Hearing of the House Committee on the Budget - Long-Term Sustainability of Current Defense Plans

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Hearing of the House Committee on the Budget - Long-Term Sustainability of Current Defense Plans

HEARING OF THE HOUSE COMMITTEE ON THE BUDGET
SUBJECT: LONG-TERM SUSTAINABILITY OF CURRENT DEFENSE PLANS
CHAIRED BY: REP. JOHN M. SPRATT, JR. (D-SC)
WITNESSES: STEPHEN DAGGETT, SPECIALIST IN DEFENSE POLICY AND BUDGETS, CONGRESSIONAL RESEARCH SERVICE; J. MICHAEL GILMORE, ASSISTANT DIRECTOR FOR NATIONAL SECURITY, CONGRESSIONAL BUDGET OFFICE

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REP. SPRATT: I call the meeting to order, and first would thank our witnesses and for that matter everyone else for coming to the hearing this morning on the, "Long-term Sustainability of Our Current Defense Plans."

Our object in this hearing is a better understanding of defense spending increases over the last eight years and some notion at least we hope to come out with of the sustainability of current defense plans for 2010 and beyond.

Over the past eight years the defense funding level has enjoyed a -- defense spending has enjoyed a rather permissive environment, and it has increased at a rapid rate. The so-called base or non-war budget increased between seven and eight percent, and the cost of our deployments in Iraq and Afghanistan increased steadily each year, surpassing $185 billion in the year 2008.

As a result, total defense spending, Function 050, more than doubled over this period, rising from $335 billion in 2001 to $691 billion in 2008. Defense spending in real terms is now at its high -- highest level since World War II.

So it is reasonable to ask, can this trend continue? Given our fiscal condition, the receding economy, surging deficits, annual increases in defense on par with what we've seen over the last eight years are not going to be easy to accommodate in the budget.

Secretary Gates implied as much himself in his testimony recently before the Senate Armed Services Committee. He told the committee, and I quote, "The spigot of defense spending opened by 9/11 is closing." He also said that the Defense Department is going to have to differentiate between quote, "Those things that are desirable as opposed to those things that are truly needed."

Now, let there be no mistake about it. I've been on the Armed Services Committee for all of the 26 years I've been here, and I've been a stalwart supporter of national defense. We'll spend whatever we need to see that our national security needs are met.

Only now more than ever, given the budget we've got, we must ensure that we do so in a fiscally sound manner. But the government to make fiscally sound and responsible decisions must first have a full accounting of its policies including both DOD's base defense plans and its prospective war plans.

Over the past eight years, such an accounting has been lacking. The government must also assess options, identify cost pressures, explore trade-offs, and assess opportunity calls, and this is what we want to begin exploring today. We have two excellent witnesses for this propose.

Michael Gilmore is the assistant director for National Security at the Congressional Budget Office. Steve Daggett an expert in defense policy and budgeting in particular at the Congressional Research Service.

I welcome you both, and I thank you for your willingness to come before the committee, for your excellent testimony which I've read, and I think you will be two good witnesses to help us understand past trends in defense spending and the implications for the future, long- term cost implications of the -- that we have in place now.

But before turning to either one of you, I want to turn to Mr. Ryan, the ranking member from Wisconsin, and ask him of any opening statement he cares to make.

REP. PAUL RYAN (R-WI): All right. Thank you Mr. Chairman. Our conference is just winding down, so I expect our members to start coming soon. Clearly, the bulk of Congress' attention has been focused on and remains to be focused on, you know, addressing the current crisis in our economy.

But dealing with the economic crisis does not excuse or even diminish Congress' responsibility to the primary role of the federal government, and that's our national defense. So even as the economy has replaced the global war on terrorism on the front page, it does not replace our commitment to those on the frontlines.

Our job, as it has always been, is to ensure that American soldiers have the best available to them. But as this hearing will point out, DOD's plan far exceeds what has been budgeted. Just as in the civilian sector, DOD's health care spending is increasing at an unsustainable rate. And just as in the rest of the budget, these costs are beginning to eat into their discretionary budget.

So I have a particular interest in hearing from both witnesses about what DOD is doing, or at least planning to do -- (audio break). Finally, as everyone on the committee is well aware, DOD did not receive a clean audit last year. It has in fact been on GAO's high risk list for, as long as I can personally remember, and regrettably I've not heard any indication that these problems will be resolved in the near future.

My point here is that while we must ensure our troops are fully funded, we cannot simply throw money at the Pentagon without proper oversight and accountability. I look forward to exploring our witnesses and the drivers behind DOD's growing budgets, and how together with Congress, it might be more efficiently, transparently, met in this important mission.

Thank you.

REP. SPRATT: Thank you, Mr. Ryan. One further housekeeping detail; I ask unanimous consent that all members be allowed at this point to submit an opening statement for the record. Hearing no objection, so ordered.

In addition, for the record, let me note, if there is no objection we will have the full written statement of Mr. Daggett and Mr. Gilmore entered in the record so that you can summarize it as you see fit.

But today we have one panel, two witnesses, and some excellent testimony, so I encourage you to take your time to give us a thorough review of what you said, and Mr. Daggett, let's begin with you, sir. Mr. Gilmore? I'll let the two of you settle.

MR. GILMORE: It's your preference, Mr. Chairman.

MR. DAGGETT: I'm glad to start out. Mr. Chairman, thanks very much for the invitation to testify. Mr. Spratt, you and I go back, I think, 25 years or so now. So it's really a pleasure to see you.

But as I've said, I particularly appreciate your asking me be -- to be on a panel with Mike today, so I know that whatever question you ask, one of us at least will be able to answer it. Mike has done -- Mike's work at CBO really has been the definitive work on the cost of long-term defense plans that all of us in town really use for further analysis.

REP. SPRATT: I interrupt you here at this point Steve, and recall when we launched the second Persian Gulf War against Iraq, CBO was the first to say if this is going to be a long undertaking you've got manpower and rotational problems that the DOD did not acknowledge to it. CBO was on the frontlines of that. You've done some excellent work also on projecting defense budget, and so --

MR. DAGGETT: Sure.

REP. SPRATT: -- we've got two good disinterested experts here, and we're glad to have both of you.

MR. DAGGETT: Thanks. Mr. Chairman, if you look at what the leaders of the military services have said, what defense industry analysts have said, what analysts and think tanks have said, you come away with a strong sense that there is a real gap in the defense budget, a real mismatch between the cost of planned programs and what most projecting will be the likely trend in the defense budget.

The chairman of the Joint Chiefs has said that defense spending ought to be kept to a floor of 4 percent of GDP, which by my calculations would mean adding about a $100 billion in 2010 to the defense budget to accommodate -- each of the military services has said similar things.

The chiefs of staff and the secretary of the Air Force for the past couple of years have been saying that the Air Force needs about $20 billion more per year in acquisition accounts to accommodate its planned program. To put that into context, the overall Air Force acquisition budget, which is weapons procurement plus R&D, was scheduled to go from about $63 billion in 2009 up to about $70 billion by 2013.

So in effect they are saying, they are about 30 percent short in the amount of money available for the program that they want. The Army has said similar things. They are projecting about $130 or a $140 billion base budget. And they are saying that their annual requirements are in the order of $170 to a $180 billion.

A big piece of that is for war costs, that they are concerned might not be funded if the war is financed out of the base budget without an accommodating increase in it. The Navy has just increased estimates of the cost of its 30-year shipbuilding plan quite substantially, and says now that there is a shortfall over the next few years in fighter aircraft procurement.

So the -- by all accounts, there appears to be a gap between projected budgets and the cost of the program. If you look on the other hand at the overall level of defense spending, you have to ask why that's true. If I look at defense in a historical context, as you noted, the 2008 budget is a historic -- high by any historical standard.

It is actually about 20 percent bigger, after adjusting for inflation in the budget -- than the budget in 1985, which was the peak in the post-Cold War period, except for one year in Korea.

The overall defense budget, just the base defense budget, excluding supplemental appropriations has increased by 43 percent above inflation, since 1998, which is about as large as the build-up in the first Reagan administration. And by the middle of the Reagan administration, the Defense Department felt that programs were pretty well funded. And we really did recapitalize the force with budgets in the 1980s.

A comparison that I'd like to do, and if we have slides up, it would be one of the first slides. Yeah, that -- yeah, this is a slide that just shows the trend in -- the historical trend in the base defense budget, not including war-related funding, going back to the end of the Korean war. And what it shows is that on average the defense budget has increased by about 2.1 percent per year above inflation, year after year.

In some years, the trend has been above the average, in some years it's been below; in 2009, which is the measure I use, the budget is actually about 8 percent above the historical trend. So again, by historical standards, the budget appears relatively high.

So the question I pose is why the disconnect? Why on the one hand do the budgets appear relatively robust? And on the other hand, we hear from the military services that budgets are very tight and getting tighter. And I have six answers to that question and I'll just briefly go over each of them, and then I'll leave that as a basis for discussion.

The first factor is just the increasing cost of military personnel. And if you look at the next slide, that tracks -- this is a slide that shows the cost of the military service member, active duty military service member, index to inflation, and then index to 1972, which is the inception of the all-volunteer force.

And if you look at the trend, it tracks with what you would think. The cost of a service member declined in the 1970s because pay raises didn't keep up with inflation. There were big catch-up pay raises in 1980 under the Carter administration, in '81 under Reagan, a 11.7 percent, and then 14.3 percent, so about a 25 percent pay raise over a two-year period.

The trend in the 1980s and 1990s was a very modest increase, if any increase at all, but then it shot up like a rocket, after about 1999. By my numbers, a military service member in 2009 is 45 percent more expensive, above inflation, in addition to inflation than in 1998.

And there are a lot of factors that went into that. There were pay raises of the employment cost index plus one-half percent in seven of the last eight years. There were three rounds of pay table reform in which people in the middle grades got larger pay raises to improve retention.

There were very big increases in the basic allowance for housing to eliminate on-base versus off-base discrepancies in housing costs. Now, that's on the take-home pay side of the equation. There were also very big increases in differed benefits, particularly in retirement benefits.

The biggest one being TRICARE for Life in which 65 and over military retirees were made -- may now use TRICARE as a second payer to Medicare for military medical care. And that's a pretty expensive benefit. DOD pays into the Military Retirement Fund about $10 billion a year for the cost of TRICARE for Life, which is 10 percent of the entire military pay and benefits package, so a hugely expensive benefit.

Second factor driving up cost is reflected in the next slide. And that is the ongoing trend in operation and maintenance costs. Operation and maintenance is one of the titles of the Defense Appropriations Act. If you go back again to the end of the Korean War, take out recent war costs, index it for inflation, and look at what the trend is relative to the size of the force per active duty troop. It increases over time at a pace of about two-and-a-half percent per year above base inflation.

Question is, is that a problem? And my answer is, I think you can make it -- you can make a strong case that it is. It is -- that rate of growth above inflation is not as high as in some sectors of the economy, like health care, but we are all concerned that health care costs are eating into federal budgets and undermining efficiency in lots of areas of the economy.

And while the trend in defense operation and maintenance isn't as high, it is still significant. And it is at odds which trends in the overall economy in which the trend has generally been in the opposite direction, a direction of improved efficiency rather than less efficiency. There are a lot of factors that explain that.

A part of it is that a large part of the O&M budget is comprised of pay of civilian personnel, and pay of civilian personnel has increased over time in real terms above inflation, as it should. But in return for that, you would also look for increased efficiency.

More people doing -- fewer people doing more work.

We don't seem to have achieved that across the board. Another factor is increasing medical costs, which are a big part of the operation and maintenance account. DOD is terribly concerned about that.

Another factor is the cost of weapons operation and maintenance. The Air Force has complained for many years that as its air craft have aged the cost of operating and maintaining them has climbed. It also appears to be the case that newer generations of weapon systems are more expensive rather than less expensive to operate and maintain, which again is at odds with the trend in the civilian sector.

What appears to be happening is that, although DOD is to some degree pursuing improvements and reliability and maintainability, when the final decision is made on like, a procure, they are really going after performance, and performance comes at a price including difficulties in operation and maintenance accounts.

Fourth factor -- third factor, excuse me. Driving up the cost of defense, which is reflected in a table that I showed you, is increasing intergenerational cost in major weapons programs.

Again, that's the -- yeah, next slide. This is the slide that compares the number of various -- number of weapon systems in various categories procured in Fiscal Year 1985 and in Fiscal Year 2008.

Those years are quite comparable in that the total acquisition budget in both years, that's again the amount of procurement plus R&D, is pretty close. It was about $240 billion in 2008 and if you adjust for inflation, about $220 billion in Fiscal Year 1985, so pretty comparable amounts of money.

But in 2008, the budget is buying many, many fewer units of many different categories of weapon systems, air crafts, ships, missiles, pretty much across the board. That's a very simple measure of intergenerational cost growth in major weapons programs.

If you consider, for example, the F-35 fighter aircraft which is going to be the mainstay of the force, both for the Air Force and for the Navy and Marine Corps in the future, the unit flyaway cost of the F-35 is now projected to be $83 million a copy. In 1985, the low-cost fighter for the Air Force, which is the kind of, equivalent of the F- 35, was the F-16. In today's prices, in 1985, the F-16 cost about $30 million a piece, so an increase from $30 to $80 or $85 million a copy.

That is not atypical of trends in weapons cost. There certainly is a rationale for spending more on weapons over time, because you get more capability in return. The issue is, has the trade off between the number of systems you can buy and the capability, gotten to a point of diminishing returns. Secretary Gates is arguing really that it has and that we need to take therefore a very close look at the investment cost of weapons and the capabilities we are trying to build into new generations of weapons.

A fourth and very closely related factor that I look at independently from intergenerational cost growth in major weapons programs is systematic underestimation of costs on the part of DOD. The General Accounting Office -- that is again the next slide, the General Accounting Office has for the last six years took -- taken a careful look at the status of major weapons programs in DOD, and this is a table that GAO provided, which shows what's going on in cost estimation. And it's not moving in the right direction.

This -- one way to look at this slide is -- and what they did was compare the portfolio of what we call Major Defense Acquisition Programs, that is the major weapons programs about certain thresholds in cost in the system.

In 2000-2005, and then in 2007, and if you compare a cost estimation in 2000 with the accuracy of cost estimation in 2007, it's gotten worse over time. And on average, in 2000, DOD underestimated the R&D cost of weapons programs by about 27 percent, which in itself is not very good.

Then in 2007 they underestimated average R&D cost by an average of about 44 percent. If you look at, from the point of view of the impact on the overall budget, cost growth in the 2007 inventory of major weapons is projected now at a total of about $300 billion, which is more than a year's worth of weapons acquisition. And it's about 18 percent cost growth over initial projections. So in effect, we're losing almost one-fifth -- we're losing our ability to acquire almost one-fifth of the weapons we plan to buy, because we underestimate costs.

Fifth factor driving costs up is -- has been the reorganization in the Army. The Army was criticized in the 1990s for not reorganizing itself very rapidly to be a more deployable force. Throughout the 1990s it still had pretty much a kind of cold war -- cold war oriented force, which was designed to be mobilized for one big war rather than to be able to be deployed on a rotational basis or expeditionary basis, as we say, abroad.

Just as the war in Iraq was beginning, they were beginning to reorganize into a more modular force. And then the war in Iraq also had some lessons with it. All of that has conspired to really drive up the cost of the Army, much of it as, I think, one-time cost, but some of it ongoing costs as well.

Modularization in the Army is projected to cost in all about $50 billion; much of that has been paid for already in -- mainly in supplemental appropriations, but there remains some cost to be accommodated for finishing the modularization of the Army.

Now there has also been an increase of 92,000 troops in the Army and the Marine Corps, 65,000 in the Army, and 27,000 in Marine Corps. Once that's fully in place that will add to military personnel and directly related operation and maintenance costs about $13 billion a year. So that's built into long-term budgets as a long-term increase.

And then, in addition to that, the lesson of the war has been that the Army -- the Army has taken away as one of the lessons of the war that it is systematically under-funded -- what we used to call minor procurement -- for things like force protection equipment, communications, and transportation, so that to outfit the Army in the future on an ongoing basis, requires a substantially larger ongoing capital investment.

Add to that the need to provide equipment for Army National Guard and combat units at a much higher level than we used to do in the past, and you further income -- increase costs.

In the past, National Guard units were regarded as likely to be mobilized only very rarely in the event of a major war and they were equipped largely with material cascaded from the active duty forces. Well, now they are part of the rotation base, so they need to be equipped at a level much closer to that of active duty forces; so all that is driving the cost of the Army substantially higher.

And then a final factor which is much harder to quantify is an expanded range of, as DOD puts it, challenges for which they think we need to prepare and that's the next chart. This is what DOD calls the quad chart or the four challenges chart. And what it does is -- it's an interesting beginning point for discussion I think.

What it does is break down the kinds of challenges DOD thinks we will face in the future in the various categories, and it organizes them according to vulnerability and the likelihood that they may materialize. So DOD's official assessment is that the likelihood of what they call traditional state-on-state, force-on-force conflict is relatively low, and we are relatively not vulnerable to that because we are so militarily capable in those areas.

Irregular warfare has a high likelihood, it's like a 100 percent likelihood, we're engaged in it now. But they also argue our like -- our vulnerability to it being damaging to the U.S. per se is relatively low, because we can manage it.

Catastrophic dangers, terrorists armed with weapons of mass destruction are, they say, a high likelihood and also a high vulnerability. So that obviously would be a focus of additional investment in the future. And then, a new category that's interesting for discussion, they refer to as disruptive challenges.

Others including near-peer competitors in the future trying to identify areas of U.S. weakness and exploit those militarily, so things like anti-satellite weapons or cyber warfare, or other efforts to exploit the vulnerabilities, or our communications networks, and energy dependence, and so on.

The investment implications of this, part of it is clear and part of it is not. Presumably, what they suggest is we should invest less money over time in traditional capabilities, because the likelihood of that kind of conflict is low and we're pretty strong in that area. That's hard to do. That involves taking a very hard look at the kinds of weapon systems we're currently building and making some choices among them.

Whether we will actually be able to do that and to what extent, therefore, to me, is very unclear. For the rest, most of these additional challenges appear to me to be primarily added to the base budget we already have. And the cost of some of them could in the future be fairly high.

There is an ongoing discussion of what disruptive challenges we might face in the future. With China, they would be likely to challenge us directly with, you know, force-on-force where, or more likely to challenge us if they do with disruptive threats, and there is -- a lot of thinking suggests they are more likely to challenge us in areas of our vulnerability.

With that, Mr. Chairman, those are what I see at least as the main things driving the cost of defense higher over the long term. And we can discuss further what we might want to do about it, and some questions.

REP. SPRATT: Thank you for an excellent presentation. Mr. Gilmore.

MR. GILMORE: Mr. Chairman, Congressman Ryan, and members of the committee, I appreciate the opportunity to discuss the sustainability of defense plans this morning. My remarks are going to be based on the report that CBO released early last month on the long-term implications of the 2009 Future Years Defense Program. So if I can have the first chart please.

In these charts that I'm going to show you this morning, funding is going to be displayed in constant 2009 dollars. So the effects of inflation are removed and you can compare the buying power of past budgets, which is on the left of the chart, to projected future budgets, which is on the right of the chart.

And in CBO's projection, DOD funding averages about $549 billion annually in the period from 2014 to 2026, which is the projection period we consider. And that's more than the peak of the 1980s build- up, which is shown on the left of the chart, about $485 billion. So $549 billion annual average in the future versus $485 billion during the peak of the Reagan build-up. And that's to pay for a force one- half to two-third the size of the force that we had during the mid 1980s.

Now, including what we label on this chart as potential unbudgeted costs, that could push that average in the future to $652 billion a year, 35 percent more than the 1980s peak. And what we include in that unbudgeted cost category are, first of all funding for continued operations overseas in the near term and the long term, and in the long term, we made a somewhat arbitrary assumption of 75,000 troops deployed somewhere in the world 2013 and thereafter, and that would cost about $60 billion a year. So that's $60 billion worth of the unbudgeted costs.

And then the remainder of the unbudgeted cost is associated with historical experience in cost growth in major weapon systems. So -- and that's about $43 billion. So we project that in order to buy the current program without cutting back on the number of aircraft, or ships, or other major weapon systems bought, which by the way is typically the way the department has handled the problem of cost growth -- if you wanted to pay for the programs as they are currently laid out, that would cost another $43 billion a year on average.

The sustained relatively high level of funding on our projection is due to, as Steve Daggett has already alluded to, growing costs of pay and benefits for military personnel and plans to increase the size of U.S. ground forces, as well as plans to purchase new ships -- new systems including systems with the advanced capabilities the department associates with military transformation that are turning out to be much more expensive than the systems that they are going to replace.

Now, let me say a little bit more about each of the areas, the two areas that are -- of funding that are indicated on the chart, investment and operations and support. And let me turn first to operations and support, which currently is about 60 percent of the budget, and which under our projections will grow to almost 67 percent of the budget over time in real growth.

So let me turn first to operations -- oh, excuse me, next chart. Let me show you another way of looking at defense expenditure. This shows you spending or funding; this looks at past and projected defense funding -- spending as a share of the economy. Defense spending average at about 5.6 percent of gross domestic product in the 1980s, it declined to 3.8 percent of GDP in the 1990s.

And it's currently about 4.5 percent of GDP including the costs of the wars in Iraq and Afghanistan. Now, in our projection, which shows relatively flat constant funding, defense spending would decline to 2.5 percent to 3 percent of GDP by 2026, excluding and including unbudgeted costs. And that assumes that GDP continues to grow. Right now it is not.

Next chart. Now, let me turn to operations and support in more detail, currently about 60 percent of the budget. About 40 percent of this funding is for military pay and the remaining 60 percent is for operations and maintenance, which is running units, maintaining equipment, and providing other benefits including medical care to military personnel.

In our projection, operations and support funding rises steadily in real terms from ($)307 billion in 2009 to ($)380 billion in 2026, excluding that unbudgeted cost category, and ($)443 billion including those unbudgeted costs, which in this projection are associated mostly with continued operations overseas, because most of the cost of operations overseas are in the operations and support category. Not all of them, and I'll say more about that in a minute.

Now, what's driving this growth is continued real pay increases and real increases in the cost of benefits, particularly medical benefits, and I'll say more about that in a minute. However, another source of growth is the increase in cost to operate both new equipment, which turns out to be more complex and more expensive to operate overall than the equipment it replaces, as well as ageing equipment. The cost of ageing equipment, maintaining and operating ageing equipment are growing as well. Can we have the next chart?

Just to bore in a little bit on the medical care cost dilemma that the department is facing that as already has been mentioned is similar to the medical cost dilemma that the economy as a whole is facing. DOD's budget for health care including accrual payments for the care that we provided to future retirees, so called TRICARE for Life is now about double the amount that is budgeted in the 1990s, as shown on this chart.

And CBO and DOD's own actuaries project that the department's health care costs will increase steadily, ($)5 billion in real growth from 2009 to 2013, and $32 billion in real growth or 79 percent through 2026. And unfortunately, the situation could be worse than that 79 percent growth, if faster than projected medical inflation -- and certainly history tells us that we frequently underestimate the growth in medical costs.

If faster than projected medical inflation occurs, that could cause a real increase in these accounts of 126 percent and that's depicted by the line -- the dash line labeled unbudgeted costs. The accrual payment growth is 6.25 percent on an annual basis, normal growth per capita pharmaceutical cost growth is 9 percent, and per capita direct care and purchase care growth is about 6 percent normal growth, so all of those areas contributing to substantial growth in the department's medical care costs.

Can we have the next chart? This is a reprise of a chart that Steve showed. This is a somewhat truncated version showing per capita, meaning per active duty service member growth in operations and maintenance funding, measured on a per service member basis DOD's O&M funding has grown steadily during the past 20 years averaging 2,100 2009-dollars, per active-duty member per year as shown here on this chart -- excuse me -- which does not remove the current war costs, which causes that large increase there over the last five years.

And then in the future we project that the 20-year trend will continue and the fact that in the period they're labeled FYDP or Future Years Defense Program that that black line is above the dash line, indicates that in DOD's plans, at least in the 2009 Future Years Defense Program, there isn't an indication that in its base program DOD was under-funding its readiness accounts.

If it were doing that, then you would expect that black line to be below the dash line. So there's no evidence when you look at this metric that DOD was actually paying for peacetime readiness in the supplemental appropriations as opposed to its base program. And we currently project the per capita O&M funding will increase by another 20 percent through 2026 relative to today's level.

Next chart. Let me turn to the investment accounts by giving you an overview of operations and support which was 60 percent of the budget. Let me turn to the other 35 percent of the budget. This shows past and projected funding for investment. In our projection, investment, which is funding to develop and purchase new weapons would average about ($)187 billion during 2014 to 2026 and that's about 10 percent below the one year peak in investment that occurred during the 1980's build-up of about ($)207 billion.

Accommodating historical trends in cost growth would increase funding demands in our projection by about $30 billion annually or about a 15 percent increase overall to pay for the program if we continue to try and buy it, but historical trends in cost growths are realized.

And the cost of purchasing new equipment to support continued contingency operations, remember our projection assumes that we continue to be engaged overseas, could cost funding demands to increase by another $22 billion annually on average based on experience in Iraq and Afghanistan. Next chart.

REP. SPRATT: You've got -- if I could interrupt you there.

MR. GILMORE: Sure.

REP. SPRATT: Two items total unbudgeted cost as opposed to contingency unbudgeted cost. What's the difference between them?

MR. GILMORE: Contingency unbudgeted costs are associated with paying for refurbishing equipment and buying new equipment to replace worn out equipment and damaged equipment if we continue to be involved in operations overseas. So our assumption included -- our projection included an assumption that over the long run we would have 75,000 troops involved somewhere overseas; not necessarily Iraq and Afghanistan, although it could be there.

So if you continued to have 75,000 troops involved overseas with the kind of operational tempo that we've been experiencing over the last couple of years, then that would, in our projection, imply an additional $22 billion in investment, mostly procurement annually to continue to replace and repair equipment associated with maintaining those operations.

And then, historical cost growth is the remainder of the unbudgeted cost. So there's contingency unbudgeted cost, which is the first dash line, and then there is with total unbudgeted cost, which is the second dash line, and the difference between the two is just historical trends in cost growth.

If we take today's investment program, and we experience what we've seen in the past with regard to growth in the costs of major weapon systems that are preproduction, then that would add another $30 billion annually to the cost of the program in our projection. That assumes that you don't cut back on the amount of weapons that we're currently planning to purchase, so that you don't further reduce joint strike fighter purchases in the Air Force, below an aircraft a year.

You try to buy those aircraft, but costs go up as they have in the past, and you just pay for those increased costs. Have I made that at all clear? Next chart.

And those two dash lines will be on every one of these investment charts, so -- and it's most noticeable in the case of the Army because the Army would bear the brunt of these continued operations overseas. So you see that there's a large amount of unbudgeted costs -- a relatively large amount of unbudgeted costs associated with contingency operations in this chart; that's because the Army would bear the brunt of those operations if they occurred.

One of the most -- this is Army investment, so I showed -- I just showed you investment overall for the Department of Defense, past and projected. Now, I'm going to show you past and projected investment for each one of the services beginning with the Army.

One of the most notable features on this chart is that, recently, due to funding provided in supplemental appropriations to replace and repair equipment associated with operations in Iraq and Afghanistan, the Army has received as much investment, mostly procurement funding in supplemental, as it has requested in its -- in the base budget.

And that's shown by that spike there, which by the way is well above the peak in investment that occurred during the Reagan build-up of the 1980s. Now, in the future, CBO's projection of Army investment averages about $36 billion annually. So that's towards the right-hand part of the chart, excluding unbudgeted costs and ($)58 billion including them.

Historical trends in cost growth for Army systems, particularly for combat vehicles such as those being developed under the future combat systems program account for about 40 percent of those under -- unbudgeted costs, and the remaining 60 percent is associated with paying for the costs of equipment used in continued operations overseas if that were to occur.

Now, saying a little bit more about the future combat systems program, which is -- you can see there, it takes up a good deal of the funding in our projection. FCS funding exceeds a ($)100 billion through 2026, about $6 billion to $8 billion annually in the projection that would buy 13 brigade sets of equipment through 2026 with another two planned to be purchased beyond 2026.

But that's about one-half of what may be needed for the Army, because the Army will have 19 active heavy brigades, seven heavy brigades in the Army National Guard according to current plans, and three to five pre-positioning sets of heavy equipment that may have to be replaced with FCS. The plan now is to eventually replace all of the heavy -- all the equipment in the heavier grades -- heavy brigades with FCS.

So something will happen -- if that doesn't occur and if they stick with the plan to buy 15 brigade sets as opposed to more than twice that amount, something will have to be done to maintain the existing equipment, the Bradley fighting vehicles and the Abrams tanks that they'll have in several thousands of numbers.

So CBO's projection includes more than $3 billion annually to replace and upgrade the combat vehicles that will not be replaced by the future combat system. Let me show you the next chart, which illustrates one of the challenges the department faces overall, but in particular, the Army faces with its combat vehicle fleet.

The top part of this panel shows on the left the weapon systems that were purchased during the 1980s and the 1990s. And in the 1980s a lot of Abrams tanks and Bradley fighting vehicles were bought, and then on the right-hand part of the chart, on the top, it shows the number of vehicles that will be procured under the future combat systems program, current plans, one brigade set a year.

Then, on the bottom, the chart shows funding to buy those weapon systems, the funding that was necessary during the 1980s to buy the number of tanks shown on the chart and then the funding that under the current Army estimates will be required to buy future combat systems at a rate of one brigade set a year.

And under current Army plans, which we hear by the way may change developments -- some of the FCS combat vehicles contained in this projection may in fact be ended. They may end up developing a fewer number of those vehicles.

The Army will spend at levels comparable to those in the 1980s to purchase about one-quarter of the number of new vehicles.

Those purchases alone would not be sufficient to sustain its force, as I've mentioned. And absent that $3 billion a year in annual funding that we include in our projection to upgrade and replace older systems, the FCS' purchases displayed in the chart wouldn't be sufficient to sustain the force, as I said.

And the age of Army combat vehicles would double over the long term from about 10 years currently to 20 years by 2026, which is about double the desired fleet-wide age. So the additional $3 billion a year or something in that neighborhood will probably have to be spent if more FCS vehicles are not bought or -- and which is the current plan. Next chart.

Let me turn to the Navy. This shows past and projected funding for investment in Navy systems. CBO's projection indicates that funding for investment in Navy and Marine Corps weapon systems will average about ($)58 billion annually during 2014 to 2026, which is slightly less than the average funding of ($)61 billion during the period of the 2009 FYDP -- 2009 to 2013.

And through 2018 in this projection anyway funding will be comparable to that of the mid 1980s and that's to support a fleet about half the size of the ship fleet that we had during the 1980s. Funding for ship building excluding historical cost growth, so there is that ship's portion of the funding at the top of the chart will average about ($)21 billion through 2026. That's about 40 percent greater than it is in 2009.

Funding to develop new weapon systems -- the bottom part of the chart shows the development funding for new systems and you can see that funding to develop new weapon systems would decline from ($)19 billion in 2009 to ($)11 billion in 2013, and eventually, in our projection to about ($)7 billion by 2026.

And as seen in the chart, such a steady substantial decline in RDT&E funding would be inconsistent with experience during the past 20 years, but nonetheless, that's the implication of current plans. They will buy out the joint strike fighter program and F-18E/F and multimission maritime aircraft, and they will not begin to develop the replacements for those systems even though at the -- reports at the end of this projection, the F-18E/Fs that have been bought over the last several years will be nearing the end of their service lives. Next chart.

And finally, let me show you our projection for Air Force investment that's shown on this chart. CBO projects that Air Force investment will average about $70 billion annually during 2014 to 2026 versus about $64 billion annually during the 2009 to 2013 period of the 2009 Future Years Defense Program.

The combined historical cost growth would increase funding demands by about $6 billion annually. And note that a substantial portion of the other funding depicted in this chart is associated with intelligence activities that had experienced substantial increased funding since 2001. Next chart.

So let me just bore in here for a second on one of the particular challenges facing the Air Force and that's the modernization of its tactical aircraft fleet. So this is the Air Force analog of that chart that I showed you a few moments ago for combat vehicles in the Army.

On the left, we have the numbers of aircraft that were purchased in the past, so there were large purchases of F-16s, particularly F- 16s and F-15s during the 1980s. Then, there was not much aircraft procurement during much of the 1990s. Then we began to buy the F-22, which are the pink bars in the chart.

And then in the future, we will buy in increasing numbers the joint strike fighter for the Air Force rising in this projection to 80 aircraft a year. Although we've heard that part of the increase in funding in the FY10 Future Years Defense Program that the department has developed would be to buy an additional 30 aircrafts -- 30 joint strike fighters a year for the Air Force. So that would raise that number to 110 a year if that were correct.

And then on the bottom part of the chart you can see the funding. And you can see that recently and in the future, we'll be spending at levels roughly comparable to the levels that we spent during the 1980s, but to buy substantially fewer aircrafts because aircraft have gotten a lot more expensive.

And let me just give you a bit more detail on that. During 1981 to 1988, 1,877 aircrafts were purchased for a total of $54 billion. That's an average unit cost of about $30 million. Most of those were F-16s. During 1993 to 2001, 105 aircrafts were purchased for $9 billion, an average unit cost of $80 million per plane.

And during 2001 to 2008, 156 aircrafts were purchased; almost all of those were F-22s, although that's the beginning of joint strike fighter purchases as well. So about one-tenth -- less than one-tenth the number of aircrafts that were produced during 1981 to 1988, and those were purchased for ($)32 billion and an average unit cost of ($)210 million.

So during 2001 and 2008, we purchased about 60 percent of the aircraft we did during the 1980s -- excuse me, we spent about 60 percent buying aircraft in 2001 to 2008 that we spent during the 1980s and we bought 10 percent of the aircrafts; so 60 percent of the funding, 10 percent of the aircraft.

And then, in the future, the joint strike fighter, which will replace those Fs -- well, not entirely replace all those F-16s, those dark blue bars there that were purchased in the 1980s, we will be buying those at $80 million a plane versus $30 million a plane during the 1980s.

That's my -- that concludes my remarks and I'm happy to take your questions.

REP. SPRATT: Well, thank you both. We asked for numbers and we got them back in spades.

(Laughter)

But interestingly enough, the one thing you didn't mention was the one thing that four years ago, or longer, Senator Kerry and Senator -- President Bush when they debated were put the question, "What do you think is the greatest threat facing the United States today?" Kerry answered, "Terrorists equipped with some kind of nuclear device," and President Bush readily concurred.

It's one thing they commonly agreed upon. You haven't touched upon that at all. My calculation, if you scrub this budget down, go to DOE and scrub this budget down for CTR and for Nunn-Lugar and all the different components of non-proliferation, you come up for about $2 billion.

Is that your -- is that approximately -- my approximation pretty close to what you would approximate as what we are readily spending on this particular threat - non-proliferation. Steve, Mike.

MR. DAGGETT: Yeah, that's -- well, there are two major categories in the defense account. One is cooperative threat reduction, which is in DOD budget and that's about -- that's been running about ($)400 million a year, and then Department of Energy has a much -- a substantially larger non-proliferation program, counter- proliferation program, largely to buy nuclear material, and so on.

And that -- I think you're right. I think it's been running about ($)1.5 billion a year. There are other initiatives in the State Department as well. I mean, the whole counter-proliferation, international counter-proliferation efforts, but those don't involve lots of money. The money for it is really in the Department of Energy. And so I think your total is about right.

REP. SPRATT: And it's been pretty static, pretty steady --

MR. DAGGETT: Steady, yeah.

REP. SPRATT: -- at that particular level for several years at least.

MR. DAGGETT: Yeah.

REP. SPRATT: How do you account for that? You think that there is none of the allocation here, simply because it gets squeezed out by other programs or that this is all the Pentagon and Department of Energy think, it would be sensibly applied?

MR. DAGGETT: Well, I know there's an ongoing program.

The big budget driver as I understand it is purchasing nuclear material and there are agreements -- international agreements on how much we're going to purchase each year.

And you might be able to increase that to some extent, but I think that's what drives really the cost of it. If you ask me, are there other things we could be doing that we're not doing, I don't know, that's a bit, you know, beyond what I've looked at in detail. I can certainly get back to you, and Amy Woolf who works with us, has worked very closely on counter-proliferation programs.

The Harvard-Belfer Center does a study every year of the status of non-proliferation efforts and they make a number of recommendations of -- they've made a number of recommendations for changes in policy. I've looked at it pretty closely a couple of years ago and didn't see many that required a lot more money.

It was more international diplomatic initiatives and things of that sort that they were looking at. But I would be glad to, you know, look more at that and talk with you and with Scott about it. We can -- you can certainly identify, I think, some additional areas of possible investment. I'm not sure it would be a huge amount of money.

REP. SPRATT: Mr. Gilmore, if we cut through all of your charts and information here to the basics, to the bottom line, what are we spending today on the base defense budget for National Defense? And what are we spending in term of -- typically in terms of supplementals for emergency purposes, primarily Iraq and Afghanistan?

MR. GILMORE: Now, let's see in '09, I think the department requested ($)517 billion and the Congress appropriated about ($)515 billion in the base budget and there was about another ($)180 billion or so in supplemental funding for operations in Iraq and Afghanistan and other purposes.

REP. SPRATT: So that comes to nearly $700 billion?

MR. GILMORE: Pretty close.

REP. SPRATT: And in real terms, how does that compare to the post war -- expenditure levels in the post-war period?

MR. GILMORE: It's a peak. I mean, if you look at a chart that's on our website that displays defense funding over the past 60 years, I think we're at a peak in terms of -- in inflation-adjusted spending.

REP. SPRATT: Compared to Korea? And Vietnam?

MR. GILMORE: It's been a pretty steady increase, so I think it's an overall peak.

REP. SPRATT: Now, we have received from DOD from time to time bills for reset, renovation, repair, reconstitution, and repurchase really of equipment that is either battle damaged or worn out due to the operating environment in the ops tempo and the two war zones we found there shows now Afghanistan and Iraq.

Have either of you paid any particular attention spending the effort try to unpack what's in the -- those substantial requests. It started at about $15 to $16 billion. Chief Scholer said if we stop the war in Iraq tomorrow, we still have these costs for at least two, three, maybe four years at the substantial level.

But the level has risen considerably from about $15 to $16 billion several years ago to around $50 billion today, just under $50 billion today.

MR. GILMORE: We -- I think a year and half or two years ago Fran Lussier in our division produced a report on the Army Reset Program trying to, as you put it, unpack some of the details which turns out to be a challenge to do, given the information that's available from the department. But nonetheless --

(Cross talk)

REP. SPRATT: -- go into the acquisition of new equipment.

MR. GILMORE: Yes. A lot of the increase is associated with buying new equipment for the Army, substantial numbers of up-armored High Mobility Multipurpose Wheeled Vehicles, Humvees that were not in the force at the beginning of the conflict which everyone knows.

A substantial amount of money, about $20 billion, I think, I could be wrong, for purchases of mine resistant ambush protected vehicles. Substantial amounts of money to purchase the most modern versions of Army trucks, the so called -- the trucks built as part of the so called Family of Medium Tactical Vehicles Program.

A lot of those trucks were bought for National Guard units that lacked the most modern trucks. And in fact most -- a large number of those trucks are just kept in the theater and the units that come in fall in on those trucks. So a substantial portion of that growth has been associated with buying that kind of new equipment that was not in the force prior to the operation.

MR. DAGGETT: Can I add one point. It really is unclear to me to what extent the Army has filled out its evolving requirements and plans for that kind of minor equipment. One of the tasks for the next administration seems to me is to really unpack what -- where the Army is going and what bills remain unfunded, and try to distinguish what is to replace war equipment and what is to fill out modularization of the force and what additional kinds of equipment needs they might identify because of lessons of the war to equip the Army National Guard. They spent a lot of money on it already.

I'm just not sure how far along they are in meeting all of those additional requirements. It could require a substantial amount additional -- if you do everything the Army wanted, it could be almost all of it has already been spent. I just don't know the answer to that. And I don't know that anybody will --

MR. GILMORE: Well, I would think -- I think the Army has indicated that, in fact, there are substantial additional bills that will come due; I've read anyway. I can't verify the accuracy of the reports that the Army has claimed that there are about $40 billion a year short in their investment accounts of where they would want to be if they could fully modernize and fully equip their force the way they want to. I've just read that. I haven't had a chance to get any information that would actually verify it.

REP. SPRATT: These requests come not in the base budget, but in -- primarily, largely in the supplemental.

MR. GILMORE: Well, it's a combination of the two. For example, some of the increases that occurred early on in the procurement requests and the supplementals were buying equipment associated with modular conversions, the conversion of the Army's combat brigades from division-centered to brigade-centered, modular brigades that were more capable of independent operations.

Although now the department claims that almost all those costs and not all those costs are being requested in the base budget, but initially there were amounts requested in the supplementals. So it's a combination of the two, but as we -- as I pointed out on that chart in Army procurement, the Army has gotten as much recently in procurement in the supplemental as it's requested in its base budget.

REP. SPRATT: Typically, when advocates or opponents speak of the percentage of defense expenditures as a percent of GDP, it talks basically about the defense budget, and to some extent, 050 -- function 050, which would include the DOE nuclear program as well.

But they generally do not include some direct cost such as veterans. The veteran's bill today is running about -- for both mandatory and discretionary -- about $95 billion a year. They rarely mention Homeland Security. An account that didn't even exist in the budget several years ago, and today is at $35 to $40 billion, maybe half of which was -- is really classified money, but there really is a $20 to $25 billion increase there.

And they rarely mentioned military aid under the 150 Account for foreign purposes, and you could go down the list. You think if -- as we try to derive that measure, what percentage of our GDP are we allocating to national security that these accounts should be included? Mr. Daggett?

MR. DAGGETT: Yeah, it's really a policy issue for Congress. I will say when I look at it, I've spent a lot of time talking about personnel cost. And when you're tracking personnel cost and if you just look at the defense budget, even the 050 account as a whole, in which -- and currently we see it as part of 050 not as 051. You don't get a whole picture of it because of -- largely because of VA cost.

So it may affect the allocation decisions in the sense that you're not capturing a full cost of personnel when you just talk about what the budget cost in DOD is, that the full cost of hiring somebody in the military is actually substantially higher than just the DOD cost because of future veterans' benefits and so on.

So it's useful, in general, to keep that in mind. You know, whether you have an overall budget account for national security or whatever, as a way of doing it, you know, I don't have an axe to grind on that. But I do think visibility of all those kinds of costs is a useful -- is certainly useful from planning point of view.

REP. SPRATT: I think the message you -- both of you bring us in great detail in your testimony today is that typically when we think about cost growth in the defense business, we think -- talk about the investment accounts, R&D, and procurement, because the percentage increase is over and above by far and tend to be substantial over time.

But now we've got a defense budget where the personnel accounts are swelling just as much as the -- or substantially, if not as much as the investment accounts. O&M, of course, is growing substantially because we've got troops deployed in two theaters and still troops stationed in places throughout the world.

It's hard to contain a budget which has got every account in it demanding substantial funding because of this level of engagement right now. Would you agree with that?

MR. DAGGETT: (Inaudible) -- to my discussion is that personnel costs really drive a large part of the defense budget, and have really driven costs up across the board. The implication I draw, by the way, is to the extent that there is a decision to cope with that by reducing spending in some way. If you just look at the investment accounts, you're really focusing on a relatively narrow part of the budget disproportionately.

So you really do need to consider the cost of personnel, both uniformed personnel and civilian personnel in this budget environment. If you think the budget is going to be tight for the foreseeable future, eventually the size of -- you're going to have to look at the size of the force and from my point of view just from a planning perspective, if you're going to draw down the size of the force in the future, the sooner you decide to do it, in a way the better, because then you save resources in the interim for other investments. So absolutely, I think it really is important to keep in mind that a big, big part of the budget is driven by the cost to people.

REP. SPRATT: Mr. Gilmore, one final question. Some time ago we asked -- after not getting the information from DOD, we turned to CBO and said would you give us your best guess, your best estimate of what our engagement in Iraq and Afghanistan has cost today, and what it's likely to cost over the future.

Can I just put those two charts up to see if those dates are still -- to see if those estimates are still applicable in the eyes of CBO? This shows that if you take funding all the way back to 2001, primarily -- or solely almost for the first couple of years for Iraq, and then for Iraq and Afghanistan together, from '01 through '09, the total amount of war funding to date, the supplementals has been $864 billion.

As primarily a matter of record, just as a matter of whether -- which costs were allocated to that theatre and which costs went elsewhere? Is that still --

MR. GILMORE: That seems correct to me.

REP. SPRATT: Now -- second chart. Picking up from there, we agree that CBO would estimate a drawdown in troops over a 5-year- period of time to about 75,000 troops in both theatres, in that zone of the world. And once the force level reached 75,000, it would be -- and that would be the steady state, it will continue that level for the next five years.

The total, then, came to ($)867 billion -- of course that's a projection, not a record number. Is that still roughly what CBO would project for the cost under those -- that scenario?

MR. GILMORE: That looks consistent to me with what was included in the recent outlook.

REP. SPRATT: And this is driving a large part of that O&S or O&M account that we saw swelling as you showed us the numbers earlier and the reset in reconstitution account as well.

MR. GILMORE: Yes, although there are under --

REP. SPRATT: Meaning --

MR. GILMORE: -- there are underlying reasons separate from operations in Iraq and Afghanistan that the operations' forecast have been growing as both Steve and I have mentioned. But the recent rapid increase is obviously due to funding; they need to fund those operations.

REP. SPRATT: Thank you very much both of you for your fine testimony.

Mr. Ryan.

REP. RYAN: Thank you, Chairman.

This is a very interesting hearing for those of us who aren't on armed services or CROBS (ph), this is very helpful to us.

Okay. A number of questions.

Mr. Daggett, I want to go to your cost overrun chart; I think it's chart six of your testimony. The change in total acquisition cost from the first estimate 6 percent increase in FY 2000, 18 percent overrun in FY05 and 26 percent in FY07, is that right?

MR. DAGGETT: Right.

REP. RYAN: That is a staggering increase. Can you drill down into that number and give us a sense why, how, and what direction are we headed now?

MR. DAGGETT: The question is why is it getting worse. It seems to be getting worse --

REP. RYAN: Right.

MR. DAGGETT: -- in spite of really pretty serious efforts on part of DOD to get a better handle on it. There is a cost analysis improvement group at the Pentagon that really does go over cost projections very carefully. Their role was strengthened in recent years --

REP. RYAN: So what's happening?

MR. DAGGETT: I think a couple of things. Just -- and this is drawn mostly from reading GAO's testimony on it. GAO really has looked very carefully at this, and this is from GAO's latest analysis.

Part of that might just be cyclical. Typically, weapons cost growth is greatest as systems end -- full-scale engineering development begin to enter their production phase, because we're finally getting down to what it's going to take to produce it. So you get larger cost growth at the end of the development cycle.

And it could be just that part of the -- part of the inventory of weapons is in that part of the cycle.

I've had some discussions with people at OMB who think that that is part of --

REP. RYAN: Is it the higher tech nature of the equipment and therefore the less predictability of --

MR. DAGGETT: Yeah. The other issue that GAO, in particular, points to is a willingness to accept very high levels of technical risk in the development process. And they actually -- DOD and GAO do measures of that. They call them TRLs, technical risk levels.

And for each major development program, there are various elements of technology in the development effort, and they assign various TRL levels to it. And there does seem, just by that measure, have been a greater willingness to accept higher levels of risk in the development process which then leads to schedule delays and cost increases.

As I said, part of that is driven, by the way, by just the length of time it takes to develop a weapon. If you're going to develop something that's not going to be fielded for 10 or 20 years, and you look at what is going on, say, in electronic developments in the civilian sector, it's proceeding so rapidly that what you say is, well, I can't afford to leave that behind. That new technology is going to be very helpful to the weapon system.

So we have to assume its availability in the development process. So we will look ahead to what we think is technically reasonable and assume we can build it. But then when you actually try to develop it or do it, it becomes more difficult than you think.

The schedules, the cost increases and -- cost increase and so on. But I think a lot -- if you really look at what GAO is saying -- and again they are looking at it very closely, that's one of the drivers of it, just a general across-the-board willingness, again, not for bad reasons.

REP. RYAN: Right.

MR. DAGGETT: Not for unreasonable -- not with an unreasonable view toward what's going on to get into a program on the assumption that we'll make it work later.

REP. RYAN: And so is that 20 percentage point increase in seven years? That's just staggering. A lot of people in our side of the aisle like this idea of a 4 percent GDP floor on spending. It's just a budget tier (ph). I don't like the idea of four -- (laughs) -- any floor for -- on any program.

Caps yes, but floors no. But looking at the CBO's -- your chart, I don't -- you don't have your charts numbered here and you had about 75 -- (laughs) -- so looking at the one which is a percentage of GDP --

MR. GILMORE: I think it was my second chart?

REP. RYAN: Yeah. Yeah, I have it. I have them all detached here. So give me a sense for where we're headed, percentage GDP, if your health care projections go off. And then I want to ask you about that. You health care projections, TRICARE -- your TRICARE projection kicks in, in what 2002 -- where it really starts taking off your accrual projection -- and that's probably chart 5 or 6.

MR. GILMORE: The program was initiated -- I mean, prior to that, prior to 2001 or 2002 --

REP. RYAN: Right.

MR. GILMORE: -- it was pay-as- you-go. I think it's paid for expenses not on an accrual basis.

REP. RYAN: Right

MR. GILMORE: Then TRICARE for Life was instituted, and it was decided to fund it on an accrual basis. So the funding every year is based on the projection --

REP. RYAN: Which --

MR. GILMORE: -- what retirees (ph) will -- you know, what you need to invest today in order to pay for future retirees. That's when the costs begin to increase --

REP. RYAN: We concur with accrual principles. Let me -- I want to get at this. So looking at the accrual rate of TRICARE and all the other health care issues, what goes into your projection? How much of it is health inflation? What health inflation rate do you use?

Do you use the same health inflation rate that trustees at Medicare use? And how much of it is demographics? So breaking that projection down, how much do you ascribe to demographics, how much do you ascribe to health inflation, and how do you arrive at your health inflation rate?

MR. GILMORE: I can't give you a breakdown on demographics. I'd have to get back to you on that. But the demographics of the DOD retiree population, we'll have to look at how much that is changing over time. But you don't have exactly the same problem there that you do in the economy as a whole.

REP. RYAN: That's --

MR. GILMORE: I can't give you more detail on that off the top of my head, but I can get back to you on that. But in any event, in terms of the growth rates that are assumed in these projections, the growth rate for the accrual cost and the TRICARE for Life accounts that we use is the same as the one that the DOD actuaries use.

We've looked at it and it seems reasonable to us, and that's 6.25 percent nominal growth --

REP. RYAN: Do they use the same rate that the Medicare trustees use?

MR. GILMORE: It's comparable, it's comparable. And then there are other things that are budgeted for in those health accounts as was displayed in my fourth chart, I guess, including pharmaceutical costs.

REP. RYAN: Right.

MR. GILMORE: And per capita pharmaceutical nominal growth is 9 percent in 2014 which we assume slows to 6 percent by 2026. And that's consistent with the kinds of growth rates that we and others -- that CBO and others use when they project pharmaceutical cost for civilian --

REP. RYAN: And even with all that, your percent of GDP projection stays under 4 percent in the out years?

MR. GILMORE: Yes, it does. On that second chart, defense resources as a percentage of gross domestic product, there is the dotted line administration plan with unbudgeted costs. That includes all of the unbudgeted costs that I showed you in all those charts, and sort of the upper end of the range in every case for all of those dotted lines.

And that includes the dotted line for total unbudgeted costs in the military medical system chart, which incorporated even faster growth and 6.25 percent for accrual and 9 percent for per capita pharmaceutical growth, cost growth, and 6 percent per capita for direct and purchase care cost growth.

REP. RYAN: What is the measurement of the crowd out within the DOD budget in nominal terms with new health care costs versus all other military spending?

MR. GILMORE: Well, medical spending, medical -- I think that's one way to look at it.

REP. RYAN: You know how we do this all the time on mandatory versus discretionary with the entire budget and how we show that, you know, the crowd out is occurring so rapidly over the years? Well, how do you -- give me an apples-to-apples comparison with the DOD budget within itself.

MR. GILMORE: Well, about the best I can do off the top of my head is just to return to chart 4 which shows funding from the military medical system of about ($)40 billion currently. And that could grow to 90 -- as much as ($)90 billion by 2026, so more than a doubling over 17 years.

And so that's a 100 percent cost -- more than a 100 percent cost growth over that period versus about a 7 percent growth overall on operations and support costs. So our projection for needed funding for the military medical system is growing seven, eight times more rapidly than O&S cost as a whole.

REP. RYAN: We've had these complaints in the last number of budgets about the administration trying to sneak, you know, what we would consider base spending into the supplemental bills. And they did a lot of this three, four years ago. We kept criticizing them. They did a little less of it.

Are you now saying that they're, from your estimation, not sneaking base spending into supplemental bills and that the supplemental bills themselves are pretty much truly supplementals?

MR. GILMORE: We really haven't taken a position.

REP. RYAN: Mr. Daggett, please feel free. I mean, either one of you want to take the question --

MR. GILMORE: We haven't taken a position on whether certain kind of funding is appropriate in supplementals of the base budget. There are arguments on both sides of that.

REP. RYAN: But you know the base --

MR. GILMORE: But in terms of what many people have argued in the past, for example, that the costs for converting combat brigades from division-centered to a modular design should be part of the base budget. That was originally in the supplementals and is now -- seems to be part of the base budget.

Other people have argued that the upgrades that are made to the Bradleys and Abrams when they return from the theater, because the Army determined that they have to be torn apart completely, and since they are torn apart and we have to put them back together, we might as well upgrade them to the most modern configuration. Not an unreasonable argument.

But some people have argued that those costs ought to be borne in the base budget since those kinds of upgrades had long been part of the Army's desired base program, but not funded because of other constraints. Those kinds of upgrades still are in the supplementals, although there are fewer of them now because there are fewer tanks, for example, in the theatre.

So, I think what you'll find is -- what you stated that over time the amount of money that's included in the supplementals, that a number of people would argue should be -- should in other circumstance been funded in the base budget has been reduced. But I don't think it's been entirely eliminated.

REP. RYAN: And last question. Our airplanes, our fighters, that -- what is the cost of a Joint Strike Fighter and an F-22?

MR. GILMORE: The Joint Strike Fighter, the current projection for the Air Force version is it'll cost about $80 million apiece, and the F-22 is on the order of $180 or $190 million apiece.

REP. RYAN: And the F-16 which I -- in my mind, I should think of Joint Strike Fighter as the new version of an F-16, right? F-16s were 30.

MR. GILMORE: They were ($)30 (million) when we bought them in the 1980s, although the more recent versions of the F-16s which are more capable, which have been sold to some foreign --

REP. RYAN: These are in real dollars, right?

MR. GILMORE: Yes, these are in 2009 dollars.

REP. RYAN: Right.

MR. GILMORE: All the numbers I've given you are in 2009 constant dollars. The more recent versions of that plane that have been purchased, I think, by the United Arab Emirates which are more capable, they have recently -- a better radar, a much better radar, have been more on the order of $40 to $50 million.

REP. SPRATT: You're talking flyaway costs, program unit cost --

MR. GILMORE: I'm talking procurement unit costs, not -- you know, procurement unit costs are a little bit more than flyaway.

REP. SPRATT: Now, of course there are the -- we've got R&D and --

MR. GILMORE: Well, no -- procurement, I'm just talking about procurement. I'm not --

REP. SPRATT: You're not putting --

MR. GILMORE: -- including the R&D cost. The flyaway costs don't include things like initial spares and that sort of thing.

REP. SPRATT: True.

MR. GILMORE: Now, procurement unit costs are a little more than flyaway unit costs which are both less than acquisition unit cost, which include the R&D.

REP. RYAN: Thank you.

REP. SPRATT: Ms. Schwartz.

REP. ALLYSON Y. SCHWARTZ (D-PA): Thank you, Mr. Chairman.

And thank you for your testimony and information. I think all of us understand, and I think would agree that protecting and defending our nation and getting the size of our military and our costs in DOD right is one of our most significant responsibilities as Congress. And I certainly do. Certainly, we're facing a budget that is the largest since World War II, at $527 billion. So we want to get this right, and I appreciate your information.

And I think as both of the -- both the chairman and the ranking member pointed out that having information from -- that's accurate from DOD is extremely important, and that's not been so easy in the -- given the previous administration sometimes not sharing all of this information that we'd like. Really just one comment and one question.

I did want to thank the chairman for his asking questions about the reset costs. I do recall in a previous budget hearing asking DOD to -- whether in fact they would be -- whether all the reset costs for replacement of equipment and repairing equipment from the wars in Iraq and Afghanistan have been accounted for.

And his answer was yes, absolutely a 100 percent. It was rather stunning. I'm happy to get that testimony. But if in fact that's not correct, is which is what you're suggesting, that's pretty important for this new administration to understand what the cost for replacement of equipment and repairing of equipment is going forward, and of course the war continues in Iraq and Afghanistan as you project.

My question really has to do with also some problems that I realize were -- came out of the supplemental discussions more than DOD, but wondered if it related to DOD and whether you could speak to them. And that is -- that's certainly there being concerns about inefficiencies and overspending in contracting.

And again these are -- the stories have come out by and large around the wars in Iraq and Afghanistan, particularly with private contractors. But could you speak to whether you have looked at -- again, we are in tough economic times. We are looking for the greatest efficiency going forward, and that includes within DOD. And we have a new administration that is very keen on greater transparency and accountability for use of federal dollars.

So could you speak to whether you have looked at those, whether there, in fact, have been problems in terms of contracting and costs that we might be able to rein in? And yet, again, I'm coming at this from the point that we do want to, and need to make sure that we have the right size Department of Defense, and that we are protecting both our troops in the field, of course, but then also going forward are prepared for the challenges and threats ahead.

Given that, could you speak to any of the specifics on efficiencies and what greater transparency and accountability might lead to within DOD, so we might apply those costs when we need to?

MR. GILMORE: You want me to try first? We have not, and it's not our function at CBO to do audits of these contracts. The special inspector general for Iraq has done that and published quite a bit of material about his findings. That's not something that we've done.

What we have done and published last August a report that summarized what we thought was the total amount of funding that had been spent in the Iraq theatre on contractors to support military operations in Iraq and neighboring countries such as Kuwait.

And we concluded that through the summer of -- or through late 2007, about $85 billion had been spent for those purposes, and that if the current rate of spending continued -- which was probably likely, given the force levels weren't going to change that much, they were in a decline somewhat but not dramatically, at least not at that time, not yet -- that probably by the end of 2008, about a $100 billion would have been spent on contractors' support of operations.

The other thing that we took a look at was whether it would have been cheaper for the government -- for the military to perform those functions, those support functions itself. And what we concluded was it wouldn't have been, not unless we thought we were going to be continually involved in occupation -- in an occupation of Iraq of the size that we've had continually, meaning, you know, virtually always, in which case then, yes, it would be cheaper for the military to do that itself, but --

REP. SCHWARTZ: Is there a point at which it's 10 years, 20 years?

MR. GILMORE: But if you don't think -- yeah -- if you don't think you're going to be involved in it continually, then it's actually cheaper to hire contractors and then shed them when you no longer engage in those activities and only hire them when you are.

REP. SCHWARTZ: That makes sense, although it's now been eight, nine years and you projected out another 10 --

MR. GILMORE: So there is the question of what "continual" means.

REP. SCHWARTZ: So it is much longer than temporary. Even -- we hope it's temporary too, of course.

MR. GILMORE: I won't dispute that. But with regard to your specific question about efficiencies, we have not looked at that, but the Iraq inspector general has and I think GAO has. And they've reached what -- the conclusions that they have.

REP. SCHWARTZ: All right. Well, you've got a sense of how much -- a ($)100 billion out of -- it's not the ($)527 billion. It's out of the supplemental. It's out of the ($)800 billion.

MR. GILMORE: At that time it probably would have been on the order of a ($)100 billion out of ($)600 or ($)700 billion was --

REP. SCHWARTZ: Maybe it's something for us to continue to -- (cross talk) -- going forward.

MR. GILMORE: But -- yeah -- but I would point out that probably about two-thirds of the defense budget is spent on contractors.

REP. SCHWARTZ: Well, it's -- again, using --

MR. GILMORE: One way or another, I mean.

REP. SCHWARTZ: One way or another. It's --

MR. GILMORE: Yeah, contractors develop the weapon systems. There are a lot of contractors that perform other functions. And so if you look at that ($)515 billion, there's a third of it that's spent on military personnel. But --

REP. SCHWARTZ: I -- you know, I'm not suggesting that we not use private contracting. I'm just suggesting that -- and I believe there's quite a bit of oversight in some situations where I visited certainly defense contractors, they said there's someone from DOD there auditing what they do all the time.

So I'm just saying that under the previous administration there were some real issues with this, again, to those audits, and that we ought to just make sure that we are spending precious public dollars as efficiently and effectively as we might. So -- maybe a question for another day and for someone else. Thank you.

REP. SPRATT: Mr. Simpson.

REP. MICHAEL K. SIMPSON (R-ID): Thank you, Mr. Chairman.

I just note that there's been a question of contract management under every administration, not just the previous administration.

In effect, you don't go into whether contract management has been appropriate or not. I sit on the Energy and Water Subcommittee. And we've looked at a lot of the contracts that have been done with the Department of Energy and some of the programs, Waste Treatment Plant at Hanford that started off at ($)4 billion and went to $14 billion; causes us great deal of concern.

I wonder about the relationship between the contractors who work for DOD, who have a close relationship with them. How much contract management oversight is there, and you don't go into that, do you?

MR. GILMORE: No, we don't.

REP. SIMPSON: Let me ask a couple of other questions. If you were -- in your budget therein -- while you're looking at your numbers here, do you take into account defense operations that are outside of the DOD, Department of Energy, example, the weapons complex, the non- proliferation funds that the chairman was talking about, those types of things, because those are certainly as much a part of defense as anything else we do.

MR. GILMORE: In the projections that I showed you, we focused just on budget Function 051 which is the Department of Defense. Considering 050 would add another $18 to $20 billion. And then there were to be amounts in addition to that Chairman Spratt mentioned associated with -- substantial amounts associated with Veterans' Affairs and other activities, homeland security, homeland defense. But my projections focus just on the Department of Defense.

REP. SIMPSON: We -- there is a proposal that this administration is currently looking at is taking the weapons complex out of civilian management and putting it under DOD. Have you looked at that proposal at all?

MR. GILMORE: We have not.

REP. SIMPSON: Let me ask you about -- one of the costs that you mentioned, health care costs, as driving the O&M budget. How does that compare with private sector health care cost increase that we're seeing in the private sector?

MR. GILMORE: In the projections that I showed you, the growth rates for the cost of DOD medical care and pharmaceuticals and so forth are all comparable to those that CBO uses in its projections for the costs of civilian health care.

REP. SIMPSON: That's surprising it seems how I thought government control of that was going to keep the cost down. And that's why we're going to go to universal health care. But that's another question.

What about the long-term increase in efficiency that you would expect when you have new technologies and so forth? We don't see that within -- I think, Mr. Daggett, you said we don't see that within the Department of Defense as we do in the private sector.

As an example I -- the first cell phone I bought cost $960. Today they'll give you a cell phone.

Why don't we see that type of thing within the Department of Defense?

MR. DAGGETT: There's a huge literature that discusses that. And you know, the bottom line on it is seeking performance rather than reliability, availability, and maintainability as they say.

For its part, DOD is really -- has been looking pretty hard at that in last couple of years. There is a new team that is working at DOD to look -- to actually get involved in the operational testing or development testing of major systems with a view toward identifying possible improvements in long-term maintainability of the system.

But that's a new initiative. I think we'll have to see how that plays out. DOD itself is very concerned about the fact that the cost of operating, maintaining weapon systems really hasn't come down as costs have come down in the civilian sector.

And you look at any part of the civilian sector, not just electronics but automobiles or aircraft operation and maintenance. The trends are not as good in DOD. Our -- and sometimes are going in the opposite direction in DOD from what's going on in the civilian sectors.

So, you know, it's certainly an area that DOD recognizes and that they're trying to work at. That said, if you go back to the '80s, you know, that was an issue back then as well. Again, what drives it here is when you're developing weapon system, what are you looking for?

You're looking for performance and you're trying to push the envelope in a lot of cases. For -- in electronics, you're trying to get a complete picture of the battlefield. And that involves, to the extent that you could use consumer -- off-the-shelf consumer technology to do that, then we'd get cheaper over time.

But a lot of these are unique kinds of things that DOD alone does, that -- and there's not a parallel requirement for it in civilian sector. So they're left to do it themselves, and it becomes a very costly kind of thing to try to do it.

And another aspect of the problem is, again, given that it takes so long to develop a weapon system, some of the old software and even the computer systems that you're using are getting pretty out-of-date. So when they do break, you have to go back to the manufacturers and get old systems or you have to replicate it in a way.

So it's more expensive to replace it than it typical is in the civilian sector. So a lot of factors that drive this.

REP. SIMPSON: That's the one thing we found within the Department of Energy is that they do unique things --

MR. DAGGETT: Right.

REP. SIMPSON: -- that are sometimes hard to estimate the cost of, because they have never been done before.

MR. DAGGETT: Because they've never been done.

REP. SIMPSON: Yeah. I appreciate your testimony, and as the chairman said, the interesting thing about this -- it's interesting to get the background on this, but an awful lot of this discussion depends on the policy decisions that we ultimately have to make.

REP. SPRATT: Thank you, Mr. Simpson.

Mr. Becerra.

Mr. Blumenauer.

Mr. McGovern.

Ms. McCollum.

REP. BETTY MCCOLLUM (D-MN): Thank you, Mr. Chair.

Gentlemen, we sit here today and Congress and the new administration, as has been pointed out in other questions must begin making smart decisions for best overall security strategy for the United States.

As the DOD working paper states, our capabilities based on planning should be apportioned for the risks across the challenges. Now it seems our current defense strategy focuses on spending on the least likely scenarios according to this chart -- the Quad chart that was put up.

Clearly, an example of this was the money that we've spent on missile defense. And I am afraid that we're not focused enough on high risk, high vulnerable scenarios. As we look to make the Pentagon more cost-efficient, is one of the tools that we have on our national security strategy box is supporting the 3D strategy.

National security is defense, diplomacy, and development. And one of the things that I notice that's missing on this Quad chart is any discussion about how climate change -- and we know that the Department of Defense is spending a lot of money with climate change scenarios out here.

So what are some of the potential cost savings for our national security spending by increasing funding for development and diplomacy? What kind of savings could we see doing that?

Thank you, Mr. Chair.

MR. DAGGETT: I put the Quad chart up, so I guess I'm on for that. It's a hard question. Secretary Gates really has done a series of speeches recently in which he's raised a lot of precisely the kinds of questions that you have.

Those of us who work in Washington on defense policy, in particular, discuss quite often different -- very fundamentally different alternative approaches to national security. What could you -- are there things you could do in prevention by building relations with allies that could then lead to, you know, reduced requirements over the long term for forces and so on.

I mean we talk academically about that all the time. They are now on the political agenda. And they are there because Secretary Gates has really put them on the political agenda. He is talking about a whole-of-government approach now to national security that involves all of the elements that you talked about.

So it's a, you know, it's a very lively discussion. One of the things -- I think in the short term his priority as he's articulated, has been to reduce the emphasis on what he calls "traditional systems," and increase the emphasis, as he puts it, on the wars we are fighting now, by which he means irregular conflict.

He's more focused on the fairly short term, not on the kind of longer term issues so much immediately that you talked about, but on the shorter term. And that does involve some shifts, some potential shifts in priorities. And I look for DOD to be discussing them over -- even in the 2010 budget and particularly in future budgets. But that, to me, is likely to mean trade-offs in major weapons programs.

Are we going to continue to produce DDG-1000 destroyer or not, transformational communication satellite, things of that sort, all of which support traditional state on capabilities for traditional conflicts, and in favor of what?

He has been very focused on trying to find more resources for the immediate fight. Some of them are fairly -- are not necessarily low tax. Some of these things are like -- are certainly UAVs and so on. But his argument has precisely been that we have not put sufficient resources into those areas.

But I think there is going to be a big debate about the allocation of resources, or there's likely to be a big debate about the allocation of resources. And I'm not sure how it will play out.

I mean you raised a much longer term question. And I think there's also -- certainly is a discussion in the government about allocation of resources between defense and non-defense. That gets way beyond what Mike and I work on, but it is a big part of the discussion.

DOD has been involved now in some -- there have been some increases in what DOD is doing in typical areas of foreign affairs.

If you leave aside, you know, military assistance, security assistance, and even economic assistance to foreign countries, if you leave aside, though, what DOD is doing in Iraq and Afghanistan, that's not, by DOD standards, a huge amount of money.

Global training equipment has become a big, big focus of attention. DOD last year asked for authority for $800 million, I think, for that. From the State Department's point of view, that's a lot of money. From the Department of Defense' point of view, it isn't particularly.

The appropriators then have taken some issue with that. They think that that should be handled primarily by the State Department rather than by DOD. And I think that again is an issue for, you know, in a sense this committee to address the Congress as a whole.

REP. MCCOLLUM: Mr. Chair, I hope we have a chance to talk about those trade-offs and balances later in the committee, especially as re-authorization for State Department starts moving forward.

REP. SPRATT: We will. Thank you very much.

Ms. Lummis from Wyoming.

REP. CYNTHIA M. LUMMIS (R-WY): (Off mike) -- attendance today. I'd like to start with a very basic question about the Department of Defense and its inability to produce a clean audit. I'm curious why that is, what obstacles you think prevent that from happening.

I support peace through strength. I support a robust capable military. But I do find it interesting that earlier in this discussion we were talking about how military auditors are auditing contracts. But why can't they, in turn, produce a clean audit of the Department of Defense? Any thoughts in that regard?

MR. GILMORE: That's not an issue that CBO really looks at. That's -- you know, auditing is the forte of the General Accountability Office. I guess the only thing I would observe -- and this is, by no means, to try and make an excuse for the problems in DOD bookkeeping.

But I think we've seen that many large organizations have problems keeping their books and accounting for every dollar that's spent, no matter how hard they try to do that. And DOD is another large organization. So it's not surprising that they have those problems, which is not to say that they shouldn't continue very hard to try and eliminate all of them. But that's not something that we've looked at specifically.

REP. LUMMIS: Okay.

Thank you, Mr. Chairman.

My next question is perhaps more on point. One of the biggest tensions, I understand, that occurs in the budget process for DOD is the constant battle between funding current operations and long-term planning and acquisition.

So my question is this. Based on your analysis, do the budget numbers give us an indication of where DOD is focusing? Is it more focused towards replenishing what we have, or spending money on what we think we might need in the future?

MR. GILMORE: Well, I think that the, you know, the base budget contains a funding for both kinds of activities, although predominantly for systems in the future. So if you look at the investment program, it's dominated by things like the Joint Strike Fighter program, the Littoral Combat Ship program, the DDG-1000, other systems like that, that are going to come online in the future.

But there's also -- there are also requests in the base budget for billions of dollars worth of procurement for what Steve and we at CBO refer to as "minor equipment" in the Army -- ammunition, radios, other things like that that are very important to current operations.

And then, of course, there are also substantial amounts in the supplementals for those kinds of things. So, you know, the short answer is it's a mixture of both. And the base budget is primarily focused on the future, not surprisingly, and the supplementals are primarily focused on funding current operation.

MR. DAGGETT: Can I -- just one point. Secretary Gates, again, has raised precisely that issue in those terms. And his -- he made a speech a few months ago in which he argued that we need to focus less on war; we're not fighting in the war -- on the war we're fighting now.

And I think that's partly -- we're concerned about that kind of issue comes from. You know, his argument is that a large part of investment has been in the direction of these systems for conflicts 20 or 30 years down the road at a time when we're having a problem, in his view, finding sufficient resources for some of the things he wanted to do in Iraq and Afghanistan.

And that drove it -- doesn't necessarily -- it's not necessarily a big budget driver. The kinds of items he was talking about for Iraq and Afghanistan aren't necessarily going to drive the budget in itself much higher. But it is a matter of allocation, it is an issue in DOD.

REP. LUMMIS: Thank you.

And one more question, Mr. Chairman. And thank you very much for working so hard to pronounce my name right. I'm struggling in both my own conference and with others to get in. You've got it right. So I deeply appreciate that. (Laughs)

My last question is about the Army National Guard or National Guards' men and women deployed in both Iraq and Afghanistan. And this is a subject that's very close to home with me, because in April, over 940 guardsmen and women from Wyoming will be deploying to Iraq in what will be the largest mobilization in the history of Wyoming's Army National Guard.

So my question is, in terms of both manpower and machinery, in your opinion, have the DOD's budget numbers aligned with the increased burden on our National Guards around the country?

MR. GILMORE: They are beginning to. There have been substantial amounts of funding requested in the supplementals and increased amounts in the base budget associated with equipping the National Guard units for the reasons that Steve mentioned.

The National Guard is now being used as an operational force. And for the prior -- before Iraq for the prior 20 or 30 years it was not regarded that way. It was regarded as a strategic reserve, and equipment-fill and personnel-fill levels for the Guard were well short of those maintained for the active force.

You know, 80 percent equipment-fill versus 90 or 95 percent for the active force, for example. And the budgets in those years prior to operations in Iraq and Afghanistan reflected that difference, that difference in priorities. But that has been changing.

But I don't think the department or the Army, in particular, would claim that they have filled all the shortfalls. And so there is still tens of billions of dollars' worth of shortfall that I'm sure the Army would claim as need to be spent to fill their shortfall.

MR. DAGGETT: I have just one point. There's another policy issue here. And that is it's clear that what the Army wants is for all four deployed units to have the most modern equipment. They want units that are training to deploy, to train on the same kind of equipment.

Then the question becomes what about the next in line after them. Do they have to be equipped with everything the next-to-deploy unit has? And the answer is well, no, but we need to think through what the mix is. And then for the fourth-to-deploy unit, a unit that's resetting, what kind of equipment levels do you need?

And not every, you know, not every unit in the force is going to have all the most modern equipment all the time. The real policy issue for the Army, that I think is still unresolved, is what are the equipment requirements in view of the -- what are overall equipment requirements relative to our rotational policy.

And again, that's why I think there is still a need for a look at what Army investment requirements are and what remain -- what have been met and what remain to be met, I should add. And that applies as well, in particular, to our Army National Guard units.

REP. SPRATT: Mr. Blumenauer.

REP. EARL BLUMENAUER (D-OR): Thank you, Mr. Chairman.

I'd like to shift just a little bit thinking about some of the long-term obligations that the Department of Defense has that -- where there are some potential significant savings. And if we don't do it right, it's going to cost us a lot of money.

The Department of Defense is the largest manager of infrastructure in the world, largest consumer of energy. We have -- what -- 10 to 40 million acres potentially contaminated from past military operations, training.

Yet it seems that year after year after year -- and I thought the Congress more than the Department of Defense, that we're sort of missing in action, that we don't really put significant resources to helping the military clean up after itself.

I mean ultimately those munitions break down, that the military chemicals get into the water supply. We spent -- I don't know how much in Massachusetts to protect the groundwater for the Massachusetts Martha's Vineyard. Or something explodes literally and figuratively, and so we throw a lot of money in Hawaii.

But we find in front pages just in the course of the last couple weeks that there's huge local resistance to expanding training facilities, because we're not a very good steward. We're not a very good neighbor. People get stuck with stuff.

I think in Sacramento it's going to be 2077 before the base that was closed in the first round of base closure is cleaned up and returned. Now, it seem to me that this -- that it has significance in terms of just military readiness, that we are kind of stupid in terms of how we use energy.

We make it hard to have energy savings contracts that would pay for themselves. We're not developing the technology that would help the military determine whether it's a hubcap or a 105 shell. That doesn't just mean that it's hard to clean up in Colorado or Pennsylvania or Wyoming.

Every state in the Union has unexploded ordinance problems, but it has implications for those people in Wyoming that are going to be shipped overseas, because we haven't developed it.

Can you give me any sense of where you see indications with the development of future budgets going forward that there's any indication that we're going to help the military save money by cleaning up after itself, help local communities avoid pollution, and frankly, explosions?

Because I've been in -- three times since I've been in Congress, we've had to pull firefighters out of national forests because the heat was exploding shells from prior training. You got a sense of where we might be going in this in terms of budget categorization and strategy?

MR. GILMORE: You go ahead.

MR. DAGGETT: Okay. All right, just a couple of things, I can't by any means give you an overall picture of where DOD is going on environmental issues. They spend a substantial amount of year -- of money each year on environmental cleanup and compliance and there are budget figures and I can provide you with the data on the trend.

And if we did a -- I actually coauthored a report, some years ago, on trends in DOD environmental cleanup and compliance activities. DOD is subject to the same kinds of environmental compliance requirements as private industry is, really the federal governmental is.

REP. BERRY: Yeah, theoretically, not in practice.

MR. DAGGETT: But let me speak to that point. And there have been a lot of debates about whether the investments that they're making in cleanup are sufficient.

On the compliance end and especially on sites like -- things like energy efficiency, DOD has done some looking at that lately and they are not satisfied with what they've invested in energy efficiency.

It has a security component to it actually. DOD -- there was a Defense Science Board report done last year which discussed potential vulnerability of military facilities to loss of power from the public grid.

And it affected potentially even mission critical activities. So it's a really natural area, when you think about it, for DOD to look at. Now, what's the solution to that? Well, part of the solution that the DSB discussed, and that is being discussed much more extensively now inside the Defense Department as a whole, is build green power production facilities for the base itself. Use wind power --

REP. BERRY: Right.

MR. DAGGETT: -- or use geothermal power if you have those kinds of things on the base. And it's not just a matter of being green for the sake of being green, it's being green for the sake of security in duress.

REP. BERRY: Right. Well I see my time has expired, but I would very much appreciate the report -- the research that you're talking about.

Mr. Chairman, I think Mr. Daggett's last words are very important. This is not just being green for the sake of being green. It has operational implications for security of our bases in terms of energy, in terms of the safety of our personnel to protect them from military toxins and unexploded ordinance, building the technology and saving money.

And because, Mr. Chairman, you wear two hats, both with armed services and with budget this is something that I would love to be able to pursue with you to make sure that we have the budget headroom, but also we get the policies aligned.

REP. SPRATT: Three hats, I wear represent a couple of bombing ranges too.

(Laughter)

Mr. Scott, Virginia.

REP. ROBERT C. SCOTT (D-VA): Thank you, Mr. Chairman. I'd like to follow through on that because it has a specific interest in Virginia on BRAC closings. Have the BRAC closing costs including cleanup -- I think you used the word systematic underestimate of costs, would -- have the real costs of closing these bases including cleanup been appropriately projected?

MR. DAGGETT: I can't speak to that, I just haven't looked at it closely enough, and we have --

REP. SCOTT: Okay. Well let me just --

MR. DAGGETT: Again, let me try to -- if you want I will be glad to get back on this

REP. SCOTT: Okay, let me just say that Fort Monroe closing and the cleanup maybe be off in the hundreds of millions in dollars and if they are off systematic underestimate is --

MR. DAGGETT: I know it's a concern.

REP. SCOTT: -- system-wide, you're talking about many billions of dollars. Ship building, what does the -- under ship building, I notice you had significant acquisition costs there, what is our ship strength that we are projecting?

MR. GILMORE: Well, currently, in 2009 the information we have is we have a 288 ship fleet, by 2013 that would grow to 295 ships, and by 2026 that would grow to 319 ships.

Fifty-five littoral combatant ships at that time that would be the total buy that's currently planned although there has been difficulty with that program and its being restructured.

That included seven DDG-1000s.

This projection was based on the 2009 Future Years Defense Program that was put forward prior to the restructuring of the DDG-1000 program that may reduce it to two or three ships.

Fifteen CG(X)s, seven CG-47, 62 DDG-51s, 62 submarines including 12 ballistic missile submarines, 44 amphibs and 54 support ships for a total of about 319 ships in 2026.

REP. SCOTT: Did you say aircraft carriers?

MR. GILMORE: Aircraft carriers are in there. I didn't mention them, but it was -- it is a lot of aircraft --

REP. SCOTT: I am from Newport News, you'd want to mention -- (laughs.)

MR. GILMORE: -- 11 aircraft. Sorry, that was -- that was an oversight.

REP. SCOTT: I am sorry. Ship repairs, is there a backlog on maintenance of ships?

MR. GILMORE: We've not looked at that, so I can't say.

REP. SCOTT: Because you may be -- have another systematic mis- underestimate on --

MR. GILMORE: I don't know what current DOD budgeting practice -- programming practice is, but many years ago when I worked there the practice was to fund -- to program in future years, any year beyond the budget year, for 80 percent of ship depot maintenance requirements versus you know funding at what we -- what they -- what the Navy thought the real requirement was in the budget year, which meant that when those future years became budget years, you had to find an additional substantial amount of money to pay for what was really going to happen. But whether the Navy still programs in that manner, I don't know.

REP. SCOTT: You mentioned the fact that the defense budget, it kind of includes, you kind of have to think about cost of veterans. When you talk about veteran's health care, have we talked about the social services and other health care like mental health, homelessness, unemployment that we have systematically not addressed?

Are we including those, are we including business as usual on mental health, homelessness, and problems like that?

MR. DAGGETT: Well, we've both focused really just on the Department of Defense budget not on the vet -- not on the VA budget. You know, my view is in order to cover the complete costs of personnel in particular you do need to take a look at the VA budget.

REP. SCOTT: Okay. On contractors -- one of the problems of having contractors is you don't even know what law they are under, what chain of command they are under, what -- who their -- and you've got problems like use of deadly force and who makes those decisions.

There are also financial complications like they're actually competing for employees with the military, we train the guys, on our dime and if they hire them at a slightly higher pay grade then we got to train and everything else.

In addition to the complications on policy, have you looked at the financial implications of the unprecedented level of contractors we're using now on the defense budget?

MR. DAGGETT: I have --

MR. GILMORE: We have just done the analysis that I discussed previously of what the contract costs have been in Iraq and that would total $85 billion to $100 billion.

By the way, in the process of doing that work we did interact with the department and asked them whether the problem that you mentioned of people, for example highly trained special operations personnel retiring and then being hired as contractors.

REP. SCOTT: Well, we've not -- deciding not to re-up because they can get --

MR. GILMORE: Yeah, correct. Whether that was in their view a problem, whether that was creating a problem for them, and they indicated it was not. And we have no independent way of checking to determine whether that's accurate but they indicated it was not.

REP. SCOTT: Thank you. Thank you, Mr. Chairman.

REP. SPRATT: Mr. Larsen.

REP. RICK LARSEN (D-WA): Thank you, Mr. Chairman.

The Defense News February 2nd headline, "New destroyer emerges in U.S. plans, options mulled as DDG-1000 hits $6 billion." I think your analysis still had it at merely $4 billion.

And so another headline in this is "Presidential Helo Cost Growth Cracks Nunn-McCurdy Ceiling," and this for the Marine One replacement, it's -- cracks the Nunn-McCurdy ceiling. And then of course, "Gates Foresees U.S. Cuts," and that's based on his testimony to the Senate Armed Services and the House Armed Services Committee.

It just seems very difficult for me to understand that we've -- as much supplemental dollars we've provided to the Department of Defense and I am a member of the House Armed Services Committee so I have seen it all happen in the last eight years.

Both given to them in supplemental and in base budgets that they are yet coming for even asking for even more beyond what one projected increase is. And so I -- guess I would expect in armed services for us to be fairly tough over there.

But something that Secretary Gates testified to last week and I wondered if you thought these in looking at your numbers. He listed seven or eight separate steps, general steps that he had planned to take to squeeze down on acquisition costs: purchasing systems at 75 percent solution rather than 99 percent solution. We apparently, on some programs, are hitting stable rates for acquisition, freezing requirements on programs, a few other things.

Mr. Daggett and Mr. Gilmore, do either of you have some views on Secretary Gates' thoughts on how to keep costs -- ameliorate increases. I won't say keep costs down, it seems impossible on the Department of Defense. Let's say ameliorate the cost increases, Mr. Daggett?

MR. DAGGETT: Yes, here I -- let me begin by saying CRS really doesn't make recommendations on policy per se. We can assess the impact of alternatives --

REP. LARSEN: Assess away.

MR. DAGGETT: When I looked at what's driving the costs in major weapons programs I look above all, first of all at the just the requirements process. And I used in the testimony -- written testimony -- I used DDG-1000 as an example.

And if you look at it, it's designed to be a multi-mission system with pretty much maximum capability in most areas of the air defense radars, not quite missile defense radar but short of that --

REP. LARSEN: Right.

MR. DAGGETT: -- it's as capable as any system you'll have across the board, but it just has so many missions.

Well, what drove that? Well, it was driven by the internal requirements writing (ph) process in the Navy.

And when you -- and now -- and you know, I mention it not because I have a view on whether you should buy it or not, but it's in trouble because it costs so much because it's such a big ship and so much has been added to it.

So to me it's precisely the kind of example of a system that is a 95 percent solution or a 99 percent solution to a host of issues, and what Secretary Gates is saying is accept a 75 percent solution in areas where that will work.

Well, first of all you need some oversight in the acquisition, in the requirements process to ensure that. I'm not sure where that is at this point. But it's a matter for organization and senior leadership to use the requirements development process really as a way of doing these cost trade offs, the -- what's the role of that the Joint Requirements Oversight Council and so on, it looked very hard at that. Other area you need to look at it is, are there some areas where you want maximum capability others where you don't.

For an air-to-air fighter I can make an argument for having a very highly capable system, with a view toward being in the service long down the road. For an airlift aircraft, I'm not sure I need that.

So why do you need the kind of acceleration requirements that you have in various systems. I think that's a matter for oversight.

REP. LARSEN: As my time runs out, I ask Mr. Gilmore to respond to that question.

MR. GILMORE: Well, we don't make policy recommendations either, but I would simply observe what commonsense tells you that the actions the secretary is proposing to take should all help reduce costs.

But I think the most important thing for the department to do is to be realistic in its initial estimates for the costs of these systems, whatever it thinks the requirements for the systems ought to be.

And when it comes to, for example the DDG-1000, we still think on the basis of past experience that that ship will cost between $4 billion and $5 billion. The $6 billion number, I think, includes some of the development costs, but I don't know for sure. I haven't seen -- I have read the article, but I haven't seen the details behind it.

And the comparable number from the Navy previously was $3 to $4 billion more like $3.5 (billion). Originally, when it was the surface combatant of the 21st century the SC-21 program the fourth (ph) ship in the class was supposed to cost, in today's dollars, you know, $1.5 billion.

Now if you looked at the cost of that ship on a cost per ton of light ship displacement, you know, the ship without any fuel or crew or anything else that would have made it the cheapest surface combatant ever built, substantially cheaper than the DDG-51.

So there were a lot of people in the building, I was in the building at that time who knew that that initial estimate was unrealistic. So I would say that when you have initial estimates, cost estimates for systems like that no program manager in the world is going to be able to manage the program in such a way that the costs will not grow and it's not really so much cost growth as cost realism setting in.

When you actually have to design the system and build it, it always ends up costing more than these initial very optimistic estimates where people sit down and think, well, if we do this differently and this differently and this differently it will save substantial costs.

Unfortunately, history tells us that the problems that we've experienced in the past may not occur, but different problems will occur and the optimism isn't warranted.

And so, a lot of what I think people characterize and in fact I characterize in the charts I showed you is cost growth, really isn't cost growth so much as it's cost realism, it's reality setting in.

And if you want to avoid having that problem you need to have realistic initial estimates of the costs, which the department doesn't have in many instances.

REP. LARSEN: Okay. Thank you.

REP. SPRATT: Mr. Yarmuth.

REP. JOHN YARMUTH (D-KY): Thanks to both of you for your testimony. On the question of the percentage of the GDP that defense department budget constitutes, what kind of growth rate are you projecting in GDP over this term at the same time?

MR. DAGGETT: It was a little over a couple of percent real growth long term.

REP. YARMUTH: Now, I mean some people might take solace from the standpoint that even with these projected increases in absolute costs that the percentage of growth -- percentage of GDP does not grow, in fact declines.

But would you be familiar with what other costs, developmental costs would rising at, at the same time because GDP -- defense is competing with obviously every other portion of the budget.

So, if say Medicare, social security, and all the other costs sectors are increasing at a much higher rate then I assume they would be -- is that --

MR. GILMORE: They are I mean, CBO's projection -- has done a number of projections of, you know, the long-term costs of those entitlement programs and over the long run social security as a share of GDP will rise several percentage points.

And the costs of paying for Medicare and Medicaid and other programs like that will rise by tens of percentage points that's really the bigger problem areas in the future health care costs associated with those programs.

But I would observe that you could set the defense budget at zero dollars and it would not materially affect the, you know, the problem that the overall federal budget faces in paying for social security and Medicaid, which is not to say that anyone who is reasonable doesn't think that because defense currently composes over half of the domestic discretionary spending that it isn't going to be under pressure.

It obviously will be and if you look at the long-term trend for overall federal spending as a share of GDP and its components what you see is that defense basically has been the bill payer. Its share of GDP has declined as the share of GDP associated with these entitlements programs has grown.

REP. YARMUTH: All right, question; what would be comparable numbers of other industrialized nations in the world? What's the range that you would say as percent of GDP.

MR. GILMORE: We are at 4.5 percentage GDP -- the Japanese are at 2 percent or less.

MR. DAGGETT: Under one.

MR. GILMORE: And all the other countries in the world are much, much less and are -- much less.

REP. YARMUTH: Mr. Simpson raised the issue of health care costs and the growth rate that's projected and tried to make a connection between that and some kind of argument for/against universal health care.

I suspect that one of the reasons that the growth rate in medical -- in defense department health care relates to factors that aren't present in the general population, is that true the nature of the injuries, the length of care that is going to be required because of many of the injuries -- those aren't -- you don't think those are factors or would they be?

MR. GILMORE: Actually, those factors will apply more to the Department of Veterans Affairs' health care costs because the veterans who suffer those kinds of injuries and require long-term care and there are obviously horrible injuries that occur.

Although thankfully that's -- a relatively small number of people deployed who have suffered those injuries but nonetheless those are costs that end up being borne by the Department of Veterans Affairs.

Our projections for medical care costs in the Department of Defense are based upon the practices that the Department of Defense currently uses. And we did not speculate in the future in doing our projection about how the defense department might change its practices, you know, employ more health information technology and so forth and so on.

So our current projections don't incorporate any savings from those kinds of practices because, you know, those are not literally speaking part of the current plan which is not to say they may not be realized, but this is a projection of current policy not how it might change.

REP. YARMUTH: Got you, one quick question before my time expires. Part of -- so we're dealing more -- really with TRICARE here. TRICARE employs a number of private insurers to administer the programs.

So in fact it is really not fair to say that the TRICARE system is a single payer system as is often talked about --

MR. GILMORE: That's correct.

REP. YARMUTH: -- with regard to the federal government. Thank you very much.

Thank you, Mr. Chairman.

REP. SPRATT: Ms. Kaptur.

REP. MARCY KAPTUR (D-OH): Thank you, Mr. Chairman very much.

Gentlemen, you've had a long morning and we thank you very much for your work.

I wanted to go to Mr. Daggett and say that in your testimony on page 4, you touch on a subject I'm very interested in and that is the rising cost per average military service member. You state about its 45 percent more expensive today than it would be 10 years ago and that does not include the cost of medicine -- medical costs and -- nor retirees, nor does it include benefits that are not part of the National Defense Budget.

I'm interested in your discussing that a little bit more. Does this have anything to do with the rising costs of recruitment, bonuses, and retention and could you discuss that a little bit please and the nature that costs versus when we had a conscripted force as opposed to a volunteer force?

MR. DAGGETT: In these figures, I just tracked cash income of personnel and deferred benefits -- retirement benefits. I did not track non-cash compensation, which is in the operation and maintenance accounts and that includes medical care, family services, dependant education, commissaries, or -- nor did I track family housing.

So it's really just focused on the military personnel account that's kind of a technical answer, but --

REP. KAPTUR: All right.

MR. DAGGETT: -- so its only part of the compensation package, although it is the biggest share of the compensation package. I also did not track veteran's administration benefits either disability, pensions or health care or any other aspect of VA.

Educational benefits again because it's -- just because it's outside the Department of Defense. So what this tracks really is what has been happening in the DOD military personnel account in paying benefits of military personnel.

It does include retired -- retirement benefits in the sense that the approval costs of military retirement are covered here. The DOD pays into the military retirement fund an actuarially determined amount for future retirement benefits for current personnel and that is included here.

That's part of the costs. And that has been increasing dramatically, but it's increased dramatically because of two programs TRICARE for Life and concurrent receipt of military retired pay and VA disability benefits. Otherwise, it's increased just with basic pay.

So what's driving it up are lots and lots of different things. Increases in basic pay, increases in basic allowance for housing, bonuses and -- retention bonuses are part of it, but that's not a big part of the overall account. Those have increased substantially in percentage terms, but they are not a big -- a huge part of the overall budget.

REP. KAPTUR: So what is -- in that because when you look at the number of personnel obviously your disbursements for personnel are your largest expenditure --

MR. DAGGETT: Look at figure 3, which is on the next page, on page 6 actually. And that is a bar graph that shows the major elements of the part of the compensation package I'm looking at.

So includes basic pay, subsistence and separation pay, the bulk of that is just day-to-day paychecks. The basic allowance for housing, people often miss how large a share of military compensation that is, and that's actually a part of take-home pay. And that has increased dramatically over time.

REP. KAPTUR: Is -- does this reflect a rental of housing off- base or the on-base contracted out housing situation. Why is that number going up?

MR. GILMORE: Well, basic allowance for housing is given to personnel in their paychecks to pay for housing themselves. This does not track the part of military compensation, that is for family housing for on-base facilities. That's a different account. What I'm tracking here is really the trend in cash income of military personnel.

REP. KAPTUR: Well, if I were to ask you the question, since we had the draft --

MR. GILMORE: Yeah.

REP. KAPTUR: -- versus today, and you look at this cost cut --

MR. GILMORE: Right.

REP. KAPTUR: -- can one make any judgments about how the current system is different or more expensive than when we had the draft?

MR. GILMORE: Yeah, I haven't specifically done those numbers, but suffice it to say, personnel are much more expensive on average now than draftees were. But then typically, the draftees were in for a limited period of time. They were not the professional part of the military corps -- military, and they were -- the draftees were a larger part of the military -- a very large part of the military force.

The uniformed force was actually the smaller part of it. They were paid at higher rates, more comparable to this. But again, the bulk of the force being drafted, they were paid at much lower rates and were in for a shorter period of time. I know that's responsive, but I can give you the numbers on it.

REP. KAPTUR: All right. I would like two pieces of information for the record, Mr. Chairman, if I might. My time has expired.

Mr. Daggett, if you could provide the figure on, though said it was small, the actual amount of reenlistment bonuses, bonus payments to retain and attract individuals to go into the military now, versus 10 years ago, that would be -- it's billions of dollars. I would just like to see that.

And then Mr. Gilmore, I would be very interested if you could provide for the record -- of the federal deficit, the cumulated deficit in the last 10 years where we've had to borrow to cover that. How would one look at defense spending, and the war in particular, as a segment of that?

MR. GILMORE: That's something that the organization doesn't do, what you described, a particular part of defense spending to the deficit. We typically don't do that.

REP. KAPTUR: You don't do that?

MR. GILMORE: Yeah.

REP. KAPTUR: Does the CBO do that?

MR. GILMORE: CRS?

REP. KAPTUR: Excuse me, CRS do that?

MR. GILMORE: No.

REP. KAPTUR: You don't do that either, oh that's interesting. Who does do that?

MR. GILMORE: Not sure how to do it.

MR. DAGGETT: Well, we don't do it because we think there are good reasons not to do it, that you can't identify a particular dollar spent and say that's a deficit dollar versus another dollar. It's not a deficit dollar.

REP. KAPTUR: Oh, there's over $850 billion that's been spent, and $64 billion on war funding; it's all been borrowed. So if one -- it can't be that hard a calculation. I thought there'd be a chart on it or something.

MR. DAGGETT: You can make a distinction like that, but it's not something that the organization --

REP. KAPTUR: Does.

MR. DAGGETT: -- argues is a correct thing to do.

REP. KAPTUR: All right. Thank you very much, Mr. Chairman.

MR. GILMORE: If you ask, we'll be glad to take a cut at it. We'll -- I mean, we'll respond to all -- any of those --

REP. KAPTUR: I would be very grateful for how you might arrange that --

MR. GILMORE: Sure.

REP. KAPTUR: -- mathematically, thank you.

REP. SPRATT: Mr. Etheridge.

REP. BOB ETHERIDGE (D-NC): Thank you, Mr. Chairman, thank you for holding this meeting.

Thank you, gentlemen, for staying. And I appreciate your presentation. Let me ask a question a little different way because I represent Fort Bragg in North Carolina, and also have the privilege of having the headquarters of the 30th Heavy Brigade that's been pulled up as -- the Old Hickory unit pulled to Iraq, and now getting ready to come back again, so thousands of brave men and women who are stationed in those areas and many who've served multiple tours in Afghanistan and Iraq.

But my question is little different. And the new administration is now considering plans to substantially increase troop levels in Afghanistan. My question is the future war-cost projections that we saw -- and you talked about them in some detail, and there's the charts and graphs, and numbers -- give us any help in looking at future projections by the CBO as you put these numbers out. Do they take any kind of probable increase in the accounts or adjustments, given this administrative change?

MR. GILMORE: The projections I showed you, which over the next few years, assume that troop levels declined from -- in the entire -- in the total Iraq theater from a 180,000 or 190,000 troops in Iraq, and then another 30,000 or so in Afghanistan, and the total number deployed declined to 75,000 --

REP. ETHERIDGE: So you're using the 75,000 figure -- the number.

MR. GILMORE: Yeah, that -- that ramp-down does not -- and we had to make an assumption and so we just assumed --

REP. ETHERIDGE: Sure.

MR. GILMORE: We had a beginning point, which is the current size of the deployments in Iraq -- Iraq theatre, and Afghanistan, and then we had a somewhat arbitrarily chosen endpoint 75,000, and we just linearly ramped it down over three or four years. That obviously does not account for how the detailed deployments might evolve over the next year or two -- I'm going to stop doing that -- over the next year or two. It certainly could end up being consistent with what happens.

If there is a drawdown in Iraq that proceeds at a more rapid pace than -- or it is more substantial, larger than the increase in forces in Afghanistan; that somewhat arbitrary assumption could turn out to be roughly consistent with what happens, but that's not the way it was designed.

REP. ETHERIDGE: Let me follow-up that because I hear from men and women quite frequently. And you touched on it early on the reset cost -- and, you know, we talked about the reset cost, but also you got that training piece.

If you don't have the equipment to train with -- and you know, we've been through this a number of times -- is that in the projections, as well as getting equipment up to speed. Because we come home, we're assuming they wind up in Afghanistan; you got a little different environment in Afghanistan than you do in Iraq -- in the sand, it's still a tough environment. Is that included in these projections?

MR. GILMORE: Short answer is, yes. We include in our projection, an estimate of what it'll cost to quote unquote "reset the equipment" based on what our experience has been over the last year or so. So to the extent that that experience is a good predictor of the future, we've accounted for well.

But there are many details of those costs that -- not withstanding our report of a year-and-a-half ago, we still don't understand. So I'm not going to sit here and say that I think we, you know, that that projection is a real prediction of the future. But it is based on our experience in reset costs over the last years.

REP. ETHERIDGE: Okay. One other point, and then I'll yield back, Mr. Chairman.

Because you touched on it, and had an overview on the health care cost that you responded earlier to two questions. I haven't -- I had the opportunity to spend some time in the military in the days when the draft was active with a lot of my friends and neighbors.

The health care issue that was raised in the current environment we find ourselves in with an all-volunteer Army. We really have a much younger force if you look from top to bottom, than you would have in the general public at large, even with TRICARE. Because you got a selected force by and large that is fairly active, accustomed to stand physically fit, by and large --

MR. GILMORE: Maybe we have a --

REP. ETHERIDGE: -- more so than the public at large.

MR. DAGGETT: Well, but under-65 retirees do get access to the military --

REP. ETHERIDGE: No, I understand that.

MR. DAGGETT: Okay.

REP. ETHERIDGE: But by and large, they normally would be a more physically fit group, I would think, because they have a habit of that.

MR. GILMORE: I think you're correct. You're obviously correct that the enlisted force which composes the bulk of the force is going to be younger than the population is old.

REP. ETHERIDGE: Yes.

MR. GILMORE: Although, as I mentioned before, we haven't really looked at the, you know, the effect that some of the demographics we have --

REP. ETHERIDGE: That would -- I would be interested to know as we go through this, not so much to call attention to either one, but to show what happens if a person stays physically fit, what happens in -- I think we know the answer, but it sure would be good to quantify. Thank you, Mr. Chairman, I yield back.

REP. SPRATT: Thank you, Mr. Etheridge.

Just quickly, one question before I turn to Mr. Langevin. Do you have a rule of thumb at CRS or CBO for what it costs to move a division or brigade before equipment's sent back to the States from Iraq?

MR. GILMORE: No, I don't. I can't give you a number off the top of my head. But I can say that my recollection is, in the past we've tried to estimate those transportation costs. And I'm not going to claim that they're small in absolute terms, but as a percentage of the operations maintenance bill -- the total operations and maintenance bill that accrues every year, which is, you know, probably 80 percent of that, $180 billion or so; it's a small fraction of that.

MR. DAGGETT: And we've tried to defer to CBO on cost assessments of forces abroad -- or deployments abroad.

REP. SPRATT: Could you submit for the record, your rough estimation of that, your rule of thumb for --

MR. GILMORE: Okay.

REP. SPRATT: -- that you set, brigades set, whatever the profit unit is?

MR. GILMORE: I'd say brigades set, would probably be a --

REP. SPRATT: You can heavily caveat it for --

MR. GILMORE: Yeah.

REP. SPRATT: Mr. Langevin.

REP. JIM LANGEVIN (D-RI): Thank you, Mr. Chairman. And gentleman, well, thank you for your patience and for your testimony here today, and for what you do to make sure that we stay informed with good information.

As I sit not only in the Budget Committee, but also the House Armed Services Committee, following the debate on the issue of the DDG-1000 versus the 51 that's going on right now, and just for my own knowledge and clarification of the record, when you talk about the range of potential costs of $4 or $5 or $6 billion for the DDG-1000, I would assume that you're talking about the first ship, which obviously, is always the most expensive. And then costs moderate over time as you achieve economies of scale.

Can you clarify that for the record, and also talk about your analysis on startup costs if we were to restart the DDG-51 line, and your estimated real cost of what that would be -- what that ship would be per copy now with, you know, add-on technologies.

And also, the trade-offs versus going with the DDG-1000, and the fact that these are supposed to be incorporating follow-on or transformational technologies that would, at a later point, be used on the cruiser or other platforms. So that it's kind of -- you can't just talk about that 51 in the vacuum, you know, they've other follow- on technologies that would be applied to other platforms and would be, of course, useful as the cruiser is developed. So if you could just kind of talk about those first -- first few minutes?

MR. GILMORE: Well, the cost numbers that I quoted of -- $4 to $5 billion were for the first ship, exclusive of the -- so it excluded the development costs, the design costs for the ship; the cost of building the first ship, so.

REP. LANGEVIN: Yeah.

MR. GILMORE: And then, yes, we do assume in our estimates that subsequent costs -- subsequent ships cost less, as there is the learning effect that occurs.

REP. LANGEVIN: Right. So can you estimate what that the follow- on cost would be, the -- if you --

MR. GILMORE: I don't remember that off the top of my head, but I can certainly provide them to you in our estimates.

REP. LANGEVIN: Yeah, that would be helpful, that would be helpful.

MR. GILMORE: And as far as the start-up costs and the new ship costs for DDG -- for new versions of the DDG-51 are concerned, that's not something at which we've looked, and I'd have to take a look at what the department is claiming before I could actually decide whether we have enough information to do a cost estimate at this point. I don't know if there is sufficient information available from the Department on what it would actually put in new DDG-51s to do a definitive estimate.

REP. LANGEVIN: They are making what they're claiming to be definitive estimates. So I think that'd be a help if you would look at that, and get back to us for the record.

MR. GILMORE: All right.

REP. LANGEVIN: And then have you looked at the last part of my question; the value of -- the fact that the kind of technologies that the 51 would be incorporating would -- the DDG-1000 would be incorporating would be used on other platforms, and particularly for the cruiser?

MR. GILMORE: I don't mean to sound obtuse -- and I probably will. I really don't know how to measure that value quantitatively. I certainly would admit that it exists. What analysis I could do that would generate numbers that would measure that value; I fall short, trying to think of.

So I'm not certain -- in fact, I'm fairly certain that I couldn't give you a -- provide you with analysis on a quantitative result that would measure that value.

I think that that's a matter of judgment on the part of people in the Congress and people in the Department of Defense as to whether they think, you know, whatever costs will accrue to implement those new technologies is worth it.

REP. LANGEVIN: Okay. Let me go back to -- Mr. Daggett, do you have a comment at --?

MR. DAGGETT: No.

REP. LANGEVIN: Okay, let me go to the final question that my colleague Ms. McCollum was asking. As obviously, the country is facing an economic and fiscal crisis right now, with the Department of Defense spending, we obviously need to do the job of keeping the country safe, but spend our dollars more wisely.

Just as the, you know, the QDR helps inform the FYDP, isn't it important than ever right now, that we will look at security from a -- from a more global perspective. There are those that would argue that we need to do a better job at using our soft power assets, incorporating that in the overall national security strategy as opposed to just looking at it myopically from the point of view of Defense Department.

And so that's something that I've thought about, and I've introduced legislations, in fact, of calling for a quadrennial national security review that would be done -- that would -- that I believe better inform the QDR, which would better inform the FYDP, and overall defense policy and strategy. And we'd obviously make sure that we're spending our dollars, you know, in the best way, most effectively possible. Can you talk about that?

MR. DAGGETT: A couple of points. A lot of organizations, lately, have been looking at improved interagency cooperation in national security affairs. There has been discussion of doing an overall national security strategy statement with regard to budgeting for DOD as well as for other agencies, for security purposes. We'll see if this administration will propose that. It could be part of consideration of legislative measures as well, if there are proposals to strengthen the interagency.

At the center of some of the proposals are -- by the way, you will find some of the strongest advocates of this in DOD. Not just Secretary Gates, but other military commanders who've involved in Iraq and elsewhere, who argue that the whole interagency system is to be bolstered across the board for prevention, but also for stability operations once they're involved overseas.

Big focus of attention is on -- how do you build teams to work on national security issues like proliferation, which cuts across agencies. It's a State Department issue, it's a DOD issue; it's a Department of Energy issue, it could be a Treasury issue to track funding flows.

We're not very good or as good as we could be probably at building -- we do build teams at the assistant secretary level to discuss policy issues. But at the implementation level, we don't do that on a regular basis. Or it doesn't work as well as it could because DOD is such a big agency. It comes in and everybody defers to them.

How do you build that kind of -- those kinds of structures across the board? That's a very big matter of discussion. And we've been looking at that a little bit, the Hope (ph) commission that did a recent study on it that has a number of recommendations for teambuilding. So absolutely, you know, huge issue on the -- (off mike).

MR. GILMORE: I think that the arguments in favor of a quadrennial national strategy review, those arguments in principle are sound, and they certainly make sense. I participated in 1997 Quadrennial Defense Review, and in the 2001 Quadrennial Defense Review, when I worked in the Pentagon. And I observed the last Quadrennial Defense Review from my position in CBO, and I would observe the following.

If you look at the reviews, which went from lasting 3 or 4 months in 1997 to over a year in the most recent version, and if you look at then what changes were actually made in the program -- defense program, subsequent to the reviews, you find that virtually nothing changed.

So in principle, I understand all the arguments in favor of these reviews. In practice, what I've seen happen is, the reviews extend in length, expand in scope, and have lesser impact -- or probably it wouldn't be fair to say "lesser," but not what I would characterize a significant effect on the actual defense program measured by what changed.

What did actually change in the program as a result of the review? And I would say, probably not much, in almost every instance. So going forward, if we can find a different way to do these reviews, perhaps, we can be more successful within taking strategy and connecting them to the Future Years Defense Program, and to spending in other departments. But when I look at the record, I haven't really seen that happen, and I measured that according to -- what are the differences between the program that existed before the review and after the review.

Now, on principle, there could be good reasons why not much of anything changed, but all the arguments I've heard in favor of things like a quadrennial national strategy review are there are all these problems that we've left unaddressed, and the only way to address them is to have a more -- a broader skill, more encompassing review. And when you look at what's happened in the past, not much has changed. And if not much has changed then it would indicate to me that all these problems that people have identified haven't been addressed.

REP. LANGEVIN: Well, I could go on and on. But since my time has expired, so I'll stop there. Thank you for your input, and if you have ways that you could suggest, then we could change that to make those reviews more effective. I know I'll be open to hearing those thoughts. Thank you.

REP. SPRATT: That concludes our hearing. I want to thank you once again for your excellent testimony. I think it speaks volumes about defense, but also about the value analysis that we have available in CBO and CRS.

Thank you very much indeed for coming in. Thank you for the efforts you put in to make this hearing a useful venture. I also ask unanimous consent to the members who did not have the opportunity to ask questions, be given seven days to submit questions for the record. Once again, thank you for coming.

END.

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