let us hope that is the case. and better inventory management. again, this has been hall mark, we have been preaching better inventory market. they are efficiency dividends, that means that we took the money out and you figure out how to be more efficient. the second is, in fact, some of the unanswered questions, this was a difficult budget process because the start point was not determined until it was wrapped up and then they had to go back and take into account what the congress acted on. a lot of the fiscal year '13 issues were g them into fiscal year '14 and beyond. you'll not have much visibility on that but you'll have hints on them. but over the review cycle for

the appropriations act, most of those punted issues will come to light, why? because the pentagon has to come to grips with fiscal year '14 immediately. they are already working on that budget and it's critical that they get that in place, that is where the impact of failing to take into account the reductions has long-term consequences. i have to say something about base closures. i have been involved heavily in base closure processes, i got an e-mail from someone reminding me of a quote i made. you'll never see a braked requested in an election year and i have to eat those words.

the viability of the request remains to be seen but there's a point that the pentagon has failed to foresee. there's a push for an expanded overseas basing presence as part of the second element of this strategic review. from the pentagon's point of view, these two are not connect. you can be making reductions for efficiency purposes with your domestic infrastructure at the same time as you are making your -- these two are in fact linked together, we have seen it where the typical mentality no matter where you are from, you say, you know what? before you close my base, why don't you go get those blank aircraft in blank base overseas and bring them home and put them

here instead and until and unless the pentagon does a better job of reconciling that dispute, we are not likely to see movement forward. there's also a question of the role of politics here, and you know, each passing administration, each passing election cycle sees a little bit more penetration of politics into the bepentagon, many of yo have been at this over the course of careers that stretch back over decades, and we have all seen it. the attempts over the last month or so to a line the white house's own objectives with the pentagon's observes are worth lauding, it's useful to have some alignment, if you will. on the other hand, the political folks need to be more careful,

contribution that they can make is to in fact be allowed to do its job, very, very well. and that was the fundamental premise that the branchs of government were set up and set up the friction between the executive and legislative branch, it will benefit us to separate out those things that are being driven for political purpose and those that contribute to the national security of the united states, i'll close my remarks that the point and we will prepare to open the floor for questions, let me remind you of the process, if you will. we have microphones, wait for the microphones so that in fact the audience on the web and on television can hear you as well. you raise your hand i'll recognize you by pointing to you and saying something, wait for the mike, if you do two things, identify yourself by giving me your name and identify your

affiliation and if you do not have anything, you can do what a registered independent does, and call yourself a nonaffiliate d participant. >> thanks for taking the question. this question is directed more towards todd and clark, we have heard a lot about the cons consequences of sequencetra tms, i want to know if you can expand on clark's comments about the alternatives to that or do you see a logical path of a roll back of sequestration, and how is the dod planning for that and what is industry's reaction?

>> here is how it lays out, the super committee failed to find $1.2 trillion in deficit reduction,ing that means turned law, they will take $1.2 trillion out of the budget, of the 600 billion allocated to the defense, they get to take the interest savings, it a lie ppli what is called the 050 budget functio so, of the $492 billion, that you actually have to cut, about 96% of that comes out of dod, though there's flexibility there, you are talking 472

billion that has to come out of dod and it has to be evenly divided over the next nine years, so $52 billion has to come out of the dod budget, fy' 13 budget, you have to have a uniform cut across the accounts, it ends up being 10%. now, with that said, what can, you know, what can you do to avoid the messiness of that and the unstrategic nature of these across the board cuts? you need the cooperation of congress to do anything, or they can submit a budget amendment that comes in at the 52 billion reduced number.

f for '13 it will take the money under the cap. you write the appropriation bill so it comes in at the lower number and you say at the bottom, increase every account in here by 11%, then you cut it by 10% and you end up where you want to be. i know it's a game but this is how you have to do it. the idea is you get to target the cuts. it's a 10% reduction. okay. what are some other alternatives if you want to avoid that, well as the president said, he will not take the pressure off the congress to handle the deficit, so what can you to make it easier for dod, reallocate thenf coming down suddenly and staying flat at the lower level the rest

of the decade, you can make it a gradual decline, that achieves the same amount of savings over the decade. i ran calculations, you would have to decline the defense budget at about a 2% real rate, adjusting for inflation, a 2% reduction over the decade that gives you about the same level of total savings as you would under sequestration, it's a more gradual ramp down that is smoother for dod >> are the rating agencies looking at the $1.2 trillion today in total? >> yeah, the way the law is written, it the not take into account time/value of money. yes, you are back loading the cuts if you take the ramp down approach i was just talking about, so the real reduction is less, but, you know, that is the way the law is written. >> part two of my question, is

there a legislative process to avoid it? >> changing the law. i mean, you have to change the law. the super committee was the legislative process to avoid it that was easiest to accomplish the process. it was to get through the house and senate without amendments and it was not subject to the 60 vote rule in the senate, that was the easiest way to avoid this and that opportunity has passed so now if they want to modify it, it's the regular legislative process and they have to get 60 votes in the senate to do anything. >> the only thing i would point out that, the only way to change it is change the law. what are the circumstances under which the law might be changed? well to reach a bargain,

bargaining has not stopped. there are teams out there thinking about life beyond seque scht ster and how to deal with it. a deal is the grand bargain, where most, i think outside analysts say, that we need between 3 and $4 billion worth of revenue increases otherwise known as tax increases. if there's a grand bargain, defense will be part of that, because it represent 40% plus of discretionary sending, you do not get there without defense, while you did not see big cuts in this first round, they are being saved about second round of negotiations, about what can

replace sequester, it will be demanded by the budget control act or it could be $2.5 billion that addresses the budget crisis. >> i know we want to get to the next question, let me stress, that part of that process of the bargain and the debate and the compromise, has to take into account what to the think about. and this is never been part of our equation before. go back to number of 21st when the super committee faed and they announced that in fact we will have to move towards sequestration, this was irrelevant. the dollars were still coming out, didn't matter from where. from the standpoint of the so

solvance of the u.s., that was fine. if we start sending the wrong signals at the wrong time and it provokes a reaction from the ratings agency, and they say, you just crossed the line, a line that you did not know was there, and a line that you did time. but it's visual, public and with potential significant impact. this is a different part of to equation, if you will and one that i think, in other words you cannot just let defense off the hook without finding that $475 billion somewhere else. so, next question. >> george nichol son, this is for todd and for clark. todd, you mentioned that the pain with the cuts, retire all the c 5-as, reduction of the

squads and tore the national air guard, that will be a absolute red flag and how will the hill handle that? >> yeah, i mean, i think it's going to be a big issue, you cited a lot of the cuts in the air force, and i'll admit my bias here as a former air force reservist where we had c 5-as. they will be taken and you'll see a lot of push back once the guard and reserve lobbying groups get mobilized. they have a lot of influence on the hill. we will have a fight where we will see the cuts. i don't think that it's a done deal. >> i don't really have anything to add to that. >> george, do you still have the mike? let's go to my right and then we

will come back to the middle here. we have two guy over here, byron you get the mike first and pass it forward. >> okay, i want to ask you a question first and then todd. >> make sure, i identified you but that is not adequate for the audience. >> -- when you looked at the program, did you see anything that applied to the industrial base, and did you think of what the glide slope and investments could be in '13 and '14 as opposed to what we had in '12. >> what we saw was evidence of potential concern, what we have had the pentagon tell us now, both with the strategic guidance in connection with yesterday's announcement is that there's an increased consideration of industrial base concerns as

these decisions are being made, that is all well and good, the real question is not is therein ceased consideration, but you change the thought to he reflre it. we do not have any proof that such a decision has been made. the supplier base is at risk, the difference of what the level is, is what is happening in the budget with other programs that would have essentially a similar supplier base and structure in place and we don't know yet the answer to that question. one might aassume, that in fact looking at across the board, the uav infrastructure that supports the large planes is sustained. but we don't know. that is what we have to look for in that equation.

>> i give them great credit for at least saying the right words and saying we have to take into account what these cuts are going to mean for the defense industrial base and we have to take action where necessary to preserve critical vital sectors of the industrial base. the devil of course is in the details. the reality is that you cannot do everything that everyone would want you to do to preserve every sector of the industrial base. the question is not what do you cut, it what do you keep. we don't know what they are talking about doing. they talked about monitoring, but i don't think that is sufficient. in terms of the procurement and rdt and the accounts, we don't know enough to say, based on what they said yesterday, my hunch is had that procurement will take a steeper cut than other parts of the budget, they are talking about protecting your, you know, s and t investment, and investment in your r and d seed corn if you will.

so, if they do that, then rdt and e may not take as much of a cut as procurement. but that is all we can really say at this point. >> i'll put in a plug, we plan here on wednesday the 15th of february, to have an event that is focused on the defense budget a assuming they release it on the 13th. and we will be able to answer questions at that point in time. let's go to the front here. >> rich mcfar land with parsons, the other issue in the room is a cr, and we are heading that way into a perfect storm of issues that have to be addressed. and i personally see another six to eight month cr that we experienced last year, do you know if the department and the rest of fwomgovernment is tryin

prepare some sort of strategy to deal with that in terms of scheduling procurements, etcetera, and if not, please ask them to do so, and that is really up to you stephanie. >> to be honest i think the executive branch has been so wrapped up in what we have been seeing lately that they have not given it much p thought. this could be the former staffer in me saying come on guys, i think you are right, we will see crs i tend to think it will be longer than eight months. it will be shorter in other parts of government. i think you made very good points and we will take that message back to people we talk to. >> already a couple of our aspects, the wild card is who wins in november, not just in the presidential level but will the republicans take back the senate, will it be a tighter

margin in the house or a larger margin margin. the decisions in the lame duck session will be driven by what happens in november. a difference between a cr level which is continue fy '12 funding into '13 is minimal and so as long as there are enough things written into the resolution so the defense department can make the adjustments that they planned to do the potential impact would not be that great absent the $52 billion. >> the uncertainty freeze s the customers and programs tend to take one of two very opposed views here, one is, i don't know what my future money is going to look like and so i'm going to be prudent and be cautious and slow it all down and the other

dynamic, i do not know my future money will look like so i have to spend every dime. we have another question back up in the front here. >> peter sharp, mitre corporation. getting back to the sequestration, would the unprecedented degree of flexibility that you describe give the defense department a once in a generation opportunity to cut things that have been sacred cows in congress? is this the chance to cut the program in the sub committee chairman's district? >> what a clever question. it sort of reminds me of richard nixon's secret plan for ending the war in southeast asia. it would potentially provide a once in a century opportunity to

do that sort of thing. i will tell you though, i see not only no indication that anybody is willing to step up to that, but i bull dozers lined up outside the building if that occurred would materialize very, very quickly and we would see some elimination. what it does is provide the opportunity for those of us that want to contribute to the discussion and provide advice as rich noted earlier, to be begin thinking a little more creatively aboutflexib flexibilities that you would need to have to execute this. we all agree this is not the end of the reductions. and the document said that released from the pentagon, if you look at the words in the transcript, general dempsey called i down participate, that means a second payment.

secretary pineda called it the beginning, that means some bssteps, if you will, i think they are recognizes it's not the end of the game. it's a fight over the process for doing it. indicated is kind of the stakes of the process, game changers and strategy. >> if i can comment on the political environment in which we are operating going back to something that todd said, there are not a lot of surprises that what we are heard yesterday. it may be a great opportunity if you look at the broader strategic construct, can you cut program s that were sacred cows in the necessarily exist. i sacrifice something in their

crisis to cut programs that may have been sacred and negative funding widgets have been built into funding programs and when it was was brought down to size or he left, because we have a fairly rapid transition of leaders, but i believe that there's a common understanding that we have to do something

about pay and benefits, that it's unsustainable and i think it's an opportunity where they are hopeful of reaching some type of agreement in dwrcongres where they are able to at least cap the growth so that it leaves room in the budget to equip and train the forces that we are going to retain. so i think that is something that is big enough, that the building is desperate enough to handle. it could be addressed at that time. >> and the commission that the defense department proposed yesterday was solely on retireme retirement. our work says that is too narrow a boundary, you have to look at retirement changes in a broader pay and benefits approach and the idea of a brak like process i think means produce a result that is an all or nothing up or

down vote. there are other elements of the process that should be incorporated here including he robuft for public input and debate and the members that could be damaged by this, to have visible active resistance so they can say they the all they could. >> can i add, a note to that? i think that is right, the retirement commission is not enough. the key thing that we need to do here, like i said before, it should not just be about what do you cut, it should be where can you get better value, if you are going to ining to do that, you get data, you have to see how servicemen value the compensation that they get. it's a complex mesh of different forms of compensation. it's something they have been

reluctant to do, you have to go out and get input from a broad sector of the department, i'll take a moment to plug a study that we are doing. we are actually trying to do this, we are conducting a survey of military personnel, people can go in, it's an online survey and they can show us their utility curves for different forms of compensation and they make trade offs in the tool, would you prefer more of this or less of that, we encourage people in the military or families or retiries to go to it. once we have the routine we will share it with the leaders here in washington and in the department, and in for ums like this in the future. >> we are going to be at this for a little while longer, but

todd harrison has to leave shortly for another commitment. if there's a question on this side of the room that you want to direct towards todd, this is the right opportunity to do that. i do see one here. if you would bring the mike up there, tarhank you. >> you said cutting the ships, which ones are you counting because there's a draw down in lcs and in the joint high-speed vessels in addition to retiring the cruisers and the amphibes, where do you get your 17? >> i got it from the department, straight from the horse's mouth. yeah, i do not have the list of how it all adds up, they are cutting two cruisers and a virginia class sub, and joint high-speed vessel, there are a number of ships involved here. that is the number that they are using and taking out.

that is a significant change from what had been planned previously and i think it just goes to reinforce the fact that these cuts are not being put only on the army and marine corp, the navy is taking their share of the cuts as well. >> okay, any other questions -- oh, we do, we have one and let's -- >> she is over here. >> we have one down front over here, it's the lights are so kind to me that i can not see people in front. let's go over here. thanks. >> hi, i'm with "defense daily" stephanie talked about reverse ability and i wonder if you have thoughts on that or concerns on that and now do you define it? >> reverseability mean a lot of things, the key question is how are they doing