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Opening Summary -- House Armed Services Committee (Budget Request)

As Delivered by Secretary of Defense Chuck Hagel, Washington D.C., Thursday, April 11, 2013

Chairman McKeon, Ranking Member Smith, members of the committee, thank you for this opportunity to discuss the President's Fiscal Year 2014 budget request for the Department of Defense.  Allow me to express my appreciation also to this committee for its continued support of our men and women in uniform and our entire civilian workforce.

These people are doing tremendous work and they're making great sacrifices, along with their families, as they have for more than 11 years our nation has been at war.  Whether fighting in Afghanistan, patrolling the world's sea lanes, standing vigilant on the Korean Peninsula, supplying our troops around the world, or supporting civil authorities when natural disasters strike, they are advancing America's interests at home and abroad.

Their dedication and professionalism are the foundation of our military strength.  As we discuss numbers, budgets, and strategic priorities, we will not lose sight of these men and women serving across the globe.

As you all know so very well, their well-being depends on the decisions that we all make here in Washington.  Today, the Department of Defense faces the significant challenge of conducting long-term planning and budgeting at a time of considerable uncertainty, both in terms of the security challenges we face around the world and the levels of defense spending we can expect here at home.

Even as the military emerges and recovers from more than a decade of sustained conflict in Iraq and Afghanistan, it confronts an array of complex threats of varying vintage and degrees of risk to the United States.  These include the persistence of violent extremism throughout weak states and ungoverned spaces in the Middle East and North Africa;  the proliferation of dangerous weapons and materials;  the rise of new powers competing for influence;  the risk of regional conflicts which could draw in the United States;  faceless, nameless, silent and destructive cyber attacks;  the debilitating and dangerous curse of human despair and poverty;  as well as the uncertain implications of environmental degradation.

Meanwhile, the frenetic pace of technological change and the spread of advanced military technology to state and non-state actors pose an increasing challenge to America's military. This is the strategic environment facing the Defense Department as it enters a third year of flat or declining budgets.  The onset of these resource constraints has already led to significant and ongoing belt-tightening in the military -- that's military modernization, our force structure, personnel costs and overhead expenditures.

It has also given us an opportunity to re-shape the military and reform defense institutions to better reflect 21st century realities, as I outlined in a speech last week at the National Defense University.  The process began under the leadership of Secretary Gates, who canceled or curtailed more than 30 modernization programs and trimmed overhead costs within the military services and across the defense enterprise.  These efforts reduced the Department's top line by $78 billion over a five-year period, as detailed in the Department's F.Y. 2012 budget plan.

The realignment continued under Secretary Panetta, who worked closely with the President and the Joint Chiefs of Staff to craft new defense strategic guidance and an F.Y. 2013 defense budget plan which reduced the Department's top line by $487 billion over the course of a decade.

The President's request of $526.6 billion for the Department of Defense's base budget for F.Y. 2014 continues to implement the President's defense strategic guidance and enhances the Department's efforts at institutional reform.  Most critically, it sustains the quality of the all-volunteer force and the care we provide our service members and their families, which again, as you all know, underpins everything we do in this organization.

Before discussing the particulars of this budget request, however, allow me to address the profound budget problems facing the Department in fiscal year 2013 and beyond as a result of sequester.  These challenges have significantly disrupted operations for the current fiscal year and greatly complicated efforts to plan for the future. The Congress and the Department of Defense have a responsibility -- an absolute obligation -- to work together to find these answers because we have, all of us, a shared responsibility, as the chairman and ranking member have noted, to protect our national security.

DOD is going to need the help of this committee and Congress to help manage through this uncertainty.  The F.Y. 2013 DOD appropriations bill enacted by the Congress last month addressed many of these urgent problems by allocating DOD funding more closely in line with the President's budget request, giving the Department authorities to start new programs and allowing us to proceed with important military construction projects.

Nonetheless, the bill still left in place the deep and abrupt cuts associated with sequester, as much as $41 billion in spending reductions over the next six months.  Military pay and benefits are exempt from sequester.  And we made a decision to shift the impact of sequester away from those serving in harm's way.  That means the cuts fall heavily on DOD's operations, maintenance and modernization accounts that we use to train and equip those who will deploy in the future.

Furthermore, the military is experiencing higher operating tempos and higher transportation costs than expected when the budget request was formulated more than a year ago.  As a result of all these factors, the Department is now facing a shortfall in our operation and maintenance accounts for F.Y. 2013 of at least $22 billion in our base budget for active forces.

In response, the Department has reduced official travel, cut back sharply on facilities maintenance, imposed hiring freezes, and halted many other important, but lower-priority activities.  However, we will have to do more.  Large, abrupt and steep across-the-board reductions of this size will require that we continue to consider furloughing civilian personnel in the months ahead.  The cuts will fall heavily on maintenance and training, which further erodes the readiness of the force and will be costly to regain in the future.  And I know General Dempsey will address some of this in particular.

As the service chiefs have said, we are consuming our readiness.  Meanwhile, our investment accounts in the defense industrial base are not spared damage as we also take indiscriminate cuts across the areas of this budget.  We will continue to need the strong partnership of this committee to help us address these shortfalls.  If the sequester- related provisions of the Budget Control Act of 2011 are not changed, F.Y. 2014 funding for national defense programs will be subject to a steeply reduced cap, which would further cut DOD funding by roughly $52 billion.  And if there is no action by the Congress and the President, roughly $500 billion in reductions to defense spending would be required over the next nine years.

As an alternative, the President's budget proposes some $150 billion in additional defense savings over the next decade.  These cuts are part of a balanced package of deficit reduction.  Unlike sequester, these cuts are largely back-loaded, occurring mainly in the years beyond F.Y. 2018, which gives the Department time to plan and implement the reductions wisely and responsibly, anchored by the President's defense strategic guidance.

The President's $526.6 billion F.Y. 2014 request continues to balance the compelling demands of supporting troops still very much at war in Afghanistan, protecting readiness, modernizing the military's aging weapons inventory, in keeping with the President's strategic guidance, and sustaining the quality of the all-volunteer force.  Today's budget request also contains a placeholder request for overseas contingent operations (OCO) at the F.Y. 2013 level, which is $88.5 billion.

This submission does not include a formal OCO request because Afghanistan force level and deployment decisions for this year were delayed in order to provide commanders enough time to fully assess requirements.  We will soon be submitting an OCO budget amendment with a revised spending level and account level details.

The following are the major components of the F.Y. 2014 $526.6 billion base budget request:

  • Military pay and benefits, including TRICARE and retirement costs, $170.2 billion. That represents 32 percent of the total base budget.
  • Operating costs, including $77.3 billion for civilian pay, total $180.1 billion, representing 34 percent of the total budget.
  • Acquisitions and other investments, procurement, research, development, tests and evaluations, and new facilities construction, which represents 33 percent of the budget at $176.3 billion.

The budget presented today at its most basic level consists of a series of choices that reinforce each of the following complementary goals, making more disciplined use of defense resources.  This budget continues the Department's approach of the last several years to first target growing costs in areas of support, acquisition, and pay and benefits before cutting capabilities and force structure.

In order to maintain balance and readiness, the Department of Defense must be able to eliminate excess infrastructure as it reduces force structure.  DOD has been shedding infrastructure in Europe for several years.  And we are undertaking a review of our European footprint this year.

But we also need to look at our domestic footprint.  Therefore, the President's F.Y. 2014 budget requests authorization for one round of Base Realignment Closure (BRAC) in 2015.  BRAC is a comprehensive and fair tool that allows communities a role in re-use decisions for the property and provides redevelopment assistance.

BRAC is an imperfect process.  And there are upfront costs for BRAC.  The future year defense program adds $2.4 billion to pay for those costs.

But in the long term, there are significant savings.  The previous five rounds of BRAC are saving $12 billion annually.  And those savings will continue.  We are also taking other important steps to cut back on support costs.  We will institute a study of our military treatment facilities, including many hospitals and clinics that are currently underutilized.

By the end of the year we will have a plan in place that suggests how to reduce that underutilization while still providing high-quality medical care for all of our forces and their families.

This restructuring, coupled with the BRAC round and other changes would permit us to plan on a cut in our civilian workforce that will comply with congressional direction.

 We are also continuing our successful efforts to hold down military health costs.  With the Department's proposed TRICARE benefit changes, our projected costs for F.Y. 2014 are about 4 percent lower than those costs in F.Y. 2012.  That's a significant turnaround compared to health care trends over the past decade.

Another important issue is our effort to improve the Department's financial management and achieve auditable financial statements.  I strongly support this initiative and will do everything I can to fulfill this commitment and the promises we've made to the Congress and the American taxpayer.

These and many other changes led to total savings of about $34 billion in F.Y. 2014 to 2018, including $5.5 billion in F.Y. 2014.

However, we are concerned that these savings from more disciplined use of resources could be eroded by sequester, as we are forced to make inefficient choices and drive up costs.

Today, for example, we are being forced to engage in shorter and less efficient contracts and sharp cuts in unit buy sizes that will increase the unit cost of weapons.

In this budget, the Department has achieved $8.2 billion in savings from weapons program terminations and restructuring.

For example, by revising the acquisition strategy for the Army's Ground Combat Vehicle, GCV, the Department will save over $2 billion in development costs.

In other cases, the Department used evolutionary approaches to develop new capabilities instead of relying on leap-ahead gains in technology.

To lessen the potential impact on local communities from the reductions in defense procurement, the Department is requesting an additional $36 million in support of the Defense Industry Adjustment program.

The Department is continuing to take steps to tighten the contract terms and reduce risk in our largest acquisition program, the F-35 Joint Strike Fighter.  The F.Y. 2014 budget request includes $8.4 billion for the Joint Strike Fighter program.  The cost of military pay and benefits are another significant driver of spending growth that must be addressed in the current fiscal environment.  In this budget, the Department is submitting a new package of military compensation proposals that take into consideration congressional concerns associated with those from F.Y. 2013.

These changes save about $1.4 billion in F.Y. 2014, and a total of $12.8 billion in F.Y. 2014 through 2018.

This package includes a modest slowing of the growth of military pay by implementing a one percent pay raise for service members in 2014.  The Department is also seeking additional changes to the TRICARE program in F.Y. 2014, to bring the beneficiaries' cost share closer to the levels envisioned when the program was implemented, particularly for working-age retirees.

 Today, military retirees contribute less than 11 percent of their total health care costs, compared to an average of 27 percent when TRICARE was first fully implemented in 1996.

Survivors of military members who died on active duty or medically retired members would be excluded from all TRICARE increases.

Even after the proposed changes in fees, TRICARE will remain, still, a substantial benefit.

These adjustments to pay and benefits were among the most carefully considered and difficult choices in this budget.  They were made with the strong support of the Joint Chiefs of Staff and senior enlisted leadership, in recognition that in order to sustain these important benefits over the long term, without dramatically reducing the size or readiness of the force, these rising costs need to be brought under control.

Spending reductions on the scale of the current drawdown cannot be implemented through just improving efficiency and reducing overhead.  Costs in changes to capabilities, force structure, and modernization programs will also be required.  The strategic guidance issued in January 2012 set the priorities and the parameters that informed those choices, and the F.Y. 2014 budget submission further implements and deepens program alignment to this strategic guidance.

The new strategy calls for a smaller and leaner force. Last year we proposed reductions of about 100,000 in military end-strength between F.Y. 2012 and F.Y. 2017.  Most of those reductions occur in the ground forces and are consistent with the decision not to size U.S. ground forces to accomplish prolonged stability operations while maintaining adequate capability should such activities again be required.  By the end of F.Y. 2014, we will have completed almost two-thirds of the drawdown of our ground forces, and the drawdown should be fully complete by F.Y. 2017.  Increased emphasis on the Asia-Pacific and Middle East represented another key tenet of the new defense strategic guidance.  This budget continues to put a premium on rapidly deployable, self-sustaining forces, such as submarines, long-range bombers, and carrier strike groups that can project power over great distance and carry out a variety of missions.  

As part of the rebalance to the Asia-Pacific, the Department is expanding the Marine Corps presence in the region, including rotational deployments of Marine units to Australia.  We continue to develop Guam as a strategic hub, where we maintain a rotational bomber presence, among other capabilities.  The Department will stage its most capable forces in the region, including an F-22 squadron at Kadena Air Force base in Japan.  The Navy has deployed a Littoral Combat Ship to Singapore and is increasing and more widely distributing port visits in the western Pacific. 

This new strategy not only recognizes the changing character of the conflicts in which the U.S. must prevail, but also leverages new concepts of operation enabled by advances in space, cyberspace, special operations, global mobility, precision strike, missile defense and other capabilities.  By making difficult trade-offs in lower priority areas the F.Y. 2014 budget protects or increases key investments in these critical capabilities.  

The high quality of our all-volunteer force continues to be the foundation of our military strength.  And the F.Y. 2014 budget request includes $137.1 billion for military personnel, as well as $49.4 billion for military medical care.  Together, these make up roughly one third of our base budget.  This budget seeks to ensure that our troops receive the training and equipment they need for military readiness and the world-class support programs they and their families have earned.

However, as in other areas of the budget, the steep and abrupt cuts of sequester would harm these programs.  Even with flat and declining defense budgets, this budget seeks to press ahead with the transition from a counter-insurgency focused force to a force ready and capable and agile of operating across a full range of operations across the globe.

The service budgets all fund initiatives that seek to return to full-spectrum training and preparation for missions beyond current operations in Afghanistan.  The Department continues its work to understand and quantify readiness activities as we seek to maximize our preparedness for real-world missions.

We do not yet know the cost of fixing the readiness of the force following the six months of sequester cuts to training in this fiscal year.  Therefore, these costs are not included in the F.Y. 2014 budget.  The Department's budget submission makes clear that people are central to everything we do.  While sequester cuts would, unfortunately, counter many of these initiatives, especially for our civilian work force, the initiatives remain important statements of the intent in this budget.

The Department continues to support key programs in F.Y. 2014 that supports service members and their families, spending $8.5 billion on initiatives that include transition assistance and veterans' employment assurance, behavioral health, family readiness, suicide prevention, and sexual assault prevention in response.

The F.Y. 2014 budget is a reflection of DOD's best efforts to match ends, ways, and means during a period of intense fiscal uncertainty.  It is a balanced plan that would address some of the Department's structural costs and internal budget imbalances, while implementing the President's defense strategic guidance and keeping faith with our men and women in uniform and their families.

It is obvious that significant changes to the Department's top- line spending would require changes to this budget plan.  The Department must plan for any additional reductions to the Defense budget that might result from Congress and the administration agreeing on a deficit reduction plan.  It must be prepared in the event that sequester-level cuts persist for another year or over the long term.

As a result, I directed a Strategic Choice and Management Review in order to assess the potential impact of further reductions up to the level of full sequester.  The purpose of this review is to reassess the basic assumptions that drive the Department's investment and force structure decisions.  The review will identify the strategic choices and further institutional reforms that may be required, including those reforms which should be pursued regardless of fiscal pressures.

It is designed to help understand the challenges, articulate the risks, and look for opportunities for reform and efficiencies presented by resource constraints.  Everything will be on the table during this review: roles and missions, planning, business practices, force structure, personnel and compensation, acquisition and modernization investments, and how we operate, and how we measure and maintain readiness.

We have no choice.  This review is being conducted by Deputy Secretary Carter, working with General Dempsey.  The service secretaries and service chiefs, Office of the Secretary of Defense principles and combatant commanders are all serving as essential participants in this review.  Our aim is to conclude this review, which is underway now, by May 31st.  The results will inform our F.Y. 2015 budget request and will be the foundation for the Quadrennial Defense Review due to Congress in February of next year.

It is already clear to me that achieving significant and additional budget savings without unacceptable risk to national security will require, not just tweaking or chipping away at existing structures and practices, but, if necessary, fashioning entirely new ones that better reflect 21st century realities.  And that will require the partnership of Congress.

The F.Y. 2014 budget and the ones before it have made hard choices.  In many cases, modest reforms to personnel and benefits, along with efforts to reduce infrastructure and restructure acquisition programs met fierce political resistance and were not implemented.

We are now in a different fiscal environment, dealing with new realities that will force us to more fully confront these tough, painful choices, and to make the reforms we need to put this Department on a path to sustain our military strength for the 21st century.  But, in order to do that, we will need flexibility, time, and some budget certainty.  We will also need to fund the military capabilities that are necessary for the complex security threats of the 21st century.  I believe the President's budget does that.  

With the partnership of Congress, the Defense Department can continue to find new ways to operate more affordably, efficiently, and effectively.  However, multiple reviews and analysis show that additional major cuts, especially those on the scale and timeline of sequester, would require dramatic reductions in core military capabilities or the scope of our activities around the world.

As the executive and legislative branches of government, we have a shared responsibility to ensure that we protect our national security and America's strategic interests.  Doing so requires that we make every decision on the basis of enduring national interests and make sure every policy is worthy of the service and sacrifice of our service members and their families.

Mr. Chairman, thank you.

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