[Senate Hearing 117-46] [From the U.S. Government Publishing Office] S. Hrg. 117-46 WASTE, FRAUD, COST OVERRUNS, AND AUDITING AT THE PENTAGON ======================================================================= HEARING BEFORE THE COMMITTEE ON THE BUDGET UNITED STATES SENATE ONE HUNDRED SEVENTEENTH CONGRESS FIRST SESSION __________ May 12, 2021 __________ Printed for the use of the Committee on the Budget [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] U.S. GOVERNMENT PUBLISHING OFFICE 45-251 WASHINGTON : 2021 COMMITTEE ON THE BUDGET BERNARD SANDERS, Vermont, Chairman PATTY MURRAY, Washington LINDSEY O. GRAHAM, South Carolina RON WYDEN, Oregon CHARLES E. GRASSLEY, Iowa DEBBIE STABENOW, Michigan MIKE CRAPO, Idaho SHELDON WHITEHOUSE, Rhode Island PATRICK TOOMEY, Pennsylvania MARK R. WARNER, Virginia RON JOHNSON, Wisconsin JEFF MERKLEY, Oregon MIKE BRAUN, Indiana TIM KAINE, Virginia RICK SCOTT, Florida CHRIS VAN HOLLEN, Maryland BEN SASSE, Nebraska BEN RAY LUJAN, New Mexico MITT ROMNEY, Utah ALEX PADILLA, California JOHN KENNEDY, Louisiana KEVIN CRAMER, North Dakota Warren Gunnels, Majority Staff Director Nick Myers, Republican Staff Director C O N T E N T S ---------- WEDNESDAY, MAY 12, 2021 Page STATEMENTS BY COMMITTEE MEMBERS Chairman Bernard Sanders......................................... 1 Ranking Member Lindsey Graham.................................... 3 WITNESSES Statement of Lawrence J. Korb, Ph.D., Senior Fellow, Center for American Progress.............................................. 6 Prepared Statement of............................................ 24 Questions and Answers (Post-Hearing) from: Senator Chris Van Hollen................................. 63 Statement of William D. Hartung, Director, Arms and Security Program, Center for International Policy....................... 8 Prepared Statement of............................................ 31 Statement of Mandy Smithberger, Director, Center for Defense Information, Project on Government Oversight (POGO)............ 10 Prepared Statement of............................................ 37 Questions and Answers (Post-Hearing) from: Senator Chris Van Hollen................................. 65 Statement of Roger Zakheim, Director, Ronald Reagan Institute.... 12 Prepared Statement of............................................ 49 Statement of Lieutenant General (Ret.) Thomas Spoehr, Director, Center for National Defense, The Heritage Foundation........... 14 Prepared Statement of............................................ 56 ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD Sustainable Defense: More Security, Less Spending, Final Report of the Sustainable Defense Task Force of The Center for International Policy, submitted by William D. Hartung.......... 68 WASTE, FRAUD, COST OVERRUNS, AND AUDITING AT THE PENTAGON ---------- WEDNESDAY, MAY 12, 2021 U.S. Senate, Committee on the Budget, Washington, D.C. The Committee met, pursuant to notice, at 11:01 a.m., via Webex and in Room SD-608, Dirksen Senate Office Building, Honorable Bernard Sanders, Chairman of the Committee, presiding. Present: Senators Sanders, Kaine, Van Hollen, Padilla, Graham, Grassley, and Crapo. Staff Present: Warren Gunnels, Majority Staff Director; Nick Myers, Republican Staff Director; Ethan Rosenkranz, Majority Senior Budget Analyst for National Defense; and Derek Gondek, Republican Professional Staff Member. OPENING STATEMENT OF CHAIRMAN BERNARD SANDERS Chairman Sanders. Good morning, and let me thank Ranking Member Graham and our colleagues on the Committee and our witnesses for being with us this morning. It is no secret that as a Nation we face enormous needs. Over 90 million Americans today are uninsured or underinsured. Almost 600,000 Americans are homeless. Our child care system is dysfunctional, and we have one of the highest rates of childhood poverty of any major country on Earth. And I think we are all in agreement that our roads and our bridges and our infrastructure are in terrible shape. And in my view, we face the existential threat of addressing climate change, which could wreak havoc on our country and the world. In other words, there is an enormous amount of work that has to be done, and much of that work will be very expensive. For that reason, we as Members of Congress have the responsibility to make sure that our taxpayer dollars are spent wisely and that they are spent cost-effectively, and that is true whether the issue is health care or education or anything else. It is certainly true when it comes to the Department of Defense (DOD), an agency with a budget of $740 billion, by far the largest spending category in our discretionary budget, consuming more than half of all discretionary spending. In my view, the time is long overdue for us to take a hard look at the enormous amount of waste, at the cost overruns, at the fraud, and at the financial mismanagement that has plagued the Department of Defense and the military-industrial complex for decades. And today that is exactly what we will be doing. At a time when we have so many unmet needs in America, we have got to ask ourselves why we are spending more on the military than the next 12 nations combined. Why is it that the United States of America is now spending more on the military in real inflationary-adjusted dollars than we did during the height of the Cold War or during the wars in Vietnam and Korea? Why is it that the Pentagon remains the only agency in the Federal Government that cannot pass an independent audit, 30 years after Congress required it to do so? How does it happen that about half of the $740 billion annual defense budget goes not to our troops--many people think that it does, but it does not--but to defense contractors while virtually all of them have paid huge fines for misconduct and fraud while making massive profits on those contracts? As it happens, since 1995, Boeing, Lockheed Martin, and Raytheon have paid over $5.4 billion in fines or related settlements for fraud or misconduct. Further, I find it interesting that, despite the fact that the lion's share of revenue for some of the defense contractors comes from the taxpayers of the United States, these same companies provide their CEOs and executives excessive and extremely large compensation packages. Last year, Lockheed Martin paid its CEO over $23 million while 95 percent of its revenue came from defense contracts. Raytheon paid its CEO $19.4 million while 94 percent of its revenue came from defendant contracts. Boeing paid its CEO $21 million while 45 percent of its revenue came from defense contracts. In other words, these companies for all intents and purposes almost function as Government agencies, the vast majority of their revenue coming from the public, and yet their CEOs make over 100 times more than the Secretary of Defense of the United States of America. And I think one of the issues that we have to also take a look at is the whole question of the revolving door where many of our top military officials end up on the boards of directors of these major defense companies. Senator Grassley and I sent a letter to all three of these CEOs asking them to testify this morning. All of them declined to come. Further, as the General Accountability Office (GAO) has told us, there are massive cost overruns. This is a huge issue unto itself: cost overruns at the DOD acquisition budget that we have got to look at. According to the GAO, the Pentagon's $1.8 trillion acquisition portfolio currently suffers from more than $628 billion in cost overruns, with much of the cost growth taking place after production. GAO tells us, and I quote, ``Many DOD programs fall short of cost, schedule, and performance expectations, meaning DOD pays more than anticipated, can buy less than expected, and in some cases deliver less capability to the warfighter.'' That has got to change, and let us be clear. As I stated earlier, a major reason why there is so much waste, fraud, and abuse at the Pentagon is the fact that the Defense Department remains the only Federal agency that has not been able to pass an independent audit 30 years after Congress required it to do so. I think it is extremely important--and I do not know how familiar you may be with this quote. I have to admit that Donald Rumsfeld, Bush's Secretary of Defense, was not a hero of mine. But 1 day before 9/11--I do not know if you are familiar with this--he made some remarks, and this is what he said, and it did not get a lot of attention, obviously, because 9/11 came the next day. But this is what he said on September 10, 2001, and I quote, this is from Donald Rumsfeld: ``Our''--meaning the Pentagon's--``financial systems are decades old. According to some estimates, we cannot track $2.3 trillion in transactions. We cannot share information from floor to floor in this building''--the Pentagon--``because it is stored on dozens of technological systems that are inaccessible or incompatible.'' And yet 20 years after Rumsfeld's statement, I wonder if the situation is any better today when the Pentagon has now received three failing audit opinions in a row. In 2011, the Commission on Wartime Contracting in Iraq and Afghanistan concluded that $31 to $60 billion spent in Iraq and Afghanistan had been lost to fraud and waste, and so forth and so on. In my view, it is time to hold the DOD to the same level of accountability as the rest of Government. And let me conclude by saying this: I think everybody in this Congress and in this Committee understands that we need a strong defense and that the men and women in the military and their families must be treated with the respect that they are due. But we do not need a defense budget that is bloated, that is wasteful, and that has in too many cases massive fraud. I hope that all of my colleagues remember what former President Dwight D. Eisenhower, a good Republican, said as he left office in 1961, and I quote: ``In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.'' And in an earlier speech, Eisenhower, remember, a four-star general who led the effort in Europe in World War II, this is what he said: ``Every gun that is made, every warship launched, every rocket signifies in the final sense a theft from those who hunger and are not fed, those who are cold and are not clothed. This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children. This is not a way of life at all in any true sense under the cloud of threatening war. It is humanity hanging from a cross of iron.'' What Eisenhower said was true then, and it is true today. Let me now turn the microphone over to the Ranking Member, Lindsey Graham, for his opening remarks. OPENING STATEMENT OF SENATOR LINDSEY GRAHAM Senator Graham. Well, thank you, Mr. Chairman. I have really enjoyed the hearings we have had. I think you raise questions that the country needs to grapple with, so let me give you my view of things. I think Senator McCain, who both of us admired, was a big proponent of trying to make procurement more transparent, and cost-plus contracting really incentivizes spending more. The big problem I have seen with weapons system development is change orders. They will ask that the weapons system do things down the road they were not designed to do early on. And sometimes that is due to the threat we face from enemies. We have to adjust our new systems to counter their new systems. But count me in for looking at procurement reform and giving the Pentagon a good once-over in terms of its modernization of its computer systems and contractors and all that good stuff. But what I want to do is remind the American public that the number one goal, in my view, of the Federal Government is to protect us. Without national security, Social Security and every other social network hangs in the balance. There are people out there that would destroy our way of life if they could, and we need to make sure they cannot do that. So let us talk about defense spending in historical terms. First, let us talk about threats. Now, this is since April. We have had Russian bombers test us since March of 2021 in Alaska at historic levels. We had 25 Chinese war planes enter into Taiwan's defenses in April of 2021, a major escalation. There are 80,000 Russian troops amassed on the Ukrainian border. There were 100,000. They say they have withdrawn. They have gone from 100 to 80. From Somalia to Mali, Nigeria, and Mozambique, ISIS in that part of the world is on the rise. We just had over 80 people killed at a school in Kabul because radical Islamic terrorists are trying to destroy all the gains we have made for women in Afghanistan. North Korea just fired two short-range missiles for the first time in more than a year. The Chinese are trying to develop a deepwater blue navy. They are building aircraft carriers, and the Russians are on the prowl, and I fear ISIS and al Qaeda will come roaring back if we do not watch it. I have not mentioned anything about the current conflict between the Palestinians and the Israelis. So this is a time of great peril. What should we be doing? We should have a defense budget that deters war, and if you enter into one, you win it. Let us go to the next chart. Last year, the Defense Department produced a 5-year spending plan to keep modernization and replenish the weapons systems that have been worn out since 9/11. Mr. Chairman, our military men and women have been deployed more since 9/11 than any time since World War II. We have flown the wings off the planes. Our equipment has been heavily utilized, and our people have really borne the brunt of this war on terrorism and other conflicts. So they projected in the 5-year plan that we would be spending $722 billion this year. The Biden budget is 715. My good friend Senator Sanders has an amendment to cut the defense budget by 10 percent. It would put us at $660 billion, way below the projected defense needs, according to the Pentagon, over the next 5 years. Now, in terms of gross domestic product (GDP) spending, you spend on the defense what you need to protect the Nation. In World War II, we were up to 41 percent. We had a worldwide war. The world was at risk. Life as we know it was hanging in the balance, so we went all in to win World War II. Everybody did what they had to do. In Korea, we were 14 percent of GDP on that conflict. During the peak of the Cold War, it was about 10 percent to make sure that the Soviet Union did not gobble up the world and keep communism at bay, and I would say it worked. Now, from Vietnam up to the end of the Cold War, we were spending about 4.9 percent of GDP. When the Berlin Wall fell, we started coming down. On September 10, 2001, we were at 3.11 percent of GDP, a historical low. The peace dividend did not last very long, did it? The global war on terror, something nobody really thought about, and how do our weapons systems relate to that conflict, we have been at about 4.6 percent. We are withdrawing our forces from Afghanistan. We are going to be at about 3.4 percent going towards 3.3 percent. So here is what I would say. We are on the low end of defense spending, but we are on the high end of the threat matrix. Personally, I have never seen more capability aimed at the United States than I do right now. You see Iran getting stronger, not weaker, when it comes to their military misadventures. You see them enriching--let us put that up. Iran is enriching at 60 percent. I want to remind you that just a few years ago we went through an event called ``sequestration'' where we were going to take $1 trillion out of the defense budget in some budget deal as a punishment for not reaching a budget number. Sequestration, according to General Mattis, for all the headaches caused by the loss of our troops during these wars, no enemy in the field has done more to harm the readiness of our military than sequestration. Remember the good old days of sequestration? They were horrible days. We were having to cannibalize weapons systems to keep them going. It was a nightmare for the Pentagon. I asked Secretary Panetta, a Democrat, who is a fine man, ``If we enact sequestration, would we be shooting ourselves in the foot?'' He said, ``We would be shooting ourselves in the head.'' Sequestration was an effort to just blindly cut $1 trillion from the Pentagon, and it made us less capable at a time we needed more capability. So to those who are watching today, half the money we spend virtually is on personnel costs; $50 billion in the Pentagon goes to health care costs. I think Senator Sanders is right to be asking the Pentagon to be more accountable and transparent. But I think it is a very dangerous idea to suggest that our defense footprint, given the threats we face, needs to be changed in terms of less. I think it needs to be more in terms of capability to deal with the multiple threats we face, but that ``more'' should be wisely spent. So this is a great debate we have been having for a long time, but the facts are the facts. Given the world we face, we are on the low end of spending at a time when our enemies are on the high end of misadventure and spending. The one thing you do not want to do, Mr. Chairman, is have the enemy miscalculate and entice them to make mistakes that could cost us all by not being ready to meet the challenges. Thank you very much. Chairman Sanders. Okay. Thank you, Senator Graham. We have an excellent panel today. I think we have four panelists who are here; one will be virtually. Larry Korb is a senior fellow at the Center for American Progress. He formerly served as President Ronald Reagan's Assistant Secretary of Defense from 1981 to 1985. Bill Hartung is the director of the Arms and Security Program at the Center for International Policy. He is the author of a number of books. Mandy Smithberger is the director of the Center for Defense Information at the Project on Government Oversight. She has previously worked in the House of Representatives and served as an analyst at the Defense Intelligence Agency and the U.S. Central Command. Roger Zakheim is the Washington director at the Ronald Reagan Presidential Foundation and Institute. He previously served as General Counsel and Deputy Staff Director at the House Armed Services Committee as well as Deputy Assistant Secretary of Defense for President George W. Bush. Lieutenant General Thomas Spoehr is the director of the Center for National Defense at the Heritage Foundation. He previously served in the U.S. Army for 36 years during which he was Commandant of the Army's Chemical, Biological, Radiological, and Nuclear School. So this is a very strong panel. Let us begin with Larry Korb. Larry? STATEMENT OF LAWRENCE J. KORB, PH.D., SENIOR FELLOW, CENTER FOR AMERICAN PROGRESS Mr. Korb. Thank you very much, Mr. Chairman, Senator Graham---- Chairman Sanders. Larry, talk a little bit closer into the microphone, if you could, please. Mr. Korb. Thank you very much, Mr. Chairman, Ranking Member Senator Graham. It is really an honor to be here with you to talk about what I think is the more important thing in national defense, which is the budget, because in defense dollars are policy. So I think it is really important. I would also like to say that it is also an honor to be here with you, Senator Sanders, and Senator Grassley because I cannot think of two members who have worked harder to make sure that every dollar that the Defense Department spends is spent wisely and effectively. And Senator Grassley and I go back to the Reagan administration when we were trying to deal with those things. Now, I am going to make three points today. One, the size of the budget that President Biden has proposed I think is too much. Number two, there are at least three major programs that I think can be cut back, if not eliminated. And then, finally, the whole question of waste in the Pentagon itself. Let me begin with President Biden has proposed a budget for fiscal year 2022 which is essentially the same as the Trump budget and basically calls for spending more than $750 billion on defense. Now, it is important to keep in mind that under the Trump administration, the defense budget rose by $100 billion, and President Trump basically said that that was necessary because of the terrible state of the military he inherited. But that is not true. If you go back to the fall of 2016 and read the writings of individuals like General David Petraeus, who I think we all know, along with Mike O'Hanlon, a distinguished defense scholar, they point out that the state of our military was ``awesome.'' In an article in Foreign Affairs, in October 2016, ``America's Awesome Military,'' they said the "United States has the best military in the world today by far.'' Therefore the Department of Defense did not need a major budget increase. It is also important to keep in mind, since we are dealing with this historically, that military retirement, which up until the middle of the Reagan administration used to be in the defense budget, is now outside, and that now totals over $100 billion. And, finally, the Veterans Administration (VA) is about $260 billion. It is clear, therefore, that we are spending a large amount on national security, moreover, even if you control for inflation, the proposed Biden budget level is higher than at the height of the Reagan buildup, which I had the privilege of working on. And I might point out that in the second Reagan administration, when we began to have deficit problems and everything, we cut defense spending by 10 percent. It is also important to keep in mind that in President Biden's campaign, he talked about the Defense Department abandoning all fiscal discipline. Well, if he is going to go along with the Trump numbers, I do not see how that does not also abandon fiscal discipline. Finally, since we are withdrawing from Afghanistan, we should basically be able to cut defense spending more with the money we will have not have to spend on that conflict. I might also point out that, during sequestration the top-line defense number came down, but--and this is so important--the warfighting budget, according to the Pentagon Comptroller, was used as a slush fund to keep defense from being cut too much onto sequestration. Very quickly, what weapons? You have got the F-35, which the late Senator John McCain has called a ``scandal and a tragedy,'' and basically this is something that the nominee to be Air Force Secretary called ``Acquisition malpractice,'' he called it when he worked for Obama. So that is the first thing you really need to take a hard look at. And whatever else you do, do not do what Congress has done the last 5 years, which is basically add to what the Pentagon has requested for the F-35. I think Adam Smith put it very well. Pouring more money into F-35 is like pouring money down a rathole. Second, there is the ground-based missile defense, I agree with Bill Perry where he says we do not need it, and basically not only do we not need it to have deterrence, but it is dangerous because, as many of you know--and I saw it myself when I was on active duty and when I worked in the Pentagon, you have to launch them on warning because it is too late if they are hit because they are not movable. And what happens if it is a false positive, it is too late. So I do think that that is something that can be eliminated, and, again, remember we are talking about a weapons system that has gone up 20 percent in the last couple of years. And then there are large aircraft carriers, the Ford Aircraft Carrier. The first one came in twice the cost of the last Nimitz, and not only--and, again, I will quote Senator McCain: ``The era of the big carrier is over.'' So if you want to build them, you ought to build small ones. And then, finally, when you get to Pentagon Management. The Comptroller of the Pentagon admitted they waste $25 billion a year. They have not passed the audit. We need another Base Realignment and Closure (BRAC), which I had the privilege of starting with Senator Goldwater, and take a look at the 800 bases we have around the world. Thank you. [The prepared statement of Mr. Korb appears on page 24] Chairman Sanders. Thank you very much, Larry. Now we are going to hear virtually from Bill Hartung, who is the director of the Arms and Security Program at the Center for International Policy. Bill? STATEMENT OF WILLIAM D. HARTUNG, DIRECTOR, ARMS AND SECURITY PROGRAM, CENTER FOR INTERNATIONAL POLICY Mr. Hartung. Thank you. I want to thank Chairman Sanders, Ranking Member Graham, and members of the Committee for this chance to address you today. As was mentioned, I run the Arms and Security Program at the Center for International Policy, CIP, and our mission is to make a peaceful, just, and sustainable world the central pursuit of U.S. foreign policy. I will focus my remarks on the issue of Pentagon waste. I see four major types of waste at the Pentagon: misguided strategy, buying ineffective weapons systems, overpaying for basic items, and excess overhead. Let us start with strategy. A defense strategy that neglects our most urgent security challenges wastes tens of billions of dollars while making us less safe. The greatest threats to human lives are pandemics, climate change, nuclear weapons, and white supremacy. The tools needed to address these challenges are not primarily military in nature. Our budget should reflect that reality. CIP's Sustainable Defense Task Force has come up with a plan that could save $1.2 trillion over the next decade by putting diplomacy first, avoiding unnecessary and counterproductive wars, adopting a deterrence-only nuclear strategy, and cutting excess bureaucracy. Even after making these reductions, the United States would have by far the best- funded military in the world, over 2-1/2 times what China spends and over 10 times what Russia spends. I ask that our report be submitted for the record along with my written testimony. [The submitted report appears on page 68] The second area of waste is spending on weapons that are either unworkable, unnecessary, or unaffordable--and in some cases all three. As we mentioned, a case in point is the F-35 aircraft. After 20 years of development, it is not fully ready for combat, and it may never be. The F-35 is immensely costly to purchase, operate, and maintain. The GAO has determined that it will cost billions more per year than current Air Force estimates and that nearly half of the fleet could be grounded by 2030 for lack of a functioning engine. That is quite an admission for a plane that is slated to cost $1.7 trillion over its lifetime. There should be a pause in production of the F-35 until it can be made effective and affordable. If it cannot meet these requirements, the program should be phased out. The second case of unwise procurement is the new intercontinental ballistic missile (ICBM), a ground-based strategic defense system, or GBSD. Former Secretary of Defense William Perry has called ICBMs ``some of the most dangerous weapons in the world'' because the President would have just a matter of minutes to launch them on warning of an attack, greatly increasing the risks of an accidental nuclear war. We can maintain a robust deterrent without building a new ICBM, which will cost $264 trillion over its lifetime. The third area of concern is price gouging by contractors. An egregious case in point is TransDigm, which took profit level of over 4,000 percent--4,000 percent--on spare parts provided to the Pentagon. This kind of overcharging is routine and costs billions of dollars per year. Finally, there is the issue of excess overhead. The greatest source of redundancy is the Pentagon's employment of 600,000 private contractors. Many of these contractors do jobs that can be done better by civilian Government employees at much lower cost. Cutting spending on private contractors by 15 percent would save over $26 billion per year. Another source of overhead comes from major weapons contractors. As was mentioned before, in all more than half of the Pentagon budget goes to private contractors. The top five contractors alone received over $150 billion in Pentagon contracts last year, and Lockheed Martin made $8 billion in profits. Its CEO made over $20 million, 500 times what a beginning enlistee in the armed forces makes. If we want to save on Pentagon spending, we need to go where the money is. That is why I believe we should have an independent assessment of contractor compensation, profits, and overhead, ideally done by the GAO, which would be a tool for cutting corporate overhead and corporate misfeasance in Pentagon spending. I think all of us can agree that Pentagon waste benefits no one and does nothing to enhance our security. So I think there are measures we can take to eliminate that, but I think we have to look at both the waste from misguided policies as well as the waste from mismanagement. And so, with that, I will conclude my remarks, and I thank you again for the opportunity to testify, and I look forward to your questions. [The prepared statement of Mr. Hartung appears on page 31] Chairman Sanders. Well, thank you very much, Bill. Our next panelist is Mandy Smithberger, who is the director of the Center for Defense Information at the Project on Government Oversight. Mandy? STATEMENT OF MANDY SMITHBERGER, DIRECTOR, CENTER FOR DEFENSE INFORMATION, PROJECT ON GOVERNMENT OVERSIGHT Ms. Smithberger. Thank you, Chairman Sanders, Ranking Member Graham, and members of the Committee, for inviting me to testify before you today. I want to thank the Committee for holding this hearing and examining spending at the Department of Defense and to thank the Chairman for his leadership in forcing a debate on the size of the Pentagon's budget. While we await details on the fiscal year 2022 budget, what we know so far shows Pentagon spending continues to increase at an unsustainable rate. Testimony heard before this Committee nearly 40 years ago largely remains true. We are paying too much for too little capability. Buying unproven weapons systems in quantity before testing is complete, awarding contracts to companies with histories of waste and misconduct, and giving disproportionate funding to an agency that is years away from being able to pass an audit wastes taxpayer dollars and undermines readiness. Significant cuts to the Department's budget are necessary to create the incentives and pressure for reform, to address how the Department spends its money and how it fails to set priorities. Throwing even more money at the Department I fear is going to make these problems worse. As has been mentioned, the Department's most expensive program, the F-35, is an instructive case study of current problems and their expensive consequences. At the beginning of the F-35 program, the aircraft's public image was that it would be ``more Chevrolet than Porsche.'' This year, the Air Force Chief of Staff called it ``something closer to a Ferrari.'' While there are many lessons to be drawn from the F-35 program, there are four I want to highlight. First, we must fly before we buy. Second, we must insist on good data from the beginning of these programs. Three, we have to beware complexity in the cost that that brings onto our force. And, four, we must secure as much as possible the intellectual property rights to enhance competition. The conventional wisdom is that the F-35 program is politically untouchable due to sunk costs and because contracts are spread out across the country. I can think of no greater indictment of our current acquisition system if we cannot course-correct a program because of corruption in our system. I think we need to make sure that we are doing the right things for our warfighter. We also have an acquisition system designed to increase costs. The most significant problem, as you mentioned, Chairman, is the corrupting influence of the revolving door of senior Pentagon officials going to work for the defense industry. The end result is officials appearing to or actually confusing what is in the best interest of our national security with what is in the best financial interest of defense contractors. Of course, the Department does not just pay too much for complex weapons systems. They also spend too much on spare parts. We get fleeced on spare parts like pins and drainpipes. The overpriced plastic toilet seat covers that cost $640 in the 1980s now cost $10,000. One of the root causes of these overcharges is misuse of commercial item designations, which makes it difficult for the Government to obtain cost or pricing information to determine whether the prices contractors are charging are fair and reasonable. When an item is designated as commercial, contractors generally do not have to provide cost or pricing information to the Government. If something were truly commercial, prices would not be secret. Reforming the definition of ``commercial item,'' as the Obama administration previously proposed, is an overdue reform to reduce overpayments and waste. As Mr. Hartung mentioned, another opportunity for savings is service contracting. Last year, the Department spent $200 billion on service contracts. POGO has found that service contractors can cost nearly three times more than civilian employees. Both the Defense Business Board and the Pentagon's own cost-estimating shop have identified this as a key opportunity for savings. Looking for those savings and improving data on that spending will go a long way to helping the Department. We must also make sure that taxpayer dollars do not go to risky contractors. Currently, companies that waste taxpayer funds or defraud the Government often continue to receive contracts. The Government could make more informed decisions about who wins those awards if reporting and transparency of responsibility information was improved. Chairman Sanders made sure that much of this information is available to the public, but it is a shadow of the information that we should have. One final danger is the opaque nature of beneficial ownership information. Hiding who really owns controls and financially benefits from an entity presents corruption risks and can undermine national security. Congress recently strengthened public disclosure of beneficial owners, but this disclosure should go farther. In summary, we recommend four major areas of reform. First, we must stop the revolving door between the Pentagon and the defense industry. Two, we most reform acquisition laws to empower the Department to make smarter buying decisions. Three, we must increase transparency and curtail the overuse of service contracting. And, four, we must enhance the Government's tools to ensure taxpayer dollars only go to responsible companies. Finally, I want to thank the Committee for continuing to conduct oversight over the Department's weak financial management and would urge the Committee to also look at how statutory requirements for wish lists undermine budget discipline overall. The importance of the Department of Defense mission along with its significant taxpayer resources means that it must be a model for efficiency and for accountability. Thank you again. I am happy to answer any questions you may have. [The prepared statement of Ms. Smithberger appears on page 37] Chairman Sanders. Thank you very, very much. Our next panelist is Roger Zakheim, who is the Washington director of the Ronald Reagan Presidential Foundation and Institute. Roger? STATEMENT OF ROGER ZAKHEIM, DIRECTOR, RONALD REAGAN INSTITUTE Mr. Zakheim. Chairman Sanders, Ranking Member Graham, and distinguished members of the Committee, thank you for inviting me to testify today. The following is a summary of my full statement, which I have submitted for the record. As Congress reviews the fiscal year 2022 defense budget request, this Committee should consider three things: Number one, providing a 3- to 5-percent real growth per annum increase in defense spending to ensure that the Department of Defense can execute its current strategy, mission requirements, and modernize the force. Two, end the repeated use of continuing resolutions and revisit the laws that incentivize ``use it or lose it'' spending, and continue to support DOD efforts to realize a comprehensive, clean audit. Three, ensuring that emergency spending measures before Congress do not leave the Department of Defense victim to reduced appropriations and harmful budget delays. Defense budgets must be strategy-driven and fiscally informed, not the reverse. Secretary Austin echoed this view during his Senate confirmation hearing saying, and I quote, our ``resources need to match our strategy and our strategy needs to match our policy.'' As the 2018 bipartisan National Defense Strategy (NDS) Commission outlined, Russia and China have embarked on massive military modernization initiatives that have diminished America's longstanding military advantages, and even surpassed the United States in some key capability areas. Accordingly, the NDS Commission's recommendation that a 3- to 5-percent real growth increase in defense spending remains an urgent priority for the U.S. military to project power and uphold alliance commitments. The Biden administration has nominated a Comptroller for the Department of Defense who just yesterday stood by this recommendation. Even before the economic downturn triggered by COVID-19, calls to reduce defense spending emerged from elements in both political parties. Now, with historic deficits following the Federal spending on COVID-19 relief and other proposed emergency measures, those calls are increasing. To examine the real consequences of cuts to the Pentagon's resources, the Reagan Institute along with the Center for Strategic and Budgetary Assessments hosted two Strategic Choices Exercises this past fall captured in this publication. The results of this bipartisan group effort were clear: Defense budget cuts would have a devastating consequence on our military and our national security. A 10-percent cut, something discussed today, would leave the United States with a military that is incapable of carrying out the current National Defense Strategy. It would compel the Department of Defense to reexamine its current standard of maintaining a force that can win one war while deterring another. In other words, ``With cuts of this magnitude, the United States could be reduced to a de facto hemispheric power by 2030.'' The administration's $715 billion budget request for fiscal year 2022, when accounting for inflation, is a reduction from the previous fiscal year. While this may appear to be sufficient to maintain the status quo, readiness and modernization accounts will shrink as other budget lines, such as personnel and operations and maintenance accounts tend to demand continued real growth. Put differently, defense cuts do not equal defense reform; rather, as our strategic choices exercise makes clear, less resources result in a less capable fighting force. As this Committee considers how to reduce waste and inefficiency, it ought to consider one of the most consistent drivers of inefficiency in the Department of Defense: continuing resolutions (CR). As this Committee knows, the Department of Defense has started the fiscal year under a CR 15 of the past 20 years, creating unnecessary uncertainty that creates significant management challenges for the Department of Defense. Interim CRs create compressed timelines for expenditures and generate waste by requiring short-term contracts that must be re-signed once additional funding has been allocated. These inefficiencies cost real money, and the NDS Commission, which I referenced before, concluded CRs have had ``a grave material impact, encouraging inefficient, `use-it-or-lose-it' spending by the services at the end of the fiscal year, resulting in delays in acquisitions and modernization, and exacerbating readiness problems throughout the force.'' A more radical reform the Congress might consider is revisiting legal restrictions that incentivize ``use-it-or-lose-it'' spending. Last, this Committee should also consider how emergency spending measures before this Congress may impact the Department of Defense and the annual appropriations processes. In the aggregate these measures before the Congress would add up to the equivalent of over 4 years of Federal discretionary spending. Though the unprecedented crisis brought on by the COVID-19 pandemic justifies emergency spending, prioritizing multi-trillion, multi-year omnibus packages threatens to exhaust congressional appetite for spending during its regular consideration of the President's budget request leaving the DOD in a precarious funding position. Americans understand what it takes to sustain the peace and prosperity, and they are willing to make the investments necessary to support a strategy that delivers just that. It is imperative that this Congress balance domestic and national security priorities in a fashion that ensures our military is properly resourced to meet the demands of our national defense obligations. Thank you for this opportunity. I look forward to answering your questions. [The prepared statement of Mr. Zakheim appears on page 49] Chairman Sanders. Thank you very much. Our next panelist is Lieutenant General Thomas Spoehr, who is the director of the Center for National Defense at the Heritage Foundation. General? STATEMENT OF LIEUTENANT GENERAL (RET.) THOMAS SPOEHR, DIRECTOR, CENTER FOR NATIONAL DEFENSE, THE HERITAGE FOUNDATION General Spoehr. Chairman Sanders, Ranking Member Graham, other members of the Committee, good morning. Thank you for the opportunity to appear today. The Department of Defense, with its nearly 20 million employees, an annual budget of over $700 billion, and more than $3 trillion worth of assets, has a special obligation to be a good steward of the resources entrusted to it for the Nation's defense. No organization is perfect, and the DOD is no exception. But given the amount of oversight, safeguards, and reforms in place over the years, it is my opinion that the Pentagon today is one of the most scrutinized and reformed organizations in the Federal Government. In March 2021, the Government Accountability Office reported ``DOD continues to demonstrate a strong commitment, at the highest levels, to improving the management of its weapon system acquisitions,'' and that ``DOD leadership continued its commitment to financial management improvements.'' Some argue that the Pentagon budget is overly large, indeed ``bloated'' and riddled with waste. But just because something is big does not mean it is bloated. Dwayne ``The Rock'' Johnson is big, yet no one in the world would accuse him of being bloated. National defense now consumes the smallest portion of the U.S. Federal budget in 100 years--15 percent--and continues to shrink. And except for a moment in 1999, spending today on national defense now consumes the smallest percentage--3.4 percent--of the U.S. gross domestic product in modern history. Critics will use the statement DOD's funding is bigger ``than the next ten nations' military budgets combined'' as grounds to argue that the budget is overly large and unnecessary. But added context and explanation is necessary. First, when adjusted for purchasing power parity, an internationally recognized method of equating economies, U.S. defense spending in terms of its purchasing power turns out to be roughly equal to that of two countries--China and Russia-- not ten. The second overlooked element is that the U.S.--for better or worse--is a global power with worldwide defense commitments to North Atlantic Treaty Organization (NATO), Japan, South Korea, Israel, Australia, New Zealand, sea lanes, and other areas. Other countries do not share these responsibilities, and it is misleading to compare the United States to others without that context. In the end, the best and, unfortunately, the most difficult way to determine the proper size of the U.S. defense budget is to understand how well that budget allows the Nation to execute its current National Defense Strategy. I would like to turn to the Pentagon's reform efforts. No other Federal department has undergone the number of reforms and efficiency drives as the Pentagon has in the last 5 years. Working in many cases at the direction of Congress, the DOD converted its defined benefit retirement plan to a hybrid defined contribution plan, cut headquarters sizes by 20 percent, completely reorganized the delivery of its health care, and produced a new acquisition framework to acquire capabilities. Pentagon efficiency efforts, such as the Defense- Wide Review or the famous ``Night Court'' review in the Army, saved billions of dollars. Finally, let me now turn to the DOD financial audit. Some point to the Pentagon's inability to pass an audit as evidence that the Pentagon is unworthy of its funding. Congress imposed the requirement for the DOD to pass a financial audit back in 1990, even though passing an audit is no guarantee an organization is well managed or free from corruption. Indeed, Enron, the poster child for corporate abuse, passed all its financial audits, right up until the moment it imploded from massive fraud. The Pentagon has undergone three full audits in the last 4 years without passing any of them. At a recent hearing, the Acting DOD Comptroller predicted that it would now take until 2028 for the Pentagon to pass the audit. Albert Einstein is credited with saying that the definition of insanity is doing the same thing over and over again but expecting different results. It is not for lack of trying that the Pentagon has not passed the audit. The audit is larger in scope and size than any other attempted of its kind. The 2017 audit cost nearly $1 billion dollars--$367 million to conduct it, $551 million to fix the issues it discovered. And subsequent years have carried similar costs. U.S. corporations by law undergo strict financial audits to assure potential investors of the soundness of their offerings. But the DOD is not a corporation and has no corresponding need. Conducting the audit is the law of the land and for that reason must be performed. But there should be more than a legal requirement to continue to spend $1 billion a year unless the payoff at the end is expected to outweigh the costs. But, unfortunately, most experts believe passing the audit will not cause the DOD to become appreciably more efficient nor better managed. The effort to audit the Pentagon should not be, however, discarded. There are some elements which, if tackled and fixed, would provide value-added like fixing problematic financial transactions and IT systems. But many elements of the audit, such as verifying physical property existence and valuations-- portions of which demand DOD recount physical property, such as World War II buildings, or the requirement to place a value on a 1960s-era armored personnel carry--carry no value. So the audit requirement should be modified. Congress should take the immediate opportunity to work with the Pentagon and the auditing community to narrow and focus the effort of the financial audit to include only those items which, if fixed, would add direct value to management and financial operations of the Pentagon. Thank you for the opportunity to testify. Nothing I have said should be taken to mean that the Pentagon deserves a free pass on efficiency. Indeed, the Pentagon must get better. There are no quick and easy solutions to making the Pentagon more efficient. But ``hard'' is not ``impossible,'' and nothing is more important to the long-term future of this country than an effective and efficient national security apparatus. Thank you. [The prepared statement of Lieutenant General (Ret.) Spoehr appears on page 56] Chairman Sanders. Thank you. Okay. Now we will begin the questioning. Let me begin with Mandy Smithberger. Ms. Smithberger, in your written testimony, you talk about the Pentagon providing $334 billion to defense contractors that defrauded taxpayers over the recent 5-year period. You talk about defense contractors being found guilty of price gouging, providing poor-quality goods and services, and improperly disseminating sensitive military information. You talk about the Pentagon paying $10,000 for a plastic toilet seat, $71 for a pin that should have cost 5 cents, and paying nearly $2,300 for landing gear that should have cost $10. So my question is: How prevalent is fraud within the defense contracting industry? Ms. Smithberger. Thank you for the question. Chairman Sanders. Speak as close as you can to the microphone. Ms. Smithberger. Yes, apologies for that. So we know anecdotally from these instances that you refer to that--and POGO maintains a Federal contractor misconduct database so that we can try and take advantage of what has been publicly reported. But I do think that we need to have a more comprehensive review on what the scale of these issues are that we have not had a review of how the Department is using its suspension and debarment system to prevent us from continuing to do business with other contractors. It is easily in the billions of dollars. I suspect it is in the tens of billions of dollars. But we really need to have an authoritative look from independent auditors. Chairman Sanders. Okay. Thank you. A question for Bill Hartung. Bill, you note in your testimony that at least half of the Pentagon budget goes to private contractors. Is that a problem in its own right? Or is the issue whether these corporations are held accountable to provide effective goods and services at a fair price? Mr. Hartung. Thank you, Senator Sanders, for the question. I think it is both. When you have five companies getting $150 billion, about 20 percent of the Pentagon budget, it gives them immense bargaining power over the Pentagon. When you see examples like the new ICBM, where it was a sole-source contract because Boeing pulled out of the competition with Northrop Grumman because Northrop Grumman was allowed to purchase the biggest producer of solid rocket motors for ICBMs, and Boeing said, well, you know, this was the end of it, we cannot compete on this basis. So these big companies and these big mergers I think just tilted the balance in favor of the contractors against the taxpayers. Then, of course, there are many measures that should be taken, as Ms. Smithberger has noted in her testimony, including empowering contracting officers to challenge bogus pricing. I think we need to, as I said, have an audit of contractor overhead. So there is a whole series of things that could be done. I think fly before you buy so we are not buying planes like the F-35, which may never get off the runway in the numbers needed to meet our defense needs. So I think it is a combination of certainly not letting any more mergers happen, maybe looking at reducing and taking apart some of the prior ones, and then much more rigorous oversight. So I think it is the combination of the two. Chairman Sanders. Good. Thank you very much. Larry, you worked for the Defense Department under President Reagan. Is that correct? Mr. Korb. That is correct, yes. Chairman Sanders. All right. The bottom-line question here, I think, is all of us want a strong defense. Senator Graham says it is a dangerous world. It is a dangerous world. But just spending huge amounts of money does not make our military more effective. We could be wasting huge amounts of money, making it less effective, in fact. So my question to you is a very simple one. You mentioned during the Reagan years actually defense spending was cut. Do you believe that, given the enormous problems facing our country in terms of infrastructure and poverty and health care, et cetera, et cetera, do you believe that we can maintain the kind of strong military that we need and yet that we can cut defense spending? Mr. Korb. Very definitely I do, because basically no matter how much you spend on defense, you cannot buy perfect security, always going to make choices. And so, therefore, my experience in Government and out of Government--I wrote my doctoral dissertation on the role of the military in the defense budget process--basically is you do the best you can with the number that you have. And so, therefore, if you told me today to go back to the Pentagon and you have got $700 billion, I think I could provide security and deal with the deficit. And remember that the deficit is also a threat to national security. And so, therefore, if you are cutting defense to help deal with the deficit, you are actually improving national security. I think that there is no magic number for the defense budget. This current number is historically high, and as I mentioned--and no one pays much attention--we used to have military retirement in there with the numbers you are comparing from years ago. It is not there anymore. It is $100 billion that the Pentagon does not have to spend in this amount, but the taxpayer still spends it. Chairman Sanders. Good. Okay. Thank you very much. Senator Kaine? Oh, sorry, my apologies. Senator Graham. Senator Kaine. I want to go, but I am not rushing. Go ahead. Chairman Sanders. I am sorry. My fault. Senator Graham. Senator Graham. Okay, I will be quick. Thank you. Thank you, Bernie. General Spoehr, are you available? General Spoehr. Yes, sir. Senator Graham. You said in your testimony, I believe, that we are about at 3.4 percent of GDP on defense spending, and that is the lowest in modern history except for 1999. Is that correct? General Spoehr. Yes, Senator. Senator Graham. Okay. So when people say that we are spending more on defense, the truth of the matter is, in terms of GDP, over the arc of time, we are the second-lowest level in modern history. Is that correct? General Spoehr. It is, Senator, yes. Senator Graham. Mr. Zakheim, do you agree with that? Mr. Zakheim. Yes, Senator. Senator Graham. Okay. Now, let us compare that to the Russian-Chinese defense budgets. In what direction are they headed, Mr. Zakheim? Mr. Zakheim. Senator, both China and Russia are significantly increasing their defense spending. Senator Graham. Okay. How many of you remember sequestration? Everybody? Mr. Korb--is that correct, sir. Mr. Korb. That is correct, Senator. Senator Graham. You mentioned General Petraeus. I have a quote here. This is in September 2016. ``It is also time to end the perennial threats of sequestration and place the Pentagon's budget on a general upwards path in real terms.'' September 2016. But the statement that I would like to run by you, the Secretary of Defense said, ``For all the heartache caused by the loss of our troops during these wars, no enemy in the field has done more to harm the readiness of our military than sequestration.'' Do you agree with that statement? Mr. Korb. No, I do not. Senator Graham. Okay. Mr. Korb. Because as I mentioned, you had a slush fund in the Overseas Contingency Operations (OCO) account. For example, we pay in the warfighting budget---- Senator Graham. Why would he say that? Why do you think he would say that? Mr. Korb. Well, I think that it could have that effect, if you did not use the warfighting budget as a slush fund to offset sequestration in the baseline budget. Senator Graham. Mr. Korb, here is what I would say. I lived through sequestration like Senator Kaine. It was great. It was devastating. Our readiness was affected. Our modernization program was robbed. We had to transfer money and equipment to front-line warfighting, and everything back home deteriorated. So let me ask you this: Do you support a 10-percent cut in our military budget as proposed by Senator Sanders? Mr. Korb. I think you could cut it 10 percent and still have an effective---- Senator Graham. Okay. Ma'am, what would you say? I do not want to butcher your name. How do you say your last name? Ms. Smithberger. Oh, ``Smithberger.'' It is just a German one. Senator Graham. Okay. I lived in Germany, and I was not very good at German then. So would you support a 10-percent cut? Ms. Smithberger. I think those are the kinds of numbers that we need to be talking about. Senator Graham. Okay. The other gentleman, Mr. Hartung, would you support a 10-percent cut? Mr. Hartung. Yes. I think with a realistic strategy and proper procurement, we could certainly defend the country with a 10-percent cut. Senator Graham. Mr. Zakheim, would you support a 10-percent cut? Mr. Zakheim. Senator, I would not. Senator Graham. General Spoehr, would you support a 10- percent cut? General Spoehr. Senator, a 10-percent cut to the military today would not allow us to execute the National Defense Strategy nor allow us to counter the efforts of China. Senator Graham. And let me just give you my 2 cents' worth. I think if we cut our budget 10 percent militarily, our allies would freak out. NATO without the United States is not a whole lot. We appreciate all their contributions, but we saw that in Libya. So we are an indispensable partner in keeping the world stable. I just cannot imagine the ripple effect throughout the world if America chose to go below where we are today in terms of emboldening our enemies. Mr. Zakheim, what threat does Iran present to the region and to the world, in your view? Mr. Zakheim. Senator, Iran presents a threat to freedom across the world. It threatens our close allies---- Senator Graham. Do you believe if they had a nuclear weapon they would use it? Mr. Zakheim. Senator, a threat is a combination of intent and capability. The mullahs in Iran have demonstrated that they intent to bully, and with that capability they would use it in lots of different---- Senator Graham. Do you agree with that, General Spoehr? General Spoehr. I do, sir. They just lobbed ten ballistic missiles against U.S. forces in Iraq. Why would they stop at a nuclear weapon? Senator Graham. So pivoting to Asia is a great aspiration, but let me tell you right now, to any administration, if you do not understand the threats coming from the Mideast to our national security and that of our allies, you are making a very dangerous mistake. And it is right to want to challenge China because they are getting more robust. So the idea of pivoting from one threat area to another is not an option. You have to deal with all the threats. And I cannot think of a worse time in modern American history to be reducing our defense capability than right now. Thank you. Chairman Sanders. And now Senator Kaine. Senator Kaine. Thank you, Mr. Chair, and thank you for calling this hearing. It is an important matter for not just the Armed Services Committee to dig into but the Budget Committee as well. I have followed the historic data about defense spending as a percentage of GDP and other spending categories. We have often talked about that in the Committee. Most of our spending categories as a percentage of GDP are going down. Nondefense discretionary is going down. Defense spending is going down. Pension and health-related items are going up. Interest as a percentage of GDP is going up. And the thing that is really going up fast is tax expenditures. Tax collection as a percentage of GDP has been dropping, but the tax expenditures have been dramatically going up. And so I put it in that background. Even though defense spending as a percentage of GDP is going down, we ought to get rid of waste, fraud, and abuse. We should. How do you determine that and how do you do it is the issue. First, you ought to match what you are doing against the threat to the Nation's security. So what I would like to ask our five witnesses to do--and I will go to the three in person, starting with Dr. Korb, and then come to our two online--is: On a scale of 1 to 10, 1 being we should not be worried at all, 10 being we should be very worried, give me your 1-to-10 rankings of how worried we should be about Russia and China on a 1-to-10 scale? Mr. Korb. I would say no more than a 5. This is not the second coming of the Cold War. Senator Kaine. And you would say no more than 5 for either Russia or China? Mr. Korb. Yes. I would say no more than 5 for China, and Russia maybe a 2. Senator Kaine. Okay. And if you want to, you can say you have no opinion about this question, but I just want to now move to Ms. Smithberger. Ms. Smithberger. Thank you for the question. I would say a 6, but I think it is important that we look at what is happening when we have such a large level of spending and whether we are actually spending money on combating those threats in an effective way. Senator Kaine. When you say 6, you would say for both Russia and China? Ms. Smithberger. Yes. Senator Kaine. Mr. Zakheim? Mr. Zakheim. Senator, I would put China ahead of Russia. You know, I do not want to make them 10 feet tall, but they are approaching that. So I would give them an 8 and then put Russia behind it. The distinction I would make and ask you to consider is that Russia's adventurism is a real near-term threat; whereas, China is a problem today and a bigger problem tomorrow. Senator Kaine. Now if I could go to Dr. Hartung and General Spoehr. Mr. Hartung. Yes, I would probably rank China at a 4 and Russia at a 2. We are more capable than China in virtually every major military, you know, capability. We spend three times as much. We have a more capable navy. We have 13 times as many warheads---- Senator Kaine. I got you. If I could, I want to move to another question, but I want to hear General Spoehr's answer. Mr. Hartung. Sure. General Spoehr. Sir, I would give China a 9. We have never seen an adversary like them, and they are on a trajectory. They are growing their defense budget this year by 6.8 percent. I would give Russia a 7. Thank you. Senator Kaine. Thank you for that. I do think it is important to match spending to threat levels. Here is the next point I want to make. If we are going to make cuts--and we should always analyze whether we should--we should not make them non-strategically. I will give you a couple of examples. A few years ago, there was a big battle in the Armed Services Committee, and over my objection a decision was made to do across-the-board cuts to headquarters--not strategic cuts, just we imposed a percentage cut on headquarters. Thirty- three percent of the Pentagon personnel that were overseeing military housing were laid off. And then 3 years later, we had a massive problem about nobody was overseeing military housing. We have in the last few years reduced significantly Pentagon staff that oversee MilCon construction projects. We know of overspending on weapons systems platforms, but if you looked at the MilCon budget for like 2017 and you looked at projects and you said what percentage of these came in on time and on budget, the answer is: Who knows? We do not have anybody there to do the analysis of this. So if we are going to make cuts, we should really try to find what is fraudulent, what is abusive, what is wasteful. The across-the-board stuff, you end up hurting yourself, and then it comes back to bite you later. And then the last thing I would like to say in my last 30 seconds on this is I think it was you, Ms. Smithberger, who may have said something about inadequate testing. This is a huge problem with the Pentagon. On weapons systems, on construction projects, we do not set up the toll booths early enough and then test to see whether it is working before we just blow through them. And then the problems turn into massive problems that could have been solved much earlier. We had testimony recently in an Armed Services Committee hearing from the Office of Testing and Evaluation at the Pentagon, within the last 2 weeks, and they said every weapons system that they tested in 2020 flunked the, well, I guess it is vulnerable to a cyber attack. And that was because enough work was not done up front on the engineering and research and early testing to protect. And so I think there is significant ways that we can cut abuse or waste or inefficiency, but we may have to invest some dollars early in things like testing or the personnel to oversee construction or acquisitions if we are going to do it in a smart way rather than in an across-the- board way that could hurt us. Thank you, Mr. Chairman. Chairman Sanders. Thank you, Senator. Senator Grassley. Senator Grassley. Thank you, Mr. Chairman and the witnesses, for this hearing on a very important issue. It is so important. I would like to hear from the Defense Secretary to come and testify as well. Every year when a new defense authorization or funding bill is due, military leaders and my colleagues claim additional funding is crucial to countering our enemies and protecting our interests abroad. National defense is the number one priority of our Government, and Congress is often reluctant to deny money that military leaders say is greatly needed. However, Congress and the Pentagon need to reach an understanding that fiscal accountability and military readiness are not mutually exclusive. Earning a clean audit opinion would strengthen military readiness and boost support for increases to defense spending with both Congress as well as the taxpayer. It is crucial for our national defense that the Department of Defense can fully account for its spending. Yes, the Defense Department has completed three consecutive annual audits now. There are some signs of progress. However, the goalposts continue to shift, and we are told maybe, just maybe, we will have a clean opinion 7 years from now, nearly 40 years after Congress first passed a law requiring a clean audit. While some findings have been closed, new ones seem to be raised. One of the key findings of the audit year after year is that internal controls are weak or nonexistent. Sloppy bookkeeping, antiquated accounting systems that cannot generate reliable transaction data lead to unaccountable spending and create an environment ripe for waste, fraud, and abuse. It is these underlying systems that must be fixed before any real progress on audit can be made. We have 3 minutes, Ms. Smithberger, for a couple questions for you. The Department of Defense has competing priorities, including supporting the National Defense Strategy of 2018. Audit remediation efforts are expensive. Do you think it is a worthwhile use of limited resources to support the efforts to get a clean opinion? And how do you think the audit efforts improve accountability in other areas such as defense contract oversight over bad actors? Ms. Smithberger. Thank you, Senator, for the question and for your leadership on these issues. I do think that the audit is worth it. I think we are already seeing the payoffs where we are discovering significant weaknesses in our real property management, discovering billions of dollars of assets and equipment that we did not know that we had, and being able to-- so I think in many ways it is going to pay for itself. There are other ways that we have seen real dividends in investing in these audit processes, as Senator Kaine was mentioning. There are a number of arenas where we are not doing enough when it comes to cybersecurity, and the audit is revealing a number of those vulnerabilities. And I think it has really been the Congress pushing the Department to prioritize the audit that has really led to making a number of overdue changes, and by having those more effective and reliable systems that we are going to be able to be better at identifying contractor fraud, we are going to be better at being able to identify systemic problems that are undermining our readiness and causing waste. Senator Grassley. Also for you, my final question. The Chief Financial Officers (CFO) Act was passed way back in 1990. It has taken decades for the Department of Defense to even begin conducting a full financial statement audit, and a clean opinion is supposedly still years away. What in terms of incentives or penalties would be effective to accelerate the pace of the audit effort and ensure that progress is made and that DOD is not simply conducting an audit every year that is doomed to fail? Ms. Smithberger. Thank you for the question. So POGO was very proud to support your amendment with Senator Sanders that would actually impose financial penalties to components who are not able to meet these goals. I think what is important about this is not only the accountability, but continuing to show to the Department how seriously you are taking these issues, and then you are empowering people within the Department to make sure that these problems are addressed and so that we can accelerate the rate so that we can get to a clean audit much sooner. Senator Grassley. Yes. And then one final statement. Since Mr. Korb mentioned my name and I do appreciate working with him decades ago, we did accomplish something that particular first term--or I guess it was during the second term of Reagan, we got the False Claims Act passed that has brought $63 billion back into the Federal Treasury as a result of all of the waste and abuse and mismanagement that we pointed out in the Reagan administration first term. Thank you. I yield back. Chairman Sanders. Okay. Thank you, Senator Grassley. Is Senator Van Hollen available? I know he wants to communicate virtually. He may be tied up. Not now. All right. Well, with that, then we have a vote, I think, so let me just conclude by thanking our panelists. This is an issue, I think, that needs an enormous amount of work on the part of Congress. The amount of money that we are dealing with is staggering. The complexity of the DOD budget is quite unbelievable. And I think at the end of the day we want a strong defense, but we want to do it in a cost-effective way. And in my view, there is a lot of work that has to be done to make that agency much more cost-effective. So let me thank the panelists, let me thank the Senators, and this meeting is adjourned. [Whereupon, at 12:12 a.m., the Committee was adjourned.] ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD [Prepared statements, responses to written questions, and additional material submitted for the record follow:] Prepared Statement of Mr. Lawrence J. Korb [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Prepared Statement of Mr. William D. Hartung [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Prepared Statement of Ms. Mandy Smithberger [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Prepared Statement of Mr. Roger Zakheim [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Prepared Statement of Lieutenant General (Ret.) Thomas Spoehr [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]