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72–386 PS











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MAY 3, 2001

Printed for the use of the

Committee on Transportation and Infrastructure


DON YOUNG, Alaska, Chairman

THOMAS E. PETRI, Wisconsin, Vice-Chair
HOWARD COBLE, North Carolina
JOHN J. DUNCAN, Jr., Tennessee
STEPHEN HORN, California
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JOHN L. MICA, Florida
SUE W. KELLY, New York
JOHN R. THUNE, South Dakota
RICHARD W. POMBO, California
JIM DeMINT, South Carolina
ROBIN HAYES, North Carolina
ROB SIMMONS, Connecticut
HENRY E, BROWN, Jr., South Carolina
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SAM GRAVES, Missouri
MARK R. KENNEDY, Minnesota
BILL SHUSTER, Pennsylvania

NICK J. RAHALL II, West Virginia
ROBERT A. BORSKI, Pennsylvania
BOB CLEMENT, Tennessee
ELEANOR HOLMES NORTON, District of Columbia
BOB FILNER, California
FRANK MASCARA, Pennsylvania
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GENE TAYLOR, Mississippi
JAMES P. McGOVERN, Massachusetts
TIM HOLDEN, Pennsylvania
BRIAN BAIRD, Washington
MICHAEL M. HONDA, California
RICK LARSEN, Washington


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FRANK A. LoBIONDO, New Jersey, Chairman

HOWARD COBLE, North Carolina
JIM DeMINT, South Carolina
ROB SIMMONS, Connecticut Vice-Chair
  (Ex Officio)

GENE TAYLOR, Mississippi
  (Ex Officio)



    Hecker, JayEtta, Director, Physical Infrastructure Issues, U.S. General Accounting Office, accompanied by Randy Williamson, Assistant Director, Physical Infrastructure Issues
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    Loy, Admiral James M., Commandant, United States Coast Guard, and Master Chief Petty Officer Vincent Patton, III, United States Coast Guard


    Brown, Hon. Corrine, of Florida
    LoBiondo, Hon. Frank A., of New Jersey
    Oberstar, Hon. James L., of Minnesota


    Hecker, JayEtta

    Loy, Admiral James M
    Patton, Master Chief Petty Officer Vincent, III


    Hecker, JayEtta, Director, Physical Infrastructure Issues, U.S. General Accounting Office:

Report, Progress Being Made on Deepwater Project, but Risks Remain, May 2001
Responses to questions

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    Loy, Admiral James M., Commandant, United States Coast Guard, responses to questions


    Fleet Reserve Association, Charles L. Calkins, National Executive Secretary, statement


Thursday, May 3, 2001
House of Representatives, Committee on Transportation and Infrastructure, Subcommittee on Coast Guard and Maritime Transportation, Washington, D.C.

    The subcommittee met, pursuant to call, at 10:05 a.m. in room 2167, Rayburn House Office Building, Hon. Frank A. LoBiondo [chairman of the subcommittee] presiding.

    Mr. LOBIONDO. If I could have your attention for just a moment, we have just had a vote that was called. So what we'll do is, rather than get started and break, we'll go over and take care of the vote, and then hopefully be able to get going and stay with it.
    So it will be about 10, 15 minutes.
    Mr. LOBIONDO. Good morning. The Subcommittee on Coast Guard and Maritime will come to order.
    The Subcommittee is meeting today to hear testimony on the Coast Guard fiscal year 2002 budget request. As you know, we will limit opening statements to the Chairman and Ranking Member. If other members have statements, they can be included in the hearing record.
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    This morning we are considering the President's fiscal year 2002 budget request for the Coast Guard. The Administration requests a healthy increase in Coast Guard funding for next year. I'm sure we in Congress echo his concerns. The President's budget for next year includes full funding for the Coast Guard's Integrated Deepwater System. This is a major step forward in the effort to modernize Coast Guard assets and increase the effectiveness of Coast Guard operations.
    I strongly support the Coast Guard's Integrated Approach to Deepwater Modernization project. This Committee has followed this project very closely over the last several years. After spending nearly seven years and $117 million on this project, it's time for us to move forward. I absolutely oppose the breaking up of the Deepwater project and acquiring Coast Guard assets piecemeal. I think this would be a terrible mistake. That approach would cost the Government even more money without providing the benefits inherent in an integrated approach.
    The Integrated Deepwater System is our best hope to prepare the Coast Guard to meet future challenges. The President's request also recognizes the need to increase Coast Guard operating expenses. Greater increases are necessary because chronic maintenance problems and increased personnel costs have outstripped Coast Guard operation resources. We appreciate the President's commitment to the Coast Guard, and we have shown our willingness to underscore that commitment.
    The fiscal year 2002 budget resolution contains a $250 million increase to cover basic operational shortfalls and provide for a higher level of drug interdiction. Under the resolution, Congress assumes that in excess of $5 billion will be available to the Coast Guard for operations, asset replacement and other critical expenditures.
    I recently met with members of a Coast Guard Goup Air Station Atlantic City in my district to discuss the Coast Guard's budget needs. These men and women who form the front line of the Coast Guard operations off the coasts of New Jersey all told me the same thing: they need appropriate funding to carry out their missions. When boaters or fishermen are in danger, the Coast Guard has been there. When floods, hurricanes or other disasters threaten local communities, the Coast Guard has been there. Now when the Coast Guard is itself in peril, we must be there for them and for our constituents.
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    Americans demand a strong Coast Guard that can protect our borders from drug smugglers and save lives at sea. If we follow the course provided in the budget resolution, we can solve the Coast Guard's problems and deliver what Americans deserve. I call on all my colleagues to support me in this effort.
    Mr. Barcia, would you like to make a statement for the minority side?
    Mr. BARCIA. I would, Mr. Chairman. I'm not the ranking member, but I would be honored to make a brief statement, so that we can hear the testimony of the very distinguished panel of guests this morning.
    I want to begin, Mr. Chairman, by thanking you for holding this very important hearing today to address the fiscal year 2002 Coast Guard budget. I would also like to welcome Admiral Loy to this hearing, and thank him for always making himself available to this Subcommittee and its members.
    Mr. Chairman, it's no secret that there is a significant difference between what the Coast Guard needs to run its day to day operations and to make the needed acquisitions and what the Administration has requested. While the current Administration request does, as you point out, represent an 11.5 percent increase over the amount appropriated for the Coast Guard last year, a step in the right direction for sure, it is estimated that the shortfall is still approximately $300 million.
    That means that if we in Congress do not address this discrepancy, we will likely have an unattractive combination of budget shortfalls, year end supplemental funding bills and operational cuts. Can we really afford to have drastic operational cuts in an organization that is such an integral part of our national defense and plays such a critical role in our maritime safety, security and mobility?
    As we all know, the answer is a resounding no. With more than 600 miles of coastline in my district in Michigan, the Coast Guard's numerous missions from ice breaking to search and rescue, from drug interdiction to marine environmental science, these are all critical to the health and safety of my constituents and the people across our great country.
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    That is why I look forward to the testimony of Admiral Loy and the chance to discuss this critical shortfall. Thanks to the impressive leadership on this Subcommittee and the full Committee and within the Coast Guard as well, I am hopeful that this problem will be rectified and that the Coast Guard will be able to continue to provide the Nation with the high level of services we have come to know and rely upon so heavily.
    Thank you, Mr. Chairman.
    Mr. LOBIONDO. Thank you, Mr. Barcia.
    Mr. Simmons, do you care to say anything to start off?
    Mr. SIMMONS. I'll pass, Mr. Chairman. I would like to hear the witnesses. Thank you.
    Mr. LOBIONDO. Okay, thank you.
    Now I'm very pleased to introduce our first panel, Admiral James J. Loy, Commandant of the United States Coast Guard, and Master Chief Petty Officer Vincent Patton, III, United States Coast Guard.

    Admiral LOY. Thank you very much, and good morning, Mr. Chairman. Congratulations on the Chair. We're delighted to have you in it, sir, as a long-time supporter and as someone who has an awful lot of Coast Guard things in one's district that are taking good care of the New Jersey coastline.
    Welcome to the new members as well, and we're delighted to have you join us and look forward to working with all the members of the Committee through the course of the ensuing budget year.
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    Good morning, Mr. Chairman. It's a pleasure to appear before you today and discuss the Coast Guard's fiscal year 2002 budget request and its impact, most importantly, on the essential services that we do provide America on a daily basis. I continue to be inspired, that's where I get my inspiration on a daily basis, and that is the daily evidence of the dedication, the patriotism and the sense of public service inherent in Coast Guard people, Coast Guard men and women around the Nation making those daily contributions.
    These are men and women who continually demonstrate their commitment to saving lives and property at sea, protecting our natural environment and safeguarding the national security of America. Maintaining their focus around the clock, frequently in very difficult situations, often in terrible weather and most of the time under some extreme pressure, Coast Guard sailors and airmen and marine safety professionals and even support personnel have compiled an impressive list of accomplishments over this past year.
    Coast Guard men and women responded with poise and vigor when 34 crew members aboard the foundering cruise ship Sea Breeze, 250 miles off shore, called for help. Their helicopter was buffeted by 65 knot winds and the sinking ship was being pounded by 25 foot waves, yet all were returned to the shore safely. The great value to me is that that case simply represented less than 1 percent of the lives saved last year.
    Coast Guard personnel succeeded in preventing major ecologic disasters in the wake of oil tanker groundings off the Mississippi River coast in the delta, and even in the Galapagos Islands. They facilitated the safe passage of over 2 billion tons of freight, over 3.3 billion barrels of oil, and over 134 million passengers, safely through our Marine Transportation System.
    As one of the Nation's five armed services, we deployed our Port Security Units to the Arabian Gulf in the aftermath of the USS Cole incident to provide force protection for U.S. Navy and for Military Sealift Command ships. They continue to be there today.
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    In addition to providing security abroad, Coast Guard men and women protected the maritime borders of our Nation by preventing more than 4,000 undocumented aliens from reaching our shores, and interdicting drug smuggling vessels, such as the Forever My Friend, who alone was carrying nearly 20,000 pounds of cocaine destined for the streets and playgrounds of America. That one case was a contribution to the 62 tons that we took out of the transit zone last year.
    I have a tremendous pride in what Coast Guard men and women have accomplished this past year. I continue to be concerned, however, with their ability to maintain those performance levels in the coming decades. Despite the dedicated hard work that the men and women of the Coast Guard perform day in and day out, we continue to be challenged to maintain our performance levels. Aging assets, spare parts shortfalls and an inexperienced work force are all issues that continue to cause me concern.
    Last fall, the small boat lowering systems davit on the 58 year old Cutter Storis, in the middle of the Bering Sea, broke into pieces and nine Coast Guard personnel were dumped into the freezing and very rough waters. Fortunately, all were recovered. Many of them were incapacitated by the cold, unable to even help themselves out of the water and in imminent danger of succumbing to hypothermia.
    As the Storis was recovering its personnel, the fishing vessel they were about to board simply slipped away. It had been illegally poaching in our waters. We didn't get the job done that day.
    The Storis incident provides one stark illustration of the harsh environments Coast Guard units operate in, and the need to maintain proper readiness, if we are to accomplish our assigned work for America.
    Mr. Chairman, the President's fiscal year 2002 budget focuses on three themes for our service. Specifically, the requested budget will help to restore service readiness to shape the future of our Coast Guard and to continue what has become a decade long transformation from the Coast Guard of the old to the Coast Guard of the 21st century. We have made noteworthy progress toward the goal of restoring our readiness.
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    My number one pledge to this Committee two years ago was to rebuild the Coast Guard work force. And our exceptional recruiting efforts, thanks to the provision of good assets by this Committee, we were able to report last year that we had completed the reserve force recruiting effort, and that that force was up to complement. This year, I'm pleased to report that the active duty enlisted force is back to its authorized strength for the first time since 1994.
    We still have skill and seniority gaps, to be sure. But we have cut out petty officer shortage in half, and in addition, the civilian work force is benefiting from its most successful recruiting year ever.
    But the work force is just once facet of readiness. To completely restore service readiness, we must continue our multi-year phased approach, to ensure that Coast Guard operating and support units are properly staffed, trained, equipped and maintained. That is our mutual challenge together.
    The President's budget helps us make progress along that path. It will provide for important personnel initiatives that will assist us in recruiting and retaining the people we need to conduct Coast Guard missions. The President's budget will annualize the fiscal year 2001 pay raise and mandatory military entitlement introduced with the National Defense Authorization Act of 2001. It will provide a fiscal year 2002 pay raise, 4.6 for military, 3.6 percent for civilians. It will improve health care and continue vital recruitment and retention incentives.
    In addition to maintaining a viable work force, the President's request provides much needed funding for aviation spare parts. It covers increasing fuel and energy costs and provides funding to operate new assets that were acquired in fiscal year 2001. These assets include 3 new buoy tenders, 10 new coastal patrol boats, 20 new motor lifeboats. All of these were brought in as part of that transformation process.
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    The President's budget also addresses our readiness concerns at search and rescue command centers and stations by increasing staffing to alleviate previously identified personnel fatigue and quality of life issues.
    I think the strongest statement in the President's request is that we step boldly into modernizing the Coast Guard's operational capability, and especially its operational capability offshore. I'm sure we'll discuss this thoroughly in the course of the hearing, so let me make just a point or two now. First, the National Distress and Response System Modernization project, and the Integrated Deepwater Systems project are crucial to our future. ND&RSMP will connect the coastal asset inventory into a safe, efficient and effective force nationwide, with no gaps in coverage. It deserves the attention of each of us to assure we move smartly and methodically to complete the prototype, to execute the testing and evaluation appropriate and to accelerate, if we can, the installation of this capability.
    Second, the Integrated Deepwater System is very simply the future of the Coast Guard's capability offshore. Aging infrastructure puts missions and Coasties at risk. We have worked diligently for three and a half years to bring the project to this point. We have examined failed projects to see why they failed. We have examined successful projects to see why they succeeded. We have reached out, we have requested and received reviews and scrutiny from constructive critics who helped us design what I think is now the best acquisition strategy so as to prepare the best RFP possible to put on the street on the 15th of June.
    Again, I look forward to a good discussion, but the bottom line is this: our offshore capability is waning, and it is waning at an accelerating pace. We are throwing more and more good dollars after bad in order to make a losing effort at holding onto the productivity of this offshore capability.
    I need three things from this Congress, as requested by the President in the budget: $338 million, the ability to hold the timeline so we can award a contract in the second quarter of 2002, and support for the prime system integrator with whom I will enter into a public-private partnership to deliver the ships and planes and sensor systems that we will need to serve America offshore for the next 40 years.
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    Third, Mr. Chairman, this budget offers the beginning of a transformation from old to new. The operating expense budget reflects a 6 percent increase from enacted 2001. I hope to show you in our discussions today that we need to break the downward spiral of spending ever-increasing amounts of money on our older assets, seemingly entering or emerging each year from one liquidity crunch that seems to bear the seeds of the next one.
    This budget acknowledges that temporary operational adjustments will likely be necessary. In order to pay mandatory bills, bring on and use the new assets procured last year, and live within the budgeted mark, old assets too costly to sustain are offered in this budget for decommissioning. And I'm ready to discuss that with you as well.
    Lastly, I want to thank you, Mr. Chairman, and the Committee, for the effort you have taken on already to get us an authorization bill this year. Our last bill was passed in 1998, and we have been operating for the last two fiscal years without specific authorization. I sincerely appreciate your effort to get unanimous House passage of H.R. 1099, which contains important near-term Coast Guard enhancements. Our administration bill should clear very soon, and I would ask the Committee to give full consideration to its provisions when it's cleared to the Hill.
    Mr. Chairman, each morning when I wake up I really only have two goals. I want to get the job done that America has asked us to do, and the second is to read carefully my job description in the law, which says come to this Hill with this support of the President and seek those things necessary to organize, to train and to equip these marvelous young Americans in Coast Guard uniforms to do their work for this country. Our past performance and our pride are the foundations for future excellence.
    Coasties will always read their orders, go out into the storm and excel. They always have, and they always will. I see it every day. Our task together is to ensure that they have what they need, not only to venture out into that storm, but to come back safely so they can do it again tomorrow.
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    Thank you, Mr. Chairman. I look forward to your questions.
    Mr. LOBIONDO. Thank you, Admiral Loy.
    Master Chief?
    Master CHIEF PATTON. Good morning, Mr. Chairman, distinguished members of this Subcommittee.
    I greatly appreciate the opportunity to meet and discuss with you my views on the state of the Coast Guard's enlisted work force. Just this morning, 2:30 this morning, as a matter of fact, I just returned from a week-long trip out on the West Coast, visiting various Coast Guard units in the San Francisco Bay area, just the Commandant just mentioned, without any expression of showing how proud I am as well as the Commandant in terms of the men and women that we have in our organization that are just doing tremendous things.
    There are some concerns, though, sir. The concerns are that they want to continue to do what they do best, and that's looking out for the needs of the American taxpayers in our Nation's waterways. To do that effectively is of course to ensure that we prepare our people well so they can perform well. And this is just a paraphrase, a credo from Admiral Loy himself, who uses the phrase, Preparation Equals Performance.
    As I've stated in my past two testimonies before this Subcommittee, major issues such as housing, family health care, recruiting, retention, pay and compensation continue to dominate the open group and individual discussions that I have had with our military personnel. Family health care and increased pay entitlement concerns have been heard throughout all of Congress. I am extremely grateful, and on behalf of all the members of our active and reserve forces in the Coast Guard, I thank you very much for your support.
    This past year has been extremely busy, addressing the needs of our Coast Guard work force, as we carry out our roles and missions into the 21st century. At present, we are examining many of our personnel practices to ensure they conform to the need of our future work force in the areas of housing, training, workload management and retention. These issues have remained the strong challenges to our personnel support system as we experience significant technical skills and experience shortfalls in our work force.
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    I'm gravely concerned in looking at how our work force shapes over the next few years, that as we continue to see more and more of our people who are eligible for retirement that retire, that have the kind of skills that we like to keep on, that we are having a shrink within the senior level of our enlisted work force that provides that carried experience that helps to ensure that the legacy of our organization continues to be as successful as it is.
    The importance of our quality of life concerns, housing, training, workload management, military pay, retirement and the demands of today's operational deployment and personnel reassignments must be recognized if the Nation is to continue to have a strong, capable, dedicated military, multi-mission maritime service in the United States Coast Guard. As we look to major acquisition initiatives, such as our Integrated Deepwater Systems project, the need for a highly capable work force that remains dedicated to fulfilling their assigned tasks cannot be taken lightly.
    I have often said that the makeup of our Coast Guard work force consists of ordinary people that do extraordinary things. I believe that this is an understatement. Our Coast Guard work force is a group of people who, through the legacy of our service's almost 200 years of existence, believes that our core values of honor, respect and devotion to duty are more than just words. These values remain as our conditions of employment where our people are concerned not only of their own personal well being, but the future of the Coast Guard as well.
    Where we are heading as an organization, our contribution to this country, and the ability for us to remain semper paratus, are key areas that I hope to address in this testimony today.
    In closing, I'd like to point out a couple of things, most recently, the tragic day on March 27th of this year, where the crew of the Coast Guard station Niagara was encountered with a very difficult situation and where we lost two crew members. Since that time, I have been keeping in constant contact with that station, not only just because of the two surviving crew members, to ensure that they're doing as well as the rest of the crew, but this was a tragic incident that was heard throughout the Coast Guard. Everyone from Attu, Alaska, to San Juan, Puerto Rico, felt that pain. And they tell me this as I go out and visit units.
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    As I said, coming back from visiting San Francisco Bay area, this was also a primary topic that they are very much concerned about all of our people. You can't get any better than that, to have an organization that everybody cares for one another. And I tell you that the good is still there. I openly invite each and every one of you, next month we will be celebrating our enlisted persons of the year ceremonies. Bosun's Mate First Class Heffner from Pacific Area Law Enforcement Team, and Machinery Technician First Class Apperson from the 17th Coast Guard District, a reserve who does his drills underway on a cutter where he spends his own money to get there are our award winners for this year. These are our extraordinary people that do extraordinary things.
    Thank you very much, and I look forward to your questions.
    Mr. LOBIONDO. Thank you, Master Chief, very much.
    We will now go into some questions from the members. I will remind the members that we will be operating under the five minute rule. If you feel the need to go beyond five minutes, if it's brief we'll recognize it, if not, we will come back to you.
    I'd like to start off, Admiral, by asking a little bit about the Deepwater project. I know there's been a lot of attention that has been focused on this, and I think rightfully so after so much time and money. But I'd like to ask you to explain once again, how important is the Deepwater project's focus on a single, integrated system of assets to the long term success of the acquisition?
    Admiral LOY. Mr. Chairman, I think it is absolutely central to the ultimate efficiency and effectiveness of our organization in the offshore realm on down the road. What we have here is an interesting convergence of the end of life cycle on most all of the platforms that are part of the deepwater environment. That provides us an opportunity like we have never had before to do something very smart, and that is to develop the replacement of that package of assets in a fashion that we have never attempted before.
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    Normally in the past, we would have said, okay, Mr. Commandant, you've got 12 high endurance cutters. We need to give you 12 new high endurance cutters. Or we have 30 of this kind of airplane, let's give you 30 new ones of that kind of airplane. This opportunity offers us a chance to take advantage, first of all, of the very best industrial minds of America, to have challenged them with a set of performance specifications and let them come and tell us, of all of the array of assets that might be available out there, although restricted in a sense to commercial, off the shelf kinds of things, so that we're not breaking through, if you will, an R&D environment that we can neither afford nor need, how do we compose the set of assets that would best serve America's interest in the future?
    The way you do that these days, in a totally accepted process, is by way of a systems integrator. So we have designed an acquisition strategy that will do exactly that, allow three competing consortia to show us what they think would be the very, very best way of doing business to provide services to America against our mission challenges of the future. The notion of an integrated system is absolutely central to our success in that regard.
    Mr. LOBIONDO. Admiral, would you talk a little bit about how you anticipate that the Deepwater project would increase the effectiveness of the Coast Guard's law enforcement and defense missions?
    Admiral LOY. Again, sir, our challenge for the future is to widen the notion of what Goldwater-Nichols brings to the joint arena in the Department of Defense. Goldwater-Nichols is supposed to blend the colors, if you will, of the capabilities of four heretofore disparate services, and find value in cohesion, collaboration and in doing things together. It's defined value in not duplicating capabilities that don't need to be duplicated in the Army and in the Air Force or in the Navy or the Marine Corps, or wherever those boundaries used to cross.
    The same kind of thought process works for us as well. We want to make absolutely certain that there is interoperability, not only between the coastal assets that we have just renewed, but this new array of offshore capability that will serve America into the future. And further, we find the requirement to be interoperable with many other services and agencies. It is not just Coast Guard people talking to Coast Guard people with the interest of getting the job done, it is our interoperability with the United States Navy, with all the joint community from DOD and with a host of Federal, State and local law enforcement and other agencies that are all part of us getting our job done well.
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    So this is about efficiency so as to provide the best bang for the taxpayer's dollars at the other end of the day.
    Mr. LOBIONDO. Thank you, Admiral. I probably will have some additional questions, but since we're close to the five minute mark for me, I'll turn to Ms. Brown.
    Ms. BROWN. Thank you and good morning.
    Admiral LOY. Good morning, ma'am.
    Ms. BROWN. I have a question that I know my fellow Floridians want me to ask. How will the Administration budget affect the level of drug interdiction operations?
    Admiral LOY. As presented, as I indicated in my opening remarks, the transformation process offers a challenge in that regard. In other words, what we want is to hold on to the performance standards that are now specified in our performance plan that is offered as part of the budget each year. We want to rise, if you will, to a baseline set in fiscal year 1999.
    As we think through holding those productivity levels in all of our missions, including counter-narcotics, this budget frankly ma'am would actually lower that profile a bit. Because over the course of 2002, we would see the requirement in order to pay bills, and in order to bring on new assets acquired last year, and in order to live within the OE mark, we would actually offer, as we have in the budget, a small number of decomissionings that would represent probably a 15 to 20 percent of loss of productivity for the organization offshore in the future.
    Now, we've thoughtfully considered how we would go about doing that, and which assets we would offer for early decommissioning, including the notion of making sure that we would offer those with the least marginal return today as we step towards acquiring new assets in the deepwater environment of the future.
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    Ms. BROWN. How many aircraft and cutters do you think would have to be laid up as a result of this budget?
    Admiral LOY. As the budget stipulates, the list is three cutters, two medium endurance 210 foot cutters, the Cutter Cowslip, a buoy tender in Astoria, Oregon. It involves three C-130s, it involves 13 Falcon aircraft, and the Tagos platforms that we acquired two years ago and their associated DPBs, or the patrol boats that operate from those. Those would essentially be—I'm sorry, two Coast Guard air facilities, one in New York, on Long Island, one in Michigan on the lake that would be decommissioned as a result of a completed budget as we see it presented.
    Ms. BROWN Let me just ask one other question. Pertaining to Tricare, can you give me a status report of that? Can the Coast Guard, I guess my question is, can they afford to provide it or should they look for other methods? But I do know most of the military personnel that I've talked to, they like the Tricare. But there are problems.
    Admiral LOY. Yes, ma'am, thank you very much. This budget would actually cover what we think should be, as is happening in America at large, escalating health care costs for the organization, but covered adequately in the 2002 budget as presented. Since last year, actually over the course of the last two years, we have worked very hard to find Coast Guard seats at the table in the Pentagon when they are deliberating such issues as housing or health care for all of our military people. We are locked into the DOD system now to help us do a better job serving Coast Guard families.
    Last year, we were directed to undertake a study as just to what would be the better way potentially for the Coast Guard to engage in health care delivery to our people. There are probably three serious options on the table as we continue to study that carefully. And our report will be delivered on time, as the Congress asked for last year.
    The three options are to hold on to Coast Guard clinics and sick bays, which we currently have, and rather than continue with Tricare, shift to the Federal Employees Health Benefits Plan for Coast Guard people that would, the notion is that we would get better health care for our people if we did that. Second option is to retain our clinics and sick bays at the moment and hold on to the Tricare augment to those clinics and sick bays and only add FEHBP at local areas where we felt Tricare wasn't reaching adequately to them. Then lastly would be to consider continuation of the current state, if you will, which is hold on to our sick bays and clinics and hold on to an improved Tricare augment that would offer that to our people.
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    So we are looking at that very carefully. But in the meantime, the 2002 budget request from the President strongly recognizes the reality that health care is escalating at 22 percent, when everything else is only up 6.
    Ms. BROWN. Thank you. I have some other questions on my next round.
    Mr. LOBIONDO. Okay, thank you, Ms. Brown.
    Mr. Coble.
    Mr. COBLE. Thank you, Mr. Chairman.
    Master Chief, Admiral, good to have you both with us.
    Mr. Chairman, I think the word has finally found its way to this Hill generally and the Congress specifically that America's oldest continuous seagoing service is a pretty doggone good investment. I wish I could believe other Federal agencies expend their appropriated monies as prudently as you all do, and I wish they could emulate what you do.
    I don't know how you do it. We continue to say do this, do this, and additionally, rarely are you the beneficiary of a corresponding increase in appropriations. That may change.
    Now, having said that, Admiral, there's a perception among some up here that the Coast Guard received a 12 percent funding increase in the President's fiscal year 2002 budget request, by far the largest increase in the Department of Transportation, and well above a nominal growth rate of 4 percent for other agencies, assuming this is true. My question to you, Admiral, is do you agree with this assessment and if not, straighten it out or correct it.
    Admiral LOY. Yes, sir, thank you for the question.
    I think this is obviously understanding the numbers, first and foremost. What the reality is is that we have a $545 million differential between 2001 enacted and the President's request for 2002. So if you use those numbers correctly, you come up with a 12 percent differential.
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    But I think it's enormously important for us to understand the basis for that increase. A little math is in order here, sir, if I may be so bold. If you take, first of all, the 2001 denominator. Last year, the President requested $110 million in his budget for the Great Lakes icebreaker replacement. It was funded, but appropriated through the MILCON supplemental, not through the Transportation appropriation.
    So how you would play that baseline against the percentage of increase needs to be clear. In other words, what were the real needs last year and what was actually appropriated, what is being asked for this year, and therefore, what is the 12 percent.
    More to the point, if you take just three things, a $98 million mandatory increase in our retired pay account, the $338 million line item for the Deepwater project, that leaves about $200 million to make up that $545 million plus-up. That's the difference in OE, which is about a 6 percent increase, again, something that we should be delighted with and are.
    But the reality inside the $198 million differential is this. When you account for NDAA 2001 and the pay increase from last year, that amounts to $119 million. When you add in the health care differential we just spoke about, that's another $37 million. And when you add in the adjustments to the energy account, compounded by a 40 percent or 45 percent increase in those this year, just those three numbers add up to the $200 million.
    And then when you add on the normal rent increases, the normal contractual increases that are part of every budget every year, when you add on the new assets coming into our organization that we now have to pay for, very quickly you get to the point of having to come up with $100 million or so of savings in order to do all of those things.
    I said in my opening statement in order to pay the bills, bring on new assets and live within the mark, we had to come up with about $108 million worth of decommissionings to afford that new amount of operational capability.
    Mr. COBLE. So the 12 percent is misleading?
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    Admiral LOY. I wouldn't call it misleading, sir. I would only say, let's recognize the reality of the math that yields it.
    Mr. COBLE. Mr. Chairman, let me see if I can beat that red light. Admiral, I want to extend the Chairman's comment on Deepwater. Will the Coast Guard be forced to neglect future shore facility and communication projects to make room in your AC&I budget for the Deepwater replacement project?
    Admiral LOY. Not at all, sir. We are quite comfortable that, first of all, that we can live within the projected marks that the Office of Management and Budget offer us today, and especially we can do that when we recognize the convergence that seems to occur year after year after year between a projected mark of a couple of years ago and what that mark actually becomes in the year of interest.
    For example, just two years ago, our 2003 mark would have been somewhere around $450 million. Last year, our 2003 mark was projected to be somewhere around $520 million. This year, our 2003 mark is already up to 680 or so million dollars. I remain fully convinced that those kinds of projections converge when both the Administration considers the need and when the Congress considers the need in the actual budget year of negotiation.
    So we are stepping forward boldly with especially the National Distress and Response System modernization project. This year we'll fund the last two buoy tenders, and we have very consciously tried to clear the decks, if you will, of our AC&I needs to make room for the Deepwater project in the out years.
    Mr. COBLE. Admiral, the Chairman does not like to see that red flashing light, so I will conclude. Thank you, gentlemen.
    Admiral LOY. Thank you, sir.
    Mr. LOBIONDO. Thank you, Mr. Coble. Mr. Taylor.
    Mr. TAYLOR. Thank you, Mr. Chairman. Chief, thanks for bringing that other guy with you here today.
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    Mr. TAYLOR. We know who runs the Coast Guard.
    Admiral, thank you for being here as well.
    A couple of things I wish you would elaborate on. I've spent a lot of time particularly on the Armed Services Committee dealing with military health care. I was a bit troubled to hear your, and I hope you can clarify this, hear your remarks of looking at FEHBP as an option. Something that I've had to explain to my retired community back in Mississippi is that FEHBP, number one, is not free.
    Admiral LOY. That's right.
    Mr. TAYLOR. Last time I checked, it cost my family $1,600, and I don't want anyone, particularly our young enlisted guys and young officers who are just getting by having to dig into their pockets for health care that should be free for active duty force and their families.
    The second thing I'd ask you to comment on is, in the transportation bill last year, we had asked for a report on the progress of going from single hull to double hull tankers. One of the things I'm happy to have been a part of while I was here was the Hull Pollution Act of 1990. I know the Coast Guard has been working towards this goal, I know since the early 1970s.
    And I am concerned that the owners and operators may be dragging their feet on going to double hulls in an effort to, and I'll use this word impolitely, blackmail the country into giving them an extension, saying, well, geezoo petes, we're at the deadline we don't have our double hull ships, you've got to give us an extension, when they have known for, in many instances, 15 or 20 years that it was coming. And I quite frankly don't want to cut them any slack. So I need a report to know whether or not that worst case scenario is happening.
    The third thing, again, having spent some time on the military health care issue, and a lot of the guys who are here, last year, I believe everyone at this panel voted for the major expansion of health care benefits that went on the Defense Authorization bill. Since the Coast Guard should be enjoying those same benefits, but since your budget comes out of a different bill, could you explain to me and this panel what has been done in order to cover that additional cost and what needs to be done in order to cover that additional cost, since when we expand benefits obviously it means our Nation has to spend more money to fulfill that promise.
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    And last is, I think there have been some well pitched balls to you already, but if you need one more well pitched ball for you to make your case for Deepwater, which I do understand the need for, I'm throwing it at you.
    Admiral LOY. Okay, sir. Thank you for all of those questions.
    First, as it relates to health care, the direction from the Committee last year was for us to study carefully, so as to see if there was a ''better way'' for us to deliver health care services to our people. So in the course of putting that study group together, we challenged them with such things as FEBHP as something that we knew was on the table, something that we knew was a system already in place, did it make sense for us to go there.
    My guess is that especially as a result of the excellent work done by the defense committees last year that resulted in significant health care, positive steps, that the FEBHP option as we continue to study it glows less brightly. We'll hang in there. But I don't want to presume the study's work, I want to let them do their thing, scrub it hard, get it back to me so that I can offer it back to the Committee as directed.
    One of the aspects that was enormously important, as you know, sir, for the Coast Guard, was Tricare Prime remote. I came back from a trip to Alaska two years ago and offered back into the Pentagon the simple realization that tri-care prime was not delivering services well to Coast Guard people in Alaska. We were all over, we were in Ketchikan and Sitka and Homer and Juneau and Valdez, etc., etc. The only two military treatment facilities in Alaska is one in Anchorage, at the Air Force base, one in Fairbanks at the Army facility.
    So our people, if they were going to take advantage of military facilities, had to do one of two things: take money out of their pockets and travel there to get the services, or pay the exorbitant price demanded by the one practitioner in Homer or the one practitioner in Ketchikan. That was a dramatic challenge for me to bring that story back and bring it into the system in DOD to help them understand how they can best deliver services to Coast Guard families.
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    Once they realized that 150,000 or so DOD employees were so exposed as well, whether they were recruiters or ROTC staff members of something, well away from military treatment facilities, even in the continental U.S., they captured the notion and of course, you ended up in the Committee passing the legislation that produced Tricare prime remote. That is an enormous step forward in health care delivery to Coast Guard families. And I would offer the Master Chief the opportunity to comment on that.
    So my sense is, sir, that because of the good work done by both the Administration and the Congress last year, we will be devising ways to make sure Coast Guard families are the beneficiaries of those health care service programs as you have improved them.
    Secondly, as it relates to single-double hulls, I am as concerned as you are. I watched the time roll by, the calendar, when there were many opportunities to take interim steps that would have given us both a better feeling that the 2015 mark is going to be hit without exception. I continue to feel that we're going to do that. Every time that I have had the opportunity to talk to one of those owners, to talk to one of those operators, those shippers, those charterers or whomever, I let them know unequivocally that there is no backing off from the established schedule of compliance as is reflected in the law.
    I think, sir, if anything we will watch in Europe, as they, in the aftermath of the Erica spill, and four other consequential tanker spills that have occurred in the last year, we will watch if anything a push in the international community at the International Maritime Organization to accelerate that schedule rather than hold on to it or let alone, let it go further. I think that is a good thing as it relates to the constancy of pressure we need to hold on to, to live up to the law that we passed here in this land.
    Lastly, you offered me a softball, if you will, on the Integrated Deepwater System project. I think the Chairman and others may have specific questions, so let me just say this. Coast Guard people, on a daily basis, are out there in platforms that range in age from about 20 years to 58 years. We are plying the Bering Sea in a number of assets that fought for this Nation, as an example that I mentioned in my opening statement. Thankfully, it does not occur every day.
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    But it doesn't occur every day because we are spending maintenance funds against a losing battle. We are investing the taxpayers' wealth in a losing proposition. And it is simply time for us to recognize that the last time we did this major change-out for Coast Guard capability offshore was in the early 1960s.
    The time has come, we have studied this project thoroughly, we have produced as a result of excellent outreach to the GAO, to OMB, to the IG, to experts in the academic community, to the best acquisition reformers in the Pentagon and elsewhere in Government, to the Defense Systems Management College. We have all of those people that have come in and scrubbed our strategy and scrubbed out RFP that's about to go on the street for the second phase of this project.
    We have built an organization at Coast Guard headquarters that will champion it. It is staffed by the brightest minds in the Coast Guard. We have four or five Sloan graduates from MIT, we have four or five project manager graduates from DSMC. We have staffed it with stability in mind. I have told the new project officer, program executive officer, Admiral Stillman, that is his job for the balance of time he's on active duty in the Coast Guard. I have hired a Senior Executive Service member in to be his deputy that we stole from the Air Force as one of their brightest acquisition minds. This project is ready to go forward, and it's ready to go forward in fiscal year 2002.
    Mr. LOBIONDO. Thank you.
    Mr. Simmons.
    Mr. SIMMONS. Thank you, Mr. Chairman.
    I suspect we'll get a little additional testimony on this, but in reading through the GAO report, it is indicated that affordability is the biggest risk of the Deepwater project. And concern is expressed that as we proceed with this, the cost of the project may create something of a drain on the Coast Guard's overall budget.
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    Let me just say at the outset, I support wholeheartedly the Deepwater project. I've been briefed up on it and think it's timely and necessary, and in the long run will save dollars and save lives, most importantly.
    But I also have an interest in other aspects of the Coast Guard. The Academy is located in my district. I have an interest in academic life, as you know. And I would be concerned as we look at the out years that the cost of acquisition and operating and maintaining this ambitious and exciting new program might draw away from other important programs, education and academic, port calls for the Eagle, which are so important to that training device, if you will, plans to expand the museum, which is an educational asset of the Coast Guard up in eastern Connecticut.
    What kind of assurances can you provide me that that sort of thing will not happen?
    Admiral LOY. I would answer your question this way, sir. First of all, the GAO report, which I just, in fact, the next panel, JayEtta offered me a copy of both her testimony and the report just yesterday. I just was able to skim through it last night.
    I would first say that an agency or an organization or service like the Coast Guard that is pressing forward with this kind of a project would be crazy if they didn't have a tight feeling in the pit of their stomach as to the capacity to press forward from the financial capacity side. I have that pit in my stomach.
    But the risk of not pressing forward with that goes far beyond, in my mind, the minimized risk associated with the dialogue that we've undertaken, both with the committees on the Hill, as well as with the Office of Management and Budget. I can't speak for those people, and I would encourage you, of course, to have them speak for themselves.
    But when push has come to shove, the Congress and the Administrations of the past, of today and of the future, will meet the needs of the operating agencies that do the business of the United States of America. And I'm absolutely convinced that that will be the case this time as well. We should have every faith and confidence of stepping forward and taking advantage of whatever is available along the way, including being smart enough to have touched the bases with folks like GAO and the IG and all the other people that I just mentioned, so that you've designed your strategy to deal with fluctuations in the financial flood that will come your way. And we have done precisely that.
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    So from that perspective, that's a question that was asked at the very beginning of our three plus years of design work.
    Secondly, your question is about, have we put a set of blinders on here, and are we going to allow the Deepwater project to dominate the scene, such that other legitimate needs are not met. That's not going to happen as well. I can guarantee you it will not happen on my watch, and I can guarantee you that it won't happen on the next Commandant's watch, either. The reality there is that I am as concerned about the National Distress and Response System Modernization project, because it is about not only search and rescue, it is about the command and control of this wonderful array of coastal assets that we've renewed our service with over the course of the last decade.
    We need that system and we need it badly. I wish I could do it tomorrow. And believe me, especially in the wake of the questions from this Committee last year, I scrubbed that project very hard. There's not much we can do to accelerate it in the design stage. But we may very well be able to accelerate it in the installation stage, once the prototype is proven. All it will take is money. All it will take is money and the time of whoever wins the project to have the capability to make multiple installations at the same time.
    I am very concerned about our shore plan. I can show you with a very good methodology that we built last year that we have about a half a billion dollars worth of deferred maintenance somewhere between aviation, shipboard electronics and shore facilities. And I can tell you the vast majority of it, probably $360 million of it, is on the shore facility side, including the Academy.
    We are an operating organization. So if we err, we err on the side of making our ships and planes safe for our people to go to sea in and into the air in. And we let the shore stations sort of take a hit. We've done that annually for probably as long as the Coast Guard has been in place.
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    But I am conscious and concerned about that. And we will take on those challenges as the years play out.
    Mr. SIMMONS. Thank you, Mr. Chairman. Thank you, Admiral.
    Mr. LOBIONDO. Thank you.
    Mr. Barcia.
    Mr. BARCIA. Thank you, Mr. Chairman.
    I have just one brief question for Admiral Loy, and want to thank again the panel for sharing your perspectives on these issues as we move forward into this new fiscal year. In addition to the planned military pay raise of 4.6 percent scheduled for this year, there has been considerable discussion about giving the Pentagon an additional $1 billion for pay and other entitlement to help retention and recruiting of our military forces.
    Has the Coast Guard been included in that discussion, and have you, Admiral, approached the Pentagon about the Coast Guard's portion of that additional $1 billion to help ensure pay parity without a negative budgetary impact? Because certainly, we want our Coast Guard personnel that put their lives at risk as much as any of our great Americans in the other branches of our military, we would certainly hope that the Coast Guard will share in that commitment that the Congress has made to upgrade pay and quality of life issues for our Coast Guard and the other branches of military service.
    Admiral LOY. Yes, sir, thank you very much.
    I have called this a mechanical problem, the notion that decisions taken either as the President builds his budget, and usually at the eleventh hour and fifty-ninth minute and fifty-ninth second they make the final judgments associated with the 800 pound gorilla across the river. Knowing full well, let me take that clause back. Because frankly, my concern has been that they haven't known full well that those decisions taken wag us, as the tail on the dog on the other side of the river.
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    We have worked very hard in making that reality known to a wider spectrum of folks than ever before. Mr. Taylor has been very kind, because he sits on both committees, to hear the dialogue going on in the House Armed Services Committee and make sure this Committee is aware of that dialogue, so the implications of their decisions can be taken into account in the Coast Guard's appropriation.
    So for this year, we would stand to have about an $80 million exposure above the President's budget if some of the things that I've heard happen. For example, there is discussion that we would raise the civilian pay raise to at least the same level as the military raise, from 3.6 percent to 4.6 percent. A general discussion that the Congress might choose to raise the military pay beyond that, let alone the entitlement that may very well be forthcoming in this year's NDAA, all of which by Title 37 I have no choice to pay to Coast Guard personnel. And that's exactly what I want to do anyhow, as you point out.
    But the challenge there is to make certain that decisions taken there are in fact reflected in the appropriations actions in the transportation bill as it impacts us. And I would hope that there is a recognition of that, as I attempted to stress yesterday with the Appropriations Subcommittee, that whatever those exposures are, this organization can no longer take it ''out of the base'' and absorb it. It has to be provided in the form of real appropriations.
    Mr. BARCIA. I want to thank you for that response, Admiral Loy, and also say that I recognize that if you're going to keep a talented and dedicated personnel team in place in our Coast Guard that these modest increases are necessary to retain those same individuals in the Guard for additional years. Because if someone goes year after year without recognition, without a modest cost of living increase and other increased entitlement for their service, we're likely to lose them from the Guard service.
    So thank you for providing leadership on that issue on behalf of all of the personnel.
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    Admiral LOY. Thank you. That is exactly, I think, where Master Chief Patton's testimony was going.
    Mr. LOBIONDO. Thank you. Mr. DeFazio.
    Mr. DEFAZIO. Thank you, Mr. Chairman.
    Admiral, in looking at your budget and your statements, I unfortunately see a disturbing trend that I've seen in every other Administration budget hearing I've attended. Yesterday I heard from the Corps of Engineers about the move away from Federal assistance in flood control to faith based flood control, while they're chiding people to build dikes and levies, they're withdrawing all the Federal money that might do that.
    I heard from the Administrator of the EPA about the Government withdrawing from enforcement of environmental laws. Then I look at your budget and I see a 20 percent reduction in operations. I just find this extraordinary.
    Are these things just unnecessary, we don't really need these 210 foot cutters and the mission they were performing was not essential? The Tagos ships were just out there cruising around having a good time, the Falcon jets are just for the flyboys to be up in the wild blue yonder, the C-130s don't have legitimate missions? How can we cut these things out and do the same thing? We can't, is that correct? If we cut these things, something's got to go.
    Admiral LOY. Yes, sir.
    Mr. DEFAZIO. And what's going?
    Admiral LOY. In order for us to build the budget, as I indicated earlier, sir, we took a stab at sort of five notions with an effort toward prioritizing as appropriate the missions of the organization. And the five notions were this. One, that we would protect search and rescue and safety as an inviolate mission at the top of our inventory. That in the future, I was not going to continue those services if it was on the backs of my people, so it was going to be to set an op tempo that was only sustainable by an adequate support structure behind it. That meant training, that meant parts, that meant maintenance, etc.
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    The third notion was that we wanted to hold on the thought of continuing as a good steward of the American taxpayer's dollars. I wanted to balance the notion of mission productivity, because it was only last year that a full fledged task force in the Administration revalidated everything in my portfolio as being important to America. And if anything, a slope that would take us to the requirement to have more Coast Guard before we had less.
    And then lastly, to always keep in the back of my mind that if I was about to offer the decommissionings of A, B, and C, it ought to be with the notion of Deepwater right around the corner, so that if I'm about to acquire Deepwater capability, then the notion of what I would be willing to give up as part of this transformation period would be those things that I itemized earlier for the Committee.
    So we took out those two 210s that were basically maintenance hogs. When we went through the mid-life on those platforms almost 15 or 20 years ago now, those two particular platforms did not go through the same mid-life experiences as the other 14 vessels in that class. Ever since then, they have been a challenge for us.
    Mr. DEFAZIO. What mission will be foregone because of the two 210s?
    Admiral LOY. Offshore law enforcement.
    Mr. DEFAZIO. Offshore law enforcement in?
    Admiral LOY. Drugs, fish, migrants.
    Mr. DEFAZIO. Okay, drugs, fish, migrants. Have those problems, I guess maybe I'm confused, have they abated? I mean, is the challenge less?
    Admiral LOY. Absolutely not.
    Mr. DEFAZIO. Okay, so actually we still have a very significant challenge on drug smuggling—
    Admiral LOY. All three fronts.
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    Mr. DEFAZIO.—illegal immigrants and fisheries violations?
    Admiral LOY. All three fronts.
    Mr. DEFAZIO. So we're going to just not be there part of the time when we should be there?
    Admiral LOY. With that particular funding level.
    Mr. DEFAZIO. That's correct. I know you're in a difficult position, you have to defend the Administration's budget. But I want to point to the fact that if we're really—I hate the term war on drugs.
    Admiral LOY. So do I.
    Mr. DEFAZIO. But this Administration is talking about being even tougher and more robust in that area. I fail to see how we're going to do it if we're cutting some of the support and the capabilities to deal with drug interdiction.
    What about the jets? What did they do? If I could, Mr. Chairman, I realize my time is almost up, if I could just ask about the jets. Well, I guess I've still got a yellow light.
    Admiral LOY. The Falcons do the same. Offshore, they are fundamentally the maritime patrol aircraft supporting the vessels at sea, and secondarily direct search and rescue and environmental protection missions that they fly directly on their own.
    Mr. DEFAZIO. So the next time a cruise ship's dumping oil, we might not see it?
    Admiral LOY. There are platforms that are Falcons directly capable of doing exactly that, the infrared sensor Falcons, that's correct, sir.
    Mr. DEFAZIO. Is the support for drug interdiction that's being withdrawn only the amount that would have been for those two 210s, or will this impede the mission of other ships that are still going to be in the fleet?
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    Admiral LOY. The delta would yield more of a loss. It's not just those associated with the two 210s.
    Mr. DEFAZIO. Thank you, Admiral. Thank you, Mr. Chairman.
    Mr. LOBIONDO. Mr. Simmons, do you have additional questions?
    Mr. SIMMONS. No, Mr. Chairman, thank you.
    Mr. LOBIONDO. Ms. Brown?
    Ms. BROWN. Yes, I do. Today later, the GAO, in their testimony they're going to discuss the five year contract and discuss the lack of competition during the project in the later years. Can you address that?
    And also, the GAO in their report says that the Coast Guard don't have in place the technology, and that after the first five years the project could very well escalate. What does the Coast Guard have in mind to address these concerns?
    Admiral LOY. We have a lot of things in mind, Ms. Brown, associated with the design of the acquisition strategy. We are very conscious of things like a change in our mission profile, can this strategy absorb changes in our mission profile on down the road? Can it absorb changes in the funding stream, which Mr. Simmons had already asked me about? Can we absorb the notion that maybe a subcontractor will fail and go under?
    Even the outside possibility that the prime system integrator would go under for some reason, although I find that amazingly unlikely when we're dealing with probably the three of the world's very best at that particular task, $50 billion companies that know very, very well what they're doing.
    The integrators will be open to competing work even from members of the competing consortia, once the down-select is made. We have designed incentives to control costs and built them right into the strategy.
    GAO themselves, in earlier efforts, have helped us understand the positive value of having off-ramps built right into the contract and into the RFP that will go on the street that will make sure that if we find the prime or subs wanting as it relates to cost, schedule or performance along the way, we will take them on. This will become a public-private partnership between the Coast Guard and the winner, the prime system integrator. And together, the contract incentivizes them to do good things as it relates to operational effectiveness and total ownership costs and incentivizes them within the structure of the contract to do exactly that.
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    GAO has helped us understand, for example, the idea of value based segments. We will be able to see every ship, every boat, every sensor, every aircraft that is being proposed on an annual basis through the course of the contract. I will have to put that in my budget annually, the Department will have to review it, OMB will have to review it, the President will send it to the Hill and the committees on the Hill will be able to see precisely what it is that we are procuring with this contract in the budget year that will be negotiated.
    Effective incentives, off-ramps, the notion of partnering, almost a hard line partnering sense, such that memoranda of agreement will be structured. When I quickly reviewed their report last night, there was I think about a half a dozen continuing recommendations as it related to either the Secretary of Transportation or myself, making sure we have these things in place before we press on with the contract.
    And I feel very confident that we will have all of those in place, whether it's the realistic funding level, whether it's to carefully consider peer review panel recommendations that we already have in hand and those are already happening, whether we have a completed program management plan which is just about to come to closure. We have already done, we have already taken advantage of their notion of useful segments and built those things right into the strategy.
    So we will have these recommendations, which we thank them for, because they are about the business of helping us succeed with this contract. That's the notion that I would like to press forward with from now on.
    Ms. BROWN. I have a quick question for the Master Chief. In your testimony, you stated that the Coast Guard is going to face an increasing rate of retirement by enlisted personnel. What can be done to help retain the service's best enlisted personnel? And also, I would like to know what is the composition of the Coast Guard as far as minorities and women is concerned, and what kind of outreach program do you have?
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    Master CHIEF PATTON. Yes, ma'am, first of all, on the efforts on retention. We are now undertaking a very vast project in looking at ways of trying to retain our people. One of the primary reasons why particularly our senior people are leaving is first and foremost, the employment picture is looking bright. The fact that most people that do come in and decide to stay in, say, I'll wait until I get to my 20 year mark, I'm still young enough to seek employment, and that is happening.
    So we're really having a very tough time competing against something that some people have set goals to do, and of course are now achieving that particular thing.
    The second part, and that's going back to Mr. Barcia's point of what he brought up in his discussion, the Coast Guard's involvement as part of the discussion on the pay issue of the President's $1 billion effort of adding into pay. We definitely are players in terms of looking at how to use that money. One of the things that myself and my senior enlisted counterparts have discussed, because the other services equally are having the same problems with retaining senior people, is to look at increasing pay at the senior level, so it will give them incentives to stay beyond 20.
    Admiral LOY. Senior enlisted level.
    Master CHIEF PATTON. At the senior enlisted level. So hopefully if those things work out, that will be a good incentive to keep people a little longer.
    In response to the last part of your question, in terms of the makeup of our minority and women, right now our minority makeup is close to about 18 percent. That's collectively of both African American, Hispanic, Asian American and so forth. I unfortunately do not have the breakdown by particular ethnic groups.
    Women currently make up a little more than 14 percent. These are old figures, as of last September. My understanding, from our recruiting efforts both on officers as well as enlisted, is that that has been on the rise. I have a feeling that we have broken the 15 percent mark, which is just slightly above the norm of the other services.
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    Ms. BROWN. Thank you.
    Admiral LOY. Ms. Brown, if I may, Mr. Chairman, add one thought to her question about gender, especially. At the Coast Guard Academy, which is the source from which we get about half of our officer corps, the student body at the Coast Guard Academy is now about 33 percent women. So we're really pleased with the progress that has been made in terms of gender equity at New London.
    Mr. LOBIONDO. Thank you. Ms. Brown, I believe you have an opening statement, and we'll be happy to enter it completely into the record for you, if that's okay.
    Ms. BROWN. Thank you.
    Mr. LOBIONDO. Okay, Master Chief, Admiral, thank you very much.
    We will take a brief five minute break to allow the next panel to set up and then reconvene shortly. Thank you.
    Mr. LOBIONDO. Okay, if everyone is ready, we'll try to get started with our second panel.
    Welcome, and we'd like to introduce Mrs. JayEtta Hecker, Director of Physical Infrastructure Issues, from the General Accounting Office. Ms. Hecker is accompanied by Mr. Randy Williamson, Assistant Director of Physical Infrastructure Issues of the General Accounting Office.
    We thank you for being here and welcome your testimony.

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    Ms. HECKER. Thank you, Mr. Chairman and members of the Committee. We're really very pleased to be here today to report on what really has been a very comprehensive review of the Coast Guard, at your request, to really try to identify ways to assure the success of this important acquisition.
    Before starting, I'd like to thank our really dedicated team led by Randy Williamson and Neil Asaba out of our Seattle office, for really enduring and committing work through a lot of personal struggles. No one let go, and really stayed with this, with the commitment of coming up with constructive analysis and ways to help the Coast Guard succeed. So I thank them for that.
    I also want to thank you, Mr. Chairman, and the Committee leadership, for your support in allowing us to really work on this very important project and with the focus on providing independent but very constructive analysis and collaborative work with the Coast Guard. I think it has been in fact a great success.
    A couple of background points before I start. I think one way we're often looked at is GAO comes in, slash and burn and find problems, and in fact, some of the earlier work on this project, which a lot of the Coast Guard people are always quick to remind us of, we had taken some issue with the justification for the modernization and particularly raised questions about the remaining useful life in the legacy assets.
    We no longer have that concern. There was a comprehensive response to that, the true remaining life of the legacy assets were updated in a comprehensive review, and that information was given to all of the contractors. Therefore that is not a concern, and I'd like to try to make sure that that's not where we're at any more, questioning whether there's a need or questioning whether really indeed all the assets aren't going to need to be modernized. But it's just a question of when.
    I think it took off some of the urgency, because there was a representation early on that almost all of them were, they called block obsolescence. And they really weren't all expiring in the next few years. They all needed to be planned for modernization, but that issue is no longer on the table in our view.
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    A key part of our focus here was the acquisition strategy, because it was clearly developing a unique strategy, one that had never been tried before, and one that is really largely untried on anything of this magnitude. The concern is that a risky acquisition strategy, the uncertainties in it really have the potential to lead to delays as well as cost increases.
    What's important today really is that the Congress and the Coast Guard are really at a major crossroads. The Coast Guard of course is on track for awarding this contract or publishing the RFP this June, awarding it next year. And that of course begins that long term commitment. The Congress really, this is a unique juncture this year, really this year before that contract, that RFP is published, and before that contract is signed, this is a unique window in terms of oversight and awareness and a comfort level with the nature and the requirements associated with the type of contracting approach being pursued.
    So in light of that, the focus of our work to try to be most constructive to you and to the Coast Guard was really looking at identifying the risks and the mitigation strategies that could address those risks for the overall approach. And we came up with four areas, and I'll discuss each of these in turn.
    The first one is about managing the contract. As I said, it's very complex. It's got a wonderful unique element of being performance based, which is nice that you're buying performance, but you're actually acquiring assets. And it's a challenge. It's not an automatic transition to manage a very, very comprehensive performance based contract. So the management issues are significant and present some risks.
    The second risk that we address is the use of unproven technology. In dozens, more like hundreds of reviews GAO has done of major acquisitions, failures, which are most of the ones that we've reviewed, unproven technology is almost present in any system failure. So we wanted to look at how the contract was dealing with risky or unproven technology. The third risk we looked at is affordability and that basically is as it sounds, what is the order of magnitude of this, how does it fit with the kind of budget marks they're getting from OMB with the kind of additional non-deepwater modernization capital asset developments they would have as well. So there's the whole issue of affordability.
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    And the fourth is really about controlling costs, particularly in the contract's later years with a contract approach that really does not build in and automatically generate the benefits of competition along the way, which are the best ways the Government believes that costs are controlled, when you have competition.
    These first two risk areas, the management one and the technology, as an overview we found relatively low, low risk. The Coast Guard has done a lot in both, there's a lot to build on, and while more work still remains to be done, those areas have been managed very well, and superbly in some cases. While there's new challenges for the next stage, we found those risks in fact were not very significant.
    The two risks that we'll spend a little bit more time on are those of affordability and controlling costs. I know the time is limited so I'll move and try to just very briefly summarize the concerns in each of those areas. Because what we tried to do, of course, working collaboratively with the Coast Guard, there's a concern, there's the expression of the concern, there's the dialogue that we had with the Coast Guard to build a common sense of the extent to which that was a concern, then there were mitigation strategies that have occurred, then there's an assessment of where they are.
    So there's almost like as if we've done five audits along the way in the course of having an idea, and instead of just reporting on it, we have been continually working with the Coast Guard trying to build a common understanding of the risks and a common approach to developing effective mitigation strategies.
    The testimony, as you know, is based on this comprehensive report, so there's much more detail behind what I'm summarizing today, and this was done at your risk and with the significant support and guidance by your staffs.
    The first risk then is managing the contract. The sum-up of where we think we are is that the management contract does not appear to be a high risk, because during the planning phase, the Coast Guard did extremely well in managing phase one. In phase one, we have three contractors and it's just design. It is not nearly as complex, in our view, as the implementation phase, where there are subcontractors and things start going wrong. Designing something is just a pretty straight dialogue. But they managed that really well, and we are hopeful that they can extrapolate that excellence and discipline and rigor in their approach to bringing the right kind of approach to the key management issues.
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    Some of the key management issues that still need to be addressed are the recruitment and staffing, developing effective strategies for relationships with subcontractors, assuring useful segments are broken out in task orders, a critical one, assuring effective measures of the effect on operations. Because they're really trying to have this whole thing run on reducing total operations cost, improving effect on operations. They key is, well, how do you measure that with someone still designing something, and there really isn't a ship to put out and test and see what kind of efficiencies it really does produce. So this area of metrics is very important.
    And contingency plans. Contingency not just in off ramp if there's a trouble. But what are the options that you really have if this did break down. These are the kinds of plans that are needed.
    Some of these, we think, need to be built into the RFP, because you want the developments of the contract. So while they're working on all of these, I would say that one of the urgent issues is to figure out any of these that need to built into the RFP. That becomes the contract, and that becomes the vehicle in which the all the bidders will respond. So if there are critical terms that the Coast Guard wants and needs to effective manage the project, all of those, many of those need to be written into the contract, the RFP.
    So that covers the first risk, as I say, it's low, there's still some more work to be done, but the Coast Guard is without a doubt to be commended for exceptionally rigorous and careful management of phase one.
    The second risk is the use of unproven technology, as I said, many, many systems have failed for trying to basically stretch existing technology, adapt it or even imagine new technology that doesn't even exist. What we found in a very careful review of the technology on all three projects for the first seven years, the Coast Guard has very effectively worked with the contractors to prevent almost any unproven technology in the first period. So the first segment of this, the first five year contract, has virtually no risk of unproven technology.
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    The issue that we did continue to raise in this area, though, is that in the further years, as is appropriate, there are things on the drawing board, some of which are being developed by branches of DOD, and they're saying, well, maybe if that works, we'll use that. But that's unproven technology. But it's supposed to be tested and evaluated and even proven by the time the Coast Guard has to make the decision.
    We were concerned that they didn't have a process in place to continually evaluate technology readiness for some of the later phases of the project. I'm pleased to say that in our meeting with the Commandant this week, he agreed that this was an issue, that a rigorous technology review process that's adapted from NASA that they will be adapting. I think this will substantially mitigate this risk.
    That brings us to the third and fourth risk which are the ones that we think are the more considerable ones, although not necessarily insurmountable. The third one is about affordability, and this was already out on the table a bit today. And I think the core message that we have for you about affordability is that the viability of this specific contracting approach that's being taken fundamentally depends on a sustained and high level of funding.
    Basically what they're doing is, the contractors are being told to plan to a level of $500 million a year, in 1998 dollars, so therefore it will keep inflating every year. And they are responsible for developing what's called an implementation plan. All right, at $500 million, in year two we're going to put in an order for these cutters, and in year three, we're going to put in an order for this or each segment is in the implementation plan.
    To the extent there are significant funding shortfalls and the Coast Guard is not able to move forward with the task orders for those individual segments because they don't have the money, well, it's true,, they don't have to order them. But now the whole baseline and the performance specs and the timeline has to be renegotiated. Everything was depending on that sustained level of funding and orders as contained in the implementation plan of the contractor, which becomes part of the contractor.
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    So there's a substantial risk of renegotiating, and renegotiating with what essentially is a sole source supplier. The Coast Guard's leverage is limited. There's a wonderful part of the long term partnership, but if you lose all leverage and the Government is basically heavily depending on the flexibility and judgment of the contractor, there are real questions about how difficult it will be for the Coast Guard to effectively negotiate if there are substantial interruptions in the flow of funds.
    Now, the Commandant in fact was asked that and in fact, he's starting the first year without even the amount, the full amount for this year was not in the OMB budget. They said they needed a minimum of $350 million, and they're not even getting $350 million and they're still mothballing resources. So they're really just barely pulling it together for this year. In our calculations, they'd be nearly half a billion dollars short in funding given the OMB mark.
    So the feedback from OMB, the Congress has yet to speak, is that they will not have a continual, sustained level of funding as this contracting vehicle really requires. The answer that the Commandant said, well, you know, you don't really have enough, he said, it will come. And it's true, we all heard, I think everyone up here said, yes, we support Deepwater, we support the vital national missions supported, we know you have outdated equipment, and we're with you.
    But the question is, where is the Congress with the requirement for this type of contract with $350 million for this year and $500 million in 1998 dollars for at least the next 25 years? That's really the risk of this contracting approach. It offers a lot of advantages, but it ties the Congress down, it basically forces the Congress at this point to say, are we in fact willing to commit $500 million a year or suffer the consequences that there will be renegotiations that will increase the costs and delay the delivery of the assets.
    So that is not a risk if the Congress is willing to make that commitment. It is a risk, in our view, given the OMB mark. OMB in fact agrees that the Coast Guard should not proceed with an RFP that calls for the contractors to develop this implementation plan assuming more than OMB has been given them to mark. OMB, as you know, is dealing within the 400 category, and there are tremendous and high public interest pressures for adequate funding for airports and adequate funding for Amtrak. It's a small ball. This was as far as the Administration thought they could go.
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    It's not in hundreds of millions a year off, but when you inflate it, as those values will be, for the five years, it's half a billion dollars short. In our view, that is very high risk of forcing renegotiation, increasing costs, rebaselining the contract with a sole source contractor. The Government will not have a substantial amount of leverage in that negotiation.
    Brings me to the fourth risk. The fourth risk is about the ability to control costs in the outer years, particularly where there's this award term which would automatically renew the contract to a well performing systems integrator at least 25 years out. What that does, it takes away the benefits that most Federal contracting provisions and best practices count on, and that's competition. You put something out there, you want something done, and they bid against each other. You not only get the best product, you get the best price for the product.
    You are receiving that in the first five years, because the firms, the contractors' plans in fact have been competing, particularly with the specifics for the first five years. You have a pretty good control on costs in the first five years. The risk isn't there. You have the benefits of the competition that has occurred over the past three years of development. It's in the later years, after the first renewal of the first award term, and particularly when uncertainties start to having to be pinned down.
    Again, you're working with this sole source contractor. They know that it will cost you a fortune to walk away, even if you have off ramps, even if you have 50 different off ramps. It's the costs of coming up with an alternative that is so prohibitive that the contractor knows that you can't push very hard to say, well, wait a minute, we added this or we take away that or we want to change this or now we need to price this technology that wasn't certain before. And what we fear is that the Government's leverage is very limited in that environment.
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    Now, it's not impossible to deal with. It was largely these concerns that led us to encourage the Coast Guard to work aggressively with a diverse set of experts who have begun some of the experimentation with these new kinds of contracts. And they did move ahead, they did some one on one contracts, getting advice about how to overcome these limitations and risks. They had an expert panel.
    Basically what I can report to you is that they got a lot of advice. There wasn't anyone who said, oh, it's fine just the way it is, not to worry. Every one of them had some ideas. Well, to get your leverage you need to do this, or you need to build this in, or you need to have incentives based this way or that way, or you need to have this kind of factor.
    I'm not sure they're keeping a data base on this, but I'm sure there are hundreds of different ideas. What concerned me is some of them were competing. Someone said, oh, your biggest leverage here is the awarding of the second term. No worry, because what that contractor really wants is the second term. Then another panel looked at that and said, you know, the odds of your really going to somebody else for that second term are so low that that's not really much incentive or leverage at all. You really need incentives built in much earlier, much more detailed, much more specific. Little competing pieces of advice to deal with the same problem.
    So my bottom line on where they are right now is they are still in the midst of evaluating all of those risks identified and then trying to turn it in to well crafted legal language.
    That concludes my status report that I have. I know in speaking with counsel before, she knew we had many recommendations, had lots of observations about risks, and she asked if we could just pin it down, what are the most important things the Coast Guard could do right now to mitigate the risks that we see happening. The first one is, they could direct the contractors to develop their plans around an assured level of funding. And if the Congress doesn't act any differently than the marks from OMB, then we would think it ought to be the marks from OMB.
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    If the Congress wants to try to mark up from the $350 million and the $500 million for each of the upcoming years, the four years beyond now, then it would be wise, then the Coast Guard would be in a very strong, logical position supported by all best practices, to have the contractors build the system around that level of funding. But absent action by the Congress that they in fact are committing to that level of funding, that's the concern we have.
    The second one, as you might expect, is hoping that there is a serious deliberative synthesis of the diverse feedback received from the multiple consultants. And not to be driven so much to make sure that it's done, but make sure that it's done right. There's some level of momentum and commitment and enthusiasm that I fear they're just quickly trying to respond and put in a fix rather than fully deliberate the mix of information they're getting about how to mitigate the risk.
    Therefore, this kind of thorough, deliberative review is what we think would make for the most successful long-term for the Deepwater acquisition.
    Thank you, Mr. Chairman. That concludes my remarks, and I'll be very happy to take any questions you might have.
    Mr. LOBIONDO. Mr. Williamson, did you have any remarks?
    Mr. LOBIONDO. Okay. Let me start off with a couple questions. At the current time, do you believe that the Coast Guard personnel can adequately manage the Deepwater project once it begins?
    Ms. HECKER. As I said in my statement, we have a high level of confidence that given the rigor and procedures in place by the Coast Guard that they are on path to having the right organization in place. I think the Commandant will tell you himself that it is still being put together.
    So they are working on staffing, they're working on training. They're working on developing relationships with subcontractors. This is an area, in fact, we've done a lot of work with DOD, where they've made terrible mistakes in not having well defined relationships with subcontractors. And in this acquisition, obviously, most of the Deepwater assets are going to be built by subcontractors.
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    So we think there's work to be done, but they have an excellent track record, and we think it's very reasonable to assume that they will have a good management structure.
    Mr. LOBIONDO. You touched on this, I think, a couple of times in your testimony. But I wanted to ask again, how you believe the Coast Guard has responded to your suggestions for improving the Deepwater project.
    Ms. HECKER. I think they have responded positively. They have been receptive. This was a project that was, when we came in in this latest assignment, they were well underway and had a lot of decisions made. We really did get to raise a fair number of concerns.
    There are a number of specific actions that they've taken, perhaps others that we're not even aware of. Occasionally, the Commandant says something that he did that we said that, he'd never told me that he did. So there has been a real dialogue. The use of that technology readiness assessment tool. The commitment and the use of this capability maturity model, a very rigorous, advanced way for developing a management structure is something they've moved toward.
    Assuring that none of the acquisitions are for anything other than useful segments, you know, one year they get a certain amount of money, you might want to buy a half a ship and half a plane and half a development of some of your C4ISR. Well, you can't do that, because if you don't get the money next year, all you're left with is half the thing.
    So making the commitment to only have task orders for a useful segment, so that at the end of it, you have something useful.
    So these and many other areas, they've been very responsive.
    The toughest area that we've had is that really, since September, we had felt that they had not rigorously evaluated alternative contracting strategies or significantly rigorously identified what the risks of this strategy was, and whether they could effectively be mitigated. We didn't really go very far down the path with them on looking at alternatives. We continued to just get responses of way they were convinced this was the right way to go.
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    We think, unfortunately, if that had been done a year ago, when we first started talking to them, there may have been some more insights there, if only for that to be the contingency if something goes wrong. Right now, they don't know what they would do if they have to walk away from this contract. So there is no known phase two or backup strategy.
    So that was an area that we struggled a bit, but I think the commitment to hear from experts, the commitment to move forward to understand the risks associated with this strategy and an absolute commitment to mitigate in every appropriate way each of those risks is something that is a direct result of our collaborative working relationship.
    Mr. LOBIONDO. Thank you.
    Ms. Brown.
    Ms. BROWN. I think you gave a very thorough presentation. I guess my only question is, it seems as if we're locked into a 15 year contract?
    Ms. HECKER. Well, it's what's called an award term, a structured contract. They're signing on only for the first term of five years. And after five years—
    Ms. BROWN. Based on your presentation, though, after five years, it would be very difficult for—
    Ms. HECKER. If performance is adequate, they automatically extend without competition to the same contractor. There is an evaluation period after the fourth year. It's not as if it's automatic. But severe problems would have had to occur for there not to be a virtually automatic continuation on day one of the sixth year by the same subcontractors.
    Ms. BROWN. Well, it just seems like it's maybe 15 years, because it will be very difficult for someone else to come in after that five year period. Let's assume that, let's say that the cost goes up, escalated. There would be nothing that we could do to back out of that contract.
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    Ms. HECKER. The issue of the cost is a very complicated one. Because as I said, the costs in the short term are very clear. You have a pretty good idea now what you're going to pay at the $500 million level. Five hundred million for four years and $350 million for the one year. You have a pretty good idea at the end of that five year period what you'll have.
    And absent either disruptions of continuity of funding or major change orders, you'll get what you paid for, what you see in that contract.
    If the further out periods, the contractor just has assurance of the $500 million a year, and they have their implementation plan of what they said they would deliver. But there's more and more uncertainty out there, particularly if it's the new technology. I mean, there are like place marked dollars for some of those assets. But they need to be negotiated.
    So I would say, you really, in truth, the Coast Guard doesn't know how much it will cost to deliver this entire IDS system.
    Ms. BROWN. I have nothing further.
    Mr. LOBIONDO. I'd like to thank you for your very valuable testimony, and your work on behalf of this project with the Coast Guard. I think we've had some great insight.
    Some members who are not here may have additional questions. So we will ask you to respond to them in writing, and the hearing record will be held open for these purposes.
    If there is no further business, and there doesn't appear to be, the meeting stands adjourned.
    [Whereupon, at 12:14 p.m., the subcommittee was adjourned, to reconvene at the call of the Chair.]

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