Defense budget takes calculated risks. (President's Perspective).

The defense budget submitted to Congress in early February is touted by the administration as its first budget that truly addresses the need to "transform" our military services into a force better equipped to deal with the threats of the new century.

But given the relatively small increases in the procurement account, it would be fair to say that this budget should be more accurately categorized as a "transition" budget that, nevertheless, appears to be going in the right direction, as far as transformation goes.

At $379.9 billion, the budget request for fiscal year 2004 is $15.3 billion higher that last year's request. But procurement spending--at $72.7 billion--is not much higher than last year's $70 billion request. The budget for research, development, test and evaluation (RDT&E) is up to $61 .8 billion--higher than last year's Pentagon request, but lower than the amount Congress appropriated for fiscal year 2003.

In many ways, it is understandable why the administration has not been able to increase procurement or RDT&E significantly. We are, after all, in a time of war. Our forces are deployed around the world, fighting an ongoing war on terrorism and participating in homeland defense missions. Further, a new, possibly large-scale, conflict looms in Iraq. That means personnel and operations funding must come first.

From the $15.3 billion increase requested for fiscal year 2004, more than half goes to pay raises, housing allowance and defense health programs. It's interesting to note that most of the entire defense budget of $379.9 billion is spent on what the Pentagon calls "fact of life" accounts: military personnel ($98.6 billion), and operations and maintenance ($117 billion). It is not hard to see why there is not much room to maneuver when it comes to procurement.

From a modernization perspective, there are several pieces of good news in the budget. Funding is going up for unmanned aerial vehicles, space-based radar, the Joint Strike Fighter, the Army Future Combat System and shipbuilding. These are programs that are critical to transformation and should be funded accordingly. They are signs that the administration is serious about transformation.

But nobody should be fooled into thinking that this budget has any "silver bullets" that will magically bring about transformation. This will be a gradual process that will continue for years.

Pentagon Controller Day Zackheim explained that the underlying assumption in this year's budget is that the Defense Department has accepted near-term risk in order to transform for the longer term. "This is the first real budget that we fully, fully controlled," he said. There is "a lot of money for transformation, [but] at the same time we've accepted near-term risk."

That means that the force structure would be reduced temporarily to help pay for the modernization of a smaller force. The decommissioning of Navy ships will be accelerated, as well as the retirement of aging Navy and Air Force planes.

The Navy for the first time in many decades will have fewer than 300 ships. That is a calculated risk that the Defense Department claims it must take to pay for new ships and futuristic technology. According to the budget plan, the Navy would rebound to 305 ships by 2009.

But the reality is that the force structure now being cut may never come back, given a projected budgetary environment where deficits are growing and Social Security benefit claims will skyrocket as the baby boomers retire in droves.

More than likely, this budget could mark the beginning of a gradual, unannounced force structure decline that is likely to be permanent.

The Air Force F-22 air superiority fighter program is being reduced from 295 to 276 aircraft, the Navy and the Marine Corps are consolidating their tactical aviation units and collectively are wiping out 497 airplanes from their aviation procurement plans.

The Army's modernization budget has $1.8 billion for the Future Combat System, which is the cornerstone of its Objective Force. But the service also is eliminating dozens of programs to not only pay for the FCS, but also to sustain its growing operations and maintenance costs.

It is hard to predict what Congress may do during the mark-up process in the months ahead. The chairman of the House Armed Services Committee, Rep. Duncan Hunter, already has voiced disappointment about the president's budget request for defense.

"The budget is still too low to fully counter the dangers America presently faces," said Hunter. "If we are going to meet our goal of air dominance in multiple theaters, we need at least two additional air wings. Further, the need for sustained deep strike capability should compel expanding the long-range bomber force."

The $72.7 billion for procurement, according to Hunter, falls short of the $90 billion per year his committee estimated is needed to replace aging equipment. I agree with Congressman Hunter. My own estimate is that we will need $90-$100 billion per year for several years to address the recapitalization needs of the services. In this budget, we don't get there until 2007-2008. I don't foresee significant recapitalization or transformation until the 2014 timeframe, give or take a few years.

To view this in perspective, you may recall when the Reagan administration was building up the Navy to a 600-ship force, which actually reached 580 ships. To achieve that, older ships were kept in service and the shipbuilding program funded 35 vessels per year. By comparison, the current budget funds five ships in 2003 and projects seven in 2004. Just to go back above 300 will take a substantial increase over today's budget.

Finally, the operations and support costs of military equipment continue to climb as their readiness rates struggle, despite increased resources. Keeping the services ready to fight, even as the force structure enters a decline, eats up those dollars needed for procurement and transformation. This is why I fear that the early infrastructure cuts may well become permanent, over time.

In summary, I view this budget as a positive but modest step on the road to transformation.

But I also see warning signals that we must prepare for continued force structure and program cuts in the years ahead. Our forces will remain the most capable and the best trained, but will likely end up smaller.

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