From a peak of 38 percent of total awards, CPFF contracts have declined to 12 percent, well below our fiscal year 1964 goal of 19.1 percent. We estimate that at least 10 cents is saved on every dollar shifted from CPFF contracts. As a result, we have been able to reduce our fiscal year 1966 budget request by about $600 million. CPFF contracts are now used only when no other form of contract is suitable, e.g., in exploratory developments or study projects where no meaningful measure of performance can be established in advance.

REDUCING OPERATING COSTS

This third category of cost reduction actions is designed to increase the efficiency of our various supply, maintenance, communications, transportation, and other support activities. In total, our goal in this area is to achieve annual savings of $1.7 billion by fiscal year 1968. During fiscal year 1964, we actually realized savings of $757 million and the anticipated savings incorporated in the fiscal year 1966 budget request total $1.1 billion.

Since my appearance here last year, another major step forward has been taken to close unneeded Government-owned facilities. From an original list of 73 closure actions announced in 1961, the number has now grown to 669, and the recurring annual savings from $220 million to over $1 billion, after deducting all one-time closing and relocation costs.

These results have been achieved through a systematic evaluation of each category of installations by a full-time staff in the Office of the Assistant Secretary of Defense (Installations and Logistics), assisted by similar staffs in each of the military departments. Among the functional systems studied were the Defense Supply Agency's supply and distribution facilities; the record centers of all of the Services; the military ocean terminals; the naval shipyards; the Air Force supply and maintenance depots; the Strategic Air Command base structure, etc. In each case, the facilities excess to requirements were identified and placed on the closure list.

As shown below, the list of base closings announced late last year is one of the largest such actions we have taken thus far.

Summary of actions to eliminate surplus, obsolete facilities (January 20, 1961, through December 31, 1964)

Although totaling only 95 (80 in the United States), they have virtually doubled the number of military and civilian positions eliminated as well as the ultimate level of recurring annual savings. In fact, about 146,000 military and civilian personnel will be dislocated by these most recently announced closings. About 82,000 of the jobs will be moved to other locations but the remaining 64,000 positions will be eliminated.

Included in this list of 95 closures are some very large facilities: Brookley Air Force Base, at Mobile, Ala., with more than 13,000 military and civilian jobs; the Air Materiel Area of Norton Air Force Base, at San Bernardino, Calif., with about 8,500 jobs; Hunter Air Force Base, at Savannah, Ga., with about 5,800; Schilling Air Force Base, at Salina, Kans., with 5,400; Lincoln Air Force Base, at Lincoln, Nebr., with 6,800 jobs; Portsmouth Naval Shipyard in New Hampshire, with 7,600 jobs; the New York Naval Shipyard, with about 9,800 jobs; and Amarillo Air Force Base, at Amarillo, Tex., with about 7,100 jobs. Because of the magnitude of some of these installation closings, their activities will be phased out over a period of years.

Nevertheless, the impact of these base closures on the employees and communities involved will be substantial and we are very well aware of that fact. With regard to its own employees, the Defense Department, in my judgment, bears a special responsibility as an employer. It has always been my contention that the burden of major dislocations caused by our dynamic economy should not have to be borne solely by the people directly involved. Our society, within reason, should help to carry that burden, and I refer here not only to the Federal

Government but to State and local governments and industry as well. This is desirable not only on the basis of equity but also to facilitate the changes required for progress.

When I first suggested that the Defense Department, as an employer, assume the responsibility for finding a new job opportunity for every employee dislocated by a base closure, there was much skepticism among some of my associates in the Department. They pointed out that the Defense Department would be assuming a new responsibility which it had heretofore avoided on the grounds that there were other Government programs designed to take care of unemployed workers and that the cost of any new effort would have to be borne by the Department. Yet it seemed to me that both for reasons of fairness to our employees and in the Government's own interest, the Defense Department should assume that responsibility. In a program as dynamic as Defense, major changes are unavoidable and must be made in a timely fashion if the program is to be managed efficiently. As I pointed out in the spring of 1961 in connection with the initial set of President Kennedy's amendments to the fiscal year 1962 budget: "Technological progress causes obsolescence not only in weapon systems, but also in the often highly specialized facilities constructed for their deployment and maintenance. Just as we continually measure our weapon system development and procurement programs against the ever-changing yardstick of military need, so, too, we review our worldwide complex of installations in light of our present and future requirements. Facilities and installations which fail this test of true need only encumber the national security effort and waste resources."

But these necessary changes will be bitterly resisted if the full burden has to be borne solely by the employees affected. It is therefore in the national interest for the Defense Department, as an employer, to mitigate these hardships to the full extent that the law permits, and this is what we have undertaken to do. To this end, we have established a continuing employment opportunity program designed to protect the job security of our employees, to minimize personal hardships resulting from Defense program shifts, to preserve the talents and experience of our work force, and over the long run to improve the climate for change itself. Under this program every career employee, dislocated by a base closure, is being offered another job opportunity and wherever possible he is given a choice of locations.

When a displaced career employee is offered a job at some other Defense installation, we now pay the appropriate expenses of moving his family and household goods. If he accepts a lower paying job or moves to a lower pay rate area, his present pay will be continued for a period of 2 years. Where a temporary waiver of qualification requirements will facilitate the placement of a career employee in a job for which he can be trained, this is being done under special arrangements worked out by the Civil Service Commission. Where feasible, we are also undertaking special retraining programs for dislocated career employees.

To facilitate this employment opportunity program we have instituted a series of hiring freezes and limitations on permanent appointments, thus, in effect "stockpiling" jobs for career employees who are scheduled to be displaced as a result of actions taken by the Department of Defense. Just 2 months ago we established at Dayton, Ohio, a nationwide centralized referral activity. Prior to that time, we depended principally upon a regional placement program in which qualified displaced employees were matched with job openings occurring within their own civil service region. Under the new system, placement opportunities will be greatly broadened and this referral process considerably speeded. In the first 7 weeks of operation, more than 6,800 employee applications were registered in the system and about 6,500 requisitions representing about 14,000 jobs were received. These numbers are expected to grow significantly in the months ahead. Finally, we are aggressively seeking the assistance of State employment services in finding jobs in industry and the Civil Service Commission in locating job opportunities in other Government agencies.

This program requires a major effort on the part of Defense management and it costs money. But, in my judgment, it is well worth the cost and the effort involved. And in this connection may I say that I don't think early retirement is a good substitute for productive employment. It would be easier on Defense management but much harder on the individuals involved and much more costly for our Nation. No self-respecting American in his early forties would want to live on a retirement income; what he wants and should have is a productive role in our society.

Admittedly, our efforts to help our own dislocated employees may not solve the problems of the communities affected by our base closing actions, especially

when the new jobs offered them are at other places. Although our responsibility in this instance is not as direct as in the case of our own employees, we still should do what we can to alleviate the impact. It was for this reason that I established in March 1961, a new Office of Economic Adjustment under the Assistant Secretary of Defense (Installations and Logistics). This Office is designed to work with the affected communities to help them find alternative uses for whatever Government facilities may be available and to advise them on other programs of assistance offered by the Federal Government.

In working with these communities, the Office of Economic Adjustment encourages and assists local leadership to identify and exploit their own resources for economic growth. Officials of local defense firms are encouraged to participate in this effort. Members of the staff of the Office of Economic Adjustment visit the communities on their invitation and therefore the cooperation of a community's leadership is an indispensable element in the success of this effort. The Office of Economic Adjustment can serve as the focal point and provide ideas and advice and put the local officials in touch with the appropriate Government agencies. But the initiative must rest with the local community and cooperation must be forthcoming if any useful results are to be achieved. Representatives of the Office of Economic Adjustment have now completed initial visits to most of the communities affected by the base closings announced last November which have requested assistance. These include Mobile, Ala.; San Bernardino, Calif.; Savannah, Ga.; Terre Haute, Ind.; Salina, Kans.; Glasgow, Mont.; Lincoln, Nebr.; Reno, Nev.; Portsmouth, N.H.; Middletown, Pa.; Amarillo, Tex.; Moses Lake, Wash.; and Madison, Wis. These initial visits are intended to lay the organizational groundwork for continuing cooperation between the community and the Federal Government.

We have found in most cases that swift, aggressive action can usually reduce and shorten the local economic impact of these closing actions. For example, shortly after we announced that Schilling Air Force Base at Salina, Kans., would be closed by this coming June 30, a group of local leaders, accompanied by Governor-elect Avery, Congressmen Dale and Shriver and representatives of Senators Carlson and Pearson met with Deputy Secretary Vance to arrange for the assistance of the Office of Economic Adjustment. Since that time, readjustment planning has moved forward at a very good pace. By next September a vocational school will open occupying part of the facilities of the former base. Action has been taken to freeze the transfer of surplus industrial type equipment located at the base which might be of use in the school's training program. Within the past few weeks, the State legislature has passed a bill approving some quarter of a million dollars for the establishment of a technical institute which will eventually enroll about 1,500 students. Also well along in planning is a new campus for Kansas Wesleyan University. Both of these new activities will occupy former base facilities. Still another portion of Schilling will become a municipal airport. The local planning group, known as the Schilling Development Council, has "fathered" enabling State legislation permitting the creation of a public authority to buy some of the remaining property for use as a large industrial park.

The final story at Schilling has yet to be written, of course. The closing of the airbase was, by any measure, a staggering economic loss. Some 5,000 military and 350 civilian jobs, upward of a quarter of total area employment, were lost to the community by this single action, not counting those jobs indirectly supported by the military activities at Schilling. Nevertheless, the prompt response of community leaders and the Government agencies at all levels makes the prognosis, in this case, I believe, good.

But, Schilling is not an isolated case. We now have extensive evidence that when obsolete or surplus military facilities are made available for long-term civilian uses, they are frequently of even greater economic benefit to the communities immediately concerned. An analysis of what has happened to the military properties released since 1961 clearly demonstrates the wide range of productive civilian uses to which these facilities can be put:

Altogether, communities in 44 different States have been beneficiaries of these disposals, and the return to the U.S. Treasury has been over $84 million. I believe you are already familiar with some of the cases where base closings have actually resulted in the creation of more jobs for the communities involved: Presque Isle, Maine, where today a new industrial complex provides jobs for 2,000 civilians (compared with a former Defense employment of 1,200 military and civilians) and where the former SNARK missile base itself provides educational, commercial aviation, local government and industrial facilities.

The former Army signal depot facilities at Decatur, Ill., where the new private owners employ half again as many civilians as did the Army and are still adding workers.

The former Naval Ordnance Plant at York, Pa., which was sold for $9.6 million as a going concern to a private company which promptly rehired the entire work force and has since increased employment by 60 percent. The following are some more recent cases:

The same kind of "going concern" disposal so successfully employed at York, Pa., is now being developed for the Naval Ordnance Plant in Macon, Ga., and it is anticipated the sale will be completed before the end of calendar year 1965.

The University of Southwestern Louisiana now plans to open a new 3,000student, general studies campus on the site of the former New Iberia Naval Air Station, which closed in January 1965. A regional airport will be located on the airfield portion of the station. The university's payroll will more than offset the economic effect of the loss of the air station.

On April 5, 1965, Governor Connally of Texas announced that Texas A. & M. University will locate a top quality, modern, 2,500 student vocational-technical institute at James Connally Air Force Base after it closes in July 1966.

On April 9, President Johnson formally opened a 2,000-man Job Corps training center at the former Camp Gary in San Marcos, Tex. The Defense Department provided equipment needed for operation of the center. Five other major 2,000- to 2,500-man Job Corps centers are being located on former military installations. In addition, smaller Job Corps camps are being planned on several radar sites and smaller installations being released by the Defense Department.

In addition to these base closures, major changes in the defense procurement program also have an important impact on the economy, particularly on those industries and companies which are heavily dependent on defense work and on those communities in which they are located. Although we are concerned with the impact of our program on the Nation as a whole and on the individuals, firms and communities affected, both our responsibility and our capability to mitigate the impact are more limited than in the case of our own employees or the communities in which our bases are located.

We recognize our obligation to do everything we properly can to minimize the disruptive effects of changes in our programs and to assist insofar as we are able and the law permits those who are adversely affected by these changes. The Defense Department, however, cannot and should not assume responsibilities for creating a level of demand adequate to keep either the national or a local economy healthy and growing.

Actually, in the aggregate, the changes taking place in the defense program today are not as severe as those which have taken place in previous periods, notably after World War II and the Korean War. Indeed, their effects on the economy as a whole are not far different in kind or degree from those which periodically take place as a result of changes in civilian demand or technology, or the exhaustion of natural resources in a particular area. Adjustments to all of these changes can best be accomplished when the economy as a whole is expanding. Thus, the most fundamental answer to the defense impact problem is a strong and growing economy, a development which we would want to foster in any event.

There are, however, a number of measures which the Government can take to alleviate hardships on particular individuals and communities during the period of readjustment. Most of these measures are the responsibilities of other Government agencies both Federal and State. They include the maintenance of employee income during periods of readjustment, job information and placement services, training and retraining, relocation allowances, assistance to communities and, in a limited way, assistance to firms. All of these measures and others

are now being studied by the President's Committee on the Economic Impact of Defense and Disarmament and a report of their findings, conclusions, and recommendations will soon be published. I do not wish to anticipate them at this time. I do want to point out, however, that the ability of our free enterprise economy to adjust to change is one of its greatest strengths. The programs I have discussed and those which are being studied by the President's Committee are designed to facilitate the necessary shift in resources, not to impede it; they are also designed to alleviate the hardships on the individuals and communities concerned.

Returning now to the cost reduction program—in addition to terminating unnecessary operations, we are also consolidating and standardizing our operations. I have already mentioned the consolidation of the contract administration services, the contract audit activity and the ocean terminal and traffic management functions. The consolidation of the management of common supply items and services in the Defense Supply Agency continues to produce savings and promote efficiency. Operating savings alone in fiscal year 1964 amounted to $42 million and the fiscal year 1966 budget request anticipates further economies of $57 million. The following table illustrates some of DSA's accomplishments:

The final category of cost-reduction projects is concerned with the logistic support services of communications, transportation, and maintenance. These activities annually involve about $15 billion of Defense expenditures. The fiscal year 1966 budget anticipates savings of over $364 million as a result of our actions in the areas and our goal for fiscal year 1968 is to achieve annual savings of well over $500 million. As a group, these activities offer a very great potential for future savings and we intend to exploit this potential intensively.

I cannot conclude this discussion of the cost-reduction program without calling attention to the fact that we have received outstanding cooperation from our defense contractors. There is much evidence that the program is taking widespread hold in defense-related industry and that industry profits have been thereby improved rather than impeded. For example, I noticed in Lockheed's annual report for 1964 that among the factors to which that company attributed increased earnings in a year of lower sales were the following: "1. Generally improved efficiency resulting from the cost-reduction program," and "2. More work carried out under fixed price and incentive contracts rather than cost plus fixed fee." Western Electric's 1964 financial report states that "price reductions * * * also reflect the sustained program of cost reduction conducted in all of our operations ***. In manufacturing operations alone, several thousand individual cost-reduction projects were completed during the year." In defense work alone, that company reports savings of "approximately $21 million of taxpayers' money." Douglas reports that "*** the company's ability to show higher earnings on a slightly lower level of sales is further demonstration of its substantial progress in effecting greater efficiency through new management systems and cost-reduction techniques * * *. In 1964 Douglas scored well in responsiveness to the national administration's heavy emphasis on cost reduction *** These efforts had a simultaneously beneficial effect on the company's own results." Similar comments are to be found in the annual reports of other defense contractors.

This trend is indeed encouraging, especially so because our contractors account for more than 55 percent of each defense dollar spent. Their efforts will contribute importantly to our ability to meet and, indeed, exceed our present goal of $4.8 billion in cost-reduction savings by fiscal year 1968.

Mr. Chairman, this has been a rather long statement even though I have not dealt with all of the points raised in your letter to me. Mr. Ignatius and Admiral Lyle will be covering some of them in their prepared statements. I will be glad to respond to any other questions you may have.