ALA Public Policy Advocacy—Hawaii Annual Conference and Product Exhibition

1. ALA Public Policy Advocacy—HawaiiAnnual Conference and Product Exhibition

3. Hawaii is center of support • Senator Schatz • Senator Hirono • Congresswoman Gabbard • Congressman Takai Long tradition of support • Senator Inouye • Senator Akaka

4. Hawaii is center of support • Lynchpin of Pacific logistics • 170,000 military patrons • 50 percent savings

5. SITREP • DoD is targeting the commissary appropriation in its 2015 budget submission, reducing $322 million of the $1.4 billion annual appropriation in 2016, and $1 billion in 2017, leaving it with $400 million • The proposal is direct reduction to military compensation and is inciting fierce opposition. • Exchange programs are under stress • On-base business model threatened

6. System is strong but fragile and vulnerable • Convergence of factors all at once could destroy it

7. State of play • Administration recommended a $322 M cut for Fiscal 16 that begins October 1. • Congress pushed back.  HASC, HAC, SAC • Problem is SASC—Accepted the Pentagon’s $322 M cut. Three provisions to transfer costs to patrons and one provision to privatize the largest stores including Pearl Harbor.

10. Convergence of exchange challenges • SDT and base operations funding • Product and pricing restrictions—tobacco (CVS), beverage alcohol • Wage hikes (minimum and SCA) • Shrinking force structure • Commissary as destination • Commissary category encroachment (legislative proposal) • Off-base competition

11. Key questions • Is the Government going to shut down this year? • Is the commissary system going to exist next year? • What about funding for commissaries? • How will sales be effected? • What’s going to happen to the employees? • Are commissaries and exchanges going to merge? • Are exchanges going to merge? • What’s going to happen to my business with exchanges and commissaries? • What’s my Association doing about it? • What can I do to help?

12. DoD • Sustain the benefit and its core deliverables • Charter an oversight Board • Adopt best commercial practices • Operate more like a business • Do not merge the system at this time

13. MCRMC • Create a Defense Resale System • Single organization single leader, single Board, phased transition • Maintain core commissary/exchange benefits • Commissary groceries and essential items sold at cost • Create a business environment that supports implementation of best practices • Migrate DeCA from an APF organization to a NAF organization

14. BCG • Establish an overall Resale Command • Implement variable pricing and private label at DeCA • Implement “regional” market pricing • Test modest price increases to Brand Name Products • Consolidate Exchange Backroom Functions • Convert DeCA to a NAFI • Consolidate DeCA and Exchange Backroom functions.

15. Is the Government going to shut down this year?

16. Is the commissary system going to exist next year?

17. What about funding for commissaries?

18. How will sales be effected?

19. What’s going to happen to the employees?

20. Are commissaries and exchanges going to merge?

21. Are exchanges going to merge?

22. What’s going to happen to my business with exchanges and commissaries?

23. What’s my Association doing about it?

24. What can I do to help?

25. Advocating • Briefing the merits of the exchanges in the East Wing and West Wing.  Got the President of the United States and the First Lady to cite the resale system, including, exchanges for their work to support military people. • Raised the profile of military exchanges with the White House. • Increased the recognition of military exchange contributions to the military with the Chairman and ranking members of all key Congressional Committees including Defense Authorizations and Defense Appropriations.

26.  Initiated and launched the Coalition to Save our Military Shopping Benefits to increase patronage and galvanize affinity group and patron support against threats. • Worked to gain Authority in the NDAA to allow exchanges to borrow from the Treasury to finance operations. •  Worked with House Armed Services Committee, Ways and Means, Senate Finance Committees to repeal the 3 percent withholding requirement. • Worked to get relief on interchange fees in the Dodd-Frank bill.

27. Worked to turn back and discredit the following: • ·     • The Congressional Budget Office recommendation on consolidation of commissaries and exchanges, price increases, and commercially redeemable vouchers. It also results in price increases, primarily for retirees. • Findings of the Bowles Simpson Deficit Reduction Commission to reduce commissary and exchange funding and raise prices to patrons. • . S 277 as discharged by the full Senate Veterans Affairs Committee to provide benefits for injured military personnel at Camp Lejeune, North Carolina.  The bill payer was the commissary and exchange benefit. • Senator Tom Coburn (R-WV) Back in Black report that recommended consolidation of commissaries and exchanges and price increases as part of a $9 trillion deficit reduction proposal. • An amendment proposed to the 2014 National Defense Authorization Act to consolidate and increase prices.

28. Protecting tax immunity • Internet tax immunity • Protecting FAR immunity & fighting other restrictions • Protecting MWR NAF siphoning to support legitimate appropriated fund requirements • Protecting status of NAF workforce--health care, pensions • Protect private & public sector mix

29. Fighting for freedom of choice • Alcohol & Tobacco restrictions • Dietary supplements • Sugar • Fight supply chain impediments • Support open most efficient sourcing and resist unreasonable local sourcing • Support keeping commissaries open to drive exchange traffic

30. Fighting the Bangladesh provision • Protecting second destination appropriations and appropriations in other categories • Advancing Federal Financing Bank authority for exchange debt • ASER relief • Resisting outright privatization initiative • Expanding patronage in cyber and brick and mortar--Veterans

31. Shareholders have a voice The system belongs to the troops

33. 2016 Defense budget request $322 million cut to DeCA • $183 million in reduced operating costs • $139 million in “efficiencies”

34. 2016 Defense budget request • Scheduled store closures: $27.3M • Labor reduction of 200 FTEs (10.9 percent of above store level support): $18.8M • Transportation efficiencies of fresh fruits and vegetables to the Pacific: $40.8M (assumes contract start date by January 1, 2016, but is subject to change based on ACTUAL contract start date) • Cancellation of case lot sales events: $900K • Elimination of subsidy to six overseas NEXMARTs (Navy Exchanges that sell specific lines of commissary goods at cost): $3.0M

35. 2016 Defense budget request • Close stores on holidays: $4.5M • Reduce operating hours: $29.5M • Reduce days of operation (includes direct labor and contract labor reductions): $58.2M • Major impacts of reducing days and hours of operation include: • Reduction of 1,480 FTEs (in addition to the 200 above store level FTEs set forth above) • Reduces the average number of employees per store to 45 – a reduction of 6 per store

36. 2016 Defense budget request • Days of operation per week would be reduced at 183 stores: 30 stores would go from being open 7 to 5 days per week; 47 stores would decrease from 7 to 6 days a week; and 106 stores from 6 to 5 days a week. Examples of reduced hours and days include: • Kaneohe Bay Marine Corps Base Hawaii would have its weekly operating days and hours reduced from 7 days and 60 hours per week to 5 days and 49 hours per week; • Fort Irwin, California, reduced from its current posture of 7 days and 62 hours per week to 5 days and 42 hours per week; • Minot Air Force Base, North Dakota, reduced from its current 6 days and 66 hours per week to 5 days and 42 hours per week; and • Yokosuka Naval Fleet Activities, Japan, reduced from its current 7 days and 75 hours per week to 5 days and 50 hours per week. • Second and third order of effects include: • Larger crowds and longer checkout lines • Potential decrease in exchange sales: According to the Army and Air Force Exchange Service, approximately 20 to 30 percent of military exchange traffic is directly tied to customers visiting the commissary

37. 2016 Defense budget request An additional $139M reduction. • Including the cost of transportation of commissary goods shipped overseas in the price of the goods (second destination transportation (SDT))--$100M • Shifting the funding source for commissary operating supplies from the Defense Working Capital Fund (DWCF) to the commissary surcharge. --$39 M

38. 2016 Defense budget request • Authorize the collection of a fee for service for value-added commercial practices (online ordering/shopping and curb-side pickup). • Authorize the collection of a fee for the use of single-use plastic and paper bags (incentivizing patrons to supply their own reusable bags, or pay for a fee for each plastic or paper bag furnished at checkout). • Authorize a demonstration project to contract out the operation of the produce department (currently, six produce contractors supply fresh fruits and vegetables to commissaries across the United States. Under this proposed demonstration project, two of the produce contractors would also operate the produce departments of the commissaries they supply. This would be the equivalent to contracting out the operations of those produce departments).

39. 2016 Defense budget request • If the Department continues to pursue a $1B reduction in appropriated fund support of DeCA, more robust legislative relief is required to: (1) eliminate the current “sale-at-cost” model, allowing items to be sold at a markup; and (2) enable additional revenue generation by authorizing the sale of additional goods and services that are commonly available in commercial grocery stores, such as beer and wine, a variety of gift cards, greeting cards, and seasonal items. DeCA also would need additional legislative relief to run more like a business without the current statutory constraints.

40. 2016 Defense budget request • Eliminate the current “sale-at-cost” model. • Authorize markup of product and establish sales prices of products to off-set appropriated fund operating costs. • Authorize the sale of all items (except distilled spirits), sold by commercial supermarkets, to generate revenue to off-set operating costs. • Use “cost recovery” as a primary criteria in establishing and closing commissaries in non-remote U.S. locations. • Authorize purchase of goods from whatever source has the best price. • Modify the Berry Amendment to authorize the purchase of operating supplies necessary to process products (e.g., meat trays) and protective clothing in overseas areas from non-U.S. sources. • Exempt the provision of goods and services for Defense Retail Systems from the application of the Service Contract Act.

41. 2016 Defense budget request • Eliminate the current “sale-at-cost” model. • Authorize markup of product and establish sales prices of products to off-set appropriated fund operating costs. • Authorize the sale of all items (except distilled spirits), sold by commercial supermarkets, to generate revenue to off-set operating costs. • Use “cost recovery” as a primary criteria in establishing and closing commissaries in non-remote U.S. locations. • Authorize purchase of goods from whatever source has the best price. • Modify the Berry Amendment to authorize the purchase of operating supplies necessary to process products (e.g., meat trays) and protective clothing in overseas areas from non-U.S. sources. • Exempt the provision of goods and services for Defense Retail Systems from the application of the Service Contract Act.

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43. Compensation Commission Recommendation 9: Protect both access to and savings at Department of Defense commissaries and exchanges by consolidating these activities into a single defense resale organization.

44. Compensation Commission • Would decrease DoD budgetary costs and Federal outlays by $1.0 billion during FY 2016–FY 2020 and result in annual steady-state savings of $515 million by FY 2021. • Reductions result from a series of efficiencies, primarily in consolidating back office functions, logistics systems, and staffing. • Studies have projected that both financial savings and nonfinancial benefits can be achieved through a consolidation of the three exchanges.51 Including the commissaries in such a consolidation increases potential efficiencies. • Proposes a new defense resale executive team that would be responsible for evaluating, selecting, and implementing these potential efficiencies. Realized costs and savings therefore depend upon the set of efficiencies selected for implementation.

45. Compensation Commission A single organization should be established that consolidates DoD’s commissaries and three exchange systems into a single defense resale system, herein referred to as the Defense Resale Activity (DeRA).

46. Compensation Commission • A DeRA Executive Director should be appointed who reports to a consolidated and simplified BOD. The BOD should replace the boards that currently oversee each of the separate exchange systems and DeCA. The consolidated DeRA BOD should also assume the responsibilities of the Executive Resale Board and the Cooperative Efforts Board and should incorporate expertise from private-sector retail. Supporting committees should be established and empowered as needed.

47. Compensation Commission • A DeRA executive team, along with operational advisors from the current organizations, should immediately be established to define the key attributes of the new organization and plan the transition. • Creation of a single organization should facilitate consolidation of many back-end operation and support functions, alignment of incentives and policies across commissaries and exchanges, as well as consistent implementation of best practices for aligning with the needs of Service members and the Military Services.

48. Compensation Commission • Core commissary and exchange benefits should be maintained at military installations around the world by continuing the sale of groceries and essential items at cost (plus a surcharge) and other merchandise at a discount. Under the combined organization, some or all commissary staff could be converted from APF to nonappropriated funds (NAF) employees to reduce commissary employee costs.

49. Compensation Commission The branding of the current exchange systems and commissaries initially should be retained. A director for each of these branded exchange systems and the commissaries should be appointed under the DeRA Executive Director. These directors should oversee operation of these systems as needed to represent the unique needs of each military service. Personnel evaluations for these executives should be cosigned by the DeRA executive director and appropriate Service representatives. Branding and organizational structure can be modified over time by the BOD.

50. Compensation Commission DeRA should assume responsibility for the operation of exchanges but not the other organizations currently managed by NEXCOM and MCCS. If approved by the BOD, the current points of integration and shared resources can be maintained through liaison positions and formal memoranda of agreement. For example, if it is mutually advantageous to share support staff between DeRA and Marine Corps MWR, options are available to continue the arrangement that currently exists with the MCX.