lots more yet to unfold. i think we're really just in the front end of this. we do see the large central direction. large central direction where this is heading. and it is grounded in a strategy that i think has fairly broad consensus in town and in the country. but what all budgets, you know, they have to have a certain policy coherence at the top. but then the details really matter. you know, they really matter. that's where we're now starting to get to that deeper phase. and we're going to try to understand all of that. i would again like to say thank you to our friends at rolls-royce that make it possible for us to offer this policy series to the defense community in washington. and let me turn to it you. david, are you in charge of this motley bunch that is going to guide us through this?

>> more or less. >> more or less. a little less than more. but let me turn it over to you. let me say thank you again for coming. this is going to be an ongoing discussion we're going to have to have, because it's going to take some time for us to understand where we're heading and what it means. and we're appreciative of all of you coming. and you're going to have to be a part of that. david, let me turn to you. >> thank you. good morning, and welcome not only to those of you in the room, but to our audience on the web. we're webcasting this at ncis. and on c-span. we're grateful for the opportunity to reach a larger opportunity that way. a couple administrative deals if you would in fact, those in the room silence your cell phones and other noise devices. i would appreciate it. i've just tried to make sure that mine are silent as well. for those of you who are viewing on the web and when it comes to questions, if you would like to e-mail questions to us, you can do that to my e-mail, dberto.

and we'll try to answer those questions as well if we like them. otherwise we'll ignore them. we can't quite do those with the ones in the room obviously. the panel that we have today is particularly well suited to addressing what is essentially an issue of where are we in the defense budget drawdown at a time where we have some information, enough to actually speculate about what it really means, but not really enough to know what it really is. we had earlier in january we had the new strategic guidance issued by the defense department yesterday. we had secretary panetta, general dempsey, the chairman and joint chiefs of staff and other pentagon officials elaborating a little bit over how that strategic guidance is going to be reflected in the reductions, and also what some of those reductions look like. but in both of those cases, that is the president's announcement three weeks ago and the secretary's announcement yesterday, it actually raises more questions than it answers.

so what we're going to try to do this morning is fill in a little bit based upon our knowledge, experience, and pure speculation on what some of those might turn out to be. so the way i would lick to proceed, i've actually got a little overview set of charts here. an those will be posted on the web as well afterwards for those of you would like to get through. we'll run through those very quickly, make a couple of additional comments, and thenally introduce our panel and turn to them. and we intend to have a lot of time for questions at the end as well. 10 thank you. let me have the next chart. this is not the first time, of course, that we have brought the defense budget down. and this chart actually takes you back to the pre-korean war period. we had another buildup, a drawdown, a buildup, a drawdown. the bars are the base budget that the defense department put in place. the white bars on top are the

supplementals, the funding that was done on an emergency supplemental basis. you'll see while there is a substantial amount of that in the recent years, which is the post-9/11, big chunks of money being appropriated under emergency appropriations or as the pentagon calls it now, oko, the overseas contingency operations account. but the same was true in korea and vietnam in large numbers and a little bit in the balkans during the '90s. so the process is that we do go up and we come back down again there is also a black line on this chart. the black line allows you the see that the up and down is not just dollars, it's also the active duty in strength. there tends to be a correlation when the budget is going up, the in strength goes up. when the budget is going down, the in strength is going down. it's not purely cause and effect. one of the challenges and the ways it's different this time, even though there are some in strength projections different in the budget, they're not commiserate necessarily with the long-term dollar reductions that we anticipate. let me have the next chart.

this actually allows you to see that in a numerical way, if you will. what you have on this chart is the four drawdowns, the post korean war, the post vietnam war, the post-cold war. and even though we don't actually yet have a name for the current drawdown, we for purposes of this chart call it the post budget control act. i don't think that's actually a name that will catch on and survive over the decades. so we're seeking a new and better name for it. we thought actually about putting post question mark on the chart here. but that does allow you to sort of benchmark the peak and the trough. so what you have on the first column is the peak and those dollars are in fact in millions. so it's really $717 billion is the peak. and the trough, and that's a projected trough for the post budget control act of about $567 million. that includes base budget and overseas contingency operations

as laid out in yesterday's announcement by the secretary. so those numbers are updated as of yesterday. that's a reduction of about 21%. that compares, in fact, with reductions of 43%, 31%, and 36% in previous drawdowns. so on a pure percentage basis, this drawdown is not as dramatic as the previous three have been. on the right-hand side, you have active duty troops, 32%, 43%, 35%, and a 7% reduction. that's where the challenge lies. if in fact we're taking a drawdown that on a percentage basis is three times higher than the percentage reduction in active duty in strength, that imply there's will be pressure in this budget on something other than personnel costs. and that's one of the dramatic challenges we facement let me have the next chart. this actually just depicts it notionally so you can see that in fact for today, the steepness of the curve is not that much less for dollars.

the steepness of the manpower of course is virtually nonexistent. and the final chart. just a timeline. how did we get here? you know, last february, the president submitted his fy-12 budget. and by the way, all of the numbers calculating how much the budget is down is off of the benchmark of the president's budget request for 2012, including the outyears of that request. that request had a significant increase. so in typical washington parlance, a reduction is not necessarily a reduction. it doesn't necessarily mean you have less money next year than you had last year. what it actually means is you had less money this year than you had originally planned to have this year. that's the nature of these reductions. and in fact in terms of the actual year-over-year spending, really, only fiscal year 13 base budget, which is the budget about to be proposed by the president compared to fiscal year 12, that's the only real reduction in real dollars. the other years are essentially

when inflation is taken into account, flat. but the reduction of the $487 billion that the secretary talked about yesterday over the ten-year period, that reduction is from what they planned to spend. so congress back in april you remember passed the full year continuing resolution. that cr had in it a defense appropriations bill for fy-11. then in august, as we were sort of railing about whether we were going to default as a nation or set a fiscal year '12 cap was for all the national security. the defense department gets the lion's share of that reduction and set a fiscal cap for year '13. it set in place the supercommittee. we know where that ended up. right the monday before thanksgiving the supercommittee announce they'd failed to achieve one of their objectives which was to come up with numbers. they had achieved another one of their objectives is they had universal agreement that it was the other guy's fault.

so they did achieve that goal. but what that set in place is a trigger that said okay, there are now additional cuts to come threw sequestration. that sequestration kicks in on january 2nd, 2013. that's a very magic date. it happens to be after the presidential election and the congressional election in 2012, but before any of the individuals who are elected in that election actually take office. which means that if anything is going to be done about that sequestration, it's going to have to be done by the 112th congress, the congress we have today. so the baseline then for the budget that we're going to be discussing this morning, the fiscal year '13 budget is actually the fiscal year 2012 appropriations, which was passed by congress late in december. there are two interesting dynamics at work here that we'll come back to over the course of the morning.

one is that the secretary of defense has made it clear that he anticipates the reductions that he has taken so far, all that he wants to take. he does not want sequestration. and he stated that crystal clear yesterday. now there is a little bit of am a ambiguity and room. we'll lock at some of the nuances if you will. when you actually don't have numbers, you have to look at words. and the words yesterday have a little bit of deviation between the written word that was approved by the communications professionals for the document, the spoken words in the actual transcript of the speech, and the expected words of what is really going to happen. and we'll look at some of those nuances as we go. nonetheless, thely of the land is sequestration will take effect unless it changes. the pentagon has said we don't think that should happen. the president, on the other hand, has stated unequivocally, unambiguously, i will veto any attempt to change the sequestration. so this is a little bit of a

strategic political dilemma for the defense department. on the other hand, i don't want to take any more cuts and i actually have a president who seems to be in line with that because this is his budget. on the other hand, i have a president who says he is going to veto any attempt to relieve me from the responsibility of take any more cuts. that's a strategic dilemma that is going to hang over us this entire budget season, if you will. with that, i'm going to throw the floor open to our panel here. we're joined by three wonderful people to comment on this morning. todd harrison is the senior budget person for the center for strategic and budgetary assessments. he has a constant, never ceasingly amazing ability to find useful information in budgetary process that i love to take advantage of. he'll be followed by stephanie sanik, who is a senior fellow here at the center for strategic international studies. and clark murdoch, who is a senior adviser here at csis. then i'll provide a few wrap-up comments and we'll open the floor for questions.

todd, are you going the talk from there, or do you want to come up here? >> i'll be happy to talk from here. >> good. i'll slide this back. >> good morning, everyone. thanks for coming out this rainy day here in washington. you know, i'll just start by saying that the numbers that came out yesterday are really not that much of a surprise. the base budget for dod, so that's not including more funding, is going to be $525 billion. war funding will be about $88 billion. this is really driven by the budget control act. that was the deal passed by congress last august that allowed the presidential to raise the debt ceiling that put caps on it for the rest of the decade, and that is what is driving this budget. the real question now is the budget. does it reflect the new strategic guidance the department came out with back on january 5th.

fundamentally, when you're talking about strategy, you're talking about choices. any strategy is really about choices. those choices are often expressed in the budget. so that's why we're looking for details about what the strategy really means in terms of choices in the budget. so where did they cut? and are those cuts consistent with the strategic guidance? they obviously talked to a great extent about cuts in ground forces. they're taking the army down to a pre-9/11 size, about 490,000 in strength. they're taking the marine corps down as well to 182,000 in strength. and these are expected. but they did not spare the other services from cuts either. they're taking about 17 ships out of the navy. they're retiring 10% of the air force's fighter squadrons. they slipped some major programs, programs that seemed to play in the new strategy like the joint strike fighter, like

the virginia class submarines. so really, no one was spared in this. you know, given the delta from what the pentagon had been planning, the growth they had been planning in last year's budget to the relatively flat budget that they're constrained to now, it did require painful choices across the board. the three things i'm going to be looking for, though, when the details of the budget come out are the following. first, the budget share of each of the services. you know, it's interesting that throughout time, the services have tended to maintain relatively equal budget shares over the years. and when you include war funding over the past decade, clearly the army and the marine corps got a much greater share of that. but i went back and looked at last year's budget request, the five-year plan that they put out. and they already showed last year that the air force was going to gradually increase its budget share over the five-year

plan. the army would gradually lose budget share over those five years. and the navy marine corps, they're basically going to stay flat. so one of the things i'll be looking for when the new budget comes out is strategy says we're going to place more emphasis on air and sea forces, less emphasis on ground forces. so are they going to accelerate that shift in budget share or is it basically going to stay at what they were predict thanksgiving were going to do in the last budget. the second thing i'll be looking for is the mix of active component versus garden reserve component forces. so one of the things the secretary talked about a bit yesterday, we don't have a lot of details yet, but it sounds like the army is -- while they're making major cuts in the active duty force, there will be smaller cuts in the guard and reserve. the air force may actually be going in the other direction. they may be cut mortgage deeply in their reserve component in order to protect some critical

parts of their active component. so that's one of the trade-offs, one of the competitions in the budget i'll be watching as well. the third one, and this is one that we often don't like to talk about, because it's very politically sensitive, but nevertheless, it is a real competition going on in the budget between retirees and active duty. what i'm talking about here is what the pentagon has to budget and pay every year for retirement benefits. not just retirement pay, but health care as well versus what they're doing to support the active duty troops in terms of pay and benefits. we didn't get a lot of details yesterday. they talked about creating a commission to good out and look at options for reforming the military retirement system. i actually think this is a great idea. i think this is a good approach because you don't want to go into this in a haphazard manner and say well, we think we can cut this, we can cut that.

you don't want to end with another redux. in the 1980s we had this great idea that we would cut the retirement benefits. the idea is we're going to make a sudden shift. everyone who enters the service from now on, they're going to get less of a retirement benefit. well, that didn't hold. it created this, you know, discrepancy within the force where as we got closer to 20 years after that point when people would actually start retiring under the new benefits, we balked. and we went back to the old system. so hopefully, if this retirement commission does get formed, they'll take a broader view of this. this shouldn't be about finding ways to cut. it should be about finding ways to get better value. they do this in a private sector. it's called preference based benefits optimization. companies do this all the time. you need to understand before you start making changes how people value various components

of their compensation. and then you can make smart trade-offs. if they do not value something commiserate with what it's costing you to provide, maybe you cut that and give them something elsewhere they are getting good value out of it. so i hold out hope that this commission that congress will take a serious look at this and perhaps get the legislation together to bring that forward. but overall, what are the trades we're seeing in the budget. personnel costs make up about a third of the pentagon's budget. when you include military personnel costs plus the defense program. so about a third of the pentagon budget. and what they said yesterday is personnel cotsts are only takin 1/9 of the cuts. that means other parts of the budget are going to take a disproportionate share of the cuts. they have a budget cap required by the budget control act they've got to fit in. so procurement i think is actually going to get hit the hardest. we heard a lot of the program

decisions yesterday. i imagine there are many more we have yet to hear. and those will come out over the coming days and weeks. the total savings that they're talking about, and again, this is the savings relative to last year's budget, it's $259 billion over the five-year plan. 25% of those savings are supposed to come from efficiencies. that's another $60 billion in efficiencies on top of $178 billion in efficiencies that was in last year's budget. boy, that's very optimistic to think that you can find all those efficiencies. i think it is incredibly risky to be banking on those savings before they have been achieved. it is always a good goal to try to find efficiencies to try to get more efficient, to root out waste wherever you can in any government agency, in any organization. but to go ahead and bank on those savings for a quarter of what you're doing in this budget

i think is a bit risky. if those savings don't materialize, where are the savings going to come from? this is a zero sum game. they're going to have to come from something else, and that's going to be a hard season. the brac proposal i thought was also interesting because number one, they're not banking on any savings from it. and that's fair because if you do another round of base closures now, you're not going to get any savings in the next five years. in fact, it's probably going to cost you a little money. they also did not budget for the cost of another round of brac. so i would not read too much into the suggestion that we're going to i think this is a notional idea right now. and in an election year, i think it's highly unlikely that congress is going to want to enact that legislation. the final point i'll make is, and i've made this before, is that this budget and this strategy do not prepare for the possibility of see questions trags.

that's a real possibility. i would not say it is highly likely to occur, but i would say that there is a finite chance it really will happen because it is the law of the land. and if congress does nothing, if there's gridlock, it will happen by befault on january next year. they presented the budget as a package deal. a take it or leave it, this is what you've got. the reality is that's not going to hold. you know there's some things in there congress isn't going to go along with. and there are probably further cuts are going to be needed in the years to come. even if we avoid it, it's obvious to think that the defense bunt is going to flatten out. history shows that that just doesn't tend to happen. so they talked a lot about how the strategy was flexible, adaptable, agile, versatile. beginning to think that they need to budget in the pentagon for a new thesaurus. they're using those words so many times.

but the same should be true of the budget. it's got to be flexible and adaptable. and the reality here is that further cuts are likely. even if we avoid it, the defense budget is likely to still decline in the years to come. so i would urge the pentagon to start working on a plan b. if it means you have to start over and come up with a new strategy that is more flexible and adaptable to the budget environment, than so be it. that's all i have. >> all right. thank you, todd. stephanie, you want to pick it up from here? >> absolutely. good morning. and, again, thank you for joining us this morning. i have a different interest in tracking yesterday's announcements. my perspective looks at programmatic details and the strategic implications and the kinds of risks that these documents that we've seen, whether it's the strategy or strategic guidance or yesterday's bunyesterda

yesterday's budgetary announcements. we don't have sufficient detail about the budget right now to make specific recommendations or to cast particular stones at considerations or decisions that were made. so i'm waiting with baited breath for the delayed budget to come out in a couple of weeks. but in the meantime, what we can go over is the broader context. and i'm thinking more about what does the budget information say about our nation's national security priorities. what is the strategic context in which we should judge whether these are the right or if wrong decisions. my starting point is the strategic guidance that was released on january 5th. what are the assumptions, the risks and the priorities laid out. so like the secretary, i would just like to provide an overview of what the five key elements are. you probably all know these, but it's worth repeating in this forum. one that the military will be smaller and leaner, but, yet, it

will maintain agility, flexibility and its technological advantages. we will rebalance our global posture. we'll build innovative partnerships, defeat aggression from any adversary and protect and prioritize key investments chlts that is mother hood and apple pie. so when dr. hammary says there's broad consensus, absolutely. who could really argue with any of those things. in fact, if you go back to the bush administration's first qdr,it said pretty much the same things. but as we know, that qdr lasted roughly eight to nine months before the global strategic environment caused huge shifts. this is back in 2001. so what i'm wondering is what the budget information that we've gotten talks about reversibility. it talks about key partnerships. it talks about the kinds of wars that we're going to be facing or rather the conflict that is we're going to be facing in the near future.

and i have some concerns. i'm a think tank and that's what we do. we have concerns. it appears to me from yesterday's announcements that the primary planning scenario is a high-tech ward. if you look at where they're placing their investments, what they're getting rid of, they are not contemplating kind of the low intensity conflict or stability operations environment in which we've been operating for the last few years. and, so, i have some concerns about kind of de-emphasizing some of the capableties that we've been developing over the last few years. i am not saying we shouldn't invest in cyber technologies, in space. those are certainly very important. and, really, things that only the state can handle in certain aspects of protection, we've heard a lot about the air sea battle and the budget review -- or preview yesterday seem today affirm that. it actually says in the strategic guidance and in yesterday's announcements that the defense department is not

anticipating a prolonged, large scale stability operations that require land forces in a rotational basis. okay. what in the strategic environment leads them to think that? if you look at ungoverned spaces, the probability of civil wars, the probability of long term instability, i'm not sure why they draw that conclusionment i would argue that from a u.s. perspective, we certainly do have an interest in maintaining a capability to address instability in places like the middle east and in asia. so i wonder about this planning scenario which appears to be high-tech, but which ignores kind of the lessons learned over the last few years. that leads me to my second set of concerns, which are focused on these innovative partnerships. so if the u.s. is going to focus on technology, who's going to

handle the rest of the issues? we have something called global train and equip in the department of defense to train military forces around the world to handle counter terrorism operations and stability operations. will we see an increase in that activity? are we going to dmend on partners, whether it's the united kingdom, whether it's molly to address concerns that, really, we have the capableties now to address. but we might not in the future because of this transition. so that's something i'm going to be watching closely. what are we asking our partners to do? well, last year, the united kingdom came out with their strategic defense and security review. and we talked to them, as a nation, about what are they giving up? i wonder whether we had similar conversations before the roll out of this new strategic guidance and this budget with our reliable, shoulder-to-shoulder departments. have we talked to the brits and the australians enough about what we are giving up and what

we are willing to accept. and, therefore, as our partners, are they going to accept the same risks? or are they going to fill their niche? based on my experience, they probably want went very quickliment they probably went two days before anything was rolled out and we called them consultations. it remains to be seen what our partners can do. that's one set of partners. and david and i have talked at length about building partnership capability. the brits, the germans, the french, what are we doing to help them with their capableties and capacities, versus innovative partnerships, which i think is the executive branch's code for, you know, partner that is we don't -- nontraditional partners, we can call them that. the ind neez yans, what are we doing with them. and i wonder how this new budget information will impact those relationships. i'm not quite sure what innovative partnerships mean. and i my third set of concerns

hinges on this word reversib reversibility. it use today be in vogue to use transformation. what does reversibility mean? when you're talking about early retirement, how do you unretire something? if you're talking about slowing procurement, i can maybe see trying to reenergize a production line. but from an industrial perspective, what does reversibility mean? is it possible? did defense officials walk the factory floors and go okay, if we slow procurement, and you have to slow down your production line, how fast can we revitalize it if we need to? this was something we saw, obviously, with up armoring humvees not too long ago. and having members of congress go out and walk factory floors. bob simmons takes great pride in talking about really focusing the executive branch on what it