 All right. I think we're ready to begin. My name is Clark Murdoch. I'm a senior advisor here at CSIS I have to say I hadn't realized the extent to which the talk by the Deputy Secretary of Defense Would set up this panel. There is a temptation to say To my colleagues here. Well, we've heard from the Deputy Secretary Bob works as stop the madness My compatriot and former colleague from the Air Force Bob Hale will undoubtedly say stop the madness and then the three appropriating Staffors the former can say this is how we'll stop the madness during that time because somebody always has to implode discipline on the process anyway It's with great pleasure that That I preside over this this is something that David Briteau did last year To quite some success and although I pleaded with my bosses to let him do it again They decided that they didn't want such a success. So I've been asked to To speak in for him. Fortunately, I have the crutch of Bob works introductory speech to build on during this time I have a few charts that I would like to Present just to put in a context Although I have to say that Deputy Secretary did a good job. So I'll be blessedly short first slide a Comparison of past drawdowns This happens to be a slide that both David and I use it's one of the most widely requested slides from CSIS and it makes a very visual Presentation of why this buildup is different than past build-ups and past build-ups particularly after Korea and Vietnam huge increase in active-duty Personnel and the numbers and the amount being paid to them Not as true during the post Cold War build-up and not at all true During the post 9-11 build-up what you see is that we spent lots more dollars But the dollars were all on civilian pay all on Contractors and all on active-duty pay for reserve components call to active duty And that the actual number of active-duty personnel in the force only increased modestly maybe a couple percent During the build-up and the downturn that the cutback while it looks the same as Previous build-downs defense drawdowns. It is only going down to a base level of $520 billion and FY 13 dollars Previous build-ups always went down to about 400 billion dollars. So we are going down to a Smaller force that costs us over a hundred billion dollars more per year in real dollars next slide this is a an argument that we've been making for about a year and a half two years at CSIS as part of a defense drawdown Affordable military study that Ryan Crotty and I have been working on during this time But it's to talk about the double whammy that's hitting the budget. It's not just Fewer dollars, which is defense drawdown. It is also weaker dollars in terms of the purchasing power of the defense dollar as we estimated The drawdown and we dated from 2012 Which was the peak base budget year? During the post 9-11 build-up we are having a decrease of about 21 percent in terms of the total amount of dollars available at the same time and this was something that The secretary work pointed out is that the building is experiencing the Pentagon is experiencing cost growth above inflation and I was I was horrified and noticed that he cited a ran study Rather than a CSIS study brand estimated one percent per year We estimate 1.5 percent per year in terms of internal cost growth above inflation, but this is hollowing out the budget From within at the same time the defense budget is being drawn down We estimate that based upon 1.5 percent per year at 15 percent over The defense drawdown period under the budget control act next slide Or perhaps not next slide. Well, I've already failed the David Bertot test All right, I think we're we're ready to come back again We need to get to The third slide of a four slide brief Which seems to be going on much longer than I intended Okay, let's go to the last slide the approaching capacity crisis This is a I feel that we face and we have not internalized yet How much less capacity we're going to be able to abide to afford? within FY 2021 at the end of the budget control act in terms of the amount of dollars available one vivid particular We took the FY 2012 budget for structure and its modernization profile as the last pre-drawdown year and That estimated that that would cost in $2013 $660 billion an order to afford that same Force in 2013 I mean an FY 2021 the last year under the budget control act that would require $757 billion again an FY 13 dollars Yet the budget control act only gives you $520 billion an FY 13 dollars So we're talking about in terms of a gap between how much it costs To sustain the current force We're talking about over 200 billion dollars in the FY 2021 time period Just two quotes on that very experienced former defense official has said recently talking about the 2012 Defense strategic guidance, which is secretary work pointed out was what they thought they had equated in the FY 13 budget Request where dollars met the strategy that the DSG. Oh, that was a hundred billion dollars here about You know we can't afford that now In a budget control act capped world I believe the question we have to ask is essentially how much strategy can we afford? Because we are in a budget capped environment With that as a setup, but really with secretary works of presentations a setup will turn again to a former administration official before we turn to the former appropriation staff committee members Bob Hale Clark, thank you Y'all hear me back there. All right. Glad to see standing room audience here. This is good Although there are some seats of your own mind. This is church seating. There are a few seats up here if you want So thank you for the chance to be here today to talk about what Clark is title sequestration and the politics of the defense budget In my time this morning, and I'll try to keep it to my 10 minutes I want to make two broad points first I believe DoD needs more funding than is available in the budget control act I realize it'll be a tough political lift my folks to the left can talk about that but I don't think an impossible one and Second DoD owes it to the American public to make hard choices about how we stretch those defense dollars No matter how many dollars are Available and I might add for those of you who heard Bob work. I'll underscore a number of his points Let me turn to that first point I believe DoD needs added funding above the budget control act under the BCA DoD and fiscal year 16 would receive $500 billion is another year of modest real decline It would be the sixth in a row for the base budget and in the years beyond fiscal 16 under the budget control act It'd be a grow at about the rate of inflation so it essentially go down again and then stay flat I think the president's proposal from last year for the next few years is more appropriate 535 billion in fiscal 16 to be about a 5% real growth Which would begin to offset or help the department offset some of the problems and readiness and others that Bob outlined this morning and growth beyond fiscal 16 under that plan modest but close to staying a pace of inflation Now your first reaction may be recommending higher funding is just a former DoD comptroller Displaying his genetic impulse toward getting more budget for the Department of Defense and there may be some truth to that reaction But I believe there are more defensible reasons for arguing that the department needs more funding Ultimately defense has got a balance moneys for DoD which increase the deficit Against the threat of not fulfilling the national security strategy and Bob did a good. How many of you heard Bob work this morning? All right, most of you So I'll paraphrase he did a good job of going through that list of national security threats He called them striking. I think that's probably a pretty good word Obviously ISIS has got all the front page news now in Syria and Iran We're still finishing a war in Afghanistan and what we've done for a couple of months We'll leave around 10,000 troops there. So there'll be a fair amount to go still in in Afghanistan I should say in Afghanistan Iran means remains a concern We don't seem to have a deal with them yet. It's not clear We're that's heading heightened by air of that concern heightened by our commitment to Israel We don't envision a military involvement in Ukraine But we clearly want a strong military as a deterrent there and let's not forget North Korea It's been forced off the front pages But it's a rogue nation is unpredictable Even while we have several tens of thousands of troops in South Korea and of course there's China seemingly intent on Expanding its presence in the Pacific and creating much concern among our allies to me these threats seem considerable To me they suggest an increase in the need and a need for increased defense spending Now even if you accept my premise that the department needs funding Above the BCA you might say there's no way that Congress will change the BCA to increase defense funding And I might add that at least while President Obama is in office Any change that gets defense more I think will have to be accompanied by a change that increases non-defense spending I've heard him say personally and with conviction That he believes there are unmet non-defense needs as well and that he won't accept simply Simple increase in defense that's going to complicate the political lift Well, I understand amending the BCA is a heavy political lift. I don't think it is insurmountable Congress has changed the BCA twice in late 2013 at 12 I should say and again in 2013 the Murray Ryan deal both times They modestly increased both defense funding and non-defense funding history also suggests at least some Possibility of of increases you saw Clark's chart the defense budget is notoriously cyclical if you look at it in real terms looks like a roller coaster up down up down We are in the fifth consecutive year in real decline of real decline in the total defense budget And it's actually including the wartime OCO spending It's actually also the fifth consecutive year of decline in the base budget as well All the base budget declines have been modest So you've we've seen some decline around 20 25% in the total budget If history is a guide, we may be nearing a turning point Any increase in defense funding would have to be part of another mini deal budget deal along the lines of the Ryan Murray deal in 2013 Congress tends to work difficult issues like that one that one only if there is an action-forcing event But next year there may be such an action-forcing event The government will again hit the debt ceiling not clear when could be the spring although with the economy performing the way it is I could see it being considerably later But the debt ceiling is going to have to be increased and it may be the action-forcing event that causes another deal Well, I think it's possible. There'll be some modest increase in defense funding It is by no means certain and if the increases don't occur Then I expect to you do you will generally follow the blueprint the department laid out last fall for operating under sequester level or BCA budgets that blueprint calls for sharper cuts in in ground forces down to 420,000 in the army 170,000 in the Marines slowing numerous defense weapons programs But the big ones tend to be slowed less the real cuts if you look at that blueprint occur in the smaller weapons programs to the other procurement and Army ammunition sharp and probably unsustainable cuts in the support activities like military construction already in this budget at Ridiculously levels of mill military construction. You can keep it out for a while but eventually we'll do what we did in the 90s and build up a Backlog that will have to be met Overall, I think these changes would lead to greater risk of not fulfilling national security requirements and in this world environment I don't think that'd be a smart decision Now I believe the defense funding needs to be increased above the levels of the BCA caps I believe with equal conviction that the department owes the public every effort to hold down defense funding needs that effort will require hard decisions in DOD But also in the United States Congress and let me turn to that topic in my remaining time Now there are though there are those who are convinced that DOD is full of waste and Duplication with a bit of fraud tossed in for good measure Cinex have said that DOD waste more money before lunch than most departments spend in a year There is most assuredly some waste and duplication in the DOD budget and unfortunately some fraud as well But there's no budget line item for those things There's no simple way to identify them and one person's duplication may be another person's choice for a way to reduce risk So in my experience managing of now more than a decade at senior levels in DOD It is not helpful to make sweeping generalizations about waste and fraud Which you got to do the only successful approach is to identify specific changes aimed at reducing waste or more typically at Finding and eliminating lower-priority programs one can then have the debate about whether it's truly lower priority And one can begin to build a consensus both in DOD, which is often a challenge and in the Congress to make lasting change So let me follow this approach and identify a few specific changes Although I'll not spend too much time on them when you do this as a former comptroller or anybody doing it You're not exactly greeted warmly in the Department of Defense I used to say that the motto in the Comptroller shop is we're not happy until you're not happy And there's certainly some truth to that when you when you pursue items like this first I should say though there's been some success DOD is slowed health care cost growth Primarily through provider costs slowing using a VA drug pricing schemes Medicare rates for outpatient Pharmaceutical co-pay increases and modest increases in fees for retirees slowed compensation By at least holding now and pay raises in this last year cutbacks in headquarters personnel and overall cutbacks in civilian personnel Some of which at least were based on process changes We've gotten some of the low-hanging fruit it'll get tougher But the single biggest way to reduce defense funding without funding without harming mission is to get rid of unneeded Infrastructure now those of you that heard Bob work. He spent some time on this. So I'm not going to repeat it Basically, we need basery alignment. We the Department of Defense needs basery alignment and closure authority It's it's difficult in the Department of Defense Not all the services agree I might add on the need for this and it's poisonous for the Congress because Brack concentrates the political problems It closes a base in a particular state or district and even though history makes it clear that almost all these communities Recover many of them prosper a few years after the closures Nonetheless, no member of Congress wants to have a base closed in his or her district beauty's asked for Brack authority twice I hope they'll do so again But I think the only way they'll get it at this point is for the president to threaten to veto the authorization bill If it isn't included and I'm not too confident in this environment that that's going to happen But they don't provide the authority. We're wasting billions of taxpayer dollars Bob works numbers Two to three billion dollars a year in likely savings from another background or about right military health care costs are another area That deserve attention you these made some good proposals in my view on the benefit side Congress isn't going to act on them this year. I hope that next year they will then involve Modest increases in co-pays which will limit the use of unnecessary use of of Health care DOD in turn needs to summon up the courage to reduce or close military treatment facilities to eliminate the very Substantial underutilization we tried while I was there we didn't get very far Maybe it's time for a change of incentives perhaps creating a working capital fund For to pay for the military treatment facilities It put the money back in the hands of the services because right now I don't believe they think that if they actually make these painful choices and close a facility They'll get to spend the savings the working capital fund might help change those incentives legislative proposals are pending For a lot of these changes including military compensation, which I'm not going to go through now I hope that in the aftermath of the election Congress will at least grant some of those changes So of course in many other ways to hold down costs eliminate ignore priority contractual activities is an example I especially applaud the Navy's effort in this regard Navy establish a contract court senior group led by the vice chief Former VCNO that reviews contracts for relevancy I say this with a little bit of concerns as I've just gone to work for Booz Allen Hamilton a major contractor But nonetheless, it's something that apartment or defense needs to do and there are other ways to do this My time has expired so let me say in some there are opportunities to get more out of defense dollars Opportunities require courage on the part both the Department of Defense and the United States Congress These action alone will not in my view provide the resources needed to meet high levels of threats We need to add defense funding and increase defense funding above the BC levels while also stretching every dollar just as much as we Can so with that I'll stop Thank you very much Clark and good morning everyone Following Bob Hale I'm reminded of the words of the late great Morris K. Udall who said it's all been said before but not by everyone So here we go I also am reminded That this is not the first time we've done this especially here at CSIS We've been here before We met and we said to ourselves. Oh, this can't happen It shouldn't happen and then God forbid it happened and We all know what a bad thing that was I remember something else about the last time I want to Pay public tribute to mr. Hale here for a moment John Henry Let off our last discussion by saying something that stuck with me and what he said was that Defense can handle something like this This was a threat that of all of the federal agencies defense had the smart guys the resources and the ability to do things That would conceivably weather a sequester. I thought it was a tribute to mr. Hale's fiduciary skills and indeed what John said was both a blessing and a curse in my eyes because We all knew it was a bad thing and the numbers that fell from it were pretty bad numbers in terms of lost productivity and lost wages and lost everything but the reality was we survived it and What it did I think in this town was build up a Level of immunity where there are certain people especially in the political sphere who say oh, hey, we can survive this thing I think going forward this year. That's one of the things that that that Those of us who think this is a bad idea are going to have to combat Bob talked about Ryan Murray Ryan Murray was a two-year Pain killer. It's wearing off this year. It's off the table And we're preparing to face life without Ryan Murray, which means that a nation like ours embroiled in a series of foreign policy and defense threats will wrestle with the questions about whether or not its resources Should arbitrarily be sliced and diced at the same time I think all of us in here will submit that that's not a very good thing Now it's not going to take us terribly long to figure out how this will play out because one of the interesting aspects Of the new Congress is that there is a lot to do And you've now seen one week after election Certain dichotomy in the press where there is a body of thought that says oh, this is going to be a continuation of the Last Congress where the legislative executive struggle is going to highlight their activities There's another body of thought that says with a change, especially in the Senate. There is an opportunity to do some productive work President's budgets do in early February The debt ceiling has got to be adjusted at the earliest probably around the 15th of March So-called doc fix that we read we wrestle with year after weary year to the to the concern of my doctor And I know yours also expires at that time. We should see a congressional budget in April We should see how serious this Congress is going to be with regard to something It hasn't done in a multiplicity of years and that is to implement the reconciliation tool Available to it to cut spending on the mandatory side if and when it can do that Hopefully appropriators will get a decent number and we'll talk about that in a moment Then we have to worry about the fact that the highway bill the nation's largest infrastructure bill Expires in May and then in June the XM Bank another critical piece of our economy the authority there will expire and After an appropriate Recess and arrest in the summertime we have to come back and worry about whether or not the nation's aviations program aviation programs Can continue now? That's just the snapshot. There's a lot else going on out there But my point to you is there are a number of significant milestones that this Congress is going to have to address in the first six month period their success in addressing these milestones I think will give us Some kind of an indicator about whether or not this Congress would be able to move and do something about spending cabs Let me suggest to you that we are about to enter year six of what was basically an 11-year budget deal as outlined in the 2011 budget control act I Would ask you for a moment to set aside the partner the partisanship and I would ask you to set aside the outside noise Take a deep breath and ask yourselves a simple question wouldn't prudent people Six years into an 11-year budget deal where numbers are basically projections, especially the out near numbers Wouldn't prudent people take a step back and say are these numbers adequate to meeting our national needs? Not just in defense, but in non-defense as well. I Hope that's the case Now there are those of you in the audience. I'm sure and and in this town who'll say wait a minute Are you calling for a relaxation in our drive-to-cut spending and the answer is no and I can say that with comfort because virtually every think tank every Budget organization every thoughtful budget person in this town will advance the notion that This type of restraint does not materially contribute to reducing our national debt Indeed it it may be it may impede those reductions For those of you who worry about long-term debt and you should because it's a long-term huge problem But the solution to that is really not over and it's not in our world It's over in the world of mandatory spending and it's over in the world of the potential For a possible revision of the tax code which actually most of us will reel it will concede needs to happen But conceding its its importance is a long way from actually making it happen Now if you look at the FY 16 BCC caption, you'll notice they're up a little bit There's a slight increase for defense and non-defense and I most of us would argue that's not enough If we were forced into a sequester, we would basically be flat lining Ryan Murray We'd be basically extending it for another year and I don't even think Congressman Ryan and Senator Murray want to do that yet if we factor into the mix We're also as above mentioned. We're cutting constant dollars below where we have been for the last several years There are multiple studies on multiple fronts including a very good one by this institution that talks about the casualties of a sequester budget Personnel cuts or structure cuts big-ticket long-term investments problems with the Navy projecting power That's a few of them So we have the right to ask ourselves now that we've identified the problem. What do you want to do about it? This Congress is About two months away from reconvening and Defense advocates across the town are advocating lifting the discretionary camps for defense only I Want to remind everybody that the Congress tried that a couple of years ago And they did it very late in the year and the initiative died I believe based on my reading of the Congress that such an initiative would die again this year I Would suggest to you that we need a more comprehensive approach consistent with post-election promises and I hope that we can reintroduce the the tool of reconciliation back into the system to cut mandatory spending I Made some calls yesterday to some friends of mine far more knowledgeable on budget issues than I am and I asked them When was the last time the Congress effectively advanced the tool of reconciliation to control mandatory spending and they couldn't remember There was no concrete answer out there. So it's been a long time, but that does not mean it's not a valuable tool in going forward it's The other point I would make to you is that if we're going to take a serious look at Reconciliation if we're going to take a serious look at changing the tax code Hopefully with a notion of providing more revenue to the system This these two actions of themselves would conceivably give us some room to revise the discretionary caps upward again Not just for defense, but for non-defense Let me make it give you a couple reasons why we ought to consider that we're coming out of the Ebola scare mercifully The whole incident has brought into question the adequacies of funding not only at the NIH But at the Center for Disease Control some of my budget friends will say Jim This is the one-off deal we can handle this thing and move on and they may be right But they may not be right and the issue is a very delicate one and it's something that budget planners ought to consider They ought to consider the fact that we've cut the National Institute of Health budget well over 20% In adjusted dollars since 2010 the court systems we've cut them by almost 15% over the same time frame The bureaucratic wrongs that the Veterans Administration going to cost a lot of money to fix and you have seen this year that the Congress has moved and provided the money We don't even know if it's enough, but they provided the money to try to do that and And this is an interesting Quandary for me because I've asked the question repeatedly over the course the past several years Can anybody tell me how much it would take to secure our borders? I don't think that answers out there because we have a difficult time among ourselves Defining what border security is we think we know the elements of it But we simply don't know the cost of it and I would submit to you that these things in addition to the needs of the Pentagon Cry out for a serious review and if we're going to review defense spending we ought to review them as well. I Would hope a new budget committee in the House and the Senate with new budget chairman perhaps new membership And perhaps some new ideas which I would urge all of you to funnel into the system Might take a serious look at the efficacy of a current caps if we could get real-time Workable discretionary caps we could do a lot of good things We could give the Pentagon the relief it seeks we could boost the economy by infusing infrastructure spending Hopefully we could take care of our veterans and we can do some good stuff But we would need the type of commitment From both sides from both ends of Pennsylvania Avenue that has been sadly lacking over the course of the past six to ten years. I Would add One or two other little things related to sequestration that I also hope could happen this year. I Think this Pentagon and indeed everybody else in this town spends too much time living under continuing resolutions These little devices some years ago were designed to give our all committee the opportunity to complete its bills But the continuing resolution has somehow in this town become a law unto itself It handicaps program managers and policy planners in and out of the Pentagon at every turn It's not just a matter now of one or two or ten or twenty days It's a matter of well over a hundred days and in indeed There is a significant body of thought on Capitol Hill today who says oh, let's run it out for an entire year No, my response to that is why why bother? Why do we even have an appropriations process if we were gonna if we're going to lock agencies like the Pentagon? Into spending all money on all priorities without getting fresh money and a fresh look at its ongoing needs We need tighter CRs We need back to go back to two three six five ten days CRs if for no other reason then we Put pressure on the system. We put pressure on our old committee would put pressure on a Congress We put pressure on a White House to try to tighten this thing up and basically refresh And and give the system the jolt of money it needs and to keep the government away from what our base Basically a series of outmoded and outdated conditions. I think that would be a worthy goal Finally, let me say something about okoh if I might Okoh is not a substitute for real-time budget cap reform and And I'll I'll take the public pledge here because some years ago in its infantry in its infant Infancy may have been some of us who thought we could put some base budget funding in the okoh accounts and may have been proud of ourselves After that was over with I'm not owning up to it. I'm just saying that may have happened But I think the Congress is going to tighten up its look at okoh because okoh's gotten so much visibility And because it's off-budget and because there is still a call in this land for transparency If we want real numbers under a real budget Not numbers hidden under a rubric of emergency spending We're going to recognize okoh for what it is and the importance that is placed on it But it is not a substitute in any way for a revision of the basic discretionary caps Back to John Hammond's ammunition of a year ago Not only is the threat very real and and the Pentagon is it full of shrewd people and most of them are sitting here at night at least the former's but but We have gone to get ourselves in a situation this year where we recognize that this is bad public policy Indeed, I would remind you that the man who wrote the original sequestration law Former senator Phil Graham said heck he never intended for the thing to come along So I would hope that we would use our voice our political influence and our energies To get this Congress and this White House to do the right thing this year Which is to step up to the plate look at these caps and it's not just the two of 2016 caps it's the runout caps through the balance of the deal these things need to be looked at worked at and Revised and if we can do these things I think we could put this threat of sequestration behind us failing that I would urge all of us to clear our calendars Because we're probably gonna be right back here again a year from now and we'll be worried about the same thing Thank you I Thank you I like to think about the budget control act Really in context of the of the choices that brought us to this point and if you think back to 2011 It was the inability of the Congress and the White House to come up with the plan to reduce deficit spending So the budget control act it was crafted to Provide some choices to deal with that and as we all know it did not work and it forced The administration and the Congress to decide all right then we're gonna be stuck with this and we're gonna move forward What that then subsequently a force not just the Department of Defense but all the domestic agencies to how to the choices how to live within sequestration and As we all know the DOD budget is comprised of things that are easy to cut and things that are not easy to cut Of course the things that are easy to get to are such things as you can cut modernization And you can slim back readiness things that are harder to do our people infrastructure healthcare and obviously compensation So we've seen that in a constrained budget environment the departments reduce spending in the areas that are easy to get to For example spinning on modernization in as declines significantly greater than in other areas in Constant dollars the average overall budget has declined about 34 percent since 2008 While the modernization budget has reduced by 44 percent in that same time frame DoD has tried to make changes in such areas and Bob alluded to those as well as Jim such as healthcare Brack and pay and benefits without much success Budget pressures are further complicated by increasing costs associated with health care and compensation which continue to consume a greater portion of the budget each and every year the shrinking budget One choice the department doesn't has is how they respond to global conflicts and global threats So since the BCA was enacted almost three years ago The global national security environment has certainly become much more turbulent and US commitments around the world have increased So the department is being asked to do more with less but isn't allowed to make the structural changes they need to make in order to alleviate some of that pressure and that's only going to get worse and And another point that's really important to remember as we lead into 2015 the same budget conditions that were present in 2011 2010-2011 are still there nothing has changed with regards to the deficit So we have to think about if we couldn't solve it in 2010. How do we expect to change it in? 2015 even with a Republican Congress a well and a divided government So meanwhile industry has had to make some hard choices. They're doing such things as reducing inventory Shrinking infrastructure letting go people Costs all kinds and measures of cost-saving measures We have also stopped investing in research and development And if you look at over the past decade R&D spending as a percent of sales for major defense contractors has declined 30% So we're seeing defense companies choosing to focus on the areas of spending that they can and Really focus on core competencies Where they see more opportunity For example, we've seen many high profile acquisition pursuits where we only have one bidder That's really remarkable Such as the combat rescue helicopter Only 45% of defense contract over the past two years were awarded competitively think about that only less than half and Many competitive awards only received one bidder They've also seen many suppliers exiting the defense business Altogether choosing the more lucrative commercial markets The Congress has many choices ahead of it as well in Light of increasing challenges around the world. They've called on Congress to Remove or lift the budget control act Don't do D is asked Congress to allow reforms that would allow them to alleviate some of the budget pressures such as BRAC and compensation reform Instead Congress is making the easiest political decisions Which is not to address the problem and deny all reform proposals or to delay those to some future Congress in Fact many in Congress do not see a problem with sequestration at all Since the BCA was enacted the deficit is down considerably and the economy has in some part recovered The combination of continued spending caps increasing costs for health care, etc And increasing global demands will lead to significant consequences to defense capability and affordability Defense R&D has declined substantially and will continue to fall as a percent of GDP Defense R&D has taken has fallen from 1% in the 1960s to 0.7% in the 1980s to 0.5% in the last decade Defense R&D is expected to continue to decline to about 0.3% by the end of this decade Similar spending on R&D and less industrial competition will allow advances in technology will slow the advances in technology in the U.S. And that relied on military superiority since World War II Under Secretary Kendall often highlights that technological superiority is key areas is in jeopardy These factors make it harder for the department to do more with the funding that they do have That instead of reduced competition that the department has less opportunity to seek price efficiencies Uncertain budgets as Jim alluded to with continuing resolutions that last sometimes as much as six months Lead to inefficiencies that and inefficient programs buying things by 2s and 3s isn't really affordable All of this will add to greater cost, unit cost, sustainment cost, you name it, and less affordability The bottom line is that unless the Congress and the administration are willing to make some of the hard political decisions and show political leadership We will continue down these paths where our country can afford and really get less Appreciate the opportunity to be here today to talk about politics, defense, affordability, sequestration The title is actually a mouthful. I could never get it straight, but it is those topics that we're looking at And I think you've heard from the other panelists about where we are and where we're headed I'm not sure I agree with everything that everyone has said, but I think we all do agree and probably everyone in this room agrees The sequestration is a terrible way of doing business. It was not supposed to have gone into effect But it is a process that was established in the Budget Control Act and we are stuck with it at this point It makes no sense when you're trying to reduce expenditures to go in and cut every program by an equal percentage point It just is nonsensical, but it is the process by which we are now moving forward I do think in Washington D.C. you will see a consensus that we should end sequestration You see it in the conclusions of the National Defense Panel, you see it in the editorial pages of the Washington Post You see it in the think tanks, you see it in a lot of the op-eds that are written And there seems to be general agreement that sequestration should end And I think there's also some agreement that we should increase defense spending at the same time So as we look to the new Congress coming back, what is the likelihood that Congress in fact will address this issue and will eliminate sequestration No one really can predict what Congress is going to do And anyone who says that they know exactly what Congress is going to do is either a fool or a liar I don't want to be seen as either, but I'll proceed nonetheless It looks to me that the Congress, a new Republican Congress coming in is probably still going to be interested in controlling deficits That should be what they are looking at, even though deficits have come down substantially I do think that is going to be probably first on the agenda While I believe that they would like to increase defense spending, the only way they would do that I believe is if there will be an offset And that offset could be in the form of new taxes, but that seems the least likely item that Republicans would turn to in order to pay for an increase in defense spending Therefore, they will look at domestic spending as a way to offset an increase in defense spending, I believe As Jim alluded to, the situation on discretionary domestic spending is in pretty dire straits They did not start from the same robust funding level before sequestration that defense did And so therefore, the consequences of living in deep post-sequestration levels has been pretty tough on our domestic discretionary programs, I think, as Jim pointed out The question then is what can we do about entitlement programs to use as a source to pay for an increase in defense spending And while Jim is correct that you could use the reconciliation process to address that free of savings and allow that to be used for defense I have a hard time thinking that you're going to see Democrats support an increase in defense spending paid for with cuts in programs like Social Security and Medicare It's possible, but I have a hard time seeing that happens And if the Congress used reconciliation to pass a bill over the objections of Democrats, I have a hard time thinking that the President would sign that bill into law So as I look forward into where we're headed, I think we're probably stuck with defense sequestration, with sequestration in general And to be the skunk here in the room, I'm not as worried about that as I sense most people in Washington, D.C. are If we go back to where we were in fiscal year 12, according to CBO for national defense, which is DOD plus nuclear weapons programs department of energy and some small national security related programs that are not in DOD We were at a level of budget authority around $566 billion. This is current dollars. This is not with OCO. This is not constant dollars. This doesn't account for inflation In fiscal year 13, through sequestration, we came down by about $48 billion to $518 billion And I think my colleague down here probably still has the scars to show how difficult it was to get down to that level of $518 billion But from those of us on the outside, when we thought sequestration was going to occur, we thought the consequences would be much more dire to DOD than what actually what actually was experienced Now if you were a DOD civilian and your pay was cut by 20% for several weeks, that's a pretty serious consequence in terms of implementing sequestration If you look at what happened in readiness in fiscal year 13, once again the degradation was very severe But the modernization world seems to have weathered the storm a little better than we did on the operations side of the house And I think there's two primary reasons for that. First is the backlog in defense industry that allows some of that shrinkage to be absorbed in drawing down the backlog And the second is that there is more flexibility inherent in modernization programs that allows you to either defer something or to delete a requirement or to minimize the cost of something So that we saw as we implemented sequester in DOD in 2013, serious consequences but not nearly as dire as many of us thought was going to occur Turning toward fiscal year 14, we had the Murray Ryan bipartisan budget agreement that provided stability in defense funding for fiscal year 14 and fiscal year 15 I paid careful attention to the vice chief's testimony last year in April, or this year in April, talking about the readiness concerns that they had And what had happened to readiness in fiscal year 13, and Bob probably knows it's a lot better than I do, but they said, yes, the consequences were very severe They looked at the Murray Ryan agreement as allowing them to kind of work their way out of trouble on readiness Not to get back to where they need to get, but we're on a glide path to get back to where they need to get And while that opinion was not universally shared by the vice chiefs, it seemed to be the majority opinion In addition to that, as I looked at the fiscal year 14 appropriations act that the Congress passed, it looked to me like they were trying to address the same problem by readiness, adding readiness, funding By trying to take care and make sure we had a stable modernization program to live within this new level of what in fiscal year 14 national defense dollars is $521 billion approximately As I look at the fiscal year 15 appropriations bills that are pending before the Congress right now, I see the same thing Congress is trying to address a modernization program with stability and it looks like they will add funding for readiness maybe as much as $1-2 billion to take care of those last concerns of the vice chiefs to make sure that we in fact get readiness back to a stable level So as we turn to fiscal year 16 and we think about sequestration going into effect again, now if we were facing a 20 or 30 or 40 billion dollar cut below where we were in fiscal year 15, I would agree with everyone that we should, we cannot do that The consequences would be, definitely would be dire for fiscal year 16 if we were to face such that type of a reduction But in reality I think it's a chart that showed you for national defense we go from about $521 billion in fiscal year 15 to $523 billion in fiscal year 16 Certainly that is not enough to fully cover the cost of inflation but in a period of fiscal austerity when we're trying to squeeze every dollar we can out of spending especially on the discretionary side of the house It seems to me the defense is actually not that bad off Furthermore if we look to fiscal year 17 through 21 as the chart showed we see defense going up by an amount which is either at inflation or above inflation So further foreseeable future through the BCA cap levels of 21 we're looking at a zero real growth budget for DOD And from my point of view when we are in fact looking at national debt, we are looking at large deficits, the fact that defense has a zero real budget growth Frankly once again I don't see that as that tragic Yes the world is a very dangerous place, yes there are threats out there, yes be it the Middle East, perhaps Eastern Europe, perhaps South China Seas, West Africa, Horn of Africa The world is a very dangerous place But the Congress is authorized to provide additional funding in the form of overseas contingency operations to take care of those overseas threats To take care of emergent requirements that come up That is in the law above the BCA caps So here we are with these relatively tight caps but we have the ability with a safety net to provide additional funding to take care of whatever emergent requirements pop up on the horizon And yes the numbers that we have in a zero real zero real growth budget do not take into account the CSIS double whammy Nor should they from my point of view The fact that DOD's costs go up at a rate higher than the rate of inflation means that there is in fact waste and inefficiency in the defense department I don't believe we should reward the defense department by increasing the budgets to take care of waste and inefficiency So I've been reading Secretary Gates' book, Duty, and I know that in his book he talks about a need to get control of the hundreds of billions of dollars in the defense budget That neither DOD nor the Congress exercises adequate oversight of He says that his deputy Gordon England referred to it as a river of money that's flowing through the Pentagon It's that river of money that we need to get control of About a year ago I was here at CSIS on another panel that was talking about rebuilding the consensus for defense spending And one of the other panelists, a former Republican colleague of mine, when addressing the issue of defense spending He said, you know, we're spending $500 billion a year on defense Never in my wildest dreams did I expect to see a $500 billion defense budget And as I walked away from that, I said, you know, he's right, $500 billion is a lot of money to devote to national defense It's about one third of what the world spends in total on defense And as I think most people know, it's more than the next eight countries spend combined on national defense What we need in defense, as Jim alluded to, is we need stability, we need to get out of CRs, we need to get appropriations bills passed We need then to allow DOD to start planning realistically for a zero real growth budget between now and 2021 No more rosey scenarios that assume that the out years are going to be great So that we in fact have enough money to take care of increasing production rates on airplane systems that's probably never going to occur Which then leads to higher costs Those are the types of things that need to be eliminated We need to have a stable budget, we need to have a stable plan And at that point, I believe last and not least, is we need to take Gordon England's river of money and turn it into a stream or at best a trickle So that the funding there is no longer this river of money flowing through the Pentagon that no one has any idea what it's being spent for Thank you very much Well, that was refreshing During that time, we're now at the stage of taking questions I think we've had in addition to the Secretary of Works presentation for very solid presentations at this panel That should provide the basis for our stimulating conversation I encourage people to use the microphones In fact, we can't take questions. If you don't use a microphone, then please state your name and affiliation as you ask your question Who would like the first question? Hi, I'm George Nicholson, an consultant for Special Operations and Counterterrorism Clark, the session that you had over at CSIS about two years ago, chaired by Senator Sam Nunn With ten former senior Republican and Democratic congressmen and senators, Secretary of Defense, going down the list But they came up with a solution set, the National Defense and National Debt They said the solution set was three-fold You had to solve entitlements, you had to solve the tax code, and you had to solve entitlements, the tax code, and entitlements But again, basically saying it's too hard to handle What do you all see as the future of getting a handle on it? Well, nothing, I view for the next couple of years in terms of broad budget reform I just don't think it's going to happen until beyond the next presidential election But it does need to happen You've heard Jim and others say the problem is on the entitlement side Principally Medicare, but Social Security is a contributor and on the tax side I just don't see that happening in the next two years I hope that beyond the next presidential election it will On the third phase they talk about revenue issues Right They need to be looked at together, entitlements, revenues and discretionary spending But especially one or two I want to add to that I think ultimately, if it's not this Congress, it'll be a Congress and a president will do it They have to do it If you look at every long-term debt projection that exists everywhere And the key here is Medicare It bulges in double-digit increases that are not currently accommodated by the current revenue flow On taxes I think there's a lot of time I'm not a tax expert, but I have two good ears The tax debate in this town is one where tax experts all agree something will be done That it would stimulate the economy, get you more revenue Do a whole bunch of good things There's this broad-based division about whether or not we could do it comprehensively Or you would do a business tax proposal first and then you get around to personals That is a political divide in this town that has not yet been bridged My problem is, I don't know how long we want to remain in this crisis atmosphere and discretionary spending Before somebody says, oh my god, we've got to do something Bob may be right, this may be the wrong Congress for it But I think you've got to do something The other problem, the other thing that would concern me is I fear the way we do business in this town The day of the big comprehensive piece of legislation may be behind us I think now we are incrementalists We solve pieces of the puzzle piece at a time We don't go after the big puzzle, whatever the issue is So we tend to view progress in this town as some little thing As opposed to a bigger, broader solution And that to me in the short term is probably what holds you back From getting to the point Senator Nunn wanted to get you to I'm much like Charlie in the sense that I don't think there's going to be a deal that emerges on BCA Because I think it's going to have to be comprehensive It has to include not just national security but domestic as well I think that's going to be the price to get this thing done And I don't see the political will to be able to swallow that So I think we're going to limp through the next two years And the sky will not fall In fact industry really orchestrated a very concerted effort on the hill to say Hey, don't do sequestration, it's bad policy, it's bad for the Department of Defense It's bad for everybody And the sky did not fall And I think that that was an effort that was well intentioned But it now is viewed as maybe we lost some credibility as a result of that So I think, you know, you've seen a lot of deficit hawks that have, you know, our defense hawks that have turned into deficit hawks They're not going to remake themselves in the next two years with the 2016 election looming I think that spending is going to be, it's a core value for Republicans I think that will continue So I am not optimistic we're going to come up with a deal to avert sequester And I think it's going to have to be some future administration that deals with this really ticking time bomb on entitlement spending That everyone knows needs to get fixed But no one knows the recipe on how to do it And I guess from my point of view, I think everyone probably can figure out that I'm going to say no, I don't think we're going to get an agreement on deficit reduction Through tax reform, you could identify revenues that could be used for additional spending If there was an agreement that you could take revenues from tax reform and use it to either reduce the deficit or to allow for some growth in spending And that could be coupled with entitlement reform, which would in fact reduce expenditures There is a way to go forward to reach agreement on that But we have been working on this since 2011, seriously trying to come up with a way to do that And Congress has not been able to do it, there just doesn't seem to be a way to get both sides together on this And until we end divided government probably, it's hard to see how we would come up with this kind of an agreement But it's sort of a crisis that occurs that then forces us, forces Congress to say we have to deal with this issue now But sort of a crisis I have a feeling will continue to kick the can down the road on this issue taking care of little problems as they arise But not dealing with the totality of the complex issue I used to be a big believer in the Herbert Stein rule that if something can't go on forever, it won't I no longer believe in that rule Because evidence's real life has indicated that that's not true I now believe in another one, denial ain't just a river in Egypt Next question Right there Hi, good morning, Megan Eckstein with Defense Daily I have a question for Secretary Hale and whoever else might want to join in You talk about the need for a higher top line When you released the FY15 budget, you sort of did a parallel budget with the sequestration level spending as well as a higher president's request level spending Presumably to show the trade-offs I wondered if you thought you got the reaction you expected from Congress They almost seemed irritated talking about a higher spending level during public hearings So I just wondered how you thought that approach worked and if you think you'd recommend that the administration do that again for FY16 No, whether you thought that strategy worked with showing Congress both a sequestration level spending and higher I think if you look at that plan Sorry, 175,000 in the Marines cuts especially in smaller weapons programs that are necessary for support It is not something that I would like to see in this environment, in this national security threat environment So I think it's the right thing to do whether it will convince the United States Congress that they should go to a higher level I'm not sure, but I wouldn't rule it out I think a mini deal along the Murray-Ryan lines again Murray-Ryan as I remember paid for the increases with some kind of low level increases And I think they changed some of the IRA rules, I can't remember the details I could see the possibility of something like that again I don't think it's very likely in the next couple of years we're going to see a broad budget deal Next question in the back right there Scott Massioni with Inside the Pentagon This is mostly for Mr. Hale I was wondering previously when sequestration was imminent What kind of operational preparations you made for those cuts And what kind of operational preparations do you think SINCOM is making now in the fight with ISIL for possible return for sequestration? Well as sequestration loomed in 2012, I mean we made a conscious decision in the Department of Defense not to sequester ourselves We listened to the president who said publicly and then the debates, the sequester would never happen To all the key leaders in Congress who said it would never happen And decided that we weren't going to do it We weren't going to sequester ourselves So we did not restrain spending in that first quarter of fiscal 13 That is not the case today There's a fair amount of restraints on spending partly because the sequestration itself imposed them But also because now we know it could happen So I don't think, I mean I likened it at that time to driving in a wall at 65 miles an hour Figuring you'd go around the wall not crash into it, we crashed into it They won't do that again and they aren't doing it again So if it happens again There'll probably be even more modest effects because many of the changes to accommodate it are already in place In the form of reduced readiness, for example, and some slowdowns in modernization And I don't think the incremental effects would be as dire as they were in 2013 I just want to add to that Stanley Kober I think it was Frederick the Great who advised his generals He who would defend everything defends nothing We're reducing spending, continuing to reduce spending But we still maintain all these commitments Couldn't help noticing Secretary Work started out by issuing reassurances to everybody How realistic is that over time? Or should we begin to reconsider our commitments Recognizing that if we try to do everything We will be too thin to succeed Well, you may have the wrong panel work Maybe a better person to do that You know, it's hard to say to a president Gee, we can't do this, we can't afford it I think that's not the department's way They'll do their best And at most you'll And it still is a big budget I mean, 500 billion is a lot of money Gates used to say for 500 billion I would be able to give him a good defense But he was also the same guy that argued hard for increases So I don't think the department I think it will take a while before it decides to actually come out and say We can't meet the national security needs of the country I think it's a question of risk Defense budgets are a question of trading off dollars for risks They'll accept some higher risk They're doing it right now If we went into a major situation today In Iran and Korea, for example We would have serious problems because of the readiness degradations that have been imposed We are taking some added risk Let's hope that those risks don't come back to haunt us So I think it'll be a long time before defense says we can't do it They'll accept higher risk And I think that just to add to that Secretary work made it very clear that while the department will not say no They will also execute missions at a reduced operational capacity Think about how long it's taking us to set up the first hospitals in West Africa Think of the magnitude I think David Tula compared it to a drizzle rather than a thunderstorm The current level of the air campaign over Iraq and Syria There are things that we are doing at reduced levels of capacity That I think in part reflect reduced levels of dollars to go into the readiness of our forces You know, I would just add If you think back to the 90s under the Clinton administration How the Department of Defense was really on a downward spiral Started in the Bush administration Continued through the Clinton administration And one of the things that we saw was tiered readiness Where units that were late to deploy got less training Got less current equipment Less exercises I think you're already starting to see some of that And that's just the beginning And then if you think about the acquisition process How quantities were reduced Timelines were stretched And certainly caused non-McCurdy's kind of some downward spirals of programs I think you're going to see more of that I think you're already starting to see some But those are the indicators that I think we all look to To see the impact on the force And so in fact you're right Really you cannot do everything at the same level And as new things pop up Something else has to pay the price So it's really a shell game in some sense I would just add to that That's true Congress has got to continue Expand or modify the authorization For the use of military force in Syria and Iraq They have the potential for a robust debate But that debate will be about policy I don't believe it will be about resources I don't hear anybody talking about whether or not Congress would not provide the necessary resources Once the policies resolved So I think you got a little thing coming up at you Watch the debate on AUMF See if there is a debate It should be interesting if there is But I guarantee it won't be much about resources Hi, Brian Bradley from Nuclear Security and Deterrence Monitor Some experts have said the nuclear enterprise Is traditionally a target for defense cuts During times of budget constraints Meanwhile, the Navy and the Air Force Are working to Well, pending in the House and Senate Armed Services Committees is the national sea-based deterrent fund And the Air Force has also said that it is In discussions on separating another set-aside fund So my question to the panelists Another set-aside fund for its two legs of the nuclear triad So my question to the panelists is Do you see all current plan programs Modernization programs in the nuclear enterprise As having good chances of going through Through or do you see Kind of some as being at risk of seeing cuts Thank you Well, all those programs are looked at in a tight budget But I think there's a pretty strong level of concern Over the status of nuclear forces right now And that much of the operating budget Since some of the smaller procurements Are likely to win support I mean, we'll have to see Big issues in the nuclear horizon One, of course, the follow-on strategic submarine I think it's got strong support and we'll go forward We get into the 2020s And assuming that we need to replace the missiles Then I think there'll be a more brisk debate Over whether that should go forward But I think for the next few years Because of all the problems we've had Because there is substantial concern I would assume most of those programs Maybe not all of them, but most of them will win support Things that I think it's important to remember Is that the total size of the nuclear modernization budget Is still only about 5% of what the total defense budget is So the question, again, becomes one of priorities Any procurement item will be debated in this budgetary climate The question is that what does the administration What does the Department of Defense Declare to be their top priorities You can protect strategic modernization If you want to The dollars are there Back there Hi, Byron Cowan, Capital Alpha Partners This is more of a hypothetical question But I'm curious if you see downside scenarios From the BCA levels If there's another recession in the United States, for example How well do you think defense is going to hold up In that scenario or environment Push your mouth It's really a tough question Because if the scenario you outline comes To play There will be pressure in the Congress For some sort of a stimulus program I can make the case And Bob alluded to it earlier That if you really want to do something along these lines Take a look at the military construction program It's a good one I'll stand corrected But I don't believe they did that In the 2009 stimulus Did that a little bit Yeah, a little bit But I think the issue becomes You're faced with a decline in revenues And the question between the two parties Will be what is an effective stimulus One will argue for changes in the tax code The other will argue for direct expenditures Maybe you get a combination of both But I don't know When I think about that I don't necessarily think That the defense budget would be put at risk In that debate One last question Before this panel concludes We have 15 minutes of Right here Thank you very much Roman Schweitzer from Guggenheim Securities I just want to Secretary Work mentioned Sort of a controversial issue That occurred earlier this year With the reprogramming Moving some funds To buy JSFs and helicopters From O&M reprogramming Certainly Congress uses Recisions in the appropriations process Of reprogramming If we have OCO continuing for a number of years Do you think that increases Or decreases the chance of a deal That might influence investment spending Does this provide sort of a backdoor Gray area for Well, I think you'll continue to see Reprogramming, you'll continue to see Research and you'll, you know What we're going to expect to see In the coming years I'd be surprised if there's any change to that If you look at September I believe it was There was a reprogramming that came forward To the Congress taking funds from O&M And putting into procurement In the OCO category And that was denied by the Congress Primarily because some question Whether or not it was an appropriate Use of resources to use O&M funds To pay for procurement systems And I do believe That that is a type of thing That you're going to see more of In the future I am concerned that the Congress Is under the OCO funding And that is, I look at this Is our safety net that allows us To in fact live with the BCA caps And so from my point of view That is something that it needs to be The DOD needs to look at very carefully Make sure that the Congress does not Come back and take away the authorities That are already in existence for them I just want to add I think Charlie's right I think the Congress From that particular issue onward Will be much more circumspect About what it approves In terms of moving this money I would also get back on my high horse Again about how If we could get ourselves in That elusive butterfly that we all Worship, the regular order around here If we could get ourselves to a point Where we could get this Congress In a regular flow Of producing appropriations bills And conference reports in a timely fashion I think we can minimize a lot of this stuff Because there is this ongoing Conversation between the Department And the Congress that is stimulated And you can handle a lot of these things If you're producing a bill in September As opposed to whether or not You have to move billions around Just in a relatively Less than transparent way Let me address the reprogramming issue Broadly than you asked And that it is critical To the department's ability To manage change It's usually one or two percent Of the budget That's always a hard sell in the Congress But during the darkest days Of sequestration They allowed a lot of reprogramming And it minimized the harm That was done So it's critical And I think the department recognizes that And pushes the envelope a little bit But not so far That it would cause the Congress To stop it Because it is a key source Of flexibility To manage through tough times Yeah, I would just add That there's always tension about reprogramming Where the Congress views Is the department obviously needs flexibility To move money to address Emerging requirements needs But I think what we saw And really this past decade Was reprogramming were used for new starts And at one point We counted the number of new starts And it was like shocking That means starting new programs Authority to proceed with new programs And so it was becoming a shortcut From the budget The budget sort of was not viewed As the way, the appropriate way to do it Well, let's just put it no go So they were just popping up every way And what happens with programs That get started in reprogramming It's a little ragged program start-up Not so much oversight And so I think appropriately The Congress kind of squashed some of that But then there's always this recognition That the department has to be able To do some of the tough things They can do, especially when you're at war I mean, some of the Juans That came up You have to figure out a good compromise And it really goes down to trust And relationships about Doing the right thing And so maybe you're right If both sides are unhappy a little bit That's a good solution I think that I'll take the Chairman's prerogative for once And speaking as a former authorizer An authorizer so rarely get the last word In any discussion on these matters That I can't help it with a panel That has three former appropriators on it To do it I think people have underestimated The extent to which OCO is a safety valve For everyone involved in this process We have, you know, an OCO to base problem Of 20 to 30 billion dollars per year That is of functions That should be funded in the base budget But are in OCO now Because it can be funded there It doesn't count against the budget deficit I believe that my colleague Ryan Crotty When he did a deep dive into the FY 2015 appropriations bill That is currently Wending way that the appropriators themselves Moved about nine billion dollars Out of the base budget Into OCO In order to make room In the budget For priorities that weren't being funded By the Department of Defense But the appropriators wanted to fund I mean OCO is a huge safety valve The reason why We're living with the unsustainable Budget control act is because of OCO You know, it's the crack cocaine Of defense budgeting to some extent So There's been a lack of discipline In the process And I think that the two of my colleagues Have mentioned that if Congress Titans up on OCO That is going to really increase The pressure on all of the participants Involved So please join me in thanking The panel for a great job And we're now adjourned together