[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



 
                         DEPARTMENT OF DEFENSE
                        LONG-TERM BUDGET ISSUES

=======================================================================

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

            HEARING HELD IN WASHINGTON, DC, OCTOBER 16, 2003

                               __________

                           Serial No. 108-14

                               __________

           Printed for the use of the Committee on the Budget


  Available on the Internet: http://www.access.gpo.gov/congress/house/
                              house04.html

                                 ______


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                        COMMITTEE ON THE BUDGET

                       JIM NUSSLE, Iowa, Chairman
CHRISTOPHER SHAYS, Connecticut,      JOHN M. SPRATT, Jr., South 
  Vice Chairman                          Carolina,
GIL GUTKNECHT, Minnesota               Ranking Minority Member
MAC THORNBERRY, Texas                JAMES P. MORAN, Virginia
JIM RYUN, Kansas                     DARLENE HOOLEY, Oregon
PAT TOOMEY, Pennsylvania             TAMMY BALDWIN, Wisconsin
DOC HASTINGS, Washington             DENNIS MOORE, Kansas
ROB PORTMAN, Ohio                    JOHN LEWIS, Georgia
EDWARD SCHROCK, Virginia             RICHARD E. NEAL, Massachusetts
HENRY E. BROWN, Jr., South Carolina  ROSA DeLAURO, Connecticut
ANDER CRENSHAW, Florida              CHET EDWARDS, Texas
ADAM PUTNAM, Florida                 ROBERT C. SCOTT, Virginia
ROGER WICKER, Mississippi            HAROLD FORD, Tennessee
KENNY HULSHOF, Missouri              LOIS CAPPS, California
THOMAS G. TANCREDO, Colorado         MIKE THOMPSON, California
DAVID VITTER, Louisiana              BRIAN BAIRD, Washington
JO BONNER, Alabama                   JIM COOPER, Tennessee
TRENT FRANKS, Arizona                RAHM EMANUEL, Illinois
SCOTT GARRETT, New Jersey            ARTUR DAVIS, Alabama
J. GRESHAM BARRETT, South Carolina   DENISE MAJETTE, Georgia
THADDEUS McCOTTER, Michigan          RON KIND, Wisconsin
MARIO DIAZ-BALART, Florida
JEB HENSARLING, Texas
GINNY BROWN-WAITE, Florida

                           Professional Staff

                       Rich Meade, Chief of Staff
       Thomas S. Kahn, Minority Staff Director and Chief Counsel



                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, October 16, 2003.................     1
Statement of:
    Hon. Dov S. Zakheim, Under Secretary of Defense, Comproller, 
      U.S. Department of Defense.................................     5
    Douglas Holtz-Eakin, Director, Congressional Budget Office...    49
Prepared statement:
    Hon. Henry E. Brown, a Representative in Congress from the 
      State of South Carolina....................................     5
    Mr. Zakheim:
        Prepared statement.......................................    10
        Response to Mr. Hensarling's question regarding Pentagon 
          efficiency.............................................    35
        Response to Mr. Hensarling's question regarding 
          documented cost savings................................    36
    Mr. Holtz-Eakin..............................................    53


             DEPARTMENT OF DEFENSE LONG-TERM BUDGET ISSUES

                              ----------                              


                       THURSDAY, OCTOBER 16, 2003

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:01 a.m. in room 
210, Cannon House Office Building, Hon. Jim Nussle (chairman of 
the committee) presiding.
    Members present: Representatives Nussle, Gutknecht, 
Hensarling, Diaz-Balart, Brown, Spratt, Moran, Edwards, Scott, 
Baird, Majette, and Davis.
    Chairman Nussle. Good morning. Today's hearing, the full 
Budget Committee, is entitled the Department of Defense Long-
Term Budget Trends. Today we have on our first panel Dov 
Zakheim, Under Secretary of Defense and the Comptroller. We 
welcome him back to the committee as the Under Secretary and 
Chief Financial Officer for the Department of Defense.
    This hearing has been somewhat difficult to schedule, and I 
appreciate your involvement here today. I hope that with the 
Department of Defense in particular, there will be future 
opportunities and growing cooperation because we have some very 
critical matters to discuss and today is only a beginning.
    This hearing will focus on a subject that I believe is 
critical to the life of every American, and that is how we can 
best support the current and potential future needs of our 
Department of Defense and by doing so, securing our Nation.
    Since September 11, and following through the war in 
Afghanistan and the conflict in Iraq, I have been a 100 percent 
supporter of our President, our troops, and our policy with 
regard to the war on terrorism, and this Congress has shown 
that we are more than willing to spend whatever is needed to 
defend our country and to support the needs of our troops.
    That said, we in Congress still have a fundamental 
obligation to ensure that the money we spend is being spent 
judiciously and with the proper planning and oversight 
necessary for a successful conclusion to the policy.
    We are holding this hearing today primarily to gain a 
greater understanding and to gain a better picture, get a 
better picture of just what the long-term anticipated needs are 
for the Department of Defense.
    On September 10, 2001, we had a budget surplus. Starting 
September 12, 2001 this Congress spent fast and furious to 
rebuild New York, our Pentagon, shore up our Nation's defenses, 
provide for homeland security, and assure that future terrorist 
attacks were not possible. Our Nation was in a state of 
emergency. Our economy was in trouble. And we did whatever it 
took, we did whatever we had to do in order to get both our 
economy back on its feet and to secure our Nation.
    But we are now 2 years into our war against terrorism, and 
since April of this year, assuming this supplemental passes 
today on the floor, we will have obligated ourselves over $160 
billion in this, quote-unquote, ``emergency spending'' to pay 
for wars in Iraq and Afghanistan, and all of that money is 
outside of the budget.
    Were these choices necessary? I think a majority of us 
would agree that they were. Can we continue to fund our war 
efforts on this type of ad hoc basis? I believe most of us 
would agree that we cannot and should not. This committee and 
this Congress must have a solid plan, a blueprint, a financial 
blueprint to set our priorities for the year and for the long 
term. To do this we must be able to gather whatever information 
is necessary and put together a credible and responsible budget 
for the Nation. In order to do that, we need to have the best 
possible information as to the likely future costs of the 
Department of Defense, one of the largest and growing 
components of our budget.
    While there are several other areas we need to address 
today, I know that there is particular interest in the 
President's supplemental request that is being debated on the 
House floor. Specifically, I need to know how much of these 
funds are considered one-time expenditures, how long the 
Defense Department estimates that the funds that we are 
appropriating today will last, and what is the future funding 
requests that will be necessary to stabilize Iraq?
    Further, as we begin the process to look forward into the 
2005 fiscal year budget, I want to discuss how the 
administration will begin to incorporate the known costs in 
next year's budget submission.
    Next, we will look at the long-term funding needs for the 
war against terrorism and how they will be incorporated into 
the Federal budgets for years to come. As the President has 
said, the war against terrorism will be long, and there is no 
one who will dispute that. We will need to gather today the 
best estimates possible to what the anticipated long-term 
funding needs in Iraq and elsewhere might be.
    I would like to turn to the readiness of our Armed Forces. 
Regardless of plans to transform the military in the future, 
there are urgent near-term readiness priorities. We have got 
some holes that we are going to need to fill, and we need to 
know just what and where they are and how much they are going 
to cost in order to be fixed.
    I have a concern regarding the extended use of the National 
Guard and Reserve forces. My State of Iowa is home to 30,000 of 
these Reserve and Guardsmen. While I doubt any of these men and 
women in their desire to serve--and I want to underscore that--
there is not one of them that I have had an opportunity to talk 
to or their families that lack the desire to serve their 
Nation. But we want to ask the question, how long can we keep 
this up? Their families have questions, their employers have 
questions. Their elected representatives have questions. And we 
need and deserve the answers to those questions so that we can 
properly communicate them to the folks back home.
    Next is the area of burden sharing. During the Gulf War, 
the United States received $48 billion in financial 
contribution from our allies. This time, apart from a smaller 
number of countries such as Great Britain, Poland, Spain and 
others, the United States is bearing almost the entire burden 
of peacekeeping and reconstruction in Iraq. As we approach the 
Donors Conference in Madrid, what steps are we planning to take 
to encourage other nations or the IMF or the World Bank to 
share this load? The supplemental request on the floor today is 
based on, in part, the success of those negotiations. What if 
success is not achieved at that donor conference? How much will 
that mean for future requests? And when will those requests 
come?
    Certainly, yesterday and again today there is some 
encouraging news about France, Germany and Russia, that they 
may be moving closer to a better partnership and to our own 
views on the administering of Iraq in the future. I certainly 
hope these signals signal increased cooperation.
    Still, for budget purposes, it seems as though we have two 
plans, one in which we will continue to bear the entire burden 
and one in which the international community begins to play a 
growing or larger role.
    Last, as most of you are aware, this committee has 
spearheaded an effort to reduce the amount of waste, fraud, and 
abuse in our Federal Government. We have taken on this 
challenge particularly in the mandatory programs, and we have 
already identified close to $100 billion in a successful effort 
to begin at least the process of looking for ways to root out 
waste, fraud, and abuse.
    The President's 2004 Defense budget and succeeding budget 
requests will put the Pentagon spending on a path to exceed 
$500 billion before the end of the decade. We simply cannot be 
spending that kind of money without taking a serious look at 
whether it is being spent efficiently. This is certainly not 
the time when the Department of Defense can afford, nor can our 
country afford, for the Department of Defense to have critical 
funds lost to waste or fraud or any kind of abuse.
    So we must discuss with this witness what steps the 
Department is taking to ensure that the funds allocated to the 
Defense Department are being spent properly. For instance, what 
is the state of the Department of Defense audit that has been 
demanded, requested, and eagerly awaited? As I said earlier, 
looking forward to the next budget and beyond is not a 
courtesy, it is an obligation of the Defense Department to 
provide for us with the most credible information that is 
available.
    So I hope today will be a positive step in that process as 
we look forward into the future for better budgeting, better 
fiscal and financial management of the Department of Defense, 
and I welcome the Under Secretary back to the committee.
    Mr. Spratt.
    Mr. Spratt. I find myself very much in agreement with the 
chairman, and would simply echo his comments and add to it. 
First of all, a welcome to the committee. And I think it is 
critically important that we get together periodically, because 
your component of the budget is enormous and growing and it is 
the elephant in the room. It tends to get its way. But one of 
these days, I have been here long enough to know, the deficit 
will again take precedence over defense, and we probably ought 
to be getting ready for that now.
    I am going to truncate my remarks because we are all 
anxious to get to the floor, but at the same time we are 
anxious to put some of the questions like the chairman just 
listed to you.
    CBO some time ago issued a report which indicated that the 
defense program exceeds the Defense budget, both as it is 
displayed in their periodic analyses of the budget and also in 
your formal budget, your multi-year budget called the FYDP, the 
Future Years Defense Plan. I will give you a few examples. The 
THAAD, theater high altitude. We have spent billions on its 
development; it is an Army program but it has been under the 
umbrella of BMDO. If you look at the procurement dollars in the 
Army's budget and in the FYDP, I don't believe you will find it 
there.
    The Air Force, they are now telling us that it is 
critically important that they buy new tankers, that something 
could happen to their aging tankers that would render the whole 
fleet questionable and, therefore, we have got to buy brand-new 
tankers as an exceptional item in the budget. If you look in 
their FYDP, none of that was anticipated or planned. This 
critical need that they are now pressing upon us was not even 
put in their own internally developed budget, the FYDP.
    Ships, Navy ship building. We all know that the rate of 
production, you picked it up for next year, but has not 
adequately reflected what it will cost to maintain our 
programmatic requirement for a 300-ship Navy.
    So we have got a FYDP. We have got a programmatic budget 
which doesn't really reflect the full program that this 
administration is pushing. Now, this has happened in all 
administrations, but the gap seems to be particularly wide and 
it is worsening now because we have got Afghanistan, where we 
are likely to be for a long time to come, and Iraq, where we 
are likely to be for goodness knows how long. Neither one of 
those is reflected in the budget. They come to us as 
exceptional items. And that is one bone in particular that we 
would like to pick with you today.
    The first budget you gave to us was a plug budget, by your 
own acknowledgment. You told us that it was not a number that 
you had internally generated as your desirable budget, but you 
would plug it in for the time being until you got us a better 
number. When we finally got the FYDP request, it was really 
half of what you wanted. Mitch Daniels held you to an $18.3 
billion increase instead of the near $40 billion that you 
wanted. But Mr. Rumsfeld, in response to a question I put to 
him, very honestly answered in the Armed Services Committee the 
President has requested the DOD not to submit its budget until 
he got his tax bill passed. As a consequence, we didn't know 
what the Defense budget was when we were making major, major 
decisions about the budget.
    The same is true with the supplemental. In mid-July of this 
year, as required by law, the Office of Management and Budget 
sent us their mid-session review. And with respect to the cost 
of our deployment in Iraq and Afghanistan, there was not a 
nickel. Now, we didn't know for sure what it was going to be, 
but we knew it was not zero. And, therefore, at that point in 
time of the budget for the year to come, they didn't include a 
dime for the supplemental. The justification typically for 
that, it is too iffy, there are too many variables, we can't 
project it. But within a little more than a month we had a 
supplemental here for $87 billion. That should have been 
factored in in some way, some measure to the other budget.
    And going forward, we need to have your best estimates of 
what it is going to cost to maintain these deployments as well 
as maybe closing the other gaps in the budget that don't 
reflect reality. We simply can't maintain a semblance of a 
budget if we have an April supplemental for $80 billion and an 
August supplemental for nearly $90 billion. I mean, you can't 
have variables like that and claim that you have got a budget, 
particularly when none of these add-ons to the budget is paid 
for. And there is a widespread resistance to paying for any of 
them on the part of the administration. They simply want to add 
them onto the budget. If that is going to be the practice, then 
we are going to have a hard time getting our hands around the 
budget.
    I have got other questions to ask, but I would rather hear 
from you first and we will come back to it. Thank you again for 
coming. We appreciate the opportunity to put these questions to 
you.
    Chairman Nussle. We welcome you back to the committee, and 
we are pleased to receive your testimony. As written it will 
appear in the record, and you may summarize as you see fit. 
Welcome.
    [Prepared statement of Mr. Brown follows:]

  Prepared Statement of Hon. Henry E. Brown, Jr., a Representative in 
               Congress From the State of South Carolina

    Mr. Chairman, thank you for holding this hearing today. And thank 
you gentlemen for being here with us. I think it critically important 
that we examine the long-term budgetary implications of the 
administration's national defense plan. Our current and future ability 
to fund our military is of critical importance, as we budget for 
operations in Iraq, long-term budget for the war on terrorism, and 
budget for our readiness priorities.
    The Department of Defense is the first funding priority in the 
President's budget with a request of $379.6 billion in budget authority 
for fiscal year 2004, an increase of $15.6 billion, or 4.4. percent, 
over the previous year's level and is the largest component of the 
national defense function. The President's plan would bring the Defense 
budget to its highest level in constant dollars since the early 1990s.
    The fiscal year 2004 budget did not reflect costs for combat 
operations, occupation and reconstruction in Iraq, and will be paid for 
by a second supplemental appropriations request that we are considering 
on the House floor this week. Are further such supplementals required? 
The President's plan will push DOD spending above the $500 billion 
dollar mark before 2010. Is this the right plan for long-term security? 
The U.S. has bourne nearly the entire burden of peacekeeping and 
reconstruction of Iraq. Can we expect engagement of NATO nations or 
other organizations to aid us in these efforts? These are all important 
things to consider as we examine the long-term budget of DOD, and I am 
pleased that we have that opportunity today.

    STATEMENT OF DOV S. ZAKHEIM, UNDER SECRETARY OF DEFENSE 
                         (COMPTROLLER)

    Mr. Zakheim. Thank you. Thank you very much, Mr. Chairman, 
Mr. Spratt, members of the committee. Thank you for having me 
back, and thank you for agreeing to submit the statement for 
the record.
    The statement, as you will see shortly, addresses many of 
the questions that you have raised. And, of course, we will 
continue to discuss them after I have finished. But let me 
briefly walk you through some markers that we wish to lay down.
    First, regarding the budget impact of our operations in 
Iraq, one paramount point is that building a stable and 
nonthreatening Iraq is not and will not be, indeed cannot be a 
U.S. only endeavor. It has been and continues to be a coalition 
of nations that removed Saddam Hussein and moved quickly toward 
enabling the Iraqi people to build a better future for 
themselves and for regional and global security. The United 
States and its coalition partners are working hard to increase 
the contributions of other nations to a goal that will benefit 
the entire global community. We are confident that these 
contributions will increase and will reduce the burden of our 
current coalition of nations, and I will be happy to go into 
detail as we proceed during this hearing.
    Any estimate of the fiscal impact on the United States of 
operations in Iraq must take account of two major ways in which 
our burden in Iraq will be relieved.
    First, America's burden will be eased by accelerating the 
contributions of the Iraqi people to their own security and 
future well-being. CENTCOM Commander General John Abizaid has 
stated that the key to success in Iraq is increasing the 
security role of the Iraqis themselves. That is a primary focus 
of the President's supplemental request and a primary focus of 
coalition leaders on the ground in Iraq. And I would note that, 
after the United States, the second largest contributors of men 
under arms in Iraq are the Iraqis themselves.
    For example, about 70,000 Iraqis are now engaged in 
security operations, and another 13,000 are in or awaiting 
training. These include the police, border enforcement 
officers, civil defense corps, facility protection service, and 
the new Iraqi Army. Plans are for this total to grow to at 
least 170,000. Needless to say, a few months ago the number of 
these forces was zero. We have gone from zero to 70,000 in 
about 5 months.
    More than 6,000 members of a new Iraq civil defense corps 
are employed, and this force should reach 15,000 by the end of 
2004. About 20,000 members of the new facility protection 
service are guarding more than 240 critical sites.
    The supplemental will support the fielding of a new Iraqi 
Army, 27 battalions by September 2004; the first battalion of 
700 Iraqis graduated from training in early October. About $5 
billion of the President's request is to accelerate this early 
progress and to increase the contributions of the Iraqis for 
their own security. That figure of course refers to the request 
in the supplemental.
    Since the end of July, Iraqi participation in security 
efforts has more than doubled. America's burdens will also be 
eased through contributions from other nations. We cannot yet 
predict how much those contributions will increase, but we 
expect considerable help.
    Regarding financial contributions, Japan has just announced 
that it will provide grant assistance totaling $1.5 billion for 
immediate reconstruction needs in Iraq. I spoke to the Japanese 
this morning; they are talking about $1.5 billion in 2004.
    The United Kingdom has announced its intention to provide 
over $850 million in grant assistance to Iraq. We expect 
additional substantial contributions from the upcoming 
international donors conference. Parenthetically, I was in 
Ottawa 2 days ago. The Canadians have committed to $300 million 
[Canadian]. Given their size, the economy that they have, that 
is not an insignificant contribution.
    In addition to contributions of funds, we continue to 
solicit more international contributions of military forces 
which should reduce the strain on coalition troops. Currently, 
32 nations have troops in Iraq. The United Kingdom is providing 
a division-sized element for operations in southern Iraq. 
Poland is providing a division headquarters and a brigade. The 
Spanish, Ukrainians, and Italians are all providing brigades to 
support the U.K. and Polish led divisions. We are talking about 
contributions in terms of thousands of people. The Netherlands 
is also providing a large battalion.
    As security contributions from the international community 
and Iraqis increase, the United States expects to lower its 
troop levels significantly. We expect to be able to reduce our 
military personnel in Iraq from 147,000 now, to an average of 
113,000 active military personnel in fiscal year 2004. If 
additional multinational troops are not contributed however, we 
are prepared to call up and deploy four enhanced separate 
brigades from the U.S. Army National Guard. These forces would 
provide a prudent hedge against uncertain international 
commitments. We intend to ensure that the gains made in Iraq 
are not lost by failing to follow through on the stability 
mission.
    Obviously, our future costs in Iraq should not be 
minimized, but they should not be overstated by omitting or 
downplaying likely contributions from the Iraqi people and the 
international community.
    Moreover, our costs in Iraq have to be assessed against the 
consequences of failure. Iraq is now the central battleground 
in the global war on terrorism. If we fail to defeat terrorism 
there, we would hurt the entire civilized world and increase 
the likelihood of direct attacks on the United States and its 
citizens.
    On the positive side, a free and thriving Iraq would be a 
powerful demonstration that there is an alternative to the 
hopelessness and hate that fuels international terrorism.
    Permit me now to turn to Afghanistan. The fiscal year 2004 
supplemental appropriations request will enable us to continue 
progress in Afghanistan toward building a peaceful, democratic 
and prosperous country that can serve as a partner in the 
region and as a model for other Muslim states. Examples of our 
progress include:
    Over the past 2 years we have provided over $2 billion in 
assistance to Afghanistan. As of late September, we had 9,800 
troops stationed in Afghanistan, approximately 8,100 Active, 
1,700 Reserves. That is roughly comparable to what the 
international community has also contributed. Thirty-nine 
countries have contributed about 8,000 troops to Afghanistan.
    Security: Security and particularly strengthening the role 
of the central government in the security arena is one of our 
top priorities. We have trained and partially equipped 10 
battalions of the Afghan National Army, trained 700 Afghan 
national police, helped implement the national communications 
system, and put in place a national police I.D. card system.
    With respect to Afghan National Army, let me point out that 
I have seen them on three different occasions. When they start 
out they can barely crawl along the ground with their helmets 
staying on their heads. By the time they are done, they are out 
patrolling. They are a professional force. Their 
noncommissioned officers have the right priorities such as 
communications and the need to be able to operate effectively 
tactically. They are very different from the ragtag bunch that 
supports some of the so-called warlords. Those of you who have 
been out there would agree that they do not match these people 
in the ANA.
    Let me talk a little bit about reconstruction. To help 
increase commerce, improve security, and better integrate the 
various provinces, the international community has begun 
working to improve the roads in Afghanistan. We, the United 
States, have graded the entire 389-kilometer portion of the 
ring road between Kabul and Kandahar. That, by the way, cuts 
the trip down from 30 hours to 6. We have deployed security 
along road construction sites. We have paved about 169 
kilometers. We have also built 203 schools and 140 health 
clinics, including schools for women and girls. Again, all of 
this helps the central government provide for its people, 
demonstrates that it is extending its reach throughout the 
country, and enables it to counter the influence of extremists.
    We have also begun to create a joint civilian-military 
provincial reconstruction team network. Two are operated by the 
U.S., one each is operated by the United Kingdom and New 
Zealand. That one was opened in Mazar-e-Sharif in July. These 
teams are going to help provide basic services to the Afghan 
people and increase security in outlying areas. We hope to have 
a total of eight up and running relatively soon.
    As you know, Afghanistan is a very poor country without 
many of the institutions necessary for democracy and 
governance. Its ability to provide basic services to its people 
is limited after decades of war. We, the United States, have 
contributed $58 million to the recurrent budget to help in that 
arena; that is to say, the government's operating budget. As 
the government starts meeting the needs of its people, it helps 
to reduce the influence of the war lords.
    We have also begun helping Afghanistan prepare for its 
Constitutional Loya Jirga, which as you know, is the unique 
Afghan institution that essentially sets the direction for 
future governance. Voter registration is proceeding--it is 
being readied, rather, in the run-up to next June's elections.
    You mention, Mr. Chairman and Mr. Spratt, defense 
transformation. I would like to address that as well.
    President Bush and Secretary of Defense Rumsfeld have 
determined not to let Operation Iraqi Freedom or Operation 
Enduring Freedom or Operation Noble Eagle deflect them from 
achieving their plan to transform the United States military 
and Defense Department business processes. Indeed, these 
operations underscore the importance of DOD transformation. To 
transform our military capabilities, the President's budget 
requested $24 billion for 2004 and projected literally 10 times 
as much for the 2004-09 framework. The fiscal year 2004 DOD 
appropriations bill will enable the Department to sustain its 
transformation agenda, and that is exactly what we intend to 
do. Transformation is still a top priority, and we intend to 
maintain that emphasis in the President's budget for fiscal 
years 2005 and beyond.
    One reason we can sustain our transformation efforts is 
that the President and the Congress have supported supplemental 
appropriations to reconstitute our forces once they return from 
Iraq or Afghanistan. This reconstitution can include depot 
maintenance or replacement for systems that have been used 
intensely during these operations. Sufficient supplemental 
funding plus a continuing robust procurement program is 
enabling the Department to sustain its transformation objective 
in spite of the heavy commitments in Iraq and Afghanistan.
    Wartime supplemental funding also protects transformation 
by funding incremental operations and maintenance costs, which, 
as you all know, in the past were covered by cuts in 
procurement and research and development. For years there was 
an outflow, from the investment accounts into the operations 
accounts. The Bush administration remains resolute in 
preventing such a migration of funds. To that end, we will 
continue our realistic funding of O&M requirements both in our 
annual budgets and in any supplemental appropriations that 
become necessary.
    In sum, with congressional support for the President's 
supplemental appropriations request, the President's commitment 
to transformation is on track. However, transformation and all 
other Defense priorities could come under intense funding 
pressure from two very costly entitlements that the Congress is 
considering.
    The first is concurrent receipt of military retirement pay 
and Veterans Administration disability payments. Section 644 of 
the Senate's defense authorization bill could cost the United 
States Government an additional $57 billion in mandatory 
outlays over the next 10 years. Even if the authorization 
conference could cut that cost in half by phasing in or 
adjusting the entitlement, funding it would still have to come 
at the expense of critical priorities. Needless to say, the CBO 
study did not include concurrent receipt, as I recall. 
Moreover, concurrent receipt would certainly not be the best 
way to spend whatever money one might want to add to help our 
Armed Forces in its transformation.
    But there is a second entitlement as well that is up for 
consideration, and that one is TRICARE for Reservists. 
Currently, Reservist health care needs are covered immediately 
upon mobilization. The health care of their family members is 
covered under DOD's TRICARE system if the Reservist is on duty 
for 30 days or more. But now Congress is considering granting 
TRICARE program eligibility for Reservists and their families 
when they are not on active duty. This new entitlement would 
cost over $3 billion a year. So, again, taking that 10-year 
time frame, we are talking about $30 billion. It would be 
complicated and costly to implement; it would threaten higher 
defense priorities such as transformation and force readiness.
    These new entitlements, if they are approved, would come at 
a time when the Department continues to wrestle with rising 
personnel costs. For example, my colleague, Under Secretary 
David Chu, is working hard to control rising health care costs 
just as governments and companies across the Nation are 
struggling with similar increases. There is no room in our 
budget for mammoth new entitlements.
    Since taking office, President Bush and his DOD leadership 
have demonstrated their commitment to take good care of their 
military people and their families. We want to continue to work 
with Congress on how best to allocate available funding to 
benefit our military people and their families while sustaining 
other national security requirements.
    In closing, Mr. Chairman, Mr. Spratt, members of the 
committee, I wish to emphasize that the Department of Defense 
continues to focus intensely on advancing stabilization and 
recovery in Iraq as rapidly and cost effectively as possible. 
The stakes couldn't be higher. The emergence of an Iraq that 
protects the rights of its citizens, that represents all of its 
diverse ethnic and religious groups, that prospers economically 
for the benefit of all its people, would be a profoundly 
important model for the Middle East and for the entire world.
    Similarly, Afghanistan is a major, major undertaking on the 
part of this country and has roughly similar goals. To help the 
Iraqi people meet this historic challenge, to help the Afghan 
people meet their challenge, President Bush has pledged 
America's commitment to stay the course. But America will not 
shoulder that burden alone, and the cost of failure would be 
catastrophic. Success is not going to come cheap. We all 
understand that. But success is our only viable option, and we 
will press on until we have completed the mission.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Zakheim follows:]

   Prepared Statement of the Hon. Dov S. Zakheim, Under Secretary of 
           Defense (Comptroller), U.S. Department of Defense

             department of defense long-term budget issues
    Mr. Chairman, members of the committee, I have prepared a statement 
to contribute to this important discussion of Department of Defense 
(DOD) long-term budget issues.
                cost and consequences of success in iraq
    As Congress continues work on President Bush's fiscal year 2004 
supplemental appropriations request, permit me to begin with several 
points regarding the budget impact of our operations of Iraq.
    One paramount point is that building a stable and non-threatening 
Iraq is not, and will not be, a U.S.-only endeavor. It has been and 
continues to be a coalition of nations that removed Saddam Hussein and 
moved quickly toward enabling the Iraqi people to build a better future 
for themselves and for regional and global security. The U.S. and its 
coalition partners are working hard to increase the contributions of 
other nations to a goal that will benefit the entire global community. 
We are confident that these contributions will increase and will reduce 
the burden on our current coalition of nations.
    Any estimate of the fiscal impact on the United States of 
operations in Iraq must take account of two major ways in which our 
burden in Iraq will relieved.
    First, America's burden will be eased by accelerating the 
contributions of the Iraqi people to their own security and future 
well-being. CENTCOM Commander General John Abizaid has stated that the 
key to success in Iraq is increasing the security role of the Iraqis 
themselves. That is a primary focus of the President's supplemental 
request and a primary focus of coalition leaders on the ground in Iraq. 
For example:
     About 70,000 Iraqis are now engaged in security 
operations, and another 13,000 are in or awaiting training. These 
include the police, border enforcement officers, Civil Defense Corps, 
Facility Protection Service, and New Iraq Army. Plans are for this 
total to grow to at least 170,000.
     More than 6,000 members of a new Iraq Civil Defense Corps 
are employed, and this should reach 15,000 by the end of 2004.
     About 20,000 members of the new Facility Protection 
Service are guarding more than 240 critical sites.
     The supplemental will support the fielding of a New Iraqi 
Army--27 battalions by September 2004. The first battalion of 700 
Iraqis graduated from training in early October.
     About $5 billion of the President's request is to 
accelerate this early progress and to increase the contributions of the 
Iraqis to their own security.
     Since the end of July, Iraqi participation in security 
efforts has more than doubled.
    America's burdens will also be eased through contributions from 
other nations. We cannot yet predict how much those contributions will 
increase, but we expect considerable help. Regarding financial 
contributions, Japan has just announced that is will provide grant 
assistance totaling $1.5 billion for immediate reconstruction needs in 
Iraq. The United Kingdom has announced its intention to provide $870 
million in grant assistance to Iraq. We expect additional substantial 
contributions from the upcoming international donor conference.
    In addition to contributions of funds, we continue to solicit more 
international contributions of military forces, which should reduce the 
strain on coalition troops. Currently, 32 nations have troops in Iraq. 
The U.K. is providing a division-sized element for operations in 
Southern Iraq. Poland is providing a division headquarters and a 
brigade. The Spanish, Ukranians, and Italians are all providing 
brigades to support the U.K. and Polish-led divisions. The Netherlands 
is also providing a large-sized battalion.
    As security contributions from the international community and 
Iraqis increase, the United States expects to lower its troop levels 
significantly. We expect to be able to reduce U.S. military personnel 
in Iraq from 147,000 now to an average of 113,000 active military 
personnel in fiscal year 2004. If additional multi-national troops are 
not contributed, however, we are prepared to call up and deploy four 
Enhanced Separate Brigades from the U.S. Army National Guard. These 
forces would provide a prudent hedge against uncertain international 
commitments. We intend to ensure that the gains made in Iraq are not 
lost by failing to follow through on the stability mission.
    America's future costs in Iraq should not be minimized nor, 
however, should they be overstated by omitting or downplaying likely 
contributions from the Iraqi people and international community. 
Moreover, our costs in Iraq must be assessed against the consequences 
of failure. Iraq is now the central battleground in the global war on 
terrorism. Failure to defeat terrorism there would hurt the entire 
civilized world and increase the likelihood of direct attacks on 
America and its citizens. On the positive side, a free and thriving 
Iraq would be a powerful demonstration that there is an alternative to 
the hopelessness and hate that fuels international terrorism.
                        progress in afghanistan
    The fiscal year 2004 supplemental appropriations request will 
enable us to continue progress in Afghanistan toward building a 
peaceful, democratic, and prosperous country that can serve as a 
partner in the region and as a model for other Muslim states. Examples 
of our progress include:
    Over the past 2 years, we have provided over $2 billion in 
assistance to Afghanistan. As of late September we had 9,800 troops 
stationed in Afghanistan, (approximately 8,100 active and 1,700 
reserves). Thirty-nine countries have contributed some 8,000 troops to 
Afghanistan. This is a major effort and a top priority for the United 
States
    Security. Security and particularly strengthening the role of the 
central government in the security arena is one of our top priorities. 
So far, we have trained and partially equipped 10 battalions of the 
ANA, trained 700 Afghan National Police, helped implement a national 
communications system, and put in place national police ID card system.
    Reconstruction. To help increase commerce, improve security and 
better integrate the various provinces the international community has 
begun working to improve the roads in Afghanistan. The United States 
has graded its entire 389-kilometer portion of the ring road between 
Kabul and Kandahar, deployed security along road construction sites. 
About 169 kilometers have been paved to date. We have also built 203 
schools and 140 health clinics, again to help the central government 
provide for its people and counter the influence of extremist 
influences.
    We have also begun creation of joint civilian military Provincial 
Reconstruction Teams (PRTs), two operated by the United States and one 
each operated by the U.K. and New Zealand, opened in Mazar-e-Sharif in 
July. These teams help provide basic services to the Afghan people and 
increase security in outlying areas.
    Democracy/Governance. As you know, Afghanistan is a poor country 
without many of the institutions necessary for democratic and 
governance. Its ability to provide basic services to its people is 
limited after decades of war. The United States has contributed $58 
million to the recurrent budget to help in that arena. As the 
government starts meeting the needs of its people, it helps reduce the 
influence of the warlords. We have also begun helping Afghanistan 
prepare for the Constitutional Loya Jirga, and voter registration in 
the run up to next June's elections.
                   sustaining defense transformation
    President Bush and Secretary of Defense Rumsfeld are determined not 
to let Operation Iraqi Freedom, Operation Enduring Freedom, and 
Operation Noble Eagle deflect them from achieving their plans to 
transform the U.S. military and DOD business processes. Indeed, these 
operations underscore the importance of DOD transformation.
    To transform our military capabilities, the President's budget 
requested $24 billion for fiscal year 2004 and projected $240 billion 
for fiscal year 2004-09. The fiscal year 2004 DOD appropriations bill 
will enable the Department to sustain its transformation agenda, and 
that is exactly what we intend to do. Transformation is still a top 
priority, and we intend to maintain that emphasis in the President's 
budget for fiscal year 2005 and beyond.
    One reason we can sustain our transformation efforts is that the 
President and Congress have supported supplemental appropriations to 
reconstitute our forces once they return from Iraq or Afghanistan. This 
reconstitution can include depot maintenance or replacement for systems 
used intensely during these operations. Sufficient supplemental 
funding, plus continuing a robust procurement budget, is enabling the 
Department to sustain its transformation goals in spite of heavy 
commitments in Iraq and Afghanistan.
    Wartime supplemental funding also protects transformation by 
funding incremental operation and maintenance (O&M) costs, which in the 
past were covered by cuts in procurement and research and development. 
The Bush Administration remains resolute in preventing such migration 
of funds. To that end, we will continue its realistic funding of O&M 
requirements--both in our annual budgets and in any supplemental 
appropriations that become necessary.
                             other concerns
    In sum, with Congressional support for the President's supplemental 
appropriations request, the President's commitment to transformation is 
on track. However, transformation and all other Defense priorities 
could come under intense funding pressure from two very costly 
entitlements that the Congress is considering.
    The first is concurrent receipt of military retirement pay and 
Veterans Administration disability payments. Section 644 of the 
Senate's defense authorization bill could cost the U.S. Government $57 
billion in mandatory outlays over 10 years. Even if the authorization 
conference could cut that cost in half by phasing in or adjusting the 
entitlement, funding it still would have to come at the expense of 
critical priorities. Moreover, concurrent receipt would certainly not 
be the best way to spend whatever money one might want to add to help 
our armed forces and its transformation.
    A second new entitlement is TRICARE for reservists. Currently, 
reservists' health care needs are covered immediately upon 
mobilization. The health care of their family members is covered under 
DOD's TRICARE system if the reservist is on active duty for 30 days or 
more. Now Congress is considering granting TRICARE program eligibility 
for reservists and their families when they are not on active duty. 
This new entitlement would cost over $3 billion per year, be 
complicated and costly to implement, and threaten higher Defense 
priorities such as transformation and force readiness.
    These new entitlements would come at a time when the Department 
continues to wrestle with rising personnel costs. For example, my 
colleague Under Secretary David Chu is working hard to control rising 
health care costs--just as governments and companies across the nation 
are struggling with such increases. There is no room in our budget for 
mammoth new entitlements.
    Since taking office, President Bush and his DOD leadership have 
demonstrated their commitment to taking good care of our military 
people and their families. We want to continue to work with Congress on 
how best to allocate available funding to benefit our military people 
and their families, while sustaining other national security 
requirements.
                                closing
    In closing, I wish to emphasize that the Department of Defense 
continues to focus intensely on advancing stabilization and recovery in 
Iraq as rapidly and cost-effectively as possible. The stakes could not 
be higher. The emergence of an Iraq that protects the rights of its 
citizens, that represents all of its diverse ethnic and religious 
groups, that prospers economically for the benefit of all its people--
this would be a profoundly important model for the Middle East and for 
the entire world.
    To help the Iraqi people meet this historic challenge, President 
Bush has pledged America's commitment to stay the course. But America 
will not shoulder that burden alone, and the cost of failure would be 
catastrophic. Success will not come cheap, but it is our only viable 
option, and we will press on until we have completed our mission.

    Chairman Nussle. Thank you.
    Let me start off with some of the questions that I posed 
within my opening statement.
    First of all, the request that is on the floor today, 2004 
emergency supplemental, is this the final request in the fiscal 
year 2004 for Iraq and Afghanistan and the war on terrorism?
    Mr. Zakheim. My understanding is that--well, let me break 
it up actually into two parts. You have the defense side, 
military operations side, and the $20 billion that is for 
Iraq's reconstruction.
    As you know, Mr. Chairman, in the past when we started out 
with Afghanistan, we were hoping to have a $10 billion fund, 
Congress decided it didn't like that idea. So basically acting 
along the lines of congressional preferences, we funded 
Afghanistan-related operations with supplementals. This 
supplemental, as I understand it, as far as we can see, would 
cover fiscal year 2004 costs through September 30, 2004 on the 
operations side. I can not speak to October 1, 2004. That is 
fiscal year 2005. But for fiscal year 2004, the answer is yes.
    The $20 billion request is different. The $20 billion 
essentially is a front-loaded effort to help Iraq for the 
immediate term undertake the highest leverage kinds of 
activities: electricity, security, health and water. We do not 
anticipate coming back to Congress for more money for a further 
supplemental along these lines. What instead we anticipate as 
we sit here now--and of course I can't predict the future--is 
that if we need more money that would come through the regular 
appropriations process, whether it is FMF or AID or whatever it 
might be. This $20 billion is more than just for a year; but it 
is essentially front-loaded because these are the expenditures 
that are needed to get Iraq back on its feet, indeed to get 
some of the other urgent things viable. You can not have oil 
production without electricity, for example.
    Chairman Nussle. Well, it appears from your answer that the 
answer to both the $20 billion and the $66 billion is, yes, 
that this is the last supplemental request for the fiscal year 
2004 for operations as well as for stabilization and security 
for Iraq.
    Mr. Zakheim. As best I see it, correct. Yes, sir.
    Chairman Nussle. How much of this is one-time expenditures? 
How much of these emergency supplemental requests are one-time 
expenditures that will not be included in the baseline as we 
move forward?
    Mr. Zakheim. The operations side and the military personnel 
side, as we have seen over the last couple of years, those are 
in fact recurrent. They are a function of how many people we 
are going to have out there. To some extent depot maintenance 
is recurrent; it is a function of what kind of systems we are 
using and how heavily we are wearing them out. So on the 
military side, on the operations side, it really is a question 
of what forces we will have over the next few years and where 
the trends lead. So those operations are recurrent.
    In terms, as I said, of the Iraq reconstruction funds, that 
is quite different and that looks to us as one time.
    Chairman Nussle. Are you able to provide us with an amount 
of how much of this will be one-time expenditures?
    Mr. Zakheim. How much of which, sir? Of the military side 
you mean?
    Chairman Nussle. Yes.
    Mr. Zakheim. I really cannot in the sense that I don't know 
what our force levels will be like in a year's time. Now, we 
know where we want them to be. I mentioned that in my 
testimony. We want them to come down to an average of 114,000. 
We are hoping that there will be international participation 
beyond what already exists. We know, for instance, that the 
Turkish cabinet and parliament have agreed to send troops, 
although the modalities have still to be worked out. We know 
that with the passage of a Security Council resolution the 
prospects for getting other forces, whether it is Pakistani or 
Bangladeshi, go up.
    But most important of all, as I mentioned in my prepared 
testimony, we are looking to add another 100,000 Iraqis to the 
various security forces. That clearly is going to make a 
difference to the levels of American forces required, and that 
in turn will drive the operational costs. So I can't make a 
prediction except to say that all the trends are pointing 
downward.
    Chairman Nussle. Are there any of the supplemental requests 
that are one-time expenditures?
    Mr. Zakheim. I would have to look at that for the record. 
Obviously if you are spending money on particular efforts to 
modernize systems, either--whether they are being upgraded or 
you are maintaining them, then by definition you are not going 
to repeat that the following year. But in terms of the military 
operations, taken as a whole, unless you were to run your 
forces down to zero next year, then it is by definition 
recurrent.
    Chairman Nussle. Will you be able to provide us with what 
those one-time expenditures are?
    Mr. Zakheim. We can certainly do that for you to the extent 
we know them. We will get that for you.
    Chairman Nussle. How long? When will that be? How long will 
it take for you to provide us with that?
    Mr. Zakheim. Since this addresses the current supplemental, 
it shouldn't take me very long at all. I am not going to delay 
this.
    Chairman Nussle. OK. We will follow up on that.
    How will you incorporate these requests and the war on 
terrorism, the war with Iraq, in the budget request that you 
will be making to us for fiscal year 2005?
    Mr. Zakheim. Obviously that is still under consideration. 
What we have right now is what has clearly been the intent of 
Congress up to now, which is to treat that separately.
    Chairman Nussle. Well, no. Whoa, whoa, whoa. I think that 
has been the intent of the request. The administration is the 
one that makes the request. Congress has allowed that to be the 
case. So I guess let me ask the first question. Is it your 
intent to continue to treat these as supplemental requests, or 
is the intent of the administration now to put these into the 
budget requests?
    Let us start with that, and then we will move to how we 
will respond to that.
    Mr. Zakheim. Obviously I am not talking about how you would 
respond. I am talking about the past, when we came in with a 
budget right after the Afghan war and added two $10 billion 
requests, which, by the way, panned out pretty well in terms of 
what we thought operations in Afghanistan would cost for that 
year; Congress didn't like them and they knocked them down. So 
we are operating on the basis of what we have in fact seen.
    Again, to formulate a request for literally, what, 14 
months from now, presupposes foreknowledge of our troop levels 
that we obviously don't have at this stage. So, again, it would 
have to be a rough estimate. Up to now, as I say, the clear 
indications we have received when we did try to do something 
like that were that they weren't looked upon favorably. At this 
stage of the game we have to factor that in. We are obviously 
putting our budget together, and we will consider how best to 
do this. But it is very, very difficult to predict at this 
time. I don't have to tell you because you know that the 2005 
budget begins in 14 months and ends in 26 months. So to predict 
what force level we are going to have, say, in 20 or 25 months 
in what is clearly a dynamic situation in Iraq, and where there 
are clear indicators that we will have certainly a lot more 
Iraqi forces there and hopefully others from the international 
community, is very, very tough to do.
    Chairman Nussle. Just to explore this for a moment. Part of 
the reason that I believe that there was objection to the $10 
billion is that it was unspecified. Do you recall it that way 
as well, that there was $10 billion requested with absolute 
zero specificity as to how that money was to be spent?
    Mr. Zakheim. We did indicate--and again my memory may be 
faulty here, but we did indicate that it was clearly for 
operations and military personnel.
    Chairman Nussle. Well, clearly, but that is a fairly 
unspecified amount. And if you were going to do it by 
supplemental requests, Congress, at least by intention, was 
hoping that you would be more specific and thereby do it 
through supplemental requests as opposed to giving a $10 
billion amount that was unspecified. That is my recollection.
    Mr. Zakheim. I don't challenge that at all. But, again, 
given that we are talking about quite a bit of time from now, 
the question then arises how well do you specify? How well are 
we in a position to specify?
    Chairman Nussle. Who is going to do that if you don't?
    Mr. Zakheim. What we have done up to now is essentially 
estimate as we got closer to the time what it looked like we 
would be needing and then come in to Congress with a 
supplemental request. I recall as well that when we first 
delivered our first budgets and Mr. Spratt recalled the $18 
billion request, we said we were not coming in for 
supplementals unless they were wartime related, and that is in 
fact what we have done. But because of that, predictability is 
very, very difficult.
    Chairman Nussle. Has this war on terror not changed? How 
long will this war on terrorism take?
    Mr. Zakheim. I guess until we win it.
    Chairman Nussle. All right. How long will that be?
    Mr. Zakheim. I wish I knew.
    Chairman Nussle. OK.
    Mr. Zakheim. I wish it were today.
    Chairman Nussle. Let us assume therefore that that means it 
may take a long time.
    Mr. Zakheim. It may well.
    Chairman Nussle. That is what the President has said.
    Mr. Zakheim. That is correct.
    Chairman Nussle. So wouldn't it also logically therefore be 
the case that we would begin to build into our budget a certain 
degree of planning for the future? I mean, there isn't a person 
in this room--or let me be more specific. There isn't a Member 
of Congress who occupies Article I of the Constitution when it 
comes to the purse strings in this country who is not clearly 
understanding and supportive of our need to win this at 
whatever price that may be. Not one of us. Yet we are growing 
frustrated that the further we get away from September 11, and 
the emergency, we had hoped to see more fiscal planning with 
regard to the Defense Department needs, recognizing that there 
has been a change in our strategy as a Nation as we look 
forward to our defenses in the future. And I have to tell you, 
what is remarkable about your testimony here today is its lack 
of specificity with regard to fiscal planning for the Defense 
Department needs for the future, and that is troubling.
    Mr. Zakheim. Let me begin by saying that many of the 
programs that we have in our future year defense plan do in 
fact address the kinds of threats that we are facing. That is 
why we focus on transformation, on flexibility, on the ability 
to respond quickly. We are dealing with a very different kind 
of threat from, say, the one that was dealt with in the 1980s. 
To that extent, we have built into our program changes that 
frankly were not anticipated as recently as a few years ago.
    To give you one example, the focus on unmanned aerial 
vehicles, which played a tremendous role both in Afghanistan 
and Iraq. In addition, the focus on band width to enable 
communications at a far higher scale than ever before, to allow 
the UAVs to speak to space, to speak to people on the ground 
and so on, which again were demonstrated in both of the 
conflicts. In both cases, the focus is clearly linked both to 
the experience in those two conflicts and to the overall effort 
to deal with a very, very difficult kind of foe.
    When I said that we couldn't, in the Department, anticipate 
the specifics that I thought you were alluding to, I meant how 
many people we might have to fund both in terms of military 
personnel and operations over the next few years, particularly 
in the case of Afghanistan and Iraq. That is by no means to say 
nor did I intend to imply that we had not accounted for this 
changing nature of conflict in our baseline program.
    Chairman Nussle. And will that be included in the budget 
request for 2005?
    Mr. Zakheim. It was in 2004 and I see no reason why it 
shouldn't be in 2005 and beyond.
    Chairman Nussle. Let me ask you about the audit. Two years 
ago Congress provided $100 million, as requested by the 
Department of Defense, to begin a transformation to better 
equipment, computers, et cetera. Could you give us an update on 
the status of that transition and where the audit of the 
Department of Defense stands?
    Mr. Zakheim. Absolutely.
    First of all, I am very grateful to the Congress, because 
with the infusion of funds we have now completed a new 
enterprise architecture, which is a blueprint that is supposed 
to take the 2,400 different financial management systems and 
neck them down, hopefully, to about 10 percent of those.
    In addition to that, we have begun a regular process, 
together with the GAO, the Inspector General, and OMB, to 
review our financial statements on a quarterly basis. I 
personally review them. We review the details of each line. We 
have, for instance, added far more assets to our books simply 
by coming up with a system for evaluating property, plant and 
equipment and our weapons systems.
    If I can digress briefly. The argument--the bureaucratic 
argument, I must say, always was we can't cost out weapons 
systems without giving away national security. We came up with 
a way of doing that by taking a composite evaluation. No, we 
won't put a value on a single F-16, but we will put a value on 
all F-16s and that way the taxpayer knows what we are doing 
with F-16s, what the assets are worth. We have done a lot, way 
more in the way of environmental liabilities. Every time I sit 
down with the services and review their financial statements, I 
sit down with OMB, GAO, and the IG in the room. And you can 
imagine the reaction the first time that happened.
    We anticipate having a clean audit by 2007. We have it 
timetabled for that. We have reviewed that timetable with the 
Inspector General, with OMB, and with GAO. It is tough to get 
from here to there. It took Gillette, for example, 5 years to 
reorganize and have a financial management system for a $9 
billion company. We are at $400 billion. But we are going to do 
it, and we are on track to do it.
    Chairman Nussle. 1990 was when the Chief Financial Officer 
Act was put in place, which required these audits. So that will 
be 17 years after passage of that act.
    Mr. Zakheim. I was not Comptroller through all those years.
    Chairman Nussle. And I wasn't Budget chairman then, either, 
but I am certainly responsible for it now, and as are you. And 
I guess my question is, is 2007 the best that we can do?
    Mr. Zakheim. That is a question that I keep asking, and the 
answer is probably yes. I think that is the consensus of GAO 
and OMB as well, and the reason is that we are trying to do a 
number of things at once. Not only are we modernizing the 
systems, we have also have to deal with all the systems that 
feed into it, whether it is health, personnel, logistics, and 
so on. In order to break down bureaucratic resistance to 
putting their numbers and their systems together in a way that 
the Comptroller wants, we have done two things.
    First, I am doing this jointly with our Chief Information 
Officer John Stenbit, so that it is not seen as some 
Comptroller power grab. That is not what we are trying to do 
here. We are trying to get a management information system that 
works and a system that the taxpayer can understand.
    Second, we have created six domains--essentially business 
lines like, health and logistics and so on, and got the 
bureaucracy that is tied in with each of those to work jointly 
with us. We are going to be testing these systems over the next 
few years, we are going to be modifying the interfaces between 
the various business lines and the financial management side. 
We are also going to work at the very same time to improve what 
actually shows up on the financial statements. We hope to have 
qualified audits, which is to say halfway there. Right now we 
get disclaimers. Right now the auditors throw their hands up in 
the air and say they can not address this at all. We want to 
get past that. Once you have a qualified audit, it means that 
at least part of your statement is verifiable.
    So we do have a game plan. If I could get it before 2007, I 
would love to, but I wouldn't be honest with you if I said I 
would.
    Chairman Nussle. In closing, let me just say that, you 
know, I have to say it is increasingly frustrating when we know 
that the information that we are basing these decisions on are 
not coming to us in either a timely way or in a way that can be 
demonstrated either to the General Accounting Office, to the 
Congressional Budget Office or to the Office of Management and 
Budget as being accurate. You know, if it is going to take to 
2007 before we know, before we can even begin to look at the 
books and discover whether or not we have challenges, it is 
going to be difficult to continue to maintain the argument that 
these expenditures are necessary. It is on the one hand 
difficult to be so clear on the need when, on the other hand, 
you can't be clear on where the money went and how it was spent 
or whether it was wasted or not. And it is going to be very 
difficult to continue this process if 2007 is the best that we 
can do.
    And, you know, I understand it is difficult to change the 
mentality of people who we may like to call them bureaucrats, 
but we are talking about following the law here. It is not a 
matter of it would be nice to get to this point. This is a law 
that has been in place since 1990, and if it is completed in 
2007, that is 17 years too late. I don't consider that success, 
I consider that failure. And so if there is any way that we can 
move this along, we will be exploring that effort sometime in 
the future, I guess.
    Mr. Zakheim. Mr. Chairman, maybe I didn't make myself 
clear. And, by the way, if you want to work with us on this, we 
would be delighted to work with you.
    First of all, it is not a matter of saying we are not going 
to have anything until 2007. What I said was we will not have 
complete clean audits for all our financial statements by 2007. 
We already have clean audits for four of our agencies right 
now.
    Second, we are breaking this matter down in terms of 
component problems. I don't even call them challenges. They are 
problems. Like problem disbursements, like our fund balance 
with the Treasury. We have already reduced our problem 
disbursements by approximately a third. Our fund balance with 
the Treasury we hope to have cleared up within a year or so.
    We are working with GAO precisely for the reason you just 
outlined, that we do not want to wait until 2007. We want to 
move this system along various parallel paths so there is more 
visibility as we go along into the financial statements and 
more solutions to the questions like, ``why can't you track 
something end to end from the time the money is spent?'' and, 
``where is the piece of paper that demonstrates the process to 
the actual outcome and execution, that is from the request to 
the expenditure?''
    The money is not winding up in Swiss banks. That is to the 
credit of our bureaucracy. We know where the money is ending 
up, it is ending up in tanks, aircrafts and aircraft carriers. 
The problem is not that. The problem is that in terms of having 
the visibility we want to make decisions, to make choices, we 
just do not have it as well as we would like, and that is 
really what we are trying to do here. Obviously we are trying 
to comply with the law. I would venture to say without 
exaggeration what we have done in the last 2\1/2\ years has 
pushed us further and faster than what we did in the previous 
14\1/2\.
    Chairman Nussle. To suggest that all of the money is ending 
up in tanks is also not correct. There is money being wasted. I 
don't think it is necessary to bring up the poster children of 
credit card abuse to Hooter's and to Carnival Cruises; but 
having said that, we know if that is going on, there are other 
abuses that are more difficult to find unless we get to the 
bottom of some of these audits.
    Mr. Spratt.
    Mr. Spratt. Thank you, Mr. Chairman.
    We can expect, as I understand your testimony, not to 
receive another supplemental request for the military 
deployment or for the economic reconstruction aid during fiscal 
year 2004?
    Mr. Zakheim. As I sit here now, that is the way it looks.
    Mr. Spratt. With respect to the cost of the deployment in 
2005, just the military end of it, can we expect to have some 
kind of estimate of what the likely cost is in your year 2005 
budget request?
    Mr. Zakheim. Right now we are looking at that. It is tough 
to do. It would make certain postulates about what force levels 
we have in particular. As I said, we have some goals which we 
hope to achieve. We are not there yet. One example: we have not 
yet gone beyond the Polish division and the British division, 
and we have had those for a few months.
    Again, can we train up all of the additional 100,000 Iraqis 
that we hope to? Yes. Will we have them all done by the end of 
next year? I don't know. So far our track record has been good, 
but it is difficult to predict. I don't know that I can give 
you an answer to that. I am not being difficult about it, but 
simply responding as I have because of the difficulty of the 
question.
    Mr. Spratt. Surely internally you have a best estimate, you 
are not just flying blind?
    I am going to come to this chart next, and I asked Mike to 
give you that. Surely you have a working estimate that you are 
using within the Department?
    Mr. Zakheim. Again, we are not currently estimating the 
operations and support costs or the additional personnel costs 
of 2005. Just to give one example of that, so much of these 
personnel are Reserves. We are trying to cut back on using 
Reserve forces. We have some question marks. I mentioned in my 
testimony we might have to use enhanced effort brigades. Are 
they Reserves or Active? We do not know. That is going to color 
the numbers. A Reserve that is called up goes from a $9,000 
annual cost to a $123,000 annual cost. There are some serious 
variables that we have to address, and it is not easy to do.
    Mr. Spratt. I just handed you a couple of pages because I 
want to walk you through the last supplemental that we passed 
in April, which was for about $80 billion. I believe the 
request was $74.7 billion, and it would be hard to follow the 
questions I have unless you have something in front of you.
    Of the $74.7 billion, $62.6 billion was for the Department 
of Defense. Does that meet with your recollection?
    Mr. Zakheim. Yes.
    Mr. Spratt. Of the $62.6 billion, according to the 
justification documents, $30.3 billion went to cover sunk 
costs. As I recall, the sunk cost definition included costs 
that you were obligated to spend by virtue of having shipped 
equipment to one theater, it would have to be removed back to 
its home base, and that cost was reflected in the $30 billion, 
as well as amounts already spent. The remaining money, $32.3 
billion, the justification documents indicate that $13.1 
billion was for a short, extremely intense period of combat 
operations; $12 billion was for mopping up and phasing the 
combat forces into an occupation force; and then there was $7.8 
billion out of the $74 billion that went to Israel and Jordan 
and other nations as well as postwar Iraq. As I understand the 
numbers, there was about $3 billion altogether in postwar aid 
to Iraq in this April request.
    Now, after the war was over you held a press conference. As 
I recall, you announced that the war turned out to be shorter 
than expected and therefore had cost less than expected, and as 
I recall, you said the war cost around $20 billion. How much of 
the $25 billion, the $13 billion plus $12 billion, remained 
unspent or unobligated at the end of the war? If it turned out 
to cost less than we thought, how much was left over?
    Mr. Zakheim. As of the middle of September, we got $56.6 
billion of the $62.6 billion that Congress appropriated..
    Mr. Spratt. That was obligations?
    Mr. Zakheim. That was apportioned to us.
    We had $15.6 billion of the Iraq Freedom Fund, and we have 
issued about $10.5 billion. We have actually come to Congress 
for about $700 million, and up to now we have about $9.9 
billion that has been issued. So you have a shortfall there. 
However, it looks like Congress is rescinding 3\1/2\ billion of 
the remaining IFF funds, so that out of that remaining, I would 
say, $5 billion, $3.5 billion has been rescinded, and all told 
we anticipate that $54 billion of the supplemental funds, so 
that $54 billion out of the $56.6 billion that we got was 
obligated prior to the end of fiscal year 2003.
    Mr. Spratt. What you are referring to is the rescission in 
the appropriation process?
    Mr. Zakheim. Yes.
    Mr. Spratt. The appropriators rescinded money that we 
provided you as recently as April in order to get the amount 
appropriated for next year down beneath the 302(b) allocation?
    Mr. Zakheim. Whatever the reason, they rescinded it, so we 
lost 3\1/2\ billion right there. Basically where we are is 
approximately a billion and a half short, and we expect to 
expend that pretty shortly. So our estimates held up reasonably 
well.
    Mr. Spratt. Nothing is left after you account for the 
rescission?
    Mr. Zakheim. Not much.
    Mr. Spratt. $56 billion was apportioned, about $3 billion 
was taken away from you, and there is about $4 billion left; 
isn't there?
    Mr. Zakheim. If you apportion $56.6 billion. And you have 
3\1/2\ out of that, so it is $53 billion.
    Mr. Spratt. About 3 billion left?
    Mr. Zakheim. There is about a billion left.
    Mr. Spratt. Can you assign what that $3 billion is for? Is 
it for replenishment of assets?
    Mr. Zakheim. We got $1.4 billion for what is called 
coalition support, including supporting, say, the Pakistanis. 
This is for operations they are conducting in Afghanistan, and 
it would be more costly and probably more dangerous and 
probably less successful if we tried to do it ourselves in the 
tribal areas.
    Instead of taking a lump sum payment, the Pakistanis have 
asked for monthly payments. They essentially stretched it out. 
They do not go by our fiscal years. So they have money still 
coming to them that will be expended. That is an example of 
some of the monies where we know where the money is going. It 
is all accounted for is what I guess I am telling you, sir.
    Mr. Spratt. With respect to the war itself, can you give us 
your number as to what the war itself cost through whatever 
date you designate as the initial conflict ending?
    Mr. Zakheim. As you know, Secretary Rumsfeld said it was 
about $4 billion a month. That was an average.
    Mr. Spratt. It only lasted 3 weeks?
    Mr. Zakheim. That's correct. But as you mentioned, there 
was money that we essentially replenished. We had cash-flowed 
money ahead of time. It was $30 billion, and the supplemental 
went to restore those funds. And we have not obviously left 
Iraq. We have still over 128,000 troops there right now. That 
continues. It is working at approximately $4 billion a month. 
Right there you can get a pretty good sense of what the 
operations and additional personnel costs amount to.
    Mr. Spratt. I understand, but the war itself, including the 
period that you call extremely intense period of combat 
operations, for which you allocate $13 billion and $12 billion 
for mopping up, is that approximately what it costs--about $25 
billion?
    Mr. Zakheim. The cost of the war was pretty much what we 
said. My memory tells me that those monthly rates were in the 
region of $6-or-so-billion a month, maybe higher than that, and 
that was in the immediate precursor to the war, the war and the 
immediate aftermath.
    Beyond that, as I said, the so-called mopping up as we have 
seen has not exactly been mopping up in the classic sense of 
the term.
    Mr. Spratt. With respect to the redeployment and 
replenishment and repair, particularly depot repair, what is 
your estimate of the all-up cost to handle that particular 
category?
    Mr. Zakheim. What we have in the supplemental is $2.8 
billion. That presupposes that both private and public depots 
would be able to do about 25 percent additional work in fiscal 
year 2004. We think they are capable of that.
    Beyond that, there are obviously other needs, but that goes 
to whether you are going actually to modernize, replace, 
repair. There are all sorts of issues in terms of what exactly 
we want to do with some of these systems. We are not thinking 
about one-for-one replacement either, so that is a factor as 
well.
    Mr. Spratt. The ranking member on the Committee on 
Appropriations is saying there is still a large unmet need for 
depot maintenance and high-level repair and replenishment.
    Mr. Zakheim. There is. It is a question of execution in 
fiscal year 2004. It is what you can actually do.
    Mr. Spratt. So there is still sort of a remaining liability 
looming over the future that this equipment is going to be 
deferred for maintenance, major maintenance, for the time 
being?
    Mr. Zakheim. Again, there is money in the baseline budget 
for this, number one. Then it becomes a question of whether you 
can dovetail the already scheduled maintenance for some of 
these systems with the maintenance that is required because 
they have come back from the battlefront.
    Secondly, as I said, the question is whether we indeed 
retain all of these systems or not.
    Mr. Spratt. The question I am getting is you and I know the 
O&M counts traditionally get funded pretty tight. Is there some 
remaining liability that is going to be a charge against, a 
surcharge, an extra cost, incumbent on those accounts, the O&M 
account, for the next several years because of this deployment 
that we have not reflected here?
    Mr. Zakheim. We have been pretty good about fully funding 
O&M over the last few years and protecting it, and there is 
some real growth built into O&M which was not necessarily the 
case in the past.
    Secondly, as I said, as we go through this, I am not ready 
to concede the point that we will have a big additional 
overhang because of depot maintenance. It is a function of 
whether we can work in what has to be repaired with the 
schedules that already were set for those repairs; and, in 
addition, whether we factor in the requirement for preserving 
or perhaps disposing of some of these systems. I am reasonably 
confident about this without challenging the question that 
there is a requirement for further repairs.
    Mr. Spratt. The $63 billion included $7.8 billion, part of 
which was designated for aid and humanitarian assistance to 
Israel, Jordan and other unnamed countries. Where did that 
money go, and has it all been spent?
    Mr. Zakheim. That of course is not in my budget, Mr. 
Spratt. It is not my budget, it is the Department of Defense 
budget. It is certainly not my budget. The Department of 
Defense does not have cognizance over that. That would be 
something to be discussed primarily with the State Department.
    Mr. Spratt. We have agreed to provide other nations like 
Pakistan, if they will send troops, incremental costs to 
maintain troops in the field. They would pay the base cost, we 
would pay the incremental cost. Could that account be tapped 
for that expense?
    Mr. Zakheim. You mean for the aid, is that what you mean?
    Mr. Spratt. Yes.
    Mr. Zakheim. These are totally separate. The DOD accounts 
are for supporting military operations by our allies and 
friends. There are some very, very strict conditions before we 
actually fork out a penny. First, they have to be operations 
that these countries otherwise would not have undertaken. 
Second of all, they have to be operations that they undertook 
at our request. And third, they have to be operations that are 
clearly geared to fighting the war on terror.
    Having met those conditions, we then actually look at what 
bills they submit to us, and we review them to see whether, in 
fact, we can verify that those operations indeed were 
undertaken to meet all those conditions. Quite frankly, we have 
annoyed some of them because we do not pay then 100 cents on 
the dollar; but that whole effort is totally separate and apart 
from aid to Israel or Jordan. It is a completely different 
account.
    Mr. Spratt. But you are paying that out of your hide?
    Mr. Zakheim. Again, it is the Department's money, the 
people's money. It is certainly not mine; but yes.
    Mr. Spratt. I have one question that does need to be put to 
you because we need some clarification.
    We frequently see the per-month cost of maintaining troops, 
the deployment in Iraq, and I guess the theater of about $3.8 
billion?
    Mr. Zakheim. It is a little higher. We have been saying 
$3.92 billion. That is about right.
    Mr. Spratt. You have requested $51 billion. If you divide 
that by 12, it actually comes out to about $4.3 billion which 
is a little higher. You said we have 128,000; I was given the 
number 113,500. I would think we would draw down those troops 
somewhat and maintain an average of 100,000 or so for the next 
fiscal year. If you do that, the cost per troop works out to be 
about $40,000-$45,000 per troop per month. That is over and 
above their base pay and all the other benefits they get. That 
is $45,000 of incremental cost, which seems substantial, to say 
the least.
    But then when we look at Afghanistan, we have 9,000 to 
10,000 troops in Afghanistan. We are getting $1 billion a month 
for their maintenance, $900 million to $1 billion. If you do 
the arithmetic on that, that comes to close to $100,000 per 
troop per month, the incremental cost, which seems an enormous 
sum, one; and two, especially in comparison to what is 
happening in Iraq where those troops have a regular high ops 
tempo, I would think.
    How do you account for the cost components that make up 
that $4 billion a month and for the difference between Iraq and 
Afghanistan?
    Mr. Zakheim. In terms of the cost components, basically 
what you have is not just the marginal cost of the forces, it 
really depends whether they are Active or Reserve because there 
is a huge difference in terms of what it costs us. The Actives 
involve additional costs, whether it is hardship pay, family 
separation allowance, or hazardous duty pay; whereas for the 
Reserves it is a different story, they are now being paid as 
Actives.
    The second fact is the cost of transporting them and 
bringing them back. There is the cost of housing them there. We 
have put more money into housing them. They were working under 
pretty rotten conditions. There was concern that we have not 
moved as quickly as some would like in terms of improving 
conditions there, and we are actually doing that, and we have 
budgeted funds for that.
    Yet another factor beyond the conditions in terms of 
living, and that includes air conditioning and water and so on, 
are the personal security elements. There has been a lot of 
concern, for instance, about the ceramic tile inserts to the 
Kevlar jackets about how to protect the Humvees and other 
vehicles, and about up-armoring Humvees, and those are 
additional costs associated with this effort. There are 
multiple inputs into the $4 billion a month that go beyond 
simply personnel costs per se.
    In terms of the difference between Afghanistan and Iraq, a 
lot of people have noticed that, and I think some of it is 
simply a function of the relative cost of Reserves there and 
the facilities that we have put in. We have been there longer 
and have spent more money on facilities there than in Iraq. 
Again, the average is about $950 million a month. On the face 
of it it seems an oddity, and we can get you for the record an 
accounting of that.
    Mr. Spratt. The cost has gone up. We were typically getting 
a number like $3.8 billion several months ago, and now it has 
crept up to over $4 billion. Particularly if you divide 12 
months by $51 billion, that is $4.3 billion in your request. It 
would seem to me that now that we have our troops over there in 
theater and ops tempo is down to at least less than what it was 
when we were fighting a hot war. We have a guerrilla war on our 
hands now, but the logistics and supply folks are trying to 
realize some efficiencies. It seems to me that the costs would 
be going down rather than up.
    Mr. Zakheim. Precisely because there are so many troops 
there that are functioning in a different way, we have new 
requirements for logistics that we did not have during the war. 
It was different logistics during the war. Now we are talking 
about keeping people on the ground doing things that in the 
wartime they did not really need to do. They did not need 
facilities on the ground in Iraq. They did not need welfare 
recreation facilities. They did not need 2 weeks of rest for 
which we are paying now. There are a lot of things which have 
materialized as a result of being there, or maybe precisely 
because it is not a combat situation.
    Mr. Spratt. If you can give us that for the record, I would 
appreciate it.
    Thank you, Mr. Chairman.
    Chairman Nussle. Mr. Gutknecht.
    Mr. Gutknecht. Thank you, Mr. Chairman.
    Mr. Zakheim, thank you for coming up here. Let me apologize 
in advance, and we hope you do not take some of these questions 
personally, but they are the kinds of questions that we get 
when we go home. In many respects, those of us on this 
committee and, frankly, in the Congress, we do reflect what the 
people are thinking about and what they are talking about.
    $87 billion is a lot of money. If you divide that up, that 
would run the State of Minnesota for probably at least 6 years, 
OK. When you talk about some of these numbers, I think Mr. 
Spratt, the numbers that he just talked about, the numbers per 
month are just mind-boggling to the average grain farmer in 
southeastern Minnesota.
    In some respects, I am happy you have been as forthright as 
you have been today, and in some ways I am a little concerned. 
I think one of the problems that we have right now in 
communicating all of this to our constituents is there is a 
dissidence. We have had various folks from the administration 
come down here in the last year or so, and we have gotten sort 
of different kinds of stories. One of the stories, for example, 
is that there are no more than 2,500 or 5,000 terrorists at 
large in Iraq, and generally toward the lower end of that 
number. And yet somehow to deal with that, we need 140,000 
Active troops. We need every type of weapon system known to 
human beings and still that does not seem to be enough.
    The other dissidence is created because the Commander in 
Chief himself said a number of months ago that the war is over, 
and yet every day we learn that is not exactly the whole truth 
and nothing but the truth.
    Secretary Wolfowitz and Armitage were up here earlier this 
year, and they said the cost of any rebuilding could easily be 
borne by the Iraqis themselves, because if you divided up the 
potential oil wealth in Iraq, they are potentially the third 
wealthiest country in the world. All of this creates an awful 
lot of dissidence not only in this committee, but among the 
American people. And now we are being asked for another $87 
billion, and I have to say what I said back home, and that is 
that this is not what we were told a few months ago.
    So as we go forward, the only thing I would ask is that you 
work with the people both at the Department of Defense and the 
State Department to at least have one story, and you are going 
to have to help us explain $100,000 a month. I am sounding like 
I am ragging on you, but these are difficult things to explain. 
When you have a 20-year-old kid who loses a leg in Iraq, and he 
is in the hospital, and we bill him $8.10 a day for food, that 
is a hard thing to explain on my radio show back home. Or, for 
example, that we are willing to spend these huge amounts of 
money, and if one of those kids gets killed, we send their 
families a check for $6,000; and, oh, by the way, they have to 
pay Federal income tax on that next year. We have to have a 
much better system of communicating this.
    I know this is not your category, but the whole area of the 
$22 billion, and I understand the President's position, and I 
also understand that we cannot afford to fail, and we have made 
an enormous commitment to the people of Iraq, and we are in a 
difficult position in trying to pull the rug out from under 
them. But I hope the people down at the White House, Pentagon 
and State Department understand that this $22 billion is going 
to be borrowed. It is going to be borrowed against future oil 
revenues of the Iraqis, or it is going to be borrowed against 
our children. One way or the other it is going to be borrowed. 
The question is who is going to have to pay it back?
    Everything that you can do to make certain that we have 
good information; and more importantly, I think what the 
chairman and the ranking member were saying, at the end of the 
day we all have to be held accountable, and that includes the 
Department of Defense. I know there are people in this 
building, not necessarily in this committee, but in some of the 
other committees, who believe that every agency of the Federal 
Government is capable of waste, fraud, and abuse, except the 
Pentagon. I do not happen to be one of those people. It seems 
to me we have every right to know how in the world do you spend 
$100,000 a month?
    Mr. Zakheim. Sir, first, I do not have any difficulty with 
the kinds of questions you ask. It is not a question of me 
taking it personally or not. We all have friends who have kids, 
or we have kids, who are out there. In my case if you want to 
get personal, I have a stepson who is a photo journalist who 
went out with sniper missions, who went with special operations 
people, who was with the 101st when that guy threw grenades 
into the tent next door. My stepson calls home from Iraq, and 
we hear the mortar fire in the background, and we do not sleep 
at night. We understand every set of parents in this country 
who have difficulty sleeping. These are questions that deserve 
to be answered and should be answered.
    So let me try to answer some of them, at least to clarify 
for you. Why do we need so many Active troops with the 
terrorists being in Iraq in such small numbers, and obviously 
by definition we do not know how many terrorists there are, 
whether it is 5,000 or 2,500. I am not an intelligence type, I 
cannot talk to that.
    Mr. Gutknecht. I did not make up that number. That is what 
we are told.
    Mr. Zakheim. No, no, I am not challenging that. I am going 
down a different path, which is simply this, and as one IRA 
terrorist once said, everything works until we succeed one 
time, and that changes everything for the British, and it has 
for all those years. Look at the thousands upon thousands of 
troops that they have in a little place called Northern 
Ireland. Look at what the Israelis have to do in territory that 
is tiny compared to Iraq. So maybe 114,000 is not the issue. 
The answer is maybe to get more Iraqis on the ground dealing 
with their own, and that is exactly what we are trying to do, 
and I think that has been a consistent message of the 
administration.
    As far as the war being over, as you know, the President 
really referred to major combat operations. No one was under 
any illusions that the war was over; but it is fair to say we 
are not talking about sending in F-15s or F-16s or those kinds 
of things. We are dealing with a different kind of operation 
and threat, and it has to be dealt with. It in no way 
diminishes the President's statement; we have just moved to a 
different phase, and I think most folks understand that.
    As to the cost borne by Iraq, there was the question of 
borrowing, grants versus loans, whether we would bear the cost; 
that someone is going to be essentially borrowing. It is fair 
to say--and actually let me step back because you did mention 
that my Deputy Secretary made some statement about how Iraqi 
oil money is going to cover things. What he said was that he 
expected over the next few years the Iraqis could generate 
about $50 billion in oil--that is our estimate, and the World 
Bank does not challenge those--over the next 4 years. In 2004 
it will be about $12 billion in revenues; about $19 billion in 
2005; and about $20 billion in 2006 and 2007. You do the sums, 
and that is what it comes to.
    The difficulty is that a lot of that money is going to go 
to the running costs of Iraq, and then there is the need to 
jump-start the economy and to do investment beyond running 
costs. Certainly over the next couple of years, maybe the next 
3, Iraqi oil is not going to do the trick. That is why it is 
not just us, but other members of the world community are 
prepared to change their own policies, like the Japanese, and 
put grants in up front. Everybody recognizes that within a few 
years, the Iraqis will be on their own feet.
    The question is: How do you get from here to there? We 
cannot do it, frankly, if we lend them the money. If we lend 
them the money, we beat them further into the ground. Let us 
leave aside all the political science stuff about resentment 
and Versailles and all that. The basic economic problem is if 
we lump them with more debt, they will never be able to get out 
from under it, we will slow down the process of recovery, and 
we will make it more costly. The Japanese understand that, and 
the British understand that, and the world community 
understands that.
    I think I have addressed the grants versus loans as well. I 
have segued into it.
    Again, you are asking the right questions, and we are 
trying to get you the right answers because the American people 
deserve them.
    Chairman Nussle. Before we move on, I need to say this for 
the record before we move to Mr. Moran, and I apologize to the 
Member.
    I hear that you are saying if you cannot budget for every 
possible future contingency, you cannot budget for any. I need 
to just say this: That may have been how we handled the budget 
in 2003 and 2004, but I just need to tell you from this 
Member's standpoint, that is not how we are going to handle the 
budget in 2005 and beyond. We are far enough way away from the 
budget submission that we have time to plan, and if there is a 
belief on the part of the Department of Defense that we are not 
going to do that for 2005 and beyond, I need to say that is a 
mistaken belief, at least by this Member's vote and intention.
    Mr. Moran.
    Mr. Zakheim. I would like to respond to that, if I may. I 
think I was misunderstood, or maybe I did not make myself 
clear. It is not that we are not budgeting for any contingency. 
In fact, the whole way we have structured our programming and 
budgeting process is to have a capabilities-based budget which 
moves away from contingencies and creates situations.
    Chairman Nussle. So then I will ask the question that I 
asked before. Are you or are you not going to include in your 
2005 budget request the global war on terrorism?
    Mr. Zakheim. The answer I thought I gave you and continue 
to give you is----
    Chairman Nussle. You don't know that yet?
    Mr. Zakheim. Beyond that in certain respects, of course.
    Chairman Nussle. What I am suggesting to you, and it does 
not require a response at this time, the response I would 
suggest very respectfully that needs to come in your submission 
is that you need to do that. That is the request, that is the 
answer I need is in your request, not an answer today that you 
will try. That is great. I am glad you will, we hope that you 
will. But the answer needs to come in the request. I apologize 
to Members for taking the time. I don't usually do that, but I 
needed to.
    Mr. Moran. Mr. Chairman, this is the same thing on all of 
our minds. Just as you said, every one of us want this venture 
to be successful, and with as little loss of life and limb as 
possible before we can get out. But if it was the Clinton 
administration, you know the kind of pressure there would be on 
specificity as to amount, as to period of time for engagement. 
I remember the deadlines that were given with regard to Bosnia, 
and that was a much smaller level amount of money and troop 
commitment.
    It has been 6 months since we passed the last Iraq 
supplemental, and things have gotten much worse. That was an 
opportunity to at least have taken care of some of the bare 
necessities which have been mentioned by the Chair, the ranking 
member, the most basic protections of the troops, the Kevlar 
jackets, protecting the Jeeps, the hand-held devices that will 
jam portable explosive devices. One would think all of those 
would have been in that request, but they were not. Now that is 
being used to partly justify this current request. How do we 
know it is going to be taken care of with the money we provide 
now?
    We were just told by Secretary Rumsfeld last week that the 
force that will be in Iraq next year is likely to be 40 to 60 
percent nonenlisted, in other words Reserve and Guard. The Army 
has told us that they cannot sustain significant troop levels 
in Iraq much beyond spring of next year. This is going to have 
a dramatic effect on our ability to have an adequate number of 
people in the Guard and Reserve for maybe a generation to come.
    There is a lot of evidence that those people who were 
telling the administration what they needed to know instead of 
what they wanted to hear were ostracized. Larry Lindsey, Chair 
of the Council of Economic Advisers, said this war could cost 
$100 billion to $200 billion. That was the only estimate we 
could get, and where is he? He is gone, put back in the private 
sector.
    Everybody else deferred answers, just like you are doing, 
Mr. Zakheim, and I do not blame you, but you are being given 
your marching orders. More importantly, the military has been 
marginalized in planning for the budgeting and operations in 
Iraq. I think that is a large part of the problem. Much of the 
military's funding requirements to reconstitute the force were 
not even considered by the Office of Management and Budget or 
by your office in the preparation of the supplemental request. 
We have been told that by the very people who should have had 
that input. They were given an arbitrary funding limit set by 
your office and by OMB.
    That is a top-down approach that is going to have dire 
consequences. A failure to expediently reconstitute the force 
is going to leave our military ill-prepared for future 
contingencies, and you justify the reason we are in Iraq is 
because we are going to go out and hunt down the terrorists. 
What about Iran and Syria and North Korea. How are we going to 
be prepared to deal with situations in those countries that 
might become critical if our forces are as depleted as we are 
told they have been?
    Boy, we have some dramatic numbers in terms of depletion of 
the force. We are told 46 percent of all Army spare parts are 
not available. They are called zero bin. Forty percent of the 
Humvee vehicles are out of commission due to the lack of spare 
parts. I could go on and on.
    This is not going to work. We need specific numbers. You 
are going to hear this over and over again. And if you have 
some better answer than what we are getting in your statement, 
I would love to hear it. But it sure makes people on your side 
voting for this supplemental and it makes it very difficult for 
those Democrats who want to support our troops to give you 
another blank check. Do you have any response?
    Mr. Zakheim. Sure. Let me try and take each of your 
concerns in turn.
    The first one is actually a pretty straightforward issue. 
You mentioned 6 months ago there was a supplemental. That was 
true, for fiscal year 2003. I was constantly asked, as were 
others in the administration, are you going to come back for 
more money for fiscal year 2003? We said no, and we did not.
    The supplemental now is for fiscal year 2004, and I believe 
I gave both the chairman and Mr. Spratt an answer on that one: 
We do not anticipate at this time coming back for more money 
for fiscal year 2004. The 2003 supplemental was, relatively 
speaking, late. We had forward-financed a lot of our 
activities, and we waited until the war was over--2004 is a 
completely different circumstance. It is an apple and an orange 
in a certain way. I am glad you asked that question, as they 
say.
    About the body armor and some of the other systems, the 
Army's original plan was to outfit about 61,000 troops, and now 
we have a lot more. The Army actually more than doubled their 
requirement. It is now about 137,000 sets. Right now, as of 
September 24--I am 2 weeks late with my information--there are 
98,000 sets already in theater, 50 percent more than the Army's 
original plan, and we expect the remaining sets to be filled by 
the end of November 2003.
    As a result of concerns that you and others have raised 
about force protection, the Deputy Secretary asked the Director 
of Research and Engineering and myself--for him to identify 
systems, for me to find the money in some way--to find near-
term solutions to deal with CENTCOM's priorities for a 
situation that was clearly involving these explosive devices. 
No one anticipated that to the degree they are taking place. We 
were asked, ``How do we up-armor the Humvees?''
    We got three different estimates every 2- or 3-week 
interval. The Army went back to the contractor and said, ``can 
you produce more?'' They gave a number. Then the Army went back 
and said, ``can you produce more?'' They gave a second number. 
The Army went back a third time, ``can you produce more?'' and 
they gave a third number. Our original estimate was about 595- 
in the supplemental, and we came in with over 700-. Now there 
is an increase for even more.
    What the Deputy Secretary said was, ``can you work out a 
plan'' for things like countermortar radars, additional 
unmanned vehicles, various electronic countermeasure devices, 
up-armoring the Humvees, body armor, Kevlar suits, ceramics for 
the jackets and so on. The Director of Research and 
Engineering, Ron Sega, has been working on putting something 
together. We are working on identifying the funds, and we 
expect to come back shortly and tell you how we are going to 
deal with that.
    We are being responsive to a situation that I don't think 
anybody really foresaw in its precise nature, not the least was 
the Army. As they have upped their requirements, we have tried 
to be responsive. We do not want the kids killed any more than 
you do. We have all visited Walter Reed and Bethesda, and it 
tears your heart out to see young women who are mothers without 
legs, young men without stomachs and so on. We have to do 
something about it, and we intend to. I am not challenging your 
point, I am showing you that we are being responsive.
    In terms of the military being marginalized, that one I 
have to take issue with. We did not marginalize the military. 
We worked with the joint staff, which synthesizes the services' 
requirements. They were not marginalized. I do not know who 
told you this, but I will tell you as best as I know and as far 
as I participated in this process, we did not marginalize 
people. We worked with the best estimates we had; and as I just 
mentioned in the case of body armor, the estimates changed. We 
are trying to be responsive.
    Mr. Moran. What did the Army tell you that it would take to 
reconstitute the force?
    Mr. Zakheim. I do not have a precise recollection right 
now. They came in with addition estimates. They worked with our 
staff. They revised them. The estimating process--as you know 
very well, you have been in this business for quite some time--
begins with preliminary estimates, and we scrub them. Sometimes 
the estimate goes up. That is what happened with the Humvees. 
The Army insisted they needed less than 600 Humvees. They went 
back to the manufacturer and got more. They wanted more, but it 
was a question whether it could be executed. Sometimes the 
estimates go down. That is the give and take of the process.
    Mr. Moran. Thank you, Mr. Chairman.
    Chairman Nussle. Mr. Diaz-Balart.
    Mr. Diaz-Balart. Thank you, Mr. Chairman.
    I think there is no higher priority than seeing our troops 
have the best training and equipment, and our national security 
is protected. That does not mean, however, that we should not 
be concerned about waste, fraud, and abuse. This chairman has 
been harping on that for a long time and has been leading 
efforts to try to get rid of waste.
    I want to mention just a couple. The GAO report that 
studies expenditures on contingencies operations in the Balkans 
and Southwest Asia said that over 5 percent of the expenditures 
were questioned by the GAO. Some of those jump up and bite you: 
a sofa and armchair for $24,000. For that it should drive 
someone to work. Decorative lock for $19,000, a designer table 
for $2,200, executive pillow for $1,800.
    You mentioned before in your statement how all of the money 
is going to aircraft carriers and tanks. Some of it seems to be 
going for things that are obviously none of the above, and that 
worries me. I think that should worry all of us, obviously, for 
two reasons. One, it is obviously taking from the taxpayers, 
and two, it is also not going to serve those troops on the 
field that need all of the help they can get.
    I am hoping that you are looking at some of those issues 
and you are going to come up with some things to try to correct 
some of those issues, but also some system of accountability. I 
don't think you can have accountability without having people's 
jobs on the line. What are you doing to make sure--and you are 
working on it, and the chairman had some very good questions as 
far as timing, but are you looking at a system of 
accountability that will actually put people responsible for 
these sorts of actions in a situation where their jobs are on 
the line even?
    Mr. Zakheim. Those are all fair questions, so let me try to 
address them. When all of that stuff came up about the sofas, I 
guess somebody also was bringing sand into Saudi Arabia. I 
asked my staff to look into what was going on and what I could 
do about it.
    The first thing that we found was a lot of this was money 
that was what is called MWR money, morale, welfare and 
recreation money. It is not taxpayer money at all. It is money 
that people raise and are able to spend. They get it from 
private sources and so on. I felt very uncomfortable because 
the average person on the street is not going to understand the 
distinction, but there is a distinction.
    The second part is that even if I could point out that 
someone had not acted properly, if that person was in the 
military, my hands were tied. There is something called command 
influence. I cannot go to a military commander and tell him or 
her how to discipline people. I can write memos and issue very 
stern instructions and warnings to the civilian side of the 
services, and I have. I can send you copies for the record if 
you need some of those. But there are bounds beyond which I 
cannot go.
    And the reason you have these command influence laws are 
straightforward. You do not want the military to be subject to 
the whims of civilians either. In this case there could be a 
very good reason for beating up on somebody, but there may also 
be bad reasons, and that is why the laws are strict about what 
someone like me can or cannot do.
    The chairman mentioned credit cards. We did not just wring 
our hands. I created a credit card task force. What we have 
done is outlined ways to get to the bottom of this. We have 
worked out systems where there are things called split 
disbursements. You pay the hotel directly, and the guy or woman 
does not get their hands on the money.
    We have ways of tracking patterns in the expenditures. And 
frankly, I do not want to go public, because if I tell how we 
are doing the tracking, then the tracking will not be as 
effective. But a lot of stories you read in the paper about 
people caught out doing fraudulent stuff, it is because of the 
tracking we have started. We have new training courses and 
handbooks. I can send you a list of these things.
    What we can do, we are doing, because it is not for some 
vague taxpayer; it is for me, you, my family, your family. So 
we are doing something about this.
    Chairman Nussle. Mr. Edwards.
    Mr. Edwards. Mr. Zakheim, you work every day on behalf of 
our servicemen and women, and I appreciate that, but I am going 
to be very direct in my comments and questions.
    First, the administration said it will take good care of 
our military families. I do not doubt the intention at all, but 
I do want you to answer, if not during this 5-minute period, in 
writing to me, how can it be that the administration this year 
can say we can afford a $230,000 tax break to someone sitting 
here safely at home making $1 million a year in dividend income 
if the administration's position this year is we should cut 
military Impact Aid education funding that provides better 
schools for the kids whose parents are fighting in Iraq today 
by $173 million? Why is it this administration says we ought to 
cut military construction funding by $1.5 billion this year, 
which means less housing for our military families, less day-
care centers, less health care clinics, despite the fact in 
this same year we passed that dividend tax cut? And why can an 
administration that pushed so enthusiastically earlier this 
year for a dividend tax cut cannot get the Speaker of the House 
to move the bill that has been sitting at his desk for 6 
months, the Tax Fairness for Military Families Act, H.R. 1307, 
which would provide modest death tax benefits and home sale tax 
benefits for military servicemen and women? I certainly hope it 
is not because the leadership in the House is offended by the 
idea that the Senate pays for that bill by closing the loophole 
on Benedict Arnolds who leave our country to keep from paying 
taxes even during time of war.
    Dr. Zakheim, I think the key question before the committee 
today is not do we support a strong national defense. All of us 
in Congress do. But I think the key question is whether the 
American people have yet been told the truth about the full 
cost of the Iraqi war and the full cost of our future Defense 
budgets. I think the answer is no. If you cannot answer as 
Defense controller what the estimated cost of the Iraqi war 
will be, then who can?
    This administration was slow to tell the American people 
what the cost of the Iraqi war might be, and when it did, it 
estimated, I believe, around $70 billion. That estimate was 
over $70- to 80 billion wrong, and we are just beginning to get 
through this process.
    Just a few months ago, referring to chart No. 13, Secretary 
Wolfowitz, in answering a question to this committee about the 
cost of Iraqi reconstruction, said to assume that we are going 
to pay for it is just wrong. Well, it was Secretary Wolfowitz 
that was wrong. What bothers me is not the cost of the Iraqi 
war, which I will pay for and support, it is not the cost of 
national defense, but it is that an administration that is so 
uncertain today about our future cost in Iraq and for national 
defense had no uncertainty when saying a few months ago we 
could afford a half-a-trillion-dollar dividend tax cut bill. 
That simply makes no sense.
    I want to ask you this question: Is there a time when you 
can estimate for us and the American people a low, high, and 
most expected cost for the Iraqi war? And secondly, will you 
stand by the present fiscal year debt for 2004-09, the 
administration's defense budget estimate, or do you think 
perhaps the Congressional Budget Office was right when it said 
that budget, excluding the Iraqi war cost, underestimates our 
defense needs by $61 billion?
    I think those are questions we need to have answered before 
the administration pushes through with what it said recently, 
and that is next year they are going to push another tax cut 
even as our military housing is underfunded, even as they are 
trying to cut Impact Aid for education for military kids at 
Fort Hood in my district while Mom and Dad were getting on the 
plane to fly to Iraq. I will stick with you in supporting a 
strong defense, but this administration needs to be carry out 
its responsibility to the American people to be honest about 
the cost of this Iraqi war and the true cost of our Defense 
budgets for the next 5 years before we start making grandiose 
promises and digging a huge hole for our children and 
grandchildren by passing on a massive national debt because 
they were not given those honest numbers.
    Mr. Zakheim. First of all, Mr. Edwards, I know you are a 
strong supporter of national defense. You do not have to 
convince me or anyone in your district, I suspect. I am not 
going to address some of the larger issues which are outside of 
the purview of my Department in terms of taxes and so on. They 
are questions that others are in a better position to answer.
    On Impact Aid, as you no doubt know, the budget is in the 
Department of Education, so it is outside my ability to do very 
much with.
    On the full cost of Iraq, I guess it really amounts to 
this: What Deputy Secretary Wolfowitz said, the question that 
he was responding to, he gave an accurate response to. If you 
put the slide up again, you would see that the question he was 
asked was whether the cost of Iraq's reconstruction would 
eclipse the cost of the war and its immediate aftermath. And 
his answer was, our contribution to the cost of reconstruction, 
which is about $20 billion, is, A, less than 50 percent of the 
cost estimated by the World Bank and the United Nations; and, 
B, is going to be less than what the Iraqis over the next 4 
years are expected to generate in terms of their oil revenues; 
and, C, is less than the cost of the war. He did give an 
accurate answer.
    In terms of the full cost of Iraq, as I told the chairman 
and Mr. Spratt, right now we see this $20 billion as our share 
of contribution costs. Beyond that, in the regular 
appropriations cycle, if there is a need to give FMF or aid 
money to Iraq, it will go through the usual appropriation. This 
supplemental is the one big, critical injection of funds.
    In terms of operations, I know it is frustrating for all of 
you. It is frustrating for us as well, but we cannot predict 
where we are going to be 1 or 2 years down the road. We know as 
long as we continue down the current trajectory of training 
Iraqi forces and anticipate getting more international troops 
in, our numbers will come down, and therefore operation costs 
will come down, and our personnel costs will come down. It is 
not that we are being stubborn here.
    Mr. Edwards. Do you have costs based on those estimates and 
assumptions?
    Mr. Zakheim. We are looking at that. We can see what we can 
do about that, but even those estimates continue to vary. So 
when you ask me whether there is a high, low or middle, the 
study I believe you are referring to did not account at all for 
the Iraqi contribution. It did not account for international 
contributions. The same, by the way, with CBO. I used to be at 
CBO. It is a top-flight place. The people there are the best of 
the best right now, and hopefully we were pretty good when I 
was there, too.
    Again, CBO's methodology is very rigorous and they are 
clear about what they do. They have assumed one-for-one 
replacement of all the systems. That is not how we will be 
doing it. The transformation is clearly not a one-for-one 
replacement. When you put $24 billion and $240 billion into 
transformation, you are talking about a complete overhaul of 
the way you are buying and replacing systems. If systems were 
replaced one for one, you would be absolutely right, because 
every few years the cost of a weapon system doubles. It is just 
compound interest effect. But that is not what we are doing.
    The other thing that the CBO highlighted in a very good way 
is the cost of all of these additional entitlements. They did 
not even count in Tricare for Reserves or the cost of current 
receipt. My goodness, what is it going to do to their estimates 
when these are brought in?
    Chairman Nussle. I am going to call on two more Members 
before we break for the vote: Mr. Hensarling and Mr. Scott.
    Mr. Hensarling. Thank you, Mr. Chairman.
    Dr. Zakheim, during my limited time I do not care to debate 
Iraqi policy with you or debate the amount of money that the 
Pentagon is spending under your watch. I do care to inquire 
some about how that money is being spent.
    First of all, as an observer of human nature, the world 
works off of incentives. On your watch, tell me about what 
incentives the guy or lady seven or eight layers down in the 
bureaucracy has to be a good steward of the taxpayer money, be 
it civilian or military personnel? Are there pay raises, 
promotions, ribbons? What is the incentive that would have 
somebody be a good steward of the taxpayer money?
    Mr. Zakheim. We have put a new proposal to Congress for a 
complete change in the way we deal with civilian personnel, 
which in many ways would create the kind of flexibility at the 
top that right now does not fully exist. I would say that the 
current system makes it very, very difficult for really 
talented people to jump up because the pay bands are quite 
narrow and rigid, and were set a long, long time ago.
    So in addition to the usual sorts of incentives and the 
kind of things you mentioned, not to mention the fact that 
ultimately people go into government and public service if they 
are talented because they care about the public. And, you know, 
the talented people in the bureaucracy could clearly be making 
a lot more money elsewhere. So their incentive, their 
fundamental incentive, is the public service.
    Having said that, I think the kinds of reforms that Dave 
Chu has been proposing are critical to create a circumstance 
where better people can be demonstratively rewarded for what 
they are doing.
    Mr. Hensarling. Well, that is what I would be interested 
in. I mean, the incentive to go and serve your country and 
being a good steward of the taxpayers' money I don't believe 
necessarily are identical concepts. There may be a lot of 
people who want to serve their country, but that doesn't 
necessarily mean that they are going to go out and purchase the 
$10 hammer as opposed to the $100 hammer.
    As long as we are on the incentive question though, a 
question that I like to ask all of our witnesses is: What else 
could this Congress do that would allow the Pentagon to 
maintain their current mission as defined but do it in a more 
cost effective manner?
    Mr. Zakheim. We do have a number of proposals, as I say, a 
number of ideas that we have put together that are currently 
pending before the Congress--the overhaul of our civilian 
personnel system, perhaps being one of the most prominent in 
that regard--which would allow us to be far more cost 
effective. There are others as well and I can give you those 
for the record. There are quite a few of them.
    [The information referred to follows:]

Mr. Zakheim's Response to Mr. Hensarling's Question Regarding Pentagon 
                               Efficiency

    The best and fastest way for Congress to enable the Department of 
Defense to fulfill its current missions more cost effectively would be 
to pass President Bush's ``Defense Transformation for the 21st Century 
Act of 2003''--submitted last April. This package includes our 
important and pressing requirements. We especially need approval of the 
National Security Personnel System. Among its several key benefits, the 
System could enable the Department to substitute civilians for military 
personnel in thousands of non-military positions, which would help 
relieve the strain on our military. Other initiatives in the Act 
include improving the acquisition and contracting process, transforming 
the appropriations and budget process, and reducing unnecessary 
reporting requirements.

    Mr. Hensarling. Well, I would very much like to have that 
submission.
    President Bush was quoted once as saying that we have to go 
beyond marginal improvements to harness new technologies that 
will support a new strategy. Obviously, the threat to America 
has changed over the years, yet I am only aware of one major 
weapons system being canceled as we add on all the new spending 
to meet the new threat. It seems to me that a case can be made 
that all we are doing is building new systems on top of cold 
war legacy systems. Can you disabuse me of that notion?
    Mr. Zakheim. I will certainly try. I guess the one you are 
thinking of is Crusader. But the Army alone cut 18 other 
systems. If you recall, we cut the size of the B-1 force by 
improving the rest of the B-1 force. We totally changed the DDX 
project. That is now completely different in terms of new 
systems that we are talking about.
    Mr. Hensarling. What are the documented cost savings then 
on these transformations and cancellations?
    Mr. Zakheim. We have those. I will get them to you.
    [The information referred to follows:]

Mr. Zakheim's Reponse to Mr. Hensarling's Question Regarding Documented 
                              Cost Savings

    To implement Secretary Rumsfeld's guidance stemming from the 2001 
Quadrennial Defense Review, the Military Services have shifted billions 
of dollars from their old multi-year budget plans to new ones--as they 
have terminated and restructured programs and systems. For FY 2004-09, 
the Military Services estimate that they have shifted over $80 billion 
to help them transform their warfighting capabilities and support 
activities.
    Of special note, the Army's fiscal year 2004-09 budget plan 
cancelled 24 acquisition programs and restructured another 24.
    Some transformational changes will not be reflected in savings. 
Instead, existing funding has been redirected to achieve 
transformational capabilities, rather than merely upgrade to legacy 
systems. For example, the Navy's planned 2007 aircraft carrier has been 
upgraded to the CVN-21 design--whose innovations include and enhanced 
flight deck, a new nuclear power plant, allowance for future 
technologies, and reduced manning. Some of these capabilities 
previously were not going into a carrier until 2011. This is an example 
that fulfills President Bush's goal of skipping a generation of systems 
or technologies.

    Mr. Hensarling. OK. I am sorry, I interrupted you. If you 
wanted to----
    Mr. Zakheim. Sure. I was just going to say that if you want 
to look at some new systems, we put cruise missiles on our 
Tridents, which is a completely new approach. Our UAV programs 
have expanded. We have got some very exciting space based 
programs and also communications programs, some of which are 
classified and perhaps you could be briefed about them in 
another venue. The Navy has a new program for a littoral combat 
ship, for completely different type of naval operations that 
are not your classic blue water operations. There is the future 
combat system in the Army, where research and development is 
going to ramp up and the new chief of staff is looking at 
making that more appropriate for the 21st century. The Stryker 
system is another one.
    That is not a bad list right there.
    Mr. Hensarling. Thank you.
    Chairman Nussle. Mr. Scott, it is your option whether you 
want to go now and sneak this in, or wait until after we 
resume.
    Mr. Scott. I prefer to come back.
    Chairman Nussle. All right. Then we will recess until after 
the second vote. Thank you.
    [Recess.]
    Chairman Nussle. The hearing will be in order. The hearing 
resumes at this point. Mr. Scott may inquire.
    Mr. Scott. Thank you. Thank you, Mr. Chairman.
    My first question involves the bulletproof vests. I 
understand that in a few weeks we are going to get around to 
having enough for everybody. How many troops did we plan on 
having in Iraq, and how many do we have now?
    Mr. Zakheim. How many troops? In terms of the vests?
    Mr. Scott. No. When we went into Iraq, how many did we plan 
on having, eventually having in Iraq, and how many do we in 
fact have now?
    Mr. Zakheim. Right now we have approximately 132,000 today. 
In terms of planning, as you know, we came in with a somewhat 
similar number, a somewhat larger number, and it seemed to have 
worked out pretty well in terms of how the war went. So I am 
not really sure where you are headed with that.
    Mr. Scott. Well, did we think we were going to need fewer 
troops than we ended up with?
    Mr. Zakheim. I don't think so. I think--I mean, obviously 
you would have to speak to----
    Mr. Scott. So we knew we were going to have a shortage of 
bulletproof vests when we went in?
    Mr. Zakheim. Oh, I see what you mean. No, sir. Again--see, 
that is what I asked you, if that was the reference point. No. 
The Army originally anticipated 61,000 vests because what they 
needed those for were for the people who were going to operate 
from vehicles and then dismount, and----
    Mr. Scott. But the total number was the same?
    Mr. Zakheim. Yes.
    Mr. Scott. OK.
    Mr. Zakheim. And then the Army simply raised the estimate 
because the nature of the operations were such that they had a 
lot more people walking around and needing the protection and 
also in the vehicles.
    Mr. Scott. OK. Who oversees the contracts in the 
reconstruction part of the budget? Would that be State or 
Defense? If Halliburton is in fact overcharging, who would be 
the one responsible for catching that?
    Mr. Zakheim. Leaving aside whether Halliburton is 
overcharging or not, AID has issued a large number of the 
contracts, Defense has issued some contracts, too.
    Mr. Scott. Who is responsible for overseeing the contract 
compliance?
    Mr. Zakheim. The----
    Mr. Scott. The one that issues the contract?
    Mr. Zakheim. Well, yes. It would be State in their case. 
When we issue contracts, it would be us. I can tell you from 
the perspective of the Department of Defense, I have under me 
the Defense Contract Audit Agency, and I have brought them in 
to review every single contract that is now being awarded.
    Mr. Scott. And you have no evidence that Halliburton is 
overcharging?
    Mr. Zakheim. I don't believe--OK, in terms of the logistic 
support contract, that is ours. We have been looking at that. I 
have nothing right now to prove that they are overcharging or 
not. We are looking into DCAA's auditing all these contracts; 
and when they report to us, we will know more.
    Mr. Scott. Is future ship construction and maintenance part 
of the $87 billion?
    Mr. Zakheim. Future maintenance of those ships that are 
coming back from the theater is part of the $2.8 billion. I 
will have to give you for the record how much is going directly 
to ship maintenance. Ship construction of course is not, 
because the SCN budget is something different.
    Mr. Scott. But maintenance is part of the budget?
    Mr. Zakheim. The depot repairs would be, yes, sir, and also 
operating the ships in theater.
    Mr. Scott. You indicated that Iraq would be hard pressed to 
pay back the debt. What is the per person debt of citizens in 
Iraq compared to the per person debt in the United States?
    Mr. Zakheim. I don't know what the per person debt in the 
United States is. There are about 25 million citizens in Iraq. 
But I can tell you this, that I believe that the average income 
of the average American is considerably higher than the average 
income of the average Iraqi, maybe by a factor of, let us see. 
They are talking about as little as $600 a year for these 
people per capita and we are at something in excess of $30,000 
million.
    Mr. Scott. Do you know what the per capita debt is for a 
citizen in Iraq right now?
    Mr. Zakheim. I think they have about $100 billion in debt. 
That is a round number. There are about 25 million citizens. So 
there it is, 4,000.
    Mr. Scott. About 4,000?
    Mr. Zakheim. I think so. But I can get----
    Mr. Scott. What is the per person debt in the United 
States?
    Mr. Zakheim [continuing]. I can get that for you in the 
record.
    Mr. Scott. Ten? Twenty?
    Mr. Zakheim. I don't know, sir. I can get it to you for the 
record.
    Mr. Scott. You indicated that Iraq is the center of the war 
on terrorism. It is my understanding that the CIA wrote Senator 
Graham prior to the war that Baghdad and Iraq was not a threat 
to the United States, but if we attacked them they would be 
more of a threat. They said, and I quote from the letter: 
Baghdad for now appears to be drawing a line short of 
conducting terrorist attacks with conventional or BCW against 
the United States. Should Saddam conclude that a United States 
led attack could no longer be deterred, it would probably 
become much less constrained in adopting terrorist actions.
    Is it your statement now that that in fact happened and 
that Iraq is now a terrorist threat?
    Mr. Zakheim. I don't think Iraq per se is a terrorist 
threat. I think what is being said is that there is a terrorist 
threat inside of Iraq. It has clearly been attracting 
terrorists. The Deputy Secretary has testified and shown some 
foreign passports that showed people coming in, particularly 
for jihad.
    As to the rest of your question, that is really outside the 
turf of a comptroller, so I wouldn't presume to answer.
    Mr. Scott. My time is running out. I would just like you to 
comment on your position on concurrent receipts. Can you 
explain what the concurrent receipt policy now is in terms of 
what a disabled veteran can get and how high a priority it is 
for this administration to see that they get what they deserve 
in terms of compensation for their service-connected 
disability?
    Mr. Zakheim. Right now, as I understand it, when they get 
the Veterans Affairs payment for disability, there is a 
reduction in their retired pay so that there isn't in effect a 
double payment. There is no intention whatsoever to denigrate 
or diminish the priority of our veterans and particularly those 
who have disabilities. The real issue is whether there is a 
need for having these effectively double payments, which will 
clearly come at the expense of the people in uniform today.
    Mr. Scott. If you have two veterans, one disabled and one 
not, and they get the same amount of money because of the 
offset, the disability is essentially not being compensated. 
The person that is not disabled can go get a job; the person 
that is disabled can't get a job. And that is what they are 
being compensated for, the fact that they can't get a job. Some 
of these people are retiring at 38, 40, 45 after 20 years of 
service and they are getting nothing for their disability 
notwithstanding the fact that they can't work, and that is 
apparently not a priority. Other priorities like tax cuts are a 
higher priority than properly compensating our veterans.
    Mr. Zakheim. Well, I believe that certainly within the 
Department of Defense compensating the veterans is an extremely 
high priority. The real question for the Department is--are the 
veterans already being compensated for their disabilities and 
their retirement, and is it appropriate to in effect take money 
from other Defense Department programs, including personnel 
programs--that is to say for the people who are now serving--in 
order to have this additional benefit, and so that in fact 
there is a cost that attaches to the benefit that is sometimes 
overlooked. There is no intention to diminish the priority of 
veterans.
    Mr. Scott. How about offsetting some tax cuts----
    Chairman Nussle. The gentleman's time has expired.
    Mr. Scott [continuing]. And making sure that the disabled 
veterans----
    Mr. Zakheim. I am not in the position to address the issue 
of tax cuts, sir.
    Chairman Nussle. I am going to recognize Mr. Baird and then 
Mr. Brown in that order. Mr. Baird.
    Mr. Baird. I thank the chairman, and I am very grateful 
that he held this important hearing on a matter of profound 
impact to the budget.
    Were you advising Mr. Wolfowitz at the time he made the 
statement that was illustrated earlier on the slide?
    Mr. Zakheim. I don't recall working specifically on the 
statement, but I certainly have been in this job while he was 
saying that, yes.
    Mr. Baird. So one of my questions is, we have asked for a 
number of projections from you, and Mr. Wolfowitz said 
essentially that, in spite of your arguments that it was 
honest, I don't think it was honest that he told this body and 
the American people that we wouldn't have to pay for the cost 
of reconstructing Iraq. Now, you tried to put it relative to 
how much we paid for the war, but as I read that statement I 
think he is saying we wouldn't have to pay for the cost of 
that.
    Now, it seems to me that he dissembled, at the very least, 
and if that is the case do we have confidence in future 
projections from this administration?
    Mr. Zakheim. I would take issue with that. I don't think 
Paul Wolfowitz dissembles. On the contrary, I think that one of 
the things that everyone says about him, whether they agree 
with him or not, is that you know exactly where he stands.
    Mr. Baird. Well, I think he stood here before this body 
before this war started and refused to give us an estimate of 
the cost. So how is that straightforward?
    Mr. Zakheim. Simply because there wasn't a good estimate to 
give at the time. I think any estimate he would have given you 
would likely have proved wrong. I think the honest answer when 
there is no answer is to say there is no answer.
    Mr. Baird. So it is sound policy for an administration to 
take a nation into war without estimates of the cost to human 
lives or economics and who would pay for it?
    Mr. Zakheim. Let us break those down. I think it is a fair 
question, but there is also a fair answer to your question. In 
terms of estimates of cost and lives, no one can estimate 
those. We have been very, very fortunate in that we train our 
people well. We have the best fighting force and the best 
equipment in the world. That is why our losses are so low. No 
one can estimate that. I remember before the first Gulf War 
there were talking heads who predicted 10,000 casualties that 
didn't happen. That is because we are good at what we do. But 
no one can say precisely or even in general terms what the 
losses are and any military analyst that does is usually wrong.
    As to the economic situation, I think it was quite clear 
that there were some terrible things that could have happened 
based on the previous Gulf War that didn't happen. The cost, 
had there been huge oil fires like there were in Kuwait and 
southern Iraq, or flooding, or the use of any kinds of 
unconventional weapons or mass destruction----
    Mr. Baird. Let me, rather than using all my time with a 
bunch of hypotheticals, let me move on to something else. In my 
district we face 10 percent unemployment. We were told a few 
months ago that the Veterans Administration may close one of 
our vets hospitals that serves 6,000 people plus 72 inpatient 
beds. We are told that there is not enough money for 
transportation projects, we are told there is not enough money 
for flood control projects. The list goes on and on. We are 
told that our police will have to get by without COPS and Byrne 
grants, and yet we are asked to send $87 billion to Iraq.
    Last night on the House floor--I honestly don't know how to 
vote on this, and I will tell you why. I have been to Walter 
Reed and I have met the troops who are burned, have double 
amputations, brain injuries they are going to have for life. 
But I don't have assurances from this administration that it 
takes the responsibility seriously, because if it took it 
seriously, it would tell us how to pay for that. It has never, 
from before this conflict started to this day, leveled with 
this Congress or with the American people about how we pay for 
this. Do we cut Social Security? Do we borrow from our 
children? Do we do something with the tax cuts? If it is 
important, be honest enough with the people to tell us how we 
pay for it. I will tell you right now, if you will tell me how 
to pay for it I might know a little bit better how to vote on 
this. And I would ask you, as a citizen of this country, do we 
have to pay for this in some fashion?
    Mr. Zakheim. Well, clearly if we are spending money, we are 
spending money. I can't argue with that. Most of the question 
you asked really isn't for someone like me in my position to 
answer. One thing I can tell you, to put it in some 
perspective, with this additional supplemental, at least the 
defense part, we will be spending 3.9 percent of our gross 
domestic product. Right now, our GDP is growing faster than the 
Defense budget. The economy is on some upswing. Put that in 
historical perspective. That is considerably less than----
    Mr. Baird. Well, I appreciate that. But I have got to tell 
you, it is hard for me to put it in historical perspective when 
one out of 10 of my constituents are unemployed, when we can't 
keep our VA hospitals open, when we can't invest in 
transportation.
    Let me ask you one final question. When I asked a question, 
a member of the other party came to me and said I would have 
answered that. I would have said take that money out of my 
salary. We have got to fund this.
    OK, fair enough. Let us suppose every Member of this body 
gives $1,000, which I would support. How many Americans would 
have to give $1,000 for us to make $87 billion?
    Mr. Zakheim. Well, it sounds to me like 87 million people.
    Mr. Baird. So we are asking 87 million people to pitch in 
$1,000, or we are passing that debt on to our kids?
    Mr. Zakheim. Again, sir, all I can say to you is you are 
looking at the cost side of the equation, and that is certainly 
a fair point. On the other hand, you have to look at what would 
be the cost in terms of troops to begin with if we didn't 
sustain the Iraqi economy and get it back up so that it could 
function on its own.
    How long would we be there? You know, estimates of how long 
we are in places tend to be radically short. I understand that. 
But at least here we have a situation where Iraqis are under 
arms, where more Iraqis will be trained, where the 
international community is ready to pitch in. I don't know if 
you know this, Congressman, but the Security Council voted 15-0 
to support the resolution. 15 to nothing. All the talking heads 
yesterday were saying, ``well, maybe somebody will veto, the 
French will abstain, the Chinese will abstain.''
    Mr. Baird. Does that mean you are cutting back your request 
to the taxpayers for $87 billion?
    Mr. Zakheim. No. What it means is that we are part of a 
much larger international effort, and everyone recognizes that 
what we are doing right now is an investment in the future.
    Mr. Baird. I thank the chairman.
    Chairman Nussle. Thank you.
    Mr. Brown.
    Mr. Brown. Thank you, Mr. Secretary. I know that you have a 
tough job, and I know there have been some tough questions 
asked today. I was just trying to reflect back. I wasn't around 
during World War II when we were invaded by the Japanese. I am 
just wondering if the Congress sat around at that point in time 
and said how much it will cost us to get involved in this war? 
You know, how many dollars will it cost? How many lives will it 
cost? We know what happened, you know it cost a tremendous 
amount of lives and a tremendous amount of dollars. But our 
security was at risk, our freedom was at risk.
    Even is such today. Now, $87 billion compared to an $11 
trillion economy is not very much and I don't know how much our 
freedom is worth, but I am certain in prior situations it is a 
small amount compared to what it was like then.
    When we passed the resolution giving the power to the 
President to go after the terrorists, we didn't know how big 
that picture was going to be, how widespread. But we do know 
down in Guantanamo there are 42 countries represented in the 
prison population down there. So we know that we are at risk 
not only in Afghanistan and Iraq, but in other parts of the 
world too. And so as we pursue the enemy, the terrorists, we 
don't know what the cost is going to be and we are not sure 
where the next station is going to be when we move from Iraq.
    As we debate this bill today, which is on the House floor, 
the $87 billion, I know there are some questions about how much 
it is going to cost and how we are going to pay for it. But is 
there a cost for freedom? And how much is that worth?
    Mr. Zakheim. Obviously, Congressman, I can only give you my 
personal view. I think the cost of freedom is priceless. I 
think any of us who have ancestors who escaped from countries 
where there was no freedom, you cannot put a dollar value on 
it. And you are absolutely right, we didn't on December 7, 1941 
start looking at what is was going to cost us to defeat the 
Nazis and the fascists in Italy and the Japanese. We just did 
it. And, at the same time, I certainly understand the concern 
of Members, that they want to know as best they can what it 
will cost, and we try our best to provide the information. We 
are not being secretive, we are not being cute. Ultimately what 
we cannot predict, we cannot predict. But we can say with 
certainty that the benefits of what we are doing, the stability 
that we can bring to that region, the control of a threat that, 
as you point out, is worldwide and right now seems to be 
centered in that part of the region and that part of the world, 
are something that is truly invaluable.
    Mr. Brown. Thank you.
    Chairman Nussle. Thank you.
    Ms. Majette.
    Ms. Majette. Thank you, Mr. Chairman, and I thank you for 
calling this hearing. I think it is very important, and it 
probably couldn't come at a better time. Mr. Under Secretary, I 
thank you for being here and for the work that you are doing.
    With many of our soldiers engaged in Iraq and Afghanistan 
and elsewhere, we are seeing a future that looks very different 
from the one we envisioned before September 11. And I know, Mr. 
Under Secretary, that you understand how concerned we are 
about, as a practical matter, how we are going to bear the cost 
of freedom. And I think all of us understand--I know all of us 
understand that there is a cost to that. It is in lots of ways 
really incalculable. But our responsibility is to put a dollar 
figure to some of these things and figure out how we set the 
priorities for this Nation with respect to defense.
    And, of course, to their credit, members of the 
administration have mentioned that they understand that we need 
to modernize the Department of Defense, including Under 
Secretary Wolfowitz when he was here earlier this year to 
testify before us.
    My concerns, one of my concerns addresses the issue of how 
we are going to make sure that we are operating in a 21st 
century world. I mean, a lot of the things that we have been 
doing have been based on 19th century and 20th century models. 
But clearly we are in a different era right now.
    There is no question that our soldiers are being forced to 
act as policemen despite the fact that that is not what the 
administration intended, and that they are being required to do 
so without the adequate training that they need and they are in 
exceptionally dangerous neighborhoods. So my question is, 
specifically, what is the Department of Defense doing to 
prepare our soldiers not just to win the battles, which they 
obviously do extremely well, but also to maintain the peace and 
the order in a post war situation like we have in Iraq and like 
we can expect to have as we are moving further into the future? 
What specific changes are being made and what kind of dollar 
amounts are being applied or projected for those changes that 
will have to be made?
    Mr. Zakheim. You are absolutely right. The conditions that 
we are now facing are really quite different from what we had 
been used to almost over the last 40 or 50 years. Let me give 
you one specific example, or actually two, that address your 
point head on.
    Under the system that we still have, virtually all of our 
civil affairs people--those are the people who will interface 
with the locals and deal with town mayors and local sheikhs or 
whatever it may be--are Reservists. The vast majority of our 
military police are Reservists. Those folks are clearly being 
used in a way that was not anticipated when we shifted all 
these tasks to the Reserves. The Secretary of Defense has made 
very clear that he thinks there should be far more active folks 
who should be doing these kinds of things.
    Now, what is the price tag? We haven't developed that yet. 
But we clearly have to move some of these kinds of functions, 
precisely the functions you just were talking about, into the 
active forces to make them more capable of dealing with the day 
after the war, and we intend to do that. The Joint Chiefs of 
Staff are taking the lead on that.
    Ms. Majette. How long is that going to take?
    Mr. Zakheim. There is every effort to accelerate that for 
two reasons. One, because we need the Actives to do it, and 
two, because we know the burden on the Reserves is huge. As the 
Secretary keeps saying, the one thing a Reservist needs to know 
is when he or she can go home.
    Ms. Majette. OK. And the other question I guess is really 
sort of a practical matter. As a practical matter, why was it 
that the troops were sent to Iraq without the basic items that 
they needed, and how difficult was that? Tell me why it was so 
difficult to figure out that if you sent 150,000 troops, you 
need 150,000 vests. Why wasn't that planning and provision made 
so--and what can you say that will assure us that that is 
really going to be taken care of this time? Because I have 
talked to Reservists and people who have returned, and they 
didn't get what they needed. And they are very concerned that 
if we go vote for this, that they are still not going to get 
what they need. So I need for you to address that, please.
    Mr. Zakheim. Certainly. Part of the reason was, as you 
hinted at, when they went out to fight the war they did have 
what was needed. In other words, you only had a provision for 
people who would operate in a dismounted fashion or operate in 
a very light vehicle that needed some protection from 7.62 
millimeter rounds. What has happened since is that you have a 
lot more people in a lot more of these light vehicles, and you 
have a lot more people operating dismounted. That is where the 
difference took place. So when the Reserve comes back and says 
to you, ``my goodness, we are out there exposed,'' he is or she 
is not making up a story. It is just that things changed from 
the time we were fighting the war itself to where we are today.
    We will have these vests, we will--everybody who needs one 
in theater will be having them by November. I think it is 
November 30, I may be off by a few days. I can get that for you 
for the record. But they will have vests. We are then going to 
buy more so that no one else in any of the other theaters is 
caught without them under any circumstances.
    So we have a lesson learned here. The money will be spent. 
You know, the Reserves should be coming back to you the next 
time you see them in a few months saying, ``yes, we have got 
the stuff,'' with the ceramic, by the way, which is critical to 
make these vests really work.
    There is every effort to learn from the lessons and to move 
quickly. I mentioned that there is an ongoing--it is almost 
actually completed--effort by our head of defense research and 
engineering to identify the key force protection elements that 
we need to have, whether it is an unmanned aerial vehicle that 
can track a terrorist a couple hundred yards away, whether it 
is devices that can locate where mortars are coming from, 
whether it is body armor, whether it is up under Humvees. We 
are putting a package together and I have been instructed and I 
saluted smartly and said, yes, I will find the money and find 
it fast, and we will have a package that will be sent out to 
the Hill very, very soon. I mean really soon, and I mean days 
not weeks, to outline how we are going to move monies around to 
deal with precisely the concern you raised.
    Ms. Majette. Thank you.
    Chairman Nussle. Mr. Davis.
    Mr. Davis. Thank you, Mr. Chairman.
    Mr. Zakheim, let me try to cover just a couple of things in 
the 5 minutes that I have. The first one, one of my concerns is 
the degree to which the engagement in Iraq and the budgetary 
consequence of the engagement in Iraq is going to hamstring us 
in making decisions about other potential engagements around 
the world. Just as we did not necessarily contemplate that we 
would be in Iraq 2 years ago, I look at Iran, I look at North 
Korea, and certainly those are threats that are very much on 
the horizon now. It doesn't take someone who is a conspiracy 
theorist or a war games novelist to imagine that we could under 
some realistic scenario have to contemplate engaging either one 
of those countries in a second Bush term or a new Democratic 
administration.
    Can you talk for a second about whether or not the Pentagon 
has done any cost estimate in terms of scenarios of what an 
engagement in a North Korea or an Iran would cost, and how that 
might relate to the projected 10-year consequences that we 
envision in Iraq? Because it seems that obviously if we make 
the kind of extended commitment in Iraq that some people 
contemplate, that that could put practical constraints on our 
ability to engage what might be immediate threats that might 
arise.
    Mr. Zakheim. Obviously people are always studying 
scenarios. What we have tried to do particularly with our new 
approach to the way we size our forces is to develop 
capabilities rather than predict where we actually will fight. 
It gives us the flexibility to deal more effectively with a 
conflict wherever it might arise. Many of the systems we have 
contemplated that we are buying, that we intend to buy, are 
really very flexible systems for that reason, so that you can 
use them under a host of different circumstances.
    What we have done with Iraq and Afghanistan up to is fund 
outside the regular budget. What we have in the regular budget 
enables us to acquire the systems and of course provide for the 
personnel, the training, and their support to deal with the 
contingencies that we cannot foresee. Now, maybe there will be 
a Korean contingency, maybe not. Certainly not too many people 
predicted an Afghan contingency. Frankly, had they predicted 
it, they wouldn't have predicted that we dealt with it the way 
we did. We actually have more forces in Afghanistan now than we 
did when we were fighting the war.
    So predictions in terms of how many people we need or what 
kinds of systems, and how many systems we need are difficult. A 
lot has to do with how you actually plan the conflict and what 
you are fighting against and so on.
    What I can say with confidence is that the program we have 
put together puts us in a position to deal with a host of 21st 
century threats and to deal with them every bit as decisively 
as we did with Iraq and Afghanistan. That I can say----
    Mr. Davis. Let me stop you at the 2-minute mark just to 
kind of make these observations. One thing that I think has 
been fairly obvious to you from the Chair's comments to the 
comments from a lot of people on this side of the aisle is that 
there is a continuing, I don't want to say resentment, but 
continuing frustration with the administration's failure to 
have addressed some of these budget consequences in its last 
budget.
    Let me remind you of something that was striking to me when 
Mr. Wolfowitz was here. The administration in its budget had a 
fairly detailed estimate of what a prescription drug benefit 
plan might cost, although at that time the administration said 
that it didn't yet have a prescription drug benefit plan and 
didn't know its contours. At the same time, the administration 
indicated that it could not make an estimate of what an 
engagement in Iraq would cost, although it was very clear that 
we had a scenario in place and that we had spent a lot of time 
war gaming that contingency.
    What I think has triggered a lot of the frustration here, 
and I hope that you understand this, is that the whole notion 
of budgeting requires making extrapolations and guesses. The 
administration obviously did it in a variety of contexts. The 
very notion of budgeting itself makes certain assumptions about 
economic growth. It strikes me that there was no particular 
reason whatsoever that the administration could not have made 
assumptions about the cost of an engagement in Iraq given the 
political situation in January and given a range of other 
scenarios. And I think that that may explain some of the 
frustration that you see here. There is genuinely no reason--I 
do want you in the limited time that I have to speak to that. 
Could you give me any sense, Mr. Zakheim, why the 
administration was not willing to engage in intelligent 
guesswork on Iraq when it was willing to do so in virtually 
every other single area of the budget?
    Mr. Zakheim. Obviously the other areas of the budgets are 
not my areas to address. But let me try to give you an answer 
to what is a very good question, Mr. Davis.
    In January, in February, and frankly almost until the last 
day prior to the war, we were still making diplomatic efforts. 
It was not at all clear, there was no guarantee that we were 
going to war. Much as in hindsight it seems that it was all 
inevitable, it wasn't.
    Mr. Davis. I don't want to cut you off. If the Chair will 
just indulge me just to make this observation, because I knew 
you were going to say that, Mr. Zakheim. The problem is that 
with respect to Medicare, with respect to a number of other 
things, the--and I don't want you as much to respond to this so 
much as hear the observation--obviously, the administration was 
still willing to make assumptions despite a wide variety of 
policy uncertainties. And the same audacity that led the 
administration to assume we are going to get a prescription 
drug benefit plan so we are going to give you a cost estimate, 
I am not quite clear whether that audacity--make no mistake, 
everybody knew we didn't want to go to war if we could avoid 
it. But that is not the question. The question is, given the 
likelihood, why couldn't the administration have at least given 
us an estimate and they could have put a big giant bold 
asterisk around it, and you all could have said, you know, we 
hope this doesn't happen, but here is what it would cost. That 
is what I think is the source of the frustration.
    Mr. Zakheim. Again, all I can say is from what I 
understand--and I wasn't operating directly in the diplomatic 
world by any means--but what I understand to have been part of 
the concern was regarding what kind of a signal would you be 
sending if you did something along the lines you suggested.
    Second of all, when we actually came in with the estimate--
and this goes back to my conversation with Mr. Spratt--the fact 
is that the estimate was pretty much on target, as was the 
initial estimate on Afghanistan.
    Mr. Davis. But just to make one last point, because I think 
this is relevant to what the chairman asked you earlier. And 
this will be my last point. You agree that that factor doesn't 
exist now, the factor that we somehow would have sent a signal 
to the rest of the world if we presumed a war budgeting in 
January. Earlier in your answer to the chairman's questions you 
indicated that the decision has not been made as to whether the 
next fiscal year will actually include a line item for Iraq. I 
find that as amazing as the Chair did, because there certainly 
is no diplomatic reason not to have that line item there. Now, 
you would agree with that?
    Mr. Zakheim. The diplomatic reason is not an issue. I 
certainly agree with that. On the other hand, the point that I 
made to the chairman and am happy to make it again is that to 
make an estimate presupposes certain things taking place in 
Iraq, and we just don't know that yet. I haven't--I certainly 
don't think that--I haven't any information that has been ruled 
out, I have no information that it has been ruled in to make an 
estimate. I am simply saying that on the face of it, as a guy 
who works with budgets and has for many years, there are just 
so many uncertainties and variables that I could see some very 
good justification for leaving it outside again and going to 
the Congress and saying, ``look, this is a wartime 
requirement,'' or, ``the Iraq requirement now I guess would be 
the better way to put it and this is what we need over and 
apart from our regular budget.''
    Again, I don't know the full impact of the resolution that 
just passed today. I don't know what that will do in terms of 
troops. Will the Pakistanis now say, ``we are ready to come 
in?'' That is going to have an impact. I just don't know.
    Chairman Nussle. I thank the gentleman.
    And just to make it clear, I supported the administration's 
request leaving out the portion for Iraq for the exact reasons 
that the witness just stated, that we were not at war at that 
time. To presuppose that in a budget for 2004 was premature, 
again, in this member's judgment. But I would agree with you, 
with my friend from Virginia, that now that that has been made, 
we need to budget for it. And while it is not easy to forecast 
the future of these expenditures, we can at least budget for 
success. Trust me, coming from farm country, I understand very 
clearly you are not going to know exactly the consequences of 
the Farm Program for 5 or 6 years or 10 years out. Yet we do it 
all the time, knowing full well that we may need to come back 
and discuss challenges in the future.
    So I would hope that at least you have read the sentiments 
of this committee today as one hoping that the administration 
will come forward and begin to include not only the wars that 
we know about but the overall global war on terrorism similar 
to the way we budgeted for the cold war in the 1970s and 1980s 
as an ongoing expense, knowing that we need to continue to 
prosecute this.
    There were a couple of things that came up during the 
hearing that I would just like some background on that you 
indicated that you will be supplying some things for the 
record, and we appreciate that. My staff will follow up with 
you and your staff to accomplish that. And maybe Mr. Spratt can 
ask the question better than I can, but I would like a 
breakdown of this per troop cost, the 100,000 or 40,000, and 
exactly what we are talking about here, because that is--it is 
an issue that I think we need to discuss, particularly when 
there have been claims made that budgets have been padded or 
whatever. I think we need to get to the bottom of that so we 
clearly know what that is all about.
    Another member brought up the credit card abuse, and I 
would just ask as a follow-up to that question, has restitution 
been made for any of these instances of credit card abuse, or 
is there prosecution that is ongoing? I am not asking you to 
comment on that, because if that is the case obviously it is an 
ongoing case. But is that being pursued in that vein?
    Mr. Zakheim. In certain cases, yes. In certain cases, no. 
It very much has to do with the nature of the card. If you have 
a travel card and you are a young serviceman or woman and you 
spent it, used the card inappropriately, not on government 
business, and then you paid the money back, that is a very 
different case from someone who had not a travel card but a 
purchase card that was for government purchases and then went 
off and bought a Rolls Royce. The prosecutions are taking 
place, yes, sir.
    Chairman Nussle. Have any been done successfully yet?
    Mr. Zakheim. I believe some have, yes, sir.
    Chairman Nussle. OK. Mr. Spratt, do you have anything to 
conclude this panel with?
    Mr. Spratt. Just to follow up. I am not going to prolong 
this, but to describe what we would like to have is your 
analysis of the cost of the war in addition to the per troop 
per month cost. You gave a $20 billion figure. Whether or not 
that includes the $30 billion you indicated was sunk cost. It 
is important for historic purposes and for future reference 
that we get these costs established so that in the future when 
we have decisions to make like this we have a reference we can 
go to and estimate at least on the back of an envelope what the 
likely cost consequences of our decisions are going to be.
    Mr. Zakheim. Mr. Spratt, I happen to know that you are a 
top budget analyst yourself, so you will understand when I say 
that in some respects your question and the categories you used 
and the paper you gave me are slightly different from our 
categories. So we are going to have to cross walk those.
    Mr. Spratt. I understand.
    Mr. Zakheim. And we will try our best.
    Mr. Spratt. Thank you much.
    Chairman Nussle. Mr. Edwards, do you have a final----
    Mr. Edwards. Mr. Chairman, I just would like to ask you, I 
would like to be sure that we have a general understanding of 
what the administration is agreeing to do. Is it your 
understanding and Mr. Spratt's that the Department of Defense 
within a certain time period is going to give us a general 
estimate, given whatever assumptions they want to make of the 
future cost to the Iraqi war? Or have they not made that 
commitment? If they have made that commitment, under what time 
period are they going to provide this information back to the 
chairman and the committee?
    Chairman Nussle. There is two parts to this right now. We 
are asking for information about what it has cost?
    Mr. Edwards. Right.
    Chairman Nussle. And that has been offered to be supplied. 
I think we have made our points very clear on what you and I 
and others hope will be the position of the administration for 
the future. We may differ on that ever so slightly by the time 
it comes up. And my point is, I think my point has been made, 
your point has been made on what we hope for for the fiscal 
year 2000 budget and beyond.
    Mr. Edwards. Did we get an answer? I think we are in 
agreement on----
    Chairman Nussle. I don't think we got a clear answer. But 
in fairness to the administration, they are still within the 
time frame before their submission of the budget, and I think 
that will be made very clear if and when it is made during that 
request.
    Mr. Edwards. Thank you, Mr. Chairman. Thank you for holding 
this hearing today.
    Chairman Nussle. I would just say to the witness that I 
know this is a very difficult time for the entire country, and 
you are bearing the brunt of all the questions today. And I 
would just urge you, through you to the Department as well, 
that the more information you provide, even though it is 
sometimes difficult to provide it, it is not always easy to 
take a moment and come up and do so, I would suggest as 
respectfully as I can will actually do more to lessen the 
tension that you maybe see today as opposed to exacerbate that. 
And so I would hope in the future that we can have these 
periodic meetings to discuss the longer term picture in 
addition to some of the other committees that obviously have an 
ongoing responsibility for writing the checks or doing the 
authorizations.
    Mr. Zakheim. Certainly, sir. For my part, that is not a 
problem.
    Chairman Nussle. Thank you very much. And with that, we 
will dismiss this panel. Thank you very much for your testimony 
today.
    Mr. Zakheim. Thank you, Mr. Chairman. Mr. Spratt, thank 
you.
    Chairman Nussle. The second panel is our very distinguished 
director of the Congressional Budget Office, Doug Holtz-Eakin, 
and we welcome him back to the committee.
    The Congressional Budget Office has submitted a full 
statement, including charts and graphs, which will be made part 
of the record. And I would invite Dr. Holtz-Eakin, if you would 
introduce the other members at the witness table with you who 
may be participating today. I know we have someone new to 
welcome as part of this. And then you may proceed as you see 
fit in your testimony.

   STATEMENT OF DOUGLAS HOLTZ-EAKIN, DIRECTOR, CONGRESSIONAL 
   BUDGET OFFICE; ACCOMPANIED BY ELIZABETH ROBINSON, DEPUTY 
   DIRECTOR; AND MIKE GILMORE, ASSISTANT DIRECTOR, NATIONAL 
                       SECURITY DIVISION

    Mr. Holtz-Eakin. Thank you, Mr. Chairman, Mr. Spratt, 
members of the committee. It is a pleasure for CBO to be here 
today. I did want to take this opportunity to introduce 
Elizabeth Robinson at my far right, who has agreed to assume 
the duties as Deputy Director at the Congressional Budget 
Office. And I am sure that I speak for her in looking forward 
to working with members of the committee. And we are pleased to 
have her on board.
    Also joining me today is Mike Gilmore, who is the Assistant 
Director at CBO in the National Security Division and who 
directly oversaw the two reports that serve as the initial 
basis for the testimony that we offer to you today. We have 
submitted a written testimony and the reports are available to 
members should they seek to have more details. What I had hoped 
to do today would be to provide you with a brief overview of 
our findings and then, with your patience, walk through six 
charts that we think give you a flavor of the nature of the 
analysis and that might serve as at least a starting point for 
any questions that we might be able to answer for you today.
    Our focus today is on the long-term resource needs that 
would be implied by current defense plans. And before turning 
to the bottom lines, let me stress to members of the committee 
the nature of these kinds of projections. Budget committee 
members are well aware of the nature of a baseline projection. 
These are the long-term implications of current plans. They are 
not forecasts in the strict sense of precise expectations of 
what will turn out--they are the implications of current plans. 
To the extent that future policies can and will be revisited, 
these projections will not turn out to be exactly correct, but 
they do provide a good indicator about the long-term 
implications of current plans, particularly in the area of 
defense planning, where the time from research, development, 
testing, evaluation, and procurement to actual deployment of 
weapons systems can take two decades. Understanding the current 
status of affairs and their long-term implications will, we 
hope, be of use to the members.
    The main points of our analysis fall in three areas. The 
first is that current plans will require annual funding 
adjusted for inflation that will average over the long term 
about 20 percent higher than it is today and about 10 percent 
higher than its peak during the 1980s. Thus, current plans are 
on track to command substantial resources in the economy and 
the Federal budget.
    Second, in terms of the composition, about half of that 
increase derives from increases in the cost of pay and benefits 
for DOD's military and civilian employees. The remaining half 
comes from demands for resources and investment that would both 
cover the catch-up from the procurement holiday that took place 
in the 1990s and support the need for systems and forces that 
would support transformation of America's military.
    The third message that comes from the analysis is that to 
the extent that these resources are committed, they will--over 
the period that we examine offset--the steady tendency toward 
aging of weapons systems and in addition to reversing will 
actually stabilize the systems in their aging trends. But 
should those resources not be provided, then there will be 
choices made in terms of either fielding fewer forces or 
equipping them with older equipment than this plan would 
envision.
    So those are really the three bottom lines. We have a whole 
series of charts. If we go to figure 1, we can briefly walk you 
through where we get some of these findings.
    Figure 1 summarizes our overview. And if you look at it, 
what you can see is that under the 2004 Future Years Defense 
Program, real defense spending is going to rise about 15 
percent over the next 5 years, from about $380 billion, which 
excludes supplementals, to about $440 billion. And then 
carrying the projection out beyond those 5 years, it will 
average about $460 billion a year--adjusted for inflation--
between 2010 and 2022. At the same time, the red dotted line at 
the top, shows cost risks associated with that projection. 
Those cost risks come from two sources. The first would be 
risks of the need for contingencies of the type we have 
experienced in Afghanistan and Iraq. And we can explore in 
greater detail the nature of those, the way we built those into 
our projections. Those cost risks also include the historical 
record of weapons systems that in the end turned out to be more 
expensive than was budgeted at the beginning. We tried to 
incorporate both of those possibilities in our cost risk.
    Figure 2 shows the division of that rise between the 
demands for pay and benefits for military and civilian 
employees of DOD and the need for investment and transformation 
and replacement of existing weapons systems.
    Now, if we move to figure 3, what you can break out is 
basically the rise in the two areas of operation and support 
versus the rise in investment spending. In the area of 
operation and support, this is about two-thirds of the Defense 
budget in 2004. It is used to pay for military and civilian 
employees, costs of contractors, and operating costs of 
equipment. And what we see is that the current projected rise 
in pay and benefits--a key feature of which is a commitment to 
pay military employees an increase that matches the employment 
cost index in the private sector plus another half percentage 
point up until 2006, and then an increase in pay that rises at 
the rate of the ECI thereafter--would lead to a level about 24 
percent higher than current level over the long term. But as 
with the overall projections, this faces some cost risks as 
well. Some of those rates are familiar from other contexts. The 
rising costs of medical care in the military mirror the kinds 
of costs we have seen in discussions of Medicare in this 
committee. There are also cost risks associated with quality of 
life programs, base closure plans, and a variety of other costs 
associated with operating the equipment.
    This is a good place as well to talk a little bit about 
what is presented in figure 3 as the blue hump in 2003 and 
2004. This is the evidence in these projections of the need for 
supplemental appropriations both in fiscal year 2003 and fiscal 
year 2004. It has been the topic of a lot of conversation 
today. But let me say a few words about how CBO has built these 
into our projections in doing this.
    In July, when these projections were put together, we 
estimated the need for a fiscal year 2004 supplemental of $59 
billion, and that is the amount that is reflected in this 
figure. Built into that was about $12 billion for operations in 
Afghanistan and about $47 billion for operations in Iraq.
    Since that time, two things have happened. The first is 
that at the request of Senator Byrd, we examined the costs and 
capability of the U.S. military to sustain an occupation in 
Iraq and came up with estimates that would indicate that our 
July estimate of the $59 billion might be a bit too high, that 
$47 billion for 200,000 troops in Iraq might be on the high 
side. We did a different kind of estimate from the bottom up 
and estimated somewhere between $36 [billion] and $41 billion. 
We also estimated a variety of other scenarios that we could 
discuss with you if you wished.
    The second thing is that the administration actually made a 
request, which has been discussed at length in this hearing. We 
of course would love to be able to compare exactly our 
estimates with the administration's request. To do that 
however, I would emphasize, we need a great deal of information 
that is currently not at our disposal. We need a breakdown 
between active and Reserve troops to be conducted and how that 
would evolve during 2004. We need a substantial breakdown on 
the kinds of equipment and the level of depot maintenance that 
will be handled in fiscal year 2004. And it would be useful to 
find some information on the actual costs incurred by each 
service during its time thus far in Iraq and the expectation in 
2004.
    And so while we have attempted in the spirit of this kind 
of an exercise to show the actual contingencies that have 
arisen--that is the blue hump in that diagram--and the 
potential for future contingencies in the future as reflected 
in our cost risks, we are not yet in a position to reconcile 
the difference between our estimates and our actual experience 
thus far. We would look forward to working with the committee 
if that became a project of some priority.
    Turning to figure 4, let me talk briefly about the 
investment side of our projections. Several features stand out 
in figure 4. The first is that the figure is in a budgetary 
sense a clear reflection of the procurement holiday that took 
place in the 1990s. You can see at the bottom of that figure is 
the funding associated with research, development, testing, and 
evaluation, which by and large did not drop off dramatically. 
But above that, for what is labeled other procurement--things 
like equipment, uniforms, and those kinds of things--and then 
procurement for weapons systems, and the remaining bars of the 
graph, you can see a sharp drop-off. And, indeed, the total 
investment fell from its peak down about 50 percent. In our 
projection we show the implications of purchasing enough 
existing weapons systems to reverse that holiday and offset 
aging trends, and also we build into it, particularly in areas 
like aircraft, the kinds of investments necessary to support 
the transformation needs of the Army. The sum total of this is 
to have investment increase by almost 25 percent, rising from 
$137 billion in 2004 to $171 billion in 2009. Thereafter, it 
would peak somewhere in about 2013 and 2014 and diminish 
somewhat in real terms.
    If we turn to figure 5, you can see the impact of these 
kinds of budgetary figures on the actual age structure of 
weapon system--in this case, Air Force fighter and attack 
aircraft. The budgetary outlays in the projection that I showed 
you are sufficient to stabilize the ages of weapons systems in 
about 8 of 10 cases by roughly 2010. Aircraft are an example of 
something that would take much longer to stabilize. You can see 
in the panel at the top of the figures, the actual history of 
aircraft purchased and then our projection over the next 20 
years. The middle panel shows the real inflation-adjusted cost 
of those purchases, and the bottom panel shows the average age 
of the aircraft fleet as a result. The bottom panel shows that 
this commitment of resources would in fact stabilize the 
average age of the aircraft by the end of the projection 
period. The comparison of the patterns in the top two panels 
shows that this commitment of resources is going to be 
comparable to that peak in the 1980s in real terms and that it 
will purchase aircraft are a bit more expensive, on average, as 
the overall size of the procurement at the tail end of that 
projection period is smaller than the aircraft purchased with 
the same resources in the 1980s. Overall, it tells a story 
where the purchase of these new aircraft will stabilize the 
average age and equip the forces with planes that presumably 
have greater capability at somewhat greater cost.
    Turning to the final figure that we provided, we step back 
and try to place this projection and also the budgetary 
implications of this defense program in the larger historical 
and economic perspective. Shown at the top is the history and 
projection of defense spending as a share of GDP. As many in 
this committee are familiar with spending peaked at about 6 
percent of GDP in the 1980s and then diminished by nearly 50 
percent. It has since turned upward somewhat in the last couple 
of years. Under this projection, even inclusive of cost risks, 
defense spending as a fraction of GDP would stabilize at about 
3.4 percent or so over the next 5 years and then diminish 
somewhat over the longer term.
    In the bottom panel, we show that despite that diminishing 
share of GDP, the real purchasing power of the resources 
committed to this particular program would remain constant or 
rise somewhat.
    Now many--including some defense leaders--have argued that 
the military ought to be given a constant share of GDP as a way 
of budgeting. We can't speak to the policy issues of that but 
will simply point out that the history and projection indicate 
neither any tendency for a constant share of GDP nor any 
tendency for a constant share of the Federal budget, and that 
even committing the resources necessary to support current 
defense plans would produce a diminishing share of GDP, despite 
the real purchasing power being relatively constant over the 
20-year period.
    I realize that is both a lot of material and also not 
nearly everything we could say about these different issues, 
but I will close there and welcome any questions.
    Chairman Nussle. Well, first of all, thank you.
    [The prepared statement of Mr. Holtz-Eakin follows:]

Prepared Statement of Hon. Douglas Holtz-Eakin, Director, Congressional 
                             Budget Office

    Mr. Chairman, Congressman Spratt, and members of the committee, I 
appreciate the opportunity to discuss the long-term implications of the 
administration's current defense plans. The Congressional Budget 
Office's (CBO's) long-term projection of the administration's fiscal 
year 2004 plans is not a prediction of future budgets every annual 
budget submission brings changes to the Department of Defense's (DOD's) 
plans and thus to Defense budgets. Rather, CBO's projection indicates 
the demand for defense resources as well as the ages and inventories of 
major weapons that would result over the next two decades if current 
defense plans remained the same. For various reasons, including the 
long lead times associated with developing and fielding new weapons, 
the administration's current plans will generally have long-lasting 
implications even if they are revisited in the future. CBO's projection 
can help defense decisionmakers understand those implications.
    CBO's analysis suggests several major points:
     Carrying out today's plans for defense would require the 
United States to fund the military through 2022 at annual levels 
averaging about 10 percent higher (adjusted for inflation) than peak 
spending during the 1980s and about 20 percent higher than current 
funding (excluding the costs of contingencies, such as operations in 
Afghanistan and Iraq).
     Relative to current funding, about half of the need for 
those additional resources is driven by steady growth in the cost of 
providing pay and benefits to DOD's military and civilian personnel.
     The other half is associated with substantial increases in 
future purchases of equipment and weapons to fill the gap created by 
the ``procurement holiday'' of the 1990s, and increases in investment 
funding to develop and eventually produce new equipment with 
capabilities that support the push for military transformation.
     If those increased resources are provided, DOD will 
eventually be able to halt or reverse the adverse aging trends 
associated with much of its current equipment.
     If those increased resources are not provided, DOD will 
have to either field smaller numbers of forces (or forces with less 
equipment) or keep equipment until it is older perhaps significantly so 
than current plans envision.
    I will discuss each of those points in more detail, ending with a 
short discussion of other contexts in which defense spending could be 
considered.

            The Long-Term Outlook for DOD's Resource Demands

    In 2003, total obligational authority for the Department of Defense 
equaled about $449 billion including a total of $74 billion added in 
legislation other than the 2003 appropriation acts. The 
administration's 2004 Future Years Defense Program (FYDP), which covers 
the period from 2004-09, anticipates that defense resources (excluding 
supplemental appropriations) will rise from about $380 billion in 2004 
to $439 billion in 2009 and will average $411 billion a year over that 
period. If the program in that FYDP was carried out as envisioned, the 
demand for defense resources would continue to rise through 2022, CBO 
projects (see the line at the top of the ``Procurement'' section in 
figure 1). That demand would average $458 billion a year between 2010 
and 2022. (Those and the other dollar figures in this analysis are 
shown in 2004 dollars to account for the effects of inflation.) Because 
that projection is founded on the 2004 FYDP including its current cost 
estimates for major weapons programs and other activities, where they 
are available it excludes costs for continuing operations in 
Afghanistan and Iraq and for other activities conducted as part of the 
global war on terrorism.
    Various factors could push the costs of current plans even higher. 
In addition to the projection described above, CBO estimated the long-
term demand for defense resources if costs for weapons programs exceed 
initial estimates to the extent that they have since the Vietnam War 
and if costs to operate military forces grow as they have over the past 
two decades. That ``cost-risk'' case also assumes that the U.S. 
military continues to take an active role overseas, like the one that 
has resulted in the present engagements in Afghanistan, Iraq, and the 
global war on terrorism. With those cost risks factored in, carrying 
out current defense plans could require an average of $472 billion a 
year (rather than $411 billion) through 2009 and an average of $533 
billion a year (rather than $458 billion) between 2010 and 2022. About 
$40 billion of the $75 billion increase in the 2010-22 average results 
from potential growth in operation and support costs (including $20 
billion for future contingencies). The rest comes from growth in costs 
to develop and purchase weapons.
    The analysis I am discussing is covered in more detail in two CBO 
reports. One, The Long-Term Implications of Current Defense Plans, was 
published in January 2003. This past July, CBO released an update of 
that analysis in a paper titled The Long-Term Implications of Current 
Defense Plans: Summary Update for Fiscal Year 2004. Both reports are 
available on CBO's Web site (www.cbo.gov).
    The projections in those reports are based on the defense plans 
that underlie the two most recent budgets that the administration 
submitted to the Congress. (DOD's plans continually evolve, and CBO's 
analyses of them are snapshots, rather like the budget snapshots that 
the Congress works with each year.) The January report reflects the 
plans underlying the 2003-07 FYDP, on which the President's 2003 budget 
submission was based. CBO's July estimate reflects the 2004-09 FYDP, 
which was the basis for the 2004 budget request. In drawing up the 
later plan, DOD reduced its funding projection for the years common to 
both plans (2004-07) by an average of about $7 billion, or 2 percent, 
per year. Many changes contributed to that decreased funding, including 
reductions in operation and support accounts, some of which are 
associated with DOD's decision to liquidate its Defense Emergency 
Response Fund. (DOD now expects to request annual supplemental 
appropriations, as it has in the past, to pay for the costs of 
activities, such as the occupation of Iraq, that are not included in 
its FYDP.)
    Not surprisingly, CBO's projections of resource demands beyond the 
FYDP period also differed between the two reports. CBO's July 
projection exceeded its January projection by an annual average of 
about $19 billion, or 4 percent, for their common years (2010-20). 
Several of the most significant changes underlying that difference are 
discussed below.
    To avoid confusion, I should note that in both the January and July 
reports, CBO projected defense funding at a lower level of aggregation 
than the one used in the Congressional budget resolution. CBO projected 
funds only for DOD's budget (subfunction 051), whereas the budget 
resolution projects funds for the national defense budget function 
(function 050). DOD's budget makes up the lion's share of function 050, 
but the latter also includes dollars for defense in other agencies' 
budgets. In the 2004 request, those additional dollars totaled about 
$20 billion, mostly to fund activities of the Department of Energy 
related to nuclear weapons.


       Projections of Resource Demands for Operation and Support

    About two-thirds of the 2004 defense budget covers what DOD terms 
operation and support (O&S), which is the total appropriations in the 
military personnel and the operations and maintenance accounts. O&S 
funding pays the salaries and benefits of DOD's military and civilian 
employees, the costs associated with many of DOD's contractor 
personnel, the operating costs of military equipment, and many of the 
costs to operate and maintain defense facilities. The 2004 FYDP 
envisions that spending for O&S will rise from $236 billion in 2004 to 
$254 billion in 2009 (see figure 2). Despite that increase, the 
administration's plan projects that O&S spending will decline as a 
share of the total defense budget: from about 62 percent in 2004 to 
about 58 percent in 2009.
    CBO made two projections of the costs of current plans for 
operation and support with and without risks of cost growth. Both 
projections assume that military and civilian end strengths are fixed 
at the levels they would reach in 2009 under the 2004 FYDP.
                          o&s resource demands
    CBO projects that carrying out current defense plans would require 
O&S spending to average $273 billion over the 2010-22 period, if no 
adjustments are made for cost risk. Such spending would end that period 
at an annual level of $292 billion. In that projection, O&S spending 
grows by an average of about 1 percent per year between 2004-22. 
Virtually all of the growth results from personnel-related increases 
specifically, the growing cost of medical benefits and rising real 
(inflation-adjusted) wages for military and civilian personnel.


    Medical Costs. If current military health care benefits remain 
unchanged, DOD's costs for medical care will almost double over the 
next two decades, CBO projects. Including accrual payments for the 
medical benefits of military retirees over age 65, total medical costs 
will rise from $28 billion in 2004 to $35 billion in 2009 and $52 
billion in 2022. By the end of that period, DOD would be spending 73 
cents on medical benefits for each dollar it spent on cash compensation 
for its personnel, compared with 55 cents today.
    Those projections assume that no legislated increases in medical 
benefits occur but that medical costs for retirees grow at the nominal 
rate of 6.25 percent a year, the rate DOD's actuaries currently use. 
The estimates also assume that medical costs for other DOD 
beneficiaries increase at the rates now projected by the Department of 
Health and Human Services for per capita medical spending in the U.S. 
economy as a whole.
    Pay for Military Personnel. Current law dictates that over the next 
3 years, pay for DOD's military personnel should grow at a rate 0.5 
percentage points higher than the annual change in the employment cost 
index, which measures pay in the civilian economy. After that, DOD 
plans to have military pay grow at the same rate as those civilian-
sector increases. CBO's projection assumes that such growth rates will 
continue over the long term, resulting in roughly a 30 percent real 
increase in military pay between 2004-22.
    Costs for Facilities. DOD included a total of about $11 billion in 
military construction funding in its most recent FYDP to pay the up-
front costs of the proposed 2005 round of base realignments and 
closures (BRAC). Judging from past rounds, a 2005 BRAC round with those 
up-front costs could eventually produce annual savings of $3 billion. 
CBO's projection assumes that any savings realized from the 2005 round 
are reinvested to pay for increased levels of maintenance on DOD's 
remaining facilities.
                  o&s resource demands with cost risks
    With various possible sources of cost growth factored in, resource 
demands for operation and support would average about $313 billion per 
year during the 2010-22 period under current plans, CBO projects. That 
figure is about 14 percent higher than the average for O&S spending 
without cost risk. By 2022, spending would reach $344 billion, or about 
18 percent more than in the projection without cost risk. Roughly one-
third of the projected O&S risk is associated with the potential costs 
of contingencies. The rest reflects growth in the cost of medical care, 
personnel-support activities, and the operating of weapons as well as 
forgone savings from delays in closing additional military bases.
    Medical Costs. Changes in technology, medical standards, and 
overall prices for health care in the U.S. economy could drive DOD's 
medical costs higher than the department's actuaries anticipate and 
than CBO assumed in its initial projection. In particular, the future 
growth rate of per capita medical spending in the U.S. economy as a 
whole (on which CBO's projection of medical spending without cost risk 
is based) is uncertain. If that rate turned out to be 30 percent higher 
than expected which is consistent with the record of differences 
between some past projections and actual growth DOD's medical costs 
would be about $13 billion higher by 2022. (Conversely, if growth rates 
were 30 percent lower, which is also consistent with the historical 
record, medical costs would be $11 billion lower in 2022 than 
projected.)
    Personnel-Support Costs. Another risk to projections of O&S costs 
is that resource demands for personnel-support activities which include 
many high-priority quality-of-life initiatives will continue the upward 
trend seen in recent years rather than remain at the levels that those 
activities are projected to receive at the end of the 2004 FYDP. A 
continuation of that upward trend could add $1 billion a year to the 
long-term cost of the administration's current plans by 2022, CBO 
projects.
    Costs for Facilities. The possibility exists that the 2005 round of 
base realignments and closures will not occur. In that case, DOD would 
save a total of $11 billion between 2005 and 2012 from not implementing 
the round, but its costs for facilities would be about $3 billion per 
year higher after that.
    Equipment Operating Costs. CBO's projection of O&S resource demands 
without cost risk assumes, as DOD generally does, that new generations 
of weapon systems are no more expensive to operate and maintain than 
the systems they replace. But in the past, new generations of weapons 
have usually cost more to buy than their predecessors did. They also 
commonly cost more to operate and support. Unfortunately, the cost of 
operating existing weapons also typically increases as systems age.
    CBO's projection with cost risk takes those factors into account. 
For aircraft and ships, CBO incorporated estimates reflecting the cost 
growth that DOD experienced as it fielded new systems or as systems 
grew older. CBO lacks historical data to calculate similar factors for 
the Army's ground combat systems, so it could not include detailed 
estimates for them. But the Army's operating costs, like DOD's total 
operating costs, have grown on a per capita basis for a very long time, 
and CBO assumed in its projection with cost risk that those trends 
would continue for Army systems. The combination of those effects could 
add $14 billion to the annual operating costs of the administration's 
current plans by 2022.
    Near-Term Costs of Contingencies: CBO's July 2003 Projections. 
Neither the 2004 FYDP nor CBO's projection of O&S spending without cost 
risk includes funding for ongoing operations in Iraq and Afghanistan. 
The President has requested about $66 billion in supplemental 
appropriations for DOD in 2004, including about $52 billion for the 
occupation in Iraq and $14 billion for operations in Afghanistan and 
other global antiterrorism activities. In its July projection with cost 
risk, CBO estimated that those activities (excluding the rebuilding of 
Iraq's infrastructure) could cost as much as $59 billion in 2004. That 
amount would be enough, CBO calculated, to maintain an occupation force 
of 200,000 troops in Iraq and Kuwait (at a cost of about $47 billion) 
and to continue activities in Afghanistan and in the global war on 
terrorism at their current level (about $12 billion).
    Near-Term Costs of Contingencies: Estimates Consistent with More-
Recent Analyses. After CBO had completed its July estimates of the 
near-term cost risk associated with contingencies, it produced an 
analysis for Senator Robert Byrd of the size and costs of occupation 
forces that the United States could sustain indefinitely in Iraq 
without harming the readiness and quality of the all-volunteer force. 
That analysis used a more detailed cost-estimating methodology than CBO 
had employed before for estimating occupation costs. Applying that 
methodology to an occupation force of 200,000 military personnel yields 
yearly costs of about $36 billion to $41 billion or $6 billion to $11 
billion less than CBO's previous estimate. However, CBO's analysis, 
which was consistent with plans that DOD had announced in July, 
indicated that the military would be hard-pressed to sustain a 200,000-
person occupation throughout 2004. (The current U.S. occupation force 
comprises about 140,000 military personnel.) That analysis concluded 
that unless DOD took such actions as mobilizing a large number of 
additional reserve units on a continuing basis or extending the 
deployments of active-component forces beyond 1 year, it would be able 
to indefinitely sustain force levels of no more than about 67,000-
106,000 military personnel (at a cost of $14 billion to $19 billion per 
year) in Iraq beyond the winter of 2004.
    The administration's recent request for supplemental appropriations 
uses different assumptions than the ones CBO has used over the past 
year to estimate the potential costs of occupying Iraq. To reconcile 
its estimates with that request, CBO would need information that it now 
lacks, including (but not limited to):
     A breakdown of the active- and reserve-component personnel 
and units to be used in Iraq throughout 2004 by each of the four 
services;
     A breakdown of the types and amounts of depot maintenance 
to be conducted on equipment as a result of activities in Iraq; and
     A breakdown of the actual costs that each service has 
incurred to date for activities in support of the occupation that have 
been conducted since the end of major combat operations in Iraq.
    Long-Term Costs of Contingencies. Over the longer term, cost risk 
associated with the global war on terrorism could amount to about $20 
billion a year, CBO projects. That amount is based on the assumption 
that, between 2005 and 2008, the size of the U.S. force in Iraq 
declines to 50,000 troops, the intensity of operations in Afghanistan 
drops to the level of the operations now taking place in Bosnia and 
Kosovo, and other activities now being conducted as part of the war on 
terrorism continue indefinitely at their current funding levels. That 
$20 billion estimate is simply a proxy for the budgetary impact of 
continued engagement by the U.S. military in such operations abroad. If 
the global situation changes in the future in a way that increases or 
decreases the need for U.S. military engagement overseas, then costs 
will rise or fall as well.

 Projections of Resource Demands for Military Construction and Family 
                                Housing

    The military construction title of DOD's budget contains funds to 
build and refurbish the department's facilities. The family housing 
title contains funds for the same purposes for the housing provided to 
service members; it also covers some of the maintenance of that 
housing. For 2004, funding in those accounts totals about $5 billion 
and $4 billion, respectively, or about 2 percent of DOD's budget 
request. CBO projects no significant changes in those annual costs 
through 2022 at least in part because any added costs are assumed to be 
offset by savings from closing or realigning bases and from privatizing 
family housing. (Historical funding and projected resource demands for 
those accounts are shown in figure 1 on page 3. The increase in 
military construction funding during the FYDP period is intended to 
cover the costs of the 2005 BRAC round.)

             Projections of Resource Demands for Investment

    In 2003, the one-third of DOD's budget not devoted to operation and 
support, military construction, or family housing went to investment. 
That category consists of funds in the research, development, test, and 
evaluation (RDT&E) and procurement accounts, which pay for developing, 
testing, and buying weapon systems and other equipment. The 2004 FYDP 
envisions that spending for investment will rise from $137 billion in 
2004 to $171 billion in 2009. That funding averages about $3 billion 
more per year over the 2004-07 period than it did in the 2003 FYDP, 
with much of the increase coming from funds that the administration 
added for transformation; higher spending on command, control, 
communications, and intelligence systems; and higher weapons costs.
    CBO projects that under current plans, resource demands for 
investment not including cost risk would continue to rise after 2009, 
peak in 2013 at about $186 billion, and then decline modestly (see 
figure 3). Over the 2010-22 period, the demand for funding would 
average about $175 billion a year, CBO projects (see table 1). 
Factoring in possible sources of cost growth pushes that average to 
$209 billion a year, with the demand peaking at $224 billion in 2013. 
Purchases of new ships and aircraft (primarily tactical fighters) 
account for more than half of the funds for procurement of major 
systems in CBO's projections.


                            army investment
    The Army has historically spent more of its budget on troops, 
largely funded in the O&S accounts, than it has on their equipment, 
which is paid for in the investment accounts. As a result, the Army has 
received the smallest investment funding of the services: an average of 
about $22 billion a year from 1980-2003, compared with $43 billion for 
the Department of the Navy (which includes the Marine Corps) and $48 
billion for the Air Force. (The Services' investment budgets exhibit 
the same cyclical trends as total investment spending rising in the 
mid-1980s, falling through the late 1990s, and then rising again; see 
figure 4.)

                                                        TABLE 1.--INVESTMENT SPENDING BY SERVICE
                                      [In billions of 2004 dollars of total obligational authority and in percent]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          2003           Average, 2004-2009    Average, 2010-2022       Peak spending
                                                                 ---------------------------------------------------------------------------------------
                                                                   Dollars    Percent    Dollars    Percent    Dollars    Percent    Dollars      Year
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                    Without Cost Risk
Army............................................................         20         15         22         15         38         22         42       2014
Navy............................................................         41         31         50         33         47         27         64       2010
Air Force.......................................................         47         35         55         36         65         37         72       2021
Defense Agencies................................................         26         19         25         16         24         14         28       2009
                                                                 ---------------------------------------------------------------------------------------
  Total.........................................................        135        100        152        100        175        100        186       2013
                                                                     With Cost Risk
Army............................................................         20         15         29         17         53         26         59       2014
Navy............................................................         41         31         55         32         56         27         74       2010
Air Force.......................................................         47         35         59         35         74         37         84       2021
Defense Agencies................................................         26         19         28         16         26         12         31       2009
                                                                 ---------------------------------------------------------------------------------------
  Total.........................................................        135        100        171        100        209        100        224       2013
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Congressional Budget Office.

Note: Numbers may not add up to totals because of rounding.

    In the 2004 FYDP, the Army's investment budget increases gradually 
through 2009. After that, continuing to carry out the plans in the FYDP 
would cause Army investment to jump by more than $13 billion in the 
next 2 years, CBO projects. It would reach a peak in 2014 of almost $42 
billion 24 percent higher than its previous peak, in 1985. The Army's 
investment budget would decline modestly thereafter, staying within $8 
billion of that peak through 2022 and averaging $38 billion over the 
2010-22 period.
    The increase in Army investment spending is driven by added 
purchases of new helicopters and upgrades to existing helicopters, 
funding for missile defense programs (such as the Patriot PAC-3 and the 
Theater High Altitude Area Defense System) that transfers to services' 
budgets when the systems enter procurement, funds to increase the 
computerization of Army systems, and a variety of other actions that 
the Army would like to take to transform itself. The single biggest 
cause of the increase is the Army's plan to purchase a family of ground 
combat vehicles, which it calls the Future Combat System (FCS). The 
Army wants the FCS to eventually replace virtually all of its ground 
combat systems, including the Bradley Fighting Vehicle and the Abrams 
tank.


    If historical patterns of cost growth persisted, resource demands 
for Army investment would be much higher, averaging $53 billion over 
the 2010-22 period, or about 40 percent more than in CBO's projection 
without cost risk. The FCS program is responsible for much of that 
difference. Ground combat systems have experienced greater cost growth 
than any other type of weapon both development and procurement costs 
have turned out to be about 70 percent higher than early estimates. And 
the FCS's costs (to which that percentage increase is applied) make up 
a large share of the Army's future demand for investment spending.
                    navy and marine corps investment
    The current FYDP would increase investment funding for the Navy and 
Marine Corps (both included here under the term ``Navy'') from $44 
billion in 2004 to $60 billion in 2009. Under that plan, resource 
demands for investment would peak the next year at $64 billion 
(excluding cost risk), CBO projects, and then gradually decline to $33 
billion by 2022. Overall, the Navy's investment costs average a little 
more than $47 billion a year over the 2010-22 period in CBO's 
projection without cost risk. If costs grew as they have in the past, 
however, investment demands could peak at about $74 billion in 2010 and 
then fall to about $39 billion by 2022, averaging $56 billion a year 
during that period.
    Funds to purchase battle force ships make up the lion's share of 
the Navy's procurement increases. The Navy plans to expand its fleet 
from about 300 ships today to 375 by 2022, in part by adding a 
relatively large number of smaller littoral combat ships (LCSs). The 
Navy's plans are outlined in the Report to Congress on Annual Long-
Range Plan for the Construction of Naval Vessels. That report envisions 
spending an average of $16 billion a year (in 2003 dollars) between 
2004-25 to build new ships and upgrade old ones. CBO's projection is 
roughly consistent with that report because it too projects that the 
Navy would need to spend slightly more than $16 billion a year (in 2004 
dollars) between 2004-22 to build a 375-ship fleet, including the LCSs. 
If past trends in cost growth continued, they would drive that annual 
average to $19 billion.
    With respect to aircraft procurement, the Navy and Marine Corps now 
plan to integrate their tactical aircraft forces more fully, resulting 
in less need for new planes than in last year's plans. Despite that 
integration, spending on naval tactical aircraft would need to rise. 
Fully funding the program of aircraft modernization envisioned in the 
2004 FYDP would require the Navy to spend an average of $9.7 billion a 
year between 2004-22, CBO projects, or $11.4 billion a year with cost 
risk. By comparison, the Navy spent $8.6 billion on tactical aircraft 
in 2003.
                          air force investment
    The Air Force typically has the largest investment budget of any of 
the services. Over the past two decades, it has received an average of 
about $48 billion per year (38 percent of DOD's total investment 
spending), compared with $22 billion (17 percent) for the Army and $43 
billion (35 percent) for the Navy. (The other 10 percent was spent by 
defense agencies.)
    In DOD's current plans, Air Force investment would increase from 
$50 billion in 2004 to $58 billion by 2009. After that, the service's 
demand for investment resources would continue to grow, CBO projects, 
reaching about $63 billion by 2011. It would then remain relatively 
constant (or decline slightly) through 2017, after which it would grow 
rapidly to a peak of $72 billion in 2021. Over the 2010-22 period, Air 
Force investment would average about $65 billion a year, CBO projects.
    The increases during the next decade or so occur partly because the 
Joint Strike Fighter (JSF) is scheduled to move from development into 
production and because funds for intelligence and command-and-control 
capabilities are projected to rise. The growth after 2017 comes from 
CBO's assumptions about two new strategic systems that would replace or 
augment today's bomber force and replace today's land-based 
intercontinental ballistic missiles (ICBMs). DOD is now conducting 
concept studies to determine what those replacements might be, and 
plans for their development and purchase are likely to change from year 
to year as those studies progress. In the absence of firm plans, CBO 
used experience with the costs and schedules of previous bombers and 
ICBMs to guide its projections. In timing the beginnings of those 
programs, CBO considered the ages of the fleets, the time it took to 
develop and field today's systems, and the potential impact that DOD's 
transformation efforts might have on the future demand for those 
systems.
    If the past cost growth in Air Force investment programs presages 
future increases, the service's investment needs could be greater. 
Incorporating historical cost growth for Air Force programs into CBO's 
projection indicates that annual spending could average about $74 
billion over the 2010-22 period, or 14 percent more than in CBO's 
projection without risk. Peak spending could equal $84 billion, or 17 
percent more than CBO projected without cost risk.
                    investment for defense agencies
    In addition to funding the Departments of the Army, Navy, and Air 
Force, DOD's budget provides money for a variety of specialized 
agencies that are responsible for performing advanced research, 
developing missile defenses, overseeing special operations, and 
developing and managing information systems. DOD plans to spend almost 
$24 billion on those activities in 2004 and an average of $25 billion a 
year over the 2004-09 period. Thereafter, CBO's projection of annual 
defense agency investment averages $24 billion between 2010 and 2022 
without cost risk and $26 billion with such risk.
    Funding for defense agency investment in the 2004 FYDP exceeds the 
level in the 2003 FYDP by an average of almost $2 billion a year. CBO's 
projection of resource demands for such investment over the 2010-20 
period was about $8 billion greater in its July update than in its 
January report, for two main reasons. First, the administration created 
a new defense agency investment account for programs that would 
transform the U.S. military. Because transformation has been such a 
high priority of this administration, CBO assumed that spending for 
those programs would continue at the 2009 level. Second, the Missile 
Defense Agency added funds through 2009 to develop new ground- and 
space-based interceptors. Given the high priority accorded to such 
activities in the administration's plans, CBO projected that funding 
for those interceptors would hold steady through the end of the 
projection period.

                  Today's Plans and Tomorrow's Forces

    Will the level of investment resources that is necessary to carry 
out the plans in the 2004 FYDP over the long term buy enough equipment 
to keep forces at desired levels and to keep the average age of 
equipment at acceptable levels? The answer to that question depends to 
some extent on the condition of today's forces. For most major types of 
military equipment, average age has been increasing since 1990. It will 
continue to grow through 2010 or, in the case of some aircraft, through 
2020 CBO estimates (see table 2).

                     TABLE 2.--AVERAGE AGE OF MAJOR EQUIPMENT, BY SERVICE AND TYPE OF SYSTEM
----------------------------------------------------------------------------------------------------------------
                                                                                          Average Age (Years)
               Type of Equipment                        Examples           Half-Life ---------------------------
                                                                          (Years)\1\   1990   2000   2010   2020
----------------------------------------------------------------------------------------------------------------
                                                      Army
Ground Combat Vehicles........................    M1 Abrams, Stryker, FCS     10-15       6     10     17     17
Helicopters...................................           AH-64, UH-60, Comanch12-18      17     18     19     13
                                              Navy and Marine Corps
Battle Force Ships............................                         CVN, SS14-18G, CG 17     14     17     16
Fighter and Attack Aircraft...................          F-14, F-18, JSF       10-15      11     12     14     11
Helicopters...................................             AH-1, V-22, CH-53  16-23      17     22     18      9
Ground Combat Vehicles........................                 LAV, AAV       10-15       5     13     19     11
                                                    Air Force
Fighter and Attack Aircraft...................          F-16, F-22, JSF       10-15      10     14     20     15
Bombers.......................................           B-1, B-2, B-52       35-40      22     24     35     45
Airlifters....................................                         C-5, C-18-23-130  20     23     23     27
Tankers.......................................                        KC-10, K28-33      28     37     40     34
----------------------------------------------------------------------------------------------------------------
Source: Congressional Budget Office.

\1\ The half-life is one-half of the full expected service life of equipment. If the average age of an inventory
  of equipment is within the half-life range, that inventory is not composed of large amounts of old equipment
  potentially nearing obsolescence.


    CBO has made projections of weapons inventories and their average 
ages for more than 20 years, using a simple method. We start with data 
from each service about how many weapons of different types it has and 
how old those weapons are. For each year of a projection period, we add 
to the inventory the deliveries that result from planned purchases, 
subtract the losses from planned retirements or peacetime attrition 
(again using the services' estimates), add a year to the age of each 
individual weapon, and calculate an average age for the total 
inventory. That simple arithmetic suggests that average ages should 
fall when DOD purchases large numbers of systems and rise when it buys 
few systems. Average ages will also decline if large numbers of older 
systems are retired, which can occur when forces are cut.
    Between 1990 and 2000, nine of the 10 weapons inventories shown in 
table 2 grew older, on average. The average age of the Army's ground 
combat vehicles nearly doubled during that period, and the average age 
of the same weapons in the Marine Corps more than doubled. Air Force 
fighters' and tankers' average ages grew by about one-third.
    That aging occurred because DOD's investment budgets, which peaked 
at $180 billion a year in the 1980s, fell to less than $90 billion a 
year in the 1994-98 period. Not surprisingly, the decline in funding 
resulted in fewer purchases of major weapons for the military services. 
For example, procurement of Air Force tactical fighters averaged about 
16 planes per year from 1992-2001 well below the steady-state level of 
purchases (106-149 aircraft per year) necessary to keep the average age 
of Air Force fighters from increasing (see figure 5). On the basis of 
DOD's current plans, CBO's projection incorporates rapidly growing 
purchases of fighters beyond 2009. The large deliveries of new aircraft 
that result from those purchases cause the average age of the tactical 
fighter fleet to decline after 2013.
    Increases in the average ages of DOD's weapons stocks between 1990 
and 2000 occurred despite the retirements made possible by the 
substantial force cuts that followed the end of the cold war. For 
example, the Army reduced its number of combat divisions by about one-
third, and the Air Force cut its tactical air wings in half, allowing 
those services to retire large numbers of older tanks and fighters, 
respectively. Fleets of Navy battle force ships also shrank during that 
period, and those retirements, combined with continued Navy ship 
purchases during the 1990s, reduced the average age of battle force 
ships the only category of weapons in table 2 that actually decreased 
in average age over that period.
    DOD may be able to make further reductions in forces. The 
administration cut naval aviation forces this past year with its move 
to incorporate Marine Corps fighter forces into Navy air wings. But 
such reductions may be much too small to eliminate the resource 
pressures that CBO's projections indicate.

                   Defense Spending in Other Contexts

    I would like to close with a few thoughts about how defense funds 
fit in with the rest of Federal spending and about the impact that 
economic trends might have on the availability of those funds.
              defense as a share of gross domestic product
    Some defense leaders have argued that DOD should receive a constant 
share of the Nation's income as measured by its gross domestic product 
(GDP). For instance, General Gordon Sullivan, a former Chief of Staff 
of the Army, suggested pegging a floor for the defense budget at about 
4 percent of GDP. Proponents of spending a constant share of GDP argue 
that defense spending is an investment in security that should grow 
along with the nation's wealth.
    DOD's share of GDP has not exhibited such constancy in the past 
(see figure 6). That share stood at about 5 percent of GDP in 1980, 
approached 6 percent in 1983, and remained close to that level through 
1987. It then declined as defense outlays dropped in the late 1980s and 
fell further after the cold war, eventually reaching a nadir of about 3 
percent in 1999. In recent years, DOD's share of GDP has been 
increasing, and it is likely to grow again in 2004 when all 
supplemental funding is added in.
    If the plans in the 2004 FYDP were carried out through 2022, DOD 
would still not receive a constant share of GDP, CBO projects. The 
funding proposed for DOD in the FYDP absorbs a roughly stable share of 
gross domestic product (as projected by CBO) through 2009 an average of 
3.4 percent per year over that period. But CBO's projection of the 
growth of real GDP in 2010 and beyond exceeds 2 percent per year, 
whereas its projection of DOD's resource demands grows by an average of 
only 0.5 percent per year over that period.


                 defense as a share of federal spending
    DOD's share of Federal spending has not been constant either. In 
the past 5 years, it has grown from about 15 percent of the Federal 
budget in 1999 to about 19 percent of the budget in 2003 (see figure 
6). That increase followed more than a decade of declines from the peak 
in the late 1980s, when DOD received about 27 percent of Federal 
spending.
    The administration's budget request for DOD in 2004 (including 
supplemental funding) represents about 20 percent of Federal spending. 
If the administration's current plans were carried out, defense would 
make up about 18 percent of the Federal budget through 2009. 
Thereafter, its share would decline, falling to about 14 percent by 
2022, according to CBO's long-term projection of the resource demands 
implied by current defense plans. That decline occurs because projected 
increases in spending for mandatory programs such as Social Security, 
Medicare, and Medicaid outpace CBO's projection of growth in defense.


   differences between cbo's long-term projection and cbo's baseline
    Committee staff asked me to point out that the long-term 
projections presented today are different from the defense projections 
in CBO's 10-year baseline, which appeared in our update to the Budget 
and Economic Outlook, about which I testified in September. In CBO's 
baseline estimate, defense discretionary funding equaled about $465 
billion in 2004 $83 billion more than in the long-term projection of 
defense resource demands without cost risk.
    Two factors account for the difference. First, as noted earlier, 
CBO's long-term projection looks only at funding for DOD (budget 
subfunction 051), whereas its baseline projects all national defense 
spending (function 050). Funding for agencies other than DOD adds 
almost $20 billion per year to defense spending (see the line in figure 
1 labeled ``CBO's Baseline for DOD''). Second, neither the 2004 FYDP 
nor CBO's long-term projection without cost risk (which is based on it) 
includes the $74 billion that was appropriated in 2003 for 
contingencies and other purposes. However, as directed by law, CBO's 
baseline estimate of future defense outlays does include that 
supplemental appropriation.
    Differences between CBO's baseline and its long-term defense 
projection diminish over time because CBO projects real growth of about 
2 percent per year for DOD through 2013 in its projection without cost 
risk, whereas CBO's baseline projects no real growth for DOD in those 
years (see figure 1). The specifics of CBO's baseline projections which 
adjust discretionary funds only for inflation are directed by law.

    Chairman Nussle. This is excellent information that you 
have provided today, and I want to go into a couple of things 
here real quick. Just to understand, and I think I can guess, 
but let me have you illustrate what is meant by the upward 
potential of risk. You have a red dotted line on each--almost 
every one of these charts, and what are you trying to point out 
with that risk element here?
    Mr. Holtz-Eakin. Well----
    Chairman Nussle. Why don't we talk about one particular 
chart and figure one as an example.
    Mr. Holtz-Eakin. We can do it in two pieces. For example, 
in the figure for investment, there is a cost risk associated 
with the development, testing, purchase, and deployment of 
weapons systems. That risk is strictly a reflection of the 
historical record in that some systems end up costing more than 
they were originally projected to cost. And using that 
historical record of cost increases during the various stages 
of research and development, and then testing and evaluation 
before final purchase and deployment, we can sketch out the 
kinds of upward additional costs one might experience for 
current plans to develop and deploy weapons systems.
    So that is strictly a cost risk in the conventional sense 
of the term. If one goes to figure 1, the overall risks 
associated with the projection include not only those kinds of 
risks but also risks of greater activities necessary for the 
same troops and weapons that would be in the program, and that 
is experiences much like those in Iraq and Afghanistan. And 
those kinds of risks for spending we have attempted to quantify 
by starting with the experience that we have had, to the best 
of our understanding, in Afghanistan and Iraq and eventually 
phasing them down to something that is roughly reflective of 
about 50,000 troops in Iraq, plus a level of activity in 
Afghanistan that is comparable to Bosnia or Kosovo, plus a 
maintenance of other activities like air patrols in defense of 
military facilities. And that is something like $20 billion a 
year in real terms.
    Again, I stress that is not a forecast of the nature of the 
costs associated with a global war on terror, but it is an 
attempt to reflect in these projections what has been an 
inconsistent position on the part of the administration--that 
this will be a long-term endeavor, that it will require efforts 
over many years. And we attempted to put into the cost risk as 
a result some of the budgetary implications of a sustained 
effort of that type.
    Chairman Nussle. Now on figure 1, you have a CBO baseline 
that is based off of the previous supplemental request for DOD, 
as I understand it. The blue hump in the chart is what we are 
assuming the dollars that we are appropriating for that. And 
the CBO baseline is the line that builds that into the budget 
over the next number of years.
    And I guess a couple of questions. One is why are you doing 
it that way? And the second is do you have a better handle on 
what one-time expenditures are a part of the requests that have 
been allocated under these appropriations?
    Mr. Holtz-Eakin. Well, the answer to the first question is 
that we build into our budgetary baselines all discretionary 
spending that is on the books at that time, including any 
supplementals, and we include them in a way that inflates them 
at the rate of inflation. And in this case, since it is an 
inflation-adjusted chart, it appears as a flat line. We 
basically follow the convention that each year we will spend 
the same discretionary funds in real terms over the course of 
the horizon.
    You notice that black dotted line goes out the conventional 
10 years and stops. That is the standard for presentation and 
budget, and it answers the question from a larger budgetary 
perspective: What are the implications for the budget as a 
whole of devoting this amount of resources to discretionary 
programs--defense discretionary and nondefense discretionary? 
It is a useful convention to make sure that the overall budget 
presentation is comprehensive and inclusive of all the demands 
from many sources.
    This particular projection is really meant to show the 
implications of a particular policy, not a budgetary stance, 
and for that reason, we did not carry it forward. We showed 
only what we know about the blue hump and then discussed the 
implications of the Future Year Defense Program, and it is 
meant to be illustrative of the implications of that particular 
policy stance.
    In terms of cross-walking from one to the other, one of the 
things that we would be interested in finding out--and we have 
a whole list of questions that will be a starting point--is the 
degree to which things that are reflective of that blue hump 
are one-time and thus not actually appropriate to carry 
forward, versus those that are. As I said, I would love to work 
with you on that. We are not in a position to draw clean lines 
of that type.
    Chairman Nussle. I wanted to get to those questions as 
well. Before I leave this, and I am not trying to quibble with 
your chartmakers as much as I want to understand this, but 
currently it would be just as easy for illustrative purposes to 
fill in that dotted line with blue and not make it a hump, but 
make it a policy that is built out into the baseline for the 
next 10 years; isn't that right? I mean, there is no hump right 
now. There is nothing that I am aware of in our budget or in 
our appropriations or in the Defense Department or anywhere 
that suggests the spending on that blue line is going to go 
down at any time in the near future.
    Mr. Holtz-Eakin. I am sympathetic to that. Again, what we 
wanted to do, the objective of the exercise was to the best of 
our ability to show the budgetary implications of the Future 
Years Defense Program as updated. And in those situations where 
we knew something more than was literally written into the 
FYDP--and there is one FYDP in particular--we include it. We 
put into this projection the 100 tankers that would be included 
in the lease deal, which received some attention, and indeed, 
we did that because it was widely discussed by the 
administration, had been approved in some cases by committees 
in Congress. And further, given the open position of the 
administration that this was just the beginning, that the 
intention was to replace the entire 500-odd tankers, this 
projection includes the 100 tankers in the initial lease and 
then subsequent leases until the entire tanker fleet is 
replaced.
    To the extent that we have firm policy direction on what 
the administration intends, we are happy to bring that into 
this kind of an exercise. We felt that in the absence of firm 
policy direction about the scope and scale of activities in the 
global war on terror, it was difficult to do that for those 
activities. But the dotted line is a reflection of what is out 
there.
    Chairman Nussle. And while I would love to see it displayed 
as a hump in this instance, meaning that there was actually a 
cost associated to this, and then there is a decrease in the 
costs associated to this, there is nothing currently that I am 
aware that would suggest that that is going to go down; that 
that cost is actually going to follow the dotted line, and we 
might as well fill it in with blue as far out as you can see as 
opposed to assuming that there is actually going to be a 
decrease at sometime in the future.
    I understand that is quibbling with your chartmakers, but 
visually I see it--it looks like a one-time expenditure, and I 
am happy to see it displayed that way. But my understanding or 
my perception of history here is that it will not be a one-time 
expenditure, but that this will be absorbed in the budget.
    And you kind of went to my last question in your answer and 
that is, you have a list of questions.
    Mr. Holtz-Eakin. We do.
    Chairman Nussle. And I will work with you to get those 
questions answered. And I guess the only thing I would like to 
know from you is there--are you at all confident or are you 
confident that these questions, left to their own devices, will 
be answered, or do you need us to step in on your behalf and to 
make these a specific request from Congress? Because I will do 
that. But I want to know if this is a process that is ongoing, 
and you are getting your questions answered, et cetera, et 
cetera?
    Mr. Holtz-Eakin. Certainly we would appreciate any 
involvement that any member of the committee might wish to have 
to understand better what has happened both historically in the 
budget and then going forward. I think we can say that we will 
get these questions answered. It is an issue of how quickly we 
will get the information you need, and I think we should 
probably work with each other on making sure it is done in a 
timely fashion.
    Chairman Nussle. Without speaking for him, I will bet you 
that this might even be done as a bipartisan project, because I 
have a feeling that the questions you are asking are the 
questions I am asking. And from sitting next to him for the 
last few years, I have a feeling that there may be very similar 
questions to the one Mr. Spratt is asking.
    Mr. Spratt. I assure you, Mr. Chairman, I accept the bet.
    Chairman Nussle. We will work together with you on that 
project. As I say, I appreciate the good information you are 
providing us, and I am sure there is a lot of background and 
details that went into this presentation. I appreciate the work 
that you and your staff has done.
    Mr. Spratt.
    Mr. Spratt. I have seen this before, and it is an excellent 
piece of work, and I want to thank you for it. It has its 
limitations, and it is the limitations of those you have to 
deal with all the time in this work.
    As I understand you have taken the FYDP and extended it as 
if it would be fulfilled over its 6-year period of time. You 
haven't tried to backfill it, as I understand it, with weapons 
systems that aren't adequately included in the FYDP. For 
example, I mentioned earlier, and I may be wrong about this, 
but I will risk being wrong twice, if the THAAD is not fully 
included in the FYDP, I understand there is some money in the 
outyears that is not nearly enough to procure the batteries of 
the THAAD that we probably want to have for theater missile 
defense.
    Mr. Holtz-Eakin. I know we have some discussion of it, but 
Mr. Gilmore is more familiar with the details.
    Mr. Gilmore. The FYDP is the FYDP. So if that is 
underfunded in FYDP, it is underfunded in our projection. 
Beyond the FYDP, beyond 2010 and thereafter, we assume, based 
on what people in the Missile Defense Agency are saying anyway, 
that you would buy bad batteries and bad radars. So in the 
years beyond the FYDP, beginning in 2010, we buy bad batteries 
and we buy bad radars. I can't remember off the top of my head 
exactly how many batteries and radars, but we can get that for 
you.
    Mr. Spratt. You issued an opinion about the purchase of 
tankers for the Air Force, 767s from Boeing. What would be the 
outlay difference between renting and purchasing outright? I 
know you would have to have a big BA number to authorize the 
execution of a multiyear contract, but would there be any 
outlay difference of the budget in the near term?
    Mr. Holtz-Eakin. In our analysis of the existing lease 
contract compared to a direct purchase, it would be $6-billion 
cheaper over the----
    Mr. Spratt. Over the life of the program.
    Mr. Holtz-Eakin. To purchase as a direct outlay, and that 
is assuming the terms of the contract as negotiated under the 
lease.
    Mr. Spratt. But what I am getting at is the simple solution 
to this is to go ahead and bite the bullet, put the amount of 
budgetary authority necessary. We just appropriated $80 billion 
in April, and we have $87 billion more; $167 billion in the 
last 6 months has been added to the defense budget for the 
situation in Iraq and Afghanistan. Why not go ahead and just 
add $20 billion in additional BA, particularly if the outlay 
effect, which is a number that goes to the bottom line and 
swells deficit, is no different?
    Mr. Holtz-Eakin. Well----
    Mr. Spratt. I am preaching to the choir, I know. Am I wrong 
about my assumption? Is there any other reason for this 
hesitation to have such a big BA number added to the defense 
budget?
    Mr. Holtz-Eakin. The effect of the current treatment is to 
shift the pattern of BA requirements from the front end to the 
back end of this particular arrangement. As we said in our 
analysis, we feel the appropriate budgetary treatment is to 
indeed include the activities of the trust set up to finance 
this entire purchase. We feel it is a governmental activity, 
and that would reverse that treatment. And we certainly feel if 
one were to view it as a lease, it does not meet the 
requirements to be an operating lease and should be treated 
again as a capital lease with the costs reflected up front. So 
in the end, we believe the appropriate budget treatment is 
reflective of the kind of solution you are suggesting.
    Mr. Spratt. Let me read one paragraph in your opening 
conclusions because I think it ought to be put on the record. 
``Carrying out today's plans for defense would require the 
United States to fund the military through 2022 at annual 
levels averaging about 10 percent higher * * * than the peak 
spending during the 1980s,'' which was a peacetime record 
level, ``and about 20 percent higher than current funding.'' 
And we are currently funding excluding the cost of Afghanistan 
and Iraq. In other words, if we leave these deployments out, 
which are extremely expensive, as we have seen, we still got a 
budget that requires 20 percent more just to procure and 
operate at the level the FYDP proposes.
    Mr. Holtz-Eakin. That is correct.
    Mr. Spratt. That is pretty daunting.
    You also indicate over the longer term, cost risks 
associated with the global war on terrorism could amount to 
about $20 billion a year. That is Iraq, Afghanistan and 
elsewhere, but that is not included in here. That is your cost 
risk number. That is the broken line that you are indicating is 
a risk of incurring?
    Mr. Holtz-Eakin. We include that as a risk without any 
particular reason to believe we have got the number exactly 
right, but reflective of the ongoing potential for that kind of 
an outlay.
    Mr. Spratt. And you did an excellent job, by the way, on 
the force study, bringing the details together to explain to 
everybody in language we can understand how the Army is 
stretched out and how our resources are being extended in order 
to maintain deployment there of 110,000 troops.
    You heard our conversation earlier about the costs per 
month of these deployments. We have heard from CBO that the 
best breakdown of the cost per month that you can derive is 
around $3 billion; not $3.8 [billion] or $4.3 [billion], but $3 
billion for the deployment that we have in Iraq right now. Can 
you account for the discrepancy?
    Mr. Holtz-Eakin. As I mentioned to the chairman, we are not 
in a position to completely reconcile our estimates--which were 
built from the bottom up using our best information about the 
kinds of activities that we understood were going on and the 
costs for the equipment and the troops--with the actual 
experience in Iraq. To the extent that we got better 
information about the actual experience, we might be able to 
reconcile them, but right now we cannot.
    Mr. Spratt. Could you give us for the record your 
accounting for the $3 billion for what you estimate to be the 
expense of maintaining the troop levels that we have right now?
    Mr. Holtz-Eakin. We can certainly provide details that 
underlie our estimate of $36 [billion] to $41 billion.
    Mr. Spratt. We would like to have major cost elements, how 
it adds up to that substantial sum of money.
    Mr. Holtz-Eakin. We can do that easily.
    Mr. Spratt. I mean it could be things we can't talk about. 
It could be intelligence money buried there.
    Mr. Holtz-Eakin. We can show you what we have put into our 
estimates.
    Mr. Spratt. Having worked for a comptroller before, there 
used to be a slogan in the comptroller's office that our duty 
is not to let the costs run over and the cash run out. And 
every good comptroller was to put something in there so when 
the commander needed something unexpectedly, there would be 
enough money in the kitty to cover it. Surely it is not $1.3 
billion a month in padding, but it would be interesting to 
know. If we could get your reconciliation of that, we would 
appreciate it.
    And just one final thing. Quite a few of these numbers 
don't include the Department of Energy. Some do apparently when 
you get over to total defense spending at the end, but quite a 
few of these are just DOD.
    Mr. Holtz-Eakin. Only in the end does it include that. The 
remainder are focused on subfunction 051, which excludes DOE 
and defense spending elsewhere outside the Department of 
Defense.
    Mr. Spratt. There is a $15 [billion] to $20 billion 
increment on top of these things?
    Mr. Holtz-Eakin. That is correct.
    Chairman Nussle. Mr. Edwards.
    Mr. Edwards. Thank you, Mr. Chairman, and thank you, Dr. 
Holtz-Eakin. Seems to me listening to Dr. Zakheim's testimony 
earlier just reconfirms what we all understood, whether we 
practice or put it into place or not, and that is the only 
certainty with defense spending is uncertainty. And I think 
where we make a mistake is we project out budgets for defense 
for the next 10 years; assume some inflation, small inflation, 
factor; totally underestimate the cost, whether it is 
production cost overruns or contingencies that we never assume 
in a 10-year budget; combat situations we never assume in a 10-
year budget; and then we spend on other programs, including tax 
cuts; and then our children and grandchildren will pay the 
price for our repeatedly making the same mistake over and over. 
And that is why I appreciate what the chairman is doing in this 
hearing to try to get as honest of an estimate as any human can 
of what our Iraqi and defense costs are going to be so that as 
we build the budget over the next couple of years, it will be 
more realistic numbers that we have used in the past.
    My question to you would be, would it be difficult to go 
back and look over, say, a 20-year period or so, maybe start at 
1980 and give us an average of for every 5-year budget 
projection for defense, or if they use 10-year budget 
projections at that point, how off in percentage terms and 
dollar terms was each projection? My guess is that each decade 
we make the same mistake over and over and over and over again, 
and we ought to stop doing that. We ought to stop assuming 
there will be--I assume Dr. Zakheim's budget projection assumes 
no funding for combat operations in the next 5 years or, 
projected out to 2013, over the next 10 years. Would that be 
correct that the defense budget, future years defense 
projections, don't assume one dime for combat operations?
    Mr. Holtz-Eakin. They certainly include the costs of active 
troops and equipment and weapons systems. The cost risks that 
we show include deployment TEMPO, things like that.
    Mr. Edwards. They assume no future Iraq. We didn't predict 
the invasion of Kuwait 5 years before Kuwait, so that 5-year 
budget projection didn't assume the cost of that. Five years 
ago, we didn't assume or predict this combat in Iraq, so there 
was no funding for that. I assume--the Department of Defense's 
budget projected out to 2013 doesn't have just an estimate or a 
plugged number for possible combat contingencies, does it?
    Mr. Holtz-Eakin. No. I think if you go back to your 
original question, could we do the math and compare actual 
outlays in the defense budget with projections 5 years earlier, 
certainly one could. However, I would caution you that the 
spirit of this kind of a projection is to ask what are the 
implications of current policy if unchanged for the future, and 
indeed when one looks at the difference between what actually 
happens and what was projected, policies change. The degree to 
which that would be illustrative depends on what question one 
is asking.
    Mr. Edwards. I understand. And I understand we would have 
to subjectively evaluate the data, but I would love to see the 
data, because my guess is, over that 20-year period, we don't 
overestimate future defense expenditures, and there are several 
risk factors. Some is cost overruns for a particular 
procurement programs. Other is projected costs, such as medical 
care costs, prescription drug costs, going up. We didn't 
predict that to the extent it has occurred 5 years ago, and we 
don't assume costs or contingencies.
    One thing we know for certain: Somewhere in the next 10 or 
20 years, American forces are going to be fighting in a war 
somewhere. I don't know if it is going to be Iraq, Iran, North 
Korea or someplace, but I didn't predict the last two Iraqi 
wars, and that wasn't all that long ago. But our budgets don't 
assume any costs for that.
    I guess what I am asking you for would take into account 
the accumulation of all of the risk factors for underestimating 
the true cost of national defense.
    Mr. Holtz-Eakin. We would be happy to look at that and put 
together a comparison of what was expected at each point in 
time and what actually transpired. That would be limited by 
data in some cases.
    Mr. Edwards. Make whatever assumptions you need to make.
    Mr. Chairman, I will finish just by saying that I would bet 
right now what little net worth I have versus what little net 
worth anybody else has that that the CBO projections on defense 
costs over the next 10 years, if we go revisit this 10 years 
from now, will be far closer to reality than the FYDP for the 
next 5 years and then projected out for 5. And that is not a 
criticism of anyone purposely trying to mislead the American 
people, but it certainly has budget implications.
    And I thank the chairman.
    Chairman Nussle. Mr. Scott.
    Mr. Scott. Thank you, and I appreciate you coming back.
    Are you aware of how much more this war is going to cost 
after the $87 billion? Have you heard suggestions that there 
will be a request of tens of billions more in the next few 
months?
    Mr. Holtz-Eakin. I haven't heard anything that you haven't 
heard in this hearing, I am sure.
    Mr. Scott. One of the things we have been hearing recently, 
60 Minutes, National Public Radio, are sweetheart deals, 
corruption with contracts. What can we do to ensure that we are 
getting our money's worth for the money we are spending?
    Mr. Holtz-Eakin. I think that is a question that is most 
appropriately directed at David Walker, the Comptroller 
General, who is much more conversant with the auditing and 
contracting functions under Congress. But as a general matter, 
I think systems need to be and have been put in place to ensure 
that there are appropriate awards of contracts and performance 
measures in the conduct of those contracts. Those are the 
general prescriptions for getting your money's worth.
    Mr. Scott. And if we are not getting our money's worth, 
that is how you would find out?
    Mr. Holtz-Eakin. Generally that is revealed in either a 
financial or performance audit.
    Mr. Scott. We have heard that Iraq could not afford to pay 
back what we are going to spend for reconstruction. Do you know 
the amount of debt per person in Iraq versus the amount of debt 
per person in the United States?
    Mr. Holtz-Eakin. Those are certainly numbers we can 
certainly do our best to get to you.
    Mr. Scott. Bulletproof vests were apparently not part of 
the $79 billion we spent earlier this year for the war on Iraq. 
Is there any excuse for not projecting the need for the 
bulletproof vests?
    Mr. Holtz-Eakin. The projection really depends on the 
structure of the policy, and I am not in a position to know 
what the expectations were at the time of the request made for 
the supplemental.
    Mr. Scott. You have a chart on aircraft purchases.
    Mr. Holtz-Eakin. Figure 5, I believe.
    Mr. Scott. I was wondering if you have a similar chart for 
shipbuilding? Can you say how close we are or how much more it 
is going to cost us to build enough ships to maintain the 
number of ships--first of all, what is the projection for the 
size of the Navy?
    Mr. Holtz-Eakin. This projection reflects the expectation 
of raising the fleet size to 375 ships from 300.
    Mr. Scott. Budgetwise, how are we doing in making progress?
    Mr. Holtz-Eakin. This projection assumes about $16 billion 
per year in shipbuilding costs in real terms, adjusted for 
inflation. In terms of the projection, that is a number about 
which both the Navy and CBO come down in the same place.
    Mr. Scott. That is $16 billion a year construction.
    Mr. Holtz-Eakin. On average.
    Mr. Scott. How much are we spending?
    Mr. Gilmore. They are requesting $12 billion in 2004 and 
planning on going up to $20 billion by 2009 it then trails off 
a little bit, but it averages about $16 billion a year in our 
projection.
    Mr. Scott. But $12 billion in 2004. And we need to average 
$16 billion?
    Mr. Holtz-Eakin. The near term, 2004-09, it ramps up from 
$12 [billion] to $20 billion, and then it goes down to average 
about $16 billion. So it is a profile that runs up and then 
down, quite similar to the pattern you see in these projections 
where there is a ramp-up peak and then a ramping down to a 
lower level.
    Mr. Scott. I have noticed that there is not much concern 
being expressed about the fact that we are not paying for the 
$87 billion. Can you give us an idea of what that does, what a 
$87 billion expenditure with no pay-for does to the future of 
the budget?
    Mr. Holtz-Eakin. As a one-time matter, it is very different 
than if it were on a sustained basis. As a one-time matter, $87 
billion in a $2.2 trillion budget is not large in percentage 
terms. A flavor of this size on a sustained basis is given by 
our summer update where you can see that the inclusion of last 
year's--the 2003, $79 billion supplemental for a full 10 years 
adjusted for inflation is about $800 billion over the 10-year 
window, and that excludes any additional debt service 
associated with it.
    Mr. Scott. You have to include debt service as part of the 
calculation; do you not?
    Mr. Holtz-Eakin. If one does that, you get to about $1 
trillion.
    Mr. Scott. Thank you, Mr. Chairman.
    Chairman Nussle. Thank you.
    Mr. Spratt. Can I look at one chart?
    Chairman Nussle. Could we have this chart just for the 
record, because this chart has been referred to on battle force 
ships.
    Mr. Holtz-Eakin. Indeed. We are happy to submit the entire 
set of charts, which include these for many kinds of weapons.
    Chairman Nussle. So we have them for the committee and the 
record.
    Mr. Scott. Mr. Chairman, I think this was in a prior 
submission. Wasn't this in your January report?
    Mr. Holtz-Eakin. Earlier versions appear in the January 
report, and we have them for the update that occurred in the 
summer reflecting the 2004 FYDP.
    Chairman Nussle. And Mr. Spratt has a follow-up question.
    Mr. Spratt. Let me flash a chart at you because it is 
pertinent to what Mr. Scott just asked. It is about the cost 
under three different scenarios. Once again, who knows how many 
troops will be deployed and for how long. Scenario A assumes 
that the final troops will leave around 2006, but there will be 
a steady phase-down to two or three division equivalents. As a 
cost of the postwar military presence of $93 billion for that 
deployment, we are assuming that reconstruction costs will be 
20, which is in the package before us today, plus 3- and the 
April supplemental plus 5. Assuming that if we are there for a 
couple more years, we will probably be soaked for at least 
another $5 billion in reconstruction assistance. And then the 
comeback costs are carrying forward mainly the cost of the war 
and adjusting for intelligence and things like that for an 
ongoing presence. Most of that is previously incurred costs.
    And then there are some savings. You have to acknowledge 
that if we subdue the country and it becomes a friendly 
country, then we don't have to have no-fly zones that will cost 
about $1.5 billion to maintain. However if we don't pay for the 
deployment, if we instead charge it up to the deficit, 
obviously that adds to the national debt, and there is a debt 
service cost to be added, and we compute that to be $83.9 
billion. So the total impact over 10 years if we don't pay for 
the deployment, we come up with $238 billion. And that is for 
the most benign of the three scenarios.
    I would hope that scenario C is the worst case, which would 
include deployment until 2010. But if you look at Kosovo and 
Korea and other places around the world where we have had 
military engagements followed by occupation, it could happen. I 
hope it doesn't, but $238 billion is enough, and it is not 
unrealistic or unlikely at all.
    Would you comment on this chart? Can you give us any 
impressions about the--I will tell you what. May I give you a 
copy of our study and get your comments on it?
    Mr. Holtz-Eakin. It would probably be better for us to have 
the details of the postwar military presence, year-by-year, so 
we understand the profile underneath those numbers.
    Mr. Spratt. We will do that.
    Chairman Nussle. Mr. Spratt and I will work together with 
you. If you will get us the questions that the Congressional 
Budget Office would like to submit, we will work together to 
try and submit them in a bipartisan way so we can get answers 
to these questions so that our analysis improves.
    Mr. Holtz-Eakin. Thank you.
    Chairman Nussle. If there is nothing more to come before 
the committee, we stand adjourned.
    [Whereupon, at 2 p.m., the committee was adjourned.]

                                
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