INTRODUCTION

Mr. Chairman and Members of the Committee, thank you for this opportunity to update the Committee on our progress in strengthening the Department of Defense for the 21st century challenges, and to discuss the President's budget request for FY 2004-2009.

I also want to thank you and the members for your action on the President's emergency supplemental request for the global war on terror. Your prompt passage of that legislation will help to provide for our fighting men and women as they prosecute the global war on terror in the weeks and months ahead.

Our troops are doing a superb job and deserve our thanks for their courage and dedication to duty.

What coalition forces have accomplished in Operation Iraqi Freedom is remarkable. They crossed hundreds of miles in Iraq-facing death squads and dust storms-to liberate Baghdad in less than a month.

Today, because of coalition forces' tenacity and skill, the regime of Saddam Hussein is no longer-and the Iraqi people are free to determine their own destiny.

Visiting with the troops, I told them that what they accomplished will go down in the history books. And it will. But at the Department, we cannot afford to wait for history to be written. The threats we face in this dangerous new century are emerging, often without warning. We need to apply the lessons from the experience in Iraq to transform how the Department and the Services organize, train and equip for the 21st century.

The "lessons learned" process for Operation Iraqi Freedom is well underway. It will likely impact budgets and procedures, training and doctrine, and the security of our country for some years to come. But even now, while that process is still in its early stages, we can already see that the experience in Iraq has validated a number of the strategic decisions that were made in our defense reviews over the past two years-decisions that drove the development of this 2004 budget.

Consider a few of those lessons:

One lesson is that speed matters. Coalition forces pressed through Southern Iraq in a matter of weeks, racing towards Baghdad. The enemy was unable to mount a coherent defense, use WMD, attack neighboring countries with SCUD missiles, destroy oil wells, or blow up dams, bridges and infrastructure-in part, we believe -- because the coalition advance was so fast. This experience highlights the value of capabilities that can move quickly into theater and reach targets with speed and agility.

Another is the importance of intelligence-and the ability to act on that intelligence rapidly. In Iraq, using "Time Sensitive Targeting Cells," the coalition was able to launch attacks on enemy targets, in some cases within 20 minutes of receiving the intelligence information. Planes taking off for bombing runs on occasion did not receive their targeting information until they were in the air and well on their way. Ground forces were able to stay "in contact" with the enemy forces, and attack them with great effect, even as those forces made every effort to avoid contact. The success of these efforts in Operation Iraqi Freedom validates the recommendation in this budget for increased investments in command, control, communications, intelligence, and persistent surveillance.

Another is the importance of precision. The capabilities employed in Iraq were discreet. One new weapon used for the first time in Iraq-a "thermobaric" Hellfire missile-can take out the first floor of a building without damaging the floors above, and is capable of reaching around corners, into niches and behind walls to strike enemy forces hiding in caves, bunkers and hardened multi-room complexes. It went from development to deployment in less than a year. Coalition military planners also used a sophisticated computer model to determine the precise direction, angle of attack and type of weapon needed to destroy a desired target, while sparing nearby civilian facilities.

This unprecedented precision allowed the coalition to fight this war with unprecedented care-protecting innocent lives while delivering devastating damage to the Iraqi regime. There was no refugee crisis because Iraqis felt safe to stay in the cities as long as they stayed clear of military targets. As a result, the Iraqi people saw that this war was being waged not against a country, or a people or a religion, but against a regime-and that we were coming not as conquerors but as liberators. We believe these experiences support the decision to request increases in the 2004 budget for research, development, testing and evaluation, and for procurement, as well as the decision to change how we develop those new capabilities-by employing "spiral development" to allow us to bring new weapons to the field in months or years instead of decades.

Another lesson in Iraq was the importance of joint operations. U.S. forces did not fight as individual deconflicted services. Instead, they fought as a truly joint force. One example is the rescue of Pfc. Jessica Lynch-it was made possible by a joint team of Navy SEALs, Army Rangers, Marines, and Air Force Special operators-with the help of an Iraqi citizen. The joint war fighting experience in Iraq supports the request in the 2004 budget to make new investments in joint training and in joint war fighting capabilities.

Another lesson was the critical importance of special operations forces. In Iraq, special operators were the first coalition forces to hit the ground-some of them before the war formally began-with hundreds more pouring into Western Iraq and other regions just before the ground invasion-securing airfields, attacking terrorist facilities and regime targets, and taking out the regime's capability to launch attacks against neighboring countries. These experiences-as well as the remarkable performance of special operators in Afghanistan-support the decisions to transform the Special Operations Command and to request needed new investments in Special Operations in the 2004 budget.

There will be other important lessons as we study Operation Iraqi Freedom. But the point is this: the 2004 budget was developed with warfare of this kind in mind-and the experiences in fighting this war have confirmed the decisions made in the defense review which are reflected in the budget before the Committee today.

Mr. Chairman, over the past two years, the senior civilian and military leaders of the Department have been working to determine how DoD can best transform to meet the changing threats of a new century. Together we have: . Fashioned a new defense strategy. . Replaced the decade-old two Major Theater War approach to sizing our forces with an approach more appropriate for the 21st century. . Developed a new approach to balancing risks that takes into account the risks in contingency plans and also the risks to the force, to modernization and to transformation. . Reorganized the Department to better focus our space activities. . Adopted a new Unified Command Plan, which establishes the new Northern Command to better defend the homeland; a Joint Forces Command that focuses on transformation; and a new Strategic Command responsible for early warning of, and defense against, missile attack and the conduct of long-range attacks. . Expanded the mission of the Special Operations Command, so that it can not only support missions directed by the regional combatant commanders, but also plan and execute its own missions in the global war on terror. . Worked with Allies to develop a new NATO command structure and begin the development of a NATO Response Force that must be able to deploy in days and weeks, instead of months. . Taken steps to attract and retain needed skills in the Armed Forces, with targeted pay raises and quality of life improvements. . Reorganized and revitalized the missile defense research, development and testing program, freed from the constraints of the ABM Treaty. . Completed the Nuclear Posture Review, with a new approach to deterrence that will enhance our security, while permitting historic deep reductions in offensive nuclear weapons. . Moved from a "threat-based" to a "capabilities-based" approach to defense planning, focusing not only on who might threaten us, or where, or when-but also on how we might be threatened, and what portfolio of capabilities we will need to deter and defend against those new asymmetric threats. These are significant changes. Last year's budget-the 2003 request-was finalized just as this defense review process was nearing completion. So while it included a top-line increase, and made important, and long-delayed investments in readiness, people, maintenance, and replacement of aging systems and facilities, we were only able to begin funding some transforming initiatives as the new defense strategy came into focus. But this year's budget-the 2004 request before you today-is the first to fully reflect the new defense strategies and policies and the lessons of the global war on terror. Our defense review identified six goals that drive our transformation efforts: . First, we must be able to defend the U.S. homeland and bases of operation overseas; . Second, we must be able to project and sustain forces in distant theaters; . Third, we must be able to deny enemies sanctuary; . Fourth, we must improve our space capabilities and maintain unhindered access to space; . Fifth, we must harness our substantial advantages in information technology to link up different kinds of U.S. forces, so they can fight jointly; and . Sixth, we must be able to protect U.S. information networks from attack-and to disable the information networks of our adversaries.

The President's 2004 budget requests funds for investments that will support these transformational goals. For example:

. For programs to help defend the U.S. homeland and bases of operation overseas-such as missile defense-we are requesting $7.9 billion in the 2004 budget, and $55 billion over the Future Years Defense Program (FYDP). . For programs to project and sustain forces in distant theaters-such as the new unmanned underwater vehicle program and the Future Combat Systems-we are requesting $8 billion in 2004, and $96 billion over the FYDP. . For programs to deny enemies sanctuary-such as unmanned combat aerial vehicles, and the conversion of SSBN to SSGN submarines-we are requesting $5.2 billion in 2004 and $49 billion over the FYDP. . For programs to enhance U.S. space capabilities-such as Space Control Systems-we are requesting $300 million in 2004 and $5 billion over the FYDP. . For programs to harness our advantages in information technology-such as laser satellite communications, Joint Tactical Radio, and the Deployable Joint Command and Control System-we are requesting $2.7 billion in 2004 and $28 billion over the FYDP. . For programs to protect U.S. information networks and attack those of our adversaries-such as the Air and Space Operations Center-we are requesting $200 million in 2004 and $6 billion over the FYDP.

Over the next six years, we have proposed a 30% increase in procurement funding and a 65% increase in funding for research, development, testing and evaluation (RDT&E) above the 2002 baseline budget-an investment of roughly $150 billion annually.

In addition to these increases, RDT&E spending will rise from 36% to 42% of the overall investment budget. This shift reflects a decision to accept some near-term risk in order to accelerate the development of needed next generation systems.

Among the more important transformational investments we propose is a request for funds to establish a new Joint National Training Capability. As we saw in Iraq, wars in the 21st century will be fought jointly. Yet too often our forces still train and prepare for war as individual services. That needs to change.

To ensure that U.S. forces train like they fight and fight like they train, we have budgeted $1.8 billion over the next six years to fund range improvements and permit more of both live and virtual joint training-an annual investment of $300 million.

The total investment in transforming military capabilities in the 2004 request is $24.3 billion, and about $240 billion over the FYDP.

We propose not only transforming the capabilities at our disposal, but also the way we develop new capabilities. The old way was to develop a picture of the perfect system, and then build the system to meet that vision of perfection, however long it took or cost. The result was that, as technology advanced, and with it dreams of what a perfect system could do, capabilities were taking longer and longer to develop and the cost of systems increased again and again -- Time is money.

A different approach is to start with the basics, simpler items, and roll out early models faster-and then add capabilities to the basic system as they become available. This is what the private sector does-companies bring a new car or aircraft on line, for example, and then update it over a period of years with new designs and technologies. We need to do the same.

Take, for example, the approach to ballistic missile defense. Instead of taking a decade or more to develop someone's vision of a "perfect" shield, we have instead decided to develop and put in place a rudimentary system by 2004-one which should make us somewhat safer than we are now-and then build on that foundation with increasingly effective capabilities as the technologies mature.

We intend to apply this "spiral development" approach to a number of systems, restructured programs and new starts alike over the course of the FYDP. The result should be that new capabilities will be available faster, so we can better respond to fast moving adversaries and newly emerging threats.

BALANCING RISK

Even as we accept some increased near-term risk so we can prepare for the future, this budget also recognizes that new and unexpected dangers will likely be waiting just over the horizon-and that we must be flexible to face them.

That is why the 2004 budget requests increased investments in critical areas such as: readiness, quality of life improvements for the men and women in uniform, and to make certain existing capabilities are properly maintained and replenished.

Over the next six years, the President has requested a 15% increase for Military Personnel accounts, above the 2002 baseline budget, and an increase in funding for family housing by 10% over the same period. The 2004 budget includes $1 billion for targeted military pay raises, ranging from 2% to 6.25%. Out of pocket expenses for those living in private housing drop from 7.5% to 3.5% in 2004, and are on a path to total elimination by 2005.

Over the next six years, we have requested a 20% increase for Operations and Maintenance accounts above the 2002 baseline budget. We have proposed $40 billion for readiness of all the services and $6 billion for facilities sustainment over the same period.

These investments should stabilize funding for training, spares and OPTEMPO, and put a stop to the past practice of raiding the investment accounts to pay for the immediate operations and maintenance needs, so we stop robbing the future to pay today's urgent bills.

In our 2004 request:

. We increased the shipbuilding budget by $2.7 billion, making good on our hope last year that we could increase shipbuilding from five to seven ships. . We increased the Special Operations budget by $1.5 billion, to pay for equipment lost in the global war on terror and for an additional 1,890 personnel. . We increased military and civilian pay by $3.7 billion. . We increased missile defense by $1.5 billion, including increased funds for research and development of promising new technologies, and to deploy a small number of interceptors beginning in 2004.

The President has asked Congress for a total of $379.9 billion for fiscal year 2004-a $15.3 billion increase over last year's budget. That is a large amount of the taxpayers' hard-earned money. But even that increase only moves us part of the way.

Our challenge is to do three difficult things at once:

. Win the global war on terror; . Prepare for the threats we will face later this decade; and . Continue transforming for the threats we will face in 2010 and beyond.

Any one of those challenges is difficult-and expensive. Taking on all three, as we must, required us to make tough choices between competing demands-which meant that, inevitably, some desirable capabilities do not get funded. For example: . Despite the significant increase in shipbuilding, we did not get the shipbuilding rate up to the desired steady state of 10 ships per year. Because of planned retirements of other ships, we will drop below a 300-ship fleet during the course of the FYDP. The Navy is in the process of transforming, and has two studies underway for amphibious ships and for submarines-we have increased shipbuilding in 2004, but we do not want to lock ourselves into a shipbuilding program now until we know precisely which ships we will want to build in the out-years. . We have not been able to modernize our tactical air forces fast enough to reduce the average age of our aircraft fleet. . We have had to delay elimination of all inadequate family housing by 2007-though we got close! . We have not fully resolved our so-called "high-demand/low density" problems-systems like JSTARS, which, because they have been chronically under funded in the past, will still be in short supply in this budget. . We opted not to modernize a number of legacy programs-taking on some near-term risks to fund transforming capabilities we will need in this fast moving world. . We did not achieve the level of growth in the Science and Technology (S&T) accounts we had hoped for. Our request is $10.2 billion, or 2.69% of the 2004 budget. . We have delayed investments to completely fix the recapitalization rate for DoD infrastructure. We still intend to get the rate down from 148 years to 67 years by 2008, and we expect to accelerate facilities investments in 2006 after we have made the needed decisions with respect to the appropriate base structure, at home and abroad. We are reviewing our worldwide base structure, and starting the steps to prepare for the 2005 BRAC. We want to think carefully about how best to match our base structure and force structure.

That's the bad news. But there is good news as well. In making those difficult decisions, we believe we made better choices this year because we followed the new approach to balancing risks that we developed in last year's defense review-an approach that takes into account not just the risks in operations and contingency plans, but also the risks to our force - the people, and risks to modernization and to the future-risks that, in the past, often had been crowded out by more immediate pressing demands. The result, we believe, is a more balanced approach and a more coherent program.

To help free resources, the services have stepped up, and will be canceling, slowing or restructuring a number of programs so they can invest those savings in transforming capabilities. For example:

. The Army came up with savings of some $22 billion over the six-year FYDP, by terminating 24 systems, including Crusader, the Bradley A3 and Abrams upgrades and reducing or restructuring another 24, including Medium Tactical Vehicles. The Army used these savings to help pay for new transformational capabilities, such as the Future Combat Systems.

. The Navy reallocated nearly $39 billion over the FYDP, by retiring 26 ships and 259 aircraft, and merging the Navy & Marine air forces. They invested these savings in new ship designs and aircraft.

. The Air Force shifted funds and changed its business practices to account for nearly $21 billion over the FYDP. It will retire 114 fighter and 115 mobility/tanker aircraft. The savings will be invested in readiness, people, modernization and new system starts and cutting edge systems like unmanned aerial vehicles (UAVs) and unmanned combat aerial vehicles (UCAVs).

In all, by retiring or restructuring less urgent programs, we believe we can achieve savings of some $80 billion over the FYDP-money that will be reinvested by the services in capabilities for the 21st century.

We feel a deep obligation to not waste the taxpayers' dollars. We need to show the taxpayers that we are willing to stop doing things that we don't need to be doing, and take that money and put it into investments we do need.

As you consider this budget, I am sure you will hear pleading for a number of programs-and plausible arguments for why this or that program should be saved or funded at a higher rate. I suspect some may disagree with decisions that have been made, and may want to make changes in this budget proposal. As a former Member of Congress, I recognize that the Congress is Article 1 of the Constitution-the President proposes and Congress disposes. But it is also important that, as the Committee considers potential changes, it recognizes that this budget has been crafted to balance a number of risks. And with every change, that balance of risks is affected.

This is not to suggest that the budget before you is perfect-no one has a monopoly on wisdom. And there are numerous examples of instances when Congress pressed the executive branch to invest in programs-such as JSTARS and UAVs-that later proved critical. What I am suggesting is that if changes are made, they be made in a coherent way-that we talk them through, and that the decisions be made with a full understanding of the effects they may have-not only on the program in question, but the costs in terms of the investments in other areas that will be put off as a result.

We have done our best to develop this budget with what we believe has been unprecedented transparency-providing detailed briefings to those interested in defense here on Capitol Hill. Congress was not simply presented with the President's budget-it was kept in the loop as decisions were being made. I am told that the extent of consultation from the Defense Department to the Congress this year has been unprecedented. We hope that this spirit of openness and cooperation will continue as Congress deliberates-so that the final budget is crafted in a way that preserves the balance of risks.

Our hope is that, with this budget, we can further transform not only our military capabilities, but also the relationship between the Defense Department and the Congress-by establishing a new spirit of trust and cooperation.

RESULTS

As a result of these strategic investments and decisions, we can now see the effects of transforming begin to unfold. Consider just some of the changes that are taking place:

. Today, the missile defense research, development and testing program has been revitalized and we are on track for limited land/sea deployment in 2004-5.

. Today, the Space Based Radar, which will help provide near-persistent 24/7/365 coverage of the globe, is scheduled to be ready in 2012

. In this budget, we believe SBIRS-High is properly funded.

. Today, we are converting 4 Trident SSBN subs into conventional SSGNs, capable of delivering special forces and cruise missiles to denied areas.

. Today, we are proposing to build the CVN-21 aircraft carrier in 2007, which will include many new capabilities that were previously scheduled to be introduced only in 2011.

. Today, instead of 1 UCAV program in development, the X-45, which was designed for a limited mission of suppression of enemy air defense, we have set up competition among a number of programs that should produce UCAVs able to conduct a broad range of missions.

. Today, we are revitalizing the B-1 fleet by reducing its size and using savings to modernize remaining aircraft with precision weapons, self-protection systems, and reliability upgrades-and thanks to these efforts, we are told the B-1 now has the highest mission capable rates in the history of the program.

. Today, in place of the Crusader, the Army is building a new family of precision artillery-including precision munitions and Non-Line-of-Sight Cannon for the Future Combat Systems.

. Today, we have seen targeted pay raises and other reforms help retain mid-career officers and NCOs, so that fewer of them leave the service while still in their prime, so the country can continue to benefit from their talent and experience.

These are positive changes that will ensure that our country will have the capabilities needed to defend our people, as well as a menu of choices from which we can select to shape the direction of the Department, as the 21st century security environment continues to change and evolve.

DEFENSE TRANSFORMATION ACT

Finally, Mr. Chairman, we can't truly transform, unless we have the ability to better manage this Department. To win the global war on terror, our forces need to be flexible, light and agile-so they can respond quickly to sudden changes. The same is true of the men and women who support them in the Department of Defense. They also need flexibility-so they can move money, shift people, and design and buy new weapons more rapidly, and respond to the continuing changes in our security environment.

Today, we do not have that kind of agility. In an age when terrorists move information at the speed of an email, money at the speed of a wire transfer, and people at the speed of a commercial jetliner, the Defense Department is bogged down in the bureaucratic processes of the industrial age-not the information age.

Some of our difficulties are self-imposed by the Department, to be sure. Others, however, are the result of law and regulation. Together they have created a culture that too often stifles innovation. Consider just a few of the obstacles we face each day: . This department spends an average of $42 million an hour, and yet we are not allowed to move $15 million from one account to another without getting permission from four to six committees, a process that sometimes takes months. . Instead of being streamlined for the fast-paced 21st century, the defense authorization bill has grown with each passing year. Just consider the changes over my brief career: . When I was first elected to Congress in 1962, the defense authorization bill was one page. . The last time I was Secretary of Defense, a quarter of a century ago, the 1977 authorization bill had grown to 16 pages. . When I came back to the Pentagon for this second tour, the 2001 authorization bill had grown to 534 pages. . I can't even imagine what it will look like in another 25 years. . Today we have some 320,000 uniformed people doing what are essentially non-military jobs. And yet we are calling up Reserves to help deal with the global war on terror. The inability to put civilians in hundreds of thousands of jobs that do not need to be performed by men and women in uniform puts unnecessary strain on our uniformed personnel and added cost to the taxpayers. This has to be fixed. . The department is required to prepare and submit some 26,000 pages of justification, and over 800 required reports to Congress each year-many of marginal value, I am sure many not read, consuming hundreds of thousands of man hours to develop, and untold number of trees destroyed. . Despite 128 acquisition reform studies, we have a system in the Defense Department that since 1975 has doubled the time it takes to produce a new weapons system, in an era when new technologies are arriving in years and months, not decades.

The point is this: we are fighting the first wars of the 21st century with a Defense Department that was fashioned to meet the challenges of the mid-20th century. We have an industrial age organization, yet we are living in an information age world, where new threats emerge suddenly, often without warning, to surprise us. We cannot afford not to change and rapidly, if we hope to live successfully in this new world.

The Department is already engaged in substantial transformation. We have reduced management and headquarters staffs by 11 percent. We have streamlined the acquisition process by eliminating hundreds of pages of unnecessary rules and self-imposed red tape. And we have begun implementing a new business management structure. These internal changes are important-but they are not enough. We also need legislative relief.

Our legislative proposal, the Defense Transformation Act for the 21st Century, would give the Department some of the needed flexibility, and ability to more rapidly move resources, shift people and bring new weapons systems on line more quickly, so we can adapt to changing events.

Among the provisions in this legislation: . We have proposed more flexible rules for the flow of money through the Department to give us the ability to respond to urgent needs as they emerge. . We have proposed elimination of some of the more onerous regulations that make it difficult or virtually impossible for many small businesses to do business with the Department of Defense. . We have proposed expanded authority for competitive outsourcing so that we can get military personnel out of non-military tasks and back into the field. . We have proposed measures that would protect our military training ranges so that our men and women will be able to continue to train as they fight while honoring our steadfast commitment to protecting the environment. . We have proposed measures for transforming our system of personnel management, so that we can gain more flexibility and agility in how we manage the more than 700,000 civilians who provide the Department such vital support. We need a performance-based promotion system for our civilian workforce that rewards excellence-just like the one Congress insisted on for our men and women in uniform.

In other U.S. government agencies, major portions of the national workforce have already been freed from archaic rules and regulations. We need similar relief. If the Department of Defense is to prepare for the security challenges of 21st century, we must transform not just our defense strategies, our military capabilities, and the way we deter and defend, but also the way we conduct our daily business.

Transformation is not an event-it is a process. There is no point at which the Defense Department will move from being "untransformed" to "transformed." Our goal is to set in motion a process and a culture that will keep the United States several steps ahead of potential adversaries.

To do that we need not only resources, but equally, we need the flexibility to use them with speed and agility, so we can respond quickly to the new threats we will face as this century unfolds.

Thank you Mr. Chairman. I'd be happy to respond to questions.