Remarks by Secretary Hagel and Gen. Dempsey on the fiscal year 2015 budget preview in the Pentagon Briefing Room

SECRETARY OF DEFENSE CHUCK HAGEL: Good afternoon. First, let me acknowledge and thank Chairman Dempsey and Vice Chairman Winnefeld, our chiefs, our secretaries who are here, as well as our comptroller and our -- our acting assistant -- or deputy secretary of defense, Christine Fox, for the work that they have put in over the last few months, in particular to get us to this point where we have a budget that we are going to present to the Congress next week. I want to talk a little bit about that today. Chairman Dempsey will also add his remarks.

But I am very grateful -- I know President Obama is very grateful -- to these men and women who have spent an awful lot of time and the people that they represent and their services in putting this -- this together.

I particularly want to note that Comptroller Bob Hale, this will be his last budget, unless we call him back into duty after he goes to find an island somewhere and doesn't return calls. But I am particularly appreciative of his willingness to stay through this budget, which was not an easy task for Bob Hale. You all know the kind of service he's given this country in this department for many, many years. And to Bob Hale, thank you, and to all of your team down there, we are grateful.

Today I am announcing the key decisions that I have recommended to the president for the Defense Department's fiscal year 2015 budget and beyond. These recommendations will adapt and reshape our defense enterprise so that we can continue protecting this nation's security in an era of unprecedented uncertainty and change.

As we end our combat mission in Afghanistan, this will be the first budget to fully reflect the transition DOD [Department of Defense] is making for after 13 years of war, the longest conflict in our nation's history.

We are repositioning to focus on the strategic challenges and opportunities that will define our future: new technologies; new centers of power; and a world that is growing more volatile, more unpredictable, and in some instances more threatening to the United States.

The choices ahead will define our defense institutions for the years to come. Chairman Dempsey and I worked in a pragmatic and collaborative way to build the balanced force our nation must have for the future. I worked closely with the chairman, vice chairman, service secretaries, and service chiefs in developing these recommendations in a process that began with last summer's Strategic Choices and Management Review.

I also want to recognize today the senior enlisted leaders in each of the services for their contributions and their involvement and their leadership and what they continue to do every day for our country, but in particular their help and input in crafting this budget.

Our recommendations were guided by an updated defense strategy that builds on the president's 2012 defense strategic guidance. As described in the upcoming Quadrennial Defense Review [QDR] report, this defense strategy is focused on: defending the homeland against all strategic threats; building security globally by projecting U.S. influence and deterring aggression; and remaining prepared to win decisively against any adversary should deterrence fail.

To fulfill this strategy, DOD will continue to shift its operational focus and forces to the Asia Pacific, sustain commitments to key allies and partners in the Middle East and Europe, maintain engagement in other regions, and continue to aggressively pursue global terrorist networks.

Our reviews made two new realities very clear. First, the development and proliferation of more advanced military technologies by other nations that means that we are entering an era where American dominance on the seas, in the skies, and in space can no longer be taken for granted. Second, defense spending is not expected to reach the levels projected in the five-year budget plan submitted by the president last year.

Given these realities, we must now adapt, innovate, and make difficult decisions to ensure that our military remains ready and capable, maintaining its technological edge over all potential adversaries. However, as a consequence of large budget cuts, our future force will assume additional risks in certain areas. In crafting this package, we prioritized DOD's strategic interests and matched them to budget resources.

This required a series of difficult choices. We chose further reductions in troop strength and force structure in every military service -- active and reserve -- in order to sustain our readiness and technological superiority and to protect critical capabilities like special operations forces and cyber resources.

We chose to terminate or delay some modernization programs to protect higher priorities in procurement, research and development. And we chose to slow the growth of military compensation costs in ways that will preserve the quality of the all-volunteer force, but also free up critical funds needed for sustaining training, readiness and modernization.

Before describing our specific recommendations, let me address the fiscal realities and assumptions behind our decision-making. On March 1, 2013 -- one year ago this week -- steep and abrupt automatic spending cuts were imposed on DOD and other agencies across the government under the mechanism of sequestration. For DOD, these irresponsible cuts amounted to $37 billion last fiscal year. These cuts came on top of the $487 billion, 10-year defense spending reductions required by the Budget Control Act of 2011.

As sequestration was being imposed, the president submitted a fiscal year 2014 budget plan that would have fully repealed those cuts in favor of balanced deficit reduction. That would have given DOD the resources needed to fully implement the president's January 2012 defense strategy and maintain a ready and modern force.

Two months ago, rather than fully repealing sequestration, Congress passed the Bipartisan Budget Act, which provided DOD with some relief in this fiscal year and for fiscal year 2015. The Bipartisan Budget Act gives DOD much-needed budget certainty for the next fiscal year. But defense spending remains significantly below what the president requested in his fiscal year 2014 budget request and five-year budget plan.

Under the spending limits of the Bipartisan Budget Act, DOD's budget is roughly $496 billion this fiscal year, or $31 billion below what the president requested. The law also limits DOD's spending in fiscal year 2015 to $496 billion, which is $45 billion less than was projected in the president's budget request last year.

So while DOD welcomes the measure of relief and stability that the Budget Act provided, it still forces us to cut more than $75 billion over this two-year period, in addition to the $37 billion cut we took last year and the Budget Control Act's 10-year reductions of $487 billion. And sequestration-level cuts remain the law -- remain the law for fiscal year 2016 and beyond.

The president will soon submit a budget request that adheres to Bipartisan Budget Act spending limits for fiscal year 2015. But it is clear that under these limits the military will still face significant readiness and modernization challenges next year. To close these gaps, the president's budget will include an Opportunity, Growth and Security Initiative. This initiative is a detailed proposal that is part of the president's budget submission. It would provide an additional $26 billion for the Defense Department in fiscal year 2015.

These additional funds would be paid for with a balanced package of spending and tax reforms and would allow us to increase training, upgrade aircraft and weapons systems, and make needed repairs to our facilities. The money is specifically for bringing unit readiness and equipment closer to standard after the disruptions and large shortfalls of the last few years. I strongly support the president's proposal.

The president's budget for fiscal year 2015 will also contain a new five-year defense budget plan, mapping out defense programs through 2019. Over five years, this plan projects $115 billion more in spending than sequestration levels.

The reason we are requesting this increase over sequestration levels is because the president and I would never recommend a budget that compromises our national security. Continued sequestration cuts would compromise our national security both for the short and long term.

Sequestration requires cuts so deep, so abrupt, so quickly that we cannot shrink the size of our military fast enough. In the short term, the only way to implement sequestration is to sharply reduce spending on readiness and modernization, which would almost certainly result in a hollow force, one that is not ready, one that is not capable of fulfilling assigned missions. In the longer term, after trimming the military enough to restore readiness and modernization, the resulting force would be too small -- too small to fully execute the president's defense strategy.

The president's fiscal year 2015 budget offers a more deliberate and far more responsible approach that protects readiness and modernization, while maintaining a force large enough to fulfill our defense strategy, though with some risk for some missions.

This plan balances the need to protect our national security with the need to be realistic about future budget levels. DOD has also completed a detailed plan should sequestration-level cuts return in fiscal year 2016 and beyond, as is the current law.

The reality of reduced resources and a challenging and changing strategic environment requires us to prioritize and make difficult choices. Some of those choices we must make now. For other choices -- particularly those involving the ultimate size of our armed forces -- we have built decision points into our budget plan. We will make these decisions when we have more clarity regarding future spending levels. Our budget will give us the flexibility to make different decisions based on different fiscal outcomes.

Before we recommended any changes in the military's size or capabilities, we first focused on implementing management reforms and reducing DOD's overhead and operating costs.

Last summer, I announced a 20 percent cut in DOD's major headquarters operating budgets, which is expected to save about $5 billion in operating costs over the next five years. These efforts began in the Office of the Secretary of Defense and in the Joint Staff, but they will also include service and combatant command headquarters.

We are paring back contract spending, making targeted cuts in civilian personnel, improving the quality of financial information, and taking other steps to become more efficient, in addition to continuing to implement the more than $200 billion in overhead cuts DOD has submitted in the last three budget proposals.

We cannot fully achieve our goals for overhead reductions without cutting unnecessary and costly infrastructure. For that reason, DOD will ask Congress for another round of base realignment and closure [BRAC] in 2017. I am mindful that Congress has not agreed to BRAC requests in the last two years. But if Congress continues to block these requests, even as they slash the overall budget, we will have to consider every tool at our disposal to further reduce infrastructure.

DOD has already been reducing infrastructure where we can. In Europe, where BRAC authority is not needed, we have reduced our infrastructure by 30 percent since 2000. A European Infrastructure Consolidation Review this spring will recommend further cuts, which DOD will pursue.

Reducing overhead will continue to be important, but the potential savings will not be by themselves enough to meet targets under either the president's budget or sequestration levels. To meet the reductions of the scale required, we had to carefully examine the military's force structure.

Our force structure and modernization recommendations are rooted in three realities: first, after Iraq and Afghanistan, we are no longer sizing the military to conduct long and large stability operations; second, we must maintain our technological edge over potential adversaries; and, third, the military must be ready and capable to respond quickly to all contingencies and decisively defeat any opponent should deterrence fail.

Accordingly, our recommendations favor a smaller and more capable force, putting a premium on rapidly deployable, self-sustaining platforms that can defeat more technologically advanced adversaries. We also preserved all three legs of the nuclear triad and will make important investments to preserve a safe, secure, reliable, and effective nuclear force.

The forces we prioritized can project power over great distances and carry out a variety of missions more relevant to the president's defense strategy, such as homeland defense, strategic deterrence, building partnership capacity, and defeating asymmetric threats. They're also well-suited to the strategy's rebalance to the Asia- Pacific region, to sustaining security commitments in the Middle East and Europe, and our engagement in other regions.

Our recommendations seek to protect capabilities uniquely suited to the most likely missions of the future, most notably special operations forces used for counterterrorism and crisis response. Accordingly, our special operations forces will grow to 69,700 personnel from roughly 66,000 today.

Let me now describe key recommendations for each of the military services. For the Air Force, an emphasis on capability over capacity meant that we protected its key modernization programs, including the new bomber, the Joint Strike Fighter, and the new refueling tanker. We also recommended investing $1 billion in a promising next- generation jet engine technology, which we expect to produce sizable cost savings through reduced fuel consumption and lower maintenance needs. This new funding will also help ensure a robust industrial base, a very strong and important industrial base, itself a national strategic asset.

To fund these investments, the Air Force will reduce the number of tactical air squadrons including the entire A-10 fleet. Retiring the A-10 fleet saves $3.5 billion over five years and accelerates the Air Force's longstanding modernization plan, which called for replacing the A-10s with the more capable F-35 in the early 2020s. The Warthog [A-10] is a venerable platform, and this was a tough decision. But the A-10 is a 40-year-old single-purpose airplane originally designed to kill enemy tanks on a Cold War battlefield; it cannot survive or operate effectively where there are more advanced aircraft or air defenses. And as we saw in Iraq and Afghanistan, the advent of precision munitions means that many more types of aircraft can now provide effective close air support, from B-1 bombers to remotely piloted aircraft, and these aircraft can execute more than one mission.

The A-10's age is also making it much more difficult and costly to maintain. Significant savings are only possible through eliminating the entire fleet, because of the fixed cost of maintaining the support apparatus associated with that aircraft. Keeping a smaller number of A-10s would only delay the inevitable while forcing worse trade-offs elsewhere.

In addition to the A-10, the Air Force will also retire the 50- year-old U-2 in favor of the unmanned Global Hawk system. This decision was a close call, as DOD had previously recommended retaining the U-2 over the Global Hawk because of cost issues. But over the last several years, DOD has been able to reduce the Global Hawk's operating costs. With its greater range and endurance, the Global Hawk makes a better high-altitude reconnaissance platform for the future.

The Air Force will slow the growth in its arsenal of armed unmanned systems that, while effective against insurgents and terrorists, cannot operate in the face of enemy aircraft and modern air defenses. Instead of increasing to a force of 65 around-the-clock combat air patrols of Predator and Reaper aircraft, the Air Force will grow to 55, still a significant increase. Given the continued drawdown in Afghanistan, this level of coverage will be sufficient to meet our requirements, and we would still be able to surge to an unprecedented 71 combat air patrols under the plan. DOD will continue buying the more capable Reapers until we have an all-Reaper fleet.

If sequestration-level cuts are re-imposed in 2016 and beyond, however, the Air Force would need to make far more significant cuts to force structure and modernization. The Air Force would have to retire 80 more aircraft, including the entire KC-10 tanker fleet and the Global Hawk Block 40 fleet, as well as slow down purchases of the Joint Strike Fighter -- resulting in 24 fewer F-35s purchased through fiscal year 2019 -- and sustain 10 fewer Predator and Reaper 24-hour combat air patrols. The Air Force would also have to take deep cuts to flying hours, which would prevent a return to adequate readiness levels.

Next, the Navy. Under the president's budget plan, the Navy will launch an aggressive and ambitious effort to reduce acquisitions costs and maximize resources available to buy and build new ships. This will enable our ship inventory to continue to grow over the next five years to support the global demands for naval presence.

The spending levels proposed under the president's budget plan would also enable the Navy to maintain 11 carrier strike groups. However, we will have to make a final decision on the future of the George Washington aircraft carrier in the 2016 budget submission. If sequestration spending levels remain in place in fiscal year 2016, she would need to be retired before her scheduled nuclear refueling and overhaul. That would leave the Navy with 10 carrier strike groups. But keeping the George Washington in the fleet would cost $6 billion, so we would have no other choice than to retire her should sequestration-level cuts be re-imposed. At the president's budget level, we would pay for the overhaul and maintain 11 carriers.

In order to help keep its ship inventory ready and modern under the president's plan, half of the Navy's cruiser fleet -- or 11 ships -- will be laid up and placed in reduced operating status while they are modernized and eventually returned to service with greater capability and a longer lifespan. This approach enables us over the long term to sustain and modernize our fleet of cruisers, which are the most capable ships for controlling the air defense of a carrier strike group.

Overall, the Navy's fleet will be significantly modernized under our plan, which continues buying two destroyers and two attack submarines per year, as well as one additional afloat staging base. We have preserved the fleet's modernization programs and provided for increases in ship inventory over the next five years.

Regarding the Navy's littoral combat ship [LCS], I am concerned that the Navy is relying too heavily on the LCS to achieve its long-term goals for ship numbers. Therefore, no new contract negotiations beyond 32 ships will go forward. With this decision, the LCS line will continue beyond our five-year budget plan with no interruptions.

The LCS was designed to perform certain missions -- such as mine sweeping and anti-submarine warfare -- in a relatively permissive environment. But we need to closely examine whether the LCS has the independent protection and firepower to operate and survive against a more advanced military adversary and emerging new technologies, especially in the Asia Pacific. If we were to build out the LCS program to 52 ships, as previously planned, it would represent one- sixth of our future 300-ship Navy. Given continued fiscal restraints, we must direct shipbuilding resources toward platforms that can operate in every region and along the full spectrum of conflict.

Additionally, at my direction, the Navy will submit alternative proposals to procure a capable and lethal small surface combatant, generally consistent with the capabilities of a frigate. I've directed the Navy to consider a completely new design, existing ship designs, and a modified LCS. These proposals are due to me later this year in time to inform next year's budget submission.

If sequestration spending levels return in 2016 and beyond, we will be forced into much tougher decisions on the Navy surface fleet. Six additional ships would have to be laid up, and we would have to slow the rate at which we buy destroyers. The net result of sequestration-level cuts would be 10 fewer large surface combatant ships in the Navy's operational inventory by 2023. Under sequestration spending levels, the Navy would also halt procurement of the carrier variant of the Joint Strike Fighter for two years. The Marine Corps' inherent agility, crisis response capabilities, and maritime focus make it well-suited to carry out many priority missions under the president's defense strategy. Accordingly, if the president's budget levels are sustained for the next five years, we could avoid additional reductions in end strength beyond those already planned. Today the Marines number about 190,000, and they will draw down to 182,000. If sequestration-level cuts are re-imposed in 2016 and beyond, the Marines would have to shrink further to 175,000. Under any scenario, we will devote about 900 more Marines to provide enhanced embassy security around the world.

Finally, the Army. We seek a highly ready and capable Army, able to dominate any opponent across the full spectrum of operations. To achieve this, the Army must accelerate the pace and increase the scale of its postwar drawdown. Today, there are about 520,000 active-duty soldiers, which the Army had planned to reduce to 490,000.

However, the Strategic Choices and Management Review and the QDR both determined that since we are no longer sizing the force for prolonged stability operations, an Army of this size is larger than required to meet the demands of our defense strategy. Given reduced budgets, it is also larger than we can afford to modernize and keep ready. We have decided to further reduce active-duty Army end strength to a range of 440[,000] to 450[,000] soldiers.

I have also accepted the Army's recommendation to terminate the current Ground Combat Vehicle program and re-direct the funds toward developing a next-generation platform. I have asked the leadership of the Army and the Marine Corps to deliver new, realistic visions for a vehicle modernization by the end of this fiscal year.

The changes to end strength would result in a smaller Army, but would help ensure the Army remains well-trained and clearly superior in arms and equipment. While this smaller capacity entails some added risk even if we execute extended or simultaneous ground operations, our analysis showed that this force would be capable of decisively defeating aggression in one major combat theater -- as it must be -- while also defending the homeland and supporting air and naval forces engaged in another theater against an adversary. If sequestration- level cuts are re-imposed in 2016, the active-duty Army would have to draw down to an end strength of 420,000 soldiers.

The Army National Guard and Reserves will also draw down in order to maintain a balanced force. Today, the Army National Guard numbers about 355,000 soldiers and the Reserves about 205,000 soldiers. By 2017, under our recommendations, there would be 335,000 soldiers in the Army National Guard force structure and 195,000 in the Reserves. If sequestration returns in 2016, the Army National Guard would continue drawing down further, to 315,000. Army Reserves would draw down to 185,000.

We have protected the National Guard and Reserves from cuts to the extent possible, but in order to maintain a ready and capable force at a time of fiscal constraints, no component of DOD can be entirely exempted from reductions. This 5 percent recommended reduction in Guard and Reserve soldiers is smaller than the 13 percent reduction in active-duty soldiers. I'm mindful that many in the Guard and Reserve community and in Congress have argued that the reserve component should be protected from cuts because they provide more troops at lower cost. If our priority was having the largest possible force in the event of a large-scale, prolonged war, that would be reasonable. However, our defense strategy calls for more than that.

Surge capacity is just one factor, as we must prioritize readiness, capability and agility. And while it is true that reserve units are less expensive when they are not mobilized, our analysis shows that a reserve unit is roughly the same cost as an active-duty unit when mobilized and deployed.

Guardsmen and reservists performed well in Iraq and Afghanistan. We could not have achieved what we did in either place without them. But experience shows that specialties requiring greater collective training to achieve combat proficiency and service integration should reside in the full-time force, where these capabilities will be more ready and available to commanders.

What best serves our national security is when Guard and Reserve units complement the active force. That's why we've recommended Army Guard Apache attack helicopters be transferred to active-duty units. The active Army will transfer Blackhawk helicopters to the National Guard, where they will bolster the Guard's needed capabilities in areas like disaster relief and emergency response.

These changes to the Guard's helicopter fleet are part of a broader realignment of Army aviation designed to modernize its fleet and make it highly capable and more affordable. The force will retire its Kiowas and the Jet Ranger training helicopters used at Fort Rucker. The active Army's overall fleet would decrease by about 25 percent, but it would be significantly modernized under the president's budget plan.

The Guard's fleet of helicopters would decline by 8 percent, but it would gain new Black Hawks and the Army will sustain the Guard's fleet of Light Utility Helicopters. If sequestration-level cuts are re-imposed in 2016, the Army would have to cut 50 of these helicopters from the Guard force.

While any force reduction has some risk, the future Guard helicopter force will still serve as an important operational and strategic complement to our active-duty force, while also being equipped for state and federal requirements for homeland defense, disaster relief, and support to civil authorities.

In making these difficult decisions on the Guard and Reserves, we affirmed the value of a highly capable reserve component, while keeping the focus on how our military can best meet future demands given fiscal constraints. We made choices based on strategic priorities, clear facts, unbiased analysis, and fiscal realities -- and with the bottom line focus on how best we can defend the United States.

Beyond force structure and modernization, there is the challenge of DOD's personnel costs -- civilian and military -- which make up about half of all defense spending.

DOD has complied with congressional direction to reduce our civilian personnel numbers and worked to reshape our civilian workforce so that it has the skills needed for the future. Given the steps already taken to reduce civilian personnel costs -- including a three-year pay freeze -- no realistic effort to find further significant savings can avoid dealing with military compensation. That includes pay and benefits for active and retired troops, both direct and in-kind.

The primary way to reduce overall payroll spending has already been discussed -- reducing the total number of people in uniform by bringing down the military's force structure and end strength. But since too small a force adds too much risk to our national security interests, we must also address spending on pay and benefits for service members, which since 2001 has risen about 40 percent more than growth in the private sector.

One of the reasons is that Congress boosted pay increases above the levels requested by DOD in budget submissions. New benefits, and increases in current pay and benefits, were also beyond what most active-duty personnel sought, expected, or had been promised when joining the military. As a United States senator, I supported these proposals. It was the right thing to do at the time, given the burdens being placed on our service members, the military's recruiting and retention challenges, and the fact that we had few constraints on defense spending.

But today, DOD faces a vastly different fiscal situation, and all the services continue to meet recruiting and retention goals. This year, we are concluding combat operations in America's longest war, a war that has lasted 13 years. We must now consider fair and responsible adjustments to our overall military compensation package.

For fiscal year 2015, we will recommend a 1 percent raise in basic pay for military personnel, with the exception of general and flag officers, whose pay will be frozen for one year. Basic pay raises beyond fiscal year 2015 will be restrained, though raises will continue.

We are also recommending a number of changes. We will slow the growth of tax-free housing allowances -- which currently cover 100 percent of housing expenses -- until they cover an average of 95 percent of housing expenses with a 5 percent out-of-pocket contribution. In comparison, the average out-of-pocket expenditure was 18 percent in the late '90s. We will also no longer reimburse for renter's insurance.

Over three years, we will reduce by $1 billion the annual direct subsidy provided to military commissaries, which now totals $1.4 billion. We are not shutting down commissaries. All commissaries will still get free rent and pay no taxes. They will be able to continue to provide a very good deal to service members and retirees, much like our post exchanges, which do not receive direct subsidies. Overseas commissaries and those in remote locations will continue receiving direct subsidies.

And we will simplify and modernize our TRICARE health insurance program by consolidating plans and adjusting deductibles and co-pays in ways that encourage members to use the most affordable means of care, such as military treatment facilities, preferred providers, and generic prescriptions. We will ask retirees and some active-duty family members to pay a little more in their deductibles and co-pays, but their benefits will remain affordable and generous, as they should be. To protect the most vulnerable, under this plan, medically retired service members, their families, and the survivors of service members who die on active duty would not pay the annual participation fees charged to other retirees and would pay a smaller share for the costs for health care other than the retirees.

Our proposals do not include any recommended changes to military retirement benefits for those now serving in the armed forces. We are awaiting the results of the Military Compensation and Retirement Modernization Commission, which is expected to present its report in February 2015. We will await the commission's report before pursuing reforms in this area. But DOD continues to support the principle of grandfathering for any future changes to military retirement plans.

The adjustments to military compensation presented in this year's budget plan will enable each of the military services to invest in more critically important modernization and readiness, while still allowing them to recruit and retain a high-quality force and offer deserved, generous, competitive and sustainable benefits. The savings will enable us to sustain a well-trained, ready, agile, motivated, and technologically superior force.

Although these recommendations do not cut anyone's pay, I realize they will be controversial. Congress has taken some important steps in recent years to control the growth in compensation spending, but we must do more.

A holistic and comprehensive approach must be taken to compensation changes. Continuous piecemeal changes will only magnify uncertainty and magnify doubts about our service members -- and with our service members about whether promised benefits will be there in the future.

Instead, we must keep faith with our men and our women in uniform and fulfill the promises that we've made to them. America has an obligation to make sure service members and their families are fairly and appropriately compensated and cared for during and after their time in uniform. We also have a responsibility to provide our troops with the finest training and equipment possible, so that whenever America calls upon them, they are prepared with every advantage we can give them so that they will return home safely to their families. The president's budget fulfills both of these promises to our service members and their families.

Our proposals were carefully crafted to reform military compensation in a fair, responsible and sustainable way. We recognize that no one serving our nation in uniform today is overpaid for what they do for our country. But if we continue on the current course without making these modest adjustments now, the choices will only grow more difficult and more painful down the road. We will inevitably have to either cut into compensation even more deeply and abruptly or we will have to deprive our men and women of the training and equipment they need to succeed in battle. But either way, we would be breaking faith with our people. And the president and I will not allow that to happen. The recommendations I have described will help bring our military into balance over the next decade and responsibly position us for an era of both strategic and fiscal uncertainty. They will allow the military to protect our country and fulfill the president's defense strategy, but with some increased levels of risk. We should be clear about these risks.

Over the near term, because of budget limitations even under the Bipartisan Budget Act, the military will continue to experience gaps in training and maintenance, putting stress on the force and diminishing our global readiness even as we sustain a heightened alert posture in regions like the Middle East and North Africa. The additional $26 billion provided to DOD by the president's opportunity, growth and security fund would allow us to continue to restore and sustain readiness, helping to mitigate this risk.

We also face the risk of uncertainty in a dynamic and increasingly dangerous security environment. Budget reductions inevitably reduce the military's margin of error in dealing with these risks, as other powers are continuing to modernize their weapons portfolios to include anti-air and anti-ship systems. And a smaller force strains our ability to simultaneously respond to multiple major contingencies. But with the president's budget, our military will still be able to defeat any aggressor.

We can manage these anticipated risks under the president's budget plan, but they would grow significantly if sequester-level cuts return in fiscal year 2016, if our reforms are not accepted, or if uncertainty on budget levels continues. As I've made clear, the scale and timeline of continued sequestration-level cuts would require greater reductions in the military's size, reach, and margin of technological superiority. Under sequestration spending levels, we would be gambling that our military will not be required to respond to multiple major contingencies at the same time.

That's why our recommendations beyond fiscal year 2015 provide a realistic alternative to sequestration-level cuts, sustaining adequate readiness and modernization most relevant to strategic priorities over the long term. But this can only be achieved by the strategic balance of reforms and reductions the president and I will present to the Congress next week. This will require Congress -- Congress to partner with the Department of Defense in making politically difficult choices, which I will address more specifically when I testify before Congress.

As I weighed these recommendations, I have, as I often do, looked to the pages of American history for guidance. In doing so, an admonition by Henry Stimson stood out. Writing after World War II, Roosevelt's secretary of war during that time said that Americans must "act in the world as it is, and not in the world as we wish it were."

Stimson knew that America's security at home depended on sustaining our commitments abroad and investing in a strong national defense. He was a realist. This is a time for reality. This is a budget that recognizes the reality of the magnitude of our fiscal challenges, the dangerous world we live in, and the American military's unique and indispensable role in the security of this country and in today's volatile world. There are difficult decisions ahead. That is the reality we're living with.

But with this reality comes opportunity, the opportunity to reshape our defense enterprise to be better prepared, positioned, and equipped to secure America's interests in the years ahead. All of DOD's leaders, these men and women sitting here today, and I have every confidence that this will be accomplished. Thank you.

GEN. MARTIN DEMPSEY: Well, as the secretary has laid out in detail, this budget proposal represents a responsible and, more importantly, a realistic way forward. In my view, it represents both sound national security and fiscal responsibility. It provides the tools for today's force to accomplish the missions we have been assigned, rebuilding readiness in areas that were, by necessity, de-emphasized over the past decade. It modernizes the joint force for tomorrow, ensuring that we're globally networked and can deliver options for the nation. And it reflects in real terms how we're reducing our cost, the cost of doing business, and working to ensure that the force is in the right balance.

In short, this budget helps us to remain in the world's finest military -- modern, capable, and ready -- even while transitioning to a smarter -- a smaller, more affordable force over time.

The chiefs and I will never end our campaign to find every way to become more effective. We'll do things smarter and more efficiently, more in line with the sorts of security challenges we face and in line with a fiscal reality. We'll seek innovative approaches not just in technology, but also in how we develop leaders, aggregate our formations, and work with our partners. We'll improve how we buy weapons and goods and services, streamline our headquarters, and, with the support of our elected leaders, shed excess infrastructure and weapons systems that we no longer need and simply can no longer afford.

At the same time, this budget recognizes the imperative of getting our personnel costs in balance. Otherwise, we'll be forced into disproportionate cuts to readiness and to modernization.

I know this weighs heavily on the minds of our men and women in uniform and on their families. Our force is extraordinarily accepting of change; they are less understanding of piecemeal approaches. They want and they deserve predictability.

The chiefs and I also continue to strongly recommend grandfathering any future changes to military retirement, and we'll continue to place a premium on efforts that support wounded warriors and those with mental health issues.

It's important to note that the services will be able to reinvest the money saved by slowing compensation growth and to closing some of the dire readiness gaps and into other programs and capabilities that will allow us to meet the nation's needs for the future.

I've said before that we must be clear about what the joint force can achieve, how quickly, and for how long, and at what risk. To be clear, we do assume higher risks in some area -- in some areas under the FY [fiscal year] '15 budget, and we'll have to manage those risks.

However, if sequestration-level cuts return in '16, the risks grow and the options we can provide the nation dramatically shrink. Now, we're all willing to take risks, but none of us are willing to take a gamble, because at the end of the day, it's our soldiers, sailors, airmen, Marines, coast guardsmen, America's sons and daughters who will face tomorrow's challenges with the strategy, structure and resources that we develop today.

Our most sacred obligation is to make sure they are never sent into a fair fight, which is to say that they must be the best-led, the best-trained, and the best-equipped force in the world. Thank you.

REAR ADM. KIRBY: We have time for just a few questions, let's start with Phil.

Q: Mr. Secretary, what would you say to critics who say this budget cannot survive contact with Congress and to allies who may be fearful that these proposed cuts and the ones that could come in 2016 suggest a military in decline, if not in desire, but in ambition?

SEC. HAGEL: Well, let me answer your question this way. I framed up in my remarks the realities of the kind of world that we live in. I also noted in my remarks what we collectively -- the leadership of the Department of Defense -- believe is going to be required to deal with these threats and challenges that the real world presents to America and our allies and our partners.

As I have said, we believe that we will present a budget that can fulfill the commitments that we have to this nation, our people, to keep them safe and secure, and also the commitments that we have to our allies and partners around the world. There are differences of opinion on how we do that. But at the same time, we owe it to the American people and our Congress, those individuals who represent the American people, the risk involved in further cuts to our budget.

So we've tried to present a budget based on the balance of those realities. We've done it in a collaborative, pragmatic way that we think we can defend. And I understand there are many audiences here. But I believe, as I said in my closing remarks, that this country should be assured that we will retain the capability to defend our country and our interests around the world.

I believe that our allies, as well as our adversaries, will understand that. There is no military in the world that is anywhere near as capable as the American military, by any metric applied, whether it's the quality of the people, it's the institution, it's the technological edge, it's the resources we apply. So I have confidence in this budget, and I have confidence that we can defend the interests of this country.

Q: Sir, I had a question about the $26 billion opportunity fund. Could you clarify a little bit? Because it implied that this was a done deal, you're going to get the money automatically. Can you -- what has to happen? What events have to happen in domestic discretionary spending and in tax revenue increases in order for you to see any of that money?

SEC. HAGEL: Well, I think, as I said -- and I think in your pre- briefing that you received -- is that we will present the $26 billion in the budget that will be presented next week to the Congress. OMB [Office of Management and Budget] is working that issue. It's part of a total $58 billion package on behalf of the entire administration. The DOD part of that is $26 billion.

I hope I didn't reference at any point about guaranteeing anything. No budget is guaranteed. But this is $26 billion that we collectively believe needs to be put back in to get us back up to a standard of readiness and buy back much of the operational shrinkage that we've had over the last two years, get us back on a track that we have fallen back from over the last two years of these cuts. So that's what it's about. The mechanics of that will be presented in the budgets and through OMB and through the president's larger budget.

Q: General Dempsey, can I add a capabilities question? A lot of your critics are going to ask, why wasn't the F-35, the largest weapons program in history, touched in this budget? It's nicked a little bit, I know, in the plan, but they're going to ask -- the money's there. Why wasn't more taken from that program to preserve Army and Marine Corps end strength?

GEN. DEMPSEY: Did you just say that I have critics out there? (Laughter.)

Q: More than one.

GEN. DEMPSEY: Oh. Look, this was all about trying to balance capability, both today's capability and future capabilities, based on emerging threats. And you're well aware of what the F-35 brings as a fifth-generation fighter, with capacity, size and readiness. And in that equation, and with the collaboration of the service chiefs, we managed it. And it wasn't managed exactly the same by each service, by the way, but this has been a year-long process.

REAR ADM. KIRBY: Tom.

Q: Mr. Secretary, on pay and benefits, you and other secretaries have headed down this road before, tried to slow the growth in pay and benefits. Congress has, you know, pretty much rejected most of this. What makes you think you'll be any luckier this time? And I know you met with the veteran service organizations this morning to sort of lay this out. How tense with that meeting? And did you make the sale?

SEC. HAGEL: You'd have to ask them. I wasn't there to make a sale on that particular meeting. I was there to -- as I have been since I've been here as secretary of defense -- this is the fourth time I've met with all of them. And it wasn't a sales job. It was, first of all, to explain to them how we came at the decisions and the choices and what we used as reference points and give them a clear understanding of that.

Then I wanted to hear from them. I wanted to get their opinions. And we listen to them -- it isn't just four times a year. We listen to them all the time. These organizations represent active, inactive. They represent veterans. This is the whole universe of -- of the people who do so much for our country and have done so much. So I wanted to hear from them.

I wanted to get their feedback on what's possible, what's not possible, also explain -- they know this better than almost anyone, there are tough choices out there. They get that. And I want to assure them that I want their input. I need their input. We all do, but we're -- we're going to proceed, as I've used the term a number of times in my speech, a fair basis, an appropriate basis, a basis that we can sustain.

Something that the chairman said is really important, in that -- and I mentioned this briefly -- whatever decisions ultimately are going to be made on pay compensation and ultimately retirement, it needs to be done once so that our men and women and their families in uniform, those who have served and those who are thinking about serving, don't constantly live under this cloud of uncertainty and threat. Well, what are they going to do to us next year? They're going to take this out next year. I don't want that, we can't have that, and we won't let that happen. So it was a number of things, Tom, that we -- we talked to them about.

As to your initial question, the only thing I can say in answer to past secretaries, this secretary, efforts that have been made before, I said in the speech here -- and everybody here knows this -- this is a different time. We haven't seen this time in our budget the threats in the world, what's going on in the world. Certainly, like every year is different, but this is the first time in 13 years we will be presenting a budget to the Congress of the United States that's not a war-footing budget.

Now, you might say, "So what?" But that's a defining budget, because it starts to reset, reshape, Marty's [Gen. Dempsey's] comments, rebalance, redefine our enterprise for the future. So what we have that we're dealing with -- and I use the term reality -- is the reality of what we have. And so it is a different time. It is a different situation.

Now, it doesn't mean that we're going to accomplish everything that we have proposed and the Congress will accept the recommendation. But it is a different time. And it -- it means that we're required to deal with that different time in a very responsible way.

REAR ADM. KIRBY: This will have to be the last question. Tom (OFF-MIKE)

Q: Secretary Hagel, you mentioned that we need to be clear about the risks involved in this. In 2016, if sequestration continued, you mentioned the Army might go down to 420,000 soldiers. What's the risk entailed with that? Does that mean the Army's going to have difficulty in prevailing in a major conflict?

SEC. HAGEL: Well, what the risk is -- and the chairman noted this in his comments, I've -- I've noted it in mine, others we have talked to, not just the chiefs and the secretaries here -- is that anytime you bring force structure down and capability down and resources down, that's going to add to the risk of the dimension of the missions that you're expected to carry out. You have fewer troops, fewer ships, fewer planes. Readiness is not the same standard.

Of course there's going to be risk. That means there's risk across the whole horizon of responsibilities. And that's -- that's what we're talking about. It cannot be any other way. If you're going to fulfill the president's defense strategy guidance and protect our interests around the world and fulfill the commitments that we have not only for our own security interests, but the commitments that we have to allies and partners around the world.

GEN. DEMPSEY: Could I add -- if I could -- I need to add something to that, though, because there's always this tendency, when you look at what's happening to the budget, to look at what's happening to each individual service. But don't forget, we're a joint force.

And let me just take, for example, you mentioned the Army's end strength and what effect would it have on the Army. It would certainly have an effect on the Army, but it would also have an effect on the joint force, because the Army provides a lot of the logistics enablers, a lot of command and control, signals, things that the other services fall in on that the Army provides. And by the way, the Army falls in on things that the other services provide.

So this -- this will have an effect on all of the services if we go to -- all the way to sequestration levels. And -- and that -- and when you add to that the human dimension of this, so -- so that, for example, inside of a force structure of 420,000, about a third of it is consumed by support to other services, the institutional support to itself, whether it's schoolhouses or medical programs, or -- you know, all the things that make a service a service, it really begins to limit in some significant ways that which is available to deploy into combat. So I'm telling you, 420,000 is too low.

Q: What won't they be able to do?

GEN. DEMPSEY: What will they not be able to do? Well, I mean, that -- that's all details that will come out as we discuss this budget, I think.

REAR ADM. KIRBY: Thanks, everybody.

SEC. HAGEL: Thank you.