongoing discussion we're going to have to have because it's going to take some time for us to understand where we're heading and what it means and we're appreciative of all of you coming and you're going to have to be a part of that. David, let me turn to you, thank you. Good morning and welcome not only to those of you in the room but to our audience on the web, we're webcasting this on CSIS and also to our viewers on C-SPAN and we're grateful for the opportunity to reach a larger audience that way. A couple of administrative details, if you would in fact, those of you in the room, silence your cell phones and other noise devices, I would appreciate it. I've just tried to make sure that mine are silent as well. For those of you who are viewing on the web and when it comes to questions, if you would like to email questions to us, you can do that to my email, dbertoe at csis.org and we'll try to answer those questions as well if we like them and otherwise we'll ignore them. We can't quite do that with the ones in the room obviously. The panel that we have today is particularly well suited to addressing what's essentially an issue of where are we in the defense budget drawdown at a time where we have some information enough to actually speculate about what it really means but not really enough to know what it really is, right? We had in January, earlier in January, we had the new strategic guidance issued by the Defense Department. Yesterday we had Secretary Panetta, General Dempsey, the chairman of Joint Chiefs of Staff and some of the other Pentagon officials elaborating a little bit over how that strategic guidance is going to be reflected in the reductions and also what some of those reductions look like but in both of those cases, that is the President's announcement three weeks ago and the Secretary's announcement yesterday, it actually raises more questions than it answers. So what we're going to try to do this morning is fill in a little bit based upon our knowledge, experience and pure speculation on what some of those might turn out to be. So the way I would like to proceed, I've actually got a little overview set of charts here and those will be posted on the web as well afterwards for those of you who'd like to get through them. I want to run through those very quickly, make a couple of additional comments and then I will introduce our panel and turn to them. And we intend to have a lot of time for questions at the end as well. So thank you. Let me have the next chart. This is not the first time, of course, that we've brought the defense budget down and this chart actually takes you back to the pre-Korean war period. We had to build up another draw down, build up, draw down. The bars, if you will, the blue bars are the base budget amounts that the defense department put into place. The little white bars on top are the supplementals, that is the funding that was done on an emergency supplemental basis. You'll see that while there's a substantial amount of that in the recent years, that is the post 9-11, big chunks of money being appropriated under emergency appropriations or as the Pentagon calls it now, OCO, the Overseas Contingency Operations Account. But the same was true actually in Korea and Vietnam in terms of large numbers and a little bit in the Balkans during the 90s. So the process is that we do go up and we come back down again. There's also a black line on this chart and the black line allows you to see that the up and down is not just dollars, it's also the active duty in-strength. And there tends to be a correlation between when the budget's going up, the in-strength goes up, when the budget's coming down, the in-strength is going down. It's not purely cause and effect. One of the challenges and one of the ways in which it's different this time is even though there are some in-strength reductions projected in the budget, they're not commensurate necessarily with the long-term dollar reductions that we anticipate. Let me have the next chart. This actually allows you to see that in a numerical way, if you will. What you have on this chart is the four drawdowns, the post-Korean War, the post-Vietnam War, the post-Cole War. And even though we don't actually yet have a name for the current drawdown, we for purposes of this chart call it the Post Budget Control Act. I don't think that's actually a name that will catch on and survive over the decades. So we're seeking a new and better name for it. We thought actually about putting post-question mark on the chart here. But that does allow you actually to sort of benchmark the peak and the trough. So what you have on the first column is the peak, and those dollars are, in fact, in millions. So it's really $717 billion is the peak. And the trough, and that's a projected trough for the Post Budget Control Act, of about $567 million. That includes base budget and overseas contingency operations as laid out in yesterday's announcement by the Secretary. So those numbers are updated as of yesterday. That's a reduction of about 21%. That compares, in fact, with reductions of 43%, 31%, and 36% in previous drawdown. So on a pure percentage basis, this drawdown is not as dramatic as the previous three have been. On the right-hand side, you have active duty troops, 32%, 43%, 35%, and a 7% reduction. That's where the challenge lies. If, in fact, we're taking a drawdown that on a percentage basis is three times higher than the percentage reduction in active duty and strength, that implies there will be pressure in this budget on something other than personnel costs. And that's one of the dramatic challenges we face. Let me have the next chart. This actually just depicts it notionally so you can see that, in fact, for today, the steepness of the curve is not that much less for dollars. The steepness of the manpower is, of course, virtually nonexistent. And final chart. Just a timeline, how did we get here? You know, last February, the president submitted his FY12 budget. And by the way, all of the numbers calculating how much the budget is down is off of the benchmark of the president's budget request for 2012, including the out years of that request. That request had a significant increase. So in typical Washington parlance, a reduction is not necessarily a reduction. It doesn't necessarily mean you have less money next year than you had last year. What it actually means is you had less money this year than you had originally planned to have this year. That's the nature of these reductions. And in fact, in terms of the actual year over year spending, really only fiscal year 13 base budget, which is the budget about to be proposed by the president, compared to fiscal year 12, that's the only real reduction in real dollars. The other years are essentially when inflation is taken into account flat. But the reduction of the $487 billion that the secretary talked about yesterday over the 10-year period, that reduction is from what they planned to spend. So Congress, back in April, you remember, passed the full year continuing resolution. That CR had in it a defense appropriations bill for FY11. Then in August, as we were sort of railing about about whether we were going to default as a nation or not, the budget control act was passed. That set a fiscal year 12 cap for all of national security. The Defense Department gets a share, the lion's share of that reduction. And it set a cap for fiscal year 13. It also set in place, of course, the super committee. We know where that ended up right in the Monday before Thanksgiving. The super committee announced that they had failed to achieve one of their objectives, which has come up with numbers. They had in fact achieved another one of their objectives, which is they had universal agreement that it was the other guy's fault. And so they did achieve that goal. But what that set in place is a trigger that said, okay, there are now additional cuts to come through sequestration. That sequestration kicks in on January 2, 2013. That's a very magic date. It happens to be after the presidential election and the congressional election in 2012. But before any of the individuals who are elected in that election actually take office. Which means that if anything is going to be done about that sequestration, it's going to have to be done by the 112th Congress, the Congress we have today. So the baseline then for the budget that we're going to be discussing this morning, the fiscal year 13 budget is actually the fiscal year 2012 appropriations, which was passed by Congress late in December. There are two interesting dynamics at work here that we'll come back to over the course of the morning. One is that the Secretary of Defense has made it clear that he anticipates the reductions that he's taken so far, you know, all that he wants to take. He does not want sequestration. And he stated that crystal clear yesterday. Now, there is a little bit of ambiguity in room and we'll look at some of the nuances, if you will, because when you actually don't have numbers, you have to look at words. And the words yesterday have a little bit of deviation between the written word that was approved by the communications professionals for the document, the spoken words in the actual transcript of the speech, and the expected words of what's really going to happen. And we'll look at some of those nuances as we go. Nonetheless, the law of the land is sequestration will take effect unless it changes. The Pentagon has said we don't think that should happen. The President, on the other hand, has stated unequivocally, unambiguously, I will veto any attempt to change the sequestration. So this is a little bit of a strategic political dilemma for the Defense Department. On the one hand, I don't want to take any more cuts, and I've actually got a President who seems to be in line with that because this is his budget. On the other hand, I've got a President who says he's going to veto any attempt to relieve me from the responsibility of taking more cuts. That's a strategic dilemma that's going to hang over us this entire budget season, if you will. So with that, I'm going to throw the floor open to our panel here. We're joined by three wonderful people to comment on this this morning. Todd Harrison is the senior budget person for the Center for Strategic and Budgetary Assessments. He has a constant, never-ceasingly amazing ability to find useful information in the budgetary process that I love to take advantage of. He'll be followed by Stephanie Sannick, who is a senior fellow here in the International Security Program at the Center for Strategic and International Studies, and Clark Murdoch, who is a senior advisor here at CSIS. Then I'll provide a few wrap-up comments, and then we'll open the floor for questions. So, Todd, are you going to talk from there, or do you want to come up here? Be happy to talk from here. Good. I'll slide this back then so we can see the audience. Thanks. Well, good morning, everyone. Thanks for coming out on this rainy day here in Washington. You know, I'll just start by saying that the numbers that came out yesterday are really not that much of a surprise. The base budget for DOD, so that's not including war funding, is going to be $525 billion. War funding will be about $88 billion. This is really driven by the Budget Control Act. That was the deal passed by Congress last August that allowed the President to raise the debt ceiling that put caps on the defense budget for the rest of the decade, and that is what is driving this budget. You know, the real question now is the budget. Does it reflect the new strategic guidance the Department came out with back on January 5th? And fundamentally, when you're talking about strategy, you're talking about choices. Any strategy is really about choices. Those choices are often expressed in the budget, so that's why we're looking for details about what the strategy really means in terms of choices in the budget. So where did they cut, and are those cuts consistent with the strategic guidance? They obviously talk to a great extent about cuts in ground forces. They're taking the Army down to a pre-911 size, about 490,000 in strength. They're taking the Marine Corps down as well to 182,000 in strength. And these are expected, but they did not spare the other services from cuts either. They're taking about 17 ships out of the Navy over the fight-up. They're retiring 10% of the Air Force's fighter squadrons. They slip some major programs, programs that seem to play in the new strategy, like the Joint Strike Fighter, like the Virginia-class submarines. So really, no one was spared in this, given the delta from what the Pentagon had been planning, the growth they had been planning in last year's budget to the relatively flat budget that they're constrained to now, it did require painful choices across the board. The three things that I'm going to be looking for, though, when the details of the budget come out, are the following. First, the budget share of each of the services. It's interesting that throughout time, the services have tended to maintain relatively equal budget shares over the years. Now, when you include war funding over the past decade, clearly the Army and Marine Corps got a much greater share of that. But I went back and looked at last year's budget request, the five-year plan that they put out. And they already showed last year that the Air Force was going to gradually increase its budget share over the five-year plan. The Army would gradually lose budget share over those five years. And the Navy Marine Corps, they're basically going to stay flat. So one of the things I'll be looking for when the new budget comes out, the strategy says we're going to place more emphasis on air and sea forces, less emphasis on ground forces. So are they going to accelerate that shift in budget share, or is it basically going to stay at what they were predicting they were going to do in the last budget? The second thing I'll be looking for is the mix of active component versus garden reserve component forces. So one of the things the secretary talked about a bit yesterday, we don't have a lot of details yet, but it sounds like the Army is, while they're making major cuts in the active duty force, there'll be smaller cuts in the garden reserve. The Air Force may actually be going in the other direction. They may be cutting more deeply in their reserve component in order to protect some critical parts of their active component. So that's one of the trade-offs, one of the competitions in the budget I'll be watching as well. The third one, and this is one that we often don't like to talk about because it's very politically sensitive, but nevertheless it is a real competition going on in the budget between retirees and active duty. What I'm talking about here is what the Pentagon has to budget and pay every year for retirement benefits, not just retirement pay, but healthcare as well, versus what they're doing to support the active duty troops in terms of pay and benefits. We didn't get a lot of details yesterday. They talked about creating a commission to go out and look at options for reforming the military retirement system. I actually think this is a great idea. I think this is a good approach because you don't wanna go into this in a haphazard manner and just start saying, well, we think we can cut this, we think we can cut that. You don't wanna end up with another redux. Back in the mid-1980s, we had this great idea that we would just cut the retirement benefit. Redux, I think it stands for reduction. And so the idea was we're just gonna make a sudden shift. Everyone who enters the service from now on, they're gonna get less of a retirement benefit. Well, that didn't hold. It created this discrepancy within the force where as we got closer to 20 years after that point, when people would actually start retiring under the new benefits, we balked and we went back to the old system. So hopefully, if this retirement commission does get formed, they'll take a broader view of this. This shouldn't be about finding ways to cut. It should be about finding ways to get better value. They do this in the private sector. It's called preference-based benefits optimization. Companies do this all the time. You need to understand before you start making changes how people value various components of their compensation. And then you can make smart trade-offs. And if they do not value something, commensurate with what it's costing you to provide, maybe you cut that and give them something else where they are getting good value out of it. So I think I hold out hope that this commission, that Congress will take a serious look at this and perhaps get the legislation together to bring that forward. But overall, what are the trades we're seeing in the budget? Personnel costs make up about a third of the Pentagon's budget. When you include military personnel costs plus the Defense Health Program, it's about a third of the Pentagon budget. And what they said yesterday is personnel costs are only taking one-ninth of the cuts. So that means that other parts of the budget are gonna take a disproportionate share of the cuts because ultimately, this is a zero-sum game. They have a budget cap required by the budget control like they've got to fit in. So procurement, I think, is actually gonna get hit the hardest. We heard a lot of the program decisions yesterday. I imagine there are many more we have yet to hear and those will come out over the coming days and weeks. The total savings that they're talking about, and again, this is the savings relative to last year's budget. It's 259 billion over the five-year plan. 25% of those savings are supposed to come from efficiencies. That's another 60 billion in efficiencies on top of 178 billion in efficiencies that was in last year's budget. Boy, that's very optimistic to think that you can find all those efficiencies. I think it is incredibly risky to be banking on those savings before they've been achieved. It is always a good goal to try to find efficiencies to try to get more efficient, to root out waste wherever you can in any government agency and any organization, but to go ahead and bank on those savings for a quarter of what you're doing in this budget I think is a bit risky. If those savings don't materialize, where are the savings gonna come from? This is a zero-sum game. They're gonna have to come from something else and that's gonna be a hard decision. The BRAC proposal I thought was also interesting because, number one, they're not banking on any savings from it and that's fair because if you do another round of base closures now, you're not gonna get any savings in the next five years. In fact, it's probably gonna cost you a little money. They also did not budget for the cost of another round of BRAC. So I would not read too much into the suggestion that we're gonna have another round of base closures. I think this is a notional idea right now and in an election year, I think it's highly unlikely that Congress is gonna want to enact that legislation. The final point I'll make is, and I've made this before, is that this budget and this strategy do not prepare for the possibility of sequestration. That is a real possibility. I would not say it is highly likely to occur but I would say that there is a finite chance it really will happen because it is the law of the land and if Congress does nothing, if there's gridlock, it will happen by default on January 2nd next year. They presented the budget as a package deal. I take it or leave it, this is what you've got. The reality is that's not gonna hold. There are some things in there Congress isn't gonna go along with and there are probably further cuts are gonna be needed in the years to come. Even if we avoid sequestration, it's optimistic to think that the defense budget is just going to flatten out for the rest of the decade. History shows that that just doesn't tend to happen. So they talked a lot about how the strategy was flexible, adaptable, agile, versatile, beginning to think that they need to budget in the Pentagon for a new thesaurus. They're using those words so many times. But the same should be true of the budget. It's gotta be flexible and adaptable and the reality here is that further cuts are likely even if we avoid sequestration, the defense budget is likely to still decline in the years to come. So I would urge the Pentagon to start working on a plan B and if it means you have to start over and come up with a new strategy that is more flexible and adaptable to the budget environment, then so be it. That's all I have. All right, thank you, Todd. Stephanie, you wanna pick it up from here? Absolutely, good morning and again, thank you for joining us this morning. I have a different interest in tracking yesterday's announcements. My perspective looks at the programmatic details but also the strategic implications and the kinds of risks that these documents that we've seen, whether it's the strategy or the strategic guidance that was promulgated earlier this month or yesterday's budgetary announcements. I will say that details really do matter. We don't have sufficient detail about the budget right now to make specific recommendations or to cast particular stones at considerations or decisions that were made. So I'm waiting with bated breath for the delayed budget to come out in a couple of weeks but in the meantime, what we can go over is the broader context and I'm thinking more about what does the budget information say about our nation's national security priorities? What is the strategic context in which we should judge whether these are the right or the wrong decisions? My starting point is the strategic guidance that was released on January 5th. What are the assumptions, the risks and the priorities laid out in that guidance? And so like Secretary Panetta, I would just like to provide an overview of what the five key elements were. You probably all know these but it's worth repeating in this form. One, that the military will be smaller and leaner but yet it will maintain agility, flexibility and its technological advantages. We will rebalance our global posture, we'll build innovative partnerships, defeat aggression from any adversary and protect and prioritize key investments. That is motherhood and apple pie. So when Dr. Hamry says there's broad consensus, absolutely, who could really argue with any of those things? In fact, if you go back to the Bush administration's first QDR, it said pretty much the same things. But as we know, that QDR lasted roughly eight to nine months before the global strategic environment caused huge shifts. This is back in 2001. And so what I'm wondering is what the budget information that we've gotten talks about reversibility. It talks about key partnerships. It talks about the kinds of wars that we're going to be facing or rather the conflicts that we're going to be facing in the near future. And I have some concerns, because I'm at a think tank and that's what we do. We have concerns. First, it appears to me from yesterday's announcements that the primary planning scenario is a high tech war. If you look at where they're placing their investments, what they're getting rid of, they are not contemplating kind of the low intensity conflict or stability operations environment in which we've been operating for the last few years. And so I have some concerns about kind of de-emphasizing some of the capabilities that we've been developing over the last few years. I'm not saying we shouldn't invest in cyber technologies in space. Those are certainly very important. And really things that only the state can handle in certain aspects of protection. We've heard a lot about the air-sea battle and the budget review or preview yesterday seemed to affirm that. It actually says in the strategic guidance and in yesterday's announcements that the Defense Department is not anticipating a prolonged large-scale stability operations that require land forces in a rotational basis. Okay, what in the strategic environment leads them to think that? If you look at under-governed spaces, un-governed spaces, the probability of civil wars, the probability of long-term instability, I'm not sure why they draw that conclusion. The large scale might be the sticking point, but I would argue that from a U.S. perspective, we certainly do have an interest in maintaining a capability to address instability in places like the Maghreb, Transahara, in the Middle East, and in Asia. And so I wonder about this planning scenario which appears to be high-tech, but which ignores kind of the lessons learned over the last few years. That leads me to my second set of concerns, which are focused on these innovative partnerships. So if the U.S. is going to focus on technology, who's gonna handle the rest of the issues? We have something called Global Training Equip in the Department of Defense to train military forces around the world to handle counter-terrorism operations and stability operations. Will we see an increase in that activity? Are we going to depend on partners, whether it's the United Kingdom, whether it's Mali, to address some of the concerns that really we have the capabilities now to address, but we might not in the future because of this transition? So that's something I'm gonna be watching closely. What are we asking our partners to do? Last year, the United Kingdom came out with our Strategic Defense and Security Review, and we talked to them about, as a nation, about what are they giving up? I wonder whether we had similar conversations before the rollout of this new strategic guidance and this budget with our reliable shoulder-to-shoulder partners. Have we talked to the Brits and the Australians enough about what we are giving up, what strategic risks we, as a nation, are willing to accept? And therefore, as our partners, are they going to accept the same risks or are they gonna fill that niche? How did those conversations go? Based on my experience, they probably went very quickly. They probably went about two days before anything was rolled out, and we called them consultations. It remains to be seen what our partners can do. That's one set of partners, and David and I have talked at length about building partnership capability within existing partners who are capable. The Brits, the Germans, the French, what are we doing to help them with their capabilities and capacities versus innovative partnerships, which I think is the Executive Branch's code for partners that we don't, non-traditional partners, can we call them that? The Malians, the Chadiens, the Indonesians, what are we doing with them? And I wonder how this new budget information will impact those relationships. Not quite sure what innovative partnerships mean. And my third set of concerns hinges on this word, reversibility. Now it used to be invoked to use transformation, rebalancing. What does reversibility mean? When you're talking about early retirement, how do you un-retire something? If you're talking about slowing procurement, I can maybe see trying to re-energize a production line. But from an industrial perspective, what does reversibility mean? Is it possible? Did a defense official walk the factory floors and go, okay, if we slow procurement and you have to slow down your production line, how fast can we revitalize it if we need to? This was something we saw obviously with up-armoring Humvees not too long ago. And actually having members of Congress go out and walk factory floors. Bob Simmons, who's the current staff director of the House Armed Services Committee, takes great pride in talking about really focusing the executive branch on what it means to use the industrial base. I know Secretary Panetta mentioned protecting, well, we won't use the word protecting, working with the industrial base to have a strong one. I'm not sure what that means. I'm not sure what they've done to ensure that that happens. When you terminate global hawk, how do you unterminate it? How is it reversible? And so that's the third set of concerns that I'm looking at. And with that, I will turn the floor over, I guess, to Clark for final comments. Thank you. It's always a little daunting to come at the end, particularly when three such competent and professional colleagues proceeded you. But nevertheless, in much the same way that Stephanie defines her role as a think tank is having concerns, my role as a think tank is to talk when I'm asked to talk. So I will do that. But I'll try to keep it blessedly short so we get to questions. One of the things that we constantly look at in Washington are the interplay, or those of us who watch the Pentagon, between strategy and resources. We usually talk about the strategy resources mismatch, where we're not spending enough resources to execute the strategy. It's very interesting that we had a base budget that had a strategy, the 2010 Quadrionnel Defense Review Strategy. It was right there. Then that defense budget, which had projected a 1% increase in real dollars, was flattened. Actually not completely flattened, as President Obama said, there was a slight increase to the defense budget over the fit of. Yeah, we have a new strategy. I've put together along with a colleague of mine, Kim Winckup, a defense drawdown working group. And we had a big debate between us as, what's the difference between a strategy and strategic guidance? The five January strategic guidance, well that's really just guidance emanating from the 2010 strategy. But that was dispelled right away because both Panetta and General Dempsey referred to it as a new strategy, even though it was a strategic guidance. It's true, more attention paid to the precise priorities within it. But if we had had any doubt whether or not it was a new strategy, it is a new strategy. Well, the sequester is another 600 billion, or maybe 575 billion, depending on how you estimate it. Will that mean that we have another new strategy? Well, if you talk to Winifill, he says, well, sequester is like taking, I think his phrase was, a chain saw to the budget. And out of the rubble of the budget, you create a new strategy. I'm actually a strategist, and I hadn't realized that our strategies were so vulnerable to relatively modest changes in the resource level. Because we've been told right now, well, the first strategy couldn't withstand a 1% decrement. And now we have another decrement, there might be another 5% to 6%, and we'll have a new strategy out of the rubble of the old budget. So I really think that our strategies need to be a little bit more robust than that. And maybe we should be, as Todd has said, looking further ahead to say, well, maybe we might have a real reduction. A real reduction along the lines of the 25 to 35% of press deductions of reductions. And we should think about what are our priorities under those circumstances, and then cast backwards. Rather than be where we are now, every time there's an increment, we say we've got to do strategy. Secondly, question was asked often in the commentary that I didn't have time to read this morning. There's not a lot of big cuts here. There's no big showy, gaudy cuts. Doesn't this reflect the fact that there's no real pain? And in the press conference yesterday, they were all very eager to say lots of hard decisions, very complex, very tough. I think Carter said at one point, there are 50 or 60 things in this budget that we wanna do but can't afford to do anymore. I would argue this is just a subtle version of the Washington Monument Strategy. There's lots of big cuts out there. They could have taken off the 11th carrier. They could have done deeper cuts and ground forces. Those are all standing right there, but they're for the negotiation over what's gonna replace sequester. Nobody wants sequester because it's across the board, and it's got a very deep rate of reduction. This is the point that Todd has made is it's not just the size of the reduction, it's how steeply it's administered during that time. So there's gonna be a negotiation over what will replace sequester because the only way to avoid sequester is to have an agreement to replace a sequester. And that will involve, I believe, more cuts to defense. It'll be a more reasonable guide path that will be targeted, it won't be across the board the way the sequester mechanism illustrates. And I think the other thing that it underscores is that we have to do something about pay of benefits. The Pentagon has been saying for several years now our current rate of increase is unsustainable. One of my colleagues at a working group meeting said, and this was before the announcements of yesterday, that if you look at current trend lines, if you look at current trend lines and you hold the budget flat by some year 2039 or something like that, all we can afford are military personnel costs. It's like the Norm Augustine issue, but not with all we can afford is one large aircraft. It is all we can afford is people, nothing to equip them with, nothing to make them ready. So I think there's no question that out of this, the hope in the Pentagon is we have to do something to stabilize pay and benefits so as to leave resources to equip them, to train them because everyone is determined to avoid the hollow force. Well, one thing to avoid with a hollow force is retain too much force structure because when you have too much force structure, you undermine them, you don't equip them, and you don't train them. I think they're doing a good job of trying to match force structure and force structure cuts along with budgetary reduction cuts. Even though as the first chart that David put up shows is that we've had a tremendous increase in dollars being spent, but not much increase in the end strength. That's what makes this so challenging is we can't just cut people and get the savings that we need. So I think that what we're gonna find is out of this process will be finally, the executive branch and the legislative branch come together to do something about unsustainable personnel costs and then deciding how deep that cut will be over what time and at what glide path. Thank you, Clark. Let me provide a few wrap up comments if you will and then we'll open the floor for questions. I think it's useful for us to observe that we're not really trying to diminish the difficulty that the Defense Department had in making the decisions associated with the $487 billion of cuts. I'm quite confident that inside the room as the decisions were being debated, it felt really hard and for all the constituents involved in each of those, it was really hard. Nonetheless, it's fair to say that there's not a lot of in fact visible damage from $487 billion of reductions and that would lead the casual observer like an appropriator to say surely there must be more. Now, sequestration actually takes more and there's a great deal of language out about sequestration that doesn't actually take into account a careful reading of the law itself and this is worth pointing out because the basis of any change to the sequestration process is not gonna be the language that's out in the ether, it's gonna be the law as passed and signed by the president. That sequestration, unlike all preceding sequestrations back to the original Graham Rudman Hollings Act in the mid-80s, provides enormous flexibility to both the executive branch in general and the Defense Department specifically in allocating sequestration cuts across a broader base. All previous sequestrations were done at what we call the PPA level, the program project or activity. Every single line item had to take the chainsaw approach as Admiral Winnefeld said yesterday. This sequestration is at the account level. That means the appropriation account level. That means the chainsaw actually just cuts off, for example, O&M Army, Milpers Air Force and Milpers can be exempt by the way, so that would be zero and then everybody else would get a bigger cut or ship construction Navy. It doesn't say every line item in the ship construction Navy procurement account has to have an equal effect, right? The Pentagon has considerable flexibility, the president has considerable flexibility. It's also by the way easy to conceive of an agreement which would relieve the pain of sequestration by providing even additional flexibility, including perhaps some modest flexibility year over year, so you could slip some of FY13 into 14 and beyond. The other part of that equation though is that unlike all those other drawdowns, we have today present as part of the dynamic the global financial market. We had, I mean, the reason we got the Budget Control Act and the sequestration reductions is because of the threat of default over the debt ceiling. Now, I don't remember the exact clock ticking. I think the president submitted his request to increase the debt ceiling on the day that the house came back, so that would have been Monday a week ago, so the 15 day clock will probably be reached next Tuesday and that means on, I presume on something like Wednesday morning, our debt ceiling as a nation will go up 1.2 trillion dollars. Failing the passage by the Senate of a resolution of disapproval and the override of an expected president's veto of that, that's not gonna happen. So the debt ceiling will go up up until we hit it again. Now, when are we gonna hit it again? Well, that depends on how the economy's doing. Good news this morning, right? 2.8% GDP growth in the fourth quarter, which is a big bump over the under 2% of the previous two quarters, and that indicates probably a little more revenue, a little less expenditure, a little pressure off how quickly we're gonna reach the debt ceiling. Woe unto us if we actually reach that debt ceiling during the lame duck session after the election, because that throws all of this calculation into a cock-tap. But we'll assume, as CBO and OMB are doing, sufficient growth rates in the economy that we won't reach that. Let's just hope reality keeps up with our estimates, if you will. So let me make some points then. I think several of the panel here noted that we've got the strategic guidance or the strategy. We have the initial information from the Secretary of Defense and the Pentagon, but we're still missing the real element here, which is the budget itself. And we've got three weekends and two weeks left before we see that, February 13th, Monday. It'll be the third time in four years that this administration has been late in submitting the budget, but that's the way it is. So we'll get to see that information. What should you be looking for in that budget as it comes forward? Number one is, as Todd mentioned, the question of efficiencies. There's $60 billion that the Secretary cited, and he cited as the basis of those efficiencies, and you won't be able to find this as a line item in the budget. You're gonna have to look at a lot of programs. Aggressive and competitive contracting practices. Now, that is actually not really an efficiency that is in fact a tightening on margin and fee, and presumably on performance. Better use of information technology. Well, ever since we created information technology, we have saved money by taking money out of the budget in anticipation of better use of information technology. And I won't be surprised if we do that again. Streamlining the staff. I will confess to be totally baffled as to how I'm gonna be able to tell whether you've done that or not. I know what getting rid of staff means. That doesn't necessarily mean streamlining. Reductions in contract services. This is probably, again, not line items, right? Most contract services are paid for out of the operation and maintenance account. There's no definitive display of that in the budget, but there are some disturbing trends already underway in the industry itself. And it isn't actually an elimination of contracts. It's a de-scoping of the requirements for the positions. And I suspect many of you out there who work in these contract environments are seeing this already. The Pentagon is saying, you know what? I really don't need a master's degree with 10 years of experiencing that job. I can take a bachelor's degree with three years of experience. With a commensurate reduction in in fact the anticipated cost of that. That's fine as long as in fact that three year experienced bachelor's degree person can do the job. Let us hope that somebody made that evaluation before they de-scoped the requirements. Let us not in fact be blinded though by false optimism in that regard. And then finally, better inventory management. And again, this has been a hallmark. I've only been at this business for about 35 years. We've been preaching better inventory management the entire time. What are efficiencies really? Well they're what the Australian calls efficiency dividends. That means we took the money out. Now you figure out how to be more efficient. So that's what you're gonna look for in the budget. The second is in fact, I think some of the unanswered questions. There's a, this was a difficult budget process in part because the start point wasn't really determined until these guys were already wrapped up. And then they had to go back and take into account what the Congress had already acted on. As a result, a lot of the fiscal year 13 issues that you'll see in the budget were solved by punting them into fiscal year 14 and beyond. You won't have much visibility of that but you'll have a number of hints on those things. And I think over the course of the congressional review cycle for both the Authorization Act and the Appropriations, many of those punted issues will come to light. Why? Because the Pentagon has to start coming to grips with those fiscal year 14 issues almost immediately. They're already starting to work at the military departments on the fiscal year 14 budget and FIDUP. And it's critical that they get that in place. And that's where the impact of failing to account for the additional reductions, whether through sequestration or something else, begins to have real long-term consequences. The final piece is, I have to say something about base closures. I've spent a quarter of a century heavily involved in the base closure process. I received an email yesterday from someone who reminded me of a quote I had made three months ago. Quote, you're never going to see a BRAC requested in an election year, especially a presidential election year. Obviously, I have to eat those words. It is a presidential election year. And I think in February 13th, and the secretary said it yesterday, we'll see a base closure request. The viability of that request remains to be seen, but there's one particular point that the Pentagon has failed yet to perceive. The base closure round is part of their first objective, if you will, in their strategic review. There is also in fact a push for an expanded overseas basing presence as part of the second element of the strategic review. From the Pentagon's point of view, these two are not connected. You can be making reductions for efficiency purposes with your domestic infrastructure at the same time as you're expanding your overseas infrastructure for better deployment of Navy and Air Force assets in the Pacific, et cetera. But from a congressional point of view, these two are in fact absolutely linked together. And we have seen this in every previous base closure round where the typical mentality, whether you're from Texas or Montana or South Carolina or wherever that you have a base that might be threatened, you'd say, you know what, before you close my base, why don't you go get those blank aircraft in blank base overseas and bring them home and put them here instead? And until and unless the Pentagon does a better job of reconciling that dispute, we're not likely to see a movement forward. There's also a question of the role of politics here. And each passing administration, each passing election cycle sees a little bit more penetration of politics into the Pentagon. And many of you have been at this over the course of careers that stretch back over decades and we've all witnessed this, if you will. The attempts over the last month or so to align the White House's own objectives with the Pentagon's objectives are actually worth lauding, if you will. It's useful to have some alignment, if you will. On the other hand, the political folks need to be a little bit careful. Historically, the greatest contribution that the Defense Department can make to any election campaign is in fact to be allowed to do its job very, very well. And that was the fundamental premise in which the Framers created the branches of government in the first place and set up the friction between the executive and legislative branches. And I think it behooves us as we move forward here to be able to separate out those decisions and activities that are being driven for political purposes and those that actually contribute significantly to the capability to provide for the national security of the United States. So I'll close my remarks at that point and we'll prepare to open the floor for questions. So let me just remind you of the process, if you will. We have microphones here. We'd like you to wait for the microphone so that in fact the audience on the web and on television can hear you as well. You raise your hand. I will recognize you by pointing to you and saying something. Wait for the mic. If you would do two things. One is identify yourself by giving me your name and identify your affiliation. And if you don't have anything, you can do what a registered independent in Maryland does and call yourself non-affiliated. So why don't we start? I think we've got a couple of questions here in the front. Wait for the mic here. Let's do the one on that side first and then you just pass it across the aisle there. Good morning. David, thanks for taking the question. Jeremy Devaney, BB&T Capital Markets. This question is actually directed more towards Todd and Clark. We've heard a lot about the consequences of sequestration. And yesterday the question was asked at the Pentagon about whether or not they're planning for sequestration but again the response was consequences and not the plan. I was wondering if you could either expand on Clark's comments about the alternatives to sequestration but do you see a logical path for legislative rollback of sequestration and what do you think the DOD is doing to plan for sequestration and how is industry reacting? Yeah, I mean, you know, let's talk about the alternatives to sequestration. You basically, here's how it lays out. The super committee failed to find 1.2 trillion in deficit reduction. That means under the law, you're gonna find they're going to take 1.2 trillion out of the budget. They do that by allocating half the cuts to defense, half the cuts to non-defense of the 600 billion allocated to defense. You get to take out 18% for interest savings because you're not gonna be borrowing as much over the years. So now you're down to 492 billion. It applies to what's called the 050 budget function that includes 96% of that budget function is DOD. The other 4% goes to the Department of Energy for the Nuclear Weapon Stockpile, things like that and a few other government agencies. So of the 492 billion that you actually have to cut, about 96% of that would presumably come out of DOD, although there is some flexibility there. So now you're talking about 472 billion that has to come out of DOD and it has to be evenly divided over the next nine years. That's what the law says. So it ends up being about 52 billion would have to come out of the DOD budget. So FY13 budget, 525 billion. You'd have to take another 52. It says you have to have a uniform cut across all the accounts. It ends up being about 10% cut. You can exempt mill peres, but then all the other accounts have to be cut by a greater amount. Now, with that said, what can you do to avoid the messiness of that and the untargeted and unstrategic nature of these across the board cuts? Well, you're gonna need the cooperation of Congress to do anything, but first of all, the Pentagon could submit a budget amendment, if you will, that comes in at the 52 billion dollar reduced number. Now, technically, the way the law is written for FY13, the sequester is a little different. It's going to take the 52 billion no matter how much you appropriate below the cap. So what you'd have to do is you write your bill, your appropriation bill, so that it comes in at the lower number and then at the very bottom, you say increase every account in here by about 11%. Then sequestration hits, it cuts it by 10%. You end up where you want it to be. What's the advantage of doing that? I mean, I know it's a game, but that's how you have to do these things. The advantage there is simply that you got to target the cuts. That's better than untargeted, but it's still gonna be tough to do. It's about a 10% reduction. Okay, what are some other alternatives if you wanna avoid that? Well, as the president said, that he's not gonna take up the pressure, take off the pressure of the Congress to handle the deficit. So what could you do that's deficit neutral to alter sequestration to make it a little easier for DOD? You could reallocate the cuts across the years. So instead of coming down suddenly in FY 13 and then basically staying flat at that lower level the rest of the decade, you could make it a gradual decline that achieves the same dollar amount of savings over the decade. I ran some calculations. You would have to decline the defense budget at about a 2% real rate. So adjusting for inflation, a 2% decline in real terms over the rest of the decade, that gives you about the same level of total savings as you would under sequestration. So it's a more gradual ramp down. That would be a little smoother, a little easier for DOD. Yeah, the way the law is written, it doesn't take into account time value of money. It's 1.2 trillion and all the numbers in there are in then year dollars. So yes, you're back loading the cuts. If you take the ramp down approach I was just talking about. So the real reduction is less, but that's the way the law is written. Changing the law. I mean, you have to change the law. The super committee was the legislative process to avoid it that was easiest to accomplish. The super committee had this unique authority to produce a plan that would get considered by the House and the Senate without amendments and it was not gonna be subject to the 60 vote cloture rule in the Senate. That was the easiest way to avoid this. That opportunity has passed. So now Congress is gonna, if they wanna avoid this or wanna modify sequestration, it's a regular legislative process and they've gotta get 60 votes in the Senate to do anything. The only thing I would add to that is that as Todd pointed out quite accurately, the only way you can change is change the law. What are the circumstances under which the law might be changed? Well, they reach a bargain. Bargaining hasn't stopped. You know that every one of these organizations, including up on the Hill, including more public ones like this one here at CSIS, have teams out there thinking about life beyond sequester and how to deal with that. So there's two kinds of deals that are out there. One is the deal for the 1.2 trillion. The other deal is the grand bargain where most, I think, outside analysts say that we need between three and $4 billion worth over 10 years of deficit reductions and revenue increases, otherwise known as tax increases. If there is a grand bargain, defense will be part of that because it represents 40% plus of discretionary spending. You don't get there without defense. So I think that there's, at this time, as I said, a subtle form of the Washington Monument Strategy while you didn't see big gaudy cuts in this first round is they're being saved for the second round of negotiations about what will replace sequester. And it can either be a sequester-sized deal for how you get that extra 600 billion demanded by the Budget Control Act, or it can be two and a half to $3 billion that actually addresses the budget deficit, physical crisis that this country's in. I know we want to get to the next question, but let me just also emphasize that part of that process of the bargain and the debate and the compromise has to take into account what do the ratings agencies think about this. And this has never been part of our equation before. Go back to November 21st when the Super Committee failed and they announced that in fact we're gonna have to move towards sequestration. From the point of view of the ratings agencies, Moody's and Fitch's and Standard and Poor's, this was irrelevant. The dollars were still coming out. Didn't really matter to them where, right? From the point of view of solvency of the U.S., this is fine. Now, if we're not careful, and I'm not quite sure how Congress can be careful on this matter, if we start sending the wrong signals at the wrong times and it provokes a reaction by the ratings agencies, it says, you know what? You guys have just crossed the line. A line you didn't know was there, a line we didn't define for you ahead of time, a line that may in fact be subjective and irrelevant, but nonetheless, visible, public, and with potential significant impact. This is a different part of the equation, if you will, and one that I think, in other words, you can't just let defense off the hook without finding that $475 billion somewhere else. So, next question. George Nicholson with StratCorp. This is basically for Todd, and also for Clark. Todd, you mentioned that the pain and where the cuts are, for instance, retire all the C5As, terminate C27s, retire large number C130s, reduction of 60 squadrons, and potentially the BRAC. For the National Guard, I think that's gonna be an absolutely red flag, and how much of a contentious issue is that gonna be with their lobby on the hill of handling that? Yeah, I mean, I think it's gonna be a big issue. You cited a lot of the cuts in the Air Force, and I'll admit my bias here is a former Air Force reservist, and I was in a wing where we had C5As. Yeah, they're gonna be taken. I think you're gonna see a lot of pushback. Once the Guard and Reserve lobbying groups get mobilized, I think that they have a lot of influence on the hill, so I think we're gonna see a real fight about where those cuts occur in the Air Force. I don't think this is a done deal. I don't really have anything yet. Do you still have the mic, George, or has anybody picked up the mic? Let's go over here to the right, my right, that is, and then we'll come back to the middle here. We've got two guys over here. Byron, you get the mic first, and then pass it forward. Okay, David, I wanna ask you a question first, and then Todd. Make sure I identified you, but that's not adequate for our audience. Byron. Byron Cowan, Capital Alpha Partners. David, when you looked at the program changes that were discussed yesterday, was there anything that struck out as a risk for the industrial base? And Todd, did you think differently on what the glide slope and the investment accounts may be in 13 and 14 from what we had in 12, based on what came out yesterday? The industrial base question is really intriguing here. I think what we saw is some evidence of potential concern. What we've had the Pentagon tell us now, both with the January 5th strategic guidance and in connection with yesterday's announcement, is that there's an increased consideration of industrial base concerns as these decisions are being made. That's all well and good. The real question is not, is there increased consideration, but you actually change a decision to reflect that increased consideration? And as of yet, we have no evidence that any such change in decision was made. But let me give you one example, and this is what you need to know the rest of the details for. Now, it's yesterday the termination of Global Hawk Block 30. That clearly puts some elements of the supplier base at risk. The real question of what that level of risk is depends on what's happening in the budget with Global Hawk Block 40, with BAMs, with other programs that would have essentially a similar supplier base, similar component structure in place. And we don't yet know the answer to that question. One might assume if one wanted to give them credit for having that additional consideration, that in fact, looking at across the board, the UAV infrastructure that supports these large planes in fact is probably sustained, but we don't yet know. So that's kind of what we have to look for in that equation. You know, and I give them great credit for at least saying the right words and saying we've got to take into account what these cuts are gonna mean for the defense industrial base and we've gotta take action where necessary to preserve critical vital sectors of the industrial base. The devil of course is in the details. The reality is in this budget environment you can't do everything everyone would want you to do to preserve every sector of the defense industrial base. So the question is not what do you cut but what do you keep? And we don't really know yet what they're talking about doing. They at least talked about monitoring but I don't think that is quite sufficient. But in terms of the procurement and RDT and e-accounts, we don't really know enough yet to say based on what they said yesterday, my hunch is that procurement is gonna take a steeper cut than other parts of the budget. They're talking about protecting your S&T investment, investment in your R&D seed corn if you will. So if they do that then our RDT and e-account may not take as much of a cut as procurement but I think that's all we can really say at this point. I'll put in a plug here. We do plan here at CSIS on Wednesday the 15th of February to have an event specifically focused on the industrial base implications of the defense budget assuming they actually do release it on the 13th as is currently planned. And so we'll be able to sort of answer our own questions and many of yours as well at that point in time. Let's go up in the front here. Rich McFarlane with Parsons. The other gorilla in the room beside sequestration is a CR and we are heading that way into a perfect storm of issues that have to be addressed. And I personally see another six to eight month CR that we experienced last year. Do you know if the department and the rest of government is in trying to prepare some kind of strategy to deal with that in terms of maybe prioritizing procurements, rescheduling procurements, et cetera. And if not, please ask them to do so. And that was really, that's really after you Stephanie. To be honest, I think the executive branch has been so wrapped up in what we've been seeing lately that they haven't given it much thought. And this could be the former legislative staffer in me going, you know, come on guys. I think you're right, we will be seeing CRs. I tend to think it will be longer than eight to nine months. I think for defense, you're looking at a year long CR. For other parts of government, it'll be shorter and there'll be much gnashing of teeth. I think you make some very good points. We will take that message back to people we talk to. Thank you. There are a couple of other aspects to it. One, obviously the real wild card there is who wins in November, right? Not only at the presidential level, but in terms of the, will the Republicans take back the Senate? Will it be a tighter margin in the house or a larger margin? The incentives for making a decision during the lame duck session will be directly driven by what happens in the first Tuesday in November. The other thing though is that the difference between a CR level, which is basically continue FY12 funding into FY13 and the FY13 request is pretty minimal. And so as long as there are enough anomalies written into the continuing resolution so that the Defense Department can in fact make the adjustments that it planned to do for fiscal year 13, the potential impact would not necessarily be that great absent the $52 billion of sequestration. The only problem with the uncertainty it freezes our customers. The uncertainty freezes the customers and you know, programs tend to take one of two very diametrically opposed views here. One is I don't know what my future money is gonna look like and so I'm gonna be very prudent and go slow and be very cautious and slow everything down. The other dynamic is I don't know what my future money is gonna look like so I better spend every nickel I've got right now before they take it away from me. That's gonna be kind of a program by program dynamic and we really can't predict where that's gonna go. I think we've got another question back up here in the front here. Peter Sharfman, Minor Corporation. Getting back to the sequestration, would the unprecedented degree of flexibility that you described give the Defense Department a once in a generation opportunity to cut things that have been sacred cows in Congress? Is this the chance to cut the program in the subcommittee chairman's district? What an astonishingly clever question. It sort of reminds me of Richard Nixon's secret plan for ending the war in Southeast Asia. It would certainly potentially provide a once in a century opportunity to do that sort of thing. I will tell you though, I see not only no indication that anybody is willing to step up to that but I suspect that the bulldozers lined up outside the building if that were to occur would materialize very, very quickly and we'd see some elimination. However, what it does do Peter is it provides the opportunity I think for those of us who want to contribute to the discussion and provide advice as Rich noted earlier to begin thinking a little more creatively about what kind of flexibilities you'd need to have in order to actually execute this. The thing I think we all agree is that this is not the end of the reductions. And in fact, even though the document that was released by the Pentagon yesterday said that if you look at the words in the transcript, General Dempsey called this a down payment. That implies at a minimum a second payment, right? Secretary Panetta called it the beginning. That implies at a minimum some subsequent steps if you will. So I think there's a recognition this is not the end of the game. The fight over sequestration is not a fight necessarily over no reductions. It's a fight over the process for doing that. And what you've indicated is kind of the stakes of that process is really some game changers. Not just strategy, but other things. Stephanie and then Clark. If I could just comment on the political environment in which we're operating. Going back to something Todd said, which was there aren't a lot of surprises in what we've heard yesterday. I don't think we're gonna have a lot of surprises. It may be a great opportunity if you look at the broader strategic construct of can you actually cut programs that have been sacrosanct or sacred cows in the past? There is that opportunity, but the political will in my view doesn't necessarily exist. And I go back to who will want to sacrifice something in their district in an election year where it is so very partisan right now because it's a zero sum game in perception at least. If I lose, you win. If I lose, my opponent wins for a host of reasons but purely just political. I'm a policy wonk. In a policy world, this wouldn't be so hard but it's not reality. And that's just my perspective on it. I think that we've had many heroic programmers in the past who've used these kind of financial crises to cut programs that might have been sacrosanct. Negative funding wedges. They've been built into many palms and then when either that heroic programmer was brought down to size or he left because we have a fairly rapid transition of people, there's broken glass all over the floor from these negative funding wedges. So I don't think people are doing that. I think that's a practice that's gotten just too risky but I do believe and I mentioned this before is that there is a common understanding that we have to do something about paying benefits. That it's unsustainable. And I do think that this is an opportunity where they are hopeful of reaching some kind of agreement with Congress either through the commission or through other means as well where they're able to at least cap the growth so that it leaves room in the budget to actually equip and train the forces that we're gonna retain. So I think that that's something that's big enough that the building is desperate enough to handle. It could be addressed at this time. And the commission that the Defense Department proposed yesterday was solely on retirement. Our work and I think all of our work up here says that's too narrow a boundary. You've gotta actually look at retirement changes in the context of a broader pay and benefits approach that cuts across the board. And the idea of a BRAC-like process I think really means produce a result that's an all or nothing up or down vote. There are other elements of the BRAC process that probably also should be incorporated here including robust public opportunity for input and debate and an opportunity for the members who would be potentially damaged by this to have visible active resistance so that at the end of the game they could say we did all we could. Can I just add one note to that real quick? You know, I think that's exactly right that the retirement commission is not quite enough. You really need to broaden it to look at military compensation comprehensively. And I think the key thing that we need to do here like I said before, it shouldn't just be about what do you cut. It should be about working and get better value. If you're gonna do that, you've gotta get data. You've gotta understand how service members actually value the various forms of compensation they get. And it is a complex mesh of different forms of compensation. That's something the department has actually been reluctant to do. It's not something you can accomplish through focus groups or just talking to senior enlisted leaders. You've really gotta go out and get input from a broad sector of the department. I will take a moment here to plug a study that we're doing. We're actually trying to do this. We're conducting a survey of military personnel where people can go in. It's an online survey and they can actually start to show us their utility curves if you will for very different forms of compensation. And then they make trade-offs in the tool of would you prefer a little more of this and a little less of that or some other combination of benefits. It's online. We encourage people in the military or family members or retirees to go to it. CSBAmillsurvey.org is the website. We need to get a lot of results. And once we've got that, we're gonna share that with leaders here in Washington and the department and forums like this in the future. We're gonna be at this for a little while longer, but Todd Harrison has to leave shortly for another commitment. So if there's a question, particularly on this side of the room, which I haven't gotten to yet that you wanna direct towards Todd, this would be the right opportunity to do that. I do see one here. If you would bring the mic up there, Terrence. Thank you. Auto Christ with C-Power Magazine. Todd, you said earlier 17 Navy ships cut in a fit up. Which ones are you counting? Because there's also a program drawdown in LCS and in the joint high speed vessels in addition to retiring the cruisers and the amphibs. Where do you get your 17? I got it from the department. Straight from the horse's mouth. And yeah, I don't have the list of how it all adds up. I think they're cutting what seven cruisers, slipping to LCS, slipping a Virginia class sub, a joint high speed vessel, there are a number of ships involved here. But that's the number that they're using that they're taking out over the fight up. And that is a significant change from what had been planned previously. I think that that just goes to reinforce the fact that these cuts are not being solely put on the Army and the Marine Corps. The Air Force and the Navy are taking a share of the cuts as well. All right, any other questions? We do have, we've got one, and let's see some of you. Oh, we have down front over here. I'm sorry, it's the lights are so kind to me that I actually can't see people right in front. So let's go over here, thanks. Hi, I'm Emily Rutherford, Defense Daily. Stephanie talked about reversibility. And I'm wondering if the other panelists have any thoughts on that, concerns on that. And also just how you're defining it or what you understand it to be. I mean, I think reversibility can mean a lot of things. The key question is how are they doing it? Reversibility also implies that there will be some cost. So, and taking down in strength in the Army and Marine Corps, they've said that they're going to try to protect the mid-level officers and NCOs. And that's smart because if you do need to rebuild your forces quickly, those are the people you need in order to train new recruits that are coming in. But it's still, it's never, without a cost, those personnel are more expensive than junior personnel. So now your mix of personnel will be changing so that your cost per person, your average cost is gonna be a little higher because you're keeping more of those middle-ranked people. The same is true with the Defense Industrial Base. You can cut programs and then make some investments that mitigate the downside to the industrial base. But often what will happen is your unit costs will go up and you'll be paying money in some cases to support overhead and infrastructure capacity in the industrial base and skills in the industrial base that you're not actively using. And there are good reasons to do that but it gets hard to defend that in front of Congress year after year. So there are definitely risks involved in doing it. Just to brief on that, I wouldn't pay too much attention to the word itself as promising a new concept. This is a case of Thesaurus inflation that Todd referred to before. We used to hedge against thing. We used to ask against what if questions. It's also true when you turn to the joint world. We used to synchronize things. Now it's synergy. You know, it's a different adverb that presumably or a different adjective that presumably connotes more content than it really does. Thank you, Todd. I got two questions on the back row there if we can take the first and then pass the mic over to the second one. Quick comment really for Todd, although he's gone. His comment about the mid-level officers. During the post-World War I period when the German army virtually did not exist, they really kept their mid-level officers. And guess what? They expanded really quickly, quickly after that because they kept their core. Yes, I've built courting with Computer Sciences Corporation. Last July, the Defense Business Board recommended that if DOD followed private sector corporate downsizing policies, it could save five to 15% without affecting readiness. Is there any sign that DOD has taken that recommendation on board or rejected it? Are any of the new data in the release yesterday suggestive that that Defense Business Board recommendation is being pursued? Yeah, are there any signs that it's been rejected? No, there's been no explicit rejection that I'm aware of. Obviously none of us can really speak for the Defense Business Board. I think some of the language that was used in the announcement yesterday, I actually saw I think for the first time in a long time the phrase reduction in overhead. That's an intriguing one to me because there is in fact no identification or line item anywhere in the Defense budget that's called overhead. So it's a little hard for us to validate and verify that such reductions have taken place. Nonetheless, I think the mentality is potentially there, Bill. And I still hold out some hope for a recognition that one of the ways in which you reduce the budget is actually figure out things that you're not, that you're doing that aren't adding a lot of value and just simply stop doing them. But we'll see whether that actually occurs when it comes forward. Got a question down here in front. Thank you, Sandra Erwin with National Defense Magazine. I wanted to ask Clark a question about the comment you made on a grand bargain that would be necessary at some point to fix a deficit. I mean, if hypothetically that were to happen, what kind of cuts would you foresee for defense would be on the table potentially, would be politically acceptable? And do you have a number in mind for that? People pull grand bargain out of the hat to describe any really serious problem that if you're gonna solve it, you have to bring in a lot more into the picture. I think the first time with respect to this it was brought in was last July and August when President Obama and Speaker Boehner were talking about a deal that was much bigger than 1.2 to 1.5. They were talking about a deal that was twice as big. And so how do you get there? Well, you have a grand bargain now. What determines what the grand bargain looks like? We're trying to think through here at CSIS, the beginning of a process will take us six or seven months because it'll take that long but we'll also figure this is something that's gonna be relevant after the election because you can't have a grand bargain until you know who your bargainers are and we're not gonna know that until after the election. But I think that that's sort of behind the scenes in any new president or any new administration coming in those that if they don't address this at that level, we're gonna have another four years that looks like the last two and I don't think anyone wants that. So to me a grand bargain just means how do you generate a combination of spending reductions and tax increases that add up to a total of about $4 billion? That's a lot of money. Projector over how many years? I don't know. And that's why I think with the Defense Department and the actions they've just taken is you see a recognition that they're one of the big stakes in this bargain because they represent 40% plus of discretionary spending. So there's no way you have a grand bargain without avoiding more of it. And so one of the reasons why I don't think you saw big gaudy cuts like a carrier or something in this first round is they know there's a second round. They know at a minimum, there's a second around to what we do to avoid the sequester cut. But everybody knows there's a grand bargain out there that we all hope addresses the fiscal crisis that this country faces. And I think there's an awful lot of jockeying going on now to determine where it is. As to what my personal ideas are, stay tuned another six months, I hope to have them. I'm gonna bring the microphone kind of to the middle in the back and then down forward while the mic is moving forward. So Terrence, raise your hand higher, thanks. While the mic is moving that way, let me point out that we've been talking this morning as if the debate on Capitol Hill over the fiscal year 13 defense budget is gonna be whether to fund the request that the president makes or to cut it further. That's not the debate that's gonna occur. The debate that's gonna occur is gonna be whether to add money back. All right, and so the fundamental underlying reality which is between the FY13 level and something lower that we've spent our time talking about here this morning is not gonna be reflected, particularly in the House when the debate is over whether or not the Defense Department cut too much and it ought to be added back. So the disconnects between the grand bargain and the reality we face today are gonna be amplified by in fact a perceived debate that's largely irrelevant to those long-term reductions but very relevant to the programs and cuts that are embedded in that budget in the first place. So with that, Howie? Yeah, Howie Linn from Floor Corporation and actually this question is right directly with commenting about what you just said regarding contingency operations overseas. I know that there's less going to Afghanistan than last year for next year and beyond but we've seen the last 10 years. The model is conflicts, the warfighters go in, the companies in this room get hired to support them logistically and base life support. Is there anything else described talked about in the budget for regarding future conflicts other than just reduction from the Afghanistan account? What I found remarkable yesterday is finding the word contractor somewhere, anywhere, was impossible. And so what this means to me is either it's something that they don't wanna talk about and there's been a general reluctance to talk about reliance and I won't say over reliance but just reliance on contractors for base operation, base operating support and other logistical type support that they receive in Afghanistan and to be harnessed in so many other places around the world. I think this is a debate that really does need to happen. I wouldn't be surprised if the authorizing committees take this up as part of the okay, you're cutting end strength and you're not gonna be doing stability operations on a long prolonged basis but we need to be involved. So how are we gonna do it? And contractors will come up in terms of stability operations and others. And so from my perspective, I think as we move forward, just watch this space. I find it remarkable that you can have an entire press conference and not really talk about it. When it's been such a topic over the last few years and David, you might have a different view on this but from my perspective, it's a conversation that we need to have in the next weeks, if not months. I would like to add one thing to that. DoD put out a fact sheet. Now I understand that using the word fact in conjunction with budgetary figures is perhaps an oxymoron but nevertheless, we used to project in terms of the out years, 88 billion for OCO and FY 13, then 50 billion, 50 billion, 50 billion. They don't do that now. Now it's 88 billion and FY 13. Why? Well they're gonna ask for 88 billion and then there's TBD for all that to be determined. So they're not making projections now about what future out years are gonna look like because they don't know what future out years are gonna look like. Let's take a question down here in row four and then I believe there might be one further back. Thank you, David. Cameron, Lucy, unaffiliated. Stephanie, in your opening remarks, you talked about land ground forces and possible future requirements. If you look at the discussion we've had here, it seems to me that the army, that the budget numbers that came out going down to 490K active seems pretty unrealistic to me. I think at the end of the day we're gonna be a lot lower than that. Could you talk about strategy land ground forces and your ideas about that please a bit? Thank you for that question. It's a concern when you look at the glide path for the end strength. You're really talking about 490,000 army soldiers in 2017. So we're not talking about 2013 at this point. We're talking about over the next few years. But from a strategy perspective, I go back to what are the kinds of engagements we're expecting our armed forces to operate in going in the future. They're not going to be hopefully the Iraq and Afghanistan kind of situation, but certainly you can't rely on relatively scarce special operations forces to take care of all of the training, advising, assisting that we are going to be expected to do. 490 I think by 2017 might be a realistic number, but it really depends on what the next few years show us. And this goes back to Clark's earlier point is if you have a strategy that requires adjustment every year or so, what kind of strategy is it? My concern about this current strategic guidance is that it talks about we're not going to be doing prolonged large scale stability operations on a rotational basis going forward. I see no evidence of that. Large scale maybe, but prolonged, I think we're going to be in places in the world. And the alternative is having friends and partners who are willing to do things that we aren't going to do. And I'm not sure those conversations have happened. I think there's also a parallel question, which is even if Stephanie's right and we're going to be engaged in a host of such operations around the world. And even if those operations actually require, as they will, contractor support, from the budgetary point of view, the question is does it drive the force structure or can you absorb it within the force structure that you have? And I think that's the question that they've tentatively answered in the abstract, but not analytically answered in the specific. Do we have any other questions? I've got one in the front row here. I'm trying to see whether there's anybody on this side. All right, I think this will be our last question and then we'll allow you to go out and take advantage of the fact that the rain will be diminishing. Thanks, Zach Biggs of Defense News. I'm curious, there was some mention of the industrial base and the fact that Secretary Panetta has mentioned the need to protect the industrial base moving forward. Do we know where that threshold is with slipping ships, with the JSF being pushed off a little bit, when you do start to risk threatening those subcontractors who provide specialized parts? And if we do have a sense of that, how far are we from starting to really risk those subcontractors as we have the potential for further slips moving forward? Zach, that's a complex question in terms of do we know? No, we actually don't know, but let me tell you what we suspect. What we suspect is in fact there are three elements to what the Pentagon has to do to be able to do a better job of thinking about the industrial base as it makes these cuts going forward. The first is actually a level of awareness and that is an understanding of what all the elements of the industrial base are. There's a tendency or has been historically for the last couple of decades to focus on just the prime contractors as part of that process when in reality, what we've seen over those same two decades is a migration of the prime contractor's share of the programs from maybe 60 or 70% 15 years ago to maybe 30 or 40% today with the rest being sustained by subcontractors. It's also true of course that a prime on one project is a sub on another. So there's a lot of mixing and matching. So the first question is, does the Pentagon have better information? I think the answer to that is yes, they've spent the last year with this sector by sector tier by tier analysis. I suspect a number of you in this room have spent considerable amount of time and energy and perhaps cost filling out the surveys that the Defense Department has sent out. The second question then is how do they actually use that information in the decisions? And that's kind of the question you've raised. We've had statements by the Defense Department that they have in fact done so. We can't yet validate any instance and we've asked them to validate instances where they have actually done so. The third is whether or not they actually did the right thing when they made those considerations, if you will, because ultimately what this is is a judgment call of how close to the edge of the cliff we will allow our industrial base to go before it falls off. And the history says pretty darn close because we've got a very good idea that we have an ample supply of parachutes and we know how to give them to people as they're falling off. And that's one interesting philosophy to maintaining the industrial base but it's kind of a scary one for the participants in that process and there's clearly some vulnerability going forward. But I think there's actually a fourth question and this is the one that really becomes important. You can't tell what parts of the industrial base you need to sustain unless you've got a clearer description of what it is you need this military for and what the role of the industrial base in providing that capability going forward. I think the strategic guidance that was issued on January 5th begins to make some small steps in that direction. It begins to answer a little bit the question of what do we need this military for? What are we gonna plan to do with it? It begins to answer a little bit the questions of what are the demand signals being sent to industry and quite frankly it says don't invest quite as much in ground forces as you were planning on investing maybe two years ago, maybe look a little more at air and sea, maybe look a little more at innovation technology that you can put on the shelf and call reversibility. None of that in fact is clear enough guidance that it would allow a company to tell where to spend its money and its investment today. That still needs to be determined. That will be determined not only by what comes out over the budget but by the debate as it plays out over the rest of this calendar year to the election and beyond. And with that I wanna thank you all for joining us. We intend here at CSIS to continue probing all of these issues on a regular and perhaps even two frequent basis. But I think that the reality of the situation is that it's changing so fast that we've got to work pretty hard just to stay on top of what the dynamics are. And we'll have numerous opportunities to revisit some of these questions as this fact sheet becomes less speculation and more fact going forward. Thank you all very much for your attendance.