Deputy Secretary of Defense
McAleese/Credit Suisse Defense Programs Conference
I have to say that as I look at the list of speakers coming this morning – and I have to find out what your secret sauce is. Whenever I call a meeting, I usually get the fourteenth special assistant to the principal. It just seems like you get all the principals -- so I’m going to have to get your secret.
I want to play out for you today, this morning -- in a very short period of time, because I want to get your questions -- some of the strategic assumptions on the major budget and programmatic decisions that we made in the president's F.Y. 2016 Defense budget. And to the degree possible, give you some direction as to where the Department thinks it's heading in terms of modernization, which I think is of great interest to this particular audience.
Now, two weeks ago, Secretary Carter went before Congress to present our budget. And our base budget is for $534 billion. The press has noted that this is $36 billion above F.Y. 2016 enacted sequestration caps and about $38 billion, or 7.6 percent above the enacted 2015 level. Now, this is only the first year, of course. We have a five-year Defense program. And if you add up all of our planned spending over the five years, we're $154 billion above sequestration level caps over the five years of the FYDP.
In addition to the base budget, we're asking for about $51 billion in OCO. We were able to present our OCO budget, our overseas contingency operations budget, simultaneously with our base budget. This will support our campaign against ISIL in Iraq and Syria, ongoing operations in Afghanistan, other operations in the Central Command area of responsibility to include the Horn of Africa, and the Gulf.
Now, we believe strongly -- very strongly, that this funding request is needed to recover the readiness that we have lost over the last three years. And, most importantly, to start investing in long-deferred modernization programs. And, of course, to meet the unrelenting demand that our joint force is trying to meet around the world.
Now, we've seen repeatedly over the past year that America remains the global security responder of choice. In concert with our NATO allies, we've responded to Russian aggression in both Crimea and Eastern Ukraine. We formed an international coalition against ISIL, upwards of 60 nations. And we're leading a global response on the Ebola crisis in West Africa.
Now, all three of these contingencies come on the top of an unrelenting pace – a demand for our forces is just unbelievable. We have our ongoing mission in Afghanistan. We have ongoing negotiations on Iran, on its nuclear program. We're facing China's provocative activities in the Eastern South China Sea. We're dealing with global cyber-attacks of a stunning nature in terms of their number and their severity, that culminated in the hack of the Sony networks. And what's readily apparent to us from all this activity is that the global demand for U.S. forces is not going down. So, people who would say, "Well, let's just cut the defense budget" -- what they're saying is, they are willing to take less activity in the world. And we just don't see that activity stopping.
We have a particular demand for deployable headquarter units. Army division headquarters are essentially all committed. Intelligence surveillance and reconnaissance assets are completely tapped out. Our missile defense naval and aerospace forces are going as fast as they possibly can at a rate which prevents them from really practicing full spectrum combat operations. So, our global operating tempo is just unbelievably high.
Now, given these circumstances and this very volatile security environment, we are constantly trying to scrutinize our strategy, our force structure and our global posture. We're always trying to ask ourselves, "Does this align with what we see happening in the world and the demands being placed on our joint force, and if we're managing to keep pace with emerging threats?"
At this point, we have concluded that the five strategic priorities of the 2014 QDR remain sound. They are rebalancing to the Asia-Pacific region. We will continue to do that. We will maintain a strong commitment to the security and stability in Europe and the Middle East. We will continue to do that. We will sustain a global counterterrorism campaign primarily through our partners. We will continue to do that. We will continue to strengthen key alliances and partnerships. And, five, we want to prioritize key modernization efforts.
Now, we recognize that the assumptions underpinning each of these particular priorities have to be continually evaluated, and in two areas, primarily. One, what is going to be required to maintain security in the Middle East and Europe? We have to ask ourselves, were the assumptions we made last year really the correct ones? And those assumptions are going to have the biggest impact on the size of our force and what we call our force planning construct. And the second thing is that fifth priority, modernization. I'll get to that in just a minute.
Let me talk about our force-planning construct. It calls for a smaller force. When you have less resources, you will get a smaller force. But we want it to be technologically advanced and highly ready. And it has to be able to defend the homeland, to carry out a global counterterrorist campaign, and to deter aggression and assure our allies through forward presence and engagement. Now, if deterrence fails, we call for the joint force to be able to defeat a regional adversary in what we call a large-scale multi-phased joint campaign. Think Desert Storm -- something like that -- where all aspects of the entire Defense portfolio coalesce and are used in a multi-dimensional campaign to defeat an adversary. And at the same time, we want to be able to impose costs on an opportunistic aggressor in another theater. In other words, we want to retain the ability to do things -- two things simultaneously, but the second thing will not be a large-scale multi-phase campaign. It will be something lesser than that.
Now, as of right now, based on what we see, we think that the size of the force we planned for last year, PB 15, essentially is broadly sufficient to need, with the key exception of intelligence, surveillance and reconnaissance (ISR). We simply underestimated the continued demand. One of the assumptions we made last year, as we pulled out of Afghanistan -- a lot of ISR assets that were there would be able to be used in the global pool. They quickly got sucked up in the unexpected campaign in Iraq and Syria. And the demand for ISR of all types remains very, very high, and continues to outstrip our supply. So, with that key exception, when you look at some of the things that we asked for in 2016, the force structure that we offered in 2015 is going to look very, very familiar to you.
And we think we can execute the strategy with those five priorities at manageable risks, at least at this point in time, and with elevated levels of risks in some areas. But we have said over and over again that any significant reduction below the president budgets -- the president's budget level for 2016, or a broad denial of the reforms we are seeking to free up the resources internally within the Department of Defense to pay for some of the higher priority things, would mean the risk to our defense strategy would become unmanageable. And, quite frankly, we believe we're on the ragged edge right now.
Now, we've arrived at this state after several years of declining defense budgets. Depending on how you cut it, I think the defense drawdown started in 2008. That was the highest wartime peak, including the base budget and the OCO budget. Other people would argue that the drawdown started in 2010. That was the height of our base budget. But that means that the drawdown happened relatively quickly, about 23 percent off the wartime peak in a very short period of time.
And throughout this, demand did not stop. In fact, demand is remaining very high. And as a result, we believe all the slack has been taken out of our Defense program. There's really no place else to go. Unless you start making fundamental changes to the assumptions of those five priorities.
And this is primarily because, as you know, personnel costs have been going up. I would commend to you a report by the Center for New American Security, which is a primer on personnel costs. And even though our in-strength continues to go down, our personnel costs went up by nearly $2 billion this year. It's because personnel costs continue to outstrip the rate of inflation. And the same thing on our O&M costs because we have a largely older force and it's harder to maintain it.
So as Secretary Gates said as early as 2010 and 2011, we need about 1 to 3 percent real growth each year to maintain a balance between personnel costs, modernization costs and other infrastructure costs. And we're out of balance right now, we're out of whack. The Murray-Ryan BBA, the Bipartisan Budget Act, was really good for us as it was above sequestration levels, but it didn't quite give us what we thought we needed, it gave us stability for two years, which was something we really needed at the time after the punch in the gut of the FY 2013 sequestration hit.
But we've been at flat budgets for three years, so if you believe Secretary Gates, and I do, that if you need 1 to 3 percent real growth each year to kind of maintain a balanced budget, and we've been at flat budgets for three years, then something's giving, and what's giving is the modernization cuts. We can't control demand, the world sets the demand. So we have to pay the O&M and readiness costs to make sure that our forces are ready, because the one thing we are not going to do is send unready forces out into the fray.
And we have to pay our personnel costs; there's a lot of fixed costs. So the place that we have been taking risks are primarily in two places, in investment broadly. But modernization accounts as well as infrastructure accounts. Now, we've been working hard to try to handle this problem ourselves. In FY 2015, we proposed a package of compensation reform, designing to slow the growth of personnel costs. We also tried to eliminate less capable and less flexible platforms such as the A-10, the U-2. These are great platforms. If we had money, we'd probably want to keep them around longer. But as the budget goes down, we need more capable systems.
We proposed a new modernization plan for our guided missile cruisers. We proposed another BRAC round a base realignment and closure round. All in an effort for us to become more efficient and use Defense resources more wisely so that we can put money back into the modernization account.
So far, however, Congress has been reluctant to accept these reforms generally, and they've largely rejected most of them. So we can't do a lot internally without being able to do a BRAC, for example. That's $2 billion that we think we're just leaving on the table. BRAC we believe would save us a minimum of $2 billion a year recurring. Well, it doesn't sound like a lot, but it would buy more EW systems for us, possibly more preferred munitions, maybe help another -- I mean, a program that's under stress.
Now, making matters worse, in order to retain force structure capacity and to provide ready forces for overseas deployment, the force -- the services have consciously started to move money out of the modernization accounts. We saw this in the '90s, we're seeing it again. In a drawdown, since you have to pay the forces and you have to keep the readiness up, modernization pays the price.
They couldn't afford essentially the capacity that we're asking them to maintain to support the strategy and the capabilities they need to make that force modern. So the bottom line to everyone in this room and to all American citizens is because of the budgetary uncertainty we've been faced with and the restrictions imposed by Congress, and because of our focus on readiness and the unrelenting demand for forces overseas, we have been chronically underinvesting in weapons and new capabilities.
Now, I know that gives everyone in this room pause, but it should give every American citizen pause because every national defense strategy that we have had since the beginning of World War II is based on an assumption that we would have technical dominance over our adversaries in a broad way. Looking back on the good old days of the '90s, if you can call them that, we enjoyed conventional dominance across the spectrum. Our global command and control network was unparalleled and it really wasn't under any type of a cyber attack threat. Our space assets, which provided us the ability in a simple theater-wide battle networks, weren't really threatened.
We enjoyed freedom of access on the land, in the air, on the sea, under the sea, in cyberspace. In contrast, we have potential competitors all across the spectrum, developing capabilities and challenges in all domains. Our space assets are now at more risk than they have ever been. Our global command and control system is at more risk than it has ever been. Several nations are developing capabilities that threaten to erode our ability to project power over trans-oceanic distances, which is what makes us the only global military superpower. The so-called A2/AD capabilities, include advanced anti-ship and anti-air missiles, as well as new counter-space, cyber, electronic warfare, undersea and air attack capabilities. We are seeing levels of weapons development in other states that we have not seen since the mid-'80s, when we faced a near peer military competitor in the Soviet Union.
So there's no question that U.S. military technological superiority is beginning to erode. It's directly related to the amount that we're spending in R&D and modernization. So in 2016, what you will see, some of it will be visible and some of it will be not visible -- will -- won't be visible, is we really move to aggressively re-address some long-term modernization to stay ahead of our competitors to prevent potential adversaries.
Now the White House really helped us out in this regard. They approved $21 billion in additional recent requirements. All of the requirements were in generally investments and high priority and high technology investments. This came with added funding. That's why we're at about $154 billion over sequestration caps. And it has allowed us to make targeted investments, again, some of which are very visible, some which are not and space control, launch capabilities, missile defense, cyber and advance sensors, communications and munitions -- all of which are designed to help keep the erosion of our military technical superiority in check.
The White House also added additional funding to help us modernize our aging nuclear deterrent force, which we will need to maintain until we bring on the new triad in the 2020s and 2030s. But we have a lot more work to do. We're addressing the erosion of technological superiority through a defense -- our department-wide defense innovation initiative. And we are trying to look for innovative ways to sustain our military advantage for the 21st century and to do so while we become a 21st century business.
Now these two goals remain hand in hand, by becoming leaner and a more efficient business, we can devote even more resources into R&D and the modernization program. This was exactly the thinking behind Secretary Gates' efficiency review, which he ordered in 2010 where he directed each of the departments to take 30 to 40 million out of tail and move it into tooth.
Now in that regard, he had two big things going on. You're going to hear about one of them later this morning, when Frank Kendall comes in and talks to you about Better Buying Power 3.0. I am leading a broad business process and systems review. We approached it as any business would. We asked ourselves what are our six primary business operations. It's human resource management writ large. It's acquisition and procurement management writ large. It's logistics and service contract management writ large, real estate property management, health care management and financial management.
Over a million folks in the Department are dedicated to those six business operations and we spent $134 billion a year to execute them, just on the management side. Now we brought in a team from outside the government. And they said, look, any businessman is going to look for 20 to 30 percent productivity improvement, if they can do it. I said, heck, I'll be happy with 10 percent productivity improvement. So that's what we're doing. We're going into every place and we're looking for productivity improvement. If we can get 10 or 20 or 30 percent, well, that starts to add up to real money. But the leading focus of all of this is to free up money and resources so we can put that back into modernization.
So we are trying to identify, develop and field breakthrough technologies and systems and develop innovative operational concepts to help us use current capabilities we have in new ways and the ultimate aim is to develop what we refer to as the “Third Offset Strategy” or more accurately “Offset Strategies,” because each of the various challenges we face are probably going to need a unique strategy to address.
Just as we offset the Soviets' advantage in numerical conventional forces, first with nuclear weapons, right after World War II and then in the 1970s, using stealth, guided munitions, battle networks, we will seek to identify new technologies and concepts that will keep our operational advantage firmly in our hands.
Now central to this effort is the Long Range Research and Development Planning Program. Before becoming the Deputy, I studied up on this, the LRRDPP of the 1970s. It's a fascinating story. It was a combination of commercial business and the Department. It led to the second offset strategy. And we are trying to do the same thing.
The LRRDPP is going to form the DNA and third offset strategy. And Frank Kendall is leading that effort. The first thing he's going to do is take a look at weapons we have right now and how can we use them differently. We just demonstrated targeting a ship with a Tomahawk cruise missile. We originally intended to have an anti-ship cruise missile with a 1 to 300 nautical mile range. But we have demonstrated the capability to fire at ships over a thousand nautical mile range. We take weapons that we already have and use them differently. Then we're going to look for promising technologies to pull forward quickly, hopefully, to make a difference in what we call the first FYDP. And then we're going to identify long range science and technology investments for those things that we can do in the second and third and fourth FYDP.
So we're looking at all sorts of disruptive technologies. And as everyone here knows, all of the technologies that are probably going to be associated with this offset strategy, whatever it turns out to be: robotics, autonomous guide -- operating guidance and control systems, visualization, biotechnology, miniaturization, advance computing and big data, advanced energetics. All of these things additive manufacturing and 3-D printing, they're being driven primarily by the commercial sector -- unlike in the 1970s when a lot of things we were pursuing like stealth and guided munitions were being driven by the government. So that means we have to devise new means of exploiting the commercial sector in more innovative ways than we have been doing in the past.
So the Third Offset Strategy is an open invitation to anyone in this room to come to the table, whether it's through Better Buying Power 3.0, whether it's through the LRRDPP, whether it's through innovative initiatives that you want us to take a look at, we want to creatively disrupt our defense ecosystem. Because we will either creatively disrupt ourselves or we are going to be disrupted by somebody else.
We are dedicating real funding to this effort. In the past several years, we were able to invest about $12 billion in our science technology accounts. We would like to increase those. And the FY 16 budget request creates a reserve account for these innovative technologies.
It also invests in some technologies that we really think will provide us a big advantage. We put $149 million in unmanned undersea vehicles in addition to what was already in the system. We put an additional $77 million in advance sea mines. We put $470 million in high-speed strike weapons. We put $706 million into rail gun technology. We put $239 more million in high-energy lasers. And Frank Kendall convinced us that we needed a new Aerospace Innovation Initiative, which is designed to develop a wide range of advanced aeronautical capabilities to maintain our air dominance.
The key thing I hear all the time, though, "Oh, you're off; here we go again; this is another RMA thing; it's all about technology." No, it's not. In the end, we take technology and we have innovative operational concepts to help blend our current capabilities with new capabilities to give us a decisive advantage.
This is very much like the '20s and '30s. This isn't like the 1975s. This is the interwar period. There were all sorts of advances going on in aviation. Hell, we would make a production run of 25 airplanes and decide they were obsolete and shift to the next one. There were advances in radar. There were advances in sonar. There were advances in radio. There were advances all over the place, a lot of them driven by the commercial sector.
The key competitors who won were the ones who said, "Aha." If you took radios, airplanes, and mechanization, you could have a new operation concept called Blitzkrieg. Everybody could have thought of that, but only one competitor did. And they had a big advantage early on in the war. Only the Japanese and the Americans really looked at what fleet carrier operations might look like, and they had a decisive advantage when the war started in that regard. So, this is very much like the '30s -- '20s and '30s. It's all about looking at all of these potential technological opportunities and saying, "How can we coalesce them into an operational concept which will give us a decisive advantage?"
Now, all of this, in my view, has to be rooted in war-gaming. This is a particular interest of mine and a priority. We're going to have a war-gaming summit. We have decided to look at war-gaming in three distinct periods: the first FYDP, how can we use our current force differently; the second and third FYDP, what are the things we can bring upon very, very quickly to give us a decisive advantage in the '20s; and then the third and fourth FYDP and beyond, what do we do to really change the nature of the game. We're also going to have experimentation and demonstration funds. We're looking at new concepts of leadership development to allow our people to adapt to all of these changes.
Now that I've kind of told you a little bit about what the Third Offset Strategy is, let me tell you what it's not. This is not “defense transformation 2.0.” In my view, that whole exercise led to a number of bloated and poorly thought-out programs where we threw out all of our learned experience in procurement and thought we would change the rules of the procurement game. And in almost every case, we gooned it up. And we're still paying for those in a large way.
They were overly ambitious and they wasted billions of taxpayer money. So we're not attaching the third offset label to every idea that the building can come up with. This will be very targeted and will be decided at the highest level of the department.
We're looking to solve very specific operational challenges. I know that the third offset will have two components. The first component I absolutely know what it will be. For the last 40 years, we've enjoyed an advantage in the guided munitions mission. So, we've seen it. Now, our adversaries are getting guided munitions. And if they don't have them now, they soon will be. From the Balkans war, which showed us what guided munitions at sea would look like, to the 2006 war between Israel and Hezbollah, we've seen the damage that anti-ship missiles can do. We've seen the damage that missiles can do on the ground battlefield. And I'd just like you to think that in 2006, Hezbollah launched somewhere on the order of 4,000 short- and medium-range rockets. Almost all of them were unguided.
The Iron Dome depends on an unguided weapons salvo because it calculates those which will just land in open dirt and not waste a shot on them, and only shoot down the missiles that threaten a populated area or a high-value target. Now, imagine if all 4,000 of those were guided munitions. That changes the game. And that's exactly where the world is headed.
So in the second offset strategy, we said guided munitions are going to give us an enduring advantage because it allowed us to mass effects rather than forces. And it allowed us to reduce the size of our force and still be able to control wide swathes of the battlefield. And it allowed a smaller force to take on a larger force. And don't take me saying that. The Soviet General Staff concluded that in 1984 when they decided that what they called conventional reconnaissance strike complexes have the same destructive effects as tactical nuclear weapons. And for them, it was game over.
Now, competitors have caught up on this regime and they're going to fire mass guided missile salvos at us. So the first aspect of the Third Offset Strategy is to win a guided munitions salvo competition. If you cannot do that, and if you cannot convince your adversary that you will dominate in that competition, then they may feel emboldened to pull the trigger, and they may feel that they can forestall us in projecting power into a theater. A larger salvo of guided munitions generally will defeat a smaller salvo of guided munitions. So, this competition we have to think through.
Winning that competition will keep our adversaries off-balance. The punch of the third offset strategy is: How are we going to change what we are going to do once we get into a theater and solve that first competition? That is unknown. We are still trying to figure that out.
But if anybody here -- remember the assault-breaker ACTD in the 1975s which led us to the second offset strategy? We need a “Raid Breaker.” We need a demonstration called Raid Breaker which can demonstrate that if someone throws a salvo of 100 guided munitions, we'll be able to ride it out. It doesn't have to be a kinetic solution. Hell, I don't really want a kinetic solution. That gets into an imposing cost strategy on us. It's got to be something else. So if anybody in this room has an idea for Raid Breaker, believe me, we'd like to hear it.
Another big area of concern is the electromagnetic spectrum. Electronic Warfare (EW) is often regarded as a combat-enabler. Our adversaries don't think so. They believe it is an important part of their offensive and defensive arsenal. And it's going to be in the forefront of any initial guided munitions salvo exchange. For relatively small investments, you get an extremely high potential payoff. And our competitors are trying to win in the EW competition.
Now, we still have a lead, I think. That lead is diminishing rapidly. I worry about it. Today, I'm signing a memo that establishes an Electronic Warfare Programs Council which starts to take a look at all of our investments across the Department and makes strategic recommendations to the Secretary and I on how we change that portfolio. This was a recommendation of the Defense Science Board and I thought it was a good one. That's going to be co-chaired by Frank Kendall and Admiral Winnefeld.
Now, this is what we want to do, but I will tell you right now the biggest obstacle in our way is sequestration. Now, we'd like Congress to help us on the reforms that we've provided. That will help a lot. It will free up some resources internally, but that will only get us halfway there. Sequester is going to keep us from doing what we need to do to implement this third offset strategy in a timely manner.
Let me tell you, the return to sequestration-level funding no matter how you cut it is a very real threat to the department and its overall strategy and overall fundamental premise of technological superiority that I consider to be one of the most dangerous things that you can imagine. As Secretary Carter testified two weeks ago, if confronted with the sequestration-level budgets, quote, "We'd have to change the shape, and not just the size of our military, significantly impacting parts of our defense strategy." And the parts that I worry about most are our technological superiority, dominance and readiness. Those are the things that I worry about the most.
So, as I said before, stop the madness. I think sequestration first would give our allies reason to doubt; would give our potential adversaries cause for opportunism; and for those on the fence who are trying to decide whether we're a good bet or our adversaries are a good bet, they'll sit on the fence because they'll have incentive to hedge, instead of sending a clear signal of U.S. strategic and fiscal strength to the world.
Now, we'll do everything possible that we can do to limit the risks of sequestration. But for the people in this room, I guarantee you this is what it will result in. It will further delay our modernization program; 50 percent of the money that's in the F.Y. 2016 increase from '15 to '16 is in the modernization accounts.
If you stop putting money into modernization, that will have two prodigious effects, which you are all well aware of. Well, the increased weapons system procurement costs because we'll be forced to stretch out programs, or delay; we'll have to cut multi-year contracts, which are very efficient. It will require us to do stupid business things that no business leader in the United States would survive as a CEO or a COO or a CFO if they allowed that crap to happen in their businesses.
Sequester will lead to higher costs to maintain aging legacy platforms. That means O&M will go up faster than it is already going up, which will divert even more money away from modernization. Now that's, as I said, one big problem.
The second problem is it makes our force less ready. Because of the stability we've had in the last three years because of the BBA -- and we really thank Congress for doing that -- we've been able to gain back some of our readiness. But right now, at the present budget level, which is $154 billion above sequestration caps, the Marine Corps, the Army and the Navy will not return to full spectrum combat readiness until 2019 at the earliest, and the Air Force won't return to combat readiness until 2023.
Is this something that I'm happy about? Hell no. So in addition to the modernization, we are not going to send unready forces into combat. That means that we will inevitably have to respond slower because we will make sure that the forces are ready before we throw them into any fight. And then a smaller force inevitably is going to provide any future president and this current president with less flexibility than presidents have enjoyed in the past.
Research and development is just not a variable cost. When we cut funding for an R&D, it doesn't mean we will have less of something, it means we won't have those things at all. If we're going to develop three DDG-1000s or 34 DDG-1000s, the R&D is the same. Full -- sequestration will impact R&D funding and could remove four to five major programs from our future inventory, further degrading our technological superiority.
Look, I need everybody's help in this room. We have been trying every which way we can to explain the damage that sequestration would have to Congress. Right now, it is uncertain whether our arguments are making headway. We think they are, but it's by no means a sure thing. We need to have sequestration lifted, or the modernization portfolio is the thing that is most at risk in the near term, and our readiness and our flexibility most at risk over the long term.
If we work together and keep our minds on the men and women who serve the U.S. every day, I think we can get ourselves to some type of compromise.
Now, I've said this a million times. The men and women that serve in our forces are the true secret weapon that the United States has. That is the offset strategy that no one -- no one -- will ever have. Yes, we've always assumed that we would have technological superiority, but we have always been assured that our people are unbelievably capable, and capable of unbelievable things.
Now, we have a new generation of really battle-hardened leaders, especially in the mid ranks and the senior ranks, multiple combat tours. Through the 13 years of war, they've gained practical battlefield know-how that can't be taught in any training manual. It's the kind of experience that troops pick up only having spent considerable time at the pointy end of the spear. It's my hope that if we keep our eyes on those men and women who are at the pointy end of the spear, we can continue to provide them with what they need to survive on future battlefields and what they deserve.
Thank you. I look forward to your questions.