The DEFENSE BUDGET TIME BOMB

EXECUTIVE PRODUCER:

Admiral Gene LaRocque (USN, Ret.),

Pres., Center for Defense Information

HOST:

Admiral John Shanahan (USN, Ret.)

Director, Center for Defense Information

DIRECTOR OF RESEARCH:

David T. Johnson

DIRECTOR of TELEVISION:

Mark Sugg

PRODUCERS:

Glenn Baker

Jennifer Hazen

Daniel Sagalyn

Stephen Sapienza

PRINCIPAL ANALYST & SCRIPTWRITER:

Daniel Sagalyn

SEGMENT PRODUCER:

Daniel Sagalyn

NARRATOR:

Kathryn Schultz

VIDEO GRAPHICS:

Adam Luther

ORIGINATION:

Washington, D.C.

PROGRAM NO.:

934

INITIAL BROADCAST:

5 May 1996

CONDITION OF USE: Credit "AMERICA'S DEFENSE MONITOR"

(Center for Defense Information).

Videotapes also available.

The DEFENSE BUDGET TIME BOMB

features comments from:

LLOYD DUMAS

Professor, University of Texas

ERNEST FITZGERALD

Cost Analyst, Department of Defense

Senator CHARLES GRASSLEY

Senate Armed Services Committee, (R-Iowa)

NOEL LONGUEMARE

Principal Deputy Under-Secretary of Defense, Acquisition and Technology

FRANKLIN SPINNEY

Program Analysis and Evaluation, Department of Defense

EDWARD WARNER

Assistant Secretary of Defense for Strategy and Requirements

GEORGE WILSON

Correspondent, The Washington Post

With additional comments by:

WILLIAM PERRY

Secretary of Defense

General JOHN M. SHALIKASHVILI

Chairman, Joint Chiefs of Staff

Rep. FLOYD SPENCE

(R-SC), Chairman, House National Security Committee

Senator STROM THURMOND

(R-SC), Chairman, Senate Armed Services Committee

The DEFENSE BUDGET TIME BOMB

GEN JOHN M. SHALIKASHVILI, Chairman, Joint Chiefs of Staff (6 March '96, before House National Security Committee): "If we are able to bring our procurement account to approximately $60 billion per year and are able to keep the same top line, we should be able to assure ourselves the same ready force tomorrow."

FRANKLIN SPINNEY: More money spent the same way is going to make matters worse.

Rep. FLOYD SPENCE (R-SC), Committee Chairman (6 March '96, House National Security Committee): "As was the case last year, we will also increase the defense spending top line in the budget resolution."

GEORGE WILSON: I think it's going to be a train wreck, I really do. I think it's going to be a train wreck around the year 2000, when most of these guys who voted all this extra money aren't going to be around to explain themselves.

["AMERICA'S DEFENSE MONITOR" program introduction.]

WILLIAM PERRY, Secretary of Defense (6 March '96, before House National Security Committee): "I'm here to present the Fiscal '97 defense budget."

NARRATOR: The Department of Defense recently released its plan for military spending for the next six years.

Secretary PERRY (same hearing): "I'm now moving to weapons systems, which is in some ways the most controversial part of the budget."

NARRATOR: One of the most contentious issues of the Pentagon's plan is its modernization program -- its blueprint to buy many new very expensive weapons. Every service has big plans. The Army wants to buy about 2300 new Comanche helicopters. The Navy wants 1000 F/A-18/E/F airplanes, 28 Arleigh Burke destroyers, and an undetermined number of new attack submarines. The Marines want to buy 425 V-22 tilt rotor aircraft. And the Air Force wants 442 F-22 fighters and 80 more C-17 cargo airplanes. And the Air Force, Navy and Marines will buy aircraft being developed in the Joint Strike Fighter Program.

In order to be able to afford all these new weapons, the Pentagon is counting on increasing overall military spending, achieving big savings from closing military bases that the Base Closure and Realignment Commission, or BRAC, recommended and getting savings generated from reforms in buying practices.

Secretary PERRY (same 6 March '96 hearing): "We have to sustain the top line budget which the president has proposed. We have to have success in BRAC and the privatization initiatives we have. And we have to have success in acquisition reform."

NARRATOR: How realistic is this? How likely is it that all these key elements will come to pass?

Rep. SPENCE (same hearing): "There is not enough funding in the budget for both timely recapitalization and maintenance of short term readiness."

NARRATOR: Some members of Congress believe the Pentagon isn't spending enough

now on buying new weapons and want to increase the military's budget.

Senator STROM THURMOND (R-SC), Committee Chairman (5 March '96, Senate Armed Services Committee hearing): "I fail to see how this budget provides for adequate modernization. I believe that the Congress will be required to add funds to the defense budget this year to provide for minimal levels of modernization."

NARRATOR: Yet some observers think congressionally- sponsored increases in military spending will drive the country into a serious budgeting crisis.

Mr. WILSON: I think it's going to be a train wreck, I really do. I think it's going to be a train wreck around the year 2000, when most of these guys who voted all this extra money aren't going to be around to explain themselves.

NARRATOR: George Wilson covered the Pentagon for The Washington Post for 24 years and has written numerous books on military issues. He believes that if the country is serious about balancing the federal budget, the prospects of increasing military spending over the long term look dim.

Mr. WILSON: But just look at the numbers. You can't start all these new programs, maintain a military of 1.4 to 1.6 million people on active duty, keep everybody ready to fight and still balance the budget.

NARRATOR: How about obtaining the savings from base closures and acquisition reforms? Will the Pentagon be able to channel money into buying new weapons that was once spent on operating bases and on cumbersome and expensive procurement procedures?

Secretary PERRY (6 March '96 hearing): "The point I want to make is that the savings from acquisition reform are not a few percent, they are not on the margin. We can cut costs in half. We can even cut costs more than a half if we do it right."

NARRATOR: Pentagon officials today point to the C-17 cargo aircraft as a model weapons program where billions of dollars will be saved in the future through innovative procurement practices.

Secretary PERRY (same hearing): "Three years ago, just three years ago, this program was in such deep trouble that it was in danger of being cancelled. And there were calls from some members of Congress, as a matter of fact, to cancel the C-17 program. Today, it is the most successful aircraft program that we have."

NARRATOR: Not everyone in the Pentagon agrees.

ERNEST FITZGERALD: I see no enthusiasm for reducing unit costs of big ticket items.

NARRATOR: Ernest Fitzgerald is an industrial engineer who serves as a cost analyst at the Pentagon. For years he's been a critic of Pentagon waste. The views he expresses on this program are his own and do not necessarily represent the views of the Department of Defense.

Mr. FITZGERALD: Within the Pentagon, when people are being candid, I'm told bluntly that we have no need for cost control or cost reduction, that we can get all the money we need.

NARRATOR: Mr. Fitzgerald thinks the Pentagon is not serious about saving money. He also points to the C-17 as an example of where costs could have been reduced as recently as last year, but were not.

Mr. FITZGERALD: One of my formal duties in the Pentagon is supposedly to do "should-cost studies" -- that is, what things should cost with the fat, inefficiencies squeezed out, rather than extrapolation of trends of past actual costs, building in all the fraud, waste, abuse, bribes, all that sort of thing of the past.

NARRATOR: Mr. Fitzgerald was recently on a team to figure out how to reduce C-17 manufacturing costs. As it appeared that they had a chance to save several billion dollars on the six C-17s that were bought in Fiscal Year 1996, the team was expanded to include members from McDonnell Douglas Corporation, the airplane's manufacturer.

Mr. FITZGERALD: The C-17 should-cost was converted from what should have been a quick, incisive, hardhitting reduction of the asking price into a long, drawn out, fuzzy list of nice things to do, some of which may be useful in the long term, manana. Meanwhile, we're paying, I think, four times as much as we should for the airplane.

NOEL LONGUEMARE: Well, I think that Ernie is either using some very old data or it's not correct.

NARRATOR: Noel Longuemare worked at Westinghouse Corporation for over 40 years. Today, he is the Principal Deputy Under-Secretary of Defense for Acquisition and Technology.

Mr. LONGUEMARE: The cost of that airplane has now been brought down with our latest offer to have a multi-year procurement to about $173 million per unit. And if you compare that with a commercial aircraft, that's not very different than a commercial freighter.

Mr. SPINNEY: I think the chances of these savings occurring is virtually nil.

NARRATOR: Franklin Spinney is a tactical aviation expert at the Department of Defense. He's also a well-known authority on Defense Department budgeting and planning. Like Mr. Fitzgerald, the views he expresses on this program are his own and do not necessarily represent the policies of the Pentagon. His latest study, called Anatomy of Decline, examines the numerous challenges that confront the Pentagon in meeting its responsibilities. He doubts the military will be able to ever see enough savings generated by reforms to pay for anything near the number of weapons the Defense Department wants.

Mr. SPINNEY: The history of defense reforms, and probably reforms in the federal government, in general, is that we form these big commissions or publish these reports, or have these prestigious boards come out with a set of recommendations. They predict these future savings and that basically buys about five years. And then at the end of five years, we set up a new group to reform the system.

NARRATOR: Franklin Spinney believes that rather than contain costs, the Pentagon will end up paying significantly more than planned for future weapons systems.

Mr. SPINNEY: If we examine our predictions of future costs, our understanding of the accuracy of those predictions really depends on the stage of their life cycle that they're in. In the case of the F-22, the F-18/E/F, and the new attack sub, these are new programs and we haven't built any of them. We can expect with a virtual certainty that they're going to cost more than the current plans predict.

Mr. LONGUEMARE: Projections are exactly what they're called. They are our best estimate of what the costs are going to be. So, we don't have any big contingency fund or any big reserve there to account for things of this nature. So, what we do is make our best estimate of what these are and then we budget for that. I would say this though. The attention we're giving to costs these days means that we're going to have a lot less tolerance for large overruns than we did in the past and I further think we're going to see many fewer of those because of the emphasis on cost.

Mr. SPINNEY: The basic problem with the DoD modernization plan is the bills don't become due until after the last year of the five-year defense plan.

NARRATOR: What really concerns Franklin Spinney is what will happen to the military in the year 2002 and beyond, after the timeframe of the Pentagon's published plans.

Mr. SPINNEY: If you look into the next decade, beyond the last year of the future year's defense plan, of FYDP, what you see is what we in the Pentagon call a "bow wave" of procurement items that builds up over time. And, in fact, that bow wave is going to be higher -- is going to require procurement budgets that are higher than they were during the Cold War. It's particularly evident in the case of tactical fighters, but it's pretty much across the board.

NARRATOR: This chart from Mr. Spinney's research shows how much the Air Force spent buying fighters and attack aircraft during the Cold War. And this big increase in spending is what experts call a "bow wave." This is how much the Air Force is planning to spend in the future on buying new F-22s and joint strike fighters.

Mr. SPINNEY: In the case of tactical fighters in the Air Force, early in the next decade, during the 10 years between 2003 and 2012, we will spend 36 percent more in constant dollars than we spent in the highest spending decade of the Cold War for new fighters.

Mr. SPINNEY: Franklin Spinney believes that if current Pentagon plans are carried out, a similar bow wave of spending will be necessary for buying ships, helicopters and many other kinds of weapons.

Mr. SPINNEY: And that basic pattern, while extreme in the case of tactical fighters, characterizes the entire DoD program.

EDWARD WARNER: We've also done analysis out another 12 years, out to the 2010, 2012 period.

NARRATOR: Edward Warner is the Assistant Secretary of Defense for Strategy and Requirements. He disagrees with Franklin Spinney on whether the Pentagon will be confronted with unmanageable and massive bills in the future.

Mr. WARNER: We have looked at our overall modernization programs and we do see challenges on sustaining those across all the many different -- the major weapons platforms, the platforms, the support systems, the mundane items, like trucks and the like. And so, I would be incorrect to say that we don't see potential problem areas. We see no great bow waves in the language of the graphs that show suddenly major expansions. We see a phasing in and a sustained process of modernization that we think can be maintained if these budgets are maintained at roughly these projected levels.

Senator CHARLES GRASSLEY (R-IA): We're finding a bow wave in regard to the future year's defense program.

NARRATOR: Conservative Senator Charles Grassley has been concerned about excesses in military spending for years. He believes the Pentagon wants to buy too many new weapons.

Senator GRASSLEY: I've got a term for what they're trying to do. It's a "blivet." A definition of a "blivet" is somebody that's always trying to pound 10 pounds of manure into a 5-pound sack. That's the way it is with their programs. They're always trying to do more than they've really got money to do.

Mr. LONGUEMARE: I think Senator Grassley is probably right in terms of the optics of the situation. If you go back and look at our defense budgets over the last decade or more, they always had this kind of a hockey stick to them where the money in the future is going up. What happens though is as we get closer to the actual year, the estimates are adjusted constantly and they tend to converge.

NARRATOR: Franklin Spinney believes that the Pentagon has a history of predicting unrealistically low costs for new weapons and over-estimating how much money they will get from the Congress. As a result, the Pentagon makes plans to develop more weapons than it can ever afford to produce.

Mr. SPINNEY: Each new generation of weapons costs much more than its predecessor. We then have a systematic bias to under-estimate the future costs of the program. That's known in the trade as a "buy-in." We downplay the future costs and very often we also plan on higher budgets than we are likely to get. The net result is we open up a big wedge in the future in which we can stuff these new program and make them appear to be affordable.

NARRATOR: One key element of the Pentagon's modernization program is to spend large amounts of money on new technologically advanced weapons, which in the long run will save the Pentagon money, according to Noel Longuemare.

Mr. LONGUEMARE: The cost of the devices may be higher, but the capability is much greater. It's because of this increased capability, which is probably -- it's hard to put a number on it, but order of magnitude is the type of thing we're talking about. When you compare one of our current weapons systems, such as a precision-guided weapon with its counterpart, even though it's more expensive, it's probably hundreds of times more effective. So, we need far fewer than that.

NARRATOR: However, not all investments in new technologies bring about improvements in the capabilities of weapons, according to Franklin Spinney.

Mr. SPINNEY: Many people argue that we have to pay these increased costs in order to get the capability needed to defeat the threats that we face. Setting aside the argument about the threats that we face, the real question often becomes is did we actually get the increase in capability for the increased money. Very often this comparison is obscured because of a generational change in airplanes. The new airplane is a different airplane than the old airplane. Therefore, when we say it is more capable, it's difficult to compare. We have an excellent example where that didn't occur, where costs grew, exploded through the roof for literally no increase of capability, and that's the Lockheed C-130/H.

Mr. FITZGERALD: The C-130 has gone up about 400 percent in constant dollars since the late sixties and the specifications have changed very little.

Mr. SPINNEY: It began production for DoD in 1969 at a cost of about $10 million a copy. By 1993, almost the identical plane, virtually identical in terms of capability, was costing DoD $37 million a copy.

Mr. FITZGERALD: And the reason is common to the other contractors. Factory efficiencies are dismal. Rates of pay, particularly for non-touch labor -- that is, for the people who don't actually make the product -- have gone way up, the rates are up. Overhead rates are unconscionable and there's no challenge to it. The contractors, in effect, the big contractors sell us their costs. That's their product, not airplanes, missiles, or whatever. They have to do that incidental to selling us their costs.

NARRATOR: Another reason why weapons are so expensive is that parts for them get made in so many places, according to Franklin Spinney.

Mr. SPINNEY: Over the years, the art of spreading subcontracts around the country, which we in the Pentagon call "political engineering," has become a high art form.

NARRATOR: According to Mr. Spinney, defense contractors intentionally place contracts in many congressional districts in order to gain support from members of Congress, who will vote to fund weapons as a way to ensure that constituents have jobs.

Mr. SPINNEY: It's done very systematically. In the case of the F-22, it will be built in 43 states, have over 1100 subcontractors, will even have some production money in Puerto Rico, and it'll have 27,000 direct jobs, plus all sorts of indirect employment.

Mr. LONGUEMARE: I see no evidence of that being a significant factor. Perhaps it was true at one point in time, when money was no object. But in today's environment, where we're very, very cost-competitive in our solicitations and our acquisitions, if somebody is actually doing something to spread work out that is inefficient and results in higher costs, they're very likely to lose the competition.

NARRATOR: Yet a political map of many weapons systems looks like this. McDonnell Douglas has a site on the Internet showing the many different states in which components of the C-17 are made. We asked Lloyd Dumas, professor of political economy and economics at the University of Texas, if any commercial or civilian products get manufactured like weapons, where components get made in so many different places.

Professor LLOYD DUMAS: I'm not aware of other systems that are systematically spread around the country because there isn't much of a reason for it. It's not generally an efficient way to do things. You don't have to concentrate your suppliers in one place, but you also don't spread -- If you're spreading things around in order to maximize political impact, you're not paying attention to what it's costing, and that's what causes the problem.

Secretary of Defense PERRY (Press Conference, 4 March '96): "It isn't as if Congress had a printing press and could print money. The money comes from somewhere. It comes from some part of the budget, and the president's budget was put together with trying to balance out these different conflicting demands."

NARRATOR: The secretary of defense says the president is sensitive to the limits on what the nation can afford to spend on the military.

Secretary PERRY (same press conference): "So, simply adding more money to the defense budget means it's going to come out of some other program, some other department, it's going to hurt something else."

NARRATOR: Yet the secretary of defense is calling for increasing military spending from $254 billion in 1997 to $288 billion by the year 2002. And according to many, DoD will require even bigger military budgets after that. Some Pentagon insiders think increasing military spending is the wrong thing to do.

Mr. SPINNEY: More money spent the same way is going to make matters worse. NARRATOR: Mr. Spinney believes the few countries the Pentagon has identified as potential threats do not warrant continued high levels of military spending.

Mr. SPINNEY: One would think that there would be a reasonable opportunity to reduce military spending given that the Cold War is over. It's kind of hard to imagine how some combination of Iraq, Iran and North Korea justify Cold War-size budgets.

NARRATOR: Does the United States even need all the new weapons the Pentagon is planning to buy? Are there less expensive weapons, alternative systems the military can use?

Mr. WILSON: The Air Force is paying $300 million for a C-17, which is a flying truck. Now how many of those do you think they're going to be able to afford? Federal Express has been buying surplus transport planes for $5 million.

NARRATOR: George Wilson points to the Pentagon's recent decision to buy 80 more C-17 cargo planes for a projected $16- to $18 billion as an example of where less expensive alternatives existed. The Pentagon could have bought 747 cargo jets and saved billions of dollars.

Mr. WILSON: The services, with the endorsement and cooperation of the Congress and the leaders in the Pentagon, are driving themselves to the poorhouse in Cadillacs.

NARRATOR: Franklin Spinney believes a more realistic assessment of the military threats will allow the Pentagon to buy less expensive weapons.

Mr. SPINNEY: There's a tendency on the part of the Defense Department to exaggerate enemy capabilities, and then that justifies a more complex weapon as a response to those perceived threats. One of the problems that we've had is that because the Executive Department has a virtual monopoly on threat analysis is it's made it much easier for the Defense Department to inflate the threat for purely budgetary purposes. Countervailing voice in Congress is needed. There are plenty of experts on international relations around the world who would be more than happy to come and testify at congressional hearings. There's no reason why these hearings have to be classified, they can be open for all to hear.

NARRATOR: George Wilson's plan would be to get rid of the bureaucracy in procurement and research.

Mr. WILSON: The only weapon I know in my time that came in under cost and under budget was the Lockheed U-2. And that was because Dick Bissell, whom I interviewed at great length about it, was working directly with Kelly Johnson of the Lockheed skunk works in California. Kelly Johnson personally would fly into the CIA. He and Bissell would have a one-on-one, discuss what more needed to be done, go back to Lockheed in California, get it done, and the plane was delivered under cost and ahead of schedule. Well, we can't have a two-man bureaucracy, but we sure can have less than -- you know, a cast of thousands.

NARRATOR: Despite the criticism from some of the Defense Department's own program and cost analysts, Mr. Longuemare believes the Pentagon already is doing its best to achieve significant savings through reform.

Mr. LONGUEMARE: I'm very excited about the progress we're making in our acquisition reform. I was somewhat skeptical when I first came here on how successful we might be to turn this big ship around. As you mentioned, there have been many efforts in the past to reform and the results to be shown for them were not very much. I'm absolutely delighted now with the progress being made because we can see some of these changes starting to happen.

NARRATOR: But if the Pentagon should fail in its effort to find the savings to offset big expenditures, he says the Pentagon has a reliable backup plan.

Mr. LONGUEMARE: The country has always been willing to pay what was necessary for defense and I would like to just assume that that would continue.

ADM JOHN SHANAHAN (USN, Ret.): I believe one could conclude from today's program that a gap exists between force plans and the financial resources available to implement them. You could also conclude that this is a direct result of front-loading the defense budget with unneeded and unwanted weapons systems that we can't afford. The Pentagon expects to pay for these weapons systems as they come on-line from savings accrued from base closure and acquisition reform. If these savings do not materialize, as is most likely the case, then the Pentagon will expect the American taxpayer to pick up the tab. Recent surveys show that the people are becoming quite impatient with unnecessary military spending. And so, when these bills come due and the savings are not there, we could well have a military budget time bomb on our hands.

For "AMERICA'S DEFENSE MONITOR," I am Jack Shanahan.

[End of broadcast.]

CONDITION OF USE: Credit "AMERICA'S DEFENSE MONITOR"

(Center for Defense Information).