DEPUTY SECRETARY OF DEFENSE CHRISTINE H. FOX:  Thank you Jim for the introduction and for hosting this important conference.  And it's great to see so many valued colleagues from the Defense Department and industry.

 

So the timing of this conference on defense programs couldn't be more appropriate, given the secretary's announcement yesterday, Secretary Hagel's announcement, of the major recommendations contained in our fiscal year 2015 budget proposal.  And I can tell you, it is -- it's been busy in the department.  We've been pushing hard and the timing is great, so it's a real pleasure to be here.

 

So I know that many of the decisions that he announced yesterday weren't exactly a surprise given the way the Pentagon works, the media works, and this town works.  Still, it's been barely 24 hours since the secretary's announcement, and I know many interested parties, including industry, are still digesting the details and impacts.

 

Today I'd like to spend some time discussing the strategic assumptions and analytic basis for these major budget and program decisions.  The goal is to provide a degree of direction to industry, to the extent political and fiscal reality is allowed, about where the Defense Department is headed in terms of modernization.

 

Finally, I'll close with some thoughts about the implications for the defense industrial base, how we can forge a better partnership in order to sustain this national strategic asset through lean and uncertain fiscal times.

 

So about a year ago, I addressed this gathering, and that was just as sequestration was going into effect, with the warnings of defense and industry leaders pretty much going unheeded at that point.  And at the time, a number of folks were saying these cuts could be managed with most military risk, implementing managerial reforms, cutting costs in the areas of compensation, infrastructure, managerial efficiencies, ground forces, and acquisition reform practices.

 

I addressed these claims at the time.  I explained why absorbing $50 billion a year in immediate and indiscriminate cuts, about 10 percent of all defense funding, was so difficult for the military.  Secretary Hagel took office soon thereafter and made it one of his top priorities to prepare the department for an era when budget cuts could be significantly lower than expected, wanted or needed.

 

The Strategic Choices and Management Review (SCMR) that he directed delved into every corner of the budget to identify options for further reductions, to determine for real how much could be saved, how quickly, and with what consequences for the military and the president's defense strategy.

 

Using the SCMR results, the services were tasked for the first time to build alternative budget plans for sequester-level funding in detail.  And it's a good thing that the secretary required this grim, but necessary exercise, while the department received some relief and stability through the Bipartisan Budget Act.  Under current law, sequestration will return in F.Y. 2016.

 

Based on our assessments, the impact of sequestration on the strategy, the budget plan announced yesterday will provide $115 billion more for defense than sequestration would have over the next five years.  And we needed these resources to execute the strategy, to fill readiness shortfalls, and protect the most critical modernization efforts.  We think this budget is reasonable and realistic and responsible, and we see that it could provide our military, as well as industry, a degree of stability to help plan and invest for the future.

 

Nonetheless, this budget plan is still less than was requested by the president last year, and so the department's leadership has had some tough choices to make.  Here I think it would be useful to revisit some of the major categories of potential savings that I addressed at your McAleese conference last year and how they came out with regard to the secretary's budget proposals.

 

When it came to managerial efficiencies, we know that industry has already slimmed their headcounts, their physical plants, executive ranks considerably over the past two years.  You have gotten leaner and more efficient, thus able to stay profitable even in the wake of defense cuts.

 

Of course, I don't need to remind you that the Pentagon is not a private corporation.  Political, legal and bureaucratic obstacles preclude the Defense Department, indeed, any federal agency from rapidly shedding people, infrastructure and missions, essentially, when national security is in play.

 

SCMR analysis last summer showed repeatedly that savings from the military's proverbial tail by reducing overhead and shrinking the bureaucracy takes several years to reach fruition and produced significantly less in bankable savings than is commonly believed.

 

Nonetheless, we tried to squeeze as much as possible out of the back end of the defense enterprise, so the budget plan just announced incorporates the reforms announced by the secretary last summer, most notably a 20 percent cut in the operational budgets for DOD's major headquarters.  These efficiency measures follow more than $200 billion in overhead cuts submitted in the last three budget proposals.

 

The imperative to become more efficient and innovative extended to the services, therefore, structure and operations and maintenance.  For example, in order to help keep its ship inventory ready and modern, the Navy will lay up half of its cruiser fleet, or 11 ships.  This means the cruisers will be placed in reduced operating status while they are modernized and eventually returned with greater capability and longer lifespan to service.

 

This approach enables us over the long term to sustain and upgrade the Navy's fleet of cruisers, which are the most capable ships for controlling the air defense of the carrier strike group.

 

With respect to reducing personnel costs, the department has already reduced the number of DOD civilians and frozen their pay for three years in a row.  So, no realistic effort to find further significant savings can avoid dealing with military compensation, which makes up one-third of all of defense spending.  The SCMR identified actually up to $40 billion in potential mixed compensation savings over the next five years, and these included aggressive proposals that addressed compensation of all types, pay and benefits, military and civilian, active and retirees.

 

Following SCMR last summer, the secretary directed the chairman and the service chiefs to identify between $20 billion and $50 billion over the next five years in potential savings to military

compensation.  We pulled together all of these results and analyses to generate some, frankly, relatively modest reform proposals submitted with the 2015 budget.  And these choices, modest as they were, were difficult, and, as we are likely to see and are already seeing in the responses to the secretary's speech yesterday, politically contentious.

 

We can't lose sight of the fact that they're fully consistent with the recruiting and retaining a quality all-volunteer force, and they're fully supported by the department's senior uniformed leaders, both officers and enlisted.

 

They include limiting pay raises, slowing the growth in tax-free housing allowances, phasing out the federal subsidy for U.S. military commissaries, and consolidating TRICARE in ways that incentivize using the most affordable medical care available.  We expect these initiatives to save $11 billion over the next five years.

 

Addressing the department's internal costs requires doing something about infrastructure, estimated to be about 25 percent more than we need relative to the size of our force, 25 percent.  Nobody looks forward to closing bases or facilities with all the disruption that it causes.  The most recent base realignment and closing process conducted in 2005 is now achieving recurring savings of about $4 billion a year.

 

Yet, as with military compensation, Congress has shown little interest in launching another BRAC (Base Realignment and Closure), which is in this budget plan and it would begin in 2017.  BRAC actually costs money upfront.  That is also in our budget plan.  In fact, we're already hearing that our proposed draft, however, would arrived dead-on-arrival on Capitol Hill.

 

As the analytical record demonstrates, the department's ability to achieve quickly significant managerial and overhead savings is limited. In order to maximize funds available for military combat power, secretary Hagel included proposals in the most recent budget plan that we believe are realistic and achievable.

 

Nonetheless, even the most aggressive and accelerated efficiencies effort would still not come close to achieving the savings necessary to meet reductions in the president's budget plan, much less sequestration.

 

It became clear that the combination of current and prospective readiness shortfalls, the emergence of more advanced military threats, and the potential for yet steeper budget cuts meant that the military would have to get smaller over the next five years.

 

In particular, we sought to avoid the mistakes of past defense drawdowns, in which the resources available for training, operations and maintenance eventually proved to be inadequate relative to the size of the force, hence, the specter of a so-called hollow military. Our analysis showed that attempting to retain a larger force in the face of sequester-level cuts would create, in effect, another decade-long modernization holiday.

 

So in many cases, we chose to absorb more risk with respect to capacity in order to ensure those forces were properly trained and remained clearly superior in arms and equipment.  This plan protected to the extent possible rapidly deployable, self-sustaining, and longer-range platforms that can strike from over the horizon.  They are also well suited to the president's strategic priorities, most notably the rebalance to the Asia Pacific, enhancing cyber and counterterrorism capabilities and sustaining security commitments in the Middle East.

 

Our analysis in both the SCMR and the upcoming Quadrennial Defense Review determined that since we are no longer sizing the military for prolonged stability operations, the Army under current plans is larger than is required.  Given reduced budgets, it is also larger than we can afford to keep adequately trained and equipped.  So the new budget plan would reduce active duty Army end strength to a range of 440,000 to 450,000 soldiers.

 

Though much has been made of the fact that the resulting Army would be the smallest since right before World War II, at that time, an active force of less than 300,000 soldiers, I think it should be noted the night-and-day difference in capability, not only between today's Army and the garrison force of the post-depression era that was starved of any meaningful training or new equipment, but also between today's Army and any major ground force in the world.

 

Furthermore, no discussion about potential ground maneuver capacity can leave out the Marine Corps, who have augmented the Army in every major conflict this past century.  Because the Marine Corps' expeditionary, crisis response, and maritime focus is well suited to strategic priorities, this budget protected the planned end strength of 182,000 for the Marines.

 

The Navy ship inventory will grow more capable under the president's plan.  The Navy included aggressive efficiency initiatives to preserve as many ships as possible.  These efficiencies included reductions in support contracts and better pricing initiatives.  The current budget plan allows for an 11-carrier fleet going forward, but if the 2016 budget submission we have to go back to sequestration, we will have to make a final decision on the USS George Washington and we will not be able to keep that carrier and not be able to do her scheduled nuclear refueling and overhaul at sequestration levels, going then to 10 carrier strike groups before sequester.

 

The U.S. Navy has traditionally put a premium on presence and thus sought to protect the overall size of its fleet.  The secretary was concerned, however, that the Navy is relying too heavily on the littoral combat ship to achieve its numbers goals.

 

The LCS was designed to perform certain missions, such as mine sweeping, anti-submarine warfare, in a relatively permissive environment.  It is now time to examine whether the LCS (Littoral Combat Ship) has the protection and firepower to survive against a more advanced military adversary and emerging new technologies.

 

So the secretary directed that no new contract negotiations beyond 32 ships will go forward.  He further directed that the Navy conduct a study with the department's testing agency of the ship's capabilities and survivability, and he directed the Navy to identify options for another more capable and lethal small surface combatant consistent with the capabilities of a frigate, and that study is due to him later this year.

 

With respect to airpower, the strategic imperative calls for more ability to strike over long distances from secure locations, whether that capability comes from bombers or missiles, manned or unmanned.  In this budget plan, the services recommitted to protect all funding -- I'm sorry, funding for all three variants of the Joint Strike Fighter, the follow-on bomber, refueling tanker, missile defense, and other systems, some of which are classified.

 

We also recommended investing about $1 billion across the FYDP (Future Year Defense Program) in a promising new next-generation jet engine technology which will help us ensure a robust private-sector capacity for this critical part of the defense industrial base.

 

However, the resources needed to buy these and other modern capabilities will only be available if we achieve savings elsewhere in the American defense enterprise, and soon.  The combination of delayed procurement, the slow pace of achieving efficiencies in personnel savings, and the high costs of filling readiness gaps in the near term mean that the department must, in effect, buy back modernization in the future.

 

This requires creating enough budget headroom in the out-years to fund these priorities, resources that will only be available if we begin reducing further the military size and overhead spending this year, as I've just described.

 

As I said at McAleese last year, the size of sequester-level cuts and the way they are timed in the near term make it impossible to reduce overall defense spending without doing serious damage to readiness, especially deferring, training and maintenance.  And our military's technological edge will be put at risk by all of the modernization invested that will need to be delayed further or possibly canceled outright.

 

This creates real risks for national security, because we know the U.S. military's dominance on the seas, in the skies, and even in space can no longer be taken for granted going forward.  While the odds of a major conflict against another modern comparably equipped military power is relatively low, the consequences of being unprepared for such a contingency could be far more damaging.

 

Yet, just as competitors and potential adversaries increase their capabilities, in recent years, the Defense Department has been forced to disproportionately reduce the very investments that are intended to sustain the U.S. technological superiority.  In fact, our military entered this latest budget slide in a decidedly more onerous position than previous drawdowns.

 

The post-Cold War budget reductions, the first modernization holiday of recent history, followed a decade of substantial investments in new platforms.  The Reagan build-up was in more most respects a procurement build-up that produced the weapons systems still in use today from Apache helicopters to Arleigh Burke destroyers to F-15 fighters.

 

The substantive defense increases of the base budget after September 11th have not resulted in equivalent gains in purchasing power, primarily because of escalating compensation, operation support, and procurement costs.  The result has been relatively little recapitalization of our military's inventory.

 

Then, last year as a result of the sequester mechanism that exempted compensation, the department was forced to cut $16 billion from procurement research, development, testing and evaluation.  For fiscal year 2014, modernization spending will be almost $12 billion less than requested last year.  For F.Y. 2015, some $25 billion less.

 

With the proverbial low-hanging fruit gone, the weapons programs left in our much constricted modernization pipeline are all truly and, in some cases, urgently needed for the future.  So the issue here turns from strategic direction, buying the right kind of capabilities on which I believe we are now on solid ground to execution, with a lower and potentially shrinking defense top-line, and investments squeezed by stubbornly high operating and personnel costs, the scrutiny will only get more intense on individual programs.

 

So this brings me to the portion of the American defense enterprise that rests outside of government, without which our military could not fight or function.  Here I'm referring to the industrial base.  Clearly the department needs a more cooperative, transparent, and -- as I will explain -- realistic relationship with the commercial sector.  To be sure, the Pentagon and industry won't see eye-to-eye on everything.  Strategic priorities may in some cases require some weapons programs to be delayed or even canceled outright, with commensurate loss of jobs, revenue and shareholder value.

 

The U.S. government is never going to have the kind of national industrial policy that favors many of your foreign competitors.  But clearly, the department can do more to deal with the industrial base in a more strategic and far-sighted way.

 

Private corporations with fiduciary responsibilities cannot keep factories open and employees on staff when there is no revenue coming in.  But we can still devote some creative thinking to developing technology and then keeping it on the shelf, so to say, for several years, if necessary, ready to be turned into procurement when there is a change in either defense budgets or strategic needs.

 

As I said in San Diego a couple of weeks ago, when defense budgets decline, there is a natural tendency to hang on to combat forces at the expense of enablers.  Yet we all know that enablers can be decisive force multipliers.  For example, with the U.S. Navy and Air Force able to outgun any and all comers, potential adversaries will look to take away our inherent military advantages to include the use of electronic warfare and other countermeasures.

 

We need to embrace these enabling capabilities, and we need to do so more than we have in the past.  This budget plan includes critical investments in electronic warfare that must be sustained in the future.  For the department, as well as industry, this should be a major focus of investment going forward.

 

Furthermore, it wasn't so long ago, to adapt Ronald Reagan's famous saying, that becoming a defense program of record was the closest thing to achieving eternal life.  This created incentives among the industry and services alike to be overly optimistic, at least early on, when it came to a system's technology, maturity, projected costs, and battlefield utility.  Consequently, the record of the past decade has not exactly been a ringing success when it comes to development of weapons systems requiring leap-ahead advances in technology.

 

The record on incremental modernization -- and with that, more incremental innovation -- from Arleigh Burke destroyers to Chinook helicopters to B-52s and now potentially the Navy cruiser fleet -- is much more promising, as many of your companies have experienced.  Given budget realities, not to mention the mixed track record of new program starts, this is an era requiring a lot more attention and, frankly, creativity.

 

In all, more forthright and clearheaded appreciation for the art of the possible is required when it comes to defense programs. We've tried to foster this shift internally at the department.  For example, representatives from AT&L (Acquisition, Training and Logistics) and the Cost Assessment and Program Evaluation Office now all participate in the Joint Requirements and Oversight Council to ensure that cost and feasibility are addressed before initiating any new program or continuing an existing one.

 

On the government side, we need to create the environment and processes that allow for a more regular, open, and sustained dialogue at all levels, from the defense secretary all the way through program managers.

 

For industry, so you know where the department is going or wants to go, depending on what budgets permit or the political system allows, and for the Pentagon, so we know better when the military's requirements, projections and aspirations are beginning to diverge from what is possible or advisable in the real world.

 

The good news is that block buys, multiyear agreements, and incremental enhancements to proven systems are all yielding substantial savings and results for the warfighter and the taxpayer, yet they all depend on healthy and predictable levels of investment that allow the military to buy in quantity and avoid the death spiral that doomed so many weapon systems in recent years.

 

For industry, we know the return of sequestration means more job losses, factories and research centers closed, and with them, the loss of military unique skills, all capacity that cannot quickly be regenerated if either budgets or threat assessments change in the future.

 

In this respect, we're in this together.  We need to your help to continue making the case to the Congress and the public about the importance of predictable and adequate funding for national defense.  One thing that has become clear is that the political and legislative environment has changed dramatically in just the last couple of years.  There are significant and growing constituencies on both sides of the political spectrum that don't see sequester-level cuts to defense as a major problem, or even minor one.  The Pentagon and industry leadership provided plenty of strong warnings about the impact of steep and immediate budget cuts.  As the result of doing the Strategic Choices and Management Review last summer we can now document the real world effects of sequestration in terms of diminished troop strength, delayed modernization, deferred maintenance and foregone training consequences not easily dismissed as posturing or fear-mongering.

 

Finally, I would like to thank all of you for being a vital partner for America's military.  Together we must do what is necessary to sustain defense industrial base as a national strategic asset indispensable to America's security.  It is up to all of us to get prepared and make the tough choices - for the men and women in uniform, for our country's national defense and credibility as a global power.

 

So thank you, and I look forward to your questions.

 

Q:  -- Sydney Freedberg, Breaking Defense.  I believe you went the entire speech without saying the word "cyber," which is almost a relief.  But, you know, you mentioned electronic warfare, one of my favorite things, which has languished, except for IED (Improvised Explosive Device) jamming, for a decade-plus.  You know, cyber, electronic warfare are overlapping certainly with wireless networks. You know, talk to me about protecting investments -- maybe increasing investments in that E.W. (Electronic Warfare), cyber area, even as we have some, you know, very tough sacrifices to make in other areas.

 

DEP. SEC. FOX:  So, thank you.  The omission of cyber in this speech -- I think I omitted SOF (Special Operations Forces), in the speech, as well -- is not at all intended to convey that we omitted them in our -- in our budget proposal.  I didn't want to recast all of the things the secretary said yesterday, but, indeed, you're right. Cyber is critically important.

I, too, see cyber and E.W. as very linked and very important areas together.  And I hope that we can continue to think about cyber and E.W. as intersecting areas and domains.  But, yes, we did protect investments in cyber, in cyber defense, cyber offense, and the Defense Department's responsibility to support the Department of Homeland Security for national cyber defense.

 

And we did also protect some growth in SOF and other key areas relevant to the strategy, so cyber is definitely in there.

 

Q:  And the E.W. portfolio, is that across DOD?  Is that actually stable, even growing, or cut less than other things?

 

DEP. SEC. FOX:  So in many cases, for example, in our ability to protect ships and aircraft, we are trying to increase investments in E.W. and E.W. R&D (Research and Development).  As you appreciate, I'm sure, relative to buying a plane, the E.W. that goes on the plane is a relatively small investment, so it's the kind of enabling thing that we need to look to do more of, because it is more affordable, relatively speaking, and it has the potential to have very high payoffs.  So we are trying to protect -- and where possible, grow -- but mostly in this budget environment protect investments in R&D and E.W.

 

MODERATOR:  Ma'am, we have another one over here.

 

DEP. SEC. FOX:  Okay.

 

Q:  Good afternoon.  Mark Shalhoub with Citadel.  Could you comment on the department's position on mergers and acquisitions between contractors, especially the four large prime contractors? Thank you.

 

DEP. SEC. FOX:  So this is an area that probably you also asked Secretary (Frank) Kendall -- or at least I hope you did this morning, since this is absolutely in the heart of his portfolio for the department -- but I will say that coming out of the end of the Cold War and the drawdown there, we had a much larger, more robust industrial base, and so opportunities for mergers and acquisitions were greater then than I think we see now.  I think we see that we need to protect our industry at the level it is to the extent possible.

 

MODERATOR:  Questions back here.

 

Q:  Good afternoon.  Sean Reilly, Federal Times.  Should you get the go-ahead for 2017 BRAC round, could you talk a little bit about how you proceed methodologically?  And would this be significantly different in that respect from what was done in 2005 or prior rounds?

 

DEP. SEC. FOX:  Yes, it would be different than 2005, but it would look a lot more like the rounds before that.  So BRAC typically is an efficiencies initiative.  And as I said, we feel that we're about 25 percent -- have about 25 percent greater number of bases than we need for the size of the force that we're moving toward.  So what we would like to do is consolidate our infrastructure to support the needs of the forces that we have.

 

2005 did two things.  It was an efficiencies BRAC, but it was also a restructuring BRAC.  And there was a lot of restructuring, additional force protection, and so forth.  So the combination of those two things under one BRAC process put it sort of a separate kind of BRAC than any of the others that we've experienced.

 

It made it more expensive, frankly, to get going, and it actually -- our ability -- or the department at the time's ability to estimate the cost of that BRAC, there were a lot of cost overruns on it, as I'm sure you're aware.

 

So that's not the model for the BRAC that we are proposing, although, as I said, it is saving us money.  Even that very expensive BRAC that included a lot of restructuring we're saving about $4 billion a year now.  But on the BRAC that we're proposing is simply the straight stick.  Let's look at where we have people, look at where we have bases, look how many bases we need, and figure out a way to go forward.  So it would be strictly an efficiency BRAC.

 

MODERATOR:  We have a question back here, ma'am.

 

Q:  Secretary Fox, Andrea Shalal-Esa with Reuters.  I wanted to ask you about missile defense.  Frank Kendall talked a little bit about this and said you really need to move ahead with some kind of new kill vehicle technology.  Can you speak about that?  I mean, missile defense is one of the largest pieces of the procurement part of the defense budget.  And it didn't really come up yesterday.

 

And then just on BRAC, we've heard sort of slightly different numbers about what was saved in earlier BRACs.  Do you have a ballpark for what you expect this BRAC round -- or what would be an appropriate comparison?

 

DEP. SEC. FOX:  So let me answer the second one first.  On BRAC there, there are estimates in the budget for what we can do that I honestly don't remember off the top of my head.  There's a lot of numbers running around in there with this budget at the moment, but they will be presented when we drop the budget next week.

 

That said, most of the investment upfront is cost, so the budget doesn't really show the -- as much of the long-term savings as we hope to get.  And, frankly, we haven't done the work I just talked about, about figuring out exactly which base and so forth.  So it's a -- it's a placeholder estimate, so I don't want to go too far on that.

 

But we certainly are looking at the kinds of savings that I talked about in my speech.  We want to get, you know, multiple billions a year from infrastructure reductions.

 

Missile defense.  So missile defense is clearly an important part of our budget.  We made a strategic decision a couple of years ago in the department, actually, to increase the emphasis on homeland missile defense and decrease the emphasis on regional missile defense.

 

Just because the number of missiles we have to defend against is growing so rapidly, we need some new approaches, another -- I invite industry to help with innovative ideas for how to deal with that regional missile defense problem.

 

But we do recognize we need very definitely to invest in our capability to defend the homeland, and we do invest in this budget in that.  We invest in Ground Based Interceptors, and we invest in the kinds of kill and discrimination technologies that you're talking about, the kill vehicles and new technologies.  So that is in the budget and is clearly an important part.

 

MODERATOR:  We have a question in the corner, ma'am.

 

Q:  Hello, ma'am.  Mike Rogan.  I'd like to ask you a question about the upward spiraling costs of durable medical equipment and medications.  If you'll permit me a brief set-up, my wife has a long-term chronic disease.  Recently, her therapist felt that she needed an electric wheelchair that reclines and tilts.  TRICARE approved a $26,000 medical expense for this wheelchair.

 

Now, having been an acquisition guy, I cannot believe that chair cost that much money.  So who is looking after those sorts of costs, when a department doesn't see them directly, the TRICARE vendor is paying?

 

DEP. SEC. FOX:  Well, I don't have a good answer for you on that.  I can tell you that our Department of Health Affairs inside the department under Personnel and Readiness is doing a very thorough scrub of our entire medical infrastructure.  We're looking at our other ways to provide health care, the NTS, whether we have too much, too little, where to focus it.  So we're looking at efficiencies there.

 

We also have an office that looks over TRICARE.  But whether it gets to the level of the example that you just provided, I really can't say.  And I doubt it.  But I think that TRICARE follows the same standards as other insurance kinds of things.  And so I believe that this is a consistent sort of medical insurance policy sort of --

 

Q:  Absolutely.  Because the insurance companies are paying the price.  The consumer and those who pay the insurance policy costs don't see them.

 

DEP. SEC. FOX:  So this is all part of the national medical insurance debate and dialogue that the Defense Department is part of, but not responsible for.  Other questions?

 

Q:  Yes, a quick question.

 

DEP. SEC. FOX:  Yeah.

 

Q:  Secretary, when we look at the -- the $26 billion opportunity, growth, security activity that's coming up, how should we think about that?  And where can we really throw our support behind, in terms of what you need, whether it's a mixture of readiness or it's a mixture of recapitalization?

 

DEP. SEC. FOX:  So the $26 billion opportunity, growth and security fund -- so let me describe that a little bit.  In last year, as you all know, we got the Bipartisan Budget Act.  And the Bipartisan Budget Act gave us stability for '14 and '15.

 

And given where we were at the time, where we've been through a government shutdown and a year of sequester, stability was a gift. And we jumped on that gift, and the president certainly signed it into law as -- as we all know he should have.

 

But when you look at the amount of money that BBA gave to the Department of Defense, for example, in F.Y. '15, it is $45 billion below the President Budget '14 request for that year, or, frankly, just about $7 billion above sequester.

 

So stability, good.  Amount, eh, not so.  So when we look at what this is going to do to us in the department, what you've got is you've got, '13, sudden sequester crashed on us, and readiness took this monstrous hit.  That's where we -- that's what we could do.  We could ground things.  We could tie things up.  We could not let them operate.

 

And '14, it's a little better than I described for '15 from the BBA, and the department is able to start recovering from that readiness impact.  With '15, at the BBA level, they kind of go right back down, because there's just not enough money.  It takes time to get the force out.  I described we're starting to get smaller.  That won't have happened yet, so we'll have in '15 too large a force for the money that we have in the budget to keep it all ready.  So the services are very concerned.  The other thing that will happen is it will impact some of our modernization programs.  You know, last year, I gave the numbers in my remarks, so more things will slip and slide.

 

So the administration being mindful of that -- and I've given you the Defense Department impacts, but there are impacts of the BBA across the entire government -- so the administration's in, frankly, a place where we have a law, the president signed the law, we all wanted the stability, but the amount is, frankly, just not adequate to the needs of the government, and particularly for the Defense Department, I can speak to where we're inadequate.

 

So he is proposing this opportunity, growth and security fund. It is a detailed budget proposal that will be part of the administration's budget submission.  Our DOD budget will delineate how we would spend the money, were we to be lucky enough for it to be appropriated.  It would almost all go to readiness, frankly.  And -- and we would like to see it enacted.

 

But once we explain what happens if we don't get it, and we explain what we would do, and the administration will also submit with it a description of how they would propose paying for it, which I know on the Hill will become a controversial thing, then we will see what happens.

 

But we felt that it was responsible, just as we felt that we could not submit -- the president and the secretary of defense can't submit a budget that doesn't support the needs of our strategy and the needs of this nation's security.  We just couldn't do it.

 

We know sequester's the law in '16.  We're not blind to that fact.  And we've planned for it, and the budget will include a description of what the force would look like under sequestration. We're going to include that as part of our budget submission.

 

But the budget detail and the budget that we submit is higher so that we have -- you know, can support the needs of our strategy, albeit with some additional risk.  The same is true for '15.  We wanted to say the near-term risk is readiness.  It's just -- (inaudible) -- the $26 billion for defense of the OGS fund, the OGS fund, would help, and this is how we'd spend it.  So it's a detailed proposal that's part of the budget submission.

 

MODERATOR:  Ma'am, we have a question back here.

 

DEP. SEC. FOX:  Okay.

 

Q:  Hi, Sean Reilly again, Federal Times.  To go back to something you alluded to earlier in your remarks, could you talk a little bit about what your plans are for DOD civilian workforce, given the pressures you alluded to?  Do you expect the need for any significant reductions going forward?  Do you expect to remain relatively stable?

 

DEP. SEC. FOX:  So the civilian workforce -- so we did execute a 20 percent reduction in the operating costs of our headquarters.  So what that means is it really will translate into civilians and contractors.  And it'll be a mix, but our civilian workforce is a part of the 20 percent reduction will go down.  And we've already brought civilians out of our workforce over the last couple of years.

 

But, frankly, beyond the headquarters staffs, our civilians are outside of the Pentagon, right?  They're outside of headquarters. They're out at depots.  They're doing work.  They're at shipyards.

 

So it kind of brings us back to BRAC.  Unless -- and there are civilians at bases doing base management and base functions.  Until we can consolidate our infrastructure, we'd love to do some efficiencies in depots.  We've got a whole set of proposals.  All of them will require a BRAC.

 

So until we get to the BRAC, our ability to significantly do more on our civilian workforce -- and so much of it is not headquarters, as people think.  It's actually people out there doing real things -- we will be constrained in how much more we can bring down our civilian workforce.

 

We are proposing a 1 percent pay raise for them this year, and I've got to say -- and I would just take one second to give a plug for our civilians -- our civilians are truly dedicated, smart, caring, hard-working, incredibly hard-working people.  They have absolutely no support.  They have absolutely no constituency.  It's the one thing everybody can agree on.  "Oh, we'll cut the civilians' pay raises. Oh, we'll cut civilians out of the force."

 

That's just wrong, frankly.  It's gone too far.  I have never seen so many demoralized people.  They were furloughed in the Defense Department last year.  They went through the government shutdown.  I'm really, really concerned that we are going to lose really talented people that we need in our government to do the things that we have to do.

 

And so the 1 percent pay raise for civilians, I just think it's imperative that that goes through this year, and we have to start recognizing how valuable our civilians really, really are.

 

Q:  Secretary Fox, just a couple of quick follow-ups.  One is on the overseas contingency operations (OCO) funding, can you walk us through where you -- you know, how quickly that kind of a request could be made, if there's something that you're waiting for, and how you see that tangentially, you know, progressing this year, next year.  When -- is this the last one?

 

And then to what extent do you think that that should be used or could be used for acquisition purposes?  In other words, about eight years ago, you funded, I think, a F-35 in the OCO.  You know, is that a possibility again this year?

 

DEP. SEC. FOX:  So for the department, OCO is a fund that supports the wars, Iraq and Afghanistan.  So it is coming down.  We have a placeholder in this year's budget, but it's not a real number, because we are still -- as I think everyone appreciates – our Afghanistan policy is right now a little bit on hold.  We'll see some things from the NATO ministerial coming forward, but fundamentally, we're waiting for President Karzai and we've got some work to do there.

 

So we don't have -- we can't do an OCO budget until we know what our posture is going to be in Afghanistan, and we don't know that until we work through these political negotiations and make some hard decisions.

 

But we will submit an OCO budget.  You asked if this will be the last year.  I don't believe it will be the last year.  We have an agreement.  We must reset the equipment that we put over there.  We have to get out.  We have to take care of people that deploy.  Many of these things are in OCO, need to stay in OCO, so there will be a tail.

 

But it will come down.  It's already come down from a peak of $200 billion in one year, all the way down last year.  I think it was maybe -- (inaudible) -- something like that, and it'll be less than that this year, so it's on its way down, and it will continue to come down.

 

Q:  (off mic)

 

DEP. SEC. FOX:  Oh, acquisition in OCO?  Well, so that is not the intent of OCO.  Reset of equipment is the intent of OCO, but buying brand-new things is not.  So how far do you go?  If something is completely shot up and you have to replace it, do you replace it with something else just like it?  Or do you replace it with something new?

 

We've been on both sides of that argument -- I'll be honest with you -- in the department, let's -- I'll just say it honestly.  We have been on both sides of that argument.  But acquisition of new systems is not the intent of OCO.

 

Now, I have to point out that our friends in Congress are not so constrained by the rules and intent.  And so OCO is used in many ways after the budget gets to the Hill, so you have that, as well.

 

Q:  Madam Secretary, Jason Miller, Federal News Radio.  I want to follow up from Sean's question about the civilian workforce.  In the drawdown of the '90s, the acquisition workforce took a huge hit, and I think a lot of the problems that DOD faces from an acquisition standpoint today stem from that '90s drawdown, not having enough contracting officers, not training them well.  What are you doing to make sure that acquisition workforce is protected as cuts and changes happen, and especially if you don't get that special fund?

 

And then I guess related to that military compensation, is that even on the table?  I mean, I know you have proposals, but --

 

DEP. SEC. FOX:  Is it real?

 

Q:  Yeah, thank you.

 

DEP. SEC. FOX:  Sure.  So the first question on the acquisition workforce -- gosh, we've worked so hard to build it up again.  We are not -- we are trying not to cut it, but it was on the growth path.  And the truth is, is -- you know, we're not buying as much stuff anymore.  We can't afford to.

 

So we needed to rebuild it.  We needed to make it better, to train it more, and to rebuild our competencies in that area.  I think we've made a lot of progress and we want to sustain that progress. But whether we -- we're not going to be growing that force.  It's more sustaining.  But we need to sustain.  We're not going to reverse that trend, because you're absolutely right.  That was a big problem for us.  And one of the ways we're going to work together better is if we know what we're doing on our side, and we're committed to making sure that we know that.

 

Your second question, again, sorry?

 

Q:  (off mic)

 

DEP. SEC. FOX:  Oh, is it real?  Compensation.  So, I don't know.  I really don't.  But I can tell you, I had the opportunity to testify with the vice chairman not too long ago on compensation.  The topic was COLA minus-1 and the BBA and what we thought of that, but the hearing was much broader on compensation as a whole.  And we made the case about how compensation needs to go down so we can keep readiness up.

 

So one of the points we made to the Congress and that we've been making every chance, so I'll take a chance here, is that there's a tradeoff for our military between quality of life and quality of service.  The quality of life of our -- of our men and women in the military, really high.  Pay is good.  Housing is high-quality.  Rec centers, good.  Everything -- commissaries, good.  I mean, they have good quality of life.  And they recognize that.  And they like it, and they should.  They should have good quality of life.  They deserve every dime of quality of life we can give them.

 

But they also deserve good quality of service.  So they leave a nice house with a good paycheck, had nice opportunities to spend some money on their family, appropriate family programs, training, education, and they go to their unit, whether it's a ship or a ground combat unit or whatever, and what do they find there?  They find that they're not able to fly, they don't have parts.  People are short.  They're picking up the slack for somebody else because the manning is inadequate.

 

And the -- so the -- there's a real distinction drawing in our service now between quality of life and quality of service.  And this isn't me talking.  I learned this from our service chiefs.  They are the ones that have brought this forward through our teamwork, our deliberations over the past year.  And I've listened, because I think they're making an incredibly compelling case.

 

So I'm trying to pick that up for them every chance I get and explain, if we don't do something about compensation, not -- not take it down, but keep it from continuing to grow, we need to take some savings from that.  And I gave you the numbers.  It's so much more modest than what we've looked at with more aggressive proposals.  But every dime of that needs to go over here into quality of service, whether it's readiness or parts or modernization, so that if we have to send them into harm's way, they can actually prevail, and we owe that to them every bit as much as we owe them a solid paycheck.

 

We're out of balance there.  And we've got to get that back in balance.  And that's the real reason that we need to tackle military compensation.  And I think -- maybe I'm being optimistic -- but I think that that message is starting to come across.  We're all saying it.

 

The secretary held a wonderful meeting yesterday with the VSOs (Veterans Service Organizations), MSOs (Military Service Organizations).  We talked about this quality of life, quality of service.  They -- they get that.  They're hearing that, too.  And they care about that very deeply, as well.  So I'm cautiously optimistic that we'll have more success this year.  And if you can help us make that argument, I'd love it.

 

Q:  On that note, can I throw out the final question?  Because I know your time is tight.  Number one, what can we do?  Would it be productive for us to be supporting not just the 2015 mini-deal, but the 2015-2016 mini-deal?  What can we do that (off mic) number one?

 

And, number two, separately, as you went through the SCMR, because you were really the voice of continuity throughout the whole process, was there anything that really surprised you, whether it was personnel, readiness, procurement, modernization?

 

DEP. SEC. FOX:  So I think that the first question of what can you do to help, the most important thing that we need to do is get rid of this prospect of going back to sequestration in F.Y. '16.  I mean, we can hold (off mic) '15.  We don't get the $26 billion, we'll know.

 

But if we know that something like the president's budget, which isn't as high as what we've asked for before, but is more than sequestration, that it gives us -- if we could get knowledge that we're going there, and -- and that we can count on it, we can start making decisions that -- I think will help all of us achieve the kind of needed stability that we need to make plans and make sure that we're going to be able to deliver the national security that we need to do.

 

And on the surprises question, what's the biggest surprise?  I think the biggest surprise for me was how hard it was to explain to people why these level of cuts were bad.  I mean, it was really very challenging.  So many people out there were writing, ah, efficiencies, big, fat bureaucracy, just take it out of that, it's a piece of cake.  They're just -- they're just bloated.  Take it out.

 

And it's such a hard thing to fight, because, of course, we're bloated.  For heaven's sakes, you know, we -- we are a huge budget.  But that doesn't mean that we don't need some bureaucracy.  We've brought it down.  We've brought it down a lot.  And now we're kind of at the meat.  We did a calculation as part of SCMR of what percent of our budget goes to headquarters, to that part that's supposedly bloated, right?  Two percent of the defense budget pays for the headquarters that oversee all of the activities that we do.

 

You know, when I'm looking at organizations to give for charities 2 percent, that's a pretty good number.  So people don't appreciate that.  They don't know it.  They just have this perception.  And it's a very hard perception to fight.  And as a consequence, we're pretending that -- pretending that went on and continues to go on that we can deal with this by just taking out all of that, is actually the most harmful thing that I think we can do, because what's going to happen is -- because we can't -- because it isn't real, we've done as much as we can, we are actually going to cut into the bone of our national security.  So --

 

Q:  Well spoken.

 

DEP. SEC. FOX:  Thank you.  Thank you very much.