Secretary of Defense Chuck Hagel has revealed the findings of the Strategic Choices in Management Review, which he ordered in March.

Hagel said he ordered the Review to “ensure the Department of Defense is prepared in the face of unprecedented budget uncertainty.” The Review had three objectives: 1) prepare for sequestration in FY2014, 2) inform the fiscal guidance for the FY2015-2019 budget plan; and 3) provide a base for the upcoming Quadrennial Defense Review.

The Review was led by Deputy Secretary of Defense Ashton Carter with support and participation by Joint Chiefs chairman General Martin Dempsey and the service secretaries and chiefs. Hagel’s marching orders were to “understand the impact of further budget reductions on the department and develop options that deal with these additional cuts.”

He cautioned that the Review “did not produce a detailed budget blueprint,” but, generated a set of options built around three possible budget scenarios: the FY2014 budget plan which cuts the budget by $150 billion over 10 years; full sequestration, which would cut the budget by $500 billion over 10 years; and a plan that would cut the budget by $150 billion over 10 years, weighted heavily in later years.

Hagel said the Review identified options in three areas: management efficiencies and overhead reductions; compensation; and strategic choices between force structure and modernization.

DoD should begin to implement efficiency reforms, regardless of changes in the budgetary situation, he said. These reforms, which could save $40 billion over 10 years, include: a 20 percent reduction in headquarters staff, which he has already ordered; making further consolidations within the Office of the Secretary of Defense (OSD); and reducing intelligence analysis at combatant command intelligence and operation centers. Hagel said he has ordered that implementing the OSD recommendations should be directed by “someone outside DoD who is deeply knowledgeable about the defense enterprise.”

In addition, he said the Review identified consolidations of regional combatant commands, reductions to defense agency missions, and additional information technology (IT) consolidations.

The Review determined that significant savings cannot be achieved without cuts to compensation and compensation-related programs, which comprise about one-half the total budget. DoD has proposed compensation-related reforms past budgets, but Congress has opposed most of them, especially TRICARE-related fee increases. The Review identified options to reform the compensation package, while maintaining a high quality force: increasing the use of private-sector insurance for providing health care to retirees; changing the calculation of basic allowance for housing; reducing overseas cost-of-living adjustments; and limiting future military and civilian pay raises.

Other compensation-related options identified in the Review were: eliminating civilian pensions for retired military personnel serving in government as civilians; ending subsidies to commissaries; and restricting availability of unemployment benefits. Hagel said implementing all the compensation-related options could achieve $100 billion in savings over 10 years.

Hagel said the Review also looked closely at force structure and modernization plans to meet the remaining $350 to $400 billion in needed savings if sequestration is fully implemented.

The Review determined that the Army could reduce end strength from 490,000 to between 420,000 and 450,000 and still execute priority missions. Army Reserve forces could likewise be reduced from 550,000 to between 490,000 and 530,000. The Review also examined options to cut up to five Air Force tactical aircraft squadrons and reduce the size of the C-130 fleet.

Hagel aid the Review identified two strategic approaches to cutting force structure and modernization that basically involve tradeoffs between capacity and capability.

One approach, Hagel said, would “trade away size for high end capability.” The active Army end strength would be cut to between 380,000 and 450,000, Marine Corps end strength would be cut from 182,000 to between 150,000 and 175,000, Navy carrier strike groups would be reduced from 11 to eight or nine, and older Air Force bombers would be retired. These cuts would be made to protect investments in long-range strike systems, upgrades to submarine cruise missiles, Joint Strike Fighter funding, and cyber capabilities and special operations capabilities. Under this approach, Hagel said the force would be much smaller and somewhat limited, but be technically dominant.

The second approach would trade-away high-end capability for capacity. DoD would sustain the capability to project regional power and have a greater presence, by making limited cuts to manpower, ships, and aircraft. This would involve stopping or slowing modernization programs, cyber advancements, and special operations forces capabilities, he said, in effect producing another “procurement holiday”

These difficult tradeoffs show, Hagel said, the problems the president and DoD face if sequestration continues. The goal of the Strategy Review was to “give the president informed options, not prejudge outcomes,” Hagel emphasized. Even so, he said, the savings from these options, will fall short of “meeting sequester-level cuts,” especially in the next five years.