[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]


                                     

                         [H.A.S.C. No. 111-22]
 
      MILITARY RESALE AND MORALE, WELFARE AND RECREATION OVERVIEW

                               __________

                                HEARING

                               BEFORE THE

                    MILITARY PERSONNEL SUBCOMMITTEE

                                 OF THE

                      COMMITTEE ON ARMED SERVICES

                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD

                             MARCH 12, 2009

                                     
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13

                                     

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                    MILITARY PERSONNEL SUBCOMMITTEE

                 SUSAN A. DAVIS, California, Chairwoman
VIC SNYDER, Arkansas                 JOE WILSON, South Carolina
LORETTA SANCHEZ, California          WALTER B. JONES, North Carolina
MADELEINE Z. BORDALLO, Guam          JOHN KLINE, Minnesota
PATRICK J. MURPHY, Pennsylvania      THOMAS J. ROONEY, Florida
HANK JOHNSON, Georgia                MARY FALLIN, Oklahoma
CAROL SHEA-PORTER, New Hampshire     JOHN C. FLEMING, Louisiana
DAVID LOEBSACK, Iowa
NIKI TSONGAS, Massachusetts
               Michael Higgins, Professional Staff Member
                 John Chapla, Professional Staff Member
                     Rosellen Kim, Staff Assistant


                            C O N T E N T S

                              ----------                              

                     CHRONOLOGICAL LIST OF HEARINGS
                                  2009

                                                                   Page

Hearing:

Thursday, March 12, 2009, Military Resale and Morale, Welfare and 
  Recreation Overview............................................     1

Appendix:

Thursday, March 12, 2009.........................................    27
                              ----------                              

                        THURSDAY, MARCH 12, 2009
      MILITARY RESALE AND MORALE, WELFARE AND RECREATION OVERVIEW
              STATEMENTS PRESENTED BY MEMBERS OF CONGRESS

Davis, Hon. Susan A., a Representative from California, 
  Chairwoman, Military Personnel Subcommittee....................     1
Wilson, Hon. Joe, a Representative from South Carolina, Ranking 
  Member, Military Personnel Subcommittee........................     2

                               WITNESSES

Baker, John B., Director, Fleet and Family Readiness, Commander, 
  Navy Installations Command.....................................    10
Bianchi, Rear Adm. Robert J., USN, Commander, Navy Exchange 
  Service Command................................................     5
Gorman, Richard, Chief Operating Officer, U.S. Army Family and 
  Morale, Welfare and Recreation Command.........................     8
Larsen, Timothy R., Director, Personal and Family Readiness 
  Division, Manpower and Reserve Affairs Department, 
  Headquarters, U.S. Marine Corps................................     7
Milam, Charles E., Director of Air Force Services, Headquarters, 
  U.S. Air Force.................................................    11
Myers, Arthur J., Principal Director, Military Community and 
  Family Policy, Office of the Under Secretary of Defense 
  (Personnel and Readiness)......................................     3
Sakowitz, Philip E., Jr., Director and Chief Executive Officer, 
  Defense Commissary Agency......................................     7
Thurgood, Maj. Gen. Keith L., USAR, Commander, Army and Air Force 
  Exchange Service...............................................     4

                                APPENDIX

Prepared Statements:

    Baker, John B................................................   160
    Bianchi, Rear Adm. Robert J..................................    87
    Davis, Hon. Susan A..........................................    31
    Gorman, Richard..............................................   139
    Larsen, Timothy R............................................   112
    Milam, Charles E.............................................   181
    Myers, Arthur J..............................................    34
    Sakowitz, Philip E., Jr......................................    99
    Thurgood, Maj. Gen. Keith L..................................    69
    Wilson, Hon. Joe.............................................    33

Documents Submitted for the Record:

    [There were no Documents submitted.]

Witness Responses to Questions Asked During the Hearing:

    [There were no Questions submitted during the hearing.]

Questions Submitted by Members Post Hearing:

    Mrs. Davis...................................................   217
      MILITARY RESALE AND MORALE, WELFARE AND RECREATION OVERVIEW

                              ----------                              

                  House of Representatives,
                       Committee on Armed Services,
                           Military Personnel Subcommittee,
                          Washington, DC, Thursday, March 12, 2009.
    The subcommittee met, pursuant to call, at 1:00 p.m., in 
room 2212, Rayburn House Office Building, Hon. Susan A. Davis 
(chairwoman of the subcommittee) presiding.

OPENING STATEMENT OF HON. SUSAN A. DAVIS, A REPRESENTATIVE FROM 
    CALIFORNIA, CHAIRWOMAN, MILITARY PERSONNEL SUBCOMMITTEE

    Mrs. Davis. Good afternoon, everybody. Today the 
subcommittee will turn its attention to the management of 
military resale and moral welfare and recreation, or MWR, 
activities. These are the nonappropriated fund operations that 
are so essential for the quality of life of service members and 
their families.
    There is much to celebrate within the military resale 
community as commissary and exchange sales are increasing and, 
in these very troubling economic times, they are fulfilling 
their promise to provide military patrons with quality goods 
and services with savings. I certainly want to applaud the many 
innovations that you talk about in your statements today, 
because we see some really quality changes taking place, that 
particularly help the men and women that we serve and we always 
want to be focused on that, you know, what's best for them not 
always necessarily our ease, but what's best for them.
    The MWR communities are continuing to work hard to provide 
the facilities and services that are so critical for the 
building of the military communities on our military 
installations. But the subcommittee continues to be concerned 
about reports that indicate that MWR programs have fallen 
victim to cuts in appropriated fund support at the installation 
level. The subcommittee is also very concerned that the 
majority of our nonappropriated fund activities are not 
confident that they have the recapitalization resources needed 
to maintain the quality of their facilities at the high level 
that we have come to expect.
    A related concern is the apparent reluctance of the 
services to use appropriated military construction funding to 
support construction of military resale and MWR facilities at 
installations impacted by base realignment and closure and 
force restationing.
    While we have an excellent panel today to help us explore 
these and a number of other issues, and I would certainly 
request that all the witnesses keep their oral opening 
statements to three minutes. I know that is very difficult to 
do. If you can do that, we certainly can appreciate it, and, 
without objection, all written statements will be entered into 
the record.
    Mr. Wilson, do you have some opening comments?

   STATEMENT OF HON. JOE WILSON, A REPRESENTATIVE FROM SOUTH 
   CAROLINA, RANKING MEMBER, MILITARY PERSONNEL SUBCOMMITTEE

    Mr. Wilson. Thank you, Madam Chairman. This subcommittee 
has had a long standing commitment to improve the quality of 
life of men and women of the Armed Forces and their families. 
One way we have shown that commitment is through efforts to 
sustain and even expand MWR commissary and exchange benefits. 
We must continue that aggressive approach. Our witnesses today 
have diverse responsibilities that span the complex world of 
MWR installations, commissaries and exchanges. They also face 
difficult challenges.
    Given the wartime high operations tempo of the Armed Forces 
today, the need for the organizations represented here to 
provide their product, quality of life to their customers has 
never been greater. It should also be pointed out we have never 
had a higher percentage of military personnel who are married 
with families and so what you are doing is just so crucial for 
the families to have a wonderful quality of life for persons 
serving in the military.
    Moreover, the demand of their customers active, guard, 
reserve, retirees, and their families for quality of life 
improvements and expansion have the benefit have never been 
higher. I sincerely appreciate the effort by our witnesses to 
provide wider opportunities for reserve and national guard 
personnel here in the United States to take advantage of the 
commissary and exchange benefits. I am also thankful for the 
leadership exemplified by our witnesses today that have worked 
continuously to provide support to all military personnel, 
their families and retirees.
    When I was on duty myself and now as a veteran, I know 
firsthand of your providing modern people friendly facilities. 
The highest compliment I can give all of you is that my wife 
and my mother-in-law, and she is the widow of a veteran, are 
very satisfied customers of the commissary and Post Exchange 
(PX) at Fort Jackson, South Carolina, and they tell me every 
time they visit of the first class staff who are always 
helpful.
    So, Madam Chairman, I join you in welcoming our witnesses, 
and I look forward to their testimony.
    [The prepared statement of Mr. Wilson can be found in the 
Appendix on page 33.]
    Mrs. Davis. Thank you. Thank you, Mr. Wilson, and now I 
would like to introduce our panel.
    Mr. Arthur Myers, principal director of the Military 
Community and Family Policy, Office of the Under Secretary of 
Defense for Personnel and Readiness. And we know that you are a 
familiar face in a new position. Congratulations and welcome to 
you.
    Major General Keith Thurgood, Commander, Army and Air Force 
Exchange Service (AAFES). And General, I understand that this 
may be your last time that you will appear before us as you are 
returning to civilian life.
    General Thurgood. Yes, ma'am.
    Mrs. Davis. So we wish you the best and thank you very much 
for your service.
    Rear Admiral Robert Bianchi, Commander, Navy Exchange 
Service Command.
    Mr. Philip Sakowitz, Director and Chief Executive Officer 
for the Defense Commissary Agency (DeCA).
    Mr. Timothy Larsen, Director, Personal and Family Readiness 
Division, Manpower and Reserve Affairs Department Headquarters, 
U.S. Marine Corps.
    Mr. Richard Gorman, Chief Operating Officer, U.S. Army 
Family and Morale, Welfare and Recreation Command.
    And Mr. John Baker, Director of Fleet and Family Readiness, 
Commander, Navy Installations Command. Thank you very much. I 
keep going back and forth.
    And Mr. Charles Milam, Director of Air Force Services 
Headquarters, U.S. Air Force.
    Mrs. Davis. Thank you all very much for being here, and we 
will start with you, Mr. Myers.
    [The prepared statement of Mrs. Davis can be found in the 
Appendix on page 31.]

  STATEMENT OF ARTHUR J. MYERS, PRINCIPAL DIRECTOR, MILITARY 
 COMMUNITY AND FAMILY POLICY, OFFICE OF THE UNDER SECRETARY OF 
               DEFENSE (PERSONNEL AND READINESS)

    Mr. Myers. Chairwoman Davis, Representative Wilson and 
distinguished members of the subcommittee, for many years I 
have welcomed the opportunity to appear before you and discuss 
military morale, welfare and recreation resale programs in the 
Air Force. However, I am here this year in a new capacity, 
representing the Secretary of Defense (SECDEF) and all the men 
and women of the Armed Forces. On their behalf, let me thank 
you for your strong support of programs and benefits for the 
military community. You are recognized within the Department of 
Defense (DOD) for your service to the American people and 
commitment to soldiers, sailors, airmen, marines and their 
families.
    I also need to salute the subcommittee for their 
hardworking and dedicated staff members who work so closely 
with all of us throughout the year. Debra Wada, Mike Higgins, 
Dave Kildee, Craig Green, John Chapla and Jeanette James, 
special thanks to all of you.
    You can rest assured that your commitment to quality life 
in the military is stronger than ever. Our senior civilian and 
military leaders understands as does the subcommittee that the 
success of the military mission depends on the well-being of 
individual service members who are our number one weapons 
system, and of course, their families.
    There is no question that the commissary exchange and MWR 
programs directly impact the well-being of our people and the 
retention and readiness of our force. Today the resale MWR 
programs face unprecedented changes within the Department, our 
society and the business world. Their employees, and especially 
the leaders representing all of them here today, we need to 
recognize them for their hard work dedication and 
professionalism.
    Working closely with our industry community partners their 
creative solutions have led to larger role force these programs 
and new partnerships promote military community and family 
support for the total force. I have written my testimony for 
the record, but like to highlight some areas four your 
consideration.
    Several years ago, the Congress granted temporary authority 
for minor military construction of child development centers. 
To meet our goals for child care and to keep our members fit to 
fight and win, we require similar authority for fitness centers 
and for child care facilities to 12 years of age. To complete 
the work underway, we need to extend this authority through 
fiscal year 2012 and increase the project threshold to $15 
million.
    We also need to eliminate barriers to hiring practices key 
to expanding our partnership with community providers of child 
care. Finally, we must address our trading partner concerns 
about payments for goods and service and access to our military 
installation.
    Thank you again for your strong support of the military 
members and their families and for giving us the flexibility to 
deliver the benefits within today's operating budget and 
realities. It is a key ingredient in the recruitment retention, 
and most importantly, the readiness of our military personnel 
and their families.
    I would be happy to respond to any questions you may have.
    Mrs. Davis. Thank you.
    [The prepared statement of Mr. Myers can be found in the 
Appendix on page 34.]
    Mrs. Davis. General Thurgood.

STATEMENT OF MAJ. GEN. KEITH L. THURGOOD, USAR, COMMANDER, ARMY 
                 AND AIR FORCE EXCHANGE SERVICE

    General Thurgood. Madam Chairman, Representative Wilson and 
members of the subcommittee, it is my privilege to appear again 
to update you on the essential services and support AAFES 
provides to the men and women of the Armed Forces and their 
families throughout the world.
    In 2008, we set a goal to enable AAFES to win the future by 
redefining our valued proposition to be our customer's first 
and best choice for quality merchandise and service and as you 
know increased selection is one key to our future success, and 
I thank you for your support in relaxing the merchandise 
restrictions on televisions, diamonds, and finished furniture. 
In my brief remarks this morning, I would like to highlight a 
few AAFES initiatives that I believe represent the tremendous 
support AAFES offers our military members and their families.
    AAFES deploys mobile field exchanges providing immediate 
support for our conflict areas abroad. We operate today 89 PXs, 
228 name brand fast food outlets and about 600 concession 
operations throughout Operation Enduring Freedom (OEF) and 
Operation Iraqi Freedom (OIF), and help troops keep in touch 
with home through our 72 calling centers and 12 Internet cafes.
    We have taken the lessons learned from the war zone and are 
using them to serve our wounded warriors. AAFES personal 
shoppers look after the immediate needs of wounded troops 
evacuated from Afghanistan and Iraq and those in rehabilitation 
back home who are unable to leave the hospital. We also support 
their transition to civilian life as AAFES participates in the 
DOD sponsored hiring heroes program and to date has hired 92 
wounded warriors, 8 in the last month, and we partner with 
numerous other government agencies that assist wounded veterans 
to locate employment.
    AAFES is taking care of military families through a variety 
of programs designed to enrich their quality of life. Twenty-
five percent of our approximately 45,000 thousand associates 
identify themselves as military spouses and dependents making 
AAFES the largest employer of military family members in the 
Department of Defense.
    AAFES keeps deployed troops connected with loved ones back 
home by offering a low rate with the military exchange global 
prepaid phone cards, and to help ease the challenges of family 
separations, AAFES is putting the finishing touches on the 
Patriot Family Deployment Passbook, a comprehensive book that 
offers discounts and money saving ideas for those families due 
to deploy.
    We know these are troubled financial times so AAFES is 
helping the budget conscious military shopper stretch every 
single dollars. An independent market basket surveyed confirms 
that AAFES is a one stop solution for thrifty military shoppers 
offering an overall savings of over 20 percent compared to the 
competition, and when you add the no tax, it is almost 30 
percent better.
    Our customers are increasingly reaching for the value in 
quality of private label merchandise, including the exchange 
select products we offer.
    I would like to offer my personal thanks to all of our 
AAFES associates who make a difference every single day but 
especially to the more than 4,500 associates who deploy to the 
Middle East, some more than once, in support of our troops and 
their families.
    I believe AAFES is on the right course to maintain a viable 
position in the market and to be a combat multiplier for our 
formation, our customer and our military communities wherever 
we serve.
    Again, I thank you for all the support you have given AAFES 
over the years. The entire military resale community and 
system, and most importantly, the brave and men and women in 
our Armed Forces.
    Thank you and I look forward to your questions.
    [The prepared statement of General Thurgood can be found in 
the Appendix on page 69.]
    Mrs. Davis. Thank you, Admiral Bianchi.

STATEMENT OF REAR ADM. ROBERT J. BIANCHI, USN, COMMANDER, NAVY 
                    EXCHANGE SERVICE COMMAND

    Admiral Bianchi. Chairwoman Davis, Representative Wilson, 
and distinguished members of the subcommittee, it is my 
privilege to appear before you today representing Navy 
Exchanges Command (NEX).
    Taking care of military family is what Navy exchange is all 
about. Deployments, long separations and recurring moves are 
just a few of the challenges our military families face. When 
our families know they are being taken care of, readiness 
recruitment and retention are positively impacted.
    Last year 93 percent of Navy spouses ranked Navy exchanges 
as the most important and most used of all Navy quality of life 
services. In today's challenging economic environment, we know 
our exchanges can provide the savings our military families are 
looking for. Based on their needs, we developed several new 
pricing strategies last year with a focus on our junior 
enlisted families. Our 2008 savings are up 3 percent from last 
year with an average of 23 percent savings and that doesn't 
include sales tax savings.
    We have a unique business model. We don't have a niche 
market. Rather we exist to serve and appeal to all authorized 
patrons. We provide a wide range of both merchandise and 
services. For example, our telecommunications program provides 
an important link for deployed sailors to phone home. Our Navy 
lodges support families with Permanent Change of Station (PCS) 
moves with affordable quality lodging. We provide school 
lunches at several overseas DOD schools, and through the 
support of our industry partners, we bring celebrities and 
events to our Navy families at bases around the world.
    We are expanding our merchandise availability through 
online channels, our NEX paper flyer is now digital. We use 
mobile text message advertising, and we even have 5,000 fans on 
our Facebook page. NEX is environmentally conscious, providing 
more green products for our customers and employing energy 
conservation technology in our facilities. In fact, tomorrow 
Congressman Nye will be participating with me as we cut the 
ribbon on the Navy's second E-85 flex fuel facility at the Navy 
exchange Oceana, which will be available for public use.
    As you know, Navy exchanges are operated predominantly with 
on appropriated fund receiving only limited appropriated fund 
support primarily for oversea transportation of goods even in 
today's uncertain retail environment our fiscal and financial 
position and capitalization programs remain strong.
    The Navy exchange strives to meet the needs of our deployed 
war fighter. Our ship store program takes care of our sailors 
while they are at sea. Our exchanges at Bahrain and Djibouti 
support those serving in remote locations, and we proudly 
support our wounded warriors.
    With assistance from our industry partners and MWR, we 
provide many events and donations targeted toward their 
specialized needs. We also actively partner with industry, MWR, 
Navy, and the other military resale activities and have 
executed many successful cooperative initiatives designed to 
complement our operations.
    In closing, I would like to assure this committee that the 
Navy Exchange Service Command is a military organization laser 
focused on our mission to support our Navy readiness 
recruitment and retention. On behalf of our dedicated sailors 
and their families, I thank you for your support.
    Mrs. Davis. Thank you.
    [The prepared statement of Admiral Bianchi can be found in 
the Appendix on page 87.]
    Mrs. Davis. Mr. Sakowitz.

    STATEMENT OF PHILIP E. SAKOWITZ JR., DIRECTOR AND CHIEF 
          EXECUTIVE OFFICER, DEFENSE COMMISSARY AGENCY

    Mr. Sakowitz. Madam Chairman and members of the 
subcommittee, it is my pleasure to appear before you to provide 
the update of the Defense Commissary Agency's performance this 
past year. Since arriving there last June, I am ecstatic with 
the Agency's performance both as a business and effectively 
delivering the commissary benefit to all those who proudly 
serve our Nation, and in its efficiency as a government entity. 
In these trying economic times, the commissary benefit is more 
valuable than ever. We have another impressive year in 2008 
with sales continuing to grow, the cost of delivering the 
commissary benefit, both in actual and in constant fiscal year 
2000 dollars, is coming in under budget and customer service 
and patron saving levels are remaining strong.
    With today's strain on individual budgets, patrons are 
making the right choice by increasing their commissary 
shopping. As shown by both our dollar sales figures and the 
fact that our customer transactions are up 2.6 million visits 
our service members are relying on the commissary benefit to 
make ends meet.
    This year's savings of 31.1 percent amounts to nearly 
$3,400 per year that an E-6 with a family of four saves by 
purchasing their grocery items at their commissary and a new 
private entering the service saves nearly $1,200.
    Of course, attaining this level of savings would not be 
possible without the tremendous support our extended team of 
trading partners, the manufacturers, distributors and brokers, 
continues to provide in the pricing, promotion and in-store 
products. Their support of military families and their 
commissary benefit remains stupendous, and I would like to take 
this opportunity on behalf of DeCA and the commissary patrons 
everywhere to publicly acknowledge and thank them.
    DeCA continues to outperform many governmental agencies and 
in many areas has been held up as a model government agency. I 
am pleased to report that for 7th year in a row, independent 
auditors have given our financial statements an unqualified 
opinion and DeCA continues to be in the top three in Department 
of Defense for implementing the internal controls requirements.
    DeCA's performance has been stellar, and I can only hope to 
lead it to new heights as we continue to demonstrate to all of 
our patrons that the commissary is worth the trip.
    I will be happy to answer any questions you may have of me 
at this time.
    Mrs. Davis. Thank you very much.
    [The prepared statement of Mr. Sakowitz can be found in the 
Appendix on page 99.]
    Mrs. Davis. Mr. Larsen.

 STATEMENT OF TIMOTHY R. LARSEN, DIRECTOR, PERSONAL AND FAMILY 
 READINESS DIVISION, MANPOWER AND RESERVE AFFAIRS DEPARTMENT, 
                HEADQUARTERS, U.S. MARINE CORPS

    Mr. Larsen. Thank you. Chairwoman Davis, Representative 
Wilson and distinguished subcommittee members, thank you for 
the opportunity to represent Marine Corps Community Services 
(MCCS) which shares the responsibility with unit commanders for 
taking care of marines and their families.
    The demands of today's military lifestyle impacts both the 
individual marine and their families. This lifestyle is 
challenging, particularly for young marines with families who 
often find that they are coping with separation, relocation, 
sometimes isolation or financial difficulties. They deserve the 
highest quality of support that we can provide.
    Today's wartime environment of frequent and extended 
deployments creates additional stressors on marines and even 
more when they are worried about their loved ones at home.
    In addition to the war and deployments, marines are 
concerned about the impact today's unpredictable economy may 
have on them.
    One of the primary goals of MCCS is to develop self-
sufficient and resilient marines and families. Their well-being 
grows as we provide the right programs delivered at the right 
time at the right place and it meets their needs.
    General Conway has clearly stated that after winning the 
War on Terror, our wounded warriors and marine families are his 
highest priority. Many MCCS programs and services were 
developed to support peacetime environments that serves to meet 
the requirements of the past seven years. The arduous nature of 
frequent deployments has caused us to reevaluate unit family 
readiness programs such as Marine Corps family team building, 
exceptional family member school liaison, and many others. And 
we have reassessed how we are funding and sustaining these 
critical programs as we go into the future to meet the needs.
    By providing relevant programs, MCCS will have a positive 
impact on readiness and retention and continue to contribute to 
the overall mission of the Marine Corps.
    Today's marines and families are naturally action oriented 
and well educated consumers. If they can't find the support and 
service they expect and deserve with us, they will go 
elsewhere. The Marine Corps exchange is focused on meeting the 
needs of our patrons and providing them a valued shopping 
experience.
    We have looked for opportunities to improve our programs, 
processes and services and will continue to do so. MCCS is 
positioned and ready to continue to take care of marines and 
families today and in the future.
    I would like to thank you for your long standing support 
for the Marine Corps, and I am happy to answer any questions. 
Thank you.
    Mrs. Davis. Thank you.
    [The prepared statement of Mr. Larsen can be found in the 
Appendix on page 112.]
    Mrs. Davis. Mr. Gorman.

STATEMENT OF RICHARD GORMAN, CHIEF OPERATING OFFICER, U.S. ARMY 
       FAMILY AND MORALE, WELFARE AND RECREATION COMMAND

    Mr. Gorman. Chairwoman Davis, Congressman Wilson, 
distinguished members and also members of the committee staff, 
good afternoon.
    I am honored to come before this committee today on behalf 
of our soldiers and their families. I have submitted my 
statement for the record, and I have just a few brief comments, 
beginning with my sincere thanks to this committee for the 
support you provide our soldiers and their families. I know 
that you know very well that the strength of our Army comes 
from the strength of its families, and it is your support that 
continues to allow us to recruit and retain high quality 
American men and women during this difficult period of 
persistent combat and multiple deployments.
    The recognition that family readiness relates to military 
readiness is the underpinning of the quest General Casey set us 
upon as he became our Chief of Staff in April of 2007. General 
Casey's assessment after five years of war is that the Army was 
out of balance and we were simply asking too much of our 
soldiers and families and not properly counter balancing their 
commitment and contribution to our Nation.
    General Casey and Secretary Geren asked soldiers and 
families how they were doing. They told us and we reacted by 
creating the Army Family Covenant which expanded programs in 
five major areas critically important to our soldiers and their 
families.
    The Chief of Staff and the Secretary doubled the Army 
family and MWR budget from $750 million in fiscal 2007 to $1.4 
billion in fiscal 2008. The increased funding was provided 
using supplemental funds and is now largely included in our 
base budget.
    The resources associated with the Army Family Covenant 
include reduced fees, expanded operating hours, increased 
counsel and other types of deployment support for child and 
youth programs. We have also included construction of 120 new 
child and youth facilities in this program, as well as 
additional facilities that are included in our submission to 
the American Recovery and Reinvestment Act.
    We have also established Army One Source as the central 
entry point for all family and MWR services either on our 
installations or wherever soldiers and families of all 
components reside in the unique, high touch, high-tech 
combination which includes instant messaging for our family 
readiness support groups.
    We have enhanced staffing in all of our family services to 
heighten value and responsiveness. We have certainly advanced 
survivor outreach as never before and implemented behavior 
modification activities to safely reintegrate soldiers 
returning from combat.
    We have implemented a customer service management program 
to assess delivery and adjust as feedback suggests 
appropriately. We have also established a synergistic 
partnership with AAFES which will allow us to make better use 
of our investment and acquisition funds through a range of 
efficiency enhancing initiatives that will allow us greater 
return to our patrons.
    I want to close by thanking you all personally and on 
behalf of the Army for all your continued support to our men 
and women who wear the uniform of our Nation. I look forward to 
answering any questions that you may have.
    Mrs. Davis. Thank you.
    [The prepared statement of Mr. Gorman can be found in the 
Appendix on page 139.]
    Mrs. Davis. Mr. Baker.

    STATEMENT OF JOHN B. BAKER, DIRECTOR, FLEET AND FAMILY 
        READINESS, COMMANDER, NAVY INSTALLATIONS COMMAND

    Mr. Baker. Thank you. Madam Chairwoman Davis, 
Representative Wilson, distinguished members of the 
subcommittee, General and flag officers and fellow senior 
executive service members, I am pleased to report that the Navy 
continues to provide world class morale, welfare and recreation 
programs to our sailors and families. Navy MWR and child and 
youth programs have developed and enhanced a wide array of 
programs in 2008 to meet the needs of our patrons today.
    MWR is everywhere our sailors are stationed or deployed and 
wherever their families live. We provide a diverse range of 
programs vital to their morale, their well-being. To the people 
we serve, MWR should be a place for physical exercise or enjoy 
some quiet time or reading a book or watching a movie. It could 
be perhaps grabbing just a bite to eat.
    It also might be where they can leave their children while 
they are on duty and knowing that they are in safe and in 
trusted hands. Whatever the service, our patrons know MWR is 
focused on taking good care of them and in turn MWR is consider 
an integral part of the Navy's readiness.
    During the past year, MWR has placed particular focus on 
family-oriented programs with significant growth in child and 
youth programs and general recreation programs that appeal to 
family members. MWR enables members to spend leisure time not 
worried about daily living, but focusing on refreshing their 
mind, body and spirit.
    We have designated 78 family fitness centers on our 
installations. We have created a dynamic youth fitness program 
called Fit Factor that has been implemented Navy-wide that 
encourages our youth to develop and apply good nutrition and 
exercise habits.
    We have established respite child care that is now offered 
to families of deployed sailors, and we continue to expand our 
24/7 child care for our standard watch bearers.
    We have also installed mobile learning centers (MLC)s that 
are funded through the national defense authorization authority 
that you provided the services last year. This authority has 
enabled us to begin installing sixty new MLCs over the next two 
years and will help address this need. This commitment will 
have a direct and positive bearing on the readiness of Navy 
families.
    We promote military readiness through a simple equation: 
Family readiness equals sailor readiness which in turn equals 
Navy readiness. All components must be synchronized, resilient 
and prepared for the daily challenges.
    In closing, MWR continues to be a vital component of the 
operational readiness and a valuable retention tool for the 
Navy. We appreciate the focus and the attention Congress 
provides in funding and developing new policies in supporting 
the MWR program. My full statement is submitted for the record 
and I look forward to answering your question.
    Mrs. Davis. Thank you very much.
    [The prepared statement of Mr. Baker can be found in the 
Appendix on page 160.]
    Mrs. Davis. Mr. Milam.

STATEMENT OF CHARLES E. MILAM, DIRECTOR OF AIR FORCE SERVICES, 
                  HEADQUARTERS, U.S. AIR FORCE

    Mr. Milam. Good afternoon. Chairwoman Davis, Ranking Member 
Wilson, distinguished members of the Military Personnel 
Subcommittee, thank you for the opportunity to appear before 
you today.
    I am happy to share the status of the Air Force morale, 
welfare and recreation programs. Our airmen and their families 
truly appreciate the leadership and support this subcommittee 
has historically provided for matters affecting their readiness 
and quality of life.
    It is a humbling experience to follow in the footsteps of 
Mr. Art Myers, and I know I speak for the rest of my colleagues 
when I say we are grateful that he has continued in the key 
leadership position at the Office of the Secretary of Defense 
(OSD).
    The Air Force has weathered many leadership challenges over 
the past years, but one thing has remained steady through it 
all, the outstanding airmen and women providing world class MWR 
programs for our airmen and their families.
    Through their outstanding efforts our programs continue to 
grow and improve to meet the ever changing needs of our 
customers, in garrison, in national support disasters, and in 
forward deployed locations. Air Force Services continues to 
deliver combat support and community service programs that are 
the cornerstone of regenerating, sustaining and retaining a 
vital weapons system, our airmen.
    Our airmen are only as strong as the network of family and 
friends around them, and we recognize the importance of taking 
care of families so our airmen can focus on the mission. A 
strong and viable MWR program must maintain this delicate 
balance of war fighting and family member support.
    My written statement has been submitted for the record and 
outlines where we are, what we have done in the past year, and 
part of our strategic view for the future. We remain concerned 
about the challenges posed by the economy, the resources 
available to support member and family quality of life, and the 
impact of issues like joint basing, post allowance and 
recapitalization.
    The hard work of our dedicated personnel is the backbone of 
success for the Air Force Services MWR mission and I am very 
proud of their successes.
    This would not be possible without the tremendous support 
of the Military Personnel Subcommittee. On behalf of the Air 
Force team, I thank you and I look forward to working with you 
as we continue to move forward in helping to sustain America's 
Air Force. I welcome your questions.
    [The prepared statement of Mr. Milam can be found in the 
Appendix on page 181.]
    Mrs. Davis. Thank you very much, and again, I want to thank 
you all for your brief statements. We appreciate that. We have 
a chance to hear from all of you at one time. We have votes 
now, and we should be back--it is always hard to project these 
things. It sounds like a long time. We like all the 
partnerships that you are developing, and we are going to give 
you another networking opportunity in the next half hour. So I 
am sorry about that, but we will be coming back and having an 
opportunity for people to ask their questions. Thanks again for 
being here.
    [Recess.]
    Mrs. Davis. Thank you, everybody, for waiting. I feel like 
asking you all to tell me how many business cards did you pick 
up, how many conversations did you have that you have been 
needing to have for the last week or two? We hope perhaps we 
gave you that opportunity. As always, it is always tough to 
have you waiting here. I know how busy your days are, and we 
hate to do that, but hopefully something good came out of that 
time.
    I want to really start with looking at the funding, the MWR 
funding, that we compare from fiscal year 2003 to 2008, and 
what we see in that is that the numbers are actually going 
down, not in huge numbers, but when you compare it to 
inflation, it is considerable.
    I want to look at where would we like this appropriated 
funding to be five years from now. I mean, what is it that you 
want from us; how can we work together to sort of answer the 
questions of what--where we want to be really in that time? We 
also know that as we move towards bringing the supplemental and 
our budget together, that some of those numbers are going to 
change just by virtue of the fact that they are items that are 
going to be included in the budget that have been in the 
supplemental before, and that throws things off a little bit. 
But I really would like you to take a look at whether there is 
a kind of inevitable degradation of programs and facilities, 
and whether we should be stepping in and protecting these 
programs. Should that appropriated funding not even be going 
down some, but going up? Have you had a chance to look at those 
numbers from fiscal years 2003 to 2008, and what can you tell 
us about that?
    Mr. Myers. What I found is we have been reporting the 
straight numbers to you every year, but we haven't included the 
supplement. So, you know, we got like $671 million in the 
supplemental. If you add that, there is an increase. Now, this 
year, without the supplemental, there is a 35-percent increase.
    So I think what we are going to do in the future is send 
you the numbers; here are the straight numbers, here is with 
supplemental money, and you can see the difference. We want to 
break that out further. The biggest increase in our funding has 
been in the child care area, because of the war and families 
separated and, of course, it is needed. Then we want to break 
that also to show you the child development number and the MWR 
numbers so you can make a better-informed decision.
    But we certainly appreciate the support and interest of the 
staff. This is something we are focused on getting it into the 
baseline. It looks like we have been successful, but as the 
year goes on, we have to make sure that we can retain those 
funds.
    Mrs. Davis. If we just look at those numbers, though, and 
recognizing the issue of where the supplemental, does that say 
something about whether or not we really are moving forward 
enough?
    Mr. Myers. I think we are moving forward enough in certain 
areas, especially in child care; we have put a lot of effort in 
that. I think in some of the MWR programs we have probably 
regressed, and that is where we have to focus, especially in 
some of our fitness programs, and that is why we probably need 
some authority so we can do these minor construction and so 
forth to our fitness centers.
    As we break it out, I can really see the difference, but 
there are programs that are suffering because of others. But, 
again, child development was a big issue with our military 
families and so forth. So we have met that need. Hopefully we 
are coming to a point years down where we have got that program 
basically fixed, and we can focus on other programs.
    Mrs. Davis. Anybody else want to respond to that? Any other 
of our chiefs?
    Mr. Gorman. I would just add to what Mr. Myers said. As I 
mentioned in my oral statement, we have increased Army funding 
from $350 million in 2007 to twice that in 2008, initially 
through the supplemental, but in 2009 and beyond most of those 
dollars are migrated into the base budget, and, as Mr. Myers 
said, significantly in support of child and youth programs that 
are critical to us, as well as other family programs. And I 
think that a refocus at some point into our other activities, 
fitness centers particularly, would be helpful.
    Mrs. Davis. And, Mr. Gorman, certainly in terms of the 
appropriated funding for Army MWR, I think the projection now 
is for 2009 that it is actually significantly higher, which is 
$900 million. So could you be a little more specific about why 
that has jumped so much? Is it because of the supplemental?
    Mr. Gorman. It goes back to the creation of the Army Family 
Covenant, which created new standards for our programs at the 
specific behest of General Casey. So the child care is a big 
part of it. In the way that we report or have reported in the 
past, we didn't include other family programs in the numbers 
that we sent forward to you all. I think the reporting has to 
do with the lack of inclusion of supplemental, but I think we 
are past that at this point.
    Mrs. Davis. Okay. Great. Thank you so much. And we have a 
great deal of interest in the family programs. We are going to 
have one or possibly even two hearings on family issues. We 
haven't done that quite in that way looking at education, but 
certainly having witnesses that can speak to that, and I am 
certain that they will identify the benefits that come from 
your programs. But I also want to be certain that we have a 
chance to really hear from them as best we can as we bring in 
some people who can represent some of those concerns.
    Mr. Kline.
    Mr. Kline. Thank you, Madam Chairwoman, and thank you, 
gentlemen, for being here, for your testimony and for your 
service to the services and to our country.
    I think, Mr. Gorman, I want to just have a short discussion 
here with you. I was down at Fort Campbell, Kentucky, or Fort 
Campbell, Tennessee, depending upon how you look at it, just a 
couple of weeks ago, and I was visiting a--I guess they call it 
a community center. I am not sure of what the name of that is, 
but it is a facility, very nice building, new building; has 
playground equipment out back for the kids; has a coffee shop 
built into it; has meeting rooms and gathering places designed 
to support housing area on the post. Is that something that 
falls under your purview?
    Mr. Gorman. Sir, that sounds like it might have been 
included under the Residential Communities Initiative----
    Mr. Kline. Okay.
    Mr. Gorman [continuing]. Where we have outsourced and 
privatized virtually all of our housing and made huge 
improvements. With some of those projects, there have been 
community facility improvements that we really appreciate and 
really come to us at no cost to our budget.
    Mr. Kline. So it does not fall under your purview even 
though it clearly seems to be all about Army morale, welfare 
and recreation, but it doesn't fall under you?
    Mr. Gorman. Not specifically, because it is privatized.
    Mr. Kline. Okay. Thank you.
    Now, I would like to turn to the issue of exchange dividend 
contributions to MWR programs, and I am looking at a chart that 
we have here--our staff prepared this? Okay. And this is 
committee staff, and I am just confused. I am hoping that maybe 
somebody can explain.
    If I am looking at AAFES, going back to 2006, it shows 
dividends at about $231 million; and if I look at 2009 
budgeted, it is still $231 million, dropping down from numbers 
like 262 and 272.
    And by comparison, the reason I am confused, if I go to the 
Marine Corps exchanges and go back to the same year, 2006, 
dividends at $31.8 million; and projected 2009, $47.2, with a 
steady increase throughout the years 2005, 2006, 2007, 2008, 
2009, 2010, going up steadily. And yet Army Air Force exchange 
system does not do that. It goes up, and then it comes down, 
and then 2010 it projects to jump back up again to 272.
    I am not sure where to start on this; Mr. Myers, or go 
straight to the Air Force, or who can help me understand what 
has happened here?
    General Thurgood. Well, sir, let me give you the best 
explanation I can. In 2009 and beyond, we did not include any 
of our appropriated funding reimbursements, so it is in our 
expense base. Typically we get about 90 to $100 million a year 
in appropriated funding reimbursement. Once you add that into 
those financial numbers, you will see that it actually grows 
every year beyond that. So if I take, for example, the 231 in 
2009, and I add in the appropriated funding that we would get 
for the expenses that we would bear in that year, if I take 231 
and add 50 million to it, which is about the right number, you 
will see that will be about 281. And all the outyears are the 
same way. We don't plan that, and that is why, therefore, we 
didn't include it in these numbers in this chart.
    Mr. Kline. Okay. Mr. Larsen, can you address what happens 
to the Marine Corps exchange system? Because your numbers 
increase in a nice linear fashion starting at 31.8 in 2006 and 
working right up through 49.5 in 2010, so you don't have that 
same issue. Or do I just have bad numbers?
    Mr. Larsen. No, sir, we have consistently been improving, 
and we have continued to increase in sales, increase in profits 
during that period, and it is projected in the budget.
    Mr. Kline. You don't have that appropriated funds issue.
    Mr. Larsen. No, sir.
    Mr. Kline. Okay. All right. So in general, in going back to 
AAFES, you are expecting your sales to go up; you are just 
having to account for moving appropriated funds out?
    General Thurgood. Yes, sir.
    Mr. Kline. Absent that, your profit, and therefore your 
dividends, would go up?
    General Thurgood. Yes, sir.
    Mr. Kline. Thank you.
    Thank you, Madam Chair.
    Mrs. Davis. Mr. Wilson.
    Mr. Wilson. Yes, unless Madam Bordallo.
    Mrs. Davis. I know Ms. Bordallo has an issue she wants to 
talk about. Why don't you go ahead.
    Ms. Bordallo. Thank you very much, and I want to thank the 
Ranking Member for yielding me his time. Thank you, Madam 
Chairman, for calling this hearing.
    I have a very important concern. I represent the territory 
of Guam, and my questions will be directed to the admiral and 
the general. And prior to us opening the hearing again, I did 
have an exchange with the admiral.
    My first question is to the two of you. As you know, the 
annual defense appropriation bill contains a provision 
regarding the purchase of beer, wine and other alcoholic 
beverages for resale on military installations. In general, the 
provision requires that beer and wine be purchased from instate 
distributors for 48 States. Now the provision further requires 
that all types of liquor in Alaska and Hawaii are to be 
purchased from instate distributors. The 2008 appropriations 
bill included a provision that would treat Guam in a manner 
consistent with Alaska and Hawaii in requiring all liquor 
resold on military installations to be purchased from local 
distributors.
    Now, one of the main concerns that I heard from my 
constituents regarding this policy change was the sudden and 
drastic increase on the part of the military, we found out 
later. I was blaming the local distributors, but they said they 
hadn't sold anything to the military as yet. And in some cases 
the increases were upwards of 60 percent on various types of 
alcohol.
    Now, can you, General and Admiral, further expand on the 
rationale for these increases, and why did it take nearly a 
year to implement the change in policy that emanated from the 
fiscal year 2008 defense appropriation bill? And, of course, 
setting aside now the provision has been repealed, but I want 
to get the history on the beginning.
    Admiral Bianchi. Yes, ma'am, I would be happy to answer 
that one for you.
    As you are well aware, the appropriations bill was not 
signed until 13 November of 2007, and basically that change 
that inserted Guam into the bill into section 8073 was a really 
no notice change to us. So, frankly, we were not made aware of 
that change to the provision until probably a couple weeks 
after the bill had been signed.
    Given that, we attempted in good faith to follow the 
provisions of the bill, and so we started down the path, 
because obviously there is a long supply chain for Guam, it is 
about a five-month supply chain when you figure ordering time, 
shipping time, et cetera. So in December we got together with 
AAFES, and we started initial planning sessions. We met again 
in January of 2008, and in April of 2008 we actually brought 
all the Guam distributors together to start talking about 
requirements, ability to handle the increased requirement there 
that would be on island if when we started purchasing. In July 
we had follow-up meeting, and actually at the April meeting we 
got together and set the date of 2 September, 2008, as the date 
when, in essence, we would flip the switch, because at that 
point the vendors on island said they would have sufficient 
capacity ramped up.
    We stopped shipping in July so that we knew we would have 
enough product so that we wouldn't run out while the vendors in 
Guam were making their arrangements with the stateside, you 
know, Anheuser-Busch, et cetera, and so it was all supposed to 
come together. As I mentioned, the last shipment left 
Continental United States (CONUS) in July of 2008.
    So on 2 September, yes, in fact, the prices were adjusted. 
Was every product in the store at this point specifically 
bought on Guam? No. But you have to sort of pick a point in 
time to adjust pricing. The reality is when we were purchasing 
the items from the U.S. and sending them over, as you know, we 
must ship anything overseas with second destination 
transportation with Appropriated Funds (APF). So there is 
clearly an advantage to the price structure in that situation.
    When we started purchasing on Guam, there the vendors had 
to absorb that transportation cost, and yes, the price 
increases were fairly significant. I will give you two 
examples: A 12-pack of Bud Light cans went from $4.47, this is 
cost price that we would be paying, up to $7.75; and Jim Beam, 
a liter of Jim Beam went from $5.55 to $11.20. So we had to 
raise the prices in our package stores commensurate with the 
increased costs that we were now having to pay for the product 
being available on Guam.
    We did not, we consciously did not, put a whole bunch of 
signage in the stores and so forth because we felt it would 
not--it might create a lot of angst on the part of the patrons 
if we put up signs that said, you know, your liquor prices have 
gone up because now we are buying it on Guam. I mean, I don't 
think that was the message that we would want to send. When 
patrons asked, we explained to them the provisions of the bill 
and that we had to purchase locally. So naturally the patrons 
obviously were concerned when they saw a sudden jump in price, 
but, you know, frankly, there wasn't much we could really do at 
point. We were living up to the bargain we had made with the--
well, the law and the bargain we had made with the vendors.
    Now, subsequent to us enacting or beginning that purchase, 
and, in fact, I guess I would offer that week of 2 September, 
at least in the Navy exchange, we even purchased 4- or $5,000 
of product from the Guam distributors. So, in fact, we were 
actually, you know, spending money on Guam buying those 
products.
    Now, as you mentioned, the law was repealed in the 2009 
bill, and obviously we were concerned about the fact that the 
vendors had invested money, had created capacity and so forth, 
and so we have been working with them since the law changed to 
make arrangements and source some of the items from there.
    Clearly, since the law has been repealed, it is in the best 
interests of our patrons for us to go back and order from the 
U.S. and allow the APF funds to be used to ship. You know, that 
is part of the benefit, delivering the benefit. But in the 
meantime we have worked hard with the vendors, and we have even 
helped to negotiate between Anheuser-Busch and other 
distributors with the vendors to try and liquidate their 
inventory. So since 2 September we have purchased almost a 
quarter of a million dollars' worth of product on Guam.
    But as far as raising the prices, it was strictly--it was a 
mathematical issue. You know, the cost went up because the 
vendors, in essence, were having to pay the transportation 
costs that normally would have been covered in the second 
destination transportation which we are authorized to use.
    So I hope that--you know, throughout this entire situation, 
we really did try to work, you know, best-faith effort. We 
involved the vendors, involved the local distributors, and I 
hope that helps clarify the situation.
    Ms. Bordallo. Yes. Thank you, Admiral, and just for the 
record, you said since that time you have purchased about three 
quarters of a million?
    Admiral Bianchi. No, a quarter, about $266,000 worth, yes, 
ma'am.
    Ms. Bordallo. Two hundred sixty-six thousand, all right.
    General, do you have any comments to make?
    General Thurgood. No. I just--again, he is the expert on 
this. We actually get our spirits from the Navy on Guam, as you 
know, ma'am.
    At the end of the day, I think what we are trying to do is 
provide the best value for our customers wherever they are 
across the globe, and that would include the pricing structure 
as well as the assortment. And if I understand the situation 
correctly, I believe that the Guam distributors for spirits 
only have about 40 percent of the assortment we currently 
carry, and on wines I believe it is 193 of 250; and therefore, 
just to ensure that we are providing our customers with the 
assortment that they have become accustomed to, we will have to 
go to search--we will have to seek other sources to go do that, 
but at the end of the day, we want to provide the best value to 
our customer.
    Mrs. Davis. Thank you.
    Ms. Bordallo.
    Ms. Bordallo. If I could just have a follow-up question, I 
notice that during some of your correspondence, it was noted 
you were concerned about the ability of the local distributors 
to store the capacity of alcohol. Now, we have three or four 
major distributors on Guam. Some of our distributors, because 
of this law, went ahead, purchased containers, additional 
containers that are regular supplies, purchased trucks, hired 
personnel, and all to no avail when the law was repealed.
    Now, I have one other question. I just want to kind of wrap 
it up. Finally, I am concerned about the consistency in the 
application of the Department of Defense instruction 1330.09 in 
your commands across the installations of the exchanges. What 
efforts are you taking to ensure the consistent application of 
this regulation?
    General Thurgood. I don't know what 1330.09 is off the top 
of my head.
    Admiral Bianchi. That is the Armed Services Exchange 
Regulation (ASER) policy.
    With respect to the pricing of alcohol? Yes, ma'am. I mean, 
we do follow that pricing policy, and it is very specific. For 
prices for a product that is bought within the U.S., you know, 
we have to follow the pricing structure for that; which is 
procured locally, we can only go 10 percent below the price of 
the local competitive sourcing, and, you know, that would 
apply, for instance, in Hawaii. Our beer and wine and spirits 
are priced within 10 percent, or no more than 10 percent, below 
the competitive market there.
    Ms. Bordallo. Well, I want to thank you, General and 
Admiral. I didn't want to put anybody on the spot, but this has 
been such a big concern on Guam. We have had problems with the 
utilization of local businesses at our exchange locations on 
Guam, and the reversal of the fiscal year 2008 policy in the 
2009 bill has left a very bitter taste with the business 
community, and at a time when their support for the build-up is 
critical.
    So we must continue to work together. I would like to see 
this put into the next fiscal--you know, instead of repealing 
the law, to continue on with it, and I think we can come 
together and come up with a better solution if we can work 
together; and possibly to keep the local community to keep 
their prices down a little bit in order to take care of the 
military business, and you do likewise. So we will work 
together, and I would look forward to further discussing this 
issue. Thank you.
    Mrs. Davis. Thank you. We certainly hope it will be better 
resolved.
    Mr. Wilson.
    Mr. Wilson. Thank you, Madam Chairman and gentlemen. Thank 
you for being here today. Thank you for your professionalism, 
for your thoughtfulness working with military families. You 
certainly enhance the opportunities of service.
    And, General Thurgood, I want to congratulate you on your 
service. I am always happy to see, as a former reservist, a 
reserve officer make such a high rank and also do such a good 
job.
    General Thurgood. I hope I haven't disappointed you, sir.
    Mr. Wilson. In fact, I was with Congresswoman Bordallo last 
August, and I mentioned this to you before, but we were in 
central Bulgaria, and it was really exciting. It was Novo Selo 
base, which is very historic. It is the first time in the 
1,225-year history that Bulgaria has invited a foreign military 
presence, and we were able to visit a temporary base, and there 
were temporary facilities; among the first, the AAFES laundry, 
the AAFES barbershop, the AAFES cappuccino bar. And we were 
both impressed to see the Bulgarian and American troops there 
sipping coffee, making lifelong friends. And so what you are 
doing is so important to make serving in a new location so 
worthwhile.
    Additionally you provide personal information services 
domestically and overseas. And can you tell us how extensive 
these are and how they reach the troops?
    General Thurgood. Yes, sir. In OEF and OIF we have 72 call 
centers, as well as 7 or so Internet cafes, I think I mentioned 
earlier. We are in the process right now, as we think about 
these strategic shifts that are taking place in Iraq, of how we 
handle the drawdown there and plus-up the infrastructure, 
including the things that I just mentioned in Afghanistan. And 
for the troops in Afghanistan, as that gets up to 17,000 or 
30,000, as the President has indicated, we are working very 
closely with the command there to make sure that we are 
providing the right kinds of infrastructure, including a new 
idea that we have called an Air Assault PX.
    So the infrastructure, as you know, in Afghanistan is not 
very robust compared to Iraq, and, therefore, we have got to 
come up with some way to support these soldiers that are in the 
far end tip of the spear, and our way of doing that is what we 
call an Air Assault PX, literally load up a container and 
sling-load it out to them.
    Mr. Wilson. The telephone call service, what is the cost of 
that to the personnel?
    General Thurgood. Today it is 15 cents a minute. It is the 
best deal going. You can't beat it.
    Mr. Wilson. Domestically what is the status of call 
centers----
    General Thurgood. Let me----
    Mr. Wilson [continuing]. And information services?
    General Thurgood. Well, as you know--well, let me back up. 
Domestically I don't think we have any call centers in the 
United States, do we? We don't have any in the United States, 
but we are working very closely on the personal information 
services with Army MWR to create an environment that allows us 
to bring telecommunications to our soldiers, airmen and 
families in a noncompetitive basis, competitive meaning with us 
and MWR, and we are trying to do that in a way that creates the 
right value equation, which is around price, quality, service 
and those kinds of things.
    We have just recently concluded a Memorandum of 
Understanding (MOU) with Army MWR that I think will put us in 
the right direction and a new strategic direction and provide 
the value that our service members and families expect.
    Mr. Wilson. It is greatly appreciated.
    Mr. Gorman, actually in visiting Jalalabad, Afghanistan, I 
was able to see a call center that I am confident that you 
helped work with, and it really meant a lot to the troops to 
have that capability. Could you tell me, are these services 
provided sole source, or is this a competitive bid?
    Mr. Gorman. Sir, all of our programs, and particularly as 
we move forward with our partnership with AAFES, are being done 
on a competitive basis with best value at the core of all of 
our decisionmaking.
    Mr. Wilson. And the cost of the services through your 
program is what?
    Mr. Gorman. Those that we operate in the United States that 
we are in the process of incorporating with the arrangement 
that we have made with AAFES, as an example, an unlimited 
month, without guarantee of long-term commitment anyway, is $39 
a month for a soldier to use wireless access from his barracks 
or wherever else the wireless will allow him to connect.
    Mr. Wilson. And what would be the cost in Jalalabad?
    Mr. Gorman. Sir, that program is more than likely--it is 
either free, or it is provided by one of our partners at a very 
low cost.
    Mr. Wilson. And----
    Mr. Gorman. We are presently not operating that program.
    Mr. Wilson. I really was sort of leading you on that.
    There has been, Madam Chairman, information that our troops 
were, quote, ``being taken advantage of or denied access to 
telephone service,'' and we found out that on visiting 
Jalalabad that it was free. So thank you all for your service.
    Mr. Gorman. I guess I would say that we are committed, 
absolutely committed, in partnership with AAFES to provide a 
best value equation through a combination partnership with 
AAFES and industry to provide our soldiers the absolute best 
value at the lowest price.
    Mr. Wilson. Thank you.
    Mrs. Davis. Thank you, Mr. Wilson.
    Can I go back, and maybe you can help me understand a 
little bit better, because I understand on this issue of 
providing the unofficial communication services--is that--you 
mentioned that you came to an agreement, you sort of struck a 
balance; is that right? Is that between AAFES and MWR programs?
    General Thurgood. Yes, ma'am. Let me address that and then 
Rich jump in anytime.
    We just within the last 30 days have finalized an MOU with 
Army MWR that allows us to integrate our business models in a 
better way, and, as Mr. Gorman mentioned, at the end of the day 
what we are trying to do is to provide the best value for our 
soldiers, our airmen, and our families wherever they are across 
the globe. And, therefore, we want to integrate the best 
practices in the industry. We want to bring best business 
partners from the industry in, let them compete for this 
service.
    Mrs. Davis. So you are looking at the competition, then, 
doing that best value.
    General Thurgood. Absolutely. And so when we do that, we 
will bring the appropriate people in that are interested in 
competing for this business. As AAFES will operate it, we will 
return the dividends back to Army MWR, but it will absolutely 
be competitive, and as Mr. Gorman said, it will be based on the 
best value, which includes things like price, quality, 
infrastructure, support services provided, and all of those 
will go into the equation from which we will make a decision.
    Mrs. Davis. Okay. So was this unique to the Army, then, in 
some ways?
    General Thurgood. It is unique to the Army right now, yes, 
ma'am.
    Mrs. Davis. Is there a similar problem internally with the 
Navy as well?
    Admiral Bianchi. No, ma'am.
    Mrs. Davis. How do you all handle it?
    Admiral Bianchi. The Chief of Naval Operations has 
designated the Navy Exchange Command as the provider of 
personal telecommunications, so we partner with MWR, but we 
provide--we have 129 Wi-Fi spots. We have all the telephones 
that float. We manage the program for Navy, and so we are in 
partnership with them, but we are the executive agent basically 
for Navy.
    Mrs. Davis. And Mr. Milam.
    Mr. Milam. We believe the current way of competing 
contracts for the services is certainly the best value, and we 
certainly welcome AAFES in that competitive bidding process.
    Mrs. Davis. All right. Thank you.
    So at this point is there anything left to do in this area? 
Obviously to get those to pull it together in terms of the 
bids, but in terms of the internal disagreements of some sort, 
is that----
    General Thurgood. I think all of those have been worked 
out, ma'am, and as I mentioned earlier, this will be an 
integrated approach to providing this kind of service. What is 
left now is to really work out the final details and get after 
the business.
    Mrs. Davis. Mr. Larsen, did you want to----
    Mr. Larsen. Just to add, what the Marine Corps does, since 
we have both MWR and the exchanges in the same organization, we 
don't have the internal competition or that issue, but I would 
like to mention one thing that we are doing in Afghanistan. We 
are pilot-testing a program to provide Internet service and 
telephone service for our marines that are forward-deployed to 
the most far-reaching areas of the forward-operating bases. And 
so we have acquired a system that has the capability of linking 
to a satellite and then provide those services to marines that 
are forward-deployed at no cost to them.
    Mrs. Davis. All right.
    Mr. Myers. From the OSD standpoint, we have reviewed the 
MOU between the Army and AAFES, and we are fine with it. We 
think it is the right approach, and that approach will provide 
the best services to our men and women in uniform.
    Mrs. Davis. Okay. Great. That is our goal, right? Give them 
the best service. Thank you.
    I wanted to just turn to the adequacy of the construction 
funding and the recapitalization needs of both nonappropriated 
and appropriated funding support.
    Mr. Myers, I understand that a DOD report concluded that 
the majority of the service MWR programs are inadequately 
funded to meet these recapitalization requirements over the 
next ten years. So where are we, and how are we going to do 
that?
    Mr. Myers. Well, funding has been a problem in a lot of 
areas. So we have got with the services, and what we are 
looking at, in a lot of cases maybe we won't have to build a 
new facility. We can renovate it, consolidate facilities, look 
for Private-Public Ventures (PPV)s or outside assistance and so 
forth. Under Base Realignment and Closure (BRAC) funding, we 
actually have a policy now that you have to use appropriated 
funds. In the past, you know, they had been using some 
nonappropriated funds for BRAC. So now we do have a policy, and 
right now we have over $300 million in the pipeline for BRAC-
related funding. So it is an issue we just have to continually 
work to get the economies of scale to get our facilities up to 
speed.
    Mrs. Davis. Okay. Thank you. I wanted to follow up with 
that. My time is up. I can turn to Mr. Wilson, or I am just 
going to go ahead for three more minutes or so.
    Mr. Wilson. Go ahead.
    Mrs. Davis. In mentioning that, I know that there was some 
funding for--in the reinvestment dollars as well for BRAC. Are 
we able to plan and take advantage of the fact that materials 
are at a lower cost right now, that construction should be less 
perhaps than it was a few years ago, even labor? Are we moving 
ahead as quickly as we can to really get those dollars out 
right now?
    Mr. Myers. Yes, we are. And in the stimulus bill we did get 
funding for our facilities now, and we are making every effort 
to take advantage of it. Even overseas, like in Korea, we have 
big projects. The won, the dollar is very strong against the 
won, so we are seeing a decrease, and as we see a decrease, we 
can use those funds to apply against other projects.
    Mrs. Davis. Okay. We would certainly like to see that 
happen.
    Mr. Sakowitz, in light of this discussion, as well should 
we be thinking about a five-percent, something greater than the 
five-percent commissary surcharge to maintain the high-quality 
DeCA projects?
    Mr. Sakowitz. Ma'am, my thoughts, bottom line, up front, is 
no, not at this time. And I don't know that it is actually 
necessary. And I will explain a little bit.
    The surcharge started in the 1980s was about facility 
management. It was about new and sustainment. And we have added 
to that account now Information Technology (IT), which, as you 
know, can be costly, and it has been great for us with our new 
finances, but it can be costly. And the result of all that, if 
you look at just the numbers, is that over the 10-year period 
that you spoke of, we have looked to be short $550 million. So 
it does beg the question.
    However, I believe that the efficiencies that we can take 
on, one that you just mentioned, building now quicker because 
of the cheaper prices, so we work with all that build for us, 
Corps of Engineers, you name it, to try to get more efficient 
at doing that. We have also instituted a new policy in terms of 
how we manage our maintenance contracts, so that is affording 
us some opportunities there.
    But lastly, and what I think is the most exciting 
opportunity for us, is taking off on the services, Residential 
Communities Initiatives (RCI), Army RCI, that Mr. Kline talked 
about before, and how they leveraged some dollars to get a 12-
for-1 buyback of housing that we could possibly do. It is not 
exactly the same model, but it is build-to-lease that we could 
use on the surcharge. Our initial discussions with those 
portfolio managers who helped the Army and the Air Force is 
that it could be applicable to us, and I think that would be 
tremendous, and if we got even half of what they got for the 
housing, then we could take care of a good portion, if not all, 
of that balance.
    So I think we have a lot of opportunity. I don't think it 
is the right time to raise it. And we are going to do our best 
to keep those costs down for our servicemembers and families.
    Mrs. Davis. Thank you.
    Any other comments on that? Anybody want to disagree? No? 
Okay.
    Mr. Wilson.
    Mr. Wilson. Thank you, Madam Chairwoman, and thank you for 
this hearing. As I conclude my participation, I want to 
reiterate my appreciation for your service. I find it 
absolutely amazing that you are operating and managing 
worldwide enterprises that have 12 million customers, that you 
have sales of $12.8 billion annually, that you employ 158,706 
people, and you can tell how calm this hearing is. And we 
reflect the people we represent, particularly Congresswoman 
Davis does. And there is great appreciation. And what you are 
doing, I believe, is providing devoted service to military 
families, increasing the opportunities for people to serve in 
the military. So thank you very much.
    Mrs. Davis. Thank you, Mr. Wilson. I am just trying to make 
sure that we stay somewhat within the time that we had 
initially anticipated. Could you just discuss briefly whether 
or not BRAC and the restationing of related construction 
projects is--where is that? Where do you see that we should be?
    Mr. Myers. Right now, as I said, we have over $300 million 
in appropriated funds for BRAC-related projects. You know, in 
the past we did a lot of those with nonappropriated funds. Now 
the policy is clear. We will use appropriated funds. And I 
think they are moving along, and I think we have got a lot of 
traction on it right now.
    Mrs. Davis. Just percentage wise, as we go back a little 
bit and look at the use of the nonappropriated funds----
    Mr. Myers. Well, I think, you know, in BRAC we probably 
used nonappropriated funds for several years because back then 
all the service had to do is--appropriate funds are not 
available, and, of course, the troop was being taxed twice, 
because they pay taxes, and now they are digging in their 
pocket. Under the new policy that is no longer a reason. The 
only reason that could be, if they have a project that is 
funded, it comes to the President's budget and is stripped out 
of his budget, then they can come back for nonappropriated 
funds. So I think it is working.
    Mrs. Davis. Are you using a fair and reliable criteria to 
do that?
    Mr. Myers. Yes, ma'am.
    Mrs. Davis. All right. I want to thank you all so much for 
being here. I can give you all an opportunity if you would like 
if there is something that was in your statement that our 
three-minute request didn't have a chance to highlight, we are 
happy to let you just, you know, give us one thing that you 
would like us to absolutely be aware of and be able to deal 
with as we deal with the upcoming authorization. We would like 
to hear from you. You don't need to use your time to thank us. 
We appreciate that. But just if there is anything, you don't 
have to say it, but just in case you would like to, I want to 
give you that opportunity, if there was an issue dangling out 
there you would like to focus on.
    Mr. Myers.
    Mr. Myers. The primary issue of our military people today 
is child care and so forth. I went to Iraq, visited 21 sites in 
December, talked to all the military. That was their number one 
priority, and it was--thankfully their families were being 
taken care of it. We have about 37,000 children on the waiting 
list. So any help you can give us with extending that authority 
for contracting and raising the limit to 15 million, that is a 
key retention and readiness issue. So any support on that would 
be appreciated.
    Mrs. Davis. May I just ask you about that quickly, because 
I support the opportunity for many families in the military to 
provide that service for others and to get involved in this and 
to have that as a source of income and also a source of pride 
and interest that they have.
    One concern, though, would be whether we have done such an 
exceptional job in training our child care providers, and I 
just wonder whether, you know, there isn't--sometimes in trying 
to spread it out there is also a concern over whether or not we 
are going to have people at the same level of training, whether 
we will be able to do that.
    Mr. Myers. I think systematically we have been doing that. 
Now, sometimes we have problems overseas hiring caregivers 
because of the pay and so forth. I think we have requirements 
in that we want to start giving them benefits, free child care, 
bonuses and so forth, because in England you can get 10 pounds 
for a menial job. That is about $16 an hour. So we can't pay 
that. So give them free child care, assistance for training and 
so forth, I think that will go a long way.
    And, of course, you may know, but this morning at the 
Longworth House Office Building, the National Association of 
Child Care Resource and Referral Agencies announced that the 
Department of Defense child care centers continue to lead the 
Nation and hold the highest rating in both standards and 
oversight. So they are doing good, but we can never be 
satisfied.
    Mrs. Davis. We want to keep those standards high.
    All right. Anybody else?
    Mr. Thurgood. Ma'am, I will give you two things to think 
about, if you would, and I think I might speak for the entire 
exchange system here, and that is, we compete in a global 
supply chain, and, therefore, our supply chains, including the 
pricing structure and the assortment that we have, has to be 
competitive. And so I would ask for you to continue to look at 
the ASER restrictions and the lifting or the easing of those 
where it makes the most sense.
    Associated with that would be the continued assistance 
working with Department of Defense on base access for our 
vendors. It is a continuing sore spot, and, at the end of the 
day, those costs are borne somewhere in the supply chain. So to 
the extent that we can smooth that out, come up with a 
consistent policy as quickly as we can, I think it would 
benefit our soldiers, our airmen and our families all across 
the globe. Thank you.
    Mrs. Davis. Thank you.
    Anybody else?
    Mr. Milam. Ma'am, I would just add, and this already is in 
our statement, that the Air Force is very committed to taking 
care of their families. And certainly on the child care issue, 
the additional funding that we received to build additional 
child development centers and reduce our waiting list was very 
key. We hope to have our numbers down on the waiting list down 
to about 250 within the next couple of years, which is the 
first time ever we have been that low. So we appreciate your 
support in that regard.
    As far as taking care of families, that is a very important 
issue for us. I know OSD is launching the Year of the Military 
Family. We are doing the same in the Air Force, kicking it off 
with a summit at the end of this month, and bringing all of our 
providers together to find ways where we can continue to take 
care of the military families. So thank you.
    Mrs. Davis. We appreciate your doing that. As you know, 
there was a resolution yesterday, and we will continue to focus 
on it on this committee. And we are very pleased that the 
President and the First Lady have also put it as one of their 
highest priorities.
    Anybody else?
    All right. That is great. Thank you all so much for being 
here, and we look forward to continuing our work with you.
    [Whereupon, at 3:16 p.m., the subcommittee was adjourned.]
?

      
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                            A P P E N D I X

                             March 12, 2009

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              PREPARED STATEMENTS SUBMITTED FOR THE RECORD

                             March 12, 2009

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              QUESTIONS SUBMITTED BY MEMBERS POST HEARING

                             March 12, 2009

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                   QUESTIONS SUBMITTED BY MRS. DAVIS

    Mrs. Davis. The Tax Increase Prevention and Reconciliation Act of 
2005 (TIPRA) requires all Federal, State, and local government agencies 
to withhold 3 percent of payments to vendors in order to ensure tax 
compliance for companies doing business with the Government. 
Implementation was delayed until December 31, 2010. Representative Meek 
has introduced bills to repeal the provision-H.R. 1023 (260 cosponsors) 
in the 110th Congress and H.R. 275 in the 111th Congress. The bills 
were referred to the Ways and Means Committee and have not been 
addressed in either the 110th or the 111th Congress. The effective 
date, initially set for January 1, 2010, has been delayed by one year 
twice, mostly recently to January 1, 2012, as a result of the American 
Recovery and Reinvestment Act of 2009 that was signed into law on 
February 17, 2009. The provision will impose a significant impact on 
the cash flow to small businesses doing business with government 
agencies, to include military resale entities. The financial penalty 
resulting from implementation of the provision will require changes to 
payment systems for resale programs and the additional advance handling 
of tax withholding may reduce incentives by vendors to provide military 
resale optimal pricing policies. Most companies doing business with the 
resale program are tax compliant and it seems improper to punish all 
for the transgressions of a few.
    Mr. Myers and Resale Commanders, has tax compliance been a problem 
for companies doing business with resale? Do you advocate an exemption 
from TIPRA for companies doing business with the resale programs? Do 
you believe that vendors may change their pricing policies if the tax 
withholding provision of TIPRA is allowed to take effect?
    Mr. Myers and General Thurgood. We are not aware of any tax 
compliance problems for companies doing business with Defense 
Commissary Agency (DeCA) or any of our nonappropriated fund 
instrumentalities (NAFIs), including the Armed Services Exchanges and 
the Services' morale, welfare, and recreation activities. We are 
extremely concerned about both the direct and indirect costs to DeCA 
and the NAFIs which are expected to ultimately be passed on to our 
Service members. DeCA and the NAFIs will incur substantial costs to 
modify all existing accounting, procurement, and inventory systems to 
handle reporting for the Internal Revenue Service. Additionally, this 
withholding is expected to be an onerous burden on the many small 
businesses resaling with DeCA and NAFIs. We expect all the vendors 
providing goods to military resale activities may either cease doing 
business with our entities or pass these costs on to our Service 
members through higher prices for goods and services.
    Admiral Bianchi. Navy Exchange Service Command (NEXCOM) vendors 
represent a cross section of all U.S. companies. NEXCOM currently does 
business with approximately 5,000 vendors and has no specific 
information regarding which vendors may have tax compliance issues. 
NEXCOM receives only two to three tax liens a year where the IRS asks 
us to forward payments to them rather than to the vendor. NEXCOM 
recommends the military resale activities be exempt from the 
withholding requirements of TIPRA. NEXCOM firmly believes that vendors 
will view the 3% withholding requirement as an added expense and an 
additional burden in conducting business with the government. In some 
instances, merchandise may be in short supply, which occurs often in 
times of high consumer demand for specific products. In these 
instances, vendors will be less likely to provide such merchandise to 
the military resale activities, due to the added 3% withholding 
requirement. Our military patrons should not be placed on the secondary 
priority system for high demand merchandise. NEXCOM believes vendors 
will add the TIPRA withholding amount to the cost of our goods and 
services or even possibly refuse to do business with us to avoid being 
monetarily penalized by the withholding provisions of TIPRA.
    Mrs. Davis. The Defense Commissary Agency (DeCA) has been working 
to restructure its workforce to develop more flexible multi-skilled 
workers and managers who can operate and advance within a whole-store 
team concept. This ``Workforce of the Future'' (WOF) includes the best 
practices of the private sector which would hopefully posture DeCA to 
improve its performance in A-76 competitions with private sector 
industry. Because the program would take a number of months to 
implement, the Congress exempted DeCA from A-76 competitions in the 
National Defense Authorization Act for Fiscal Year 2006 until December 
31, 2008. Many of the aspects of WOF implementation were dependent on 
the successful execution of the National Security Personnel System 
(NSPS). Unfortunately, implementation of NSPS was problematic and WOF 
was never able to move forward on its original schedule. Consequently, 
the Congress must now contemplate restoration of the exemption from A-
76 competitions or risk great damage to a capable DeCA workforce and 
the greatly improved stores they operate.
    Mr. Sakowitz, given that the Defense Commissary Agency has not been 
able to fully implement its new workforce model, Workforce of the 
Future (WOF), do you agree that the continued exemption from A-76 
contracting out competitions is necessary?
    Mr. Sakowitz. The Defense Commissary Agency (DeCA) implemented the 
Workforce of the Future structure in all the stores located within the 
continental United States, Hawaii, Alaska and Puerto Rico, before the 
moratorium expired. DeCA was not able to convert all personnel in the 
existing positions before the December 31 moratorium expiration. The 
new workforce structure provides the necessary flexibility to utilize 
personnel in all operational functions of the store, producing a better 
overall operational execution. DeCA is transitioning to the redefined 
positions through attrition and expects to complete that transformation 
by 2014.
    Mrs. Davis. Mr. Myers, what is the DOD perspective on this issue?
    Mr. Myers. The Department is supportive of the Defense Commissary 
Agency (DeCA) efforts to transform its workforce. This transformation 
will improve operational performance and individual potential for 
career advancement, and allow DeCA to compete favorably in OMB Circular 
A-76 competitions. However, pursuant to Section 737 of the Omnibus 
Appropriations Act for FY 2009 (P.L. 111-8) (the Act), which precludes 
the use of funds appropriated or otherwise made available by the Act 
(or any other Act) to announce or begin A-76 competitions, the 
Department has placed all such competitions on hold through FY 2009.
    Mrs. Davis. The retirement systems for the various military resale 
and NAF activities are, to some degree, invested in the stock market. 
Given the decline in stock prices that has accompanied the recession, 
it seems likely that the investments supporting the retirement plans 
have decreased in value and may present a problem to personnel 
managers. All panel members, given that retirement systems are, to some 
degree, invested in a declining stock market, have there been losses in 
securities supporting your retirement plans that now threaten the 
security of your respective systems?
    Mr. Myers, General Thurgood and Mr. Sakowitz. The non-appropriated 
fund (NAF) defined benefit retirement plans in the Department of 
Defense have suffered asset losses to be expected with a recession that 
are commensurate to the decline in stock prices (and the value of other 
asset classes such as bonds and real estate). However, based on the 
solid pre-recession financial position of the plans, diversification of 
plan investments, history of United States equity market performance, 
and current measures being taking by plan sponsors to address asset 
losses, we believe the security of the plans is not threatened.
    NAF plan sponsors have exercised strong plan oversight for decades, 
which includes regular collaboration with private sector actuarial, 
accounting, and investment firms. This collaboration ensures accurate 
actuarial reporting and appropriate benefit and funding levels. Further 
cooperation is producing actions for dealing with recent asset 
declines, including increasing or reinstating employer contributions, 
adjusting retiree cost of living increases, and refining investment 
diversification strategy. We believe NAF employers are well-positioned 
to ensure the financial security of their respective plans.
    Admiral Bianchi and Mr. Baker. The Navy Exchange Service Command 
(NEXCOM) has a pension trust that funds the retiree benefits. As of the 
end of our fiscal year at January 31, 2009, the pension plan asset 
allocation was as follows:

    Equity securities      45%
    Debt securities        44%
    Real estate & other   11%

    The declining stock market has reduced the value of the NEXCOM 
pension trust fund, however the plan remains adequately funded. As of 
January 31, 2009, the end of our fiscal year, our pension obligation 
was $808.5 million and our pension trust fund balance had a fair market 
value of $883.4 million. The retirement plan's investment strategy is 
to be invested with a long-term outlook, with the risk and return 
balance of the asset portfolio reflecting a long-term horizon.
    Additionally, since our retirement plan is a defined benefit plan, 
there is no impact to current or future retirees as a result of the 
declining market conditions.
    The Navy MWR NAF Retirement Plan maintains a diversified investment 
portfolio held in a retirement trust. Included in this portfolio are 
investments in U.S. equity securities. The returns generated from this 
portfolio over the last year have reflected the overall decline 
experienced by the U.S. equity market in general. The precipitous drop 
in equity values has altered the funding status for most retirement 
plans, including the Navy MWR NAF Retirement Plan.
    While this market decline has taken the Navy MWR NAF Retirement 
Plan from an overfunded to underfunded condition, the basic investment 
strategy of holding a diversified portfolio of several asset classes 
remains the soundest long-term investment strategy. Unfortunately, this 
strategy has not fared well over the past year. The financial downturn 
has affected all asset classes, driving asset values down for U.S. 
equities, international equities, real estate, and corporate bonds. 
This aberration should correct itself when the U.S. economy begins to 
recover and other world economies begin recovery in conjunction with 
the U.S. History tells us that investment in U.S. equity securities 
remains prudent and will continue to offer attractive long-term 
returns.
    In its first 25 years of existence, the Navy MWR NAF retirement 
plan was underfunded and MWR made annual contributions to reach an 
overfunded state. For the past 20 years through September 2008, the 
Navy MWR NAF retirement plan had maintained an overfunded status 
without employer contributions from CNIC. Since that situation has now 
changed, CNIC has re-started employer contributions and will continue 
to do so as long as the plan remains underfunded. The level at which 
CNIC must make future employer contributions will depend on the 
direction of future market returns and actuarial estimates as to 
requirements.
    Mr. Larsen. Losses to the Marine Corps Nonappropriated Fund (NAF) 
Civilian Employee Pension Plan have been consistent with losses in the 
private sector as well as that of the other NAF employers. While the 
funding level of the Plan has decreased, the security of the Plan is 
not threatened.
    The Marine Corps is currently exploring several practical courses 
of action to achieve a fully funded status. Various funding options are 
being explored and will be presented to the Fiscal Director of the 
Marine Corps as well as the Board of Directors for consideration.
    Mr. Gorman. Although the Army's Nonappropriated Fund (NAF) Employee 
Retirement Trust investments have experienced some losses during the 
declining stock market, we do not believe those losses threaten the 
security of our retirement system. Our portfolio is diversified over 
several investment types, including stocks, bonds, insurance contracts, 
and US Government Securities. As of October 1, 2008, the date of our 
most recent actuarial valuation, the total actuarial accrued liability 
was $909.5 million, and the actuarial value of plan assets was $887.4 
million. As the markets continued their decline, the estimated 
actuarial value of assets declined to $742.4 million by the end of 
February 2009, yielding an estimated funded status of 90.2 percent. 
Given the current condition of the investment markets, this is not a 
serious concern. However, as a precautionary measure, we invoked the 
Retirement Plan provision which allows us to cap the annual cost of 
living adjustment (COLA) for our current retirees at 4 percent, rather 
than grant the normal Consumer Price Index based COLA of 5.8 percent. 
We have also made the decision to increase the employer contribution to 
the Trust from 6.5 percent of covered salary to 7 percent of covered 
salary for the foreseeable future, effective October 1, 2009.
    We believe these precautionary measures, along with prudent 
attention to our investments and adherence to our investment strategy, 
will protect the long-term security of the Retirement Trust and insure 
the financial security of our current and future NAF Retirees.
    Mr. Milam. The Air Force Nonappropriated Fund (NAF) retirement 
systems are invested in the stock market and, as such, respond to 
market conditions. While there has been a change in our portfolio due 
to market fluctuations, there is no threat to the long-term viability 
of our retirement systems. We monitor the market's performance on a 
continuing basis and adjust accordingly to minimize negative trends. We 
are currently evaluating a potential increase in contribution rates to 
the Air Force NAF Employee Retirement Plan Trust.

                                  
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