Background

Since 1955, the executive branch has encouraged federal agencies to obtain  commercially available goods and services from the private sector when  the agencies determined that such action was cost-effective. The Office of  Management and Budget formalized the policy in Circular A-76, issued in  1966. Later, it issued a supplemental handbook that provided the  procedures for competitively determining whether commercial activities  should be performed in house, by another federal agency through  interservice support agreements, or by the private sector. In general, the  competition process involves the government describing work to be  performed, such as aircraft maintenance or base operating support, in a  performance work statement and soliciting private sector offers. The  government also prepares an in-house cost estimate to perform the same  work based on its most efficient organization. The government estimate is  then compared to the selected offer from the private sector to determine  who will perform the function.
We have previously reported that A-76 studies can produce cost reductions  whether the competitions are won by the public or the private sector. Cost  reductions result from efforts to achieve more efficient organizations. At  the same time, we have also noted some limitations in (1) the preciseness  of the Department of Defense’s savings estimates from A-76 studies due to  such factors as the need to offset up-front investment costs associated with  conducting the studies and implementing the results and (2) baseline  operating costs against which savings are calculated.
When contractor performance is chosen, wages and benefits are often  governed by the Service Contract Act for services or the Davis Bacon Act  for construction, which prescribes minimum pay and benefits for  contractor employees under government contracts. The Service Contract  Act of 1965 provides that pay and benefit levels be established by the  Department of Labor for certain contractor employees, including, for  example, office clerks and aircraft maintenance workers. The Davis Bacon  Act of 1931 provides for the establishment of minimum pay and benefit  levels, again to be set by the Department of Labor, for most construction  skill classifications. Some employees, however, may be covered by existing  collective bargaining agreements.
The Department of Labor is responsible for administering the provisions of  these acts. It periodically establishes and reassesses pay and benefit levels  based on a survey of the wages offered by the private sector in local  geographic areas by skill classification. It also establishes flat hourly rates  for skill classifications in different geographical areas based on the median  level of pay for those job classifications in those areas. The Department of  Labor periodically reassesses the rates and publishes updates when the  median levels change.
In terms of other benefits, the Service Contract Act and the Davis Bacon  Act require contractors to provide a minimum level of benefits.  Contractors, however, have flexibility in the types of benefits they provide.  For example, they could provide a combination of benefits, such as  retirement, and health and life insurance, as long as benefits meet or  exceed the minimum level. They also could allow employees to place some  or all the benefit amount in a 401(k) plan or receive the benefit in cash.

	Costs Reduced Primarily From Using Fewer Persons to Perform Required Work

Our analysis and discussions with government and private sector officials  that are involved in A-76 competitions continue to affirm, as we previously  reported, that most estimated cost reductions from competitions are  related to reduced personnel cost estimates—mostly a reduction in  personnel requirements. Government and contractor officials told us they  use a variety of techniques to minimize the number of personnel needed to  perform a required function. These techniques include limiting proposed  activities to the streamlined requirements detailed in the performance  work statement, substituting civilian for military workers, designing a new  work process, multiskilling (employees performing more than one skill),  and proposing modern methods and equipment to complete the tasks.
Contractor and defense officials stated that personnel reductions are key to  achieving reduced costs from A-76 competitions. For example, we  previously reported on an A-76 competition involving aircraft maintenance  at the Altus Air Force Base, Oklahoma, where the Air Force estimated cost  reductions of $20 million annually. In initiating the study, the Air Force  planned to convert its largely military workforce to civilian personnel,  either government employees or employees of a contractor, depending on  the results of the A-76 study. Either way, civilian workers were expected to  be less costly. The organization in place before the study had 1,444  authorized positions: 1,401 were military positions. After the study, the  selected government organization had 735 positions—all civilians, almost a  50-percent reduction.
A performance work statement serves as the basis for determining  personnel requirements for both government estimates and private sector  offers. Because labor represents the predominant costs in an A-76 study,  both the in-house government organization and the contractors develop  work strategies that enable them to perform the work requirements with  the minimum number of people. They also develop their personnel  requirements by determining the skill classifications needed and the  number of staff hours per classification to complete tasks over a time  period. For example, if they had an average need for 240 hours of plumbing  tasks each 40-hour week, then they would need six people with plumbing  skills. Contractors told us they use the least costly skill classification and  multiskill and multirole employees to complete the required tasks. For  simple plumbing, electrical, and carpentry tasks, a less costly maintenance  worker classification could be used, not a fully qualified electrician, for  example. Contractors also have the flexibility to use temporary or seasonal  workers to meet periodic workload needs, pay overtime, or pay higher  wages to workers in a lower pay classification to temporarily perform tasks  performed by employees in a higher classification. The government can use  many of these techniques, but it may need to obtain the cooperation of  employee groups and obtain waivers to personnel procedures.

	Impact of A-76 Competitions on Affected Employees’ Employment, Pay, and Benefits Varies

The impact on employment, pay, and benefits of individual employees  affected by A-76 studies varies depending on factors such as the results of  the competitions, the availability of other government jobs, and other more  individual factors such as retirement eligibility. Pay may also be affected by  the location and technical nature of the work. These factors make it  difficult to draw universal conclusions about the effects of A-76 decisions  on affected federal employees’ employment options, pay, and benefits. Our  analysis of the results of three A-76 case studies, one that remained a  government activity and two won by the private sector, illustrates how  federal employees may be affected. The three studies show that about half  of the civilian government employees remained in federal service, either in  the new or another government organization, with similar pay and benefits,  and most of the remaining employees received a cash incentive of up to  $25,000 to retire or separate. A small number of employees were  involuntarily separated. Further, we found that all employees that applied  for positions with winning contractors were hired. Types of benefits  provided by the contractors, such as health insurance, vacation time, and  savings plans, appeared to be similar to those offered by the government.  Results of these three cases are highlighted below and further summarized  in appendix I. The results are not projectable to the universe of employee  actions resulting from A-76 studies, but they do illustrate estimates of a  range of effects that may occur.

		Impact on Employees’ Employment, Pay, and Benefits Where Competitions Are Won by an In-House Organization

Federal employees’ employment, pay, and benefits may be adversely  affected even when the in-house organization wins an A-76 competition  because the new in-house organization typically restructures the work and  reduces the number of employees required to perform the work.  Employees may be faced with positions being downgraded or even  eliminated. However, the ultimate impact on pay and benefits of affected  employees varies, depending on factors such as availability of other federal  positions, retirement eligibility, or use of “save pay” provisions associated  with exercising employment rights under federal personnel reduction- in-force rules.
In establishing the new in-house organization, a reduction-in-force usually  occurs. To minimize disruptions that can occur as the result of a reduction-  in-force, the Department of Defense offers eligible employees a cash  incentive, up to $25,000, to retire or voluntarily separate. According to  reduction-in-force procedures, a government employee that accepts a  lower graded position is eligible to retain his/her former grade and pay for 2 years. At the end of the 2-year period, if the employee remains in the same  position, his/her grade may be lowered, but his/her current pay is not  lowered, although future pay raises may be limited. Employees who do not  obtain positions in the new organization have priority for placement in  other jobs within the Department of Defense for which they are qualified.
One case study at Wright Patterson Air Force Base, Ohio, involved studying  623 positions—428 civilian and 195 military. The in-house organization won  the competition and the number of positions was reduced to 345 civilian  positions and the military personnel were reassigned to other duties. In this  case, 83 full-time civilian positions were eliminated. Of the employees in  the positions eliminated, 28 obtained other government positions, 53 chose  voluntary retirement, and 2 were involuntarily separated.
Of the 345 employees authorized for the new organization, 310 came from  the previous organization. Available information indicated that among  those employees,  52 percent experienced a reduction in grade,  31 percent remained at the same grade level,  1 percent obtained a higher grade level, and  15 percent changed wage systems, making it difficult for us to determine  the impact on their grade level.
As mentioned previously, those employees who had reductions in grade  may not experience a decrease in actual pay or benefits.

		Impacts on Employees’ Pay and Benefits Where Competitions Are Won by the Private Sector

When a contractor wins a competition, generally positions associated with  the in-house organization are eliminated through a reduction-in-force and  all government civilian workers in the former activity must evaluate their  options. In general, this means they must obtain other government  employment, retire, or separate, as discussed previously. Employees who  retire or separate may also have the option of working for the contractor.  Separated employees have right-of-first refusal for employment with  winning contractors for positions for which they are qualified.
In the two studies we examined where contractors won, approximately  two-thirds of the affected civilian employees accepted a cash incentive to  voluntarily retire or separate. About 25 percent obtained other government  jobs and generally retained their same pay and benefit levels. The  remaining employees, less than 10 percent, were involuntarily separated.  Some of the retired and separated workers applied for a job with the  contractors and, according to the contractors’ officials, all were hired.
Contractors we spoke with indicated that they actively recruit displaced  and retired workers because they do not usually have a readily available  workforce in place to staff the new organization. Further, they stated that  they want to hire as many former government employees as possible  because it gives them an experienced workforce and also lowers their  recruiting, hiring, and training costs compared to hiring an external  workforce. We were told that all former separated or retired employees  who applied with these two contractors were hired. However, not all  separated or retired government employees sought employment with the  contractors. One contractor told us approximately 60 percent of the staff it  hired were former civilian or military employees. Another contractor  reported hiring about 20 percent.
Employees that go to work for a contractor may have a different salary  than what they had with the government, which could be higher or lower.
Salaries and benefits for most employees that provide services on  government contracts are based on the pay and benefit wage scales  established pursuant to the Service Contract Act. Contractors we spoke  with said they must minimize labor costs to win the competition—first  against other competing contractors and then against the in-house  government estimate. Therefore, they do not typically submit offers with  higher pay and benefit levels than the minimum established by the  Department of Labor under the Service Contract Act. Thus, while the  contract labor rates can differ either positively or negatively for a former  government employee, for covered positions, the contractor must pay  wages that prevail in a given geographic area.
In the two contractor case studies, information was not readily available to  identify precise changes in pay for the former government employees who  had accepted employment with the winning contractors. In general, for the  one contractor where we analyzed pay changes, we identified instances  where pay rates were less and in other instances where pay rates were  more than before. However, the precise difference was not always clear  because of limited information on employees’ previous salaries. In many  instances, these former government employees received a cash incentive to  leave government service and were also receiving federal retirement  benefits.
In terms of benefits, table 1 shows that the government and contractor  employees in our case studies were provided many of the same types of  benefits. However, comparing actual benefits was not possible because  data were not readily available on benefit amounts for individual  employees. In addition, some government employee benefits were  calculated based on length of service (such as vacation time) and pay (such  as contributions to the federal retirement savings plan), and participation  in many of the benefits is voluntary (such as health insurance, life  insurance, and the Thrift Savings Plan).
Some of the contractors we spoke with also offered sick or personal leave  and some contractors added additional paid vacation time for length of  service.

	Agency Comments and Our Evaluation

In oral comments on a draft of this report, on February 23, 2001, the Deputy  Under Secretary of Defense for Installations concurred with the report’s  findings. Technical comments were also provided and were incorporated as  appropriate.

	Scope and Methodology

To determine how A-76 competitions have reduced estimated costs, we  relied on our review of A-76 savings and a separate review of the status of  the Department of Defense’s competitive sourcing program. We also  discussed this issue with contractor representatives who had participated  in A-76 competitions.
To determine the impact of A-76 competitions on employment, and on  estimated pay and benefits, we judgmentally selected two studies at Wright  Patterson Air Force Base, Ohio (one where contractors were selected and  one where the in-house government organization was selected) and one  study that contractors won at Tyndall Air Force Base, Florida. These  studies were selected because they involved a large number of positions,  resulted in both in-house and contractor decisions, and were completed  within the past few years to better ensure availability of data. We sought to  determine the employment options for employees involved in these three  studies as well as the impact on their estimated pay and benefits through  interviews and analyses of documentation from defense contracting and  personnel officials and contractor representatives. We also interviewed 79  of the 82 former civilian or military government employees that went to  work for the contractor that won the Tyndall civil engineering segment of  the competition. However, our analyses were constrained due to limited  available data concerning individual former employees. For example, base  personnel offices did not track what happened to personnel affected by a  specific A-76 study and could not provide us with exact government salary  information for employees that went to work for contractors. We did not  independently verify the pay and benefit estimates provided by the  government or the contractors. Therefore, we could only estimate the  impact on pay and benefits for these three cases. The results are not  projectable to the universe of employee actions resulting from A-76 studies,  but they do illustrate estimates of a range of effects that may occur.
We conducted our review from August 2000 through January 2001 in  accordance with generally accepted government auditing standards.
As agreed with your office, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days after the  date of this letter. At that time, we will send copies of the report to the  Honorable Donald H. Rumsfeld, Secretary of Defense; the Honorable  Mitchell E. Daniels, Director, Office of Management and Budget; and other  interested congressional committees. We will make copies of this letter  available to others upon request.
If you or your staff have any questions regarding this letter, please contact  me at (202) 512-5581. Key contributors to this assignment were  Cheryl Andrew, Margaret Morgan, Thad Rytel, and Marilyn Wasleski.

Summary Information for Three A-76 Case Studies

The following provides key information surrounding three A-76 case  studies discussed in this letter. In general, the studies indicate that savings  result from personnel reductions, whether the government or contractor  organization is selected. Displaced workers must either obtain other  government employment, retire, or separate. The studies showed that  about half of the civilian government employees remained in federal  service, either in the new or another government organization. Relatively  few workers were involuntarily separated and those employees who retired  or separated and wanted to work for the contractor were hired.
Our efforts to compare precise pay and benefits before and after the  competitions were hampered by not being able to obtain actual pay and  benefit data and the differences in pay systems and job responsibilities.  However, we were able to determine that government employees retained  in government positions had virtually no change in pay and benefits  because of pay protection provisions. Most workers employed by  contractors had their pay and benefits determined under the Service  Contract Act, which requires pay comparability to the local area and a  minimum level of benefits as determined by the Department of Labor.

	Civil Engineering Study—Wright Patterson Air Force Base, Ohio

Overview: In August 1997, Wright Patterson Air Force Base announced its  plans to conduct an A-76 study of 623 positions—428 civilian and 195  military—associated with civil engineering. Personnel involved in this  activity were responsible for general building and grounds maintenance  such as plumbing, painting, electrical, and carpentry work. The in-house  most efficient organization won the competition and as a result, the Air  Force expects to save an estimated $97 million over 6 years.
Impact on employment: The new in-house organization, which was  implemented in October 2000, consists of 345 positions, representing a  reduction of about 45 percent in the number of positions previously  associated with the activity. Figure 1 shows what happened to the civilian  personnel involved with this study.
Of the positions filled, almost 90 percent of the personnel in the new civil  engineering organization (310 employees) were previously assigned to the  former organization and almost all of the remaining employees came from  other organizations at the base. A majority of the positions that were  eliminated were military positions. The military personnel were reassigned  to other activities. Eighty-three full-time civilian positions were eliminated.  Of the employees in positions eliminated, 53 people retired and received a  $25,000 separation incentive along with their pension; 28 people found  other government positions. Only two permanent employees were  involuntarily separated and received severance pay based on their years of  service.
Impact on pay and benefits: The study results were implemented primarily  through reduction-in-force procedures. With the exception of a few  employees that experienced a salary increase by obtaining a higher grade  level, employees in the new government organization or those that found  other government jobs kept the same salary and benefits they had when  working in the previous activity. For the 310 employees in the new  government organization that were previously assigned to the organization:  52 percent experienced a reduction in grade,  31 percent remained at the same grade level,  1 percent obtained a higher grade level, and   15 percent changed wage systems, making it difficult for us to determine  the impact on their grade level.
However, according to reduction-in-force procedures, employees that  experience a reduction in grade are eligible to retain their former grade and  pay for 2 years. While at the end of the 2-year period, the employee’s grade  is lowered, the current pay would not be lowered; however, future pay  raises could be limited.

	Base Operating Support Study—Wright Patterson Air Force Base, Ohio

Overview: In May 1996, Wright Patterson Air Force Base announced its  intent to conduct an A-76 study on 499 positions—411 civilian and  88 military—associated with base operating support activities. These  activities included base supply, transportation, maintenance, a laboratory,  and a laboratory supply function. In 1998, the base awarded firm  fixed-price plus award fee contracts to two separate contractors. The Air  Force estimates the study will result in $14 million in annual savings, for a  total of almost $58 million over a 49-month contract period.
Impact on employment: As a result of the contractor win, 411 civilian  positions and all 88 military positions were eliminated through a reduction- in-force, with the military personnel being reassigned to other activities.  Figure 2 shows what happened to civilian employees as a result of this  competition.
Most of the civilian personnel whose positions were eliminated (about  75 percent) retired or voluntarily separated. These employees received a  separation incentive of up to $25,000 and in the case of those that retired, a  retirement pension. Fifty-eight other civilians (14 percent) found other  government jobs with the Air Force and generally retained their same  salary and benefit level. Another 47 people were involuntarily separated  and received separation pay based on their years of service.
According to the contracting official in charge of overseeing the contract,  46 of the affected government employees came to work for the contractor.  Almost 60 percent of these employees retired from government service.
Impact on pay and benefits: The impact on pay and benefits of each  employee varied depending on whether the displaced employee obtained  another government position, retired, separated, or went to work for the  contractor. Based upon discussions with Wright Patterson officials and our  review of federal reduction-in-force procedures, we determined that those  employees who found other government jobs generally maintained the  same pay and benefit levels they had prior to losing their base operating  support activity position. We could not, however, precisely determine the  change in salary for each individual employee that went to work for the one  contractor that hired former government employees because Wright  Patterson officials could not provide us with their actual salary  information. Instead, they gave us the grade level each employee had  achieved before leaving government service, but not the step within that  grade level. To the extent the employees may have been at the bottom steps  of their pay grades, our analysis indicated that about 60 percent of these  employees would likely have received less pay from the contractor than the  government. The higher the steps within the grade, more employees would  have received less pay under the contractor. However, at the same time, a  majority of these employees accepted employment with the contractor  after retiring from federal service and augmented their contractor pay with  their retirement annuities.
Contractor employees receive a minimum of $1.92 per hour, or about  $4,000 per year in benefits. Employees can use this amount to pay for  health benefits, invest the money in a company 401(k) plan, or take an  additional cash payment in their check. Employees are offered a variety of  benefits, including medical, dental, vision, short- and long-term disability,  and life insurance. They also receive paid vacations, holidays, and sick  time.

	Aircraft Maintenance Support and Base Operating Support Study—Tyndall Air Force Base, Panama City, Florida

Overview: In December 1994, Tyndall Air Force Base announced its intent  to conduct an A-76 study on 1,068 positions—272 civilian and 796  military—associated with aircraft maintenance and base operating  support. Three contractors won the competitions and in October 1997, the  base awarded fixed-price incentive fee contracts for its base operating  support activity and aircraft maintenance support. Air Force officials  estimated at the time of award that this A-76 study would save about  $19 million over a 5-year period compared to the previous cost of the  activity.
Impact on employment: As a result of the contractors’ win, 262 civilian  positions and 796 military positions were eliminated, with the military  personnel being reassigned to other duties. To implement the study results,  a reduction-in-force occurred. Figure 3 shows what happened to civilian  employees as a result of this competition.
About half of the civilian personnel either retired (39 percent) or  voluntarily separated (13 percent). These employees received a separation  incentive of up to $25,000 and in the case of those that retired, a retirement  pension. Forty-four percent of the civilian employees found another  government job and retained their same salary and benefit levels. About 5 percent were involuntarily separated and received separation pay based  on their years of service.
Impact on pay and benefits: We could not determine the change in salary of  each employee that went to work for the contractors because Tyndall  personnel officials did not have actual salary information accessible. We  focused our review on only the employees affected by the civil engineering  contract and interviewed 79 of the 82 former civilian or military  government employees who went to work for the contractor. Based upon  our interviews, many had retired from the military or civil service. The  consensus of the employees was that they were being paid less for similar  duties than when they were working for the government. However, for the  retired government and military workers, the combination of retiree pay  and benefits together with the pay and benefits from the contractor was  usually greater than what they had previously received. Further, they  indicated that the contractor’s wages were greater than what they could get  working in similar duties in the local private sector. The contracting official  in charge of overseeing the contract said positions were offered to all  former government employees that applied and, as of January 2001, none  had been let go.
The contracting official further told us that these employees receive a  minimum of $2.56 per hour, or about $5,300 a year, that they can apply to  various health benefits and a 401(k) plan. Employees are offered a variety  of benefits, including medical, dental, vision, 401(k), short- and long-term  disability, and life insurance. They also receive paid vacations and holidays,  but paid sick time is not provided.

	Ordering Information

The first copy of each GAO report is free. Additional copies of  reports are $2 each. A check or money order should be made out to  the Superintendent of Documents. VISA and MasterCard credit  cards are accepted, also.
Orders for 100 or more copies to be mailed to a single address are  discounted 25 percent.
Orders by mail: U.S. General Accounting Office P.O. Box 37050 Washington, DC  20013 Orders by visiting: Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders by phone: (202) 512-6000 fax: (202) 512-6061 TDD (202) 512-2537 Each day, GAO issues a list of newly available reports and  testimony. To receive facsimile copies of the daily list or any list  from the past 30 days, please call (202) 512-6000 using a touchtone  phone. A recorded menu will provide information on how to obtain  these lists.

	To Report Fraud, Waste, or Abuse in Federal Programs

Web site: http://www.gao.gov/fraudnet/fraudnet.htm  e-mail: fraudnet@gao.gov  1-800-424-5454 (automated answering system)

Summary:
What GAO Found

Office of Management and Budget Circular A-76 competitions have reduced the estimated costs of Defense Department activities primarily through reducing the number of positions needed to perform activities being studied. The impact on employment, pay, and benefits of individual employees affected by A-76 studies varies depending on factors such as the results of the competitions, the availability of other government jobs, and other individual factors such as retirement eligibility. Pay may also be affected by the location and technical nature of the work. These factors make it difficult to draw universal conclusions about the effects of A-76 decisions on affected federal employees; employment options, pay, and benefits. GAO's analysis of three completed A-76 studies showed that about half of the civilian government employees remained in federal service following the studies, either in the new or another government organization with similar pay and benefits. There were relatively few involuntary separations.