DEPARTMENT OF DEFENSE

The primary mission of the Department of Defense (DoD) is to defend the United States of America and advance its interests around the globe. In peacetime, DoD trains and equips military forces needed to deter aggression while protecting U.S. interests and promoting U.S. security objectives. Now that we are at war, DoD�s goal is to defeat the terrorists and their supporters who threaten our freedom. DoD is the largest federal agency and the largest corporate entity of its type in the world.

Overview

New Challenges in the National Security Environment

Shortly after his inauguration, President Bush called for a review of all U.S. military capabilities setting the goal of how best to achieve the necessary transformation to meet the new challenges of the 21^st Century. Over the past year, the Secretary of Defense has led efforts to transform the way U.S. military forces defend the country while also addressing long-standing management problems at DoD. The terrorist attacks on the United States on September 11, 2001, underscored the urgency of Secretary Rumsfeld�s effort. The new security environment requires a military force that is balanced to counter both conventional and unconventional threats and is armed with strong intelligence gathering and analysis capabilities. Even so, intelligence gaps will persist, so innovation must be factored into our defense planning and response.

The future, both near- and long-term, presents numerous challenges and great opportunity. When President Bush took office, he inherited a defense program that needed to be strengthened. As a percentage of the nation�s gross domestic product, defense expenditures had shrunk to 2.8 percent. Inadequate funding strained both equipment and people. Recognizing these deficiencies, President Bush provided significant increased resources for defense in 2002. Much remains to be done. In a post-Cold War world, where freedom and democracy remain imperiled, this budget lays the groundwork for a sustained, long-term investment in the nation�s security. The United States must strengthen its defense posture to protect the nation�s interests and to assure its lead role in global affairs. A war on terrorism has begun, and while there has been success in achieving specific military objectives, the shape and dimension of the subsequent phases of the campaign will remain a work in progress for some time to come.

The President's 2003 Budget for DoD and the intelligence community reflects the Administration's strong commitment to winning the war on terrorism, sustaining current military readiness, transforming the way the nation defends itself, and enhancing American intelligence capabilities. To address these needs the President's Budget proposes $369 billion in 2003 for DoD and an additional $10 billion, if needed, to fight the war on terrorism.

Winning the War at Home--Homeland Security. The growing importance of homeland security raises a host of challenges in the post-September 11^th environment. These issues include policy and resource allocation decisions to improve homeland security. More than ever, coordination among defense and non-defense agencies will be critical to success. DoD plays an important role in homeland security, providing assistance to law enforcement at the state and federal level when authorized by law, enhancing airport and border security, sharing intelligence information, and marshaling resources to respond to new attacks. Hand-in-glove with the domestic war on terrorism, Air National Guard, Air Force Reserve, and active Air Force aircraft serving in Operation Noble Eagle began providing combat air patrols over major U.S. cities starting on September 11^th. Shortly thereafter, the National Guard helped provide security at the nation�s airports. Similarly, Navy Reserve and Coast Guard units are helping to protect our waterways and harbors, and Army National Guard troops will provide assistance to Customs Service and Immigration and Naturalization Service personnel on our northern border.

Waging the War on Terrorism--Winning the War Abroad. The U.S. military responded rapidly to the terrorist attacks, initiating major combat operations 7,000 miles from the United States in less than one month. By November 2001, the Air Force and Navy had flown 40,000 hours in support of Operation Enduring Freedom. The Navy has had as many as four aircraft carrier battle groups in the region supporting flight operations and special operations forces. Almost 400 fighter, tanker, and airlift aircraft and more than 50,000 troops have recently been engaged in this mission.

Status Report on Select Programs

The Administration is reviewing programs throughout the federal government to identify strong and weak performers. The accompanying table shows some selected DoD programs and their effectiveness.

Congressional Earmarks

Congressional earmarks add funding for programs that are not requested by the Defense Department, diverting funds from higher priority and more effective programs. The 2002 Defense and Military Construction Appropriations Acts earmarked funds for 963 DoD projects totaling $5.4 billion. The DoD budget process thoroughly reviews all programs to determine the optimal cost-effective mix of programs for national defense. Earmarking disrupts this balance of programs and crowds out other important projects.

For example, the Congress has added funds for aircraft the Air Force does not require and thereby limits resources for war fighting needs. In addition, funding has been directed for military construction projects that the services do not want to build. Some earmarks have little relationship to an agency's mission. For example, the 2002 Defense Appropriations Act included over $600 million for a variety of unrequested medical research projects. These projects include research on breast cancer, ovarian cancer, prostate cancer, diabetes, and osteoporosis. While research on these diseases is very important, it is neither the mission nor the core competency of the U.S. military. Rather, these functions can be carried out and coordinated more effectively by other medical research agencies, such as the National Institutes of Health.

Intelligence

The intelligence community is adapting to the changed environment of the 21^st Century. Advances in encryption, denial and deception techniques, and information technology create enormous challenges for intelligence gathering and analysis. Policymakers need timely, accurate and insightful information on the capabilities and intentions of foreign powers. The armed forces also need real-time battlefield data furnished with a significant level of detail. The intelligence community meets the full range of U.S. intelligence needs from the national level to the tactical level.

The 2003 Budget strongly supports these efforts and makes a substantially increased investment in our intelligence capabilities. This budget also makes major investments to transform the intelligence community to meet the challenges of the 21^st Century.

Transforming Our Armed Forces

One of the President�s key defense priorities is to transform America�s armed forces to perform their missions more effectively and to meet emerging security challenges. The Defense Department began the process of transformation with its 2001 Quadrennial Defense Review. The review shifted to a "capabilities-based" defense strategy that focuses on capabilities of potential adversaries and the tools that America�s armed forces will need to deter and defeat adversaries employing those capabilities. Both the terrorist attacks of September 11, 2001, and the subsequent conduct of Operation Enduring Freedom in Afghanistan underscore the urgency of military transformation. They illustrate the need for America�s military to prepare for different types of conflict and execute missions with new tactics and new technologies. The growing use of unmanned aerial vehicles, the effective utilization of real-time intelligence, and the coordination among special operations and allied forces all demonstrate the cutting edge of what military transformation can achieve and offer a glimpse of a future transformed joint force. To shape this effort, DoD has recently established an Office of Force Transformation to coordinate all of the military service transformation efforts and advise the Secretary of Defense.

In 2003, the Department will invest over $9 billion in science and technology. New efforts include: easy-to-wear chemical/biological protection masks, chemical, biological, and nuclear weapons detectors, bunker and cave-defeating weapons, intelligence systems to detect assembly of weapons of mass destruction, and unmanned air, land, and sea surveillance and combat vehicles. In addition, DoD will invest $7.8 billion in ballistic missile defense with the objective of developing the capability to defend the forces and territories of the United States, its allies, and friends against ballistic missile threats.

Besides continuing the development of highly capable fighter aircraft such as the Joint Strike Fighter and new ships, the Defense Department�s 2003 budget invests in technologies that will transform the military and fundamentally change the American way of warfare. These systems include:

• four Trident ballistic missile submarines converted to submarines equipped with long-range cruise missiles which will dramatically increase the range and precision of strikes and our capability to insert Special Forces;

• unmanned aerial vehicles such as those used in the war against terrorism, which provide greater, longer-endurance intelligence and combat capabilities directly to the war-fighter at far less cost and risk to military personnel than manned aircraft;

• unmanned underwater vehicles that can greatly extend the range and capabilities of submarines and surface ships at less cost and without risk to sailors;

• the Army�s Land Warrior technology, which digitizes the communications and intelligence capabilities of the individual infantry soldier to enhance situational awareness and combat capability;

• small precision bombs, which increase the quantity of targets that each individual aircraft can strike;

• bunker-defeating munitions to target the growing threats of deeply hidden weapons of mass destruction; and

• space-based radar and space control systems, which enhance our surveillance capabilities and our capabilities to collect and utilize information from space.

Other emerging areas of defense investment focus on America�s ability to conduct information and space operations.

Assuring the Readiness of Our Armed Forces

The cuts to procurement spending and investment in the immediate years following the end of the Cold War, combined with an increase in overseas contingency operations, put a strain on both equipment and people. Frequent deployments meant strains on military readiness because of missed training and strains on families because of more frequent separations from loved ones. The President has pledged to solve this problem.

Despite these strains, the U.S. armed forces remain the most capable in the world and have demonstrated their readiness with their rapid response to the events of last September. Soldiers, sailors, air force crews, and marines have routed enemy forces in Afghanistan, while also keeping the peace in the Balkans, patrolling the no-fly zones of Iraq and maintaining a strong forward presence around the globe.

Readiness relies upon three main factors. First, we must recruit and retain personnel with key skills and talents. Second, we must provide high quality training to give troops the expertise and skill to fight and win our nation�s wars. Third, we must maintain equipment and facilities that our forces use to accomplish their missions.

These three factors are a high priority in this budget.

• First, a 4.1 percent across-the-board pay increase supports the Services� recruiting and retention goals.

• Second, the adage "you fight the way you train" remains true. This budget robustly funds the Services' training goals, as measured in aircraft flying hours, ship steaming days, and ground vehicle miles. Without these crucial training and operating activities, the safety and well being of our troops and their ability to accomplish their missions successfully will be at risk.

• Third, this budget adds significant resources for maintaining military equipment and the facilities where our troops work and train. DoD can not afford any further growth in maintenance backlogs. With scarce resources, the Department has been forced to delay needed maintenance. If equipment and real property maintenance needs are not met, training opportunities and readiness erode, and costs rise.

As the attacks have demonstrated, U.S. military facilities are terrorist targets. The budget will enhance force protection for our armed forces and the facilities where they work and live. It also ensures that transportation, communications, and information systems are strong enough to cope with terrorist attacks when they occur. Just as important, these activities protect and support our troops� families.

Enhancing the Quality of Life of Military Personnel and Their Families

Military quality of life is crucial to retaining service members and their families. The military services have long recognized that while they recruit the service member, they must retain the family. No matter how advanced the technology or what strategy is developed, having imaginative, highly skilled, and motivated military and civilian personnel is essential for America to address the challenges of the future. To recruit and retain these people, the Department has increased funding and will work to enhance a number of quality-of-life efforts, including compensation, housing, and health care, among other community and family work-life support programs.

Military Compensation

Building on this record, the 2003 Budget contains another pay boost of 4.1 percent with the option of selected targeting of larger raises to mid-grade non-commissioned officers and officers. This continues the President�s commitment to take care of our men and women in uniform and their families and ensures that pay continues to be competitive. This commitment is working: DoD is meeting its goals for recruiting talented young people and retaining experienced, highly-trained military personnel.

Housing

About 20 percent of all service members have inadequate housing on military bases. The definition of inadequate housing is unique to each Service. While some houses are old and in need of improvement, other houses are simply inadequate to meet the needs of today�s military family, which has changed since on-base housing was first constructed decades ago. The Administration is committed to eliminating 159,000 inadequate housing units (out of a total of 275,000) by 2007.

DoD is tackling the problem of inadequate housing by demolishing dilapidated units, renovating existing houses, and building new homes. Increasingly, DoD relies on the private sector, which has expertise to manage real property and can increase the quality of DoD-owned housing at less cost and faster than the government. In 1996, the Congress gave DoD authority to privatize DoD-owned housing. Since 1996, DoD has privatized 16,817 units, or about six percent of the current inventory. While privatization began slowly, DoD is accelerating its efforts. Two public-private partnership launched in 2001:

• The Army, in partnership with private developers, initiated a $260 million family housing privatization project at Fort Hood in Killeen, Texas, the largest Army base in the country. This project will construct 973 new housing units and renovate 4,939 housing units. Over 4,000 units eventually will be replaced.

• The Navy, in partnership with the private real estate companies and developers, initiated a $262 million family housing privatization project at the Naval Complex San Diego, California. This partnership will construct 519 units and operate a total of 3,248 housing units.

By the end of 2002, DoD plans to privatize an additional 12,970 units. In 2003, DoD plans to privatize 35,600 more housing units to eliminate inadequate housing by 2007. Currently, the Navy and the Army are on track to eliminate inadequate housing by 2007. The Air Force does not plan to eliminate its inventory of inadequate housing until 2010.

The Administration plans to reduce the average out-of-pocket expense of military families living in private housing in local communities to zero by 2005. In 2003, out-of-pocket expenses will drop to 7.5 percent from 15.0 percent in 2001. This will enable more military families to afford quality private-sector housing located in the local communities around DoD�s installations. This initiative improves the quality of life for our military families, and makes a contribution to the local economies and real estate markets.

Strengthening Management

The President and Secretary of Defense have made management improvement at DoD a key goal. DoD will transform its business processes and infrastructure to enhance capabilities and creativity of its employees and free up resources to support war fighting and transformation of military capabilities.

To support 2.3 million men and women in uniform effectively, the Department�s efficiency must improve. DoD�s business practices and financial infrastructure must be overhauled; they are outdated and have not kept pace with today�s business environment. The Department is working to streamline its organization and infrastructure, adopting new business models to react to rapid changes in technology, and implementing financial management strategies to repair the outmoded and poorly connected accounting and auditing processes. DoD has over 600 different management systems that provide financial information, few of which are truly compatible.

One significant management challenge is the Defense Health Program (DHP). DoD supports an internal health care network, as well as private contractors who provide health care. The core mission of DHP is to provide health support for the full range of military deployments and to sustain the health of military personnel, retirees, and their families. DoD is effective at maintaining a health care system supportive of day-to-day operations, stays ready to perform its wartime mission, and provides its beneficiaries with the highest quality health care available.

The cost of DoD health care contracts, however, has increased over the past three years to its current level of almost 50 percent of the health budget. Despite various risk-sharing provisions in the current versions of the contracts, there is still a need for greater incentives in the internal system and the private contracts to control escalating costs. High contract costs are caused by a combination of factors including the national health care market, enhancements to the benefit package offered to beneficiaries, effects of downsizing and closures of military health care facilities, the Department�s inability to manage where patients are treated, and ineffective cost incentives. Additionally, DoD has historically underestimated the funding needs of its own medical care system, which has forced beneficiaries into the private sector at a higher cost to the Department. All of these factors resulted in the government paying an additional $655 million in cost overruns to DoD health care contractors in 2001, and DoD receiving over $1.3 billion in emergency supplemental appropriations in both 2000 and 2001.

DoD has made progress in better projecting its funding needs for health care contracts and military pharmaceuticals. More work, however, is necessary to strengthen its projections for health care growth in the future. The Department is committed to redesigning health care contracts and administrative policies to create incentives that preserve the ability of DoD to meet its mission and control costs effectively.

The table that follows illustrates how the entire Department fares on the President�s Management Agenda.

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