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[H.A.S.C. No. 108–6]



FOR FISCAL YEAR 2004—H.R. 1588






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MARCH 12, 2003




JOHN M. McHUGH, New York, Chairman
TOM COLE, Oklahoma
JIM SAXTON, New Jersey
JIM RYUN, Kansas
ROBIN HAYES, North Carolina
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VIC SNYDER, Arkansas
MARTY MEEHAN, Massachusetts
JIM COOPER, Tennessee

John D. Chapla, Professional Staff Member
Michael R. Higgins, Professional Staff Member
Lynn W. Henselman, Professional Staff Member
Debra S. Wada, Professional Staff Member
Dudley L. Tademy, Professional Staff Member
Mary Petrella, Research Assistant



    Wednesday, March 12, 2003, Fiscal Year 2004 National Defense Authorization Act—Patron and Industry Perspectives on Military Exchanges, Commissaries, and Morale, Welfare and Recreation Programs

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    Wednesday, March 12, 2003



    McHugh, Hon. John M., a Representative from New York, Chairman, Total Force Subcommittee

    Meehan, Hon. Marty, a Representative from Massachusetts


    Barnes, Joe, National Executive Secretary, Fleet Reserve Association

    Cannon, Lillie, Deputy Director, Government Relations, National Military Family Association

    Johnson, Lloyd, Vice Chairman, Armed Forces Marketing Council

    Murray, Maj. Gen. Richard D., USAF (Retired), President, National Association of Uniformed Services
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    Raines, Boyd W., Chairman of the Board, American Logistics Association


[The Prepared Statements can be viewed in the hard copy.]

Air Force Sergeants Association

Johnson, Lloyd

Naval Reserve Association

Raines, Boyd W.

The Military Coalition, presented by Chief Joe Barnes and Lillie Cannon

The National Military and Veterans Alliance, presented by Maj. Gen. Richard D. Murray

[There were no Documents submitted.]

[There were no Questions and Answers submitted.]
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House of Representatives,
Committee on Armed Services,
Total Force Subcommittee,
Washington, DC, Wednesday, March 12, 2003.

    The subcommittee met, pursuant to call, at 5:43 p.m., in room 2212, Rayburn House Office Building, Hon. John M. McHugh (chairman of the subcommittee) presiding.


    Mr. MCHUGH. The meeting will come to order. It is good to be with all of you again after a few years hiatus, but welcome. And I want to start off by saying something I have actually never said before in any hearing that I can recall, and I am going to now. Good evening. [Laughter.]

    I am not particularly thrilled to say that, but I appreciate all of you being here. And, obviously, as all of you recognize, we have some extraordinary circumstances in meeting this year's very compressed timeline, and it has necessitated, amongst other things, a hearing starting at this time of the evening.
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    But you are not just welcome, your presence is deeply appreciated as always, but particularly given the time of this hearing. So you can talk as long as you want. We can get pizza or something. The folks giving testimony will not get any, so——


    Mr. MCHUGH [continuing]. I do not want to limit you in other ways.

    If I may, If I may indulge upon you even further, and I hope you will understand and bear with me, for the past going on now 11 years, I have had the distinct honor of representing a wonderful piece of America, as we all do, in northern New York that is home to Fort Drum and the 10th Mountain Division. And yesterday, as I am sure many if not most of you have heard, we had a tragic training exercise accident. One Blackhawk helicopter went down, and as of this moment we have 11 lives lost.

    I would simply say that it underscores to me in our responsibilities as members of this great committee, and in this instance the subcommittee, the very important nature of our job and helps to remind certainly me that while a lot of us spend a great deal of time, as we should, visiting the forward deployed forces who put their lives on the line and sadly but realistically will probably continue to do so for some time to come, but those who happen to be home based are engaged in very dangerous work as well. And all of it is designed to protect all we know and love about this great country.

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    And yesterday after having been deployed all over the face of the planet, and in fact the last place I saw these folks and several of whom on the helicopter who lost their lives were there when I visited them in Afghanistan just prior to Operation Anaconda at Tora Bora serve as valiantly and as dangerously as well.

    So if I could please just ask for a moment of silence and ask for your prayers and thoughts for the deceased, for those fallen heroes, and of course their families and loved ones.

    [Moment of Silence]

    Mr. MCHUGH. Thank you. I am going to make some on-the-fly changes to my opening statement. The first one that says, ''Good afternoon,'' I have already taken care of that. But today is a day of firsts. Not only is this the first hearing of the subcommittee in the 108th Congress, it is also the first hearing under our new name, the Total Force Subcommittee.

    And it seems to me our new name represents very appropriate recognition that today our Nation mobilizes thousands of reservists and guardsmen to continue the war on terrorism and prepare for the potential war with Iraq. During this period when our Nation relies so directly on our reserve components, you can be sure that this subcommittee will examine reserve support and benefit programs very closely in the coming weeks.

    And our subcommittee's new name does mean our primary responsibility has in any way changed. We remain the guardians of the personnel policy, compensation and benefit programs that directly affect the welfare of service members, retirees and their families. And I am pleased and very thrilled that our first hearing will address some of our most important and highly valued benefits: exchanges, commissaries and morale and welfare recreation programs (MWR).
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    One of the many rewards, and there are many, of serving on the Armed Services Committee are the frequent opportunities that we have to visit the military members, to learn about their lives within the military, and through these experiences I have come to believe very strongly that those who criticize exchanges, commissaries and MWR programs and view them as merely an additional form of compensation, some benefit added beyond what we are called upon to do to retain their service, simply do not understand the very unique and very important military culture.

    In my view, these programs occupy a critically important position in the fabric of life in the military. These programs are the adhesive that bonds the military community together. It is in this sense of community that is the foundation for combat readiness.

    Different people will give it different names—good morale, espirit de corps, unit cohesion—but regardless of what label you may choose to apply, combat readiness starts with the military community, and the exchanges, commissaries and MWR programs are important pillars of that community. It is because of this larger vision of these programs that I am committed to the methodical examination of any proposal for the potential to disrupt the current status of these programs.

    The rumor mill is awash with the talk of proposals to restructure, privatize and to somehow cut these programs. To a large extent, these proposals center on simply the need to save money. And let me say clearly that I believe it would be a terrible mistake, a tragic mistake to disrupt these programs merely to save a few dollars.

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    Money is important, I understand that, I recognize it, but the priority consideration for these programs must be service to that military community. There is far too much at stake to allow decisions on these programs to be driven solely by fiscal and financial calculation.

    In addition to the statements provided by our witnesses today, the subcommittee has received statements for the record from the Naval Reserve Association and Air Force Sergeants Association. Without objection, I would ask that those be included in their entirety in the record.

    [The information referred to can be viewed in the hard copy.]

    And let me add a couple other closing comments. I mentioned a day of firsts. This is the first hearing of this subcommittee for many, many new members in their first term of office, and we are honored to have at least two of those members with us today.

    And I am delighted that people who came to this committee, and I can tell you because I am on the Steering Committee, it was a fight to get on the Armed Services Committee and thereafter to want to be involved in MWR programs. It serves them very well, and I think it speaks very highly of their commitment, and we are thrilled for them to be here today.

    I also want to say to the MWR community, when the restructuring that we effected in the full committee occurred, there was understandably a great deal of concern about the restructuring of the MWR panel, of which I had the honor of serving as chairman before, of which Mr. Meehan had the, I will say honor, I will let him speak to that, but the opportunity to serve as—he certainly served honorably—the opportunity to serve as the ranking member.
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    And all of us understand those concerns, but I want to assure the community today that in no way was that intended to be a slight to the community; rather, we felt that the restructuring would allow us to focus on this in a context which is so important, and hopefully it would not become lost in our efforts, our necessary efforts, to look at the entire personnel picture.

    So all of us on this subcommittee today recognize that charge, and I want to promise you, as the chairman but more important as a member, we are all devoted to the cause and to the work that you have advanced so very, very ably, so very effectively in years past. And that is why you are getting two hearings, not just so you will feel better about it, but also so we can learn more about it.

    So before introducing our witnesses, our designated ranking chairman, Dr. Vic Snyder, as some of you may have heard, is recuperating from a medical procedure. I am told he is doing well and we are all delighted to hear that. But today we do have two senior members of the minority with us who have extensive experience on the committee and on the MWR Panel.

    Mr. Meehan has either drawn the short stick or the long stick, I do not know which it is, to sub for Dr. Snyder for this moment. And I mentioned, Marty, and I served I think very amicably in the past, and I am delighted that he is filling in for a great guy like Vic in the meantime.

    So with that, I would be honored to yield to Mr. Snyder for any—or excuse me, Mr. Meehan—well, I would be delighted to yield to Vic if he was here, but he is not—Mr. Meehan for any opening comments he would like to make.
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    Mr. MEEHAN. Well, thank you very much, Mr. Chairman. It is great to be back working with you. Let me say for the record that I was humbly honored to be the ranking on the MWR Panel, and because of that experience look forward to continuing to be very involved. And as you had indicated, Congressman Snyder recently underwent surgery. He is at home recuperating, and he is anticipating returning soon, and I look forward, as I know all of us do, to his speedy and healthy return.

    Sitting here today I cannot help but remember my first session years ago as a ranking member of the MWR Panel, and what impressed me the most at the time was the diversity of the programs and the critical role that these activities play in the services and also in the lives of the patrons. Today, I am still impressed but I also have a better understanding of the tensions that are related to the Department of Defense managing those activities and the importance of Congressional oversight in protecting those benefits.

    While much has been done to improve the perceptions of the quality of the benefit, we are not at a point where we can declare compete victory. I am encouraged by the results of the recently released 2002 Active Duty Status of Forces Survey, which assessed both MWR programs and military resale activities. That survey again showed the high value that authorized patrons place on these programs.
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    With the significantly increased deployments of the reserve component, I am sensitive to the need to relook at the use of military resale activities by the reserve component. I would like to hear from the witnesses on that issue.

    Mr. Chairman, I am also very concerned about the ability of the services to sustain the high quality commissary and MWR activities available to military family members. At a time when this nation is asking service members to make more sacrifices, their quality of life activities appear to be vulnerable to erosion.

    While no appreciable downturn has been detected in the quality of the MWR benefit, I am concerned about any reductions in the appropriated funding to support these activities. Specifically, appropriated funding for category A and B, child care centers and fitness, is being scrutinized as potential sources of funding for other activities. At the same time, anticipated dividends from the revenue-producing activities will be less because of deployments and increased security.

    Finally, I want to express my reservations about the recent committee reorganization. By not reappointing the MWR Panel, the committee, it seems to me, has inadvertently sent a message that these activities are less important today than in the past. And I hope that today's hearing and the future hearing will correct this mistaken message.

    But, again, Mr. Chairman, I thank you and look forward to the testimony from the witnesses.

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    Mr. MCHUGH. Thank you very much, Marty.

    I would ask the other members in attendance, and it is only a suggestion, that given the lateness of the hour, if any have statements they would like to make, perhaps those could be submitted for the record. If you think it is contrary to what you would like to do, I would certainly be happy to yield to you. Okay.

    Let me just make one more point and we will get to the other members. But the gentleman on my right, your left, Tom Cole, a freshman who has been both selected and has agreed to serve as the subcommittee's vice chairman, the gentleman from Oklahoma, Tom, thank you for being here.

    Let me just introduce the panel. We have, and I am going to read them in the order to which they were given, and as I look, I think they kind of coincide, and you do not need to change your seats if I read somebody out of order.

    But Lillie Cannon, Deputy Director of Government Relations, National Military Family Association; Joe Barnes, National Executive Secretary of Fleet Reserve Association; Richard D. Murray, president, National Association of Uniformed Services; Lloyd Johnson, Vice Chairman of the Armed Forces Marketing Council; and Boyd W. Raines, Chairman of the Board, American Logistics Association.

    Lady and gentlemen, your statements, of which I have read each one, have been received in their entirety and without objection I would ask that they all be submitted in their entirety for the record. Hearing no objection, so ordered. So we would start from left to right.
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    I want to again welcome you all and appreciate both your work and your initiative and concern and effort with respect to being here today. And I would ask to the extent that you feel it is appropriate if you could summarize your comments so we can get to the work of the panel.

    But, Ms. Cannon, thank you so much for joining us, and we will turn our full attention to you.


    Ms. CANNON. Thank you. Thank you, Mr. Chairman and distinguished members of the subcommittee for the opportunity to present testimony on behalf of The Military Coalition (TMC). Morale, Welfare and Recreation Programs are the foundation of the military community and a readiness force multiplier. The readiness of our military is intricately linked with the strength of the military community.

    MWR programs draw beneficiaries to that community, promote espirit de corps, enhance educational opportunities and provide support during times of high Personnel Tempo (PERSTEMPO). Military community members constantly rank MWR programs among their most valued benefits. Service members view MWR activities as a link to home and a breather from laborious duty. Their families depend on MWR for support and for social, educational and recreational activities that are inexpensive.
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    Service members and their families feel the strain of increased operational requirements in support of our war on terrorism. Family center staff, chaplains and other support personnel are essential in the transition to military life for new arrivals. Financial counseling, parenting classes, community orientations and volunteer opportunities quickly infuse the family into the military community.

    The Sergeant Major of the Marines stated that when Marines deploy they depend upon the Corps to support their families. These service members and their families rely heavily on MWR programs to ease the strain of separation and provide assurance that the family is being cared for.

    The greatest morale challenge for the deployed service members and their families is communication. E-mail, video teleconferencing and phone banks enable service members to maintain connectivity to home. Although the services are increasing Internet access, the TMC remains concerned about continued reports of the high cost of phone calls to our military families when the service member is deployed.

    Increased installation security and deployment in support of the war on terrorism continues to challenge the Department of Defense (DOD) and the services in providing morale and welfare programs for deployed service members and their families. Installation security in the past year has made it difficult for beneficiaries living off the installation to access MWR facilities. The Military Coalition is concerned that the further increased security anticipated in the very near future will result in another fall-off in the use of MWR facilities, thus restricting the generation of funds to support other installation activities. The resulting lower revenues may force cutbacks in key recreational and support programs. TMC encourages Congress to provide the services with the funding for MWR programs and to ensure that programs and services are continued at an acceptable level despite downturns in MWR revenues due to deployments or other security alerts.
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    Readiness of the total force in today's environment depends on proactive leadership and outreach to all our service members and their families. National guard senior leader spouses tell us that their state and unit family program coordinators require additional resources in order to provide the assistance needed by geographically dispersed families.

    All guard and reserve families, regardless of location, must have access to family readiness programs. These programs are key and essential in helping service members and families deal with their transition to active duty and the emotional and financial stress caused by increased deployments.

    The Sergeant Major of the Army stated in recent testimony that in 2002, 27 percent of enlisted soldier parents lost duty time due to lack of child care, and this creates our readiness issue. Although the military child care system is the national benchmark against which other programs are measured, TMC sees some continuing challenges for DOD and the services.

    One issue is the difficulty in finding staff for some centers, especially in Europe. Another issue is the inability of child development centers and family child care homes to meet the needs of families living off the installation and of reserve component families. TMC urges Congress to provide the resources necessary to ensure that support is available for all families of all service members called to support contingency operations.

    Mr. Chairman, as you know, we are asking our military service members and families to do more with less. Quality of life programs are paramount when we place added demands on our military families and our military members. These demands require a change in methods of delivering programs necessary for the readiness of our military forces and their families.
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    The Military Coalition is grateful to the subcommittee for its oversight of MWR programs. MWR activities are vital force multipliers as we face uncertain challenges. Thank you.

    [The prepared statement of Ms. Cannon can be viewed in the hard copy.]

    Mr. MCHUGH. Thank you, Ms. Cannon.

    Mr. Barnes, Fleet Reserve Association. Welcome, sir.


    Mr. BARNES. Thank you, Mr. Chairman, Mr. Meehan, distinguished members of the subcommittee. The 33 member organizations of The Military Coalition thank you for the opportunity to express the Coalition's views concerning the commissary benefit and the military exchange systems. I will briefly summarize several issues with regard to these benefits.

    The Defense Commissary Agency (DeCA) should be adequately funded to maintain the benefit at the current level. The annual appropriation is a sound investment that contributes not only to its patrons' quality of life, but to readiness and retention while strengthening the sense of community within the services.

    During testimony presented to the MWR Panel last year, the Coalition recognized the Defense Commissary Agency's impressive reform initiatives that included improved management practices and operating cost reductions on the revitalization and protection of the surcharge account.
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    We also expressed concern about potential negative impacts due to the budget cut and the elimination of numerous full-time staff positions. Despite these concerns, the coalition notes that so far, there appears to be little evidence of significant negative impact on customer service. Something also reflected in the recently released General Accounting Office (GAO) study and generally favorable DeCA customer survey results.

    The Coalition appreciates these achievements and DeCA's continuing commitment to maintain and improve customer service while achieving greater efficiencies. However, we must caution the agency to constantly monitor the impact of reform initiatives on customer service, store operations and employee morale.

    The Coalition also would like to take this opportunity to restate its strong commitment to maintaining the commissary benefit as an integral part of the total military compensation package and its continuing opposition to privatizing the benefit. The intangible and highly valued aspect of this benefit is not quantifiable solely in monetary terms.

    Now more than ever our Nation relies on active duty guard and reserve personnel to defend our borders, ensure our security and sustain our interests throughout the world. These personnel are increasingly important to operational commitments, and the Coalition supports their unrestricted access to commissaries to include gray area retirees.

    The commissary and exchange benefits are consistently ranked as top quality-of-life benefits. The commissary can save in excess of 30 percent on groceries, and purchases by exchange patrons generate funds for important MWR programs.
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    Over the past decade, the Army and Air Force Exchang Service (AAFES) and Navy Exchange Command (NEXCOM) sales have generated billions of dollars in support of MWR programs that are essential to maintaining a high quality of life for military personnel and their families plus military retirees and survivors. And in support of deployed service members, AAFES operates field exchange operations in remote locations, while NEXCOM goes where the Navy goes, offering needed merchandise and services in ship stores and other facilities.

    The exchange systems are responsive to the needs and concerns of young families and single service members with limited budgets, as well as retirees who are the focus of special appreciation programs. These initiatives, coupled with online marketing programs, expand access to products and services, especially for reservists and retirees who may not live near military installations.

    With regard to Base Realignment and Closure (BRAC) closures anticipated in 2005, the Coalition again stresses the importance of evaluating the impact of closures on guard and reserve personnel and military retiree and survivor patrons. BRAC actions usually result in the closing of commissaries, exchanges and MWR facilities and contribute to resentment and frustration for beneficiaries, especially in the retired community.

    Thank you again for this opportunity to present the Coalition's views on these important programs.

    [The prepared statement of Mr. Barnes can be viewed in the hard copy.]

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    Mr. MCHUGH. Thank you, Mr. Barnes.

    General Murray, welcome.


    General MURRAY. Thank you, Mr. Chairman, for allowing me to testify for the National Military and Veterans Alliance on behalf of DOD's number one asset—our military personnel. The military resale system is the most misunderstood activity in all of government, especially the Pentagon. No one takes the time or effort to understand the operation and its purpose.

    When I was in the exchange system in 1983, the Chief of Staff of the Air Force informed me that he was going to be in the F–16 plant in Fort Worth, Texas and would come to Dallas for a half a day for me to tell him about the exchange operation. After briefing him for almost four hours and answering all his questions, I asked him why he wanted the briefing and if we satisfied the purpose of his trip. He said, ''Yes, because every time the subject of exchanges comes up in the Pentagon, everybody in the Pentagon is an expert on your operation. So I decided to come and see if they knew what they were talking about, and now I know they do not.''

    One other brilliant general during the tour was Major General Schwarzkopf at Fort Stewart, Georgia. In the 1980s, he told me to come see him and tell him why we did not have credit cards in the exchange because his troops were getting ripped off by some local stores charging them 24 percent interest on TVs and other high ticket items at very high prices. With the support of General Schwarzkopf, the former MWR Panel here in the House, we stopped our troops from getting ripped off by approving credit cards for purchases in the exchange.
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    Just a few more comments and then I will shut up. The commissaries and exchanges are not a grocery store or a department store. They are two activities in DOD that are unique to the needs of our military personnel and families, and there is no way you can transfer these two operations to the civilian sector without destroying the purpose for which they were established or the value they provide to our troops no matter where they are located.

    Example, in my opinion, a large food chain could operate 20 percent of our commissaries that make up 80 percent of the sales better than DeCA because they have great experience in operating large grocery stores. However, prices would go up, and they would want to close 80 percent of the commissaries because they only make up 20 percent of the sales or charge DOD more for operating small commissaries than we are spending now for the operation of all commissaries.

    Now for my most important point and should also be DOD's as it relates to the commissaries. The commissary is a factor in the pay of military personnel. I was a bean counter, that is a budget officer, for the Air Force, because I had an accounting degree and I certainly understood that the commissary enabled me to make my salary go further because I did not have to spend as much for food. I knew it was part of my pay, and I knew that the reduction and the support of commissaries would result in a cut in my pay or the inability of the commissary to provide the same level of service.

    Now, for my last point, the exchanges give 100 percent of their profit for MWR activities and construction of new facilities. No other operation or retail merchant in the world can match the success of this operation with little support from the taxpayer. Here is a list of over 1,600 funded projects from the exchange profits for small bases that the commercial corporations would not fund because the return on the investment does not meet commercial accepted profit criteria.
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    The Navy and Marine Corps exchanges provide the same great contributions to their MWR operations as the Army and the Air Force exchanges. No commercial retail corporation would ever consider providing this type of benefit to our troops without taking some of the profit.

    Finally, if I have confused anyone, I will be glad to slow up and explain that the commissaries and exchanges are the two best investments in all of government for the American taxpayer, because they take care of the greatest fighting force in the world.

    We also are supported by the best vendor reps, these two on my left and many more in back of us, for many, many years, and we owe them a great deal for their sacrifice.

    Finally, I would like to recognize on the record the service of Colonel Chuck Partridge who everyone in this audience has benefited from his efforts for the past 42 years. Could we have Chuck Partridge please stand?


    [The prepared statement of General Murray can be viewed in the hard copy.]

    Mr. MCHUGH. General, are you done? [Laughter.]

    Yes? Note to self, Dick does not need a microphone. [Laughter.]

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    I now know how you became a general, Richard. Thank you very much for obviously very interesting and pretty frank testimony by Washington standards. I appreciate it.

    Mr. Johnson, welcome.


    Mr. JOHNSON. Thank you, Mr. Chairman. That is a little bit of a hard act to follow, but I am going to give it a run.

    Mr. Chairman and members of the Subcommittee on Total Force, good afternoon. Thank you for the opportunity to express our views on a variety of important issues concerning the military resale system.

    The Armed Forces Marketing Council, otherwise known as the AFMC, is a non-profit league of privately owned small businesses who represent over 400 well-known manufacturers of consumer products to exchanges, commissaries and Navy and Coast Guard ships afloat. We exist because we bring these products to this unique market in a more cost-effective manner for most manufacturers than other strategies that are available.

    Our views are thoroughly explained and supported in a detailed written document that we have submitted for the record. In the interest of time, I will attempt to summarize those views in the next four to five minutes.

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    Let me start with the basic question of whether or not providing and managing commissaries, exchanges and ship stores represents a core competency for the Department of Defense? As you know, that has been an issue and a question.

    Our answer is a resounding yes. Why is that? There are several reasons. The resale systems are an important part of military compensation because of the low prices they offer versus outside-the-gate retailers. Commissary savings, as has been noted, are at about the 30 percent level, and exchange savings approach 20 percent. Exchange earnings also help support MWR activities.

    Studies show that this economic benefit also plays a significant and sometimes crucial role in recruitment, retention, readiness and the sense of community so vital to military families who move frequently and often find themselves in harm's way.

    Trained and motivated volunteer people are our most important asset in the fight against terrorism and other enemies that threaten the safety and freedom of all Americans. In no way should this vital quality-of-life element be outsourced to private firms or be diminished in any way due to lack of funding or proper attention. In our written statement, we explain in detail why privatization will degrade savings, reduce overall compensation and destroy a vital part of the fabric of military life.

    To that end, we respectfully request that Congress act to strengthen Title 10 of the U.S. Code to ensure the continued viability of what most assuredly should be a core competency for the Department of Defense. Prompt passage would reassure military members and their families that our country cares at a time when they are once again poised to defend the American way of life.
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    The AFMC is fully supportive of any change in the resale system that promises to bring more efficiency and better overall service to the military community of active duty members, retirees, reserve and guard volunteers and their families. But we strongly oppose several ideas that, in our view, would clearly degrade and even threaten the existence of this benefit.

    For example, the introduction of variable pricing to commissaries might well reduce the appropriated fund subsidy but it would clearly and unequivocally raise prices, in effect, decreasing military compensation. Mr. Chairman, that is the wrong thing to do, we believe, especially to the 80 percent or more of active duty people who live on very tight salaries and budgets.

    The proposed introduction of private label merchandise to commissaries at marked up prices is an equally flawed idea designed to raise revenue in order to decrease the commissary appropriation. Doing so would violate a long-standing practice where commissaries essentially sell at cost. It would raise administrative costs for DeCA and interfere with an already successful best value program offered to DeCA patrons on brand name goods.

    Nor would the introduction of private label goods help small businessmen, as the GAO has contended. The fact is most private label goods are manufactured by companies that clearly fall outside of the usual definition of small business.

    Another proposal concerns exchange services integration. To date, after several studies, we have seen no conclusive evidence that operational savings, if any, would justify the turmoil and long-term interruption of customer service involved with consolidating complex and often very different resale organizations that currently have no common information technology systems, dissimilar cultures and even different missions and responsibilities.
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    As previously noted, we support changes that will bring added efficiencies and improved service and value to the patrons. One example of such action would include an improved method to provide vendor stocking in commissaries. The current system is not nearly as effective as it should be. We enthusiastically support the director of the Defense Commissary Agency, Major General Michael Wiedemer, and his commitment to finding a workable solution. Industry will clearly work with DeCA to try and come up with that.

    Likewise, we urge the lifting of all restrictions on the kind of merchandise and the prices at which they are offered by exchanges. In particular, there is high demand within the military community for larger and newer types of TVs, an expanded availability of furniture and upscale jewelry. Lower exchange pricing accompanied by much lower exchange credit terms than are available outside the gate will afford our military families many millions of dollars in well-deserved savings. The impact on outside-the-gate retailers would simply be minuscule.

    Mr. Chairman, that concludes my remarks, and at the appropriate time, I would be glad to try and answer any questions that you or the other members might have. Thank you.

    [The prepared statement of Mr. Johnson can be viewed in the hard copy.]

    Mr. MCHUGH. Thank you very much, Lloyd.

    Mr. Barnes—Mr. Raines. Why do I keep doing that? I apologize. Mr. Raines.
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    Mr. RAINES. Thank you, Mr. Chairman. Please, carry the condolences and sincere best wishes of everyone in this room back to those families of those brave young soldiers that were killed yesterday.

    Mr. MCHUGH. Thank you.

    Mr. RAINES. And tell them from a lot of citizens that we appreciate their sacrifice and we grieve with them.

    Mr. MCHUGH. Thank you very much, sir.

    Mr. RAINES. And thank you for allowing us to be here today to share our views on the issue at hand, Mr. Chairman. I am here today as chairman of the American Logistics Association (ALA), an industry trade group comprised of companies that are actively engaged in the providing of goods and services to the military resale and MWR activities.

    The membership of our association is comprised of both large and small businesses, with over 55 percent of our members being from the small business arena. In addition to supplying goods and services, our members also employ several thousand military dependents and retirees in both full and part-time positions around the world.

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    Not only am I here today to speak about the relevance and engagement of our association and its members, most importantly I am here today as an advocate for enhanced quality of life for our members of the military

    Mr. Chairman, the ALA, as others have stated in this room, believes that taking care of our military service members and their families should be a core competency that the Department of Defense pursues very vigorously. It is ALA's observation that the commissary, exchange and MWR functions greatly contribute to the quality of life of our military members. These quality-of-life programs, as you have pointed out, sir, directly impact retention and readiness.

    Each year, the Defense Commissary Agency delivers savings of approximately $2 billion to the military community. For every dollar of appropriation that you, the Congress, grant, the military community receives $2 in value. Mr. Chairman, I wish every program supported by Congress had that type of return on investment. As such, Mr. Chairman and distinguished members of the subcommittee, let there be no mistake, ALA supports the continuation of full appropriated funding for military commissaries.

    Each year, the exchanges provide hundreds of millions of dollars in dividends to the MWR activities to support day care centers, youth programs, fitness centers and recreation programs. ALA supports full appropriated funding also for all MWR mission-sustaining and community support programs since these programs also impact readiness and retention.

    Exchanges also provide much needed support to our troops stationed around the world to include those deployed as a part of Operation Enduring Freedom. Tactical field exchanges offer our service members a way to remain connected with home while they are deployed in dangerous and hostile environments.
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    However, Mr. Chairman, despite all the good works that are done by our commissaries and exchanges and MWR activities, we are highly concerned. We are highly concerned that support for these programs is eroding within the Department of Defense. We are concerned about continued budgetary pressure from within the department that would reduce funding now provided to resale and MWR programs.

    As an example, last November, a program budget decision was drafted that would divert $109 million from the commissary surcharge fund and transfer that amount into operational accounts. Fortunately, Congress had previously taken measures to prevent such an occurrence, and the proposal was withdrawn. This example, however, illustrates the need for your continued oversight of these important programs.

    We also have concerns about the proposals to introduce private label products and variable pricing strategies as a means to fund commissary operations. We believe that these initiatives will result in increased costs to the patron and a degradation of the current benefit.

    Mr. Chairman, we believe that the Congress has before it an opportunity to ensure that the benefits of our military members and their families, something that you have long supported, remains viable. We do also support Congressional action to strengthen Title 10 of the United States Code as it relates to these issues.

    At present, there is no statutory provision that identifies the authorized beneficiaries of commissaries, exchanges and MWR activities. ALA supports equitable access to these benefits for the entire military community. Not only do we support continuation of shopping benefits for the current recipients, we support extension of full commissary shopping benefits to reservists and national guardsmen to include the gray area retirees.
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    Since reserve and national guard components are such an integral part of the force structure, we believe they deserve full benefits. Further, ALA supports extending commissary shopping privileges to all DeCA employees as well.

    Mr. Chairman, ALA, too, requests that the Congress consider making an enduring commitment to the military community to provide these benefits afforded by commissaries, exchanges and MWR activities. We believe our military community is deserving of this commitment, especially considering the current world situation and the sacrifices being made on a daily basis by our families.

    Without your continuing support and the support of the entire Congress, we believe that these benefits will be eroded and our service members and retirees will suffer as a result. Thank you, Mr. Chairman.

    [The prepared statement of Mr. Raines can be viewed in the hard copy.]

    Mr. MCHUGH. Thank you, Mr. Raines. Thank you all.

    I want to get right to the members who really made an extraordinary effort to be here today, Mr. Cole and Mr. Saxton, who are very senior members of the full committee and Mr. Saxton is chairman of our Terrorism and Unconventional Threats Subcommittee, and of course Mr. Meehan and Ms. Sanchez, a veteran of both the committee and the subcommittee on her personnel nomenclature, and of course one of the other new members, Ms. Bordallo from Guam.

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    So I want to ask one quick question on a specific that both Mr. Johnson and Mr. Raines brought up, and then I will yield to the other members.

    When I understood that MWR would again be under this—or would be under this subcommittee, I made an effort, along with the staff, to try to bring myself back up to speed, so to speak, and I was struck by what I was seeing. And I was reminded of Yogi Berra's old adage, ''It is deja vu all over again.'' A lot of these issues were issues that we were dealing with when I had the honor of serving as chair of the panel and Marty Meehan and others were members of it as well.

    The last time the Armed Services Exchange Regulation (ASER) was expanded it was when we were able to effect a significant but in the scope of things rather small change. We were dealing with the privatization potential there and I have heard you talk about that today. The last time the Guard and Reserve visitation opportunities were expanded was at the time that we worked on that issue.

    We are also dealing with a situation called private labels, invariable pricing, and there was a little product line, I believe at the time, called ''Always Home,'' but we are back at it. Mr. Johnson and Mr. Raines obviously commented upon their perspective on both of those issues, and I think they are very closely related, but I wanted to provide the opportunity to the good folks on the left, our left, side of the panel, Ms. Cannon and Mr. Barnes and General Murray, with the opportunity.

    From the patron perspective, what do you think the attitude or the value of both the introduction of private labels and the imposition or opportunity for variable pricing might have? Is that something your folks and you support or do you have concerns, just so we can fill out the record, whomever wants to go first.
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    Mr. Chairman, I will——

    Mr. MCHUGH. Mr. Barnes.

    Mr. BARNES [continuing]. I will not profess to have expertise on this issue, but given what we have heard from our industry experts, it appears that both of these has the potential of eroding the benefit and possibly having a negative impact on the savings and the progress that has been made by DeCA to increase average savings above the 30 percent level. So, obviously, there would be concern at that point.

    Our support or our position is maintaining the benefit at the current level. And as I understand it, this has been looked at, as you referenced, in the past; this is not something new.

    General MURRAY. Absolutely. It gives variable pricing, and the only way I would agree to having the no-name brands would be if it was at the same quality and at the same price. But you could also get the stock assortment in the commissary so high that it would be detrimental to enabling them to provide all the food in all of the areas, because we do have limited space. So you would have to look at that on an individual basis where that no-name brand has proven that they are the best in the world and they could provide those goods all over the world.

    Mr. MCHUGH. Yes. I suppose if there were no savings, you would not need them, by definition.
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    Yes, Ms. Cannon.

    Ms. CANNON. Mr. Chairman, the National Military Family Association feels that there should be no erosion to the benefits that our military families are privy to at this point. So any initiative that would create any erosion to any of the benefits we could not support that, and we know that our beneficiaries would have a lot of heartburn with that.

    Mr. MCHUGH. Maybe we can get a store brand name and it is inexpensive.

    Ms. CANNON. Yes.

    Mr. MCHUGH. Mr. Johnson and Mr. Raines, I want to provide you an opportunity to add if you would care to.


    Mr. JOHNSON. It seems to us that the main reason that variable pricing and the introduction of private label merchandise to commissaries has been raised is because those who propose that see that as an opportunity to raise money, in other words, use the sale of those products to create a margin, and then that margin can in turn be used to reduce the appropriation. But when you raise margins, you raise prices, you degrade the benefit. So there is just no way to have variable pricing and the introduction of private label that would, the thinking is that that would be sold at a profit, and maintain the benefit as we know it today and as the soldiers and sailors and airmen and all know it. I mean you would get a tremendous backlash from uniformed personnel if they realized what was happening. And this is surely not the right thing to do.
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    Mr. MCHUGH. Boyd, I do not know if you want to add anything.

    Mr. RAINES. Yes, sir. I have two observations. When we looked into this issue of private label we came to two conclusions. Number one, contrary to what the GAO study concluded, we found that 53 percent of the current suppliers to DeCA are identified as small businesses. Part of the premise in the GAO study was that by adding private label, you would increase the opportunity for small business to participate in that arena.

    Our view indicates, and our review of this indicates, they would simply displace other small manufacturers, because you need those name brand products in the commissary to form your benchmark. And the way I understand private label to work is you need a pricing gap between your national brand and that private label.

    Well, in the commissary system, as we all know, those national brands are sold at cost in the commissary, so your pricing gap is very small to begin with. So in order to have enough room to make the private label attractive and at a margin, you have got to bump up those national brands. And at that point, as my colleagues on the panel have said, you are into a variable pricing scheme. And you do look at it as a funding mechanism for the commissary, and that comes directly out of the patrons' pockets. And I, too, believe that they would object over that circumstance.

    Mr. MCHUGH. Thank you all very much.

    Mr. Meehan.
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    Mr. MEEHAN. Thank you. There has been some discussion about expanding the commissary benefits for members of the reserve. I am just wondering what your take is on that. I think presently reservists can shop at a commissary two days a month. The reservists, obviously, are being asked to do all kinds of things that they have not in the past. Can I have a brief view that any of you have on this subject? Is it appropriate to expand when reservists can use the——

    Ms. CANNON. Sir, I would like to comment on that. From our standpoint and from the reserve families that we talk to on a day-to-day basis, those that live in close proximity of the commissaries would definitely love to have the opportunity to shop more than the two allotted times that they can go to the commissary.

    They feel that as a member of the total force that they should not be penalized because they are reservists, that their spouses are fighting alongside the active duty, and that because of some of the financial issues that they are facing because their spouses are called to active duty, that the commissary benefit allows them to offset some of the financial issues. So we would definitely support doing away with that limitation for them.

    Mr. MEEHAN. Yes. I have a reservist who works for me in my district office who has been deployed, and the financial sacrifices associated with deployment are enormous.

    Ms. CANNON. Yes.

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    Mr. BARNES. Excuse me, Mr. Meehan, I would just echo and support the comments from Lilly. The coalition has a long-standing position on this of supporting unlimited lifting the restrictions for all guard and reserve personnel.

    I would add that with regard to the proposal which has been floated, the coalition does not take a position on allowing employees to shop at the commissaries, but the immediate response to some of our member organizations was the disparity between limiting guard and reserve access on one hand while moving to open shopping privileges to the employees who are not currently authorized to shop there.

    General MURRAY. My comment, and I wish somebody in the audience would tell us, of the reserves that have been called to active duty cannot their families shop every day?

    Mr. BARNES. Yes.

    Mr. JOHNSON. I believe they can, but I want to support the folks that said that they ought to have ongoing privileges whether they are on active duty or not. As you know, reservists, you know, they have one weekend a month of duty and they have two weeks a year and occasionally additional duties. They get paid for that, but as we all know, that is a rather modest sum that they get paid.

    The erasing of all restrictions on shopping privileges on base I think is absolutely the right thing to do for reservists and Guard people, even though they are not called up to duty. Because when they get called up to duty they get those privileges. But while they are waiting to be called, there is still that certain amount of extra devotion that they are giving to their country by volunteering to be in the reserves, and the pay is pretty darn low.
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    And so giving them the privilege of shopping on base would not cost the U.S. government hardly a dollar, because the facilities are already there, the goods are already on the shelf. But it would be greatly appreciated by those reserves and guard people.

    Mr. RAINES. Sir, if I may, the operative word, I think, is total force. If we consider those components to be part of the total force, if truly our doctrine has changed with how we look at our armed forces and the necessity to call upon the reserves more and more frequently, this is not something that happens occasionally, it is something that happens very frequently, why should they be treated as second-class members of our military community?

    I think the concept of military community embraces those reservists and those active guardsmen who are putting their lives on the line in lots of places around the world, and they can be called up with a moment's notice. And so, yes, sir, we believe they deserve the benefit without question.

    Mr. MEEHAN. One other brief issue. Over the past several years Congress has lifted some of the restrictions on the sale of televisions. And I remember I was ranking member at that time and felt that, boy, if I had a 35-inch screen—see, I am a big NFL fan and I had a 35-inch screen at the time, and I thought——


    Mr. MEEHAN. But I thought to myself, well, we at least ought to raise it to that. I mean I enjoy my 35-inch screen. But now a few years has passed, I now have a 40-inch screen, and my understanding is that it is still at—is it 35 or 36 inches? What is it?
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    Mr. JOHNSON. I believe it is 36 inches.

    Mr. MEEHAN. Thirty-six inches? Can you comment on this issue, generally? I mean I do not know why we have these kinds of restrictions, but, specifically, respond to claims that lifting the restrictions will increase sales that will result in the drive—will drive out or hurt local mom-and-pop stores and drive them out of business. My own sense is today it is the very big stores that actually sell these large television sets.

    Mr. JOHNSON. Absolutely. The mom-and-pop stores are of course a dying breed. Maybe that is another different kind of an issue, but the fact is that is happening regardless of this issue. We believe that those restrictions should be lifted all together. There is a demand among uniformed personnel and their families for upgraded TVs, and they cannot get them in the exchange.

    That costs them money to go outside the gate in two ways. Number one, higher prices outside the gate, and, number two, much higher, double, the credit rates. As you know, the Star card that is the main credit card for the exchange services, I believe the interest rate is about nine percent now. Compare that to your Visa and Mastercard in your pocket, and that is about 18 percent, I believe, or sometimes higher.

    And the other thing is a lot of military members cannot qualify for credit cards outside the gate in order to buy the kind of entertainment equipment that they would like for their families. So it is just penalizing our military families by forcing them to go outside the gate.
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    The amount of hurt that that is going to be put on retailers—first of all, it is very dispersed around the country, and, second of all, it is a tiny amount in the total perspective compared to the benefit of lifting those restrictions.

    General MURRAY. I think it is a slap in the face for the military to be told that their exchange cannot sell the same thing that they are selling on the outside, and the location of the exchanges and the local merchants would benefit a heck of a lot more than they would lose from having that base in that location.

    Mr. MEEHAN. I cannot imagine anyone who could not be at the game to miss Adam Vinatieri's kick when the Patriots were the world champions. [Laughter.]

    But in any event, I know I watched it myself over and over, particularly after last season after we were beat by the dolphins. In any event, thank you. I hope that is an issue we can deal with candidly, particularly when you see the technology changing and you see that working families all over America have these large screen television sets, and our men and women and their families ought to have the same opportunity, it seems to me.

    Mr. JOHNSON. And, Mr. Meehan, a related issue is this furniture issue.

    Mr. MEEHAN. Yes.

    Mr. JOHNSON. An argument could be made that furniture is even more important than TVs and——
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    Mr. MEEHAN. Depends upon the time of the year.

    Mr. JOHNSON. That is true. But the availability of furniture is restricted by some sort of regulation that says the exchanges cannot devote the necessary space to the sale of furniture. Well, that sure enough is a restriction, and that is a tremendous penalty on these young families that are living on tight budgets to have to get their furniture outside the gate because the exchanges are not permitted to allocate the necessary display space for it. It just seems crazy.

    Mr. MCHUGH. Marty.

    Mr. MEEHAN. I am all set. Thank you.

    Mr. MCHUGH. Thank you. I know where the potential spouses are in lifting the one-karat restriction on diamond rings. I am not sure where the military people are on that, but you make good points. It is a much different force today than it was just a few years ago in terms of guard and reservists and those issues that Mr. Meehan and you just talked about.

    The vice chairman, the gentleman from Oklahoma, Mr. Cole?

    Mr. COLE. Thank you very much, Mr. Chairman. Great privilege for me to be here, and thank you very much for your testimony; very enlightening. I grew up in a military family, and it is a culture in a small town on a military base. It is not something that can be broken apart and calculated piece by piece.
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    Let me ask you this. Most of your collective testimony has been really, in a sense, defensive, things that you want, you are very interested in protecting and making sure are not compromised in any way. Let me ask you to kind of reverse your thinking a little bit and tell us two or three of the changes that you would like to make that would make life better beyond those that we have already discussed here in terms of lifting some of the restrictions on what can be sold at commissaries. Is it that good that——

    Mr. RAINES. Mr. Vice Chairman, if I may, I think there are some opportunities, one of which Mr. Johnson did allude to, and that is to improve the stock availability of products on the commissary by initiating a shelf-stocking test to improve that process. So there are certainly process improvements that are out in front of us.

    And we in industry are anxious to partner with the Defense Commissary Agency and the exchanges or other appropriate agencies to try to seek those improvements and efficiencies, because that is good for the patron, and it is good for the resale system, and it is good for our industry. So there are opportunities certainly in that regard.

    And perhaps those opportunities also spillover into some safety areas. I am very concerned about the safety of the food source. That is going to become a very important issue, I am afraid, in the near future, not only abroad, but also here in the United States. So I think there are process improvements that we need to work together on to try to improve the situation for the future.

    General MURRAY. I recommend that we contact the exchanges and have them provide us a list of the items that put them at an advantage and the items that they cannot add to it, rather than those of us that are not close to the exchange system. But, of course, you all could provide it, but I think we ought to have the exchanges, the three service exchanges tell us the items that they have a disadvantage because they do not have them, especially the ones in Oklahoma. [Laughter.]
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    Mr. COLE. Thank you, General. Now I know why you are a general.

    Mr. BARNES. Congressman, I would add to the previous comments some focus on additional hybrid or BX-Mart facilities, particularly at BRAC sites. We are aware of some locations around the country where there is a great deal of interest in having these stores open and what have you and looking towards the additional BRAC closures that are on the horizon some additional perhaps expanding the number of those stores, but I would just add that to your list.

    Mr. JOHNSON. Perhaps you already know that the Major General Wiedemer of the Defense Commissary Agency is going to convene a meeting with his colleagues from the exchanges services to talk about long-range strategic planning. And some of the things that I am sure they are going to be talking about are creative ways to make the shopping experience on base even better for military families than it is today.

    And we are very supportive, industry is, of General Wiedemer's effort to bring those parties together to talk about some new thinking to make the shopping experience better. And it will be very interesting to see what comes out that meeting. I believe it is scheduled for May.

    Of course, he could tell you more about this if you had the opportunity to talk to him about it, but there is going to be some new ideas emerge from that effort, and we in industry are very interested to see what does emerge and to be supportive of anything that makes the shopping trip better.
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    I also can say that they are trying to find ideas and creative ways to do this without spending more government money, and I think that is good. The appropriation for commissaries is substantial, it needs to be continued, but we need to create these new ideas without expanding that.

    Mr. COLE. One further question, if I may, Mr. Chairman. Do any of you that are in the private sector into this arrangement conduct on any kind of regular basis the same kind of customer surveys, so to speak, that you would in the private sector to find out what that particular clientele really wants so that we actually are hearing directly back in some measured and scientific way from the people we are trying to serve?

    Mr. RAINES. Let me speak to that, Mr. Vice Chairman, if I may. Our association annually partners with the Defense Commissary Agency through patron awareness outreach programs to get feedback from the community on those issues and to find out and identify those areas where the patrons think there can be improvement and to identify areas where we can encourage them to use the opportunity to shop more often.

    So, certainly, those programs are in the works. We have had some success, and we have had, quite honestly, a few non-successes in that, but we have had some key learnings over time. That is, I think, characterized correctly as an ongoing process of continuous improvement as well as each of the services having their own measurement devices to measure the things you are talking about.

    Mr. COLE. Thank you very much. No further questions.
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    Mr. MCHUGH. Thank you.

    Ms. Bordallo.

    Thank you, Mr. Chairman. First of all, I am a freshman Member of Congress, and I thank you very much for the opportunity to be on this subcommittee. I represent the people of Guam. Guam, of course, is known for its many military bases, and I grew up with military commissaries and exchanges. So I am pretty well-versed on the subject, and I do want to commend both The Military Coalition and the American Logistics Association for providing the testimony today and to know that you are watching out for our men and women in service.

    During the short time that I have been a Member of the Armed Services Committee, I have heard many of the military leaders come before us to explain to us that their number one priority in the military are the people, the men and women in service. And this is a benefit that I feel they deserve.

    As many of you pointed out, the pay grades are very low, and they are struggling. They move a lot. It truly is a sacrifice on behalf of the families in particular.

    I want to say that just a couple of years ago when I was lieutenant governor, I was invited to the Anderson Air Force Base military commissary. They had overhauled it and they invited me in to see the new look. And I will tell you, it looked like a Safeway market; it was beautiful. And so there are many new enhancements being provided in both the commissaries and the exchanges.
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    They are non-profit organizations, so I do not think we expect them to be making money. I mean they are to provide this as a benefit for our men and women in service and their families.

    And in particular, I met Mr. Raines yesterday in my office representing the American Logistics Association, and what impressed me, Mr. Chairman, is that his organization is working with the private vendors so that they can provide some of the—is this correct, Mr. Raines, that you are looking for a partnership between the commissaries from the local community, not just bringing in food stuffs and other stock from off islands, say from off Guam, from the mainland? In other words, you are looking that they partner with local vendors that are from Guam; is that correct?

    Mr. RAINES. Yes, ma'am. It is my understanding that the Defense Commissary Agency has a program to allow local vendors to have access to the commissaries.

    Now, as I was often reminded by your predecessor, Mr. Underwood from Guam, there are always greater opportunities to do so for the people of Guam.

    Ms. BORDALLO. That is right.

    Mr. RAINES. And, certainly, I am sure that when General Wiedemer comes here he will be glad to share with you some of their programs in that regard. Yes, I am aware of those programs, and as I said in your office yesterday, we are going to get you some information and some pictures of those products out in those stores on Guam so that you will have some firsthand information on that.
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    Ms. BORDALLO. Yes. Well, I think this is good, the cooperation, to show that they are just not trying to underprice all the mom-and-pop stores. And I will share this with the members of the—the witnesses here and the committee, that many times outside prices are lower than the commissaries and the exchanges. We find that on Guam quite often. I have military friends that say, ''Well, you know, I can get a better deal. They have got a big sale going on at K-Mart or somewhere.'' So it is not always that the prices are lower, but in most cases they are.

    I also just again want to mention on the inclusion of others for privileges that I support that. As you said, it is a total force, and the veterans and the guardsmen, reservists, I think that is something that we should be looking at. But other than that, I think the commissaries and exchanges are providing a wonderful benefit to our men and women in the service, so I certainly support you.

    Thank you, Mr. Chairman.

    Mr. COLE. Thank you. This is a heady and historic moment for me. I am now presiding over a congressional hearing for the first time. Gosh, can I grab the gavel, Jim? If I may, let me yield to my good friend, the congressman from New Jersey.

    Mr. SAXTON. Thank you, Mr. Chairman. Tom Cole used to help me when he was over at the NRCC and so it is a pleasure to see you——

    Mr. COLE. Thank you.
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    Mr. SAXTON [continuing]. At your first presiding moment here on a subcommittee.

    Hey, listen, I am not going to take a lot of the subcommittee's time, Mr. Chairman. I would just like to say that this is a pleasure for me to be here today. I have been on the Armed Services Committee for a lot of years. This is the first time that I have had the opportunity to deal with these issues on this subcommittee, and that is primarily thanks to our good chairman, Congressman Hunter, who oversaw the reorganization of the subcommittee structure on the Armed Services Committee. I think it was very productive and it gives me the opportunity to do something that I have always kind of wanted to do but never really had the chance to do it.

    So I look forward to working with all the folks in this room, particularly my old friends Rich Murray and Chuck Partridge. And Rich and Chuck, if I do anything out of the way that you do not like, just tell Jim Guliana, who has also in the room, and he will tell his brother whose office is right next to mine back in Mount Holly, New Jersey, and he will take care of that. [Laughter.]

    So with having said, I represent a district with a couple of great commissaries in it, and I have got 85,000 or 90,000 veterans who have settled around Fort Dix and McGuire Air Force Base, and many of those are in the retired community. And the commissary system is extremely important to them, as well as the active and reserve military folks from all around the country, not just New Jersey, of course.

    So I look forward to this opportunity to work and provide for advancement in the system that provides great quality of life opportunities for military people.
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    Thank you, Mr. Chairman.

    Mr. COLE. Thank you. It is like driving without your dad but he showed up. [Laughter.]

    So, Mr. Chairman, I am going to turn it back to you.

    Mr. MCHUGH. Did Mr. Saxton—he did.

    Mr. SAXTON. I duly thank you for the opportunity to be here.

    Mr. MCHUGH. Well, listen, Jim. I appreciate your coming. I know now I have a tough time in not knowing what you have asked. Let me just pose another question.

    Some of you commented upon this in your oral testimony, but also a number of you commented upon it in your written testimony, and that is exchange consolidation. I have to be honest with you, if you just look at the surface of this issue, it seems to make at least some sense. Efficiencies of scale, the integration of a variety of things that happen, procurement, et cetera, et cetera, product purchase, et cetera, through a consolidated single exchange makes intuitive sense. But what makes intuitive sense does not always make common sense, I believe.

    So I would like to get on the record your perspectives with respect to exchange consolidation for a unit as the case may be and if you see any benefits or what you believe is the other side of the equation is the case with the negative aspects of that would be. And I will just open it up.
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    Mr. Raines?

    Mr. RAINES. Mr. Chairman, when assessing the feasibility of combining or integrating the exchanges, there are several obvious considerations. First of all, what are the savings and efficiencies, what are the costs, and what will be the impact on the patron, and what is the impact on the taxpayer?

    Several years ago, the department commissioned a study by PricewaterhouseCoopers (PwC) on this subject at a cost of approximately $7 million. The crux of that study was that most of the potential savings would come from inventory reductions, savings from combining common functions such as Information Technology (IT), personnel and the back room activities, and also increase buying power from being a larger organization.

    Unfortunately, after much debate and discussion, there was a decision not to move forward on that initiative, and I think you understand why now.

    Over the past several years, the exchanges have been focused on just-in-time inventory and have significantly reduced their on-hand inventories. As such, much of the savings that was identified in the PwC study have now been realized.

    Second, without the involvement of taxpayer money, I do not know where the efficiencies go. Do they go to the patron? I do not know that because there was never a clearly defined patron benefit, and we believe that if we are going to embark on such an activity, we have to figure out is it good for the servicemember. And, frankly, sir, I do not know if it is or not. That deserves some study.
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    Third, when you look to integrating the exchanges, you do have to look at that cost. On the IT systems alone, PwC concluded it would cost, I believe this correct, $198 million to implement that new IT system. Because the exchanges have gravitated toward their own systems, they are not compatible. So from our perspective, I sincerely question whether or not there is a cost savings at least in the near term with any sort of reasonable payout over a five-or 10-year period such that the efficiencies would be realized.

    Mr. MCHUGH. Anyone else care to—Lloyd?

    Mr. JOHNSON. I think it is worth also pointing out that to combine those services would be an extraordinarily complex project. When DeCA was combined in 1991, we were only combining four different services with one store on each base, and there was a great commonality between those stores, and that was a very difficult, wrenching process to go through to create DeCA.

    Some folks might recall how the thing almost crashed from a bill paying situation where DeCA just simply could not pay the vendors, and the vendors were threatening to stop shipping to the commissaries and the whole thing would have crashed. And that was a much simpler project in combining the exchanges.

    I would tell you that the exchanges manage gas stations, convenience stores, name stores that have a variety of goods in it, restaurants, all kinds of things on base to put those things together when there is no commonality with the information technology systems would be one extraordinarily difficult task.
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    And our concern is that customer service, as it exists today, would suffer badly in that transition. And the savings, as has been alluded to, are not that great anymore, because the exchanges found ways to save money without consolidating, and most of the savings that were identified have already been realized.

    Now, you know, nothing is forever. Maybe some day this will make sense, but we have seen no evidence where it makes sense today to do that.

    Mr. MCHUGH. Any on the patrons' side?

    General MURRAY. My comment would be competition is healthy and especially here in the Washington area where you have the exchanges. And that is probably one of the biggest complaints of the customers that every Army-Air Force exchange you go into all over the world have the same stock assortment. And so I think the competition is healthy, and I think the competition among the exchanges, the Marine Corps, the Navy and the Army-Air Force is healthy because they both try to outdo each other.

    Mr. BARNES. Mr. Chairman, I would just support the excellent points that have been made by my colleagues here. The Military Coalition supported the decisions to keep the exchanges separate while they moved ahead to adopt resource sharing and other efficiencies, and that seems to be progressing well.

    Mr. JOHNSON. One last point—I am sorry, go ahead. I am sorry, were you finished?
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    Mr. MCHUGH. Ms. Cannon, did you want——

    Mr. JOHNSON. Oh, I am sorry. I thought—I went like that. I just had one more point to make. The missions of the different exchange services are actually a little different. For example, in the Marine Corps, and I see Retired General Mike Downs is here today and he will have an opportunity, I guess, at your next hearing to explain this, but the Marine Corps is set up differently. They just do not run exchanges, they run community service programs and assorted other things. It is a whole different—the whole MWR thing for the Marine Corps is combined with the exchange service. That seems to work for the Marine Corps.

    In AAFES, for example, that is not the case. In NEXCOM, the Navy, they do not do it that way. Also, the Navy runs the program to support ship stores. That is a very specialized kind of a function that AAFES and the Marine Corps would probably find a little mind-boggling. So to put these things together, when some of the missions are actually different, just further complicates already the things I talked about earlier.

    Mr. MCHUGH. Which got to what was the—yes, Dick?

    General MURRAY. I think the biggest thing you could do is to have the Navy and the Army-Air Force exchange services do like the Marine Corps and put everything under one operation, and we would make more money. I am talking about the MWR activities and all of the exchange. Like the Marine Corps, it is all under one commander, and he is running the whole show, and they do a lot more smarter things on the Marine Corps than they do on the Army, Navy and Air Force bases.
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    Mr. MCHUGH. Either of the vendor reps want to comment on that or we will just let it pass?

    Mr. JOHNSON. And that was coming from an Air Force general about a Marine Corps—that is amazing.

    I think there is value in what Dick Murray just said. That is an interesting concept to perhaps expand the responsibilities of AAFES and NEXCOM to include some MWR things that the Marine Corps is doing. Seems to make some sense, but clearly consolidating all that is a very difficult task.

    Mr. MCHUGH. Yes. If I was sitting next to him, I would not tell him he was full of it either. [Laughter.]

    I appreciate that. And as I started to say, Lloyd Johnson's last comments about the differences gets to the heart of my follow-up which is going to be about the different cultures, which is what we heard very often about consolidation when we spoke to it. But you did a good job covering that, so I will not press it any further.

    A number of you, again, talked about funding for MWR, which becomes a particular challenge, it is always a challenge, but it becomes a particular challenge when you have the enormous number of forward deployed forces in an enormous number of places. The estimates that we have been given from DOD is that MWR programs in those forward deployed locations for this fiscal year, the 2003 year, will be about $40 million. And that is probably low, just a wild guess on my part, but let's accept that figure as gospel for the moment.
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    If you couple that reality with the fact that the DOD comptroller has announced that no contingency funding will be allocated to support MWR programs, you obviously have to ask the question what is the erosive effect? And as I mentioned, some of you did talk about that, both in your oral as well as your written statements.

    Have any of you any perspectives you could share with us with respect to the scope of that problem, vis-a-vis the reduction of programs in the non-forward deployed initiatives at home stations because of the, if not totally insufficient, the diminished resources to support them trying to back fill that $40 million. Is this something that if it has not yet occurred, we ought to be deeply concerned about it, and we are, but I am just curious are you aware of an erosive effect already that may have happened?

    Mr. RAINES. Sir, I am only anecdotally when you hear of long waiting lists to get signed up for the day care center on base and young families are having to go outside the gate to higher cost alternatives for child care and where that waiting list can be months and months, perhaps as many 12 months long or longer. That is how it manifests itself in not getting that service and support on the base. Perhaps one of the family associations has also heard of those types of situations.

    Ms. CANNON. Yes, sir. We are aware of long waiting lists for child care. We are also aware of some of the home care providers not being able to provide child care for outside the installation families. So we do see some but not a lot of degradation. But if there is an erosion of funds, we expect that there will be numerous cases of degradation of services.
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    Mr. MCHUGH. Dick.

    General MURRAY. I think it will be criminal if we have the exchanges providing all of the support they are providing, because we provided a million dollars worth of inventory and items for the Desert Storm that we put in place, and we took the goods and just gave them away but DOD reimbursed the exchanges for all their expenses. So if you do not get the $40 million, then I think that is an excellent estimate of what they will probably cost them. Then you are going to have projects canceled that should be done for the bases.

    So we are going to be balancing the DOD budget on the back of the soldier and the airmen and the Navy personnel's income from the non-appropriated fund activities, and I think that is absolutely wrong for somebody to say right now that they are not going to be reimbursed for their costs associated with that. Because they are leaning forward in the cockpit, and they are going to make sure that they are not going to run out of any inventory for those guys that are over there fighting.

    Mr. MCHUGH. And by the way, on child care, it is an excellent point, and the Congress did authorize the services to get into a contracting program with private providers off base. They established a pilot program. We are very interested to see what the status of that is, and it is something we are going to pursue.

    But beyond that, the $40 million figure causes concerns on the horizon rather than what we are dealing with right now. We can all agree, can we not, that if you are not going to provide any contingency funding and you are going to expend $40 million that you were not expending last year with respect to the forward deployed programs, that $40 million is going to come out of whatever it is you are doing somewhere right now. Fair?
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    And, Tom, if you have any questions or anything, we are kind of informal here now.

    Mr. MCHUGH. Let me just return to a final point I want to probe.

    And, Lloyd Johnson, in your oral testimony, you spoke about the situation with shelf stocking. And I want to be clear on where you and your association, of course the vendors in general, are with respect to a potential change where you extend flexibility to the military side to let them assume either a large share or perhaps all of that shelf stocking.

    I heard you indicate a favorable attitude towards pursuing it, but I am not sure you were willing to commit to a particular proposal. Can you help me better understand where your view is on that?

    Mr. JOHNSON. I think right at this moment there is not a good proposal on the table, but I think most people agree that the current vendor shelf stocking situation is badly flawed. What happens is many years ago it was somehow determined that certain categories of goods in the commissaries would be stocked every day, in every store, 276 stores, from Turkey to Japan and points in between, that in certain categories vendors like ourselves would stock the shelves.

    And the reason that was done is because there were not enough appropriations in the commissary—in other words, not enough appropriated dollars in the commissary budget for them to do their own shelf stocking like any other grocery chain would do. So to be sure that the groceries got on the shelf, the commissaries asked the vendor community to respond. We responded.
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    Unfortunately, trying to manage that process is extraordinarily difficult, and in fact the cost of doing that has, in many cases, been built into the pricing, because the cost has to be paid somewhere, and the patrons are, to some degree, paying the price for vendor shelf stocking.

    The ideal situation would be for the commissary system to get enough funding to do their own shelf stocking as other grocery chains do, and that would better ensure that the proper groceries got on the proper shelves at the proper time every day. Right now, there are some out-of-stocks that occur randomly around the system, because the shelf stocking system as it exists is badly flawed.

    So we need to work with the commissary system as a vendor community to try and come up with a solution to that that is not going to cost too much money. And I believe General Wiedemer has some good ideas that he is floating around and going to be discussing intensely with industry here over the next month or so.

    And it may well be by the April hearing that I believe you have scheduled for April 2 that some of those ideas will emerge to the top and be able to discuss with Congress, and it may in fact require some legislation or funding relief for DeCA to properly solve this problem. I cannot give you a great answer or a great proposal for how to do that right now.

    Mr. MCHUGH. Well, it was—but otherwise it was a great answer.

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    Mr. RAINES. Mr. Chairman, if I may——

    Mr. MCHUGH. Mr. Raines.

    Mr. RAINES [continuing]. I had the benefit of being with General Wiedemer last week. He was gracious enough to meet with the American Logistics Association Board of Directors and what we discussed in concept was to develop a test scenario where you would pick a specific challenging category, such as health and beauty care that is now vendor stocked and engage in a cooperative test between industry and DeCA whereby those products would be stocked, let's say, in 10 stores in one region for an agreed upon period of time with an agreed upon set of metrics and measures to either measure the success or lack of success of such a program.

    And our board of directors agreed, and we have representatives on our board from large and small companies, to support that test financially, just as we are now relative to shelf stocking, to see if such an approach might work. So I think we are close to having a trial, if you will, to see if some of these ideas can be put into motion. And, again, industry would welcome that opportunity to test some of those ideas.

    We have some details yet to be worked out. One of those would be if there is an industry contribution, how would that be handled? Right now, industry pays anywhere from $0.35 cents a case, on average, to over $0.40 cents or $0.50 cents, on average, to stock a case of product, depending on whether it is dry grocery, frozen, chilled, depending on the size of the case, whether or not it has intersleeves, et cetera.

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    How could that money be provided to DeCA? Could it be provided as a set aside is a question that perhaps the Congress would have to answer even for a test scenario. How would those future case rates be set, how would it be managed, et cetera? So industry is very willing to partner with DeCA again to try to figure out some of the issues surrounding that question.

    Mr. JOHNSON. Just one more perspective to sort of give you all some food for thought. In a way, DeCA already has sufficient funds to do the necessary shelf stocking. The problem is they are required by regulation to hire niche contractors, which are essentially handicapped folks, to put the groceries on the shelves on the groceries that DeCA stocks. They pay about three times per case than vendor shelf stocking pays to get our cases on the shelf. They are paying three times the rate because they are dealing with handicapped folks.

    Now, that has great social value and there is no question about that, but it is a very inefficient way to get groceries on the shelf and it is costing a lot of money. And it will be interesting to see if there is some way to get DeCA some relief from the requirement that they hire niche contractors to get groceries on the shelf at a very inefficient rate. But that is a tangled up issue, and I understand that with the social value of that.

    Mr. MCHUGH. It is, and it is important to all of us here on the panel. But I would hope—you are right, Lloyd. I mean this is an important part, the niche contractors, and, clearly, challenged individuals are utilized. But maybe there is a common ground. I do not think there are too many members of either the House or the Senate who want to see that very useful and I think helpful initiative be totally wiped out, but there may be a common ground.
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    Let me just follow up. So we can—I believe, Lloyd, I heard you say that the ultimate—would the vendors ultimately see as an achievable objective—and we do not have a plan so I cannot ask you to commit, although we are transcribing, we did not swear any of you in, so answer as you will—but it becomes a far more attractive initiative if it does indeed result in additional price savings to the patrons. I mean from your perspective, that is certainly something you want to shoot for in addition to other components.

    Mr. JOHNSON. Yes. And that is a possible result of a better shelf stocking program, yes.

    Mr. MCHUGH. Good. The record will show they both said yes. And money is an important part of it. And, surprise, everything in this town has at some time or another, at one point or another has something to do with money, but it would also would require, I think, depending on what the general's proposal is, probably requires some changes with respect to the civil service personnel structure to provide that.

    So we will be looking forward to the general's testimony, as you noted, Lloyd, on April 2, and we will pursue that further. And it is probably something in a larger context that Dr. Chu, Secretary Chu may address as part of his personnel reform initiatives that we are going to be talking about tomorrow.

    Someone mentioned food for thought, I am thinking about food for dinner. Cannot yield to anybody else, so have you got any questions for me? Reverse it. This is an unusual hearing, we might as well pull it. Except for General Murray, does anybody have any questions? [Laughter.]
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    Mr. RAINES. Well, sir, if I may.

    Mr. MCHUGH. You may, Boyd.

    Mr. RAINES. We would be most appreciative to hear your vision for the role of the subcommittee and the things that you want to personally see the subcommittee focus on during your tenure and the stewardship that will be provided.

    Mr. MCHUGH. My 10-year or tenure?

    Mr. RAINES. For the hopefully long——

    Mr. MCHUGH. I want to get through tonight. Well, I appreciate that. Obviously, we have a very serious charge. All of us on the entire committee and subcommittee recognize that when it comes to the important job of military action, military and defense strategy, the men and women in uniform, for all the importance of laser precision-guided munitions and the latest platforms and the cutting-edge technology of the 21st century battlefield, it starts with that man and woman in uniform, and we care very deeply to ensure that we do a better job.

    And I think we have been doing a better job from the personnel perspective, whether it be in questions of ensuring a better health care system, a work in progress, whether it is the pay raise adjustments that we have made and we must continue to make, that is going to be our primary concern.
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    And as I mentioned with respect to MWR, largely those are let's-deal-with-it-again issues as well. We are going to try to very hard—work very hard to continue the progress we have made. We think it is a critical component of the success of the very challenging and, in large measure, dangerous situation, as we had before.

    So one of the reasons, with respect to the hearing we are having here this evening, we wanted MWR under the subcommittee jurisdiction is that in today's total force concept, seamless force, the MWR programs are an integral part of that. Having been on both sides, the panel, being the chairman at one point, and now the subcommittee chairman, is that we are jointly concerned.

    And I commend Chairman Hunter for his attention to this, and I know he is met with a number, if not all of you. I think he felt as well that under the previous structure MWR issues would be a set-aside as though somehow there is a difference between what we do on MWR and the things we need to do for the personnel.

    And although I do not think it ever worked that way, we were deeply troubled by the potential that it, in a very unintended direction, underscored those who happened to think that this is kind of an added compensation, it is not part of the entire benefit package, that we have got to focus on pay and we have got to focus on health care, and we truly do, but if we have got to get tough anywhere, MWR is just—you know, it is already icing on the cake, gravy on the potatoes, and that is not, in the chairman's view and in my view what it is. So we are going to work very hard to integrate these MWR programs into what they should be.

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    And some of you mentioned administrative adjustments, legislative adjustments to Title 10, and as I promised you, Boyd, we are going to look at those. But whether that is successful or not, we still want the objective to be maintained and have that objective prevail, and that is to ensure that these programs are part of the critically important initiatives that we have to do the best we can by these very, very brave men and women in uniform. So that is the post-7 p.m. synopsis of it, and I appreciate the opportunity to fill it out.

    So let me just say, Ms. Cannon, gentlemen, thank you again so much for being here. I guess I have kind of given my rededication to the important work you do, and I deeply appreciate that. And I have spent a lot of time in the forces, both forward deployed, as I have traveled the world from the Demilitarized Zone (DMZ) in Korea to Bahrain, to Qatar, to Saudi and on and on and on, and I know how important it is to those folks, as Ms. Cannon noted, to walk in to an exchange or a commissary and feel that in a very troubling time a long way from home and oftentimes a very, very strange land they can still have a little piece of that home through the products and services that you provide.

    And we are going to work with you as hard and as closely as we possibly can to continue that. And I know we are going to continue to have meetings. We have another MWR hearing, which I am sure you will pay very close attention to. As we begin the immediate deliberations on the 2003 authorization bill, we want to make sure you are an integral part of that legislative proposal, because you are an integral part of the military family, and I thank you for the amazing cooperation that occurs between the patrons organizations, as well, of course, the vendors and the military.

    And with that, I do not want to—Marty, I do not know if you——
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    Mr. MEEHAN. I actually had 45 minutes worth of comments that I wanted to——


    Mr. MEEHAN. I am all set.

    Mr. MCHUGH. Is Vic here?

    Mr. MEEHAN. Thanks very much.

    Mr. MCHUGH. Well, thank you, Marty, and I appreciate Marty Meehan's stamina, as always; he has shown it in the past.

    So with that and with my added words of appreciation, I adjourn this subcommittee meeting. Thank you.

    [Whereupon, at 7:25 p.m., the subcommittee was adjourned.]