Remarks by Acting Deputy Secretary Fox at the American Enterprise Institute

ACTING DEPUTY SECRETARY OF DEFENSE CHRISTINE H. FOX: Thank you, Mackenzie, for that very kind introduction and, again, thanks to all of you very much for coming out on this snowy morning, 11 snowstorms this year. That sounds about right. It's been an amazing year.

So I want to thank all of you at American Enterprise Institute for the great work that you do and for the opportunity to be with you today.

So as Mackenzie said, Secretary Hagel recently announced a number of recommendations and proposals that will be contained in the Defense Department's fiscal year 2015 budget submission. It goes without saying that making spending choices that will be portrayed as having more losers than winners due to the fact that budgets are tight and could get even tighter is no way to win a popularity contest.

In many respects, there was something in this package to set off just about everybody's alarm bells and umbrage meter. And from my perspective -- and as I hope my remarks will make clear -- the two categories of stakeholders most protected from these changes are people we should all feel the most accountable to: the average American fighting man and woman and the average American taxpayer.

To best take advantage of our time today as well as this informed audience, I thought I would be useful -- it might be useful to provide the broader context, thought processes and strategic shifts underlying the FY [fiscal year] 2015 proposal.

We are unveiling this latest budget at a time of continued transition and uncertainty for the U.S. military in terms of its role, missions and available resources. The past decade has been dominated by the protracted land wars in the Middle East and Central Asia. Today, even as the fight winds down in Afghanistan, the military's focus is preparing to counter a variety of security threats and embracing opportunities on all points of the compass.

Recognizing that America was answering this historic inflection point two years ago, President Obama issued strategic guidance to the Defense Department that articulated our top security priorities and most important military missions.

Because these priorities weighed so heavily on the recent budget choices, it is worth revisiting them briefly. They included shifting operational focus and forces to the Asia Pacific, sustaining commitments to key allies in the Middle East, being prepared to defeat a major adversary in one part of the world while denying victory to an opportunistic adversary elsewhere, reducing the force planning requirement to conduct large, prolonged counterinsurgency and stability operations, aggressively pursuing terrorist networks and countering weapons proliferation that threaten the homeland, enhancing capabilities in cyberspace and missile defense, maintaining a small but -- smaller but credible nuclear deterrent and continuing a military presence and pursuing security cooperation in multiple regions -- Europe, Africa and South America -- though at reduced size and frequency.

OK. That list is not a short one.

It reflects the president's chief objectives of protecting the American homeland and fostering stability overseas by supporting traditional allies, cultivating new partners and deterring would-be adversaries.

These strategic tenets are affirmed and refreshed in the 2014 quadrennial defense review scheduled to be released to Congress with the official budget submission.

All of the reviews and deliberations in recent years have brought into sharp focus two historic realities: first, as you can see from that list, the world has gotten no less dangerous, turbulent or in need of American leadership. There is no obvious peace dividend as was the case at the end of the Cold War.

Second, there is a strong possibility that under current law, most notably the return of sequester in FY 2016, resources for national defense may not reach the levels envisioned to fully support the president's strategy.

Consider the recent fiscal history; the Budget Control Act of 2011, even before the sequester provision was triggered, then reduced projected defense spending by $487 billion over 10 years.

The next two defense budgets submitted by the president stayed generally on this fiscal course, though last year's request added another $150 billion in reductions backloaded towards the end of the BCA period.

As director of DOD's cost assessment and program evaluation organization during this period, I worked closely with the services, the joint staff and the secretary on putting these budget plans together.

While no government official in or out of uniform likes having their projected funding reduced, most senior military leaders considered the 2013 and 2014 budget plans supportive of the military's mission and global obligations as defined by the defense strategic guidance.

Then, of course, the department, along with the rest of the executive branch, got hit with sequester just under one year ago today. With military compensation which represents one-third of all defense spending put off limits by sequester, the operations, maintenance and investment accounts received disproportionately steep cuts.

The result was more delayed modernization and readiness shortfalls that are still with us today. Some relief uncertainty arrived in the form of the Bipartisan Budget Act [BBA] signed in December. But for 2014 and 2015, the BBA still reduces defense spending by more than $75 billion relative to the budget plans submitted by the president last year.

And without farsighted bipartisan action by the Congress, sequestration will return in FY 2016, cutting defense by more than $50 billion annually through 2021. This brings me to the Defense Department's response to these fiscal challenges.

With our leadership's stern warnings about sequestration appearing to fall mostly on deaf ears in the Congress last year, one of Secretary Hagel's top priorities is to prepare the department for an era when defense budgets could be significantly lower than expected, wanted or needed.

The secretary recognized that those of us charged with helping to prepare the U.S. military for their future have to deal with the world as we find it, as it is, not as we'd like it to be, either beyond our borders or within the beltway.

In the current political environment we are not likely to return to levels of spending favored by the most ardent defense proponents in organizations like AEI, on the Hill or, frankly, in the Pentagon.

Now the budget plan announced Monday would provide $115 billion more over the next five years than sequester level funding. We think it is a realistic proposal that reflects strategic imperatives as well as the resources the department might reasonably expect to receive, albeit with strong leadership and cooperation in the Congress.

If enacted, the changes will help remedy some of the damage already caused by sequestration, albeit with continued training and maintenance shortfalls in the near term and mitigate the impact of potential cuts in the future.

Now if the $26 billion provided by the administration's proposed opportunity growth and security fund is also approved for FY 2015, the military's near-term readiness picture improves significantly.

In all, the budget plan and associated proposals provide a sustainable path toward shaping a force able to protect the nation and fulfill the president's defense strategy, albeit with some additional risk.

As the department assessed our strategic environment, budget options and risks, we have drawn upon work from outside organizations; AEI has made some important contributions to our understanding on all of these issues.

So I'll dive into a couple of areas most frequently debated and then close by addressing one overriding concern, sequestration, on which we should all be in violent agreement.

There was a recent exercise in which AEI and three other think tanks presented alternatives to the department's budget and QDR; given concerns about potential near-term threats, the department's budget plan put more of an emphasis on recovering and protecting readiness.

But otherwise, there was a good deal of overlap with the overall thrusts of your recommendations. We found that in order to ensure adequate funding for new procurement, research and development there was no choice but to also reduce force structure.

Now, to be sure, shrinking the future military contains real risks, as a smaller force, no matter how ready or technologically advanced, can go to fewer places and do fewer things, especially when confronted by multiple contingencies or a scenario in which mass is required.

However, attempting to retain a larger force in the face of potential sequester level cuts would create, in effect, a decade-long modernization holiday on top of the program cancellations and delays already made.

And while the odds of a major conflict against another technologically advanced military power are relatively low, the consequences of being unprepared for such a contingency could be catastrophic.

We also have to consider how these cuts to investment funding would impact the viability of America's private sector industrial base, a national strategic asset ignored at our peril.

In the recent budget decisions, we were guided very much by the lessons of past major drawdowns, after World War II, Korea, Vietnam and, to a less extent, the Cold War. In each case the U.S. military kept more force structure than could be adequately trained, maintained and equipped, given defense budgets at the time.

The Defense Department was thus forced to cut disproportionately into accounts that fund readiness and modernization; the worst example of this phenomenon was the hollow military of the 1970s.

That is why, for many parts of the military, Secretary Hagel chose to reduce capacity, the quantity of forces available for global engagement, deterrence and crisis response in order to ensure those forces were properly trained and clearly superior in arms and equipment.

I also know Mackenzie and others have written about the need to pare back the department's overhead costs, the proverbial back office. The idea being that squeezing more savings out of that back office could obviate the need to shrink the military further.

During last year's SCMR [strategic choices and management review], we did take a hard look at the vaunted Pentagon bureaucracy, the Office of the Secretary of Defense, service headquarters, joint staff, defense agencies and field activities and found that some reductions are necessary and some savings are possible.

However, achieving savings in the military's proverbial tale takes several years and produced significantly less in bankable savings than is commonly believed.

Furthermore, a SCMR analysis showed that DOD's headquarters structures comprise just over two percent of its personnel and 1 percent of its budget. When all is said and done, an enterprise of the U.S. military's size, complexity and global reach requires a substantial administrative and support operation.

But these back end functions can certainly be done more efficiently with less duplication, fewer contractors and with fewer executives, generals and admirals, plus their associated staffs.

And that is why Secretary Hagel announced last summer that he would cut civilian and contractor personnel from all headquarters by 20 percent. The total savings, however, are a fraction of the reductions required by either sequestration or frankly of the president's budget over the next decade.

The efficiency efforts extended to the services, their force structure and their operations maintenance as well, the Navy, for example, is pursuing aggressive cost savings initiatives, including reducing support contracts and achieving better pricing initiatives to maximize the possible size of their ship inventory; however, if these -- if these efforts generate fewer savings than planned and counted on in our budget, there will be little choice but to further reduce the size of the Navy's fleet.

Finally, I also know that the various reviews and resulting proposals of recent years have been criticized as mere budget drills or math, not strategy. And when confronted with major spending cuts, especially on the scale and schedule of sequestration, there's no avoiding the imperative to seek savings -- and fast.

Yet, I would suggest that the notion of crafting a strategy totally devoid of risk and totally disencumbered from resources is a logical fallacy and historical fiction.

For starters, a relevant strategy is not a set of goals and preferences put together on the assumption or hope that the money would just follow. In reality, strategy requires a symbolic relationship between resources, outcomes and courses of action.

In the real world, our military is provided with a certain level of funding, as was the case in each of America's major conflicts and during the riskiest periods of the Cold War as well.

As analysts and, yes, strategists, we do an assessment of what this will buy and what the options are. It is an iterative process. These results are then linked with the major defense priorities as outlined by the president.

Each strategic element informs one another on the path to final decisions. The result of this feedback loop is a strategy that is neither budget driven nor budget blind.

Remember that even the largest defense budgets will have limits. As will our knowledge and ability to predict the future. So they always contain some measure of risk.

When talking about risk in the Pentagon's sense of the term, at issue is not the ability of the U.S. military to prevail against any adversary, but how long it takes and at what cost: material, financial and human.

That does not mean, however, that we can ignore or rationalize the strategic consequences of slashing the resources available for national defense. If we don't like the strategy that results, then additional funding is required to allow for a different set of tradeoffs and lower levels of risk.

For this budget plan, we added $115 billion above current law in order to have a reasonable opportunity to fulfill the president's strategic priorities, albeit with higher risks for certain military missions.

This brings me to the specter of sequestration slated to return in current law in FY 2016. As a result of the last few months of analysis, we were able to identify with some precision what the post-sequestration military would look like over the next decade.

That means significantly fewer Navy ships, including at least one less aircraft carrier, dropping the Army down even further to 420,000 active duty soldiers, cutting more Air Force squadrons, delaying or curtailing the purchasing of joint strike fighters and other platforms critical to U.S. air superiority and shorting combat units of spare parts, basic maintenance and the ability to conduct complex, realistic training.

So consider the kind of military and most significantly the kind of world that could follow several years of sequestration. The U.S. could not respond decisively to simultaneous aggression by two states, thus inviting military adventurism by potential adversaries.

Our forces could not deploy quickly and in strength to respond to disasters overseas or other contingencies that require America's leadership. Some allies and partners would be more likely to hedge their bets and cut side deals with their larger and more aggressive neighbors.

And finally, America would remain the world's leading military power, but would no longer be the guarantor of global security that can be counted on to protect our values, interests and allies.

These are the kinds of scenarios we need to consider, the kinds of discussions we need to have. After looking at these issues carefully, analytically, with real data for many years, as CAPE director and most recently helping Secretary Hagel through this latest budget review, I know this much: pretending that a return to sequester is not harmful is the most harmful thing that we can do.

There needs to be a serious national dialogue on what a sensible, sustainable and strategically sound defense budget looks like. We believe that we have proposed that budget this year.

If our elected officials and body politic conclude that they truly want a diminished role for the U.S. in the world, then we can start paring back missions and ratcheting back the corresponding military investments in force structure.

But as I wrote a few months ago after leaving the Pentagon the first time around, let's drop the illusion that efficiency nip and managerial tuck the U.S. military can absorb cuts of this size and of this immediacy without significant consequences.

As defense leaders, we must prepare our institutions for leaner times and we must make sound choices. The country as a whole, including its elected leaders, need to understand the strategic and human consequences of reducing drastically the resources available for national defense and in so doing reducing America's role in the world as a global power and a force of stability.

It is up to all of us in government and out to make the case and make the choices necessary on behalf of the men and women in uniform for our country's security and credibility as a global power.

So thank you again for this opportunity to speak with you. And now I look forward to your questions. (Applause.)

MODERATOR: Thank you so much. I'm going to just briefly kick it off, because we are still going to get Ms. Fox out of here on time this morning with the snow. She is very generous and is a busy woman.

So thank you for those remarks. It's very enlightening. I agree with you where -- I think we're in violent agreement on pretty much everything.

If you could, we spoke yesterday at the Pentagon in another enlightening conversation with the secretary. And if you could clarify, perhaps, a little more, not just for me, but I think really for the audience.

There's two budgets, but there's really one FYDP [future years defense program] coming over. Is that -- that's correct?

But in that budget that's coming over, that's slightly higher, the $115 billion that you outlined, there are basically off-ramps for policymakers and for DOD therein. Some of them are in and some of them are out, however, but you still have a long list of options that you can pull from.

So it may not be clear to policymakers right away. You know, so, for example, you clarified yesterday at the Pentagon that the -- it's in a consequence of sequestration that it is an Army that drops to 420,000 active duty soldiers. That is built into the budget. Now you hope that you do not have to do that, and I understand that.

But then there are other things like the aircraft carrier that are in the budget, but you could take it out if you need to or if funding does not materialize.

Could you please walk through a little bit more for everyone on what's baked in and what's baked out of this cake?

DEP. SEC. FOX: Yes. I think that is we tried harder, we couldn't have made this budget more complicated. So -- (Laughter) -- it is very hard to explain.

So there are actually multiple budgets embedded in this submission, so maybe I could just walk through the list, even a little more than I did yesterday, if that would be OK for this audience.

So first of all, we will include a description of the force that I just kind of touched on in my remarks, of what the sequester force will look like. We -- actually the services produced POMs at sequester level -- for the first time. So that is the first time we actually have the detail necessary to clearly show, OK, do you like this picture? If you do, then keep going on the sequester path.

And that will be not submitted at budget level detail, even though we have that at the Pentagon, but a description that's included in the budget.

So then that brings me to the actual budget, which has sort of two budgets in it. So we did this planning. And as I said in my remarks, complex force structure takes time to get out and is really hard to plan for.

So bringing the Army down smartly, not the way we've done it before, creating the Swiss cheese Army, but an Army that remains capable as you bring it down, is hard. It takes a lot of time and a lot of planning. And the Army and the Marine Corps both did that planning.

And so we left that in the budget. But we know where the off-ramps are. So if we get assurances that we're going to the president's budget level in '16 rather than sequester, we'll plan that off-ramp. And we'll put that into the budget submission next year and the year after.

The aircraft carrier is another one. We have to take the carrier out at sequester. Again, you have to plan refueling and yards and all of that planning, and the Navy did all of that planning. So, frankly, that planning is still in the budget.

But in '15, we'll kind of hold. We won't take the people out; we won't take the air wing out. We'll put the ship in the yards and start the actions that you would take, whether you're going to refuel it and put it back in service or take it out of service.

So we have time. Again, if we get some assurances that the budget's going up instead of down after -- in FY '16, we'll keep the carrier. If, however, we go back to sequester, we really have no choice.

Now, it's true; the budget is higher. It's $115 billion higher. So what we tried to put in there are things that we could reverse more quickly than the kinds of really complicated things I just mentioned.

So programs, do we just cancel, like Global Hawk Block 40? Or parts of our structure you would just take out immediately, like the KC-10s. Or, unfortunately, readiness, which we've put a lot of investment in in the $115 billion that, again, you would just have to stop doing?

It's a complicated story, as I said, and I thank you for the question to give me a chance to at least walk you through what we've tried to do.

MODERATOR: I will just offer one comment in sympathy to you and your colleagues. You know, as sequestration hit in FY '13, last year, and then the comptroller sent over his report and there was one other from the Pentagon last summer, but you were coming off the continuing resolution and sequestering and then there was a budget, finally, and then there was sequestration -- or maybe I reversed the order. But they all three came in rapid succession.

And it is very -- just to even look back at a year ago, it is very complicated to get a clear sense of what the impact of last year's sequestration -- so I know we're talking about the moment and looking forward to 2015.

But when I try and look back and if we have trouble at the think tank, I know Congress really struggles with this to be -- to be sure.

So I would just say in great -- in great sympathy to you that this is a very cloudy budget picture and my only worry is that because it's so complicated, again, it is hard to get Capitol Hill to be sympathetic, as sympathetic as we are, because it is very, very confusing. And I know that's not your fault.

One quick question on your Navy remarks.

You mentioned just very specifically in the comments -- and I know it will be of great interest to the audience and to Washington, that if there aren't certain -- I believe it was multiyear contracts that -- or certain savings that you get out of certain contracts in shipbuilding, in particular, that you would have to make other decisions to -- just to free up funding, could you elaborate just very quickly on that, please?

DEP. SEC. FOX: So it's actually a broad package of acquisition related efficiencies that the Navy has proposed this year. So, I mean, you've pushed on efficiencies; we've all pushed on efficiencies. And I think we have booked a lot of efficiencies, you know, $200 billion to date; we've got another package in there this year. And so we think efficiencies are important.

But when it comes to acquisition efficiencies, it's difficult to count on them, right? You want to have efficiency because you're going to be tougher in your contract negotiations or you're going to get more stability and be a partner with industry. Or you're going to live with fewer support contractors and you've got a plan.

The Navy did some really detailed work on that this year. And they have projections. And they're -- and we're excited that they did that, because if the whole department could do that kind of thing, we could do even better with the money that we have, which is obviously the goal.

But I did want to mention that we're counting on those predictions. They were able to keep force structure slightly higher than what we predicted in the SCMR because of those efficiencies.

So it reinforces the points you've made on the value of efficiencies. The more efficient we can get, the more structure modernization we can keep; obviously, a good thing. On the other hand, there's a bit of a gamble there. And I'm just excited the Navy's given it their best shot. We're going to -- Secretary Kendall and I looked at it hard and we're fully in support of them and hoping their successes will migrate across the whole department.

MODERATOR: That's fantastic. We will be watching that closely.

We're going to open it up for questions from the audience.

And we'll start with George right up here, and we have about 15-18 minutes.

Q: (INAUDIBLE)?

MODERATOR: Yes, please.

Q: Oh.

MODERATOR: I'm sorry; yes. Please wait for a microphone.

And if you could stand and let us know your name --

(CROSSTALK)

Q: I'm George Nicholson from the Policy Consultants Counterterrorism Special Operations. I was on Capitol Hill yesterday for the Senate Armed Services Committee before Senator McCain put the hold on Bob Work's nomination.

One of the questions is in your inputs into the budgets and concerns, the concern about retiring the A-10, which the senator from New Hampshire is adamantly against, Senator Blumenthal says you will reconstitute a combat rescue helicopter program.

The issues right now, with the Army's big battle they're having, reducing the Guard, both in the Air Force, that with those inputs, if those change, what kind of impacts are those going to have on the budget?

Where is the money going to come from?

DEP. SEC. FOX: So thank you for that question. I -- this is our annual challenge and has been, frankly, since the first $487 billion reduction in budget.

We take what we -- I mean, we work very hard in the department, as I know this audience appreciates, to take a holistic view and it's a -- it's a tightly crafted package where it -- you know, if you don't get this, something else comes out. And then it goes to the Hill and they take it piece, piece, piece. And they don't have that.

And I wish I had a magic solution. All I can say is we are going to do everything in our power to explain those tradeoffs. If they force, as they have, every year, us to keep things that we don't want to keep, something else happens. And we are at the point, even with the $115 billion additional, that there's very few places it can come out.

It ends up coming out pretty much of readiness or we end up slipping and sliding and making our programs even more expensive.

We are up there, trying to make that case. I'm trying to do a lot of that myself, because I've done a lot of the analysis behind these things for the Guard, for example.

The secretary asked me to establish a tiger team with the Guard and the Army to put together the facts and come up with a balanced, fact-based rationale behind all of our -- of our reasons. And we're continuing to work with the tags to see if we can't come together on this and not fight ourselves and kick it to the Hill.

Things like that, we're working as hard as we know how. But, frankly, we also need your help. If anybody here could help us make the case that you take -- if you -- if you force us to keep something we don't need, something we need, we're at that point where the -- there's not slop here. We have to take it out somewhere else.

Thank you.

MODERATOR: Absolutely, of great interest to AEI as well.

Richard?

There's a mike.

Q: Thank you, Richard (inaudible) from the British Embassy.

You mentioned the upcoming QDR and with the degree of budget uncertainty that you set out -- and I've very relieved to hear you describing it as complicated and slightly opaque. But there does seem to be some uncertainty what sort of budget you could base a strategy on. And obviously it's not done that way 'round. But clearly you need to have a strategy which is at least resource informed.

Can you give some sort of indication of the thinking of how your QDR can come out, given that extent of uncertainty?

DEP. SEC. FOX: Absolutely. So QDR, as I know this audience knows, is supposed to be fiscally unconstrained. It's the strategic aspirations of the department and the -- and we didn't do that. I mean, that's just the bottom line. We took a -- we made a choice to make this QDR fiscally constrained.

I think of this QDR as the QDR that seeks -- looks to achieve the defense strategic guidance slightly refreshed. But in a sort of resource informed, more austere way. And to articulate clearly what we would do, what the geostrategic context is for that today, again, updated since the DSG came out two years ago, and then looking at what the resources, as I've pretty much just laid out, will support and where the risks are and then a little bit on sequester.

So QDR tracks very closely with the kinds of remarks that I just made. And we did it in that iterative way because we really didn't want to put forward in this QDR view of the world that that just didn't match the reality that we're living.

Q: Christine, this is great to hear.

I'm Mitzi Wortheim. I'm with the Naval Post-Graduate School.

DEP. SEC. FOX: Mitzi.

Q: One of the things that has struck me in the last two years is the importance of storytelling. And what I find is people who are a part of the inner circle when they write it, they can understand it. They don't test it.

I mean, in many ways, it's kind of like the problems we had with the health care. They didn't go out and see if it worked for those at the bottom who are gonna have to use it.

And I guess my suggestion is, you might want to bring a random collection of people together to look at it, to see what they don't understand.

I just went through something like this last week with a Navy admiral, who was gonna make a -- and, all of a sudden, when he presented it, the audience got it. And so, it makes a real difference, doing those tests with people who don't understand the detail.

DEP. SEC. FOX: That's a terrific suggestion. Thank you for that.

And we should do that. I'm gonna take that back. Because we aren't communicating. We were not able to communicate the impact of sequester last year, because we talked about readiness, and nobody knows what readiness is.

I had the opportunity to do an NPR interview, and I knew -- my great staff helped me, saying, "They're not gonna understand what readiness is. If you use readiness, it's not gonna communicate."

So I talked about, you know, having your teenager drive to Ohio in a snowstorm. You want to make sure they can drive. You want to make sure they can drive in snow. You want to make sure their car works, and that it's been serviced and if it breaks down, they've got a spare tire.

That's what readiness is for all of our ships and airplanes and tanks and so forth.

And it's like, oh, that's what readiness is.

So it worked. A little longer than the word, you know. But -- but I think those kinds of points that you're making is so important, and we forget it, because we go into Pentagon speak. And I get it.

So I think trying out our story on these particular parts with outside groups is a terrific idea. So thank you, Mitzi.

MODERATOR: To your point, as we await more questions, I was -- I was thinking about our conversation this morning and yesterday, getting ready to come over here. And I was literally -- I'm so frustrated with the Pentagon's inability to get to yes with Congress on so many of these decisions. Kind of with the first question in the audience.

And it's not just -- it's not just -- people focus on the hardware, but it really is -- it's about the National Guard. It's about retiring fleets of aircrafts and ships and other air priorities.

And I was thinking in terms of what -- what would that be like -- and I haven't given this enough thought, as you'll find out, but my three-year-old son, I thought well, what if I take him to the hairdresser and I say, "You need to cut an inch off of his hair, but you can't take any off the front, the back or the sides, just the top."

I mean, because basically what Congress is telling the Pentagon when they send the budget back to you, they say, we're gonna fence off anywhere from half to two-thirds of this budget that you can't cut, even though you've proposed cutting from virtually everywhere, except the one-third that is military personnel compensation in particular.

And so, again, I sympathize. And I understand the messaging component to this. And it's something we give great thought to here at AEI.

Do we have any more questions?

Q: Thomas Risberg. My question has to deal with right now -- and I think you acknowledged that our conventional forces are in the near term gonna be superior to any of our adversaries. And so, what you're really looking at is terrorism, cyber-warfare, and other kinds of asymmetric tactics.

And yet, we talk about, you know, needing, you know, an extra aircraft carrier or other Joint Strike Fighters.

And I was wondering, is there discussion there that in putting money into current weapon technologies that are probably, you know, built for an enemy that doesn't exist at this point, is that gonna hurt us 20 years down the road when a conventional adversary, such as China, may arise?

DEP. SEC. FOX: So, the -- sort of said another way, are we living in the past with our force? Should we move to the future?

And, boy, we debate this a lot in the Pentagon, as I'm sure you can imagine.

So, we have to move to the future. And the budget does protect submarines, for example. The -- we actually took out more Air Force structure than we would like to protect the new long-range bomber. And we are protecting cyber, we're protecting SOF.

So the aspects of the force that we see as clearly vital for the future are protected.

But the things like the aircraft carrier, you know, we thought in the SCMR, we'd have to go down to nine or maybe even eight with sequester. And I think that your study also took the carriers down more.

The outcry of going to 10 has -- I mean, I've not had any more calls on anything than that.

And I am, by my own admission, an aircraft carrier analyst myself. So I -- I have a lot of experience with this. And I get it. It's an incredibly important capability of the force. It's a huge symbol.

Look at how China's announcing that they're trying to push up their aircraft carriers.

So, you know, here's the poor president. We're putting him in a position where he's gotta look our -- the global community in the eye and say, "We're bringing carriers down," at the very time China's trying to build them. OK?

But the point you're making is spot on. It -- we have to think about keeping that platform viable for the future. If we're gonna keep it and we're gonna have it and we think it's important, then it's gotta be able to play.

And, you know, it's not the first time that carriers have had this problem. In the whole -- in the whole Cold War, the Soviets put enormous energy, enormous money into taking out the aircraft carriers and the strike groups.

And that's how I cut my teeth in this business, is figuring out ways to make it survivable. And we did. Actually, we did an awful lot in those days.

Now, none of those things would work in today's world, but we have to be creative again.

We are so used to dominating at sea and in the air, we don't spend anywhere near the money we should on enablers, like electronic warfare and deception and other things like that, that can make a huge difference.

And in this budget environment, we can actually afford things like that.

So we need to be more creative, so that's point one.

Joint Strike Fighter is another program that -- that suffers, I think, from the same challenge, of how can we talk about shorter range TACAIR in a world where they're pushing us further and further out.

And I think that the same point comes in there. We have to make -- recognize, JSF is the only jet that we've built that is built from the ground up to be survivable in a challenging EW environment, for example.

That's a tremendous capability. We haven't even started to figure out what we can do with that capability.

And there are phases to any conflict. The early phases may not be able to use your JSF. Maybe you're just in your long-range bomber. But eventually, you can get in there. So we have to think of it across the spectrum.

But I think your point is very good. And we're -- it's not lost on us. We have to make sure that the platforms we have today can work tomorrow. And we are preferentially trying to protect those investments in our budget.

MODERATOR: In fact, what we did briefly at the CSBA exercise, which last summer, as Ms. Fox knows, we conducted a shadow strategic choices and management review, and then we had the opportunity to discuss that with you. And then this winter, it was a shadow 2015 budget/QDR.

And what we found at AEI basically was we had to cut further than sequester levels in the budget year that you're in, so that you could free up money to make investments in electronic warfare and other enablers, like she talked about. Combat logistics was another high priority for us as well as space and satellite, et cetera.

So you even -- you take things down even further than sequester asks for. It's really a difficult situation, and all the more reason why you're looking for the additional help in funding.

DEP. SEC. FOX: Thank you for saying that. That is very true, and very few people understand that.

Q: Hi, I'm Mary Walsh with CBS News.

I wonder if you could expand on your remarks drawing down the Army smartly. You have a force now that is highly skilled in combat. And I was recently at some training.

And when you have combat veterans conducting training, it's a -- it's a totally different game out there. Yet, it's those seasoned combat veterans that are potentially the ones that will be taken out of the Army, or forced to retire or just leave the Army.

So how do you draw down the Army smartly?

DEP. SEC. FOX: So, the Army is extraordinarily capable right now in counterinsurgency operations, for example.

One of our challenges for all the force, not just the Army, is that we have to rebalance the force towards full-spectrum operations. So we actually feel that, in addition to the challenge that you rightly raise, we have to actually add readiness investments to the Army to help them recover their full-spectrum capabilities.

And, again, where -- you're talking about the Army, but this is a readiness challenge we face across the entire force.

So as we bring down the Army, we want to have the money to keep the Army we have at that time ready and repurposing for a globally available force, on any type of conflict.

So we need to keep those seasoned combat veterans. We can't let them just leave the force.

If we were to be sequestered and we took the Army down immediately, we would lose all of those people, just as you suggest. And we would not have the money to -- to rebalance in the way that I described.

So that's what we mean by "smartly." While we have a force the size of that force, we want it to be capable. And then, next year, it'll get a little smaller. So we need that force to be capable, and so forth.

We aren't really gonna have the readiness dollars in the near years to keep the whole force capable. But we have to try to manage through that.

The quicker you take down the force, the more you break it, and you lose the very talent that you need.

The quicker you take down the money while you keep the force large, the less ready it is.

So it's a really tough set of tradeoffs. We tried to make the Army -- the Army has done all this very hard work, and that's why we left it alone, is how do you bring it down relative to the budget you expect to have, keep it as ready as possible, until you reach that end-state, where the money is enough to keep the force that you have modern and ready for today's world? That's just gonna take time.

And the more time that we have, the smarter we can do it.

Hopefully that answers your question.

MODERATOR: OK. We're gonna take our last three.

And we'll go here, here, and we'll finish here.

Q: Hi, good morning. Megan Eckstein with Defense Daily.

You spoke about the challenges of trying to cut from the tail instead of the tooth.

I wonder from DOD's perspective how you've looked at things like DOD schools, base operations, morale/welfare-type things. And then, from the services' perspective, kind of how they're looking at more battlefield setting type things, such as logistics and signals, and, you know, whether that's falling into tooth or tail as you're looking at where to cut.

DEP. SEC. FOX: So, we looked at everything. Everything is on the table, and has been for a couple of years now.

Schools, schools are on the table. We looked at schools. SCMR went from very benign efficiency initiatives all the way to very aggressive. That included the schools.

And then we turned it over to the chiefs and the joint staff. The chairman led a process and the vice chairman.

And they concluded that schools were really important to the quality of life of the military families. We move them around so much. They -- their kids are jerked out of school all the time. Some confidence that DOD is going to make sure we provide for their family's education was judged as important to the future force recruit/retain.

So we honored their perspective, obviously. I mean, the compensation package they've come up with is, frankly, hard enough.

So -- but we looked at it. And I just want you to know, we looked at everything.

Now, you talked about the logistics, and I would put things like depots and things like that in there. So, yes, we've looked at that as well.

And here's the situation. There are lots of things we could do and would actually like to do to reduce the base infrastructure, the -- we have about 25 percent more bases and installations than the size of our force would require.

That's why we've asked for a BRAC for 2017. And we've been told it's dead on arrival, but we need it.

To consolidate depots, to get efficiencies, you need a BRAC. So an awful lot of our identified efficiencies for logistics have to be part and parcel of a BRAC.

Now, we put BRAC in the budget. In the early years, it costs money. In the later years, it saves.

So in this FYDP submission, with BRAC starting in 2017, it's not a lot of savings in this FYDP. But we put the money in to pay for a BRAC, because we feel that we need it so badly for the very reasons that you suggested.

MODERATOR: Thanks.

Right here, up front?

Q: Hi. My name is Sungchul Rhee . I am a journalist from South Korea with SBS Seoul Broadcasting System.

I ask a question from an international perspective. First, how the reduced number of years Army troops would affect -- affect the presence in East Asian? Now, 28,500 troops are stationed now.

Second question is, Secretary Hagel said that he's gonna -- he wants to substitute U-2 reconnaissance aircraft with Global Hawks. And, this is a technical question, do you want the allies to contribute to -- to substitute the U-2 with their own Global Hawks?

DEP. SEC. FOX: So, the importance of our relationship with Korea and the importance of our commitment to South Korea and the troops on the peninsula is not affected by our plans.

In fact, it was one of those strategic imperatives as an input, as we sized the Army, and other forces, for that matter.

So there will be no impact, at all, on our agreements or commitments to Korea. And we made sure of that as we went through.

The challenge for the smaller Army, at 440 to 450, we believe it's manageable. Of course, General Odierno would prefer more flexibility. But it gives him enough flexibility to meet the requirements that any Korean contingency would require and sustain our commitment to the forces on the peninsula and protect the homeland and do something else.

But the smaller the force, the less else you can do. But it wouldn't -- it's not Korea. Korea is set and was an input.

On U-2 and Global Hawk, I think, just generally speaking, any time that we can work closely with our allies and share capabilities and equipment, it's a good thing.

And so, we've been, I think you know, back and forth on the U-2 and Global Hawk Block 30 decision. And I would say that it has always been a close call.

When we looked at it this year, the operating and sustainment costs of the Global Hawk Block 30 have come down. They've come down significantly. And the contractor, I don't know, perhaps because we said last year we weren't gonna keep it, helped be very aggressive to help us get those costs down, and we're appreciative of that.

Of course, the Air Force has worked it very hard themselves, so I don't want to take away any credit that's deserving to the Air Force for getting those costs down.

With those costs down, it makes sense now to keep the Global Hawk Block 30. And our -- the implications of our -- to our allies is something I look forward to working with you on.

MODERATOR: Thank you.

Very quickly, last question, please.

Q: Hi. This is (inaudible) from TV Asaki (inaudible).

It's a similar question, but more widely.

Secretary, did I hear you say and you also mentioned the Pentagon will continue to shift its operational focus to Asia Pacific.

And so, I wonder, what kind of impact will this budget outcome have concretely on the region, especially East and Southeast Asia.

Thank you.

DEP. SEC. FOX: So, if I understand the question, you're asking about our strategic imperative to rebalance to the Asia Pacific AOR, and does this budget support it.

And the short answer is yes, just as our commitment to carry on plans for Korea was an input to the budget, so was the rebalance.

We intend to continue to do a lot of the things that we're already doing. For example, the Marine Corps are deploying to Australia and doing operations in Australia for the first time in a very, very long time.

We're continuing with putting LCS in Singapore. We've got two there, and two more are going.

We -- our national leaders, the president and the secretary both, are making numerous trips to the Asia Pacific AOR.

And with regard to the kinds of critical capabilities that we need to operate successfully in that region, now and in the -- in the far term, as I've already mentioned, we preferentially protected those kinds of capabilities, like submarines and the bomber and so forth.

Sixty percent of our fleet is oriented toward the Asia Pacific AOR, and in the future.

So I think that the rebalance to Asia is very real. I know it -- because a continuing question and concern, what are you really doing? Isn't this just lip service?

No, not from our regard. It's a part of everything we're talking about, from managing the secretary's travel plans to the inputs that we made to the budget.

MODERATOR: That's a great question to conclude with.

And you know that I've learned so much more about the defense budget, spending this time with you. And I want to thank you so much for your time...

DEP. SEC. FOX: Thank you.

MODERATOR: ... your willingness to take questions from everyone this morning.

DEP. SEC. FOX: Thank you.

MODERATOR: Thank you all for coming.

And, once more, let's thank Secretary Fox. (Applause.)

DEP. SEC. FOX: Thank you, guys. It was a great pleasure to be here.