Page 1       TOP OF DOC
[H.A.S.C. No. 108–6]



FOR FISCAL YEAR 2004—H.R. 1588






 Page 2       PREV PAGE       TOP OF DOC


APRIL 2, 2003




JOHN M. McHUGH, New York, Chairman
TOM COLE, Oklahoma
JIM SAXTON, New Jersey
JIM RYUN, Kansas
ROBIN HAYES, North Carolina
 Page 3       PREV PAGE       TOP OF DOC

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, April 2, 2003, Fiscal Year 2004 National Defense Authorization Act—Military Resale and Morale, Welfare and Recreation Programs Activities

 Page 4       PREV PAGE       TOP OF DOC
    Wednesday, April 2, 2003



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

    Snyder, Hon. Vic, a Representative from Arkansas, Ranking Member, Total Force Subcommittee


    Abell, Hon. Charles S., Principal Deputy Under Secretary of Defense for Personnel and Readiness

    Downs, Michael P., Director, Personnel and Family Readiness Division Headquarters, U.S. Marine Corps

    Frost, Maj. Gen. Kathryn G., USA, Commander, Army and Air Force Exchange Service

 Page 5       PREV PAGE       TOP OF DOC
    Maguire, Rear Adm. William J., Supply Corps, U.S. Navy, Commander, Navy Exchange Service Command

    Wiedemer, Maj. Gen. Mike, USAF, Director, Defense Commissary Agency

    Zettler, Lt. Gen. Michael E., USAF, Chairman, Department of Defense Commissary O[perating Board, Deputy Chief of Staff for Installations and Logistics Headquarters USAF


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

Abell, Hon. Charles S.

Decker, Brig. Gen. Robert L., Commander, U.S. Army Community and Family support Center

Down, Michael P.

Frost, Maj. Gen. Kathryn G.

Gallagher, Arthur A., Jr., President, American Military Family Services

Maguire, Rear Adm. William J.
 Page 6       PREV PAGE       TOP OF DOC

Molino, John M., Deputy Under Secretary of Defense (Military Community and Family Policy)

Myers, Arthur J., Director of Services, United States Air Force

Purcell, Rear Adm. (Sel), U.S. Navy Assistant Commander, Navy Personnel Command Fleet Support

Wiedemer, Maj. Gen. Michael P.

Zettler, Michael E.

[The Documents can be viewed in the hard copy.]

North American Perishable Agricultural Receivers Commentary

2003 Report From the Industry Committee on Produce Procurement for Military Commissaries

[The Questions and Answers submitted can be viewed in the hard copy.]

Mr. McHugh
Mr. Meehan
Dr. Snyder

 Page 7       PREV PAGE       TOP OF DOC

House of Representatives,
Committee on Armed Services,
Total Force Subcommittee,
Washington, DC, Wednesday, April 2, 2003.

    The subcommittee met, pursuant to call, at 1:05 p.m., in room 2212, Rayburn House Office Building, Hon. John M. McHugh (chairman of the subcommittee) presiding.


    Mr. MCHUGH. Let us begin the hearing. Let me begin by thanking you all for being here tonight—tonight, that was not a Freudian slip. We are not going to be here until tonight. And one of the reasons this has been rescheduled is we have a briefing from Secretary Rumsfeld at 4 o'clock on the full House floor. And so that necessitated moving the previous time from 3:30 to 1. We particularly appreciate our distinguished panelists for accommodating us.

    I also want to apologize to the second panel that was scheduled to appear. Because of the time compression, we did not feel we could deal with their perspective on the issues in an effective manner and in the time available. So we have now restructured the hearing to just have this first very distinguished panel.
 Page 8       PREV PAGE       TOP OF DOC

    And while I am on the issue of thank yous, let me also thank two people. First, my mom for giving birth to me so I could be here, but also—I had to say that in case there is a clip somewhere. [Laughter.]

    But also in the audience is my predecessor, who owes me some apologies, by the way, for mischaracterizing this job. [Laughter.]

    Who helped me not only to learn how to spell MWR, but the importance of it. A 12-year member of both this committee and a long-serving member, a dedicated member of what was then the Morale, Welfare, and Recreation (MWR) panel, David O'Brien Martin.

    O'B, good to see you my friend.

    Good afternoon, as I said. Today is the second of two hearings the subcommittee will conduct on military resale and morale, welfare and recreation or MWR programs. As I explained, the scheduling conflict has necessitated this change and we appreciate your flexibility.

    During the first hearing on March 12th, 2003 the subcommittee heard testimony from organizations representing the patrons of MWR activities and business leaders who work closely with the military resale community. During that hearing the witnesses raised many important concerns.

    Since then there appears to me to be a growing intensity about those concerns, fueled, in part, by perceptions that the military resale community will inevitably be subjected to budget cuts, privatization and consolidation with the ultimate objective being an end to the commissary and exchange benefits as we know them today.
 Page 9       PREV PAGE       TOP OF DOC

    The intensity of the concern is especially acute, I imagine, and tangible with the appearance in recent days of a Department of Defense (DOD) staff paper that indicates consolidating the three exchange systems is now a DOD priority. Given that Congress legislated a bar to consolidation in 1999, this new evidence of DOD interest will certainly be one of the subjects the subcommittee will explore with our witnesses today.

    To just underscore and make certain everyone understood my message of March 12th, let me restate it. The need to find money for the budget is insufficient justification, in my mind, to reduce military resale and MWR benefit levels provided to our servicemembers and their families.

    Let there be no doubt that the Congress, and in my opinion only the Congress, will be the final arbitrator for any change to commissary and exchange programs. We are willing to consider proposals to make these pillars of the military community more efficient and more effective, but not if there is any potential that the proposed changes will reduce benefit levels.

    I feel that reaffirming support for these critical programs is particularly important right now during a war when the military community is under its greatest stress.

    Right now, when our troops are in harm's way, is when these programs are needed most and when we reap the biggest rewards from our commissary, exchange and MWR investments. Right now the military resale and MWR activities are bringing much needed stability, familiarity and cohesiveness to the military community.
 Page 10       PREV PAGE       TOP OF DOC

    And I would challenge critics who believe that military resale and MWR activities are nonessential activities-to go to a military installation today and simply ask how important these programs are to the military community. And I think if that were to occur, we would be hearing far fewer rumors about benefit cuts.

    The question is, what is the nature of the threat to these benefits, if any? Fortunately, our DOD witnesses today are positioned to give us an assessment of the budget pressures that threaten military resale activities most directly. And we are certainly grateful for the opportunity to hear about management's plans and expectations for military resale activities.

    In addition to the statements provided by our witnesses today, the subcommittee has received statements in addition from the witnesses from the now-canceled second panel representing MWR activities within the services.

    These are obviously very, very important perspectives. And the necessity to, as I said, compress the hearing and unfortunately not hear from them directly does not in any way diminish our concern, our respect and our great interest in that input.

    And certainly all of those panel's witnesses testimony, without objection, will be entered into the record.

    And just for the record, those statements come from the Honorable John M. Molino, Deputy Undersecretary of Defense for Military Community and Family Policy, Brigadier General Robert L. Decker, Commander U.S. Army Community and Family Support Center, Rear Admiral Select Mark Purcell, Assistant Commander, Navy Personnel Command PERS–6, Mr. Arthur J. Myers, Director of Services, Headquarters, United States Air Force. And without objection, as I said, those statements will be entered into the record.
 Page 11       PREV PAGE       TOP OF DOC

    In addition, the subcommittee received two statements from the North American Perishable Agricultural Receivers and the American Military Family Services. Also without objection, those additional statements will be entered in their entirety into the record.

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

    And before I do introduce our witnesses, let me very appreciatively yield to the acting ranking member, long-time member of the former MWR Panel, in fact, former ranking member of the MWR Panel, my good friend, from the great state of Massachusetts, Mr. Meehan.



    Mr. MEEHAN. Thank you very much, Mr. Chairman. I want to thank my mother as well. [Laughter.]

    Mr. MCHUGH. Smart move.

    Mr. MEEHAN. I want to join the chairman in welcoming our distinguished witnesses today.

    During the first MWR hearing this session, we heard the perspectives of representatives of authorized patrons and merchants who support the military resale system. They reinforce the perception that the military resale system is an integral and important part of the military community and is perceived as a significant determinate of the quality of life of authorized patrons. The contribution of the commissary as part of the non-pay compensation system was singularly emphasized.
 Page 12       PREV PAGE       TOP OF DOC

    While there might be questions at large about why the Department of Defense continues to invest in MWR activities, committee members recognize the high return on that investment. MWR activities support military families. Military families contribute enormously to the strength and readiness of our armed forces.

    I hope that there was a clear message that this subcommittee fully supports retention of quality MWR programs, especially in light of the significant sacrifices the total force and our military families are making at this particular time in our Nation's history. They deserve nothing less.

    Today's hearing should help us to better understand how the department intends to sustain the MWR benefits. There is not much time available, but I do want to offer two pressing concerns, if I may, Mr. Chairman. Both have the potential of changing the character of military quality of life as an unintended consequence of some of the cost-saving proposals under consideration.

    First, I would like the department to address the need for a comprehensive MWR strategic plan that would incorporate and implement elements of the department's compact with war-fighters in many recent studies and defense reviews.

    And in light of the enhanced use of guard and reserve forces to support ongoing operational requirements, the strategic plan should address the reserve component force access equity issues. In other words, should reservists have the same access to commissaries as the active force? I think they should.
 Page 13       PREV PAGE       TOP OF DOC

    Additionally, I am concerned about the recent initiative to consolidate the services' exchanges. I am familiar with many of the studies that have been conducted over the years regarding exchange integration.

    It would be helpful if the witnesses would relate why the department has decided to direct a consolidation of the exchange rather than have the service exchange directors continue to seek agreements and operations among the exchange systems that are determined to be mutually beneficial.

    I look forward to the testimony and response to our questions.

    Thank you, Mr. Chairman.

    Mr. MCHUGH. Thank you very much. The gentleman's comments, participation, leadership is always appreciated.

    Any other members wish to make any opening remarks?

    With that I want welcome the actual ranking member, Dr. Vic Snyder.

    Vic, thanks for being here.

    Let me get right to the introductions of the panel. First, the Honorable Charles S. Abell, Principal Deputy Undersecretary of Defense for Personnel and Readiness.
 Page 14       PREV PAGE       TOP OF DOC

    Mr. Secretary, welcome.

    Lieutenant General Michael E. Zettler, chairman, Department of Defense Commissary Operating Board.


    Major General Kathryn G. Frost, Commander, Army and Air Force Exchange Service.


    Rear Admiral William J. Maguire, Commander, Navy Exchange Service Command.


    Major General Mike Wiedemer, Director, Defense Commissary Agency.

    And Michael P. Downs, Director of Personnel and Family Readiness Division.

    Welcome to you all.

    And with that, Mr. Secretary, let's go right to the big gun and hear from you, sir.
 Page 15       PREV PAGE       TOP OF DOC


    Secretary ABELL. Thank you, sir. Good afternoon, Mr. Chairman and members of the committee. I appreciate the opportunity to come today and discuss our exchange and commissary operations.

    As our troops are engaged in Operations Noble Eagle, Enduring Freedom and Iraqi Freedom, the exchange systems and the commissaries are there with them, providing the goods and services they need and maintaining that necessary touch with home.

    The commanders seated up here with me will speak to their specific initiatives in support of the troops and their families.

    Mr. Chairman, as you and members of this committee are aware, or you mentioned in your opening statement, staffing document that resulted in a memo signed by the deputy secretary directing me to take the initial steps toward consolidating the three exchanges was leaked to the public last week. The unfortunate result of this leak is that, contrary to our intent, we were unable to notify you, the members of this committee, Members of the Senate Armed Services Committee and other interested members in advance of public release.

    The memo in question has changed some during the drafting process, but the intent of the Department is to initiate a planning process that will ultimately result in the consolidation of the exchange systems.
 Page 16       PREV PAGE       TOP OF DOC

    Mr. Chairman, we are acutely aware of Section 346 of the National Defense Authorization Act for Fiscal Year 1999. As you know and, as you mentioned, this section requires that the Department seek specific approval before we take action to consolidate the exchanges. The effort that I expect the deputy secretary to initiate will result in a plan that we will bring to this committee for approval. While I do not have a precise timetable, I expect the effort will take several years before we would bring that plan to you.

    The purpose of exchange consolidation is to preserve and strengthen the benefit. Our morale, welfare and recreation programs cannot exist without the dividend the exchanges provide. Exchange dividends have been declining over the years, and are projected to continue that decline. If we can reduce duplication, take advantages of economies of scale and best business practices across the exchange systems, we can maintain or even increase the dividend to the MWR programs.

    Mr. Chairman, this consolidation effort will not be a takeover by one system of another. The result will be transparent to the customers: Marines will continue to walk into a Marine Exchange, sailors will shop in Navy Exchanges, soldiers will visit a PX and airmen will gather at the BX, just as they do today. The back rooms, the IT systems and overhead infrastructure will be streamlined and made more efficient.

    As we develop a plan, each of the exchange commands, each of the military services, representatives of the beneficiary groups and industry associations will participate with us. We will ensure that all equities are considered as we move forward. When we bring the plan to you for approval, we may not have pleased every faction but all will have participated in the development.
 Page 17       PREV PAGE       TOP OF DOC

    During the hearing this afternoon we will also discuss the Defense Commissary Agency. General Wiedemer and his team are doing a great job providing this important benefit, and I want to point out that the Exchange Consolidation Initiative does not include the Defense Commissary Agency.

    Mr. Chairman, with that I am prepared to respond to your questions.

    [The prepared statement of Secretary Abell can be viewed in the hard copy.]

    Mr. MCHUGH. Thank you, Mr. Secretary.

    Next to General Michael Zettler.

    Mr. Chairman, welcome.


    General ZETTLER. Thank you, Mr. Chairman, members of the committee. It is, indeed, an honor to be here to represent the Air Force, the Commissary Agency, Army-Air Force Exchange Services today, all of which I interact with on a daily basis.

 Page 18       PREV PAGE       TOP OF DOC
    I think when the end-story is told we will all be tremendously proud of how the Commissary Services and the Army-Air Force Exchange Services, as well as the Navy Exchange and the Marine Corps Exchange, have interacted together to support our troops in the deployed environment.

    It has truly been incredible. Every morning at 4:30, 5 o'clock, when I start to take the morning briefings, one of the highlights of my briefings is where are we opening another exchange at, how are we making things move, how is the commissary providing goods and services to feed our soldiers, sailors, airmen and Marines around the world in the deployed environment. It is inspirational.

    It has been my honor to work with these folks, they are doing great work. They certainly do have some challenges as we go forward, but I think these men and women are prepared to step up to these challenges.

    Sir, with that I am prepared to take your questions.

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

    Mr. MCHUGH. Thank you, General.

    General Kathryn Frost, Army and Air Force Exchange commander.

 Page 19       PREV PAGE       TOP OF DOC


    General FROST. Mr. Chairman, if I could follow your lead and thank my mother, too?

    Thirty-eight years ago, she came home from bridge club to tell me that there was a system in the military, the PX, that sold Villager clothing at discount. I only wish she knew—she could know that I am the commander of the Army and Air Force Exchange Service (AAFES), she would actually think I had amounted to something in my Army career.

    Mr. MCHUGH. She would be right, by the way. [Laughter.]

    General FROST. Over 30 years ago, I walked into my first PX and discovered that there was a special benefit that was provided just for people in the military and their families.

    That benefit continues to get better and better as our AAFES team really steps up to the plate. And, as you said, never before has that benefit been so critical for our force.

    AAFES provides to our customers value at the cash register, it generates over $7 billion in revenue a year, last year it put $329 million on the bottom line, and contributed some $220 million to the services for MWR. And we serve the best customers in the world in all 50 states and some 35 countries. We literally go where they go. Right now AAFES has 39 stores in Operation Enduring Freedom, Operation Iraqi Freedom, staffed by some 275 AAFES associates. We have 16 stores in Kuwait, serving soldiers, airmen, sailors, Marines and coalition forces. And we are making plans right now to move forward into Iraq as soon as we get the word.
 Page 20       PREV PAGE       TOP OF DOC

    There are three maps that we put out in the hallway as you enter the anteroom which show the committee where AAFES has operations serving our forces today in contingency operations. I hope you will have a chance to take a look.

    I recently opened a new store at Camp Udairi in Kuwait. I was reminded just how important the exchange benefit is when I looked at hundreds of 3rd Infantry Division soldiers waiting for the ribbon to be cut on their new store, waiting to go inside for a little bit of home in a place about as far away from home as you can get.

    That is why I look forward to working so closely with the committee to continue to deliver value, service and support to our servicemembers and to ensure that 30 years from now the exchange benefit is stronger than ever.

    I look forward to answering your questions.

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

    Mr. MCHUGH. Thank you. I would like to thank your mother, too, General. [Laughter.]

    We appreciate your devotion and dedication.

    Admiral William Maguire, Commander, Navy Exchange Service Command?

 Page 21       PREV PAGE       TOP OF DOC
    Admiral, welcome, sir.


    Admiral MAGUIRE. Good afternoon, Mr. Chairman, distinguished members of the Total Force Subcommittee, Secretaries Abell and Molino, my fellow flag officers and representatives of government and industry, I am honored to speak to you as commander of the Navy Exchange Service Command and its 16,000 associates worldwide.

    The Navy Exchange System is a global enterprise made up of three distinct business units. They are the Navy Ship Stores Afloat, the Navy Exchanges along with all associated business elements, and the Navy Lodge Program.

    Our commander-in-chief told our military to be ready. Like our military forces, I am pleased to report to you that the Navy Exchange System is ready to answer any challenge that we will be called upon to face. Whether it is to support the men and women who are forward-deployed defending this Nation, or whether it is to support and take care of their families back home, we are ready.

    I have provided my full written statement for the record, and I thought I would spend a few moments discussing the specialized mission of the Navy Exchange System.

    Our role transcends the traditional relationship between a customer and a retail store. We concentrate our efforts on serving that very specialized niche market: the military family. From the most junior enlisted to the most senior flag officer and everyone in between, we have products and services to support them all, including their families, well into their retirement years. It certainly is our passion.
 Page 22       PREV PAGE       TOP OF DOC

    We are a very important part of the total military community onboard every Navy base and Navy ship. We know the culture of those we serve, and we tailor our support to their unique needs. We truly are the Navy family store.

    Finally, we provide our stores where they are needed to support our servicemembers, not just where they are profitable. Our profit motive in the Navy Exchange System is secondary to providing products at a savings to our customers. But we are still committed to generating money to support morale, welfare and recreation activities, both ashore and afloat. This relieves the U.S. taxpayers of some of the fiscal burden of supporting MWR programs.

    I am pleased to report that in 2002, we increased our contributions by 15 percent over 2001. Whether it is a ship store, an exchange, a commissary or an MWR support activity or a Navy lodge, we are all part of the fabric of military life. We take this role seriously and with a great deal of pride in those patriots we serve.

    Mr. Chairman and members of the subcommittee, I welcome your questions. And I look forward to working with you in partnership with the Department of Defense, the military services and this great industry that supports us. Thank you very much.

    [The prepared statement of Admiral Maguire can be viewed in the hard copy.]

    Mr. MCHUGH. Thank you, Admiral.

 Page 23       PREV PAGE       TOP OF DOC
    Major General Mike Wiedemer, Director of Defense Commissary Agency?

    General, thank you for being here. Good to see you.


    General WIEDEMER. Mr. Chairman, members of the subcommittee, it is truly my pleasure to appear before you, to provide an update on the Defense Commissary Agency (DeCA).

    After nearly eight months as its director, I can report that the foundation upon which DeCA was built is sound and that we are committed to the full intent of Congress, the sale of authorized products at costs plus five percent. Cost plus five percent is the heart of the commissary benefits.

    The dedication to the commissary benefit is deep-seated, but DeCA's commitment to strengthening it and improving it is even greater. The members of our armed services community have not only earned, but also deserve the commissary benefit. And I am particularly pleased to have been chosen to lead the outstanding men and women who administer this vital benefit.

    Let me highlight just three of the most significant accomplishments that DeCA's men and women have achieved over the past year.

 Page 24       PREV PAGE       TOP OF DOC
    First, they have achieved the highest level of customer satisfaction in DeCA's history.

    Second, they are providing outstanding service to our deployed forces by providing the troops the peace of mind that comes with knowing their loved ones are taken care of back home and by providing deployment centers in a number of our commissaries that offer our troops in the field what they want and need. And finally, by provisioning AAFES and Navy ship stores, sails, outlets in Southwest Asia.

    Third and finally, they have achieved compliance with the Chief Financial Officers Act, being one of only three defense agencies having received a clean audit opinion on fiscal year 2002 financial statements. It is truly an honor to lead these dedicated individuals who so ably serve our Nation's servicemembers and their families.

    Mr. Chairman, I concur with the assessment you voiced in the March 12th hearing that the military resale system is the foundation of combat readiness. Moreover, I believe the commissary benefit has a significant, positive influence on recruiting, retention and readiness.

    At times, many of us have lost sight of DeCA's true mission, that is administering the commissary benefit. Some believe the commissary is only a grocery store. However, I submit the commissary benefit should be characterized as a cornerstone of military compensation. The commissary is a core benefit by and for members of the armed services community, providing consumables and household necessities at cost while preserving a sense of community for the military member, retiree and family member. In my opinion, without the commissary benefit as its cornerstone, the armed services quality of life crumbles.
 Page 25       PREV PAGE       TOP OF DOC

    At the same time, we are ever-mindful that the business of providing a commissary benefit comes with a cost, and that we are charged with the responsibility to manage and control that cost. DeCA continues to improve its cost effectiveness while enhancing its customer service.

    In fact, DeCA greatly exceeds the average supermarket performance in the United States for any industry standard used, whether it be labor expense as a percentage of sales, average transaction dollars per customers, sales per employee, sales per selling square foot, or inventory turnover ratio.

    And our outstanding customer service was validated by the American Customer Satisfaction Index, or ACSI. The ACSI is an economic indicator that measures customer satisfaction through a uniform and independent means in 35 industries across the United States.

    Earning a rating of 75 from ACSI, the report verifies DeCA's customer service satisfaction rating is slightly higher than the U.S. supermarket industry average.

    Now these benchmark comparisons clearly indicate that we are a leader in supermarket business practices and the good stewards of the taxpayer dollar. But our achievements would not be possible without your commitment to the benefit. After all, it is the appropriated fund support that allows this benefit to provide quality American products at cost plus five percent.

    I believe those funds are exceptionally well spent, that the commissary benefit is consistently ranked as the top comped pay compensation benefit by members of the armed services, giving a family of four more than $2,400 per year in additional disposable income.
 Page 26       PREV PAGE       TOP OF DOC

    On behalf of the men and women of the armed services and their families, I thank you for providing this benefit. I look forward to working with the subcommittee to ensure the commissary benefit remains strong and viable for future generations of America's fighting men and women.

    And I will be delighted to take any questions you may have.

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

    Mr. MCHUGH. Thank you, General Wiedemer. I appreciate it.

    Michael Downs, next, Director of Personnel and Family Readiness Division. Mr. Downs, thank you.


    Mr. DOWNS. Mr. Chairman, members of the committee, thank you very much for this opportunity to testify today.

    The Marine Corps experienced a very good year in 2002 in our exchanges. Same-source sales were up five percent. Estimated net profit was up $6 million.
 Page 27       PREV PAGE       TOP OF DOC

    More importantly, we earned a $34.5 million dividend for the MWR programs of the Marine Corps, which is a 15 percent increase over what we experienced in 2001.

    Like AAFES, we are also supporting Marines and others in Operation Iraqi Freedom. In partnership with AAFES, Marines are running five tactical field exchanges in northern Kuwait. One of those exchanges, selling goods desired by the deployed Marines had sales of over $2 million in about a 30-day period out of tents and backs of trucks.

    Needless to say, 2003 will be different. Over 67 percent of the operating forces of the Marine Corps are deployed to Operation Iraqi Freedom. Many of our bases have lost substantial portions of their patron base. Sales of the first two months of this fiscal year are down in an uneven way, across our bases, from five percent to 40 percent.

    Fortunately, installation commanders are making the important decisions and taking the important actions necessary to balance their responsibilities from a business point of view and from a quality-of-life point of view.

    They are aided measurably in this duty and responsibility of theirs by, in accordance with our organizational structure, having control over all the elements that are necessary for them to make the hard decisions that will be required to ensure that they are taking care of the Marines deployed; at the same time, looking to the increased needs of families and those left at home.

    We continue to implement two major efficiency-enhancing initiatives in our exchanges: implementation of a modern, compatible retail merchandise system and transitioning to centralized buying.
 Page 28       PREV PAGE       TOP OF DOC

    The merchandise system is fully integrated with our finance, electronic point-of-sale and open-to-buy systems. When we complete this initiative early in 2005, our retail system will be in line with modern industry standards, and we will be even more competitive in today's aggressive retail market. We realistically expect our dividends to go up, not down.

    Our success is due in no small part to our Marine Corps Community Services (MCCS) organization, which combines all retail, quality-of-life and family programs, to include child care, voluntary education in one holistic organization. As we experience our fifth year of operation under the MCCS concept, this organization continues to prove its appropriateness and its relevancy for the Marine Corps.

    MCCS enables the Marine Corps to not only generate revenue and use it more effectively to support programs and capitalization, but also to offer a more robust set of programs and services in support of Marines and their families. These efficiencies are important to our success, and all the more essential during these challenging times for America and its men and women in uniform.

    I am prepared to respond to any questions.

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

    Mr. MCHUGH. Thank you very much. We appreciate your comments, Mr. Downs.

 Page 29       PREV PAGE       TOP OF DOC
    And thank you to all the other panelists.

    Mr. Secretary, let me start with you. Obviously, the issue of the memorandum—and by the way, I am absolutely shocked anything was leaked in this town. It came as a surprise to me. I am sure it was a surprise to you as well. [Laughter.]

    But I appreciated your comments about the efforts to inform us. You made a statement that I heard to be very definitive. But I want to make sure what I heard is what you said.

    I mentioned in my statement about the mark the Congress laid down with respect to exchange consolidation. But sometimes what Congress intends is not always what Congress does, and I recognize that.

    But assuming there comes the time when you will submit your package and your proposal, do you envision any components of that that perhaps may not need Congressional review and/or direct authorization? Or do you consider the effort to consult with Congress to be all-encompassing?

    Just so we are clear on—and you understand many are concerned about a piecemeal approach that perhaps could be done without direct authorization of the Congress. And that may or may not be the case. So I just wondered if you could better define the department's intents in that regard.

    Secretary ABELL. Yes, sir.
 Page 30       PREV PAGE       TOP OF DOC

    The language specifically says—and I am—this is not a direct quote because I am remembering it—but that the department cannot take action and consolidate the exchange systems without the authority being granted by the Congress. So my view is that technically you—Congress only has to give us the authority to do it.

    In my perception and my intent is that the way to come seek that is to bring you the entire plan at one time and then put that in front of you. And then the legislative language would probably be fairly simple. But not intended to be a part of legislation, but certainly part of your deliberations, would be the entire plan. Not going to try and do it piecemeal.

    Mr. MCHUGH. I would appreciate that.

    You made comment—and obviously no one recognizes at this point how long this process would take. But you used a rather encompassing statement, which I understand.

    Many reports had said two to three years. We had a private discussion that touched upon—no commitments made; I do not mean to suggest that—three to five years. Which do you think—and no one intends to hold you to this, but just for our edification, which do you think the process would tend more towards, the two-year end or the five-year end?

    Secretary ABELL. I think the——

    Mr. MCHUGH. Right in the middle, I bet.
 Page 31       PREV PAGE       TOP OF DOC

    Secretary ABELL. No, no, I understand. Let me give you my best shot at that and then we will—later on we can hold up these words and see how I did.

    I would hope that within 24 months of the deputy secretary signing the memo that would charge us to begin this effort, that we would have a plan that—in which all of the stakeholders have participated and that we could bring to you all.

    So the 24 months is where my disappointment begins if I do not have that plan. Certainly if we do not have it done in three years, then we will, in my view, have gotten to the point where we cannot—we would have figured out that we cannot do this or we should not do this.

    So hopefully at the 24 month mark, we will be able to bring something to you. You all will take a legislative cycle to deliberate about that. I am sure you will have at least one, if not more, hearings about that. And then you would give us the authority, in an ideal world. At that point, then we can begin to take the actual steps, which gets me now into years four and five in, sort of, my view.

    So I would think it would take us a couple of years to get ready. You all, a one-year legislative cycle to deal with it and become satisfied and make whatever modifications you might choose. And then we will go implement, ultimately, whatever you approve. Or should you not approve, then we will put this on a shelf in a pretty binder and it will be there for somebody else.

 Page 32       PREV PAGE       TOP OF DOC
    Mr. MCHUGH. Okay. I appreciate that.

    Again, just so—and this is for the benefit of those in the audience as well as for those of us up here. You have made very clear in both statements previous—prior to today and to your comments today and in your written statement that you want this to be a transparent consultative process. And for what it is worth, I think that is vital.

    But whether we are speaking about the services and the folks seated with you here today, or some component, whether it is the resale community or some others, I assume we are not operating like the United Nations Security Council in that nobody has a veto here, and that consultation in and of itself does not mean agreement. Is that a plausible assumption on my part?

    Secretary ABELL. Yes, sir. I think the way I understand how things work, at the end of the day, the Department of Defense will make the ultimate decision. But, of course, our intent would be to have accommodated as much of the inputs from all the interested parties as we could.

    Mr. MCHUGH. Okay.

    Which would bring me particularly to Mr. Downs because the record there is a little bit more evident and others here at your table may find that to be the case as they go through this. But I do not believe any of the other commanders have expressed concerns. Because as I understand it, Mr. Downs, the Commandant of the Marine Corps did ask the Secretary of the Navy to register objections to this plan.
 Page 33       PREV PAGE       TOP OF DOC

    Mr. DOWNS. That is correct, sir.

    Mr. MCHUGH. Well, then let me—and I do not know, frankly, sitting here now, if the secretary actually registered that or if it was just a consultation, verbal. If you want to comment on that, that is fine. But really, what I would ask you, sir, as you look down the road conceptually, can you see a way in which the proposed consolidation might be configured in a way that would work for the Marine Corps?

    You heard the secretary's, I think, very important statement about sailors, Marines, going to one; the Army, Air Force, others; of course, the Navy, going to their ship's stores, et cetera. And I do think that is important. But do you think that concept, vis-a-vis the Marine Corps, could be realized?

    Mr. DOWNS. I, frankly, do not. The Marine Corps made a transformational reorganization decision, beginning in 1988, to combine exchanges and MWR into one organization. We furthered that thought process in 1999 by then including family services.

    We gained great efficiencies because of a single overhead structure over all those elements of our program, and we get synergistic effects that we would not receive or would not get otherwise. A consolidated exchange would require us to dismantle and to lose the very efficiencies that we worked hard to gain.

    The Marine Corps Exchange has a dividend-to-sales ratio and a profit-to-sales ratio in 2002 that is two points better than our second place. Our dividend of $34.5 million would be reduced by 38 percent, or $13.2 million, if we were to go to the second of the dividend-to-sales ratio that was experienced in 2002.
 Page 34       PREV PAGE       TOP OF DOC

    At the same time, it would break up the efficiencies that not only have been earned or realized with the exchange system, but equally on the MWR side. So, while MWR is losing $13.2 million as a minimum—that is a conservative figure—in dividends, their costs of running their organization or running our MWR programs would substantially increase.

    I do not know how you can marry these two.

    Mr. MCHUGH. I appreciate your very early and very open comments and on that.

    I did see the other commanders. I would open up the floor, if you would want to comment on, not, obviously—unless you care to—Mr. Downs' comments, but as it may apply to your concerns that you have, perhaps not insurmountable—but concerns you have vis-a-vis possible consolidation; the kinds of things you would want the secretary to be looking at, the kinds of things you would want us to be keeping an eye out for as well. Anything?


    Admiral MAGUIRE. Ah, yes, sir.

    When I look at consolidation, this will be a merger. And if you look at the private sector on mergers, it requires meticulous planning, detailed execution, and it requires a compelling business reason to do the merger.

 Page 35       PREV PAGE       TOP OF DOC
    A strong business case will need to be made for this. I feel that when you look at the PriceWaterhouse Coopers study, the due diligence—that was a study done six years ago—over the last two years, we have been working extensively with the exchanges in a cooperative effort—engagement, and have achieved savings through that group that would accomplish approximately 80 percent of the savings identified in the PriceWaterhouse Cooper back room consolidation.

    I think we have to make sure that when we do the study, that we have equal-to or better-than prices, that we have equal-to or better-than MWR contributions, and that we have an organization and a unified command that is responsive and agile and understand the culture of the Navy, Marine Corps, Air Force and Army.

    I also think in the information technology (IT) expense arena, that we are very proud of the Navy Exchange Command moving out on, as I put in my written testimony, a number one retailing, open architecture system that will continue our movement towards best business practices. And then when you look at the savings that we are showing in the out years and the potential increases in MWR, we want to make sure that we stay on that path when it comes time to wrestle and tackle the issues of a common IT platform.

    And then I think governance will be an issue that we have to look at. I have 16,000 associates, like I am sure the other exchange commanders, that are laser focused. They lean forward. We have been very aggressive in our best business practices, in pursuing best business practices.

    And I want to make sure there is a role for them in the unified exchange command as well as the issues of having governance that takes into account that we do support that unique store front, in our case, that Navy family store and respects the culture that is associated with each of our services.
 Page 36       PREV PAGE       TOP OF DOC

    Mr. MCHUGH. Thank you very much, Admiral.

    Either of the other commanders? General Frost?

    General FROST. Well, Mr. Chairman, I am not opposed to integration or consolidation. There is something intuitive that tells me the business case can be made. And as the commander of the Army and Air Force Exchange Service, I believe that consolidation can work.

    Mr. MCHUGH. General, I apologize for interrupting. Could we perhaps move that mike a little closer? Too much rock and roll when I was young. Thank you.

    General FROST. Yes, sir. As the Commander of the Army and Air Force Exchange Service, I know consolidation can work. Whether or not it will work does depend in fact on how we plan it and how we implement it. It has to be a very collaborative effort. It cannot be done in the back room.

    We all have to have our cards on the table, and we have to work together to make that happen. And hopefully as we work through this, as Admiral Maguire said, we will work to enhance the benefit. I also hope we can work to preserve the promise that we have made to our career associates at AAFES so that they are not at risk for losing pension, losing health care, losing those kinds of things.

    And also, I hope that we will work in such a way that AAFES will not bear a huge burden of the costs associated with any systems that need to be developed to integrate any planning that needs to be done to bring this about, that that would be funded by the department as we work toward integration. I do not want soldiers and airmen to have to pay that bill.
 Page 37       PREV PAGE       TOP OF DOC

    Mr. MCHUGH. Thank you very much.

    The two remaining, General Zettler, General Wiedemer?

    General WIEDEMER. About a decade ago, the Defense Commissary Agency went through a consolidation process associated with the service commissaries. There are lessons learned there. And we would be more than willing to share those.

    Mr. DOWNS. If I may, Mr. Chairman,——

    Mr. MCHUGH. Mr. Downs.

    Mr. DOWNS [continuing]. The DeCA example was put up. Admiral Maguire mentioned a need for having a compelling reason. I could understand the compelling reason to make the DeCA. There was substantial appropriated fund dollars to be saved. There are no appropriated fund dollars to be saved in the consolidation of the exchanges. And in my view, the exchange systems are not broken.

    Additionally, consolidating this exchange operation, roughly $9 billion a year and substantially more complex operation than was DeCA, it is also useful to remember the DeCA consolidation was not easy, and it was not invisible to the patron. I walked with the original DeCA commander through the commissary in Camp Lejeune, North Carolina as we saw shelves at about the two thirds stockage level, also introduced him to IT people that were in the store that did not need to be in the store when the Marine Corps ran it because our commissary management information system allowed us to do some things centrally.
 Page 38       PREV PAGE       TOP OF DOC

    The DeCA example and bill paying troubles that existed, DeCA spent 75 to $100 million trying to come up with an IT system that would work for the DECAs that is not yet in place. That first one was scuttled. So to suggest that the DeCA consolidation which has now gone on for over 10 years was a smooth undertaking, it is at high risk. But at least the costs associated with it were appropriated fund costs. The costs that are going to be associated with an exchange integration are going to be borne by Marines and families of Marines in reduced dividends and in other ways.

    Mr. MCHUGH. Thank you. Just for the record, I do not believe I heard General Wiedemer say that he supported it, just they learned some lessons that maybe would be helpful. You can learn good and bad lessons. But I again, appreciate your candor. Well, maybe. I wanted to give General Zettler a chance because he has not—and I am not forcing you, sir. What the heck.

    General ZETTLER. Sir, I had the experience and the honor to serve as the AAFES chairman for two and a half years. And my term ended last October. I think I agree with each of my colleagues here. This is a very difficult march that we have been put on.

    When I sat there as the Chairman of the Board of AAFES, I always struggled with how do we reduce our costs. And I think there is an opportunity to continue the benefit for our soldiers, sailors, airmen and Marines and reduce the costs. We do not need three distribution systems. We do not need three IT systems. We do not need three stacks of overhead. We can continue to provide a great benefit, reduce the costs and maintain the benefit.

 Page 39       PREV PAGE       TOP OF DOC
    Each of the exchange systems' forecasts over the next few years are dividends going down. When Mr. Abell outlined a plan that will not solve the near term. But we have to face that in the long term. And we have to address our business costs. This is one way to do that. It may not be the only way.

    It will be a difficult way, and with the plan that the department is putting forward to go through this in a methodical way and allow the services to participate. And we shall allow it to proceed and see what some of the better minds that we have, to include these four officers at the table here, can put on the table to make it go forward.

    Mr. MCHUGH. Thank you very much.

    Mr. Secretary, in fairness, my colleagues have been very patient here. I have taken a lot of the time, and I apologize. But I think this is an important issue.

    But in fairness, if you would like to say anything in closing out on this particular round,——

    Secretary ABELL. I would like to agree with most of what I have heard my colleagues say. It is not easy, or we would have already done it. It does take a good business case. And if we do not have it, we will not proceed. The Marine Corps presents a unique challenge to this effort because of their integration. Mr. Downs talked that they integrated and gained efficiencies and synergies.

    That is what we are seeking here are efficiencies and synergies as well. Admiral Maguire talked about the uniqueness of the Naval Exchange System. And they do have ship stores which are unique to them and certainly look to protect that and preserve that part of the benefit as well.
 Page 40       PREV PAGE       TOP OF DOC

    I also agree that it is not going to be easy. And I also agree that we can learn some lessons perhaps from the commissary integration effort. Army and Air Force consolidated years ago. DeCA consolidated ten years ago. Five years ago, the Marine Corps consolidated. Those are three models that we can look at to see how we learn to do this better and not make the same mistakes they did, hopefully, come up with the plans that will be more efficient.

    But what I pledge to you is it will be an open effort. Back to my original comments, the beneficiaries will be involved, the industry reps will be involved, all of these folks will be involved. As you know, the department has oodles of auditors, and they will come check our numbers for us. And then we will give them to you. So I am confident that we can do this, but I am also confident that there is a lot of hard work ahead.

    Mr. MCHUGH. Thank you very much.

    And to you all, I appreciate your comments.

    And again, thank you to my colleagues for your patience.

    Mr. Meehan.

    Mr. MEEHAN. Thank you, Mr. Chairman.

    Mr. Secretary, Admiral Maguire has referred to the most recent due diligence study performed by PriceWaterhouse Cooper. There have, in fact, been numerous studies conducted over the last three decades all aimed at determining whether the service exchange function should be consolidated into a single entity.
 Page 41       PREV PAGE       TOP OF DOC

    And it seems that none of these studies have produced compelling evidence that would show a measurable increase in the value of consolidated services.

    What has been the level of the savings accrued over the last three years as a result of the implementation of the mutually agreed cooperative efforts and best business practices?

    Secretary ABELL. I think the fair answer to that, sir, is that I do not know. I would have to get you that. We have heard some numbers bantered around here today. I cannot talk to the fidelity of any of those. I am not sure that there has been an audit done with the level of specificity that would produce a number upon which we could all agree.

    Mr. MEEHAN. How much more savings are potentially available through further integration and consolidation of the exchanges?

    Secretary ABELL. I am not sure. We have not proceeded forward. We do not even have the charter from the deputy to do that. And again, perhaps we are using the term savings here. But I want to make sure we are at least in sync on the definition.

    I am not looking to save money here. I am looking to preserve or enhance the MWR dividend that the exchanges provide to our bases, installations kept. So that is declining, that is a fact, over time. I want to arrest that decline and perhaps built it back.

    I share the tenets that Admiral Maguire has stated here that we are not going to do it by raising prices. And that would be silly in light of the competition on the outside. So I do not have a number for you. That will be part of our effort to develop that number.
 Page 42       PREV PAGE       TOP OF DOC

    Mr. MEEHAN. Thank you. General Zettler, in the previous hearing, I stated my concern about the need for unrestricted access to the commissary by reservists or reserve component personnel.

    They are aware of the current policies, but believe that the changing nature of the use of the reserve component seems to me in the sense that they are supporting ongoing military operations have changed some of the assumptions that underlie policies that are in effect.

    What are your views regarding a change in the commissary policies to allow unrestricted access for the reserve component personnel?

    General ZETTLER. Well, Mr. Congressman, I agree with you. We certainly have changed the way the national guard forces and the reserve forces are used. They are so vital to our current mission. And in our Air Force, they have been that way for many years. So to cut to the bottom line, I think that where we have commissaries, they should be open to access for the reserve component members all the time.

    Mr. MEEHAN. Thank you, General. No further questions. Thank you.

    Mr. MCHUGH. The gentleman from Virginia, Mr. Schrock.

    Mr. SCHROCK. Thank you, Mr. Chairman. Let me first say I want to associate myself with the comments of the chairman and ranking member. I agree with everything they said in their opening statements. So I will not repeat that.
 Page 43       PREV PAGE       TOP OF DOC

    There is probably no one in Congress more passionate about this issue than Ed Schrock. And the reason he is, the reason I am is because for 39 years I have been privileged to use this benefit that was promised to me when I joined the Navy. And it is one that I want to see protected, not only for the active duty men and women and their families, but for the retired community as well.

    People have not mentioned the retired community, but they are a huge part of this as well. And they are used to it. They like it. It has served them well. It is not broken as far as I can see. I have always been—and I am quoting here. I do not usually use this kind of language. ''If it ain't broke, do not fix it.'' And I do not feel it is.

    But I do believe, however, that Mr. Rumsfeld's philosophy about transformation is very important. Clearly, the military, the Department of Defense, needs to be transformed in many, many ways. And I can see that. And I respect you for doing that.

    But I think when you pick a benefit like this that is probably not considered a core competency, I do consider it a core competency. I think the stronger your exchange, the commissary benefit is, and the MWR programs, you know, that is going to keep the young men and women in uniform in. And I can assure you if mom and the kids are not happy, dad is not going to hang around very long. And this is one of the key benefits that they have that I think they appreciate. And to try to erode it, I think, only undermines the recruiting efforts that the services have undertaken and of course, their retention as well.

    You recruit a sailor—I was a sailor. You recruit a sailor, you retain my family. And I think we cannot overlook that. And I think there have to be, as Mr. Downs said, there has to be compelling reasons for doing this. I guess I am, at this age, I am a hard head. And I have to understand really strong, compelling reasons for doing this and, I think, eroding a benefit.
 Page 44       PREV PAGE       TOP OF DOC

    I guess my devious mind thinks that a consolidation of this nature would be the first step in eventually trying to privatize the commissaries and the exchanges, which means they are going to go away. No commercial, no private business in their right mind would take on this task. They might for two years. But afterwards, they are going to say, we cannot handle this anymore because the commissaries and exchanges have to be profitable in the continental United States to make up for those that they have overseas which are loss leaders. But you have to have them there because that is a benefit those people deserve and must have as well. So that is what I worry about that this is just the first step in that.

    And I know that there has been a lot of talk in the Pentagon about privatization. And I agree with some of it. Housing, I think you can privatize. I do not like to go on the Navy base and see sailors cutting grass. I do not think they have to do that. And there are some other administrative things that probably do not have to be performed by uniformed people.

    But I think when we start messing with the commissary and exchange privilege, boy that is a hornet's nest I do not want to get into. I probably represent more active duty military and retired than 385 members of the House combined. And take my word for it, I have got to go home every weekend. And I want to make darn sure that we are protecting their right up here.

    I agree with General Zettler. There is overhead. But I think in any consolidation, if there is a consolidation, there is going to be overhead in the exchanges anyhow. I cannot imagine they are going to be closing down a lot of the exchanges with the consolidation, or I hope not anyhow.
 Page 45       PREV PAGE       TOP OF DOC

    And I do not understand, either, whose system will be used. I know there are three systems, the Marine Corps, the Navy and AAFES. I guess I do not have a clear picture yet whose system will be used, if it will be one of the three systems or if it will be a new system that is developed.

    And clearly, Admiral Maguire made a point. The Navy's kind of unique because of the ships. You have got to have the ships' stores. And those are mini exchanges that you have on each of those ships. And I would certainly hate to see that eroded. And I was privileged to sit next to General Frost last week. And she was talking about one of the exchanges. Was it in Afghanistan? Actually it was in Kuwait, I guess. And there was like a two hour wait to get in because that was a little piece of home that those people had that you can find nowhere else. In Kabul, an exchange burned down. Forty-eight hours later, it was up and running again. I am not sure if we consolidate and then privatize commercial—is going to be willing to take that on.

    And clearly, the bottom line is the bottom line. But in my head and my heart, the bottom line is the men and women in uniform and the families with them. That is the bottom line as far as I am concerned. If we do not take care of our people, that does not send a very clear message to anybody in this country, in this world. And if we do not do that, and if we do not do it well, then we are going to be in rough time.

    And of course, I have seen all the studies. And nothing in the studies that I had seen, unless there are studies that have not been presented to me, do not really show a compelling argument for doing this. I just think there are so many other areas in DOD.
 Page 46       PREV PAGE       TOP OF DOC

    For instance, child care is a travesty, I think. It especially is in the district I represent. We need to be focusing on child care. That is broken. That is clearly broken. We have one child care facility that sits flooded half the time. I do not see that happening in the commissaries and exchanges.

    I am certainly willing to listen and understand and see any reports that come down. But I am really going to take a hard, hard look at this. I am just wondering if the service exchange systems had any input into the decision that is coming out of the Defense Department.

    And I would be curious if, Mr. Downs, you would be willing to comment on that. If you were asked for your advice on this, and Admiral Maguire and General Frost.

    Mr. DOWNS. No, sir. I was not. The last conversation that I was involved in was in May of 2002 when the three exchange chiefs at the time, Admiral Moss, General Wax and I met with Mr. Abell and Mr. Molino. And at that time, there was a universal view of three exchange chiefs that no case had been made for consolidation. And when we left that meeting, there was some discussion as to the possibility of a further study. Maybe that is where we are today.

    Studies are also bothersome to me because we have been studying this for 35 years. And we have, with our overhead supporting three entities, were busy. And we do not have time to have the first team stop doing what they are doing, the important things that they are doing while they are involved in further studies and meetings and discussions on what an affect is a move to do away with you.
 Page 47       PREV PAGE       TOP OF DOC

    We are pressing forward with modernization. We would be where we expect to be in 2005 some years ago if we had not held things in abeyance because of the threat of integration that was going on in the 1990s.

    And the last group that is troubled by this is our employees. They have been living under clouds of various darkness for too long. And they deserve to have a period of time where they are not threatened with the loss of the job and the business that they have been involved in for many years. But no, this new initiative was a surprise to me.

    Mr. SCHROCK. It seems like this was an easy target. It has been that way ever since I came in the Navy and since. I know that has been an easy target when they try to find funding and when they want to cut, this seems to be the place to cut. And I certainly do not agree with it. General?

    Admiral MAGUIRE. Yes, sir. I have had no involvement in the current initiative. I have been engaged in the cooperative effort initiatives that we have been working with the fellow exchange commanders.

    Mr. SCHROCK. I think in DOD's defense—and I talked to Mr. Molino and Secretary Abell about this earlier. They did not have a very auspicious rollout because somebody shot their mouth off and released it. And of course, unfortunately in government, that happens once in a while, but we have to deal with that. So there were probably things they wanted to do that they did not get done. And that is unfortunate.

 Page 48       PREV PAGE       TOP OF DOC
    General Zettler.

    General ZETTLER. Sir, I completely understand your point about taking care of the troops and the bottom line. The bottom line is taking care of the troops. I think with the recognition that Mr. Downs has a significantly different situation than the rest of us as we approach the bottom line, that bottom line has to be translated into the dividends that come back to the services to provide for MWR support.

    This AAFES dividend is our single largest source of revenue to upgrade our facilities, provide equipment in some of the facilities, take care of people on our installations. So it is the projected line that says we are going to lose some of that because of revenue, because of changes, because of competition outside the gate. I think we need to be fully attuned to that and work our way through it.

    So the Air Force is understanding what Mr. Abell and his team is trying to do here. And we want to be able to work with them to find opportunities to maximize benefit for the people.

    We have worked very well to get some 50 plus areas that are being done in a common way. We need to continue that. But there may be more. And Mr. Abell has had to take this on in a tough way. So that is where we are going to, from an Air Force standpoint, go forward and support it. And I endorse that.

    General FROST. I think your question was did we know in advance. We did not know at all in advance. I learned it from the Navy. But we plan to be significantly engaged as we move forward in discussing the how, the why.
 Page 49       PREV PAGE       TOP OF DOC

    Mr. SCHROCK. Let me just say, Mr. Chairman, you know, I intend to watch this real carefully and follow through because it is so incredibly important. And I am probably more passionate than most because of my military background.

    And I think it is something we need to look at just to make sure we are not eroding this benefit. Because if this benefit goes away, God knows what will go next. And I just think there are so many other areas within the Department of Defense that could be looked at for improvement.

    When you have some that are working like these are, I am just having a rough time coming to grips with that. And I want to make sure I have access to you at any time I hear things, we can discuss things, that we follow this thing through in a rational way.

    Mr. MCHUGH. Anytime. Well, I do not—Mr. Schrock, let me assure you, and I know I speak for every other panel member here, I should say subcommittee and full committee member here that we share your passion. And I commit to you we will try to do everything that is required of us to maintain our oversight. And I feel confident that secretary will make every effort to keep us informed.

    Mr. SCHROCK. I agree.

    Mr. MCHUGH. So, I appreciate that.

    We have, as you have heard—I do not think we can go to the next panel because it would not be fair to the member or to the panelists—two votes. If I could impose upon our distinguished panel to stay with us a bit longer while we make those votes. And I promise we will get back as soon as we can. So we will stand in recess until return.
 Page 50       PREV PAGE       TOP OF DOC


    Mr. MCHUGH. Thank you for your patience. As usual in Congress, something could go wrong, and it did. We had an extra vote that was not originally scheduled. And I apologize for the added delay.

    So without any further delay, let me yield to the gentleman from Tennessee, Mr. Cooper.

    Mr. COOPER. Thank you, Mr. Chairman. I too, would like to honor my mother, mainly because my opponents claim that I had no father.

    I have a very distinguished retired military person in my district. He claims that there are two things I should not mess with: his wife, and his PX privileges and not necessarily in that order. So I realize the importance of this topic.

    One thing that particularly intrigued me, you talked about we all want our troops to get in and out of Iraq safely. And the fact that we already have 16 PXs in Kuwait amazed me. How does that work? Do you follow within a week of the troops or two weeks? And do you stage in a safe place using regular military forces or volunteers? And you just set up shop as close to the front lines as you can?

    General FROST. Congressman Cooper, we basically plan far in advance with the combatant commander of what the requirements are going to be when they move into a contingency operation. When we get the word from the combatant commander, we will move our people forward. Now our people are not military.
 Page 51       PREV PAGE       TOP OF DOC

    AAFES personnel who are providing this benefit, the 275 that are in Operation Enduring Freedom (OEF) and Operation Iraqi Freedom (OIF) now, the 300 that will be there by the end of the week are all AAFES civilian associates. Up until this week, every one of them has been a volunteer. We have now, because of future requirements that we understand are going to happen in Iraq, we have gone out and asked people to go who have not volunteered. And they are moving out smartly to go into the theater to provide that service to our troops.

    They do a magnificent job. They live right beside the troops they serve. If they are in Kandahar, they are in the tent that burned to the ground and were up and operating, as Congressman Schrock said, 48 hours later.

    If they are in Kuwait, they are living in tents out at Camp Udairi where they run the store there, at Camp Pennsylvania where they run the store there, out in the desert where as far as you can see there is only sand. They are real heroes for us. And they are finding this to be the single most rewarding experience that they have had in their entire career at AAFES.

    Mr. COOPER. You said up until a week ago. And then you said something like you asked those to go who had not volunteered. That sounds like you drafted them to go.

    General FROST. Well, we encouraged them forcefully to go.

    Mr. COOPER. That is part of the military euphemism.
 Page 52       PREV PAGE       TOP OF DOC

    General FROST. And these are at the more senior levels of management that we believe we will need as we move into a more complex operating environment.

    Mr. COOPER. Is this coercive diplomacy you are talking about? How much does this cost? How does this work, you know, the business? Because it is fascinating to me, business following the military so closely, in fact, intermingling.

    General FROST. Well, it costs AAFES a lot of money. Last year, the support we provided in 2002 cost AAFES $14 million. We expect significantly higher costs this year. We are projecting $50 million. Most of that in terms of the pay for the personnel that go, some of it to do with shrink that is anticipated by inventory that perishes and so forth.

    But we are working very close with the Office of the Secretary of Defense (OSD) to—AAFES will fund now. And we hope that when we tally up at the end that that money which is truly soldiers' and airmen's money will come back to AAFES as a supplemental to us to pay for that cost of war.

    Mr. COOPER. But right now, the $14 million or $50 million is coming out of the MWR basically? Because it would deplete your——

    General FROST. Well, $14 million last year we did not get reimbursement for. But we are working closely with OSD this year to report out what we have had to fund out of AAFES to go forward.

 Page 53       PREV PAGE       TOP OF DOC
    Mr. COOPER. But since the profits go to MWR, then there will be less profit. So effectively when you have to spend money for things like this, that depletes MWR.

    General FROST. That is true. But I would say two things to that. First of all, in many ways, AAFES is the quality of life to those servicemembers in OEF and OIF. That is a cost that we are proud to shoulder.

    But it is also a cost that we hope we can get reimbursed so that soldiers and airmen are not paying for their quality of life by a reduction in the dividend. So that is why we are going to work very closely with OSD to get reimbursement for our costs.

    Mr. COOPER. Yes. So that would be $50 million or whatever the real costs.

    General FROST. Yes. Whatever the real cost is. We are not looking to make money on this. But we would like to have our costs reimbursed.

    Mr. COOPER. Yes. Because no other business in the world could do this to follow in so closely in harm's way. In fact, I wonder about the sanity of some of your employees, either volunteers or coerced.

    General FROST. Again, their stories are heartwarming because they see firsthand why the benefit is so very important.

    Mr. COOPER. I thank the chair.
 Page 54       PREV PAGE       TOP OF DOC

    Mr. MCHUGH. I thank the gentleman.

    Dr. Snyder.

    Dr. SNYDER. Thank you, Mr. Chairman.

    And Mr. Cooper, you may be interested in knowing that in August of 1999, General Frost and I hiked up, walked up in the heat of summer in the desert of Israel the mountain that is known as Masada, where this very famous battle occurred in which some Jewish defenders held off for months and months an overwhelming Roman force. And they were finally defeated because the Romans went up the mountain just by building it, just moved massive amounts of dirt until they had a ramp.

    And the night before they were scheduled to overthrow it, overrun it, two things occurred. Number one, the Jewish defenders all laid down, and they killed each other not to give the Romans the pleasure of doing it. And the second thing is they laid out food and water to show the Romans they had plenty of supplies. And General Frost took an early interest in this issue of logistics and the food and water. And I can tell you that heat was something going up that mountain.

    But let's see. I wanted to ask Secretary Abell a couple of questions if I might. And while I have been on the personnel subcommittee, this particular topic is new to this Total Force Subcommittee for me. And so I wanted to ask, I think, what is a basic question here.

 Page 55       PREV PAGE       TOP OF DOC
    But this business of saving money—and on page ten of your written statement you say although agreement has been reached on a long-term vision, there is no implementation plan to achieve common business philosophy and best business practices in support of core merchandising distribution and financial operational functions.

    I am increasingly concerned that our military members are being short changed as a result of these—and used the word boundaries. Would you give a couple examples, even though they may be examples, specific examples of where you can trace through for me where you see a specific inefficiency or problem and trace through how you think it could be changed in such a way that our military members would not be short changed?

    Secretary ABELL. I would be happy to, sir. Let me give you a couple. I think, as you have heard today, running one IT system realizes efficiencies there. At the end of the day, we will need one chief financial officer and not three. We would need one human resources (HR) officer, not three. To more substantive things, I do not need an AAFES truck, a Navy truck and a Marine truck running up and down 95 carrying goods when I could have one truck stopping at a Marine base and then a Navy base and then an Army or Air Force base buyers.

    We have three groups of buyers today. If we have a common IT system that signals from the cash register back through to the ordering people, one set of buyers, not all in one place, but one set of buyers could certainly buy for the unified exchange. Those are the kinds of things that I am looking at.

    Dr. SNYDER. Well, I guess this is kind of the bottom line. I mean, the underlying premise is that bigger is better from your view?
 Page 56       PREV PAGE       TOP OF DOC

    Secretary ABELL. No, sir. Better is better.

    Dr. SNYDER. But I mean,——

    Secretary ABELL. More efficient.

    Dr. SNYDER. More efficiency is better.

    Secretary ABELL. Exactly.

    Dr. SNYDER. But as you describe it, what you are saying to me is that bigger is better. And it does not always work out that way. I mean, I can give you an example in Arkansas right now where we put in an IT system trying to link up all government. And it is just the monsters that are eating the state budget because of its problems.

    To this point, in my view and the view of a lot of people, it does not automatically follow that taking some independent IT systems that were functioning reasonably well and deciding to put in a whole new IT system throughout the agencies has not generated the efficiencies yet. I mean, it is not automatic. In my view, bigger is not always better. But I can understand what you are describing.

    Secretary ABELL. Sir, as part of this several year process, we will bring that back to you.

 Page 57       PREV PAGE       TOP OF DOC
    Dr. SNYDER. Yes, I understand.

    Secretary ABELL. And if the numbers do not add up, then first of all, we will not make that recommendation.

    Dr. SNYDER. Yes.

    Secretary ABELL. But second of all, you will not approve it.

    Dr. SNYDER. And I assume that underlying your statement here is that certain functions can be merged, and others do not have to be merged. Is that a fair statement of this whole analysis that you are going to be going through?

    Secretary ABELL. Yes, sir.

    Dr. SNYDER. Yes. Are you familiar with this—I will just hold up this. Who put it out here? The Defense Manpower Data Center, this survey of the quality of life and family programs. How satisfied are you with each of the following? And the exchanges and commissaries get the 67 percent satisfied rating.

    Secretary ABELL. Yes, sir.

    Dr. SNYDER. Is that something that you are familiar with?

    Secretary ABELL. Yes, sir.
 Page 58       PREV PAGE       TOP OF DOC

    Dr. SNYDER. What I wanted to ask was I understand that—am I correct that child care activities—I am following up on the same line that Mr. Schrock was pursuing. I was really struck by, in my view, very poor child care numbers in contrast to the 67 percent satisfaction rating, or I am satisfied rating of exchanges and commissaries. On base child care, which I assume is both centers and with families, gets less than one out of four, 23 percent.

    And one out of three military families are expressing dissatisfaction with their on base child care. Now to me that means right now that one out of three of the parents that are serving overseas right now whose kids are in on base child care, one of the things they are concerned about is that the child care that their kids have now with a one parent family that they are not satisfied with.

    And the other thing I do not understand is 44 percent do not express an opinion, which to me is the same as not being satisfied, that I would expect to be able to go to a parent, and I would hope that one of the things we could do in the military is that we could at least get a parent the quality would be so good they could say yes, I am satisfied with it. I do not know what it means when almost half do not express satisfaction or whether it is satisfactory or unsatisfactory.

    And the only reason I mention this is because well, I know more about child care than I do about exchanges and commissaries.

    But in terms of prioritizing energy and all, I would assume that this is also—we are having this hearing obviously today on this exchanges and commissaries. But this to me seems to be going along with Mr. Schrock, his philosophy of ''if it ain't broke, do not fix it,'' does not mean you still cannot improve it and make it better and more efficient.
 Page 59       PREV PAGE       TOP OF DOC

    But when you have got one out of three military families who have got a kid in child care on base saying I am not satisfied with it, I think that is a big time problem. But do you have any comments about that?

    Secretary ABELL. Absolutely. I think if you drill down through those numbers what you will find is that they are not expressing dissatisfaction with the quality of the child care. They are expressing dissatisfaction with the amount that we have.

    We do not meet the need, do not even come close to meeting the need. And some military members will express loudly their dissatisfaction with the rates that they have to pay. They are based on the base pay of the individuals.

    And two military couples, it is their combined base pay so that it gets calculated against by one military member, one non-military member family, it is based on the military member's base pay. So those who are dual military couples object to that thinking that they have to pay pro rata more than their colleagues.

    I think what you see there are those two things. I do not know of any objections, certainly not in those numbers, to the quality of our care. I think the military in particular, thanks to this committee and the Child Care Act of 1986, has probably a world class child care system. We just do not have enough, and we are working on that. And we do have these fees that our folks have to pay that they wish were less.

    In fairness, I need to point out that the fees on base are augmented by MWR money, which ultimately comes from the exchanges, so they are subsidized fees. And they are significantly lower than they are at off base child care facilities.
 Page 60       PREV PAGE       TOP OF DOC

    But that is not a comparison that our servicemembers want to make. And they should not have to. But they do believe they are paying too much for child care.

    Dr. SNYDER. May I ask just a question for the record, please, if you would provide to the staff and to me? I would like you to provide to the committee your survey that goes in, as you say, drilled down through,——

    Secretary ABELL. Right.

    Dr. SNYDER [continuing]. That fleshes out those distinctions. Because as I read this, it says percent of applicable servicemembers.

    And I would assume that is people who actually have a kid in the child care on the base, which I would think, would take out those who are expressing concern about the availability. But it could be they have got one kid in, and they are struggling to get the other kid in or something.

    Secretary ABELL. That happens.

    Dr. SNYDER. But if you could provide yours, I would be interested in seeing yours.

    Secretary ABELL. We will get you all the details.

 Page 61       PREV PAGE       TOP OF DOC
    Dr. SNYDER. Yes. Yes.

    Secretary ABELL. And we will cover all those angles.

    Dr. SNYDER. Yes, that would be great.

    Thank you, Mr. Chairman.

    [The information referred to can be viewed in the Appendix beginning on page ?.]

    Mr. MCHUGH. Thank the gentleman.

    As I mentioned in my opening comments, there is a Secretary of Defense briefing at 4 p.m. And we want to give members the time to get over there and settled so that we are not disrupting the secretary's presentation. So we have got about 15 more minutes.

    So let me probe at least one other issue. As I know those of you on the commissary end of it are aware, and perhaps you all are, there are restrictions on the outright privatization of the commissaries, as there are restrictions on consolidation of the exchanges.

    But again, hearing the concerns of some, and based on the inevitable rumor mill, and looking at the increased pressures upon the commissaries to lessen their dependence on appropriated funding, I think there is reason for many to be concerned about not a wholesale privatization through Congress per say, but a trend to perhaps increase pressure to require bits and pieces being privatized through subcontracting and such. And regardless of the means, the end at some point becomes the same. And I for one am concerned about that.
 Page 62       PREV PAGE       TOP OF DOC

    If you compare that possible initiative and the fact that DeCA has about $10 million still in limbo with respect to your shortfalls of this current year and how that might be covered, I was wondering—and starting with General Wiedemer, pardon me, sir. If you could give the panel members a perspective on what concerns you might have about piece meal subcontracting privatization. Is that a real concern?

    Are you feeling pressure to find appropriate fund savings that may force you to consider that kind of initiative or just a general overview of how you see that issue?

    General WIEDEMER. Yes, Mr. Chairman. We believe that the A–76 process was not really designed to deal with providing military non-pay compensation through a retail business. And in that process, it does in fact lead to piece meal privatization of functions. And that piece meal outsourcing leads to loss of control over individual cost centers. It also leads to increased costs to administer multiple contracts. And finally, we believe it is inconsistent with developing a cohesive work force.

    What I would like is the opportunity to develop an appropriate fund work force model that was consistent with the Department's efforts to revamp its personnel system. And then I believe we would have a retail oriented work force that would be able to compete favorably under any competitive process.

    You also mentioned our $10 million shortfall. And I believe that, you know, we are working very well with the Department and the Commissary Operating Board right now to resolve that $10 million shortfall this year. It is going to be tough to contend with because we have had some unanticipated costs.
 Page 63       PREV PAGE       TOP OF DOC

    For example, the west coast dock strike, transportation support to, currently, the Middle East. We had a super typhoon that damaged our facilities in Guam. We have had fluctuating currency exchange rates that are affecting us. And of course, we had to cover the one percent civilian pay raise.

    But we will work hard with the department and the Commissary Operating Board to fix that $10 million shortfall this year.

    Mr. MCHUGH. Is my understanding, correct, that there was at least a verbal agreement or indication that when that $10 million shortfall became evident, you have got limited choices in that time frame? And one of the choices you had was perhaps to reduce store hours, to do those kinds of things that are certainly indicative of less quality of service to your patrons. But that the Department, or I should say the services at least said well, ''continue your funding, and we will try to make your whole.'' Or is that an overly optimistic reading of how this might be resolved?

    General WIEDEMER. Mr. Chairman, I think there are pieces of—in there. Let me summarize a little bit. We immediately when we heard about the $10 million shortfall that would befall us this year, we immediately took action to put in a hiring freeze above the store level. And we also took a look at what could be done to cover those costs which we thought we could either have an operating loss this year or look at the possibility of reducing store hours.

    When we brought those proposals, those options forward to the Commissary Operating Board, there were a considerable number of commanders in the field who expressed interest in having more commissary operating hours to be available to the troops who are being deployed, augmented or those troops that are being left behind and family members who actually needed a greater number of store hours in order to get to them because now they might be working 12 hour shifts, or they might have moved to another location. A whole bunch of reasons for requiring greater store hours.
 Page 64       PREV PAGE       TOP OF DOC

    And the Commissary Operating Board thought that the best option was to not reduce store hours, but to run at a loss. And if a loss was actually incurred, that they would fund it next year. And so we have not had the loss yet, but we will see what will happen. Now we need to continue to work with both the board and the Department to figure this one out.

    Mr. MCHUGH. Well, I appreciate that. I certainly think the board made the right decision. I am not criticizing that. But I do get concerned about this appropriated fund savings pressure. But before I get to the secretary for his perspective, General Zettler, do you have any comments on this, either from the $10 million or from the appropriated fund search and potential cuts in general?

    General ZETTLER. My comment would be that we really went through a great deliberation. And Mr. Abell and his staff worked it with the comptroller at length to try to ameliorate that $10 million. But in the end, across the department, we were given that. And we are going to look at the best way to handle it.

    And General Wiedemer has outlined how we approached that. But at the time, it seemed to the board that we were talking about from 1.5 to $4 million per service that we did not want to put that reduction on the backs of the troops as they were mobilized and their families remained behind.

    And we wanted the commissaries to remain open with the hours that they had. We put restrictions on you cannot open up for more hours, but let's keep going at the right way here. And we will address that in our budget deliberations in the fall when we parcel out next year's operations and maintenance (O&M) adjustments.
 Page 65       PREV PAGE       TOP OF DOC

    Mr. MCHUGH. Well, Mr. Secretary, I would appreciate your comments on that. And let me just make an editorial statement. And I understand the budgetary pressures across the board, and they are tremendous, particularly given the realities of what is happening in this world.

    But I do think at least my, perhaps not at informed as it should be and casual observation, that DeCA's done a pretty darn good job at tightening its economies and its efficiencies about as far as they can go, as they say in Oklahoma. So, any perspective on this, why we keep trying to squeeze more out of DeCA?

    Secretary ABELL. Mr. Chairman, I think it has been fair and accurately characterized by both General Wiedemer and General Zettler. The why is that budget pressures. I mean, this was part of the normal budget building process that the Department goes through.

    And when this came down, as General Zettler said, we pushed back with Dr. Chu and my level, with the comptroller expressing our concerns about the impact of this cut or the potential impact of such a cut. At the end of the day, there was a budget decision. And we all are aware of what that is.

    So now we are, I would hope, partners. I would see us as partners in working through the solutions here. We are not looking again to do anything that hurts that benefit. But it is a cut that was part of which was appropriated across the many activities of the Department.
 Page 66       PREV PAGE       TOP OF DOC

    Mr. MCHUGH. Yes. Well, it all comes down to money. I understand. And it is a tough challenge. And I appreciate your efforts to try to resolve it as painlessly as possible.

    But any questions?

    Well, let me, to the commanders and Mr. Secretary, thank you all for being here. I have a number of other questions, but I do not think we can get through even one of them before we would have to leave.

    I am definitely going to submit to you some questions on your perspectives on ace or on flexible pricing, store brands, et cetera, et cetera, that are perhaps not new, but remain relevant and of concern to us. So you have all been very supportive and cooperative in your efforts to respond to those in the past. And we would appreciate that in the days ahead.

    And let me just close. Everybody has talked about the importance of this. And I think everyone on this panel understands that. But I remember going into K2 in Uzbekistan, where I visited the 10th Mountain Division that David O'B Martin had a little bit to do with their resurrection, had a whole lot to do with. And they are at a Soviet air base.

    Their place is a mess. And you are knee deep in mud, and they would scatter stones around. And there were not too many creature comforts. But the tents for the exchange and the commissary had opened just hours before we got there. And those soldiers and airmen were standing around winding one end to the other of that air base waiting to get in. And it was not because they were not being cared for.
 Page 67       PREV PAGE       TOP OF DOC

    It was because it gave them a little touch of home. And if that does not bring home to me and to the issue the importance of what you do, I do not know what does. God bless you for that. And I pledge to you we will continue to do everything we can to support you in that vital mission that, as has been noted today, is even more vital than ever before.

    So with that, thank you for your presence. Thank you all for being here. And I will adjourn the subcommittee.

    [Whereupon, at 3:38 p.m., the subcommittee was adjourned.]