Thank you for the kind introduction- and for the invitation to speak once again at this event. I very much appreciate the chance to share my thoughts with you, and your willingness to hear them.
As always, I should state at the outset that these views are my own and not necessarily those of my employer.
Multiyear and block buy contracting
I want to begin by noting briefly, with regard to Navy shipbuilding in general, that the Navy has requested authority this year to negotiate a multiyear procurement contract for the DDG-51 program, and a follow-on multiyear procurement contract for the Virginia class program. If Congress grants these two requests, then in coming years, all three of the Navy’s year-to-year shipbuilding programs- the DDG-51 program, the Virginia class program, and the LCS program, which is being executed with block buy contracts- will employ some form of multiyear contracting. This is a significant change from the past, and one that should not go unnoted.
Industry has long asked for stability in shipbuilding to help reduce shipbuilding costs, and the use of MYP and block buy contracting in all three of these programs can be viewed as something that moves Navy shipbuilding a fair ways in that direction. Procuring aircraft carriers under two-ship block buys, without changing the currently planned years of procurement for each carrier, could extend this situation further, though the Navy has testified that it would prefer to wait until next year before considering that option.
The best of times: support for submarine procurement
Let me shift now from shipbuilding in general to submarines in particular. For supporters of submarines, the current situation might be characterized as the best of times and the worst of times, or- to borrow another literary reference- as the year of living dangerously. Either phrase captures a sense of where we are right now.
For the submarine community, these appear to be the best of times in terms of support on Capitol Hill for submarine procurement. Congress historically has been very supportive of the Navy’s annual shipbuilding requests, including submarines, but this year, Congress’ support for submarine procurement appears particularly strong.
Members on various committees have expressed a strong interest in finding a way, if possible, to restore a second Virginia class submarine to FY 14, and consequently to increase to 10 the number of boats in the next Virginia-class multiyear.
There’s a difference of opinion on whether this would be done by using incremental funding in the Virginia-class program, or by simply procuring the additional boat with traditional full funding. But it does appear that a number of Members are interested in finding some way to fund that extra boat.
I think it’s fair to say that the possibility of adding this boat is receiving support this year in part because of the Virginia-class program’s success in achieving its goals for reducing unit procurement costs and shortening construction times while maintaining or improving ship capability. If the program instead had been experiencing cost growth and schedule delays, it might be harder to make the case for adding that boat.
If the Virginia class program’s success in achieving its acquisition goals is a part of the reason why there is support for adding a second boat in FY14, then that is something that other DOD acquisition programs might take notice of, which in tum might be of some benefit to DOD acquisition in general.
It can also be noted that there’s been little opposition or questioning of the inclusion in this year’s 30-year shipbuilding plan of a couple of years not too far into the future- specifically, FY20 and FY22- showing the procurement of 3 attack boats in a single year. This is the first time in eight years that a 30-year plan has included some years with three attack boats per year.
I don’t want to make too much of this, because FY20 and FY22 are beyond the end of the FYDP, where there’s less responsibility for showing how you’re going to pay for things. But the Navy’s willingness to pencil in 3 boats a year for those two years, and the little pushback to date against that, can be noted.
Support for the Virginia-class program this year appears to derive not just from the program’s good execution, but from two other things. The first is awareness of China’s military modernization effort. Policymaker awareness of, and concern about, this effort has grown steeply over the last year or two, in no small part because of China’s assertive behavior regarding its maritime territorial claims in the South and East China Seas. As a result of this growing awareness and concern, China’s military modernization effort is now much more at the center of the discussion of U.S. defense plans and programs than it was just two or three years ago. The new U.S. strategic guidance announced in January, with its emphasis on the Asia-Pacific region, can be viewed in part as a reflection of this. As many observers anticipated, increased concern about China and the new strategy’s emphasis on the Asia Pacific region have led to a stronger emphasis on the Navy in discussions of U.S. defense plans and programs.
The other apparent cause for supporting the Virginia-class program this year, beyond the program’s good execution, is a growing focus on the projected attack submarine shortfall, particularly when that shortfall is viewed in the context of China’s military modernization effort and the new strategic emphasis on the Asia-Pacific.
As some of you might remember, I first highlighted the projected attack boat shortfall in 1995, and have been reporting, testifying, and speaking about it pretty much every year since then.
In this year’s 30-year shipbuilding plan, there’s been more progress to close up that shortfall than perhaps any other single year. Due to those two years with three boats in them, plus a couple of other years where an additional boat has been added, the bottom of that shortfall has moved up by four boats, from a minimum of 39 boats in last year’s 30-year plan to a minimum of 43 boats in this year’s plan.
The new projected low point of 43 boats is the highest in any 30-year plan going back several years, and I would imagine it is the highest projected low point in Navy internal planning going back years before that. If a second boat were added to FY 14, that low point would become 44 boats, which reduce shortfall at its lowest point to less than 10% of the force level goal.
In earlier years, when the maximum depth of the shortfall was projected to be larger, it made more pressing the question of whether it would be feasible or cost effective to refuel and extend by 10 years or so the service lives of some number of 688s. If the numbers in this year’s 30-year plan continue to hold in future 30- year plans, that question will become less pressing.
The worst of times: the budget and sequestration
So in terms of support for finding a way to fund a second Virginia-class boat in FYl4, and the reasons behind that, supporters of submarines might well say that these are the best of times.
But they might also say, at the same time, that these are the worst of times, because of the damage to FY 13 programs that might occur with sequestration in January, and because uncertainty about whether sequestration will happen is making it difficult for government and industry officials to make decisions about what kinds of activities and commitments to undertake between now and then.
The question of sequestration, and the potential impact of the Budget Control Act in general, are not easy to sort out. Because I suspect that the possibility of sequestration is a concern for many of you right now, here are 11 things that I can tell you about the situation- and for many of these comments, I’m relying on Steve Daggett, who until very recently was one of our key analysts at CRS for questions on sequestration.
First, although many people are trying to find a way to avoid a sequestration on the defense budget, so far no plan for doing that has emerged that third-party observers have generally deemed likely to pass both the House and Senate and be signed into law by the President. Nor is it certain that such a plan will emerge between now and January. And the expected lame-duck session following the November elections will have a number of other pressing legislative matters to address. On this basis, a sequestration on the FY 13 defense budget would appear to be a real possibility.
Second, although a sequestration may occur on the FY 13 defense budget, sequestration appears unlikely to be used in defense for the remaining eight years covered under the Budget Control Act- that is, for FY 14 through 21. That’s because in those years, the lower caps on discretionary funding are established at the beginning of the budget and appropriations process, and those caps may be enforced through points of order in the appropriations process.
Third, sequestration on the FY 13 defense budget would be imposed on each program, project, and activity, or PPA, and while PPAs are quite broad in the O&M portion of the defense budget, providing some flexibility for how to best use the remaining funds, they are very narrow in procurement and R&D parts of the budget, providing much less flexibility for mitigating the impact on individual programs.
Fourth, if military personnel accounts are exempted from a sequester, which is permitted, then the across-the-board cuts on other PP As could be roughly I 0%. That figure could move up or down somewhat, depending on certain factors that go into the calculation, but something in the range of about 10% is a fair estimate.
Fifth, because of the low annual procurement quantities of Navy shipbuilding programs, the effects of a sequestration could be particularly disruptive on Navy shipbuilding. Since most Navy shipbuilding programs have a procurement rate of one or two ships per year, losing an FY13 ship to a 10% sequestration- because you can’t sign a contract for a ship that isn’t fully funded- could mean a 50% or 100% reduction in the program’s FY13 procurement quantity.
Sixth- and more specifically for our purpose here today- a 10% reduction on the FY 13 Virginia-class program could make the second FY 13 boat unexecutable, reducing the FY 13 procurement quantity from two boats to one. Whether that second boat would then be deferred into a future fiscal year, or simply lost, is not clear.
Seventh, if the second boat in FY 13 cannot be executed as scheduled, the Navy might have to break the current Virginia multiyear contract. Since FY13 is the final year of that contract, the consequences for the government in terms of penalty costs for breaking the contract might not be that great. But the reduction of the FY 13 quantity from two to one could have implications for the pricing of the boats to be included in the· follow-on multiyear that the Navy is seeking authority from Congress to negotiate for the years FY 14 through 18. In short, the cost of the boats in the next multiyear could increase.
Eighth, under a little-discussed 1990 amendment to the law that governs sequestration, the President has authority, prior to the implementation of sequestration, to propose to Congress a Joint Resolution that would reallocate the cuts among PPAs, provided that additions to some PP As are offset by reductions to other PP As that are equal both in budget authority and in outlays. Such a Joint Resolution would have to be approved by Congress and signed into Jaw. If the President were to propose such a Joint Resolution, and Congress were to approve it, and the President signed it into law, this reallocated defense budget could become the new baseline for imposing sequestration on FY 13 PP As.
Under this scenario, it is possible to imagine a reallocation that pluses up certain FY 13 PP As, so as to preserve their wholeness following sequestration, while setting up other FY 13 PP As to be, in effect, designated sacrificial lambs. If so, then sequestration might wind up harming some programs, but not others, and sequestration, instead of being a completely thoughtless mathematical operation, as it often has been described, might instead become a partially thoughtful one. This reallocation process might be of particular value to Navy shipbuilding, because of the outsize effects that a straight 10% sequestration across PP As would have on low-annual-quantity Navy shipbuilding programs.
The ninth thing I can tell you is that it is not clear whether this reallocation process can be used. The process is set forth under Section 258B of the sequestration law- a section that was approved in a 1990 amendment to the law. But Section 2588 refers back to Section 254 of the Jaw, and sequestration of discretionary spending occurs not under Section 254, but under Section 251. So whether the Section 25 SB reallocation process applies to the spending targets set by the Budget Control Act is uncertain due to ambiguities in the language of the statute, and OMB- which would make the final legal determination on the question- has not yet done so, at least to CRS’s knowledge as of late April. The Joint Resolution that would make the reallocation, moreover, might be subject to objections during congressional consideration on parliamentary grounds.
The tenth thing l can tell you is that since the lower defense spending caps in the Budget Control Act for FY 14 through 21 would likely be achieved through the annual appropriations process, rather than through sequestration, programs being executed in those years through multiyear contracts could be afforded some degree of protection from funding reductions that would require breaking those contracts, particularly if the penalty costs of breaking those contracts were significant. A Virginia-class multiyear beginning in FY 14 would be an example of such a program. The flip side, however, is that if officials believe that defense spending in FY 14 and beyond is likely to conform to the lower caps in the Budget Control Act, a decision could be made to limit the new Virginia-class multiyear to fewer than the currently proposed nine boats.
The eleventh and final thing I can tell you about sequestration and the Budget Control Act is a reminder that avoiding a sequestration on the defense budget in FY 13 is not the same as avoiding the possibility of reductions in defense spending in FY 13 and beyond. The Budget Control Act was passed last summer in the midst of signals from the credit markets to do something to reduce projected growth in the federal debt by a certain minimum amount. If the credit markets, and also the equity markets, perceive that the reduction in growth of the federal debt that was to be accomplished under the Budget Control Act will now not occur, or not fully occur, they could begin sending signals to do something new to achieve that goal. That new something could include, among other things, further reductions in planned levels of defense spending.
So like I said, for the submarine community, you might say these are the best of times, and the worst of times- or if you prefer, that this is the year of living dangerously.
Range of uncertainty over future Navy budget
Stepping back, and looking at the situation a bit more broadly, it can be noted that there currently is an extraordinarily wide range of possibility for where the Navy’s budget might go in coming years. The low end of that range of possibility might be a DOD budget that follows the stage two caps in the Budget Control Act, and an allocation of that DOD budget that doesn’t favor the Navy more than marginally.
The high end of that range might be the proposal in the Romney campaign defense white paper from last October to set the defense budget at 4% of GDP, and to increase Navy shipbuilding to 15 ships per year.
That’s quite a range of possibility- and it’s unclear where, within that range, things will settle out, because the outcome will reflect the result of a much larger debate over federal expenditures, revenues, and deficits that the country has been engaging in since at least last year.
That larger debate could go on for a while before it’s resolved. And while it is underway, debate could continue or intensify on questions such as whether there would be strategic grounds for favoring the Navy in allocating a smaller defense budget, or for favoring the Submarine Force in allocating a smaller Navy budget.
Anti-access and area-denial (A2/AD)
In discussions today about the future compos1tton of U.S. defense spending, a major theme is the potential value of various force elements for countering adversary anti-access and area denial forces. Just as, a decade ago, everyone was rushing to argue how their favorite defense acquisition programs were transformational, today people are rushing to show how their programs have value in countering A2/ AD systems.
Since attack submarines qualify as a classic platform for countering A2/ AD systems, supporters of attack submarines should be well prepared to argue the value of attack boats in relation to this strategic focus. Indeed, if they can’t make this argument, they ought to just pack up their bags and go home.
But there are two other points I want to make in relation to this issue.
The first is that the A2/ AD topic has a political and legal dimension, and that part of this political and legal dimension is China’s view, which is subscribed to by some other countries as well, that coastal states have the right to regulate the activities of foreign military forces operating within their exclusive economic zones, or EEZs. This view stands in contrast to the view of the United States and many other countries that coastal states have the right to regulate economic activities, but not military activities, in their EEZs.
Although China’s view on this issue is a minority view among world nations, it is one that could gain additional adherents over time. If China’s view on this issue were to become the dominant view over time, it could significantly affect U.S. Navy operations around the world, many of which take place in the EEZs of other countries. It could certainly affect operations of U.S. Navy surface ships and aircraft, if not submarines as well.
China’s view on this EEZ issue, and the challenge it poses to the current majority view, often gets commingled with, and tends to exist in the shadow of, the related but ultimately separate issue of China’s disputes with other countries in its region regarding maritime territorial claims in the South and East China Seas. To some degree, the issue of rights within the EEZ has been a sleeper issue, in spite of its potential for one day significantly affecting the U.S. ability to use naval forces to affect events ashore around the world.
It is China’s view on the issue of a coastal state’s ability to regulate foreign military activities in its EEZ, and not China’s maritime territorial claims that appears to be at the crux of the incidents at sea between Chinese and U.S. ships and aircraft in 2001 and 2009. And it is China’s view on the EEZ which carries the potential, should it become the dominant view, for affecting U.S. Navy operations not only in the Western Pacific, but around the world. Even if all the issues concerning maritime territorial claims in the South and East China Sea were somehow resolved, this other issue regarding China’s views of its rights within its EEZ would remain.
The Navy, including the submarine community, needs to focus on this issue as an integral part of its approach to the anti access/area-denial issue. To date, I haven’t seen too much evidence of this.
Geography and a crown jewel
The second point I want to make on the issue of countering A2/AD systems is that while it’s relatively straightforward to make an argument about the value of attack submarines in countering such systems, it can also be easy, in making that argument, to overlook an opportunity to make a broader argument about the value of submarines in supporting U.S. grand strategy.
It is an accident of geography that more than two-thirds of the world’s surface is covered by water. But because of this, the United States has the opportunity, through its naval forces, to convert a major part of the world’s surface into a medium of operations and maneuver for defending U.S. interests. And underpinning that ability are the Navy’s attack submarines, which can deny the use of the oceans, if need be, to all other parties. The United States has built up, over several decades of effort, an advantage in the design and operation of attack submarines, and in undersea warfare generally, that would take other countries many years, and a lot of investment, to match.
By underpinning the U.S. ability to convert what happens to be a major part of the world into a medium of national advantage, and by being something that would take another country a lot of time and investment to match, the attack Submarine Force can be viewed as a crown jewel in U.S. national strategy- as an investment that the country has developed over time, and which has a high return in terms of the leverage it provides to U.S. policymakers.
The valid point about the value of attack submarines in countering A2/AD forces should not, in my view, obscure this broader point about the value of attack submarines to U.S. grand strategy, particularly if other elements of U.S. strategic dominance become more contested in coming years.
Ohio replacement program
In my final remarks, I want to discuss for a moment the Ohio replacement program.
With the focus that has occurred this year on the Virginia class program and the possibility of adding a second boat to FY 14, there’s been less discussion of other submarine issues, including the Ohio-replacement program.
But the discussion that has occurred on the Ohio-replacement program demonstrates an awareness of how the proposed two-year deferral in the program would reduce the SSBN force to 11 or 10 boats for the period FY29 through 41. Supporters of submarines, and those who track strategic nuclear program issues, have expressed misgivings about this, and there has already been some legislative activity on the issue on the House side.
It can also be noted that until this year, the Navy had testified that that there was no slack in the Ohio-replacement program schedule, if a force of 12 SSBNs was to be maintained. This year, the Navy has testified that a two-year deferral in the program could help mitigate risks in the program, and that the resulting reduction of the SSBN force to 11 or 10 boats for the period FY29 through 41 , though not optimal, would be manageable, with some risk. The question is whether this shift in testimony has damaged the Navy’s credibility with certain audiences.
I remain concerned that potential pressures on the shipbuilding budget in coming years, combined with the funding requirements for the Ohio-replacement program, could crowd out funding for the Virginia-class program during the years of Ohio-replacement procurement. My thoughts on this issue are largely unchanged from what I have told you before, particularly since the Navy over the last year hasn’t announced any further definite progress toward the goal of reducing the average unit cost of the follow boats in the Ohio-replacement program from about $5.6 billion to $4.9 billion in FY 10 dollars.
Finally, it can be noted that in spite of the points I have just made, there appears to be strong support for the Ohio-replacement program. There are some proposals for building fewer than 12 boats as part of a plan for reducing the size of U.S. strategic forces, but the idea that SSBNs should form a core part of the future strategic deterrent force appears to enjoy wide support.
In conclusion, in my remarks today, I have ranged from narrow and technical matters such as Section 2588 of the sequestration law to broader matters such as world geography and the value of submarines in U.S. grand strategy. The situation currently facing submarines spans matters from one end of this spectrum to the other, and presents an unusually wide range of possibility for where things might go in the future. Hopefully, somewhere along the way, I have shared some comments that you will find of value in trying to address this uncertain and complex situation.