59

Bolstered by its ability to utilize the ISAA, it has recently expanded into
conference management, outplacement, and contract personnel services as
well. And ISAA was just the magic tonic it needed to accelerate into the fast
lane.

Before 1990, the Grad School was unable to obtain ISAA, which, after all, is
available only to appropriated federal agencies. Not that it hadn't tried,
having recognized the tremendous competitive advantage it would provide.

But the Comptroller General had ruled—twice in fact (1978 and 1984)—that
since the Graduate School isn't a federal agency, it wasn't entitled to use the
ISAA in competing with other, private vendors.

But the Grad School solved that program by sliding authorization for ISAA
into the mammoth 1990 Agriculture Appropriations bill—thus making it the
only non-appropriated fund activity in the government to have such
authority.

Since then everything's been coming up roses, with the cost-free acquisition of
OPM's training business standing out as the crowning accomplishment in its
unrestricted growth surge.

Other factors that have aided its growth, of course, include freedom from all
federal, state and local taxes; having well-placed federal executives from
customer agencies sitting on its board of directors; and being able to provide
managers from customer agencies with paid speaking engagements. Private
companies engaging in such practices, of course, would be barred from federal
contracts or worse.

8
FPMI Communications, Inc. » 707 Fiber Street * Huntsville, Alabama 35801-5833


123

how federal training dollars are spent, particularly how much of
those dollars go towards small firms like FPMI. My
understanding is that the goal of this initiative was not
designed to hurt small businesses, and | intend to find out if
that is true.

There are also lessons to be learned from this privatization.
OPM is ahead of the other agencies with its privatization
efforts. This Subcommittee stands to gain considerable insight
into the kinds of enabling legislation needed for a successful
privatization.

This concludes my opening statement. Again, thank you,
Chairman Mica, for calling this hearing. | look forward to

hearing from the witnesses.


25

ment agencies for training services. Interagency agreements are
not proper vehicles for transactions between NAFI’s and govern-
ment agencies, end quote.

Undaunted, the graduate school still pushed for its prize and in
1990 prevailed upon Congress to grant it statutory authority to re-
ceive interagency agreements. Its authority came in the form of two
small paragraphs hidden in the middle of a 700-page farm bill
known but to a few as section 1669 of Public Law 101-624.

This sweet deal buried in a 700-page statute enables the grad-
uate school to receive noncompetitively millions of dollars of work.
Additionally and not surprisingly, it allows the graduate school to
award contracts without regard to Federal procurement law.

And what has the graduate school done with this right? First, it
has wasted no time in building its portfolio of noncompetitive inter-
agency agreements. Companies like mine can provide high quality,
professional training to Federal agencies at competitive prices, but
we cannot compete for a contract that never sees the light of day.

Second, by expanding on the definition of “training services,” the
graduate school has grabbed lucrative interagency agreements to
provide career planning and development services with NASA, the
Nuclear Regulatory Commission, and the Patent and Trade Office.

Likewise, it has provided services to a number of Federal agen-
cies. Both of these functions could be handled better and for less
money by the private sector and are only marginally related to
training.

What business area will the graduate school head into next?
Let's cite the consequences to the private sector of the merger if ac-
complished under the present terms. First, unfair competition will
continue.

Mr. Mica. If you could begin to summarize.

Mr. DuNGAN. Effectively, the graduate school competes unfairly.
It is able to syphon off millions of dollars of work without any de-
gree of competition and has a detrimental effect to the private sec-
tor. Thank you.

[The prepared statement of Mr. Dungan follows:]


COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT

WILLIAM F. CLINGER,

BENJAMIN A. GILMAN, New York

DAN BURTON, Indiana

J. DENNIS HASTERT, Illinois

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

STEVEN SCHIFF, New Mexico

ILEANA ROS-LEHTINEN, Florida

WILLIAM H. ZELIFF, Jr., New Hampshire

JOHN M. McHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

PETER BLUTE, Massachusetts

THOMAS M. DAVIS, Virginia

DAVID M. McINTOSH, Indiana

JON D. FOX, Pennsylvania

RANDY TATE, Washington

DICK CHRYSLER, Michigan

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

WILLIAM J. MARTINI, New Jersey

JOE SCARBOROUGH, Florida

JOHN B. SHADEGG, Arizona

MICHAEL PATRICK FLANAGAN, Illinois

CHARLES F. BASS, New Hampshire

STEVEN C. LATOURETTE, Ohio

MARSHALL “MARK” SANFORD, South
Carolina

ROBERT L. EHRLICH, Jr. Maryland

JR., Pennsylvania, Chairman

CARDISS COLLINS, Mlinois

HENRY A. WAXMAN, California

TOM LANTOS, California

ROBERT E. WISE, Jn., West Virginia

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

JOHN M. SPRATT, Je., South Carolina

LOUISE MoINTOSH SLAUGHTER, New
York

PAUL E. KANJORSKI, Pennsylvania

GARY A. CONDIT, California

COLLIN C. PETERSON, Minnesota

KAREN L. THURMAN, Florida

CAROLYN B. MALONEY, New York

THOMAS M. BARRETT, Wisconsin

GENE TAYLOR, Mississippi

BARBARA-ROSE COLLINS, Michigan

ELEANOR HOLMES NORTON, District of
Columbia

JAMES P. MORAN, Virginia

GENE GREEN, Texas

CARRIE P. MEEK, Florida

CHAKA FATTAH, Pennsylvania

BILL BREWSTER, Oklahoma

TIM HOLDEN, Pennsylvania

BERNARD SANDERS, Vermont
(Independent)

James L. CLARKE, Staff Director
KEVIN SABO, General Counsel
JupitH McCoy, Chief Clerk

Bup Myers, Minority Staff Director

SUBCOMMITTEE ON CIVIL SERVICE
JOHN L. MICA, Florida, Chairman

CHARLES F. BASS, New Hampshire
BENJAMIN A. GILMAN, New York
DAN BURTON, Indiana

J. DENNIS HASTERT, Illinois
CONSTANCE A. MORELLA, Maryland

JAMES P. MORAN, Virginia
BERNARD SANDERS, Vermont (Ind.)
TIM HOLDEN, Pennsylvania

EX OFFICIO

WILLIAM F. CLINGER, Jr, Pennsylvania

CARDISS COLLINS, Illinois

Georcr NesTeRCZUK, Staff Director
Ne LYNCH, Professional Staff Member
CAROLINE FiBL, Clerk
CEDRIC HENDRICKS, Minority Professional Staff

ap


119

point. However, ! would venture that in December of 1994,
when Director King was tasked by the Administration to
privatize training and investigations, that he and most
government officials would have had a hard time defining
privatization, nevertheless excluding an option. | would go as
far to say that Director King had no guidance on how to
privatize these functions. In fact, privatization guidelines from
the National Performance Review were not issued until months
later.

However, there are features of this ini

‘ive that are very
appealing, even to someone who does not generally support
privatization.

The merger with the USDA Graduate School removed a
number of employees from the federal rolls and the federal
retirement system and provided those workers an opportunity
to continue working in a field they enjoy and to continue
earning a living. Because the USDA Graduate School is a non-
appropriated fund instrumentality, any losses due to

marketplace dynamics are incurred by the Graduate School and

3


68

3. Shut down the USDA Graduate School operation, since it serves no
legitimate purpose.

4. Simplify procurement procedures so agencies can deal directly with
vendors without having to jump through ridiculously lengthy, absurdly
expensive hoops to let even the smallest contracts.

Mr. Chairman and members of the committee, thank you again for providing
the opportunity for us to be heard here today. My partner and I, as well as all
employees of FPMI Communications, greatly appreciate it.

END

7

FPMI Communications, Inc. * 707 Fiber Street » Huntsville, Alabama 35801-5833


79

Mr. Bass. Thank you very much, Mr. Wakham. I'll start with a
question for you. You’re in a rather unique position in that you've
worked in OPM on one side, and then a year or so ago, as I under-
stand it, you left their employment, started your own business, un-
derstanding the process fully and apparently, according to your tes-
timony, able to make ends meet and make your business operate,
even given the competitive disadvantage that you knew you had
from the very start.

And let's assume that this subcommittee disagrees with Mr.
King, as you said near the end of your testimony, and feels that
we're working in the public interest by privatizing training serv-
ices. How, from your perspective, can we do it legislatively in a
simple way? What are your legislative recommendations? How do
we address the problem legislatively?

Mr. WAKHAM. Well, I suggest that there might be a new look—
and OPM, of course, could be directed by this committee or an’
other to take another look at which parts ought to be privatized.

And then second, I think privatization could be achieved rather
quickly and rather easily if they were being privatized to one or
more organizations that don’t have a built-in statutory advantage
and the ability to for some purposes be governmental and for other
Purposes on different days be considered nongovernmental.

r. Bass. So again, I guess what you’re suggesting is that in
some form or fashion, we mandate that these training services can-
not be subcontracted to any agency that has conceptually a com-
petitive advantage. But I’m looking for a little handle, if you will.
For somebody who’s in the inside, what’s the best way to deal with
the problem, if you agree? I guess I’m asking the same question
again.

Mr. WakHAM. Mr. Bass, yes, in my judgment, if the USDA Grad
School, regardless of name, were, in fact, severed from the Federal
Government and did not have a mandated board of directors of
Federal agency officials who are in a position to be customers, as
well as the board of directors, and if they did not have the right
to enter into noncompetitive agreements and contracts, regardless
of their name, they would be a private firm. And my guess is that
people who work in private business would have no objection.

Mr. Bass. Thank you. I appreciate your delineating the dif-
ference between the policy decision as to whether or not we want
to privatize versus the process itself, which clearly is noncompeti-
tive at the present time.

Do any of you other three gentlemen have any comments on that
question that I just posed to Mr. Wakham?

Mr. REISCHL. If I may.

Mr. Bass. I know you address it to some extent. You rec-
ommended abolishing the USDA Graduate School, I think.

Mr. REISCHL. Yes, sir. If your question is, as I understand it—
and correct me if I miscast it here—if your question is how legisla-
tively that could be done, I don’t pretend to be an expert in legisla-
tion. However, it seems to me that there are at least several op-
tions I could see here.

One would be—perhaps the simplest would be a piece of legisla-
tion that simply prohibited government entities from being in com-
mercial profit-seeking ventures. A simpler and much smaller-scale


15

STATEMENT OF HON. SCOTT KLUG, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF WISCONSIN

Mr. KLuc. When I was asked by the Speaker last year to begin
to explore the idea of privatization, it seemed to us there were
many opportunities for the Federal Government. In fact, if you look
back at the early days of the Eisenhower administration, President
Eisenhower urged the Federal Government to get out of whatever
it was doing that competed with the private sector.

Now, that has been a nice idea in theory, but from a practical
perspective over the last 45 years, instead, we have seen in man;
cases the Federal Government continuing to run and operate and,
unfortunately, often times expanding operations which do compete
with the private sector.

I think one of the great dangers we need to worry about in this
entire discussion about downsizing government is whether we truly
downsize government by eliminating programs, or what we're sim-
ply doing is shifting names around on letterhead. And I think
that’s the case of the program this committee’s going to look at
very carefully this afternoon and which you've already worked at.

T’m obviously pleased that you're holding these hearings today on
the OPM agreement with the USDA Graduate School. And I should
say up front that I had jong discussions with Dennis Reischl, who’s
going to testify in front of this panel, earlier on. While he’s not
rom my congressional district itself, he’s from Milwaukee, which
is only about 70 miles away from Madison. And he was the one
who first flagged this entire agreement and raised the entire ques-
tion which is in front of this committee today.

Now, I think the entire problem really began with OPM’s atti-
tude on this project, which essentially said, “Here’s a government
service which has no commercial value and is not worth money
whatsoever.” If you look, for example, at a June 1995 Government
Executive article in which OPM Training Director Judith Jaffe—I
think the committee characterized correctly as contemptuous of the
idea that OPM’s training curricula would have any significant mar-
ket value.

As you're going to hear today, at the time that the USDA Agri-
culture School or Graduate School actually got this contract from
OPM, there was an offer on the table for $5 million. And so it goes
across a wide range of government services. And in this case, it
seems to me the relationship is particularly incestuous.

Because it seems to me in this case, OPM was not only inter-
ested in trying to privatize this program, but it was interested if
it could Privatize it by essentially in some ways keeping it in the
hands of an organization very closely aligned to the Federal Gov-
ernment and second keeping it in the hands of an organization
where it could guarantee the placement of many of its employees.

When it seems to me OPM’s fundamental responsibility was to,
A, shed this business, and second, if they’re going to shed it, to
make money of it—the entire idea of privatization is to get out of
competition with the private sector and not in many ways to see
itself as an employment agency, which is, I think, unfortunately,
the way OPM handled this entire approach.

Now, as you know, the USDA Graduate School classes are held
in Federal buildings, such as the Labor Department Perkins Build-


128

Specifically, we take umbrage at his characterization of our financial analysis of
the situation as something originating in "La-La land.” If anyone inhabits La-La
land in this sad tale, Mr. Chairman. it is the self-admittedly incompetent
leadership at OPM, not the authors of a proposal to buy its business.

In support of this point, Mr. Chairman, | would direct the Committee's attention to
the fact that it was Mr. King, not FPMI Communications, who was presiding over
a business that was losing, by his own account, $10,000 per day—despite
enjoying a monopolistic grip on the market

It was Mr. King. not FPMI Communications, who could not imagine a profit
margin exceeding 10%. Small wonder, since his organization had apparently
logged no profit at all in several years, and showed no signs of ever being able to
do so.

And it was Mr. King, not FPM! Communications, whose astute calculations found
it a better deal to give away not only the business itself, but all of its last quarter

revenues and business equipment—purportedly because he feared OPM might
not realize the full $5 million we had offered.

With leadership and financial acumen of that caliber, Mr. Chairman, it is not
surprising that OPM managed to lose $10,000 of the taxpayers’ money day-in
and day-out, year-in and year-out. A manager possessed of such dubious.
operating credentials is, we believe, in no position to make light of either the
validity or the sincerity of the offer we presented. Especially one coming from an
organization that has managed to grow and increase profits in the same
“declining market" Mr. King used to explain away his agency's dismal record.

We would submit, Mr. Chairman, that if anyone inhabits LaLa land, that
distinction righttully belongs, we believe, to Mr. King and the over-populated band
of managers who not only engineered OPM's chronic multi-million dollar losses,
but literally managed to give away the store in their haste to find a new federal
roost for themselves and their employees.

Finally, Mr. Chairman, we feel that only someone who is truly lost in La-La land
would believe that merely repeating the mantra "seamless, humane transition”
endlessly will be sufficient to convince anyone capable of rational thought that
this transparent scam actually had anything to do with privatization.

Thank you again, Mr. Chairman, for your time, attention, and willingness to hear
both sides of the story.

Sincerely,

nes Ke Kies &O

Dennis K. Reischl
Partner


184

DEPARTMENT OF THE ARMY

HEADOUARTERS, FORE DFTAIC
FREDERGK, MARYLAND 29702-5000

August 3, 1995

tachment 3
office of the
Inspector General

Mr. Manning Mosley
P.O. Box 21201
Philadelphia, Pennsylvania 19114

Dear Mr. Mosley:

I have researched your allegations against the us Army
Garrison, Directorate of Civilian Personnel, Training Division,
and the Office of Personnel Management (OPM), Training Division,
and the results are as follows:

The allegation that the OPM, as of Jul 1, 1995, divested
itself of the training business and was falsely operating under
the Graduate School, USDA, is not substantiated. In a letter
dated 2 Jun 95, OPM’ explained that their regional training
centers would be joining the U.S. Department of Agriculture
Graduate School effective Jul i, 1995. The OPM programs will now
continue with USDA being the training organization.

The allegation that the Fort Detrick Civilian Personnel
office (CPO), Training Branch, is ignoring the fact that the OPN
is no longer’ in the training business is not substantiated.
There is a Memorandum of Understanding between the General
Counsel of OPM and the General Counsel of USDA in which they
agreed to a transfer of responsibilities, contracts, training
aspects, etc. The Fort Detrick CPO had entered into a contract
with OPM in October 1994 for retirement training on August 8, 9,
and 19 1995, The Graduate Scho21, USDA, is now honoring all
former OPM contracts.

You had also mentioned that the USDA training catalog for
1996 misrepresented the actual relationship between the two
organizations. I have received a copy of this catalog and find
no misrepresentation on USDA's part. It states, "Old friends,
new partners", and shows both logos.

eva

Contin eas



74

2
I am sure it comes as no surprise to you that our business, capitalized
with our own funds and at our own risk, is in the field we know a good
deal about. I have brought with me materials describing our programs.
Some of them are similar to programs offered by OPM, but less costly.
That puts us on the same playing field with them and the USDA Graduate

School. If the field were level we would be natural competitors.

I want to make sure you know how much I respect many of my former
colleagues in OPM’s training organizations. When I directed the
Western Management Development Center at Denver, we had a diverse,
talented, dedicatea, 1nd productive staff. They did, and I believe
they still do, fine work. They could do even better in a competitive
environment, devoting more resources to their programs and less to
overhead. There is no question about it, however; they are quality

people who will find a way to do well, regardless of environment.

In point of fact we are not really competitors to OPM and the USDA
Graduate School, because they don’t compete. The reason they don’t
compete is that they don’t have to. So far as I know they are the only
two institutions in America that have especially conferred statutory
authority which allows them to sell training and training related
programs and services to Federal agencies without regard to any law
whatsoever concerning Federal procurement. Yes, we have competitors
but they do not include OPM and the USDA Graduate School. Their

advantage is legally mandated.


32

Testimony of Thomas F. Dungan, Jr., Management Concepts Inc.
Hearing on OPM Privatization of Training Services ~ July 26, 1995

‘Also, by expanding on the definition of "training services,” the Graduate School has grabbed lucrative
interagency agreements to provide “career planning and development" services with NASA, the
‘Nuclear Regulatory Commission and the Patent & Trademark Office (sce Attachment 4) Likewise,
it is providing "conference management services" to a number of federal agencies, Both of these
functions could be handled better and for less money by the private sector, and they are only

‘marginally related to training, What area of business is the Graduate School headed into next?

Consequences of the Proposed Transfer
{In summary, let's explore the consequences to the private sector if the merger is accomplished under

its present terms:

= unfair competition;
layoff and lost business; and
= alloss of confidence that the government will follow its own regulations.

‘And the consequences to the government and taxpayer?

® alos of the cost and quality benefits that come with competition,
TM a loss of new ideas and approaches from the marketplace;

=a shrinking tax base, and

% a step back from the principles of the National Performance Review


103

These and other factors, including the downsizing of
government, all contributed to a diminishing demand for training
and thus to serious financial losses for some of our training
programs, starting in 1991.

As you well know, Mr. Chairman, we have been hearing many
calls for a smaller, less costly government, and one way to achieve
that is to privatize -- to return to the private sector --
activities that can be performed as well there as by government.

By the fall of last year, officials of the National
Performance Review, entering Phase II of the Clinton
administration’s reinvention of government, were focusing on
privatization as another tool for meeting its goals.

On December 19, at a ceremony involving the President,
the Vice President, and several Cabinet members, a number of steps
were announced that would accelerate the downsizing of government.
Among these were OPM’s privatization of its training and
investigations units.

As my staff and I studied privatization, we found several
possible ways to proceed. You can contract out government services.
In some instances, you can sell government assets. You can form
quasi-governmental corporations such as Amtrak. Or you can simply
close down a governmental operation, fire its employees, and let
its customers sink or swim.

Mr. Chairman, some have questioned whether our training
unit, the majority of whom have now joined the staff of the USDA
Graduate School, have in fact been privatized. The fact is that
their jobs were terminated -- they were RIFed, if you will. From
that day forward, the annual cost of the privatized units -- more
than $10 million in salaries and benefits -- would not be paid by
the American public through appropriated funds, and the taxpayers
were no longer at risk of further debt.

Some 220 career civil servants had ceased to be employees
of our federal government or to be paid by the taxpayers. They
were on their own. If you ask any of them, I think they’1l tell you
that they feel extremely privatized.

But we did not stop there. Having made a decision to
separate these employees, we did not wash our hands of them. We_
felt we owed them more than that -- and owed our customers and the
taxpayers more than that.

We wanted to help our departing employees do what was
best for themselves -- and what would be best for the taxpayers as
well. Thus, early this year, we set several goals for the
privatization process:


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64

But like some government creations—the old Rural Electrification
Administration springs to mind—although the need underlying its mission
has long since disappeared, the entity has not. Indeed, it has quietly grown—
and grown—and in this case promises to grow yet more, since this one is free
to enter any business it finds attractive.

At this point, however, the USDA Grad School is no longer providing
necessary training that is otherwise unavailable. Quite the contrary. Now it's
in a head-to-head battle for market share with its private and non-profit
competitors, seeking to provide—or broker—the same services that are
already amply available.

And, in an effort to gain the upper hand in that commercial battle, it has used
its government status to obtain a competitive weapon that is not now—and
never will be—available to its private competitors: exemption from
competition under government procurement rules. Analogously, it is now the
only participant in a fist fight who is permitted the use of a firearm.

In occupying this privileged position, it provides only two identifiable
"benefits."

1. It allows agencies to avoid the competitive bidding process
2, It provides competition-sheltered employment for displaced feds.

Unfortunately, neither of these are of benefit to the public. In avoiding
competition, agencies also avoid discovering if they have obtained maximum
quality for the dollars expended. Indeed, in paying the brokerage fees
associated with supporting the middleman, it's virtually certain they haven't.

And, in keeping the broker's employees on the federal payroll—visible or
not—it continues to stick taxpayers with their cost, regardless of the fact that
the cost is now hidden in the higher rates agencies pay to cover the extra
brokerage fees.

13
FPMI Communications, inc. * 707 Fiber Street + Huntsville, Alabama 35801-5833


35

Revolving Fund Entity
Combining Statements

U.S. Office of Personnel Management

Revolving Fund

‘COMBINING STATEMENT OF FINANCIAL POSITION [Unaudited|
[Dollars in Thousands!

As of September 30, 1993

Fund Balances with Treasury (821,522) $26,130 ($2,551) sare $2,475
Accounts Receivable, Net,

Non-Federal 7 52 o ° 58
inventories 11,991 386 ° 0 12,37
Intragovernmental items:

‘Accounts Receivable, Net, Federal 13,997 41,895. 3,672 676 60.240
‘Advances, Federal 479 338 ° ° 517
Total Financial Resources 4.652 68.801 4.320 1.094 __75,667

‘Non-Financial Resources:
‘Advances, Non-Federal 260 20 1 28 309
Curriculum Development ° 1,083, ° 0 1,043
Property and Equipment, Net 4.585 4.390 74 325 9.374
Totel Non-Financial Resources 4,845 5.453 75 353 __10,726
Total Assets $9,497 $74,254 __ $1,195 __ $1,447 __ $86,393
UWABILITIES:
Funded Liabilities:
‘Accounts Payable, Non-Federal $8,782 $5,951 $747 $885 $16,065
‘Accrued Payroll and Benefits 1,979 782 213 15 2,989
Intragovernmental Liabilities:
‘Accounts Payable, Federal 3.086 2,091 262 205 5.648
Deferred Revenue, Federal 31,071. __72,466 34 718 __84.349
‘Total Funded Liabilities 24,918 __ 81,290 1.316 1.523 __ 109,047
Untunded Liabilities:
Accrued Annual Leave 3.100 1.879 o 23 4,802
Total Unfunded Liabilities 3,100 1,679 ° 23 4.802
Total Liabilities 28,018 62,969 1.316 1.548 __ 113.849
NET POSTON:
Fund Balance 18,521) (8.715) 20 (99) __ (27,456)
Total Net Poskion (98,521) __ (8,715) 920) (99) __(27,456)

‘Total Liabilities end Net Pesition $9,497 $74,254 $1,195 $1,447 __ $86,393

The accompanying notes are an integral part of these statements.

10 Financial Statements - FY 93


67

Sadly, Director King exhibited neither imagination, nor initiative—nor even
an open mind—in dealing with this situation. He opted instead for the easy,
obvious, and just plain wrong way out, choosing to keep doing business the
same old stuff the same old way, and hoping no one would notice.

The good news is that OPM's ludicrous version of privatization is easily
correctable. It's not too late to open the federal training market to
competition, and to place the overwhelming majority of OPM employees with
non-governmental employers.

Nor is it too late to get the USDA Graduate School out of the business of
being a federally-sponsored business predator, especially since the
Agriculture Appropriations bill—the source of the Graduate School's special
competitive privileges—is again before the Congress for approval.

Consequently, we ask that, at the very least, you take steps to revoke the
Grad School's completely unjustified use of interagency service agreement
authority.

But preferably, recognizing, we hope, the fundamental unfairness of this
situation and that the Grad School no longer has a legitimate function, we
ask that you simply shut it down. Please end this example of the fleecing of
the American public, and use the occasion to erect a wall of separation
between commercial business and the real business of governing.

In pursuit of that goal, we recommend four specific actions:

1. Rescind the ludicrous sweetheart deal OPM and USDA Graduate
School have engineered, applying the dollars earned by OPM's scheduled
training contracts over the last quarter of FY 95 to its accumulated debt.

2. Require OPM to conduct an aggressive outplacement effort for its
training employees among private and non-profit training vendors
serving—or wishing to serve—the federal market.

16
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104

-- To keep the training programs together, if possible,
to provide a national delivery capacity, and thus to have a
seamless transition that would involve no disruption or additional
costs for our customers.

-- To give our employees a chance to work together in a
new organization if that was what they wanted, and at the same time
to move quickly to prevent further financial loss to the public
treasury.

In order to meet those goals, we worked closely with the
training staff to help them explore their options. But the
decisions affecting their lives and careers were always theirs.

The fact that some two hundred and twenty talented
training specialists were leaving OPM did not go unnoticed. Some
private training firms expressed interest in hiring some -- or even
all -- of our employees. Some firms thought they could "buy" our
training program, just as someone might buy a hardware store or a
baseball team.

‘There were two problems with this.

First, we had no legal authority to sell our training
program. .

Second, we had nothing to sell.

The training program’s one great asset was its talented
employees. They were free agents. Private firms were free to
recruit them, but they were not ours to sell. The employees
believed, however, that there was strength in numbers -- in many of
them negotiating together with existing firms, and we helped them
do that.

Did we have other assets? We had course materials we had
developed, but they had little value because private firms
routinely obtained them, under the Freedom of Information Act, for
no cost beyond copying fees. We had some existing contracts, but
once we privatized our customers would be free to honor them or
not, as they chose. We had some used furniture, computers, office
space and the like, but they were government property and not ours
to sell.

In your letter of July 19, Mr. Chairman, you spoke of a
proposal that would have yielded the government five million
dollars for the training program, and asked why we had given away
the resources when such an offer existed.


August 1, 1995

Mr. John L. Mica
Chairman
Subcommittee on Civil Service

Dear Mr. Mica

This is to thank you again for providing the opportunity to address the
‘subcommittee on the issue of OPM's purported privatization of its training
functions, and to respond to your request for further information.

We believe several points merit consideration in response to Mr. King's assertion
that our offer to purchase OPM's training business was one it needed not view as
“serious.* They include the following:

1. We are not in the habit of making frivolous offers to purchase anything, much
less a multi-million dollar business—particularly when doing so would have
involved placing all of our corporate and personal assets on the line.

2. At the time we made the offer, we had already drawn up a business plan and
met with two banks to line up the necessary financing. Both our business plan
and the request for term and line-of-credit loans had been approved.

3. How could Mr. King know whether the offer was serious without bothering to
discuss it with us. Instead, he chose to ignore the offer for approximately a month
until his legal staff came up with the dubious assertion that OPM lacked authority
to strike a deal with any genuinely private organization. Nor, of course, did he
seek such authority. His behavior indicates that he understood all too well the
seriousness of the offer, and used the OPM legal staff to concoct an excuse that
would enable him to avoid having to deal with it. Particularly since doing so would
tikely open the door to other, harder to ignore offers from the more than 30 other
organizations that expressed interest in acquiring OPM's training business.

4. ff Mr. King felt the amount being offered was too low, or that projected profits
were improbable, he could have addressed the matter through discussions with
us. Had OPM done so, it would have leamed a) that our historical profit margin is
more than twice the number postulated by Mr. King, b) that we maintain it by
running a substantially more etficient operation than OPM, and c) that we were
certainly willing to negotiate further as to price and payment terms, depending on
what further information might come to light in the course of negotiations.

FPMI COMMUNICATIONS, INC.


45

NRC Training Facility
‘Summary of Estimated Costs
Interagency Agreement
June 1994 through May 1985
1906-95 1995-96 199697 Grand Totat
Personne! 285,592.11 305,583.55 326,974.40 1,092,598.57
Presentations 170,040.00 175,664.00 190,532.00 638,120.84
Design 131.445.48 131,446.48 131,446.48 469,283.92
Travel 12,765.71 4742084
Outside Services 23,700.00 88,557.42
5,000.00 17,850.00
stage & Shipping 4178.33, 636.
raved
lAverage of past three years
[Adjusted by 4% increase per year in

for ‘manuals televideo sessions, etc. ($50 /hout)
‘of Training Announcements, Catalogs, tc. (@30 / hour)
lEstimates
: 1,500.00
22:200.00

otal Bae



87

Statement for the Record

to

Congress of the United States
House of Representatives
Committee on Government Reform and Oversight
Subcommittee on Civil Service

from

Graduate School,
United States Department of Agriculture

Philip H. Hudson
Director

Graduate School, USDA
July 26, 1995,


privatization. While the transfer indeed removed government employees from
the federal payroll, it did not ensure that the services provided would be of the
quality and competitive prices that taxpayers deserve. I view this transfer as
more of a shifting of function rather than pure privatization.

Any activity for which government agencies rely so heavily upon the
private sector should be contracted out. Private sector businesses are readily
available to take on these contracts as opposed to sitting back and watching
more “sweetheart deals” occur within the federal government. The Workforce
Training Services transfer to the USDA Graduate School is a perfect example
of why I became involved in the contracting out of government goods and
services and why I introduced H.R. 28.

Based on my research, I understand that legislation such as mine was
introduced in Congress the last time Republicans were in the majority in this
House. Faced with the prospect of enactment of such a bill, the old Bureau of
the Budget in the Eisenhower Administration issued a policy statement
concerning reliance on the private sector. The Executive Branch argued that
legislation was not necessary and that it inappropriately would inject the
Legislative Branch into the legitimate management functions of the agencies.
So, in lieu of that legislation, an Executive policy was issued. Over the past 40
years, federal agencies have grown, the expanse of agency performance of
commercial activities has proliferated, and the extent to which government
activities duplicate and compete with the private sector has become pervasive.

In fact, the genesis of contracting out legislation dates back even further.
The history of government competition is best described by Dr. Allan V.
Burman, President Bush’s Administrator of the Office of Federal Procurement
Policy. In testimony before one of this Subcommittee’s predecessors, the
Subcommittee on Human Resources of the Committee on Post Office and Civil
Service, on January 25, 1990, he said:

"As far back as 1932, a Special Committee of the House of
Representatives expressed concern over the extent to which the
government engaged in activities which might be more.
appropriately performed by the private sector. The first and second
Hoover Commissions expressed similar concern in the 1940's and
recommended legislation to prohibit government competition with
Private enterprise. However, there was no formal policy until


OPM PRIVATIZATION INITIATIVES—TRAINING

WEDNESDAY, JULY 26, 1995

HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE ON CIVIL SERVICE,
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT,
Washington, DC.

The subcommittee met, pursuant to notice, at 2:06 p.m., in room
2247, Rayburn House Office Building, Hon. John L. Mica (chair-
man of the subcommittee) presiding.

Present: Representatives Mica, Bass, and Morella.

Staff present: George Nesterczuk, staff director; Ned Lynch, pro-
fessional staff member; Caroline Fiel, clerk; Cedric Hendricks, mi-
nority professional staff; and Elisabeth Campbell, minority staff.

Mr. Mica. Good afternoon. I would like to call to order this meet-
ing of the House Civil Service Subcommittee. This morning, the
subcommittee’s hearing is on OPM privatization and training. And
I welcome our witnesses and guests.

This hearing will provide an opportunity for the subcommittee to
assess the Office of Personnel Management’s privatization initia-
tives in the area of training. OPM’s initiative was in response to
a National Performance Review recommendation and together with
the proposal to create an Employee Stock Ownership Plan, ESOP,
out of the Office of Federal Investigations and was intended to, and
hopefully, will, save approximately $30 million over the next 5
years.

There’s no doubt that the commercial nature of training by OPM
of Federal employees does cost us $40 million a year. But it’s im-
portant that we look at this as a reimbursable activity similar to
commercially contracted training provided by a variety of other
agencies, commercial organizations, think tanks, and educational
institutions, from trade schools through some of the Nation’s lead-
ing graduate schools. It’s important that we look at it from that
perspective.

On May 16, the Office of Personnel Management and the USDA
Graduate School signed a memorandum of understanding transfer-
ring OPM’s work force training services to the graduate school ef-
fective July 1st of this year. As of the end of June, most of the re-
maining training staff had their Federal employment terminated
and began working for the graduate school.

The graduate school also acquired the training obligations for-
merly held by OPM, as well as lists of students, advertising infor-
mation, certain leased space, training equipment, software and
other assets. In developing cost analyses of five options for the pri-

qd


42

be procured was not itself sufficient to justify sole-source procurement). Additionally, of course, a
NAFI may compete in, and be awarded a contract under a competitive procurement unless otherwise
precluded by its charter from doing so.

The Department of Agriculture cites 37 Comp.Gen. 16 (1957) in support of its position that the
Graduate School is a proper recipient of an “interagency” order. In that decision we considered a
protest by a disappointed bidder on a contract for laundry service ultimately awarded to a NAFL. The
contracting officer had solicited bids from commercial services, but then procured the services from
aNAFT on the basis of a cost comparison. We decided to take no action on the protest. However,
‘we did state our view that "it would be solely a matter of administrative discretion as to whether or
not to procure the work or service from another Government agency or instrumentality when
determined that its prices are lower than all bids received in response to a formal advertisement.”
37 Comp.Gen. at 18-19.

The decision in 37 Comp.Gen. 16 concemed the propriety of the contracting officer's rejection of
the submitted commercial bids. The decision did not reach the issue of whether the procurement from
the NAFI was proper, and whether, if proper, such procurement could be done by imeragency
agreement. Accordingly, to the extent our language in 37 Comp.Gen. 16 suggests a different result
than our holding in 58 Comp.Gen. 94 (1978) and similar cases, discussed above, it should not be
followed.

Further, the Department of Agriculture contends that 58 Comp.Gen. 94 can be distinguished from
the instant case. The Secretary specifically points to language in that decision where we observed:

“This does not mean that Defense Department NAFIs must now compete with regular
commercial contracting services. NAFis exist to help foster the morale and welfare of military
personnel and their dependents. DOD Directive 1330.2; Army Regulation 230-1. Providing regular

Defense Department operating activities with goods or services is not directly related to that purpose.
This is particularly so with respect to the resale NAFls such as the exchanges, which operate for the
purpose of selling goods and services primarily to military personnel and dependents; they are not
expected to sell to the ‘Government itself, Thus, as a general proposition, we would view the sale
of goods and services by NAFIs to regular Governmental operating activities to be outside the scope
of the NAFIs’ proper functions. Accordingly, as a general rule there should be no competition
between NAFis and commercial sources simply because NAFis are not in the business of supplying
the Government with its procurement needs.” 58 Comp.Gen. at 98.

Page 53664 follows

infers from this paragraph that the “principle factor leading to the conclusions [of 58
Comp.Gen. 94] is the fact that the sale of goods and services to regular Governmental operating
activities is outside the scope of the authorized activities of the Defense non-appropriated fisnd
instrumentalties." On the other hand, the Secretary observes, the mission of the Graduate School
specifically includes cooperation with other agencies. Accordingly, he concludes that the rationale
of 58 Comp.Gen. 94 is not applicable in the instant case.

‘The analysis quoted above regarding the "scope of the NAFIs' proper fiznctions” was not the basis
of our conclusion that interagency agreements are not proper vehicles for transactions between


3

EXECUTIVE SEMINAR CENTER
P.O Bor 10760 # Golden. Colorado 80401-0610 @ (203) 235-0960 @ FAX (303) 235-0362 @ Ouisive Denvor Metro. 1-800-372-5329

STATEMENT OF E. C. WAKHAM, PRESIDENT, EXECUTIVE SEMINAR CENTER, GOLDEN,
COLORADO, BEFORE THE CIVIL SERVICE SUBCOMMITTEE, HOUSE GOVERNMENT
REFORM AND OVERSIGHT COMMITTEE, JULY 26, 1995

Mr. Chairman, Members of the Subcommittee, I am E.

Wakham, President
of the Executive Seminar Center. Ltd,, a limited liability company
organized in Colorado. My partner, and the other member of the firm is

Tom Connoliy of Oak Ridge, Tennessee

I appreciate vour invitation to appear at this hearing. Mv statement
will be brief, and then I will be glad to respond to the extent I can

to any questions you may have.

Both Mr. Connolly and I are former employees of the U. S. Office of
Personnel Management. I retired in August, 1993, and he followed suit
in February, 1994, We both had proud public service careers spanning
more than thirty vears, We organized our company on July 29, 1994, so

on this date we are a small company three days shy of one year old.

I have spent twenty seven years in the executive and management
development field. More than half of that time, fourteen years,
directed OPM's Western Management Development Center, initially at
Berkeley, California, but most of the time at Denver. I also have
experience in state government, graduate level university teaching, and
working with profit and non-profit private sector organizations. My

partner's experience complements my own.


82

Mr. Bass. It’s much easier to go down the street.

Mr. DuNGAN. My comments are based on a threshold of 100,000.
I'm not talking in terms of something lower than 100,000. I’m talk-
ing about a threshold of 100,000.

Mr. Bass. I have a couple questions I would like to get out of the
way so that we can conclude our testimony. We have a series of
votes coming up, so I’m going to ask them as quickly as I can to
get them on the record. I hope you'll excuse the formality of it.

This is for you, Mr. Wakham. You testified that during your ex-
perience at OPM, that tuitions charged were not related to the
costs of producing the training. Could you describe for us some of
the differences that you find in operating as a private company pro-
viding these services?

Mr. WAKHAM. May I say I’m glad you asked? We're a small busi-
ness, and we have to have something that sets us apart from every-
body else. In our case, we decided that it was going to be a money-
back guaranteed quality and responsiveness in price. And so price
must be kept low, period.

And if we're going to make that work, we have no choice but to
spend our revenue differently. We have to spend whatever it takes
to provide quality programs. And so that has to come first, meeting
and exceeding customers’ needs.

If there’s anything left from our revenues, and only after we
know for sure that there’s something left and money in hand, then
we can think about overhead, a new desk and all that. And then,
if there’s anything left out of that, we pay our taxes, and we divide
it up.

OPM comes at this very question backwards to us. They set up
the organization in advance. They decide on the overhead that
they’re going to have to have, including how many people are going
to be on the payroll and the facilities they are going to use for the
job that they’re given and the level of business that they choose to

lo.

They add additional costs of common services, and these are ad-
ministratively determined and also things like awards for senior
governmental officials in the agency. Then, they add on a regular
overhead. That’s a share of the director’s office costs and the IG of-
fice costs and the general counsel and the OPM library and so on.
Then, they decide at that point what they’re going to charge.

And finally, they decide how much profit they want from this
program or function, sort of just in case, but in case plans don’t go
right or in case some other part of the revolving fund gets in seri-
ous trouble. And we have no choice but to operate the way we do,
and they have no choice but to operate the way they do.

Mr. Bass. How much money do you have in your library?

Mr. WAKHAM. We use the public library, believe it or not. But
really, they have no choice but to operate the way they do, because
the Anti-Deficiency Act makes it illegal for them to go in the red.
Now, when we go in the red, it comes right out of our pockets.
That’s our investment. It’s our decision.

But it is absolutely illegal for them to go and stay in the red.
They really must operate that way. That’s a function of their being
a different kind of animal than us.


OPM PRIVATIZATION INITIATIVES—TRAINING

HEARING

BEFORE THE

SUBCOMMITTEE ON
CIVIL SERVICE

OF THE

COMMITTEE ON GOVERNMENT
REFORM AND OVERSIGHT
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
FIRST SESSION

JULY 26, 1995

Printed for the use of the Committee on Government Reform and Oversight

ae

U.S. GOVERNMENT PRINTING OFFICE
99-728 CC WASHINGTON : 1997

For sale by the U.S. Government Printing Oftice
Supenntendent of Documents. Congressional Sales Office, Washington, DC 20402

ISBN 0-16-055005-X



108

Mr. Bass. Thank you very much, Mr. King. I appreciate your tes-
timony. I guess I have a series of questions here to get into the
record. But one that pops to mind is, if you were losing $10,000 a
day, what’s going on over at the USDA Graduate School?

Mr. KING. Well, Carol, Ms. Okin, would you answer the Chair’s
question on that?

Ms OKIN. Clearly, over the last several years, Mr. Chairman, the
revolving fund training program had suffered some losses. Over the
last couple of years, we had put significant improvements in the
process in place to turn that around. We were beginning to see that
happen.

But clearly, there are things in the revolving fund training pro-
gram that we managed that there were costs incurred that we were
just going to have to spend more time really getting ourselves out
of. The last quarter of the fiscal year is usually the period of time
when most of the training income comes into the organization, so
I think we would have seen a dramatic turnaround over the next
few months, which I think that the grad school will benefit from.

But they are obviously taking a risk. We have had some less
than stellar performances in the training program over the last few
years. The training regional delivery centers that are one of the
key components of the program being transferred, or the work
being transferred, had been in the red for the last few years.

So they are taking a risk to turn that program around. I think
it can be done. I think the grad school has some of the mechanisms
and means to do that. But it is, in fact, a risk.

Mr. Kinc. And the key thing is flexibility, Mr. Chairman. On
personnel issues, as I know you're very sensitive to, on personnel
issues, we have almost no flexibility under our Federal operation,
especially in the kinds of things where the market is dynamic. It
is next to impossible under our present system to really work in
a dynamic situation where you're Being market-driven.

Mr. Bass. I can certainly sympathize, and I do, with your com-
passion and concern for the welfare of the employees who would
otherwise have possibly lost their jobs if you had gone any other
route than the one you chose to take. We have heard earlier toda: ay,
especially from our first witness, Congressman Klug, that it really
is our responsibility to provide the best possible services for the
lowest possible cost.

Given the fact that the USDA Graduate School is really not a
private entity, it has a whole series of built-in advantages that pri-
vate companies don’t have, don’t you think that you might have
been able, the employee issue perhaps not withstanding, to have
been able to save substantially more money by going a different
route, even given the fact that this particular agency does have ad-
vantages and may not really be private?

Mr. KING. Carol, I know you looked at that.

Ms. OKIN. Right. Going a different route, let’s talk about that a
little bit. What we really did, Mr. Chairman, was make an agree-
ment. This memorandum of understanding that we signed on May
16th really enters into an agreement with the grad school for the
remainder of this fiscal year. We had training obligations that we
had entered into with our agencies that there was an expectation
of delivery of services for those training events and experiences.


131

page 3.

Even though these dollar amounts don’t have six or seven zeros, they do reflect
income levels for a small business. Three or four zeros mean a lot to a two person small
business partnership.

‘This is only a sample of what's going on { got so frustrated that | placed a call to
the Inspector General's office for the U.S. Army Garrison at Frederick. If it’s the job of
the IGs to “detect and prevent fraud, waste and abuse, and to promote economy,
effectiveness and efficiency within agencies" then this office apparently missed the point
about promoting economy and preventing waste, (Attachment 3).

Another key issue mentioned at your heanng is the "strong-arm tactics" used when
a government monopoly is threatened, A good example of this is what occurred on
August second. | received a phone call from an Anthony Cooper who was a former
division manager in the OPM Philadelphia office Ile was among the employees hired by
the Graduate School on July first. The reason for his call? "He heard that | was telling,
government agencies OPM was out of the training business and he wanted to clarify my
role.” Apparently some of the former OPM cmployees believe they are still government
employees with the power to "threaten and bully” civilians.

| did give him the name and number of my attorney. { also called the Graduate
School Director's office and informed them about one of their employees harassing
another private contractor.

‘AS entrepreneurs my partner and | accept the risk involved in business
competition. We're willing to let the market place dictate who gets the business based
‘on experience, quality and price; but we can’t compete against organizations who get
“special deals" that allow them to maintain a monopoly.

‘Thank you for your consideration in this matter.

Sincerely,





109

We, in order to transition in an orderly and seamless fashion, as
Director King said, looked for the best way that we could
seamlessly and quickly meet our obligations and also privatize the
training delivery function of OPM. And I think this memo of under-
standing achieves that.

They, under interagency agreement, if you will—and I’ve heard
that term used a lot this afternoon—agreed to take on our training
obligations for the remainder of this fiscal year. That’s what the
MOU entails. And to meet those obligations. And for that, there is
a $5 million projected gross receipt.

On October 1, 1995, that interagency or memorandum of under-
standing really ceases to exist. Then, the grad school and the em-
ployees who have been hired by the grad school from the Office of
Personnel Management are really in a position to seek and gather
and obtain their own commitments from the client agencies
throughout government to offer and perform training delivery serv-
ices,

I would suggest that in that sense, they're very much more on
an equal footing with some of the private sector firms that have
spoken here this afternoon. So we really have entered into a memo-
randum of understanding for the foreseeable and short-term future.

At that point, it remains the responsibility of the grad school and
the employees who work at the grad school to offer and deliver the
training that we think they can do in a very fine fashion.

Mr. KiNG. There’s another thing in this, Mr. Chairman. We're
doing a trapeze act, quite frankly, because we're going from one
swinging over to the other. You’re seeing us in mid-air. The only
way we could make the leap was, we’re talking about a revolving
fund that is critical in cash-flow. You’ve been in business. Are you
going to be dealing with me if you think in 90 days I’m not going
to be there? Or do you start moving away from me?

Second, if you tell your employees that are doing the training
and doing all of the management side and the ongoing selling, if
you will—because some of this is short-term selling—that they're
not going to be working there 90 days from now, I hate to say this,
Mr. Chairman, but it’s a human characteristic. They begin to un-
derstand that their future is not where they currently are.

By the way, we’re one of those agencies that don’t come in here
with academic discussions. We have lived through it, because we
have been doing it. The employees cease to function at the level of
effectiveness that they historically functioned at, which has been
more than reasonable.

And what would happen—and we knew it would happen—is that
our receipts would plummet, the debt would go way up, and the
value of anything that was being done there would fall. By the
way, the major factor was the interruption to the agencies, which
would be catastrophic, from their perspective.

So the idea was, how could we suspend the program and in a
short period of time, move the program into the private area, set
it up then so it would be competitive outside. And that begins real-
ly in October. You’re seeing us in transition, Mr. Chairman.

Ms. OKIN. That's correct. That’s correct.

Mr. KinG. Would that be a fair characterization of it, Carol?

Ms. OKIN. That’s correct.


30

Testimony of Thomas F. Dungan, Jr., Management Concepts Inc.
Hearing on OPM Privatization of Training Services -- July 26, 1995

In 1984, in a ruling that sprang from the grand jury probe, the Comptroller General used even
stronger words than six years earlier, and directed them squarely at the USDA Graduate School (see
Attachment 3).

“Graduate School of the Department of Agriculture. as a NAFI, is not

a proper recipient of "interagency" orders from Government agencies

for training services (..) Interagency agreements are not proper

vehicles for transactions between NAF Is and Government agencies."

Undaunted, the Graduate Schoo! still pushed for its prize, and in 1990 prevailed upon Congress to
grant it statutory authority to receive interagency agreements. This authority came in the form of two
small paragraphs, hidden in the middle of the Farm Bill, This little-known provision, known as

Section 1669 of Public Law 101-624, said the following:

364. Comp Gen 110, Decision B-214810


89

In response to the questions contained in Chairman John L. Mica’s July 19 letter, 1 offer the
following testimony

Question: What factors made the transfer attractive to the Gradyate School?

The contact to the Graduate School was made by representatives of the OPM staff who came to
explore alternatives for future placement of the training programs A key factor in pursuing the
School as an option was an employee survey in which affiliation with the Graduate School was
the most acceptable alternative, The interest expressed by the employees was a key factor in
making the transfer attractive to the Graduate School because we feel that our primary asset is a
workforce trained and firmly committed to human resource development of ‘the public service

In considering the possibility from a business perspective the School projected that additional
program units would not require increased administrative overhead at a corresponding rate. We
project that over time we can provide training services on a more cost-effective basis, therefore
saving taxpayer dollars

The addition of the OPM training programs will result in a more comprehensive and coordinated
training service to federal employees because most of the courses were not offered by the
Graduate School or were in geographic areas (i ¢ field regions) that the Schoo! did not previously
provide in-depth service, We will be able to share best practices, in order to operate more
effectively and improve quality.

Preservation of the capacity the programs provide for goverament agencies was also a key factor
in the School's interest. Members of the Schools General Administration Board who represent
the Department of Agriculture and other Federal agencies expressed a keen desire to keep the
programs operating in a viable way in order to be a resource for training needs of their employees

In the past few years, the OPM units that the Graduate Schoo! absorbed lost money on their
operations. Future years will be difficult challenges as well We firmly believe that the USDA
Graduate School provides the best opportunity for future viability and continuity of service


84

things like that that did have value. Our proposal—and we were
trying to be innovative about it. We’re a small company. We were
looking for some way to finance this that would make sense.

So in effect, what we proposed to do—and again, this is included
with our written materials, also—was to finance the acquisition, in
effect, out of the profits we felt we could derive. Now, we shot in
the blind a little bit—I'll be very frank about this—with coming up
with that price, because OPM was not exactly forthcoming or forth-
coming very rapidly with financial information.

We thought, “Well, at least we'll get on the board with an offer.”
If the assets and the revenues might be part of it that are already
booked, whatever would work out in the deal we thought was nego-
tiable, it might change the offer very considerably.

So we felt that was a reasonable approach to it, to hope to pay
for them out of profits that we were confident we could derive. We
do have 10 years’ experience as a profitable business. We thought
we could do that. But we were quite willing to negotiate from that
as a starting point.

Mr. Bass. That’s interesting.

Mr. REISCHL. Excuse me. Could I add one further thing to that?

Mr. Bass. Yes, certainly.

Mr. REISCHL. One of the other assets—and let me stress this, be-
cause I don’t want our attitude or our approach to
mischaracterized here—one of the assets we thought was there,
frankly, was the expertise of many of those OPM employees.

We were confident that if we could get many of those employees
working with us in a better structured, more efficiently structured
organization, that it could very easily be a profitable organization,
simply for the reason, as Mr. Wakham said, that we would not
have had to structure it and put the kind of overhead burdens and
administrative duplication in there that OPM is forced into. But we
pe the employees themselves were a big part of the assets, frank-

our. Bass. OK. I appreciate your response. And I would like to
ask you gentlemen—we do have some other questions which we
would like to get on the record—if at the discretion of the commit-
tee, we could pose them to you and you could respond in writing,
I would be very grateful to you.

I would also like to thank you all for appearing here today, un-
derstanding as I do the delicate nature of your relationship with
the Federal Government with whom you do a fair amount of busi-
ness and the fact of your willingness to come forward here and give
this gommittee this important information is very much appre-
ciate

And it will certainly be used in our deliberations as we try to de-
velop a solution or direction to this discussion. So thank you very
much. I apologize for having to run out the door.

And we will recess now and, just to make sure everybody’s here,
convene in 20 minutes.

{Recess.]

Mr. Bass. The Chair will next call Mr. Philip Hudson, the direc-
tor of the USDA Graduate School. Mr. Hudson, before you sit
down, as is customary, we would like to swear you in. So if you
would raise your right hand.


12

6

The FY 1996 Budget Resolution passed by the House and Senate includes
a provision in which savings from contracting out is included in the assumptions
of revenues and outlays. The budget plan language includes:

"Congress should examine federal functions to determine those that
could be more conveniently, efficiently, and effectively performed
by the private sector, and ... facilitate the privatization of these
functions."

The Conference report says:

"Since 1955, it has the policy of the federal government that it will
not provide a product or service for its own use if such product or
service can be procured from the private sectof. Each federal
agency should obtain all goods and services necessary or beneficial
to the accomplishment of its authorized functions by procurement
from private sources unless the goods or services are required by
law to be produced or performed, respectively, by the agency or
the head of an agency determines and certifies to the Congress that
government production, manufacture, or provision of a good or
service is necessary for the national defense; a good or service is
so inherently governmental in nature that it is in the public interest
to require production or performance, respectively, by a
Government employee; or there is no private source capable of
providing the good or service. The conferees recommend that
committees of jurisdiction examine impediments to accomplishing
this objective."

This language comes almost verbatim from my bill, H.R. 28. The
“Freedom from Government Competition Act,” which currently has thirty-six
cosponsors. It would require each agency of the federal government to obtain
s from the private sector through ordinary and appropriate
ion processes unless: the product or service is required by law to
be performed by the agency, or the head of an agency certifies to Congress that
in accordance with regulations promulgated by OMB that (1) in-house
performance is necessary for national defense, (2) the activity is so inherently
government in nature that it is in the public interest to require performance in-
house, or (3) there is no capable private source.



54

« Mr. Harper also stated that OPM's general counsel had determined it could
not transfer any of its assets to a private organization without first obtaining
authorizing legislation, but that the chances of obtaining it appeared slight.

Mr. Harper and the OPM attorney also contended that, although the USDA
Grad School was essentially a private organization, it could be the recipient of
OPM assets. They declined to explain the apparent contradiction with their
previous statement that OPM lacked authority to transfer assets to any
private organization. Mr. Harper ended by stating, however, that no decision
had been made in favor of any option.

© Following the meeting, we filed several FOIA requests for OPM course
materials, wishing to analyze their quality and potential value as part of the
asset base. Contrary to a publicly-reported statement by Ms. Judith Jaffe,
Associate Director for OPM's Workforce Training Service that such materials
were "available for a 32 cent stamp," however, we soon discovered that OPM
demanded sums of up to $22,500 to provide various portions of the
information. (Appendix 2)

© Following the meeting we also provided Mr. Harper with a letter OPM
agreed to distribute to its training employees. The letter (Appendix 3), dated
May 1, 1995, contained information about FPMI, described our proposal to
purchase OPM's training operation, and invited employment applications
from interested employees. In response to repeated inquiries, we
subsequently learned that it was not until after OPM had announced it's
agreement with the USDA Grad School, however, that the letter was finally
distributed to OPM employees.

* On May 4, 1995, we received a letter from Ms. Jaffe stating that the agency
was “considering a proposal” to transfer its programs to the USDA Grad
School, and that OPM employees "favored" it.

* On May 16, without further notice, with no discussion—much less
negotiation—of our proposal to buy the operation, and with no apparent effort
to obtain legislative approval to sell its business, OPM signed a deal giving its

$30 million a year operation to the Grad School—for free. (Appendix 4)
3

FPMI Communications, Inc. * 707 Fiber Street * Huntsville, Alabama 35801-5833


96

ing materials under copyright laws and otherwise protect their in-
novations by legal means.

We're required to use the GPO, while private training companies
can use faster and cheaper private printers. They have a larger
customer pool, and they can train outside of our Federal employee
customer pool. They can also train the general public.

They can accept cash from students. We couldn't and can’t. They
have a greater flexibility in purchasing—I’m sure you’ve heard a
great deal about that today, Mr. Chairman—and greater freedom
to reward and compensate their own employees. These and other
factors, including downsizing the government, all contributed to a
diminishing demand for training and, thus, to some serious finan-
cial losses for some of our training programs starting in 1991.

Mr. Chairman, we have been hearing many calls for a smaller,
less costly government. And one way to achieve that is to privatize,
to return to the private sector activities that can be performed as
well there as by government. By the fall of last year, the officials
in the National Performance Review entered phase II of the Clin-
ton administration’s reinvention of government. We are focusing on
privatization as another tool for meeting those goals.

On December 19th of last year, Mr. Chairman, at a ceremony in-
volving the President, the Vice President, and several Cabinet
members, a number of steps were announced that would accelerate
the downsizing of our government. Among these were OPM’s pri-
vatization of its training and investigations unit.

As our staff and I studied privatization, we found several pos-
sible ways to proceed. You can contract out government services in
some instances. You can sell government assets. You can form
quasi-governmental corporations, such as Amtrak, or you can sim-
ply close down our operation, fire its employees, and let its cus-
tomers sink or swim.

Mr. Chairman, we had some question as to whether our training
staff, the majority of whom have now joined the staff of the USDA
Graduate School, have, in fact, been privatized. Well, let me put it
this way. The fact is that their jobs were terminated. They were
RIF'd, if you will, which is a term of art within government, as you
know, Mr. Chairman.

From that day forward, the annual cost of those units, more than
$10 million in salaries and benefits, would not be paid by the
American public through appropriated funds. And the taxpayers
were no longer at risk of further additional debt.

Some 220 career civil servants had ceased to be employees of our
Federal Government or to be paid by the taxpayers. They were on
their own. If you ask them, I think they'll tell you that they feel
extremely privatized. As a matter of fact, Mr. Chairman, they may
have another word for it, but I would yield to their judgment.

But we did not stop there. Having made a decision to separate
these employees, we didn’t wash our hands of them. We felt we
owed them more than that and owed our customers and the tax-
payers more than that. And, Mr. Chairman, that, you're going to
see, is the underlying theme through our whole testimony and our
actions.

We wanted to help our departing employees to do the best they
could for themselves, in addition to what was best for the taxpayer.


“iy

3
The allure for Federal agencies to do business non-competitively with
OPM and the USDA Graduate School is almost irresistible. They can
legally spend hundreds of thousands, even millions, of dollars per year
with OPM or the USDA Graduate School and still avoid the time and
trouble of shopping around for quality and price by getting bids.
Believe it or not, understanding 4s 1 do something about some of the
ponderous and expensive procurement regulations, I can sympathize with

them.

Doing business with OPM or the USDA Graduate Schoo] is also a legal way
to carry over spending authority. It can be a parking place for
money. Agencies pay a premium, but when spending authority would

otherwise expire, they can afford it.

Given the monopoly system I have just described, one might suppose
OPM’s professionals are awash in cash, and can afford the absolute best
quality, Not so when I was there. Things could be different now,
suppose, but I doubt it. We took in lots of money, but the tuitions we
charged were unrelated to the costs of producing the training. Prices
were administratively determined based on a variety of factors, as you
would expect in any monopoly. Out of receipts OPM headquarters took
common services charges, overhead, and fixed facilities costs, With
the remainder we paid students’ food and lodging costs, produced the

programs, and delivered the profit headquarters required at vear-end


36

Revolving Fund Entity
Combining Statements

U.S. Office of Personne! Management

Fund
COMBINING STATEMENT OF OPERATIONS AND CHANGES IN NET POSITION (Unaudited)
{Dollars in Thousands}

For the period ended September 30, 1993

REVENUE AND FINANCING
SOURCES:

Intragovernmental Revenue:

Investigations $83,387

Human Resource Development $108,199,

DOD Testing $7,094

Other 1056

Total Revenue and Financing

Sources $83,387 __$108.199 $7,094 $1056 __ $198,736

EXPENSES:
Personnel Salaries 347.403 $19,894 $4,910 $328 «$72,535
Personnel Benefits 11,088 3,821 1,038 76 16,023
Contractual Services 23,655 67.576 45 152 91,428
Rent, Communications, and 9.940 14,753 66 mm 2.

Unilties

‘Travel and Transportation 5.793 1,875 os 135 8451

‘Supplies and Matenals 2.800 4.034 eo 6,506

Printing and Reproduction 593 2.340 8 105 3,048

Depreciation Expense 2.142 1.188 62 11 3473

‘Annual Leave Expense 157 7 0 Oo) 230

Bad Debt Expense 3 150 ° 5 158

Curriculum Development Cost,

‘Amortization 9 676 0 o 676
Total 103,074 __ 113.351 6.866 4.267 __224.558
Excess (Shortage) of Revenues
‘and Financing Sources over Total
Expenses (519.667) _ ($5,152) $228 ($211) __ ($24,822)
‘Net Position, Beginning Balance

(Restated) $1,165 ($3,563) ($349) $112 ($2,634)
ExcessiShortage) of Revenues and

Financing Sources over Total

Expenses (18.687) (8.152) 28 (241) __ (24,822)

Net Pontion, Ending Blanc S18 S21) (58715) ___ $121) __ soe) __ 27.488)
FN

‘The accompanying notes are an integral part of these statements.

Financial Statements - FY 93 " 55


48

PIU Interagency Agreement 14-94~813-007

A

INTERAGENCY AGREEMENT
EEIWEEN

U.S. PATENT AND TRADEMARK OFFICE

AND
GRADUATE SCHOOL, U.S. DEPARTMENT OF AGRICULTURE

FOR

MANAGEMENT AND ADMINISTRATION,
OF

‘THE PTO UNIVERSITY

ACQUISITION AUTHORITY ~- Economy Act U.S.C. 31 and Farm Bill, 1991.
BACKGROUND

PTO University was created to ensure that our employees would not be displaced de to
‘the demands made by a more sophisticated PTO workplace environment. New taining
‘approaches are needed to address specific worker learning problems associated with
changes anticipated to meet future demands. PTO University is prepared to:

+ Provide college tition assistance programs,
+ Award certificates of competency, and initiate work towards completion of
AAJBA degrees in critical and shart

+ Provide a competency-based curriculum tied to fature occupational paths,
. is ‘assistance.

‘Training and educational objectives are balanced to meet the needs of the individual as
‘well as the needs of PTO, in accordance with specific performance targctx. Without a

‘target, employees have no guidance, policy makers do not know what is
‘working, and comomers bave no idea where they may be served best. Employees need
to understand that throughout their careers, their most important task is to comtmus
Jeaming and applying new knowledge to the challenges they face.

1. Objective
‘The purpose of this agreement is to provide on-site contractor management and

23


117

STATEMENT OF THE
HONORABLE CONSTANCE A. MORELLA
HEARING ON OPM PRIVATIZATION:
CONTRACTING OUT TRAINING
SUBCOMMITTEE ON CIVIL SERVICE
JULY 26, 1995

| would like to thank Chairman Mica for calling this
hearing. | have followed the privatization of OPM’s training
services very closely so it is with keen interest that | listen
today. | must say Mr. Chairman, that as | read your

background paper, seeing terms like “market value," “merger,”
“employee stock ownership plan,” and "asset transfer," | had
to remind myself that this was the Government. The
Administration and this Congress are clearly pushing the
envelope with privatization, and my paradigm of government, if
not being challenged, is being "reengineered" as we speak.
Privatization is being touted as a strategy for reducing the
size of government, both its programs and personnel, and for
reinventing government. It is seen as a humane alternative to

RIFs and other fates awaiting federal workers. We heard OPM

Director James King reiterate this "humane" side of


53

« Shortly thereafter OPM Director King announced OPM would consider a
variety of options for complying with the mandate. Subsequently, OPM
developed a Privatization Options Paper which identified 5 alternatives.

* On February 14, 1995, in response to media reports of OPM interest in
sending its training business to the USDA Grad School, we wrote to Director
King, pointing out a number of problems with that course of action. By a
letter dated 3 weeks later—but which arrived over a month later—King
replied that OPM was "considering" several options.

* On March 6, 1995, concerned at reports that OPM officials were already
meeting with Grad School officials to work out the details of a transfer, we
contacted Director King with an unsolicited proposal to purchase the bulk of
OPM's reimbursable training operations. (Appendix 1)

* We subsequently contacted OPM Transition Director Kirke Harper seeking
information on OPM's financial records, the numbers, classifications and
salaries of employees, and other information necessary to prepare for
meaningful negotiations.

* A month later, on April 3, 1995, we received a letter from Director King
informing us that OPM was "drafting legislation that would authorize the
transfer of programs to successor organizations," but that currently its
“options [were] limited."

* In late April, transition director Harper agreed to meet with us to provide
some of the information we had sought. At the meeting an OPM lawyer
stated that the representatives present could not discuss our proposal, since
more than 30 other organizations had also expressed interest in acquiring
OPM'’s training business.

2
FPMI Communications, Inc. * 707 Fiber Street * Huntsville, Alabama 35801-5833


138

Reductions-in-Force

OPM issued 202 separation notices in the Workforce Training
Service (WTS) Reduction-in-Force. Of that number 71 employees
were eligible to retire and 61 elected to exercise this option.
If buyouts had been authorized for this purpose 131 of the
targeted employees would have been eligible. However buyouts
were not authorized or paid as a result of the RIF due to the
privatization of training functions.

All impacted employees have been offered assistance through OPM's
Career Transition Program. This program provides logistical and
counseling support including, but not limited to, job search,
resume/application assistance, assistance in identifying
occupations in demand, and assistance in identifying training
necessary/available to pursue careers in such occupations.

Of the WTS employees who participated in the OPM program, 91
percent have successfully completed transition. There are 16
individuals still in the process of transitioning. Five of those
are in Washington, D.C., four are in Denver, four in the San
Francisco Region, and three in the Dallas Region.

Most of those separated accepted employment with either the
Graduate School or Brookings. Many others found positions in
Federal agencies, including OPM. As of our latest information
seven people have been hired into private sector positions. Jobs
have also been located in state and local government, and at
least one individual has accepted such employment. Another person
has started a private business.

Overhead Accounts

In response to the question of how much money and how many
positions were attached to the training portion of the revolving
fund, we can state that common services of approximately $5.8
million were associated with the training portion of the
revolving fund. Based on an average annual compensation level of
$43,000, this would equate to 135 positions if all funds had been
directed to personnel expenses. As you might expect with common
services, there were positions supporting more than one program
so this is the best way to estimate the number of positions.

Elimination of revolving fund functions will result in the
elimination of related overhead activities.


1

49

‘The tonal amount of this arrwal Interagency Agreement will be chargeable to the
‘appropriations and account data cited below:

Avorcoriations Amount
81350 011712 2597 $244,398.91

RESOLUTION OF DISAGREEMENTS
Any disputes arising from disagreements may be settled mutually by both parties. Tasks

amy be added and length of he Agioement exam, and costs mary be adjusted
determined and egreed fo by both partias.

AMENDMENTS
‘This Agreement may be amended by mutual consent of both parties. Tasks may be added
a length of the Agrecoent exaded, mh exended, and costs may be adjusted as determined and

Bb

24


78

Executive branch leadership for managing the Government.” I understand

him to say that training really should be delivered by the Government

It is a truism, of course, that competition in the production and
delivery of goods and services is in the public interest absent an
overriding reason to the contrary. Previous Congresses made the laws
and gave OPM their preferential status, at the expense of the lower
costs, efficiency, and responsiveness of the private sector. I assume
they considered their reasons sufficient at the tame. If you conclude
those reasons still exist with the same force, it makes no sense to
privatize this function now. If you disagree with Director King, and
find there is no longer an overriding reason for government delivery of

training, then it certainly belongs in the private sector.

I think a real possibility exists now for half measures, driven by no
philosophy at all and meeting no real need. Training delivery either
is or isn't a core governmental function. Director King seems to say
it 1s both, and he tells us which part is to stay in government, but
not why. It is not obvious to me. Then, of the part Director King
agrees to privatize, he turns it over, without competition, to the
public sector, non-competitive USDA Grad School. Why? Why turn it
over at all to achieve no net change? Again, it is not obvious to me,
and I have heard no serious rationale. I hove you will explore these

questions.

Mr. Chairman and Members, thank you again for inviting me. I will be

slad to respond to any questions you may have.


We are pleased to be able to provide the House Committee on Government Reform and

Oversight Subcommittee on Civil Service a testimony regarding the transfer of certain training
functions of the Office of Personnel Management (OPM) to the United States Department of
Agriculture Graduate School (Graduate School).

For 74 years the Graduate School has been devoted to lifetime learning and self

improvement of government workers The School is an ideal location for OPM's training
programs for the following reasons

EFFICIENCY AND LOWER COST TO GOVERNMENT. The School's programs
help agencies contain the size of their internal training units. The School is a resource
where courses are attended by students from many agencies. The Graduate School has a
structure and a delivery system that has been operating. parallel to OPM to deliver training
services to government employees _A melding of the two organizations will effect
‘economies that will make a more efficient operation with lower costs and improved
training materials for federal agencies,

NO APPROPRIATIONS NEEDED. The Graduate School is an entrepreneurial
organization of the type considered in discussions of reinventing government, The
School's personnel and financial systems are totally independent and severed from the
federal government personnel system and the treasury.

TRAINING IS NEEDED: In these critical times agencies are in desperate need of
timely, targeted, low-cost training, The Graduate School is in the unique position of being
able t0 provide service to federal government customers in an efficient transfer of

training delivery. This allows the agencies to continue to receive the training they need
with minimal interruption.

27 wu
PLACEMENTIOF EMPLOYEES. OPM's)decision to divest thesg/programs resulted in
reduction in forcenotices to employees, fThe Graduate School has provided employment
‘opportunity. offers were made and“Lag have so far accepted@h «ters at the Graduate
and apprecimately ethers have accepted pesitiers else where)
GOVERNMENT OVERSIGHT, The Graduate School operates as a self-supporting
organization under the control and oversight of a Board appointed by the Secretary of
Agriculture, The Board includes representatives from other agencies, including OPM.

This Board exercises effective control of the School on behalf of its customers, U.S
government agencies and their employees,

ADMINISTRATIVE STRENGTHS: The Graduate School provides an administrative
framework that has been tested for 74 years. It has financial, registration, and
management information systems that can support the additional training delivery units

HUMAN RESOURCES DEVELOPMENT EXPERTISE. The School has been a
leader in adult education and training for many years. Customer agencies recognize the
importance of an in-depth knowledge of government in making human resource
development programs relevant to their needs The Schoo! has a reputation and
commitment to delivering high quality training to government employees and
organizations

Chae,


43

NAFIs and Government agencies. That conclusion was based on several critical differences berween
NAFIs and Government agencies, including coverage under the procurement and appropriation laws.
58 Comp.Gen. at 98. The analysis regarding the "scope of the NAFls proper function" was merely
an observation that, although military NAFIs for some purposes were not required to compete with
commercial enterprises, it seldom would be appropriate for a Government agency to purchase goods
and services from Defense NAFis, by any procurement method, "because NAFls are not in the
business of supplying the Government with its procurement needs.” 57 Comp.Gen. at 98.

‘We agree with the Secretary that this analysis would not be fully applicable in the instant case, given
the wide range of activities of the Graduate School. However, our agreement in this regard, indicates
that it is more likely that the Graduate School would be an appropriate recipient of a sole source or
competitive procurement comract. It does not affect our conclusion that the Graduate School, as a
NAF, is not a proper recipient of an interagency order.

Finally, Agriculture has included in its submission an intemal Civil Service Commission
memorandum dated December 13, 1978. The memorandum concludes that there is "no legal
impediment to designation of DOA [Agriculture] as the lead agency for Federal interagency training
of auditors" under the Economy Act or the Traiming Act. Further, it concludes that there is "no legal
problem with the assignment by DOA of the training responsibility to the Graduate School.”
However, this memorandum is not helpfid to DOA's position in this case. As the memorandum
correctly points out, the “issue of whether the (training] may be assigned to the Graduate School
through DOA under section 601 of the Economy Act without going through contracting-out
procedures is subject to the supervening authority of GAO to determine.” In exercising this
authority, we have determined that training may not be obtained from the Graduate School by
imeragency order either under the Economy Act or under the Training Act.

Page 53665 follows

Accordingly, it is our conclusion that neither the Economy Act, 31 U.S.C. Sec. 1534, nor the
Government Employees Training Act, 5 U.S.C. Sec. 4104 (1982), constitutes authority for the
Graduate School to enter into “interagency agreements" with Federal agencies. However, in view
of the longstanding uncertainty in this area of the law, this decision should be applied prospectively
only, and the termination of agreements now in effect will not be required.

Milton J. Socolar

for Comptroller General of the United States
Copyright (c) West Publishing Co. 1994 No claim to original U.S. Govt, works.


129

THE RETIREMENT WORKSHOP | ry

‘SEMINARS * WORKSHOPS PERSONAL PLANNING

P.O BOK 21101 PHILADELPHIA, PA 19114 (215) 824.3697

August 14, 1995

Honorable Jobn L. Mica, Chairman.
Subcommittee on Civil Service

U.S. House of Representatives

2157 Rayburn House Office Building
Washington, DC 20515-6143

Dear Congressman Mica:
My partner and I would like to respond to some of the issues raised at the recent

hearing you held on July 26, 1995 concerning the OPM privatization of their Workforce
‘Training Services.

‘We have cead the testimony given before the Subcommittee on Civil Service and
we agree with the other consulting firms. Our recommendation would be to:

First, revoke the Interagency Service Agreement authority that the Graduate has.
This would help in “leveling the playing field” for the small business attempting to solicit
tcaining business from the federal agencies. And,

Second, request that the director of OPM clarify, through a memo to all heads of
the executive branch, the intent of his agency's "privatization" of the Workforce Training
Services, This would help dispel a lot of the confusion thar still persists about the status
of the training services.

Because of the way the “privatization” was implemented most of the federal
employees that we have contacted since July 1, don’t understand the intent of
privatization or their responsibility with taxpayers’ money.

As a small business organized as a Limited Liability Company, (Attachment 1), we
have been and are continuing to solicit training business. Since the OPM "privatization"
of theic WIS my partner and I have been contacting agencies, (Attachment 2), to offer
our training services for programs that were already scheduled between July 1 and
September 30, 1995, and for any anticipated training needs for the upcoming fiscal year.



113

Ms. MICHELSON. We were cognizant of the requirement on the
one hand not to dissipate or dispose of any kind of government as-
sets without the authority of Congress. So we would have had to
come to Congress in order to sell any of the physical property or
physical assets we had. So that would have required legislative au-
thority. And then there was the question of how quickly that could
be pursued.

On the other hand, if the decision was to try to contract with the
private sector in some manner to perform the services through the
remainder of the fiscal year, we were also cognizant of contracting
procedures, competitive contracting procedures.

So if the decision was going to be to go that route, we were very
concerned that we do nothing to treat anyone in any kind of an
unevenhanded manner. So our advice was very much, “Whatever
you're doing with regard to any private sector company, do the
same with regard to all.” We advised the program to disseminate
the same information to everybody, et cetera.

So our guidance throughout this procedure was, “Here are the
bright lines prescribing our activities. Don’t overstep any of them
until you have determined that you are going to go to Congress and
try to seek authority to do this in another manner.”

Mrs. MorELLA. I know my time has probably expired, but just
a final question, then. How many employees were impacted by the
privatization? And then following up on that, what percentage were
hired by the graduate school?

Mr. KiNG. Well, first, there were 220 directly. There will be some
othe:s impacted from our central core who provided overhead sup-
port. So there will be an additional spinoff in there. I don’t have
the exact number, but I would guess it to be somewhere between
12 and 14 people that would be in their central core.

We're talking 220 people. Presently, all but 28, 87 percent, have
made a successful transition in some form, shape, or manner. But
the 28 remaining people we’re continuing to work with on
outplacement. And we'll keep the committee advised as to how
that’s going.

Mrs. MORELLA. Twenty-eight that are out of work right now?

Mr. KING. ‘Twenty-eight people, yes, about 13 percent of the en-
tire group right now are still in transition. By the way, many of
those have been offered positions and declined them because they
feel there are some other kinds of options that they would like to
exercise. But I’m still saying, until they can successfully make a
transition, whatever they wish to do, we’re going to support and
work with them.

Mrs. MoRELLA. Do you have a large percent that retired?

Mr. KinGc. A number retired. But what would you guess, Carol?

Ms. Oxin. It’s not a large percentage, but a number did opt for
retirement. And I can get that number for you specifically.

Mrs. MoRELLA. I’m just curious. I notice that your testimony
mentions 28 people.

I yield back and thank you very much.

Mr. Bass. Thank you very much, Mrs. Morella.

I have a couple very quick questions, and we'll finish up here.
There are fixed assets, typewriters and space and so forth. What
happened to them?


122

was a God-send. It was familiar digs and had a similar
philosophical approach to training. It was about all the
entrepreneurship these public servants could stand at this time.

Those are the appealing features of the initiative -- now for
the aspects of concern. It is unclear if the Graduate School
will reimburse OPM for furniture and other equipment. | hope
Director King and Dr. Hudson will discuss this aspect of the
Mou.

OPM also did not pursue a $5 million offer from FPMI, a
small, private training organization. OPM has expressed
concern over the legitimacy of this offer since it was based on
profits -- profits that OPM has never obtained, even in the
training organization’s heyday. | hope that FPMI is prepared to
establish the credibility of this offer and that OPM is prepared
to back its claim.

FPMI has also raised the issue of fair competition.
Although the combined forces of OPM training and the
Graduate School equal less than 15% of the federal training

market, this is a legitimate concern. | would like answers to

6


127

5. Even assuming, for the sake of argument, that OPM eventually received only,
say, $1 million in exchange for their moribund business, it would have been $1
million more than they got out of donating the business to the USDA Grad

School. Actually, to be more accurate, it would have been about $8 million more
than they got, since we were not asking them to throw in their last quarter's
revenues and all their equipment. To be blunt, it's hard to imagine how OPM
could have achieved a worse deal than they worked out with the Grad Schoo! —at
least trom the view of the taxpayers who are financing it.

Obviously, however, Mr. King was not interested in obtaining maximum value for
the taxpayers. The only apparent objective of this exercise was to place as many
OPM employees as possible in comfortably familiar surroundings; ie, ina

competition-sheltered monopoly in which they could continue doing business in
the same old inetficient ways.

6. Beyond the glaring inconsistency of Mr. King's simultaneous assertions that a)
the OPM training business had no value, and b) that he did not take our offer
seriously because it was not high enough, while c) concluding that giving it away
for free was the best deal available, there is the absurdity of his claim that there
was nothing of value to sell.

Mr. King would apparently have us believe that he has somehow managed to
escape all knowledge of the accounting concept of "good will" in evaluating
business entities. In short, that a business has no value other than that of the
bricks, mortar and equipment within its walls. Under King's theory, no legal,

medical, accounting, consulting or dental practice would have any value upon the
retirement of its chiet practitioner.

That, of course, is hogwash. The primary asset in any service business is its
established web of customer relationships—and we can reasonably assume that
Mr. King is not ignorant of that simple principle. Indeed, his actions show he is
keenly aware of it, since he and OPM scrambled to transfer exactly that asset—
the established business relationship with OPM's former customers—to the
Graduate School. Why else throw all of OPM's last quarter revenues to the Grad
‘School, rather than applying them to the $16 million deficit?

7. Finally, were we to accept at face value Mr. King's assertion that neither he nor
his staff took the FPMI offer seriously, that admission would tell us far more about
the attitude of OPM than the validity of our offer. In summarily dismissing a
formal, written offer to purchase the business, he displayed not the attitude one
would expect of someone serious about considering all privatization options, but
rather, that of someone intent on ignoring all but a pre-selected course of action;
in this case, shuffling off to another federal address as rapidly as possible.

In sum, Mr. Chairman, | would like to note that although we did not find it
surprising to hear Mr. King contend that neither he nor his staff took our offer
seriously, we did find his characterization of our offer extremely objectionable.


CONTENTS

Hearing held on July 26, 1995 .
Statement of:
Dungan, Thomas, Management Concepts Inc.; Dennis K. Reischl, FPMI
Communications, Inc., accompanied by Ralph Smith; and E.
Wakham, Executive Seminar Center .
Hudson, Philip H., director, USDA Graduate School .
King, James B., Director, Office of Personnel Mana;
by Carol Okin; and Mary Michelson
Hon. Scott, a Representative in

Duncan, Hon. ‘John J., a Representative in "Congress from the State

of Tennessee, prepared statement of ...
Dungan, Thomas, Management Concepts inc.
Hudson, Philip H., director, USDA Graduate

» prepared statement o
school, prepared statement

Kg, dames B., Director, Office of Personnel Management, prepared
statement of
Klug, Hon. Scott, a Representative in Congress from the State of Wiscon-
, Bre pared statement of ..
Mica’ lon. John L., a Representative in Congress from the State of
Florida, prepared statement of .
Reischl, Dennis K., FPMI Communications, Inc., prepared statement of
Wakham, E.C., Executive Seminar Center, prepared statement of ...

amp

Page
1

23

95
1b


106

In short, the privatization we achieved saved the
taxpayers $3.5 million while also helping our employees do what
they felt was best for their careers and serving our customers‘
interests.

Your letter also asked about the training unit’s
revolving fund debt, which has been accumulating since 1991 and now
totals about $16 million. We are having discussions with OMB to
determine the most efficient way of resolving that deficit, and we
have raised the issue with staff of both the House and Senate
Appropriations Committees. What is clear is that we are no longer
in the downward spiral of having good money chasing after bad.

As the training staff explored its options, they came to
believe that the two most viable options were to merge with an
existing Non-Appropriated Fund Instrumentality, such as the
Graduate School; or for them to create an Employee Stock Ownership
Plan, or ESOP.

We brought in an expert to brief employees on an ESOP.
After hearing him, our employees felt that an ESOP might not be
feasible, and most of them preferred to join an existing program
of excellent reputation rather than risk the uncertainties of
starting a new one.

For that and other reasons, the possibility of joining
the well-known and highly-respected USDA Graduate School was the
option most employees favored.

The Graduate School was founded almost 75 years ago and
has grown into a center for continuing education that serves some
50,000 students a year. In 1990, Congress gave the Graduate School
authority to enter into agreements with federal agencies.

As I understand it, the Graduate School receives no
appropriated money and supports itself through tuition fees. Its
employees are not covered by federal personnel law. They have
private health insurance and retirement plans.

The Graduate School was very interested in hiring many of
our staff. Acting on behalf of our employees, we entered into
discussions over the terms of such an arrangement.

On May 16, we and the Graduate School signed a Memorandum _

of Understanding. It provided that the Graduate School, on July 1,
would take over OPM’s interagency training obligations. The
Graduate School agreed to interview all of our training employees
who were interested in employment and to make written offers of
full-time employment, at levels comprable to its existing staff,
and with its usual benefits package, to at least 134 of our
employees.


66

employees knowledgeable in, and familiar with the federal training market.
What better place to look for them than the people who have been working in
exactly that market?

As we noted in our own letter to all OPM training employees, they would
provide an outstanding source of new employees for companies and non-profit
entities interested in expanding into this market. Which is precisely why we
have already hired several of them, despite the OPM/USDA continuation of
business as usual.

We firmly believe that if OPM had made any effort at all to truly privatize its
operation, rather than just seeking some means of hiding it elsewhere in the

government, everyone associated with this situation would have benefited—

with the obvious exception of the USDA Graduate School Here's how:

1, Taxpayers would have benefited by having OPM's employees and the
bloated administrative support costs associated with them off the federal
budget.

2. Most OPM employees would already be employed with private and non-
profit entities seeking to exploit the federal training market, many of
them with superior earnings potential.

8. Agencies would be able to find a broader, better array of choices, with
far more competition in both price and quality.

4. Private and non-profit training vendors would no longer be competing
with hobbles around their ankles, giving them a fair opportunity to win
business on the basis of the quality and price of their products and

services.

The bad news is that OPM obviously didn't even consider this approach in its
rush to find a new home somewhere inside the federal government. Instead of
taking the NPR's directive seriously, it simply attempted to avoid its effects.

15
FPMI Communications, Inc. * 707 Fiber Street » Huntsville, Alabama 35801-5833


52

Testimony of FPMl Communications, Inc.
before

The House of Representatives
Committee on Government Reform and Oversight
(Subcommittee on Civil Service)

My name is Dennis K. Reischl. I am the co-owner of FPMI Communications, a
small firm that develops training seminars and instructional publications for
federal agencies. Beside me is my business partner, Mr. Ralph Smith.

Our company employs 14 people full-time, and 5 people part-time—most of
them located in Huntsville, Alabama. We are currently in our tenth year of
operation, and have grown steadily after starting our business, literally, on
our kitchen tables.

We greatly appreciate the invitation to appear before you today, and wish to
take the opportunity to address two areas of considerable concern to us that
are related to OPM's version of training privatization. The first is the manner
in which OPM selected the USDA Graduate School as the recipient of its
business, despite our attempts to purchase it and similar expressions of
interest from more than 30 other organizations. The second area of concern
we wish to address is our experiences in competing with a federally-funded,
competition-sheltered, tax-exempt offshoot of the federal government, and our
conclusions as to the unsuitability of allowing government agencies to
sponsor commercial business ventures.

Chronology of Events

It may prove helpful to start by providing a brief chronology of the events
that have led up to OPM’s agreement to effectively transfer its training
operations to the USDA Graduate School. They include the following:

* In late 1994 the National Performance Review (NPR) directed OPM to
privatize its reimbursable training operation.

1
FPMI Communications, inc. * 707 Fiber Street * Huntsville, Alabama 35801-5833


101

savings in the long run, and all without disruption to the American
people.

I don’t believe anyone questions the right of our former employ-
ees to join the graduate school. The only question is whether we
should have helped them act in their own best interest. I believe
it was the right thing to do for all the reasons I’ve indicated.

I thank you for your patience, and I would like to respond to any
questions the Chair or the members may have.

[The prepared statement of Mr. King follows:]


26

Testimony of Thomas F. Dungan, J, Management Concepts Inc.
Hearing on OPM Privatization of Training Services ~ July 26, 1995

Mr, Chairman and Subcommittee members, I thank you for this opportunity to testify today on a
matter that is of vital interest to my firm, to private training companies in general, and ultimately to
the U.S. taxpayer. My name is Thomas F. Dungan, Jr, and Iam the founder and president of
Management Concepts Inc., a 22-year-old business providing training services to both the public and
private sectors. I have over 33 years of federal contracting experience, starting while I was in the

military.

My purpose here today is not to oppose the transfer of OPM's training functions to the USDA
Graduate School, but rather to take issue with one of the terms of that transfer, and to oppose the

Graduate School's unfair competitive practices

The term of the proposed agreement that I oppose is that which provides for the automatic transfer
to the USDA Graduate School of over $72 million’ of non-competitive work funded by federal

taxpayers.

‘Deferred revenue as reported in Audited Financial Statement af OPM; FY ‘93. See Attachment 1

1


22

some of the kinds of budget cuts we have seen this time in Con-
gress.

And it’s going to be a very difficult situation for some specific
programs of the country, just as it has been on the Base Closing
Commission. It seems to me if we’re going to sever Federal employ-
ees, you need to be very aware of the fact that they have respon-
sibilities and obligations and families.

What you do to those Federal employees has a ripple effect on
the surrounding communities. And we need to figure out some kind
of transition program and some kind of training program. But I
would argue that our fundamental respon: ity is not to be an
employee agency. Our fundamental responsibility is to deliver serv-
ices for the American taxpayers.

Mr. Mica. I thank you, and I yield to the vice chairman.

Mr. Bass. Thank you very much, Mr. Chairman. And thank you
very much, Congressman Klug, for your good testimony here today.
You mentioned in the end of your comments that the idea behind
this whole process was to provide the most cost-effective services
possible to constituents.

And we have a situation, apparently, where OPM has transferred
its work force training services, which has a budgetary value of
roughly $40 million, over to the USDA Graduate School and that
there was an offer apparently to purchase certain assets of OPM
for $5 million.

I’m wondering—if this isn’t too technical; you may not know the
answer to this—where is the leap, in your mind, from the transfer
from OPM to USDA Graduate School and the $40 million worth of
potential, the value there, the $5 million asset purchase that’s on
the table that was ignored, if you will, or may have been ignored
by OPM and how you provide the most cost-effective services to
constituents.

Perhaps rephrasing it, in your opinion, do you think that OPM
did not use the most cost-effective—and what would have tran-
spired had they taken this offer up for $5 million? Would we have
gotten a better deal, or would the taxpayers have gotten a better
deal under a different scenario?

Mr. Kiue. Well, in my opinion, the taxpayers would have gotten
a much better deal, because we would have made money on the
program. And second, we would have provided jobs in the private
sector where those companies pay taxes, in contrast to the govern-
ment continuing to hold on to responsibilities.

Now, I think OPM’s going to try to claim that it really had no
legal authority as such to sell these assets. But I don’t remember
OPM ever coming up here to Congress asking us to have the ability
and the authority to sell those assets. And that’s a mind-set that
this Congress has an obligation and a responsibility to change.

I also think you're likely to hear, if my reading of the facts is cor-
rect, that when OPM looked at a whole series of options in front
of them, it chose essentially a middle course. And again, the read-
ing of the record as best as I can understand it is that OPM chose
the middle course to do two things.

One of the primary responsibilities was not to maximize the re-
turn to the taxpayers. The two things they wanted to do were to
provide jobs to its employees and to take what in many ways was



105

That proposal came from FPMI Communications, which we are
told has about fourteen full-time employees, many of whom are
former government employees. One of its partners, Dennis Reischl,
did in fact send us a fax which expressed a wish "to purchase" the
training program.

Specifically, his fax proposed to “Pay to the federal
government, in consideration for the named business units, 10% of
all pre-tax profits FPMI derives from its combined company
operations in the first 36 months following the transfer of the OPM
business units -- up to a cumulative maximum payment of $5
million.”

There are several problems with this. First, it assumes
we could deliver these professional employees like so many
hostages. Second, insofar as the $5 million figure is concerned, it
assumes that FPMI had made a legitimate offer and could buy our
employees, and would then make profits of $50 million in the next
three years, from which it would give us five million.

Mr. Chairman, I would be less than candid if I didn’t
tell you that outcome was highly unlikely. Since 1991 the training
program has lost more than $17 million.

Nevertheless, OPM met several times with officials of
FPMI. They were always free to try to recruit our training staff,
and in fact they did hire three of them, but the vast majority of
the employees chose to work elsewhere.

Mr. Chairman, your letter also asked about some estimates
of the cost of privatization that were given in a paper our staff
prepared back in February. I must say that those figures were
highly tentative and were based on assumptions we would no longer
make. We have learned a great deal since those estimates were made.

No matter what we did, there were large fixed costs.
Based on the information we have now, we estimate that the action
we took cost about $3.5 million less than it would have cost simply
to have terminated the training staff. I am submiting detailed
explanations of those estimates.

These savings came because we moved faster than we had
anticipated, because we needed no capitalization, feasibility study
or outside consultants, and because the action we took resulted in _
less of an outlay for unemployment compensation, outplacement and
retraining, and litigation and other employee actions.


34

Testimony of Thomas F. Dungan, Jr., Management Concepts Inc.
Hearing on OPM Privatization of Training Services -- July 26, 1995

List of Attachments

1 Excerpts from Audited Financial Statement of OPM

Washington Post Column re. USDA Graduate School, 8/21/85

Comptroller General Decision B-214810, 11/29/84

4. Excerpts from Interagency Agreements Held by USDA Graduate Schoo!


115

of all those things. So, Mr. Chairman, if it quacks, waddles, swims,
and has feathers, it might pass for a duck.

Mr. Bass. Thank you very much, Mr. King. That’s all the ques-
tions I have. The committee has some other questions that they
may wish to ask, other members of the committee, and I would be
most grateful to you if you would be willing to answer them in
writing at a later date?

Mr. Kina. Absolutely.

Mr. Bass. Does anybody else have any—do you have any other
questions?

Mrs. MoreE.ta. I just might want to ask Director King, do you
have any letters from Federal agencies that support your merger
with the graduate school?

Ms. OKIN. I’m not sure I’ve seen any specific letters, but we have
many conversations with our client—have had over the many
months in preparation for this transition.

And it has been, in my experience, nothing but, “We're glad that
the services can still be provided in a seamless way. We are glad
and pleased that you are making efforts to transition this activity
into a privatized mode without disrupting our needs,” because
that’s really what we're about, is training the Federal community.

So I’m not aware of any specific letters, but I certainly am aware
of conversations and communications from the agencies who we
have delivered training to successfully for many, many years.

Mrs. MORELLA. That have been favorable?

Ms. OKIN. Yes.

Mr. Kina. By the way, the programs have gone two ways. One
went to Brookings. Some people went over to Brookings from the
unit. Some went over to the graduate school. And isn’t it the gov-
ernment programs that they'll be competing immediately?

Ms. OKIN. Right.

Mr. KinG. So, Mr. Chairman, it isn’t just lip service or some kind
of show. It’s real out there, and there is a struggle going on. And
it’s going to be in a very competitive way. And by the way, I know
you didn’t miss it, because it was clear that you had read the testi-
mony when you were asking your questions, that 96 percent of that
government training was outside of our agency. So obviously, the
folks we have talked to do compete.

And on the purchasing comments that were made, about 87 per-
cent of all the training is not done through one of these 50-page
procedures. It’s done on a single sheet of paper, and it’s moved
ahead, the vast majority of it. Is that not correct?

Ms. OKIN. I would like to just add a footnote to that. I’ve listened
this afternoon to a lot of discussion about interagency agreement
authority and the benefits that that provides for an entity who can
avail themselves of it. The fact is that, of the $40 million of the
training delivery work that I oversaw in fiscal year 1994, only $5
million was what we would call interagency agreement work; $35
million was individual training forms that were submitted.

The private vendors, some that were here this afternoon, can ac-
cept individual government training forms as a form of payment.
The small purchase activity, which is a very simple process, cer-
tainly not the 50-page documentation that Director King men-
tioned, is done for the lion’s share of at least the work that we are


136

‘one HONORED FOURTH CONGRESS

Congress of the United States

Mouse of Representatives
‘COMMITTEE ON GOVERNMENT REFORM AND OVEASIGHT
2157 Ravounn House OFFICE BULONG
Wasnncron, OC 20515-6143

August 25. 1995

‘Mr, Manning H. Mosley, {IT

General Manager. The Retirement Workshop
P.O. Box 21101

Philadelphia, Pennsylvania 19114

Dear Mr Mosley:

‘Thank you for your letter of August 14 providing additional information related to the
‘Subcommittee on Civil Service's hearing on the transfer of the Office of Personnel Management's
Workforce Training Services to the United States Department of Agriculture Graduate School. We
appreciate this opportunity to learn of your experience, and your submission will be included in our
record of this hearing

‘Your concems about the capacity of the Graduate School to provide services through
interagency agreements ure shared by other private sector witnesses who appeared before the
Subcomavitee. The Department of Ageiculture’s authorizing legislation is scheduled for renewal
this year, and the Committe on Agriculture should be made aware of your concems, since this
legislation will not fall within the jurisdiction of the Civil Service Subcommittee.

While we recognize that the Graduate School and the agencies were inclined to honor

previous agreements through the end of fiscal year 1995, OPM Director James King’s response to

‘questions at our Subcommittec hearing indicated that there would be a different competitive

environment after October 1, 1995, We would appreciate learning whether these conditions actually
We once existing arrangements expire

“Thanks, again, for your letter. We appreciate your interest in this Subcommittees work and
the Subcommittee will continue te monitor this transition.

Chairman
Subcommistee on Civil Service


58

grossly unfair position. Paying no taxes, evading procurement rules applied
to its competitors, and able to ignore the ethics requirements that limit
private companies’ access to federal customers, it "competes" for business
from a grotesquely tilted playing field.

Ironically, it doesn't even deliver the services it sells. Rather, it farms them
out to private vendors for delivery, garnering its profits—as OPM did—from
the brokerage fees it receives in return for "administering" training contracts;
ie, functioning as a gatekeeper at the center of federal training procurement.

It offers no training services that are not already amply available elsewhere.
It increases costs by allowing agencies to avoid competitive bids and by
tacking on its brokerage fees. And it benefits none but the "off-the-rolls" feds
on its payroll.

In short, the Grad School has managed to reproduce the same inefficient,
unfair system that OPM had erected. And it serves exactly the same purpose:
providing employment opportunities for those intent on remaining on a
federal payroll.

Who Are These Guys?

How did the Grad School get itself into this position? The answer is slowly, at
least until recently. It was established in the 1920’s to provide then-
unavailable training to Department of Agriculture employees. But as with
some other federal entities that have been allowed to expand with little or no
scrutiny, it continued to add courses and grow. Until now it has become a $25
million a year training services broker, competing for market share head-to-
head with the colleges, universities and private companies that provide the
same services it offers.

Clearly the key to the Grad School's recent explosive growth, however, was its
1990 attainment of “interagency service agreement authority" (ISAA)—which
allows it to sidestep procurement requirements in getting federal contracts.

7
FPMI Communications, Inc. * 707 Fiber Street + Huntsville, Alabama 35801-5833


112

could confirm and verify that there was some employment in the
future for these employees, regardless of the mechanism—and the
merger with the grad school ended up being the most appropriate
mechanism for us, we believed—but there was a great deal of con-
cern in the early months about any employment.

id yet we were telling our employees, “Continue to work. Con-
tinue to deliver the product. Continue to deliver the services, be-
cause if those start to dissipate, the revolving fund will worsen,
and we'll be in an untenable situation.”

So I wholeheartedly endorse Director King’s comments about the
need to move forward speedily for the benefit of our employees and
our customers—agencies called me in the early days of the deci-
sion, and it was a very public pronouncement, that, “What’s hap-
pening? Are you still going to deliver? What about the courses I
need to have my people go through over the next several months?”

We were able to assure them because we were able to assure our
work force that we were going to do this in a measured, careful,
responsible way for them, as well as the Federal Government.

Mrs. MoRELLA. And the ESOP, they also thought was too risky?

Ms. OKIN. Very much so, yes. Very much so.

Mrs. MoRELLA. I wondered, based on current legislation, what
kind of options did you have in terms of privatization?

Mr. Kinc. Well, you have the famous five.

Ms. OKIN. Right. Well, we started out with five options. They
were out and out termination, merger with an entity that was al-
ready established like the grad school, getting a nonappropriated.
fund instrumentality on our own, and a variety of cats and dogs
that we thought, if all else fails, maybe we can just do a variety
of different things for the different programs.

And really, all of those things in the early days—and I think the
options paper reflects that—identified legislative change as part of
the requirement to get there. Again, we were learning, and we
thought there were things that had to be done legislatively so that
we could sell some of our packages, sell some of our—we had our
equipment, we had our employees. There was the issue of whether
we would have carryover of retirement benefits, et cetera.

So there were always legislative issues on the agenda, but we
quickly, I think, over the months where we worked through this,
realized that a legislative option was really going to put the timing
of this whole move into jeopardy. Because a legislative option takes
a long time. And so we then focused on things that didn’t require
legislation.

Mr. KING. And then finally, the reason?

Mrs. MORELLA. Congress can move fast when they really want to,
when they see a reason for it. And that was another question I was
going to ask, is why didn’t you come and ask Congress for the au-
thority legislatively to sell the assets to the private sector?

Mr. Kina. Well, I was just going to say, that’s why we had our
general counsel with us, because during this process, I thought we
might be able to move on that expeditiously. And to suggest our
general counsel was a wet blanket would be an understatement in
this case, with all due respect.

Well, I'll let you say it.


76

4
We had to produce programs on the cheap because we simply didn’t have
the money. From our perspective all other costs, including the

required end-of-year margin, were fixed and non-negotiable. I credit

the staff and the adjunct faculty that we did as well as we did.

Speaking now just for myself, I want to make sure you know I am not
here as a special pleader or to lobby you to change things in my

favor. Would I like a level playing field? An emphatic ves. Would it
be fairer? Yes. Would agencies save money without loss of quality? I
believe yes. What would be my preference as a taxpayer? Again, the
answer is obvious. But at the same time, I must tell you I knew the
lay of the land when we opened our business. I knew OPM and the USDA
Graduate School had a built-in statutory advantage. How could I not
know it? I experienced it. And I did not quit then and petition the
Congress to change things. I played the hand I was dealt at the time.
I am perfectly willing to do that now, whatever the Congress does or

doesn't do.

i mentioned that ¥e don't think of OPM and the USDA Graduate School as
competitors because they don't compete. That's right, but they are
certainly a big fact of life in our environment. Our business is
beginning to succeed in that context for the very reason that we are
competitive. We and they are qualitatively different, and we have the
natural advantages any economist would predict. Our prices are lower
for equivalent training -- hundreds of dollars lower per person. We

provide an absolute money-back guarantee. We are flexible; we will go


28

Testimony of Thomas F. Dungan, Jr., Management Concepts Inc.
Hearing on OPM Privatization of Training Services -- July 26, 1995

The Federal Acquisition Regulation, and its underlying legislation, clearly recognize the value of full

and open competition. FAR 6 101 mandates:

“Contracting officers shall promote and provide for full and open

‘competition in soliciting offers and awarding government contracts.”

The FAR further states:

"No agency shall contract for supplies or services from another agency
for the purpose of avoiding the requirements of (full and open

competition)”

This regulatory preference for competition has resulted in the federal government purchasing the best

products, research and services that the marketplace can produce

Interagency Agreements: Better Than a Foot in the Door

How does this focus on competition relate to the Graduate School's unfair advantage? Quite simply,
the USDA Graduate School knows that interagency agreements are the key to millions of dollars of
noncompetitive work. Why? Because federal training officers and contracting officers will invariably
choose the path of least resistance. And the path of least resistance is an interagency agreement. It
helps the buyer to circumvent the FAR requirement for full and open competition, notwithstanding

3


94

you agree that the graduate school is substantially dependent on
Federal payments, even if to an off budget account?

Mr. Hupsown. Absolutely. Our mission is to serve government em-
ployees and government agencies. And that is what essentially we
call the bull’s eye of our target, of our mission, is to serve govern-
ment employees.

Mr. Bass. If you were here earlier, you probably heard other wit-
nesses testify from private companies that their prices for com-
parable training are less than the graduate school’s, in part be-
cause of their lesser overhead charges. Can you tell me what por-
tion of your fees reflect overhead expenses?

Mr. Hupson. Our overhead is about 18 to 20 percent. I think
that our costs are probably lower. I’m talking about the graduate
school. The overhead that was being charged to OPM training, I
think, was much higher, or at least certainly was somewhat higher.

Mr. Bass. I guess my last question is, we will be hearing next
from Mr. King, and he'll testify that private sector organizations
have advantages in providing services over government agencies. I
would like to review a few of the advantages that he cites and ask
if your organization has them.

And they are: Can you accept cash from students? Do you have
more flexibility in hiring and firing personnel? Do you have greater
flexibility in rewarding personnel? Are you under any requirements
to use the Government Printing Office? Can you expand or contract
more easily in response to market conditions? Can you protect your
teaching materials and innovations under patent and copyright
laws? Are any of your materials considered in the public domain?

I’m sorry that’s such a long question, but if you can address
those factors that you can remember, I would be grateful.

Mr. Hupson. Basically, we do have the flexibility within the
graduate school to do almost all of those things that you mentioned
there. We are not required to purchase through GPO. We do accept
cash. We have flexibility in hiring. I would say that we probably
do not have as much flexibility in reward systems as the private
sector would. But we do have flexibility to expand and contract, as
well.

Mr. Bass. I guess my concluding question, then, is, why do you
think that—as policymakers, we’re making a policy decision here—
why the graduate school should retain all of these advantages of
private organizations and yet also have its status, in effect, as a
government agency?

Mr. Hupson. Well, I think the graduate school was established
with the express purpose, really, of having the ability to be more
flexible, so that it could respond and at the same time to have a
mission of serving government employees. In other words, I think
that it was created initially and has been refined over the years in
a way that it can work very well for the interests of government
employees.

And let me say that to get back to that, that we do not accept
contracts to do work for private sector firms. In other words, our
focus is limited and is entirely focused on the Federal sector. That’s
as a part of our mission and as a part of our creation within the
Department of Agriculture. So I think it was set up to work well,
and I think it does for those very reasons.


1955, when Congress introduced legislation to require the
Executive Branch to increase its reliance on the private sector.
Finally action was dropped only upon assurance from the Executive
Branch that it would implement the policy administratively. Bureau
of the Budget Bulletin 55-4 ... was issued in 1955 prohibiting
agencies from carrying on any commercial activities which could
be provided by the private sector. Exceptions were permitted only
when it could be clearly demonstrated in specific cases that the use
of the private sector would not be in the public interest."

On January 15, 1955, the policy directive issued by President Eisenhower
stated:

“the federal government will not start or carryfon any commercial
activity to provide a service or product for its own use if such
product or service can be procured from private enterprise through
ordinary business channels”

Dr. Burman told the Subcommittee,

"since 1955, every Administration has endorsed the general policy
of reliance on the private sector to provide commercial and
industrial services."

Unfortunately, this policy has not been implemented. It is estimated that
as many as one million federal employees are engaged in commercial activities.
While this policy has been endorsed by every Administration, Republican and
Democrat, since 1955, enforcement has been poor. Contracting out seems to
be a little bit like Mark Twain’s comment about the weather, "everybody talks
about it, but nobody ever seems to do anything about it."

This federal policy is now found in Office of Management and Budget
Circular A-76. This circular is a miserable failure. It is a classic case of the
fox being in charge of the hen house. It is completely up to the bureaucrats to
decide if they want to convey their in-house activities to contract. It is up to
the bureaucrats to decide if they want to do an A-76 study. It is up to the
bureaucrats to decide whether to perform an activity in-house or by contract.
Being empire builders by nature, there should be little doubt about how
bureaucrats will decide each of these issues.


TT

where the customer needs us, saving them additional hundreds of dollars
per person in travel and per-diem. In short, we are low cost, high
quality, completely reliable, responsive, customer friendly, and
finally, entrepreneurial -- which is why I couldn't resist adding this

commercial into my statement.

Turning specifically to the question before you, Should they be
competitive? Should the playing field be leveled? The answer is
largely a matter of philosophy. And it is your call, not mine, I have
my own views, of course, and I have already mentioned important
advantages, including advantages to my company. But 1 do not delude
myself that it is your job to make my life easier. Rather, you must
determine the public interest. 1 am not presumptuous enough to try to

tell you what that is in this case.

I have known about the USDA Graduate School for most of my career, but
have had no occasion to work with them, I have never understood them,
even why they exist. I can conceive of gain, but no loss, actual or

theoretical, from the revocation of their non-competitive priviles

In the case of OPM I can also conceive of much gain, but in their case,
a potential loss as well. The 1996 edition of the OPM Management
Development Center catalog contains a statement by Director James B
King. "I regard Government-wide executive development, as provided by
the Federal Executive Institute and Management Development Centers, as
@ corporate resource and one of OPM's core functions. We serve not

only our agency customers, but also the President, by providing


83

Mr. Bass. Real quick follow-up question. OPM will be testifying
that its training materials are available for the cost of copying.
Does your firm use any OPM materials in its programs? If not or
if so, why or why not?

Mr. WAKHAM. No, we don’t. We haven’t, which is not to say we
wouldn’t ever. I wouldn’t make any such commitment. If they
turned out to have something that was that good and timely, and
we could get it for the cost of copying, I’m certain that we would
look at that as an option. But, in fact, they develop their materials
by committee. It takes quite a while.

When they get something developed and documented, most often,
it’s really not cutting edge. We can rely on our own adjunct faculty
to produce generally more timely materials.

Mr. Bass. Mr. Reischl, do you have any observations on that?

Mr. REISCHL. Yes, I have several things I would like to say in
response to that, Mr. Bass. I'll make it quick. No, we don’t use
their materials. In fact, what we see as one of our few advantages
is the superiority of the materials we have produced from the be-
ginning of our company.

However, as we were nearing the end of this process and we had
put in a bid to purchase some of OPM’s assets, we filed FOIA re-
quests in hopes of having a look at some of their course materials
as potential assets in the sale. They were not available, suffice it
to say, for the cost of a 32-cent stamp. In our written submission
we have turned over to you, there are appendices which include the
actual replies from various OPM regions.

In some cases, the price quoted to us went as high as $20,000
and $100 and some dollars on top. This form of training materials
that I would mention to the committee are, for the most part,
preprinted, handed out to people routinely in the course of doing
business. Now, why it would cost $20,000 to reproduce some of
those, I have no idea. But it sure was a lot more than a 32-cent
stamp.

Mr. Bass. It’s my understanding, Mr. Reischl, that you were the
company that made the unsolicited proposal for—$5 million pro-
posal for assets of OPM.

Mr. REISCHL. Yes, sir. That’s correct.

Mr. Bass. Could you explain the nature of your unsolicited pro-
posal and identify the assets of the OPM training program that you
sought to purchase?

r, REISCHL. Certainly, sir. First, let me reverse that and start
with the assets, what we saw was there. Let me say bluntly, I
thought the OPM reply to the extent that there were no assets
there was disingenuous at best.

We're all, I think, familiar enough with the concept of good will
in any business to recognize, for example, whether it’s a dental

ractice, an accounting practice, a law practice, that there may not
much in the way of hard assets there. Nonetheless, there is a
business there. And the transfer of that business relationship has
in itself a very substantial value. That was probably the primary
asset we saw.

There were other assets, as well. Some of the OPM courses, as
Mr. Wakham mentioned, presumably were well-developed and had
some value to them. The mailing lists had value. We saw other


School, for example. can work through interagency agreements, a form of noncompetitive
procurement that gives it a decided advantage over commercial vendors of training services.

‘Competition is the critical factor in privatization, Competition is the driving force for
both reducing prices and improving quality. When we remove competition from privatization
initiatives, we lose substantial benefits of privatization

Lam also concerned about OPM's long-term plans for monitoring the quality of training
provided to federal employees We saw one example of training gone awry in the HIV/AIDS
training programs that we reviewed last month. With major changes in missions being proposed
for federal agencies, some retraining of federal employees may be necessary. And, with tight
budgets. a better focus of training dollars on job related requirements is essential

It is not clear that the Office of Personnel Management has this oversight role in its plans.
White | fully support greater reliance on the private sector for the delivery of training services. |
also reognize the importance of improving the quality of programs so that they enhance the
skills of individuals and the effectiveness of organizations. OPM must concentrate additional
effort on this oversight in order to make its privatization effort contribute to more effective
government

Our witnesses today include our colleagues Representative Scott Klug of Wisconsin, who
chairs the Speaker's Task Force on Privatization, and Representative John Duncan of Tennessee.
\who has sponsored several initiatives to promote greater reliance an the private sector by federal
agencies.

‘Our second panel includes Mr. ‘Thomas Dungan of Management Concepts Incorporated, a
Vienna, Virginia firm that offers a variety of training services, Mr. EC. Wakham, a retired
director of OPM's Western Regional Training Center who is now co-owner of the Executive
Seminar Center. a Denver, Colorado, based company, and Mr. Dennis Reischt, accompanied by
Mr. Ralph Smith, corporate officers of FPMI Communications, the Hunsiville, Alabaria-based
firm that offeted to purchase the OPM assets,

Our third panel includes OPM Director James King, accompanied by Deputy General
Counsel Mary Mitchelson and Carol Okin, who is Director of the Oltice of Merit Systems
Oversight and Effectiveness. Our final panel will be Mr. Philip Hudson, Director of the U.S
Department of Agriculture Graduate School.

We appreciate your panicipation in our hearing, and look forward to your testimony.

4H


111

Mr. Krnc. Oh, yes. And the public announcement came from the
President, because we were swamped then by various and sundry
people who were interested in the work.

Mrs. MorRELLA. I’m curious also about why the ESOP was re-
jected as a privatization option. Could the so-called “seamless tran-
sition,” which seems to be one of those vogue transitions, have been
accomplished through an ESOP?

Mr. KING. Well, as you know, we're looking at two. One is our
investigations. We’re looking at the ESOP. And in the training,
that was looked at. But why don’t I yield? Because I didn’t directly
work with the employees on this, but Ms. Okin was responsible for
the overall thrust.

Ms. OKIN. When we started this search, I as a senior manager
in the program worked with line managers and workers through
several months of fact-finding and data-gathering to determine
what was the best option available to us.

The decision to privatize was there, and Director King gave this
group of employees and managers the license to look through what
would best fit the program, the needs of the customers, and the
needs of the employees. And ESOP was certainly one of the four
or five initial ideas that we had to pursue.

We looked very distinctly and definitely at an ESOP. We had
some people come in who were experts. We had some folks do a lot
of research and reading and briefing to the folks in the program.

And I think basically, the employees themselves—and Pendorse
this; I agree with this—felt that the kind of work that we do—be-
cause there isn’t a defined market out there, a defined segment
that would go with the ESOP as it started up its business—was
much too much of a risk and potentially not a viable option.

So it was basically rejected because of that—predominantly for
that very reason. But it was examined with some degree of care.
I think it was one of the ones at first that we thought might be
the most viable option for us. But the nonappropriated fund instru-
mentality issue Became clear as we worked through the many
months of data-gathering and talking to people and examining our
Programs and how they would best suit privatization.

ir. KiNG. There’s one other thing I think in this that’s implied,
but I would like to have the record reflect, if you would. What we
were suggesting—and the chairman was correct—is that it was a
moral and humane thing to do, but it was also profitable. Let’s
clearly understand, it was profitable.

It kept people working hard because their future was directly
tied to their output doing their present work, because they knew
that once that agreement was signed, that their future was going
to be determined. And if they weren’t producing, these other folks
weren't going to be interested in them.

So really, there was a direct tie. So I’m suggesting it was the cor-
rect way to go from the moral point of view, but I must tell you,
I would be less than candid if I didn’t express that part of this un-
derlying thrust was the trapeze act to make the jump over and to
make everyone interested in making that jump together.

Ms. OKIN. Right. I can’t endorse that more strongly. As the sen-
ior manager involved in the early days of dealing with a group of
employees whose future was very, very uncertain, as soon as we


81

those properly evaluated, giving the contracting officer the ability
to sort out people very, very quickly.

So I don’t see it as a problem with the process. To me, full and
open competition is very, very important to small businesses. It en-
sures that we’re not prescreened out, that everybody has an oppor-
tunity to submit a proposal or, for that matter, a bid to ensure that
we have a whack at obtaining ‘the Federal funds.

And ironically, we’re really kind of talking about this right here,
where you have interagency agreements that have gone on a sole
source basis directly to a particular agency. Thus, I feel very
strongly about it.

Mr. Bass. Yes?

Mr. REISCHL. If I could respond to that, also, Mr. Bass. I’m not
familiar with the specific legislation you're alluding to, so I can’t
comment in any detail on how that would work. I disagree to some
extent with Mr. Dungan that the process itself isn’t a problem. I
think it is, to some extent.

The procurement rules now are so complicated that they create
the pro roblem to a large extent. It imposes a tremendous burden on
the Federal agencies who are just trying to get the job done from
day-to-day with a shrinking resource base that when they have to
jump through all of those hoops to buy the simplest service, often
at a very low expenditure for them, they still have to jump through
a surprising number of hoops to get there.

That’s what provides the impetus, the motivation to start looking
around for sole source, noncompetitive sources for those services,
such as the graduate school. So to my way of thinking, what I
would suggest this committee look at or consider the possibility of
distinguishing perhaps by level of expenditure somewhere in there
setting a threshold where you have simpler rules for having an
open competition, but doing of quickly and simply.

In effect now, right down to sometimes purchases of just a couple
thousand dollars, agencies have to expend an amazing amount of
time to figure out who has the best price and the best quality. And
it’s impracticable to have them sitting around writing lengthy re-
quirements.

I would also tell you from our side of this telescope, at the small
end of it, that it’s impracticable for a small company to fill out, as
we get them all the time, some 50- or 60- or 70-page request for
a proposal. That’s an enormous amount of investment of time that
a small company can’t afford to make.

So you just let those go by. In effect, those in and of themselves,
as Mr. Dungan said, will just screen small competitors out of the
field. So I would recommend looking at perhaps simplifying the
procedures and perhaps simplifying tying that to some sort of
threshold expenditure amount. Thank you.

Mr. Bass. The reason I’m nodding my head is because as one
who—there are a lot of differences between the 104th Congress and
the 103d Congress, and one of them is that there are a fair number
of people here who have actually been in that very position. And
I’m one of them. I can’t tell you how many times my little business
wanted to buy or sell something to the Federal Government, and
when we received all the applications it wasn’t worth the effort.

Mr. REISCHL. You know what I mean, then.


107

This agreement was implemented on July 1. The Graduate
School made the 134 offers and thus far 125 of our former employees
have accepted those offers. Nine others accepted offers from the
Brookings Institution, and others took jobs elsewhere in government
or the private sector or retired.

At last count, 192 of 220 training unit employees -- 87%
-- had successfully completed their career transition, and we are
continuing to work with the remaining 28 people.

We also achieved the seamless transition our customers
needed and wanted. OPM’s customers can now take the same high-
quality courses as before, taught by excellent instructors at the
same or similar locations.

For the record, Mr. Chairman, the Graduate School took
over these elements of our Workforce Training Service: the Career
Development Programs, the Washington Training Center, the National
Independent Study Center, and the regional training centers in
Atlanta, Chicago, Dallas, Philadelphia and San Francisco.

We did not privatize the Federal Executive Institute or
our two Management Development Centers, because we believe that the
federal government, like any major corporation, cannot surrender
control of its management and executive training and maintain
excellence. :

In closing, Mr. Chairman, this privatization is a success
story. The right thing was done for our employees, it was done
quickly, and it was done at minimal cost to the taxpayers in the
short run and real savings in the long run, all without disruption
to our customers.

I don’t believe anyone questions the right of our former
employees to join the Graduate School. The only question is whether
we should have helped them act in their best interests. I believe
it was the right thing to do, for all the reasons I’ve indicated.

1/11 welcome your questions.

#tt


92

kground Information:

‘The Director of the School, Philip Hudson, has been an employee of the School for 144 years and
Director since 1985. He has a Doctorate in Public Administration and a Master's Degree in
Business Administration. Prior experience includes ten years in community college work and five
years in the private sector and local government

In fiscal year 1994 the School's budget was $19,502,000 and the School enrolled more than
47,000 students. It offered approximately 1000 different courses, using 700 part-time
independent contract faculty supported by 115 full-time and 60 part-time employees

The Graduate Schoo! is a non-appropriated fund instrumentality (NAFI) of the Department of
Agriculture (USDA). It is not subsidized by either Congress or the USDA. It receives no
appropriated funds. Iris entirely self-supporting from tuition and fees, operating similarly to a
non-profit organization Graduate School employees are not federal employees With few
exceptions, the Graduate School buys its own furniture and equipment, pays its faculty and all
other costs associated with its operation. The Graduate School serves as a training service to
Federal agencies, that is also available for use by any U.S taxpayer

In Comptroller General Decision B-214810, November 29, 1984, the Comptroller General held
for purposes of that decision that the Graduate School was a NAF. As a NAFI of USDA, the
Graduate School is under the general supervision and direction of the Secretary of Agriculture
The Secretary has issued regulations governing the Graduate School, Pursuant to those
regulations, the Secretary appoints a General Administration Board (Board) to oversee its affairs.
The Board acts similarly as a Board of Trustees would for a college, or a Board of Directors for a
non-profit educational entity, It is pursuant to these regulations and through the Board that
USDA exercises control over the Graduate School The USDA furnishes a limited amount of
space and related services (internal mail delivery, copier service, etc ) in accordance with the
Secretary's regulations, which are reimbursed fully by the Graduate School to USDA.

The tax status of the Graduate School is that of an activity of the United States Government and
as such is not subject to federal income tax and is not required to file federal income tax returns,
Their status is reflected in an IRS ruling dated January 30, 1981

The Graduate School provides services to government agencies under provisions of 7 U $.C
$922, which authorizes Federal agencies to enter into agreements with the Graduate School for
trainizg and services incidental thereto in accordance with the provisions of the Economy ACT 31
U.S.C. 1535, and competitive procurements The Graduate Schoot's internal procedures are
covered in its handbook, The Graduate School CODE.


60

A final factor in its rapid growth has been its chameleon-like ability to stress
its federal aspects when helpful, but to downplay them when it is more
advantageous to appear "private." Its "private" NAFI status allow it to avoid
congressional budget scrutiny. But its "federal" status shields it from suit. On
the other hand, because it is not a federal agency, it refuses to reveal data in
response to FOIA requests. The crowning achievement in this game of "now I
am, now I'm not, of course, is its simultaneous contention that it is a non-
federal entity possessed of an exemption from procurement rules that is
available only to federal entities. A conundrum, apparently, that did not
trouble Director King in making his privatization decision.

In short, the USDA Grad School currently exists as every small company's
nightmare of a competitor. It is an operation that has the inside track to
federal customers, is financed by the government but pays no taxes, is free of
regulatory oversight, and cannot be sued for unfair or unethical business
practices.

In allowing the Grad School to write its own competitive rules, USDA has
essentially created a predator with no natural enemies. Small businesses
attempting to compete with it face a grotesque combination of governmental
special privilege wedded to a profit-making objective.

To call this an unfair and unreasonable exercise of taxpayer-funded resources
would be a masterpiece of understatement.

What's Wrong With This Picture?

We have two fundamenial objections to OPM's approach to privatization—
above and beyond the fact that it hasn't actually privatized anything.

Problem # 1: Threats, Lies and Strong-arm Tactics

Our first problem with this approach is that, based on ten year's experience
competing with OPM's training operation, we've accumulated ample evidence
that when they find themselves under anything resembling bottom line

Q
FPMI Communications, Inc. * 707 Fiber Street * Huntsville, Alabama 35801-5833


OPM's Rationalization

In response to inquiries as to the reasons for this astonishing deal, OPM
Director King labeled it a "model privatization effort," and offered the
following defenses:

1. It provided for a "seamless transition" of OPM's training functions
2. It was a "humane" way to privatize.

It certainly was that. One would be hard pressed to imagine a more
"seamless" transition than one in which nothing significantly changed. One in
which most of the same employees simply started drawing paychecks from a
different federal entity—in compensation for doing the same old things, the
same old way, and, in most cases, at the same old address. Probably sitting at
the same old computer.

In his pious enthusiasm for seamlessness, however, Director King failed to
explain how this maneuver met the NPR's order to get OPM's reimbursable
training operation out of the government—precisely because it didn't belong
there; ie, was not an “inherently governmental function."

Also unaddressed in Director King's feel-good pronouncement was any
explanation of how sending the operation to an organ of the federal
government amounted to "privatization."

After some probing, it turns out that OPM's contention that this is, indeed,
privatization hinges entirely on the fact that the USDA Grad School is a non-
appropriated federal entity. But then, so are military exchanges and
commissaries, and no one would mistake them for private supermarkets.

OPM's contention that the USDA Grad School is not really a part of the
federal government is a pretty tough line to deliver, at least with a straight
face. Especially when its entire board of directors is appointed by the
Secretary of Agriculture, when it occupies USDA space and uses its name,
and when it is equipped with inter-agency service agreement authority—which

5
FPMI Communications, Inc. * 707 Fiber Street * Huntsville, Alabama 35801-5833


18

Whenever the issue of downsizing the federal government comes up, I
have always said that if Congress doesn’t specifically address exactly what
will be done to the agency's functions or employees, we run the danger of
changing letterhead instead of downsizing government. The issue of
privatizing the Office of Personnel Management’s (OPM) Workforce Training
Services (WTS) is the perfect example of the federal government opting to
change letterheads as opposed to truly privatizing the federal agency’s
functions. Instead of exploring all privatization options including an open
bid, OPM chose to transfer its training functions to the USDA Graduate
School.

I'm pleased, Mr. Chairman, that this Committee is holding these
important hearings to review OPM’s agreement with the USDA Graduate
School. As the Speaker-appointed head of the House Privatization Task
Force, I have some reservations about how OPM’s training functions were
handled and how the federal government has found itself in the position of

competing with the private sector.


aT

Delivery Order Seven (7)
$-93712-E
Page 3 of 3

3. ARTICLE T - ACCOUNTING AND APPROPRIATION DATA is modified to add the

following:

PCN:
JON:
APP:
BLI:
OBI:
AMT:
B/NC:
PPC:

114-22604A (1C)
114-010-01-03-44
8050112(95)
A2-32

11-2596
$155,000.00

063

98

Funds currently obligated to this Agreement are changed:

Basic:
DO1:
DO3:
DO4:
DOE:
DBO7:

Total:

$175,000.00
30,000.00
270,669.40
(45,100.00)
239,700.00
155,000.00

$845,269.40

‘The total contract value is NTE $907,173.20. The obligated amount of funds for this contract is

$845,269.40.

22


51

think, frankly, any business could really deal with that very well
if it’s allowed to stand. What we're asking today, I think, is prob-
ably the same kind of thing that you’re going to hear from some
of the other witnesses. We’re asking you to take a look at this hard
and come to one of several conclusions.

We think the most appropriate conclusion would be just to get
the USDA Graduate Schoo! out of business. Frankly, we don’t
think, in our opinion, the government belongs in a commercial
business.

The government is here, we think, to govern. We also think gov-
ernment entities, in our perhaps simple-minded view, should exist
to serve the people of this country, the taxpayers of this country,
not to compete with them for business. And that’s precisely what
we pave. We have a governmental entity competing for business
with us.

So we would ask that you either take whatever steps are appro-
priate to end this entirely or, if that is not for some reason pref-
erable or possible, at the very least put them on the same playing
field with us. If they want to be in business, fine. But then I think
they should have to compete for their contracts. I think they should
have to pay taxes like the rest of us. I think they should have to
adhere to the same ethics rules.

And, in short, if they’re going to be in business, do so on a field
that’s level. Thank you very much. I greatly appreciate the oppor-
tunity to be here.

[Note——The appendixes to Mr. Reischl’s prepared statement can
be found in subcommittee files.]

(The prepared statement of Mr. Reischl follows:]


80

approach to this particular problem with the USDA Grad School
would be simply to remove the authorization that they slipped
through so neatly in 1990 as part of their appropriations bill grant-
ing them interagency service agreement authority. That, in effect,
would remove their ability to obtain contracts without competition.

I suppose yet a third approach might be to simply require them
to be disassociated from any Federal agency; that is, no longer have
the use of its name, no longer have the use of this noncompetitive
ability to round up contracts, require it to pay taxes and, in effect,
truly become what it contends it is, which is a business like others.

Mr. Bass. Mr. Dungan, do you have any comments, or not? I’m
not expecting that you don’t.

Mr. DuNGAN. I just see the two clear choices. One is a true pri-
vatization, while the second choice is to clean up the act and let
them compete on a level playing field, in which case the market-
place will make the determination of how successful the organiza-
tion is.

Mr. Bass. Mr. Dungan, can you describe the extent of your cur-
rent training that’s done under contract for Federal agencies?

Mr. DUNGAN. Yes, we do have Federal contracts existing in the
organization as it stands now. That’s correct.

Mr. Bass. Can you describe them at all, or the extent to which
you do contract with the Federal Government now?

Mr. DuNGAN. Fairly extensively, yes.

Mr. Bass. The Committee on Government Reform and Oversight
is developing legislation to reform procurement procedures. And I
was part of a process on another committee assignment whereby
we were working on the same project in the defense area, the idea
being to enable more flexibility.

Your testimony highlights the benefits of full and open competi-
tion—I think all three of you do—a requirement that would be re-
laxed under the proposed procurement legislation that this commit-
tee is considering.

Are any of you concerned about competing in an environment
that would give Federal officials greater flexibility in determining
the range of competition, which would envision—again, it’s a sub-
set of the issue of privatization versus public. Are any of you con-
cerned about giving Federal officials more flexibility?

Mr. Dungan.

Mr. DUNGAN. Mr. Bass, I would like to address that. Under the
present arrangement in the FAR as a result of the Competition In
Contracting Act, we have what’s called “free and open competition,”
which you're, I’m sure, familiar with. And in House Resolution
1670, in Representative Clinger’s resolution, he has talked in terms
of “maximum practicable competition,” which I think now has
moved to “open access.”

I think all of that has come into focus as a result of streamlining
the process; that is, Representative Clinger feels that, clearly, too
many bidders are dragged through a long process, which I happen
to agree with very strongly. I feel that it’s not so much the process
as it is the inability of Federal requirements personnel to not clear-
ly address their specifications, their needs, then clearly establish
evaluation criteria which are used to sort out offers and then have


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Thank you for contacting us with your concerns.

Sincerely,

BRENDA D. BAKNER
Assistant Inspector General


13

The bill also requires the Director of OMB to conduct an inventory of
commercial activities and report such to Congress within one year. That report
should also include a schedule for converting those commercial activities to
contract within five years.

When we look for ways to cut the size of government, we should look
first at those activities which can be done by the private sector. There is no
reason why the federal government should own and operate aircraft for non-
military use when planes and helicopter services can be obtained from the
private sector. There is no reason for federal employees to design roads and
buildings when there are architecture-engineer firms that can do this work by
contract. There is no reason for agencies to operate motor pools when
maintenance of cars can be done by private contractors. There is no reason for
the taxpayers to pay the salaries of federal employee$ to operate cafeterias,
guard posts, perform janitorial services, painting, printing, electrical work, and
scores of other activities that can be obtained from the private sector, including
and especially small businesses, woman owned business and minority
enterprises.

Let me take a moment to highlight one of my favorite examples, and it is
one I noted that Chairman Mica mentioned in his opening statement at your
first hearing on this issue in March -- map making.

OMB estimates the federal government spends $1 billion annually on
surveying and mapping in some thirty-nine federal departments, agencies and
bureaus. Figures from the Office of Personnel Management show more than
7,000 employees involved in surveying and mapping positions. The federal
government maintains the same mapping responsibilities as it did 40 years ago.
In fiscal year 1993, only $84.7 million, 8.5 percent of the $1 billion federal
expenditure, was contracted to the private sector for surveying and mapping
services, according to information from the Federal Procurement Data System.

The private sector is comprised of more than 6,000 surveying and 250
mapping firms. The capabilities of these firms meet and exceed those of the
government agencies.

Not only do federal agencies not contract a significant amount of their
own work, but many agencies do work for other federal agencies, as well as
state, local or foreign government, in unfair competition with the private sector.


187

UNITED STATES

F y’ ‘OFFICE OF PERSONNEL MANAGEMENT
“= OCT -2 6S

OFFICE OF THE puRES TOK

Honorable John L. Mica
Chairman

Subcommittee on Civil Service
Committee on Government Reform
and Oversight

U.S. House of Representatives
Washington, D.C. 20515

Dear Mr. Chairman:

The additional information you requested regarding the
privatization of OPM's Workforce Training Service is enclosed.

If you have further questions or need additional information,
please contact Mr. Ira N. Forman of our Office of Congressional
Relations.

You have set a very full agenda for the Subcommittee this fall,
and I look forward to testifying again.

Sincerely,



Terms of the Transfer
And what a deal it was. Among the highlights were the following:

* OPM transferred all of the training contracts it had booked for the final
quarter of the fiscal year—amounting, usually, to about 60% of its annual.
training revenues—to the Grad School for delivery. Thus the Grad School
was able to lock in the revenues without having absorbed any of the
advertising or administrative costs involved in securing those contracts.

* OPM declared all the business equipment involved in its training
operations—computers, furniture, etc.—surplus, and gave them to the
Grad School at no cost.

* The Grad School agreed to make employment offers to 134 of the
approximately 190 training employees still on OPM's rolls.

* The Grad School paid nothing for the business, despite reportedly
having a multi-million dollar "surplus fund" available. Consequently, the
OPM training operation's accumulated debt—over $15 million according
to OPM officials—was left behind, presumably to be written off as a loss to
the public.

In sum, rather than attempting to sell its business to one of the more than 30
interested suitors, OPM had chosen to hand its $30 million a year business to
the USDA Grad School, a purportedly private organization, absolutely free of
cost. As if that were not sufficiently generous, it had thrown in all its
equipment and other assets, as well as more than half its FY 95 training
revenues to sweeten the deal.

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FPMI Communications, Inc. * 707 Fiber Street « Huntsville, Alabama 35801-5833


2

vatization of the training programs, OPM does not appear to have
considered this sale to a commercial firm.

Yet this transition has demonstrated the commercial value of
these training activities. If OPM had desired to achieve full privat-
ization of the training function, at least one opportunity was pre-
sented. One of the witnesses who will testify today delivered an un-
solicited proposal to OPM, offering $5 million to ac tuire mailing
lists, addresses of students, and a designation as OPM’s successor
in the delivery of training for accredited Federal employees.

It’s very unusual in a tight budgetary time, such as we’re in, for
any Federal agency to give away a resource when private compa-
nies are, in fact, willing to pay for it. This hearing will enable the
subcommittee to gain a better understanding of OPM’s rationale for
this and other decisions.

Although OPM described this initiative as “privatization,” the
function is only getting part of the way toward making this a pri-
vate sector activity. The graduate school as a nonappropriated fund
instrumentality—and I checked on that; it’s a nonappropriated
fund instrumentality of the Department of Agriculture—it’s still a
part of government.

The graduate school, for example, can work through interagency
agreements, a form of noncompetitive procurement that gives it a
decided advantage over commercial vendors of training services.
Competition is the really critical factor in privatization. Competi-
tion is the driving force for both reducing prices and improving
quality.

When we remove competition from privatization initiatives, we
lose substantial benefits of the real purpose of privatization. ’'m
also concerned about OPM’s long-term plans for monitoring the
quality of training provided to Federal employees. We saw one ex-
ample of training gone awry in the HIV/AIDS training program
that we reviewed last month.

With major changes in missions being proposed for Federal agen-
cies, some retraining of Federal employees may, in fact, be nec-
essary. And with tight budgets, a better focus of training dollars on
job-related requirements is truly essential.

It’s not clear that the Office of Personnel Management has this
oversight role in its plans. And that’s something we need to look
at. While I fully support greater reliance on the private sector for
delivery of training services, I also recognize the importance of im-
proving the quality of programs so that they enhance the skills of
individuals and the effectiveness of organizations.

OPM must concentrate additional effort on this oversight respon-
sibility in order to make its privatization effort contribute to more
effective government.

Our witnesses today include our colleagues, Representative Scott
Klug—without my glasses, Scott, you’re just a blur—Scott Klug, a
real champion of privatization and government reform, and he also
chairs the Speaker’s task force on privatization; Representative
Jimmy Duncan of Tennessee, who has sponsored several initiatives
to promote greater reliance on the private sector by various Federal
agencies.

Our second panel today includes Mr. Thomas Dungan of Manage-
ment Concepts, Inc., a Vienna, VA, firm that offers a variety of


72

if this must be in the public sector for the public interest. But if
you disagree with Director King and find there’s no longer an over-
riding reason for government delivery of training, then it certainly
belongs in the private sector.

I think a real possibility exists now for half-measures driven by
no philosophy at all and meeting no real need. Training delivery
either is or isn’t a governmental function. Director King seems to
say it is both, and he tells us which part is to stay in government,
but not why. And it’s not obvious to me.

Then, of the part Director King agrees to privatize, he turns it
over without competition to the public sector, noncompetitive
USDA Grad School. Why? Why turn it over at all to achieve what
I perceive is no net change? Again, it is not obvious to me. I’ve
heard no serious rationale. I hope you'll explore these questions.

Mr. Chairman, thank you again for inviting me. I'll be glad to
respond to any questions that you might have.

[The prepared statement of Mr. Wakham follows:]


27

Testimony of Thomas F. Dungan, Jr., Management Concepts Inc.
Hearing on OPM Privatization of Training Services -- July 26, 1995

‘My second point of opposition is to the USDA Graduate School's ongoing eligibility to receive
interagency agreements, which provide it the opportunity to grab millions of dollars of work each
year noncompetitively, despite the fact that these are commercial services readily available from the

private sector

‘Members of the subcommittee, let's set the record straight at the outset The Graduate School of the
Department of Agriculture, despite its name and 74-year history in this area, is not part of the federal
government It isa "non-appropriated fund instrumentality" (NAFI), which means it gets no direct
funding from Congress. Instead, itis supported entirely by fees that it charges to students and federal

agencies for its services

And because it is not a federal agency, the USDA Graduate School should not be eligible to receive

sole-source “interagency” training contracts or agreements.

Fuli and Open Competition: It's Not Just a Good Idea -- It's the Law

As you can see, both of my issues today center on the principle of full and open competition


70

in a competitive environment, devoting more resources to their pro-
grams and less to overhead. There’s no question about it, however.
They're quality people, and they will find a way, I believe, to do
well regardless of what environment they're in.

In point of fact, we’re not really competitive to OPM and the
USDA Graduate School, because they don’t compete. The reason
they don’t compete is they don’t have to. So far as I know, they're
the only two institutions in America that have specially conferred
statutory authority which allows them to sell training and training-
related programs and services to Federal agencies without regard
to any law whatsoever concerning Federal procurement.

Yes, we do have competitors, but they do not include OPM and
the USDA Grad School. Not the way we see it, anyway. Their ad-
vantage is legally mandated. The allure for Federal agencies to do
business noncompetitively with OPM and the USDA Graduate
School is almost really irresistible. They can legally spend hun-
dreds of thousands, even millions of dollars per year with OPM and
the grad school and still avoid the time and trouble of shopping
around for price and quality by getting bids.

Believe it or not, understanding as I do something about the pon-
derous and expensive procurement regulations in the Federal Gov-
ernment, I can sympathize with that. Doing business with OPM or
the grad school is also a legal way to carry over spending authority
that might otherwise expire. It can work out to be a parking place
for money.

Agencies pay a premium, in my opinion, when they’re doing this,
but when spending authority would otherwise expire, they can af-
‘ord it.

Given the monopoly system that I’ve just described, one might
suppose OPM’s professionals are awash in cash and can afford the
absolute best quality. Not so when I was there. Things could be dif-
ferent now, I suppose, but I doubt it. We did take in a lot of money,
but the tuitions we charged were unrelated to the cost of producing
the training. Prices were administratively determined based on a
variety of factors, as you would expect in any monopoly.

Out of receipts, OPM headquarters took common service charges,
overhead, and fixed facilities charges. With the remainder, we paid
students’ food and lodging costs, we produced the programs, and we
delivered the profit that OPM’s headquarters required at year end.
We had to produce the programs on the cheap because we simply
didn’t have the money.

From our perspective, all of our other costs, including the re-
quired end-of-year margin, were fixed and nonnegotiable. I credit
the staff and the adjunct faculty that we did as well as we did.

Speaking now just for myself, I want to make sure that you know
Tm not here as a special pleader to lobby you to change things just
for my benefit. Would I like a level playing field? An emphatic
“yes.” Would it be fairer? Yes. Would agencies save money without
loss of quality? I certainly believe yes. What would be my pref-
erence as a taxpayer? Again, the answer is obvious. But at the
same time, I must tell you that I knew the lay of the land when
we opened our business a year ago, and I knew OPM and the
USDA Grad School had a built-in statutory advantage.


63

Worse, it allows them to retain a stranglehold on the federal training market
by placing them in an operation that has carefully rigged the rules to
ensure—as did OPM—that virtually all the marbles will roll downhill and
into its pockets.

Having a federal business which, inevitably, is supported by tax dollars,
competing directly against the firms that are required to pay those tax dollars
is objectionable enough. But when the game is skewed by handing the federal
enterprise an array of insurmountable competitive advantages, we're beyond
objectionable and well into the land of utterly unconscionable.

Maybe we have an overly simplistic view, but we still believe that
government entities should exist to serve the taxpaying public, not to
compete with it for business.

If OPM's former employees want to compete in a commercial business, that's
fine. But then they ought to be in business as we are; that is, playing under
the same mules as the rest of us.

They definitely should not be the recipients of special competitive privileges
simply because they work—or, in Mr. King's version of reality, worked —for
the federal government.

Frankly, it is precisely the sort of arrogant, self-serving behavior evident in
this slick little shell-game that has created deep feelings of resentment and
anger toward federal agencies in this country. It is yet another deeply
disturbing example of those who are being paid to serve the public serving
themselves first—and at the public's expense.

Where Do We Go From Here?
Like most government entities, the USDA Graduate School began as a

sensible solution to a real problem. It provided necessary training that was
not then readily available.

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20

the Federal Judiciary Building. In addition, the USDA Graduate School has
the ability to enter into interagency agreements with other federal agencies
without complying with federal regulations private businesses must follow. By
choosing to transfer its training functions to the USDA Graduate School,
OPM is choosing to unfairly compete with the private sector and closing off
an area that should be allowed to thrive in a free market.

Finally, OPM has put the federal government in the position of
competing with the private sector. The federal government was never meant
to be in the business of competing with the private sector. OPM’s training
services are not inherent government functions and duplicate what is already

provided for in the private sector.

Conclusion

The arrangement between OPM and the USDA Graduate School is not
privatization. By refusing to consider all possible cost-saving options
including an open competitive bid, OPM is denying taxpayers the opportunity
to save money and downsize government. OPM has also denied free market
access to federal training services. Privatization is meant to open

opportunities to the private sector - not deny them.


37

Revolving Fund Entity
Notes to Principal Statements

REVOLVING FUND
NOTES TO PRINCIPAL FINANCIAL STATEMENTS
‘SEPTEMBER 30, 1993 AND 1992

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
‘A. BASIS OF PRESENTATION

The accompanying financial statements present the financial activity for the Office of Personnel
Management's Revolving Fund. They have been prepared to report the financial position and results
of operations of OPM programs, as required by the Chief Financial Officers Act of 1990, and are
generally in compliance with Office of Management snd Budget (OMB) Bulletin 94-01, Guidance on
Form and Content of Agency Financial Statements. These statements are therefore different from the
financial reports, prepared by the Revolving Fund programs pursuant to OMB directives, that are used
to monitor and control the program use of budgetary resources.

8. REPORTING ENTITY

‘The Revolving Fund was ned in 1952 to personnel background inv jons for other
Federal agencies. in 1969, P.L. 91-189 (5 U.S.C. 1304e) was enacted to allow the financing of
‘training and other reimbursable activities through the fund. Each individual activity is required to break
even over jasonabie period of time. During FY 93 and FY 92, these activities included personnel
background investigations, human resources development, administration of military entrance exams
for the Department of Defense, and other miscellaneous activities.

C. BUDGETS AND BUDGETARY ACCOUNTING

‘The Revolving Fund is available without fiscal year limitation to support a continuing cycle of business-
type operations by using receipts derived from those operations. The fund is credited with
reimbursements received for services provided by revolving fund programs. Activities thet may be
financed in any fiscal year by the fund are restricted to those functions that are noted in budget
estimates submitted to Congress for that fiscal year,

D. BASIS OF ACCOUNTING

‘Transactions are recorded on both an accrual and budgetary basis. Under the accrual method,
reimbursements are recognized when earned, and expenses are recognized when a liability is incurred,
without regard to receipt or payment of cash. Budgetary accounting facilitates compliance with legal
constraints and controls over the use of Federal funds. All material interfund balances and transactions
have been eliminated,

. FUNDS WITH THE U.S. TREASURY

OPM does not maintain cash in commercial bank accounts. Cash disbursements and receipts are
processed by the U.S. Treasury. The Funds with the U.S. Treasury are available to pay current
liabilities and finance authorized purchase commitments relative to goods and services that have not
been received.

Fingncial Statements - FY 93 12 a


57

enables it to evade procurement rules that apply to everyone but federal
agencies. ’

This is a private organization to the same extent that Air America, otherwise
known as CIA Airlines, is a private carrier. In short, the contention that OPM
moved its operation to a private location collapses under the mildest scrutiny.

Despite the flimsy rationalizations offered by OPM Director King and Grad
School Director Hudson, it's easy to see this deal for exactly what it is: A
cynically blatant attempt to avoid downsizing by simply re-creating OPM's
training jobs in a somewhat less visible federal location. One in which they
can continue business as usual, while remaining shielded from private
competition by special governmental privileges that exempt them from the
procurement rules that apply to genuinely private firms. Humane and
seamless indeed.

Exposed to the light of day, it is glaringly apparent that this exercise
amounts to nothing more than a transparent scam, a glorified paperwork
exercise designed to allow OPM to take credit for major "downsizing," while
simply shifting its employees to a new federal address.

The Other Side of the Equation

OPM's role in this mock "privatization" may be at least understandable, if not
admirable, if one assumes that it was primarily interested in finding jobs for
its about-to-be-unemployed workers.

On the other side of this cozy little deal, however, no such altruistic motives
can be attributed to the USDA Grad School. Its objective, pure and simple, is
to make money. There's nothing inherently wrong with that, of course, if it
involves the pursuit of legal business objectives, and is carried out in a legal
and ethical manner.

But in this case, the "business" itself is a chameleon-like federal entity that
relies on the advantages its quasi-federal status grants it to compete from a

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23

a very comfortable and easy transition role. And if this deal doesn’t
make sense, I think it doesn’t make sense because OPM really
wasn’t interested in privatizing this program.

Mr. Bass. Thanks a lot.

Thank you, Mr. Chairman.

Mr. Mica. I thank you, Mr. Klug, for coming before our panel
today and for your leadership on this and a number of issues. I’ve
seen you stand alone on the floor in the last Congress and advocate
a number of positions for which it was very tough to get the sup-
porting votes.

But you continue to be a leader in trying to make government
more effective, more responsible, and a benefit to the people who
are paying the tab. We appreciate that and commend you again for
your interest, participation, and contributions to our subcommittee.

Mr. Kuue. ’ Phankk you, Mr. Chairman. And obviously, good luck
to you and your colleagues on reevaluating this entire contract.

Mr. Mica. It’s tough. Any changes are tough, as you well know.
Thank you.

I would like to call our next panel, if we could have them come
forward, Mr. Thomas Dungan, Management Concepts, Inc.; Mr.
Ralph Smith and Dennis Reischl of FPMI Communications; and
E.C. Wakham of the Executive Seminar Center. Welcome gentle-
men.

And as you know, we have an investigation and oversight respon-
sibility, so it’s the custom of this subcommittee and our committee
to swear in our witnesses. If you would stand, please, and be sworn
in.

[Witnesses sworn.]

Mr. Mica. Thank you. And we'll let the record reflect the wit-
nesses answered in the affirmative. Again welcome. We thank you
for your participation and look forward to your comments.

As I mentioned to Congressman Klug, you have the ability to
have a lengthy statement and documents entered in the record.
And I'll be glad to do that. The panel will, without objection. We
would like you to try to limit your comments and remarks to 5
minutes. We will use a timer here. So if you would like to summa-
rize, you can do that.

We'll start with Mr. Dungan. Mr. Dungan, do you have a brother
by the name of Travis?

Mr. DuNGAN. No. I don’t, as a matter of fact. But I am familiar
with him.

Mr. Mica. Well, nice to see you. And if you would begin, please.
Thank you.

STATEMENTS OF THOMAS DUNGAN, MANAGEMENT CONCEPTS
INC.; DENNIS K. REISCHL, FPMI COMMUNICATIONS, INC., AC-
COMPANIED BY RALPH SMITH; AND E.C. WAKHAM, EXECU-
TIVE SEMINAR CENTER

Mr. DuNGaN. Mr. Chairman and subcommittee members, I thank
you for the opportunity to testify. My purpose here today is not to
oppose the transfer of OPM’s training function to the graduate
school, but rather to take issue with one of the terms of that trans-
fer and oppose the graduate school’s unfair competitive practices.




90

rivate provi

In regard to the transfer, the Graduate School provided OPM with a sound business proposal
which OPM used as a basis for its decision. One of OPM's goals was to accomplish the transition
of its non-residential training programs with minimum disruption to the ongoing training and
development of its customer Federal agencies. We believe that the School was the best
alternative to help them achieve this goal by offering both secure employment opportunities for
the displaced workers and to provide the continuity of cost-effective training services

In regard to its on-going activities, the Graduate School operates in the very competitive
environment of training providers, Agencies have considerable procurement flexibility in the
purchase of training, and they continually seek cost-effective options, particularly now. Agencies
which sign interagency agreements must determine that the agreement isin the best interest of
government and that the services are cost effective When they cloose the School, they do so
because the School is fess expensive or they are confident in the quality of our services,

‘As a non-appropriated fund instrumentality (NAFI) of the Federal government, the Schoo!
receives no appropriated funds and is not subsidized by either Congress or the USDA. The
Graduate School provides services to government agencies under provisions of 7 USC. $922,
which authorizes Federal agencies to enter into agreements with the School for training and
services incidental thereto in accordance with the provisions of the Economy Act 31 USC 1835,
and competitive procurements,

The Economy Act sets out procedures for interagency agreements between government entities.
The Graduate School is one of several government training facilities which provide training
services to other government entities under these regulations These cross-servicing agreements
are cost-reimbursable and therefore contain no profit margin

Private sector firms often overlook the limitations on the School. As a government entity, we are
prevented from bidding on training contracts which are set aside for small businesses


44

GiniSINAL
Interagency Agreement
Between
U.S. Nuclear Regulatory Commission (NRC)
and
Graduate School, U.S.Department of Agriculture (GS/USDA)
For Operation of the NRC Training Facility

A. Acquisition Authority - Economy Act 31 U.S.C. and Farm Bill, 1991.
B. Background

. Objective

‘The NRC Office of Personnel (OP) provides a full range of instruction to
employees in the areas of nontechnical expertise from basic secretarial skills to
advanced management training, acquisition management, sociological and ethical
topics, statistics, and nontechnical, NRC-specific issues. For purposes of this
agreement, these training courses will be referred to as “professional development
courses.” In addition, OP also provides hands-on instruction in computer software
applications necessary to agency operations. These training events are provided
on-site at its taining facility located at Two White Flint North, Rockville,
Maryland and at remote training sites at regional offices and the Technical
Training Center. The purpose of this agreement is to provide on-site contractor
support for administrative aspects of the training program including scheduling,
registering, reporting, and administering classroom details. The on-site contractor
should further provide course development and presentation of all classroom
computer training. .

2. NRC's Training Environment
NRC's Office of Personnel, Division of Organizational Development and Training
(ODT), has a training facility at Two White Flint North to support all in-house
training requirements (July, 1994). Seven classrooms are provided and each is
equipped with projection screens, white boards, VHS, and will soon have portable
televideo capability.

a OP/ODT's staff contract for several professional development courses. The
OP Project Managers are responsible for defining needs, developing course
materials, and arranging presentation dates for those courses. Classes that fall
in this category are usually instructor-based and are given in one of three
classrooms capable of holding up to 30 suadems, or a fe
configured to support up to 50 individuals.

19


85

[Witness sworn.]

Mr. Bass. Thank you very much, Mr. Hudson, for appearing here
today. And without further ado, you can begin your testimony. We
have a 5-minute rule in effect.

STATEMENT OF PHILIP H. HUDSON, DIRECTOR, USDA
GRADUATE SCHOOL

Mr. Hupson. Thank you and good afternoon, Mr. Chairman and
members of the committee. My name is Philip Hudson, and I’m di-
rector of the graduate school of the Department of Agriculture, a
nonprofit organization serving Federal employees for 74 years. I’m
very pleased to be here today to provide information on the trans-
fer of training units from the Office of Personnel Management to
the graduate school. I have submitted my full statement to the
committee, and I ask that that be made part of the record.

I firmly believe that the transfer of the training programs to the
graduate school is in the best interest of the taxpayers of the Fed-
eral Government, and I offer you the following reasons.

First, a lower cost of training to the government. The school’s
programs do help agencies to contain the size of their internal
training units by essentially being a resource where students from
many agencies can come together and attend training at the time
that they need it and in locations that are convenient to their
workplace.

The addition of the OPM training units within the graduate
school can be made without additional comparable investment in
administrative costs. And in the long term, this will result in
economies in more efficient combined operation with lower costs,
and the ability to invest in improved quality.

Second, no appropriations are needed for this transfer or for the
ongoing operation of the school. As a nonappropriated fund instru-
mentality, the graduate school supports itself entirely through its
tuition. The school’s personnel systems and our financial systems
are independent from the Federal personnel system and from the
appropriated process.

Most important, Federal employees are in need of training. Agen-
cies are undergoing significant changes in mission requirements,
and staffs are being downsized. The school is in a position to be
able to continue to provide this training, so that employees can be
productive. These training courses are available when they need
them, but only if they need them.

Fourth, the placement of OPM training employees. OPM’s deci-
sion to divest of the training programs resulted in a reduction in
force. The school has provided an excellent employment oppor-
tunity for many of those workers who might otherwise have been
left unemployed.

And fifth, government oversight. The graduate school serves
under the control of a board appointed by the Secretary of Agri-
culture, which includes members from other agencies, including
OPM. This board manages the school on behalf of the Federal Gov-
ernment. In addition, the General Accounting Office and the USDA
inspector general and inspector generals of customer agencies also
exercise oversight on the school.


62

competition's access to skilled labor, it's a lot easier to maintain the upper
hand.

Nor, when necessary to forestall competition, has OPM hesitated to ignore
the law. For example, when we filed FOIA requests for OPM mailing lists,
most regions simply ignored them. Of the few that answered, one, the
Philadelphia Region, said we'd have to pay over $7,000 to get the list,
claiming two clerks would require several weeks to copy it from index cards.

Since that region advertised its own training courses by sending out dozens of
mailings each year, and had long since discovered the computer, that was
obviously untrue. More recently, OPM regions have played the same game in
response to FOIA requests for copies of public domain training materials—
which in most cases, are already printed and sitting in storerooms. No
matter, as indicated in their responses to us (Appendix 2), prices ranged up to
$20,500—considerably more than the "32 cent stamp" OPM training director
Jaffe claimed to the media.

In short, the agency has blatantly thumbed its nose at the requirements of
the FOIA? But how, exactly, can a small company force a federal entity to
comply with anything?

The answer, of course, is that it can't. Nor can it sue the government-run
business for unfair and unethical business practices—such as false
statements to customers and threats to potential employees. That's because,
unlike other private companies, federal entities are immune to suit.

Problem # 2: Do you want to be in business or government?

Our second objection to OPM's version of privatization is that it keeps a cadre
of people who are clearly federal employees—no matter how much OPM
might split hairs and prevaricate—firmly entrenched in what the NPR
already has conceded to be a commercial business venture.

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86

In summary, I believe that the transfer of these training pro-
grams to the graduate school is in the best interests of the tax-
payer and the Federal Government, because it helps to control the
cost of training. No appropriations are needed. It provides proven
quality of training for employees, a placement for OPM employees,
and ongoing government oversight is in place.

I thank the chairman and the committee for this opportunity of
appearing before you and will be welcome to answer any questions.

(The prepared statement of Mr. Hudson follows:]


121

The merger is also good for employees. And to
understand this we must understand the mindset of these
employees. These workers had traded careers in the private
sector, and in some cases higher wages, for the supposed low
risk and high security of the government. Many had survived
three RIFs during 1994 and the announcement to privatize, for
many workers, was the new code word for RIF. The option of
Employee Stock Ownership Plan (ESOP) was rejected officially
by employees and managers after the privatization team
brought in consultants to discuss the pros and cons of
employee ownership. Other options to pursue selling the
assets to private firms required legislation and were also
scoffed at by employees. Employees feared the selling of
assets to a private firm may not have necessarily meant them.

To the employees, who were concerned about their
mortgage payments, their kids’ tuitions, their payments to
nursing homes, and finding jobs past age forty, and for
employees, who had lost weight, suffered anxiety attacks, and

road an emotional roller coaster in 1994, the Graduate Schoo!

5


124

[s]orasuste
School, \ISOA tice of the Director

(202) TOO.20F

August 15, 1995

The Honorable John L. Mica
Chairman

Subcommittee on Civil Service

‘Committee on Government Reform and Oversight
Rayburn House Office Building - Room 2157
Washington, D.C. 20515-6143

Dear Congressman Mica

1 appreciate the opportunity to provide the additional information you requested in your
letter dated July 28, 1995

The table on the following page provides the breakdown of the full time and the part-time
offers made by the Graduate School, USDA, as well as the actual acceptances by former OPM
employees. As you can see, the Graduate School made a total of 137 full time offers and 5 pan-
time offers, Of these, 2 total of 111 individuals have accepted offers with the School so far
Another 9 individuals have accepted offers with Brookings, and 4 are currently employed in the
European Training Program. The information contained in the table is current as of August 1,
1995, but we are continuing to review applications from OPM personnel and will make selected
offers when matches are found between vacancies and applicants.

‘The Graduate School has filed a variety of positions with the former OPM employees
from management to support stafl. However, these employees are not instructors. Our
instructors, as T noted in my testimony, are indeed individuals or companies with whom we do
business as independent contractors on a course-by-course basis

With regard to the number of OPM employees who were offered part-time positions and
who retired, 1 regret that we do not have that information We made 5 part-time offers but our
personnel office did not request retirement status from any individuals hired by the Graduate
School

| appreciate the opportunity to provide the additional information and hope it answers
your questions. If] may be of further assistance, please do not hesitate to contact me.

Sincerely,
Pa. tly Vf Wdbnh an —

Philip If Hudson
Director
Graduate School, USDA


31

Testimony of Thomas F. Dungan, Jr., Management Concepts Inc.
Hearing on OPM Privatization of Training Services ~ July 26, 1995

SECTION 1669 GRADUATE SCHOOL OF THE DEPARTMENT OF AGRICULTURE

(a) TRAINING SERVICES --

‘Notwithstanding any other provision of law, the head of @ Federal agency or other
major organizational unit within any agency, including agencies and offices within
the Department of Agriculture, may place an order (or enter into an agreement)
with the Graduate School of the Department of Agriculture under the provisions of
section 1535 of title 31, United States Code*, for training and other services
incidental to the provision of such training

(b) GOODS OR SERVICES --

The Graduate School may obtain any goods or services necessary to the fulfillment

of an order under subsection (a) or its obligations under such agreement without

regard to the requirements of--
(1) the Federal Property and Administrative Services Act of 1949 (40 U.S.C. 471
et seq.) or
(2) any other law that prescribes procedures for the procurement of property or
services by an executive agency

‘Refers to the Economy Act, which authorizes mteragency agreements

This "sweet deal” buried in a 700-page statisic enables the USDA Graduate School to receive non-
competitively millions of dollars of work Additionally, and not surprisingly, it allows the Graduate
School to award contracts without regard to federal procurement law. And what has the Graduate

School done with this right?

First, it has wasted no time in building its portfolio of non-competitive training contracts. Companies
like mine can provide high quality professional training to federal agencies at competitive prices But

we cannot compete for a contract that never sees the light of day


Statement of
Representative John J. Duncan, Jr.

Subcommittee on Civil Service
House Committee on Government Reform and Oversight

July 26, 1995

Mr. Chairman, Members of the Subcommittee, it is my pleasure to
appear before you today to discuss the issue of contracting out. As the sponsor
of H.R. 28, the Freedom from Government Competition Act, I am delighted
that the subcommittee is conducting these hearings to explore strategies that
could and should be implemented to eliminate govergment competition with
private firms. This is necessary to have a government that works better and
costs less.

I am pleased to see this Subcommittee, under the leadership of Chairman
Mica, devote a series of hearings to the issue of contracting out. This hearing
on the Office of Personnel Management (OPM) privatization initiatives on an
issue of great importance to both taxpayers and private sector businesses is
certainly commendable. . °

So many commercial firms already provide training functions to the
federal government that there is no good reason for the bureaucracy to continue
this type of activity. Further, where the federal government does provide
training services commercially, the agencies should be required to ensure that
private sector firms compete fairly with open competition and cost
justifications.

While later panels will more fully discuss this point today, I would like to
make note of the cost justifications that were done to transfer OPM’s
Workforce Training Services (WTS). Cost did not appear to factor into this
decision to move the WTS to the U.S. Department of Agriculture (USDA)
Graduate School, which ranked as a middle cost option.

Since training services are not inherently governmental in nature, I am
surprised it took OPM so long to get out of this area. I am also surprised that
the shift of OPM’s training services is being considered by some to be


139

Legal Authority to Sell

The concerns Ms. Mitchelson addressed in her testimony were that,
first, OPM had no statutory authority to sell to the private
sector, and second, if OPM intended to contract for the
performance of its training obligations then OPM would have to
conduct that procurement in accordance with the requirements of
the Federal Acquisition Regulations (FAR) and the Competition int
Contracting Act (CICA).

Even if OPM had the statutory authority to sell to the private
sector, it still would have been required to conduct a
competitive procurement. Also, the statutory authority would
have to be fairly specific as to what could be sold to the
public, given that there are statutory authorities that allow
sale of certain items by other agencies to the public. An
example is the Federal Property and Administrative Services Act
of 1949, which authorizes the General Services Administration to
sell government property to the public. See 40 § U.S.C. 484.

Privatization Options Costs

In our February "Options Paper" we estimated that the cost of
outright termination of the training program would be $39.2
million, versus $34.2 million for the cost of an instrumentality,
as defined in the options paper. As of June 30, 1995, we
estimated that these costs would be $35.0 million and §31.3
million, respectively. Included in both June estimates is $30.2
million of "fixed costs". The fixed costs represent:

a. The Revolving Fund Training Program deficit at June 30,

1995.

b. An estimate for the cost of severance pay for the
employees who would be separated from government
service.

c. An estimate of the undepreciated costs of the assets
which would be written off when operations cease.

d. An estimate of the uncollectible accounts receivable

which we would write off.

The June estimates include variable costs of $4.8 million and
$1.1 million, respectively .
The variable costs represent:

a. Estimate of the cost for incremental staff time for
implementation of the instrumentality option.
b. Estimates of the incremental costs for compensation,

outplacement/retraining services for affected employees
and costs of representing the Agency in adverse actions
arising from the implementation of the termination
option.

The decrease in the deficit for the four months ended
June 30, which we estimate would not have been realized
under the termination option.

These amounts are still estimates, as full costs have not yet
been realized.



46

INTERAGENCY AGREEMENT
BETWEEN
NASA/GODDARD SPACE FLIGHT CENTER
AND

GRADUATE SCHOOL, U.S. DEPARTMENT OF AGRICULTURE

FOR TRAINING AND RELATED SERVICES

Acquisition Authority - Economy Act 31 U.S.C. 1535 and
Section 203(c) of the National Aeronautics and Space Act of
1958, as amended, 42 U.S.C. 2473(c).

Background
i. Need

The Goddard Space Flight Center (GSFC) is committed to
the training and development of its workforce and
recognizes the demands for human resource development
are inherent in a changing, highly technical
environment. In addition, the Center recognizes the
complexities that accompany a large, highly diversified
research and development organization and that
organizational effectiveness is central to the
accomplishment of assigned missions.

The Center has a widely diversified human resource
Program to address mission requirements including
individual training, employee recognition, employee
involvement activities, organizational development, and
other human resource support services. To meet these
requirements, a wide range of civil service, contracts,
and agreements are necessary to provide the services
and products to develop and maintain the GSFC
workforce.

sectiv,
The purpose of this Agreement is to obtain a number of

training services with the Graduate School, U.S.
Department of Agriculture (GS/USDA) .

Page 1 of 13 pages

2


6

Mr. Mica. If we could have our colleague, Mr. Klug, come for-
ward, I understand Mr. Duncan is going to submit his remarks for
the record. Welcome to our subcommittee, Mr. Klug. It’s the custom
of the subcommittee to welcome your Yemarks in total for the
record. You have 5 minutes.

Mr. KiuG. Thank you, Mr. Chairman. And I'll make sure I stay
within that time, as well.

[The prepared statement of Hon. John J. Duncan follows:]


40

COMP. GEN, DECISIONS, 1982-94 64 Comp.Gen. 110, Department of Agriculture
Graduate School—Interagency orders for training

Page 53661 follows

64 Comp.Gen. 110, B-214810

MATTER OF: Department of Agriculture Graduate
School—Interagency orders for training

November 29, 1984

DIGEST:

Graduate School of Departmen of Agriculture, as a non-appropriated fund instrumentality (NAF,
is not a proper recipient of “interagency” orders from Government agencies for training services
pursuant to the Economy Act, 31 U.S.C. Sec. 1535, or the Governmem Employees Training Act, 5
ULS.C. Sec. 4104 (1982). Interagency agreements are not proper vehicles for transactions between
NAFis and Government agencies.

This is in response to a request from the Secretary of Agriculture for a decision regarding the
propriety of “interagency agreements" under which the Graduate School of the Department of
Agriculture provides education or training services to Federal agencies on a reimbursable basis, As
authority for these agreements, the Secretary cites provisions of the Economy Act, 31 U.S.C. Sec.
1535, and the Government Employees Training Act, § U.S.C. Sec. 4104 (1982). As set forth below,
‘we conclude that neither of these statutes constitutes authority for the agreements in question.

The Graduate School of the U.S. Department of Agriculture conducts academic courses and
‘raining programs in a large number of disciplines, ranging from Arts and Humanities to Secretarial
Studies. The Graduate School is a non-profit organization under the general supervision of the
Department of Agriculture. The Secretary of Agriculture appoints a General Administration Board
of 15 members (more than half of whom are Department of Agriculture officials) which functions
similarly to a university board of trustees. The Graduate School receives no appropriated funds, but
rather operates with finds derived from student fees and revenue from training services. Full time
employees of the Graduate School are not Federal employees for purposes of the Federal employment
laws, Most of the instruction is conducted by independent contractors.

It is the position of the Secretary that the Graduate School constitutes a non-appropriated fund
instrumentality (NAFD) of the Department of Agriculure. NAFIs encompass a wide range of activities
and resist a general definition. They share common characteristics in that they are associated with
governmental entities, and, to some extent, are controlled by and operated for the benefit of those
‘Government entities. However, the essence of a NAF is that it is operated with the proceeds of its
activities, rather than with appropriated funds. For purposes of this decision, we agree with the
Secretary's opinion that the Graduate Schoo! constimutes a NAFI.


120

are not ultimately passed on to the government, i.e., the
taxpayer. The Graduate School's status and the fact that the
agreement with OPM is in the form of an memorandum of
understanding (MOU) also allow OPM to maintain a certain
amount of oversight over and coordination with the Graduate
School. This will help maintain the currency of courses,
involving personnel policy and management practices in
government, and keep prices down, thereby negating possible
price gouging of customers. | see these features as positives
for the taxpayer.

The merger is also good for the customers. The
“seamless transition” has allowed journey-level workers and
managers in the Executive Potential Program, the Women’s
Executive Leadership Program and the LEGIS Fellows Program
to remain in these long-term programs. It also allows federal
agencies that had multi-year projects with OPM to continue
these projects without fear of funds being returned to the
treasury and of mission-based training not being developed and

delivered. That’s good for the customer.

4


19

The Flaws of OPM’s Privatization of WTS

Nearly 90 percent of current federal training is provided by contractors.
OPM, however, did not follow the federal government's lead. They chose to
merge with the USDA Graduate School, even though it was not the most
cost-effective option. OPM did not even consider selling the training services
to the private sector.

This is the first flaw to OPM’s approach to privatization. By refusing
to explore the options of an open competitive bid, OPM has refused to
looking into ALL possible cost-saving measures. They maintain the argument
that their services are worth practically nothing in the private sector. At the
same time, however, OPM had a proposal from FPMI Communications
which amounted to $5 million.

Tam also concerned about the fact that OPM is calling the transfer to
the USDA Graduate School, "privatization." While the USDA Graduate
School is technically not a government organization, it enjoys the advantage
of having the benefits of a government agency. The USDA Graduate School
classes are held in federal buildings such as the Labor Department Perkins

Building, the General Services Administration Regional Office Building and


4

The federal rules and procedures that have historically been in place to
protect the private sector are routinely ignored by federal agencies. For
example, OMB Circular A-76 mentioned earlier not only requires agencies to
perform cost comparison on their activities and contract out those functions that
can be more efficiently provided by the private sector, but also prohibits one
agency from doing work for another agency if the providing agency has not
conducted a cost comparison. No federal agency has completed an A-76 on a
surveying or mapping function. Yet agencies routinely do mapping work for
other agencies. OMB Circular A-97, which implements the Intergovernmental
Cooperation Act, prohibits a federal agency from providing services to a state
or local government agency unless the recipient certifies to OMB that the
service cannot be acquired by contract from the private sector. No such
certification of a surveying and mapping activity has ever been filed with OMB,
yet several federal agencies regularly do such work. #”

Over the past 20 years, numerous government studies have concluded that
more contracting should be used in federal surveying and mapping activities.
Increased contracting of mapping has had support from Administration of both
parties. It was targeted for increased contracting in President Reagan's last
budget and the Clinton Administration's National Performance Review. A
recent Heritage Foundation report also cited mapping as an area of particular
contracting out opportunity.

Mr. Chairman, when you look at states like Michigan, Washington and
Massachusetts where Governors of both parties are discovering the benefits of
contracting out, or cities like Chicago and Philadelphia, where Democratic
mayors are leading the contracting out parade, or countries like Poland, Russia,
Rumania, where state-run enterprises are being turned over to private
enterprise, when you look at what is happening all around the world, a cynic
might say the only two places where contracting out has not caught on are
Havana, Cuba, and Washington D.C.

I'm not a cynic, Mr. Chairman, I’m an optimist. I believe that when
private enterprise is permitted to compete in the marketplace for the right to
win a contract to perform a commercial-type good or service for the federal
government, we will end up with the best value for money. That is what the
taxpayers demand and deserve.


3

training services; Mr. E.C. Wakham, a retired Director of OPM’s
Western Regional Training Center, who is now co-owner of Execu-
tive Seminar Center, a Denver, CO-based company; and Mr. Den-
nis Reischl, accompanied by Mr. Ralph Smith, both corporate offi-
cers of FPMI Communications, a Huntsville, AL-based firm that
has offered to purchase OPM assets.

We're going to divide our third panel into a third and fourth
panel, so our third panel will include Mr. Philip Hudson, Director
of the U.S. Department of Agriculture Graduate School.

Our fourth and final panel—I’m going to reverse the order of
this—is OPM Director Jim King, accompanied by Deputy Counsel
Mary Michelson and Carol Okin, who is Director of the Office of
Merit Systems Oversight and Effectiveness.

[The prepared statement of Hon. John L. Mica follows:]


132

Attachment 1

The partners of The Retirement Workshop LIC. represent over 40. years of
management, supervisory and consulting experience in the public and private sectors This
includes over 15 years in the investment industry providing financial planning and investment
guidance for the clients of Merrill Lynch and Waddell & Reed, Inc.

Manning H. Mosley III, the Gencral Manager is enrolled to represent taxpayers before the
Internal Revenue Service, and holds licenses with the National Association of Securities Dealers
and the Pennsylvania Insurance Commission, As a training consultant he has developed and
implemented seminars and orientation programs tor the federal government since 1983. This
also includes training programs for the 1987-88 transition to the FERS benefit system.

‘Audrey J. Manley, Partner was a member of OPM’s Retirement and Insurance Group in
Washington, D.C. and later a member of the Philadelphia Regional training staff; designing and
conducting retirement seminars tor federal personnel specialists and employees.

Clients of The Retirement Workshop (Partial Listing)

The Philadelphia Gas Works, Internal Revenuc Service. Social Security Administration, AT&T
US. MincPhiladelphia, Naval Air Warfare Centers, Philadelphia Naval Shipyard, Federal
Executive Board-Baltimore, U.S. Otfice of Personne! Management, Military Academy-West
Point, US. Deparment of Housing and Urban Development, Federal Women’s Program
Managers Council

What Others Have Said . . .

"Your vivid and informative explanation of how to determine financial goals... taking into
account civil service retirement benefits, was highly praised by the participants’
Chief, Personnel Branch, Internal Revenue Service

“want to express my deep appreciation for your excellent presentation and contribution to the
National Army Library Institute held at West Point. 1 applaud your professionalism anid

expertise"
Brigadier General, U.S. Army, Dean of the Academic Board

"Participants rate your classroom performance as superior. making you a valued member of our
extended training family in the Philadelpbia Region’
Chief, Regional Training Center-OPM

"would like to express my appreciation for the seminars you gave on the [FERS]... The
information has given, [the participants]. a better understanding of bow to approach the
decision making process’

Chief, Management and Technical Support Division, U.S. Army Material Systems Activity

“Your presentation on Personal Financial Planning was well done. The information my wife
and | obtained will help us receive the joy that should result when you decide to give up full-
time employment’.

Office Of The Director, U.S. Small Business Administration

“Your presentations during the Pre-retirement Seminars have consistently received superior
evaluations from the participants"
Director, Human Resources Office-Philadelphia Naval Shipyard


110

Mr. KiNG. So that at the moment, nobody is really taking that
90-day gamble, as it were—and it wasn’t really a gamble. The
graduate school understood that it was a fairly solid program, and
they hoped to build on it. But they’re going to have to compete as
of 1 October, I am told. That competition has not been established
by me, Mr. Chairman.

They were the folks who were willing to come in and to take that
risk, whatever that risk level was. And it served everyone’s inter-
est. And it kept the cost way down. So that if we’re talking real
cost-benefit analysis, this was the way to go. And it was even
cheaper than termination. If you were just going to take the abso-
lutely hard—say you say, “Jim, you’re going to be hard, you’re
going to be callous. Do it.”

We did it the least expensive way, the least disruptive way. We
have served everyone’s interest. And in the process, we have shown
that it was the profitable way to go as far as the government itself
was concerned.

Now, what the future holds—and I think you're addressing that
in your question, too, Mr. Chairman—what the future holds is an-
other ballgame in which we’re not involved, other than we would
like to maintain the quality of the programs that are there to serve
the agencies. But other than that, we step back.

Mr. Bass. Thank you very much. I will yield at this time to the
gentlewoman from Maryland, Mrs. Morella.

Mrs. MoRELLA. Thank you, Mr. Chairman.

Director King, always a pleasure to see you. Mr. Dungan called
this merger—I quote—‘“a step back from the principles of the Na-
tional Performance Review.” What discussions did you have with
the National Performance Review regarding the privatization ini-
tiative, and who at NPR and OMB sanctioned that arrangement?

Mr. KinG. Well, my memory was that from the beginning, this
had been an area identified, I believe, in the September 1993 an-
nouncement that both investigations and training looked like likely
candidates for privatization because of the revolving fund aspects.

And then later, they profiled it as being in constant crisis from
a financial point of view, and it was the inability of the govern-
mental agency to respond to the market that put us in a downward
spiral. So it was felt that these were ideal candidates for privatiza-
tion because the employees were familiar with the market, and
they were organizational types that could lend themselves to being
privatized.

I was asked in early December the specific question by Ms.
Rivlin and the Vice President as to whether we could move ahead
with privatization. And I said I believed we could. And they said
then they would like to put it on the agenda for the President’s an-
nouncement for December 19th.

And I said I wasn’t certain as to timeframe or anything else, be-
cause we had not set a timeframe. I said 1 would have to go back
to the professional staff, but we would certainly work toward it.
And the basis of it, I said, was to move to the downsizing of govern-
ment. And clearly, I felt that it might be a way to reduce cost si-
multaneously. But I did not necessarily see any large savings to
the government at that time from this action.

Mrs. MORELLA. But you feel you did get an OK, then?


69

Mr. Mica. Well, I thank you. We have heard from two of the not-
too-happy campers. We'll get to hear from a third. But in order to
be entirely fair to Mr. Wakham, what we’ll do is recess this hear-
ing. I think, Mrs. Morella and Mr. Bass said about four votes.
What do you think about time?

Mr. Bass. We’re going to be half an hour.

Mr. Mica. I would say quarter past, which will give people the
time to get a cold drink and visit the graduate school and come
back. [Laughter.]

About a quarter after, we'll reconvene for a few minutes after the
last vote is called. Thank you, and we'll be back.

[Recess.]

Mr. Bass [presiding]. I think we'll call the subcommittee hearing
back to order. Mr. Mica and I spoke on the floor. He is participat-
ing in the Waco hearings, which are going on next door. So as you
gentlemen well know, all the testimony that’s heard here today will

e part of the record. It will be given just as much consideration
as it would have been if every person was here who was supposed
to be. So with that, we will continue. And we'll hear from you, Mr.
Wakham. Welcome.

Mr. WakHaM. Thank you, sir. Mr. Chairman, I’m E.C. Wakham,
resident of the Executive Seminar Center, Limited. It’s a limited
liability company that’s organized in Colorado. My partner and the

other member of the firm is Tom Connolly of Oak Ridge, TN. I ap-
preciate your invitation to appear at this hearing. My statement
will be brief, and I'll be glad to respond to any extent I can to any
questions you might have.

Both Mr. Connolly and I are former employees of the U.S. Office
of Personnel Management. I retired in "August 1993, and he fol-
lowed suit in February 1994. We both had proud public service ca-
reers spanning more than 30 years. We organized our company on
July 29, 1994, so on this date, we’re a small company 3 days shy
of 1 year old.

I’ve spent 27 years in the executive and management develop-
ment field. More than half that time, 14 years, I directed OPM’s
Western management development center, initially at Berkeley,
CA, but most of the time at Denver.

I also have experience in State government, graduate level uni-
versity teaching, working with profit and nonprofit private sector
organizations. My partner’s experience complements mine.

I am sure it comes as no surprise to you that when we opened
our business, capitalized with our own money and at our own risk,
we opened a business in a field that we know a good deal about.
I have brought with me, if you would like them, copies of materials
describing some of our programs. Some of those programs are simi-
lar to programs that are offered by OPM but less costly.

Now, that puts us on the same playing field with them and also
with the USDA Graduate School. And if that field were level, we
would be natural competitors.

I want to make sure that you know how much I respect many
of my former colleagues at OPM’s training organizations. When I
directed the Western management development center at Denver,
we had a diverse, talented, dedicated, productive staff. They did—
and I believe they still do—fine work. They could do even better


24

The term of the proposed agreement that I oppose is that which
provides for the automatic transfer to USDA Graduate School of
over $72 million of noncompetitive work funded by Federal tax-
payers.

'y second point of opposition is to the graduate school’s ongoing
eligibility to receive interagency agreements which provide it the
opportunity to grab millions of dollars of work each year non-
competitively, despite the fact that these are commercial services
readily available from the private sector.

Members of the subcommittee, let’s get the record straight from
the outset. The graduate school of the Department of Agriculture,
despite its name and 74-year history in this area, is not part of the
Federal Government. It is a “nonappropriated fund instrumental-
ity,” a NAFI, which means it gets no direct funding from Congress.

Instead, it is supported entirely by fees that it charges to stu-
dents and Federal agencies. And because it is not a Federal agency,
the graduate school should not receive sole source interagency
training contracts or agreements.

As you can see, both of my issues today center on the principle
of full and open competition. Federal Acquisition Regulation 6.101
clearly states, “Contracting officers shall promote and provide for
full and open competition in soliciting offers and awarding govern-
ment contracts.”

The FAR further states, “No agency shall contract for supplies
and services from another agency for the purposes of avoiding re-
quirements of full and open competition.” This regulation has re-
sulted in the U.S. Government purchasing the best products, re-
search, and services that the market can produce.

Now, how does this focus on competition relate to the graduate
school’s unfair practices? Quite simply, the graduate school knows
that interagency agreements are the key to millions of dollars of
noncompetitive work. Why, you may ask? Because Federal training
officers and contracting officers will invariably choose the path of
least resistance. And the path of least resistance is an interagency
agreement.

It helps the buyer circumvent the FAR requirement for full and
open competition, despite the fact that the FAR prohibits the use
of interagency agreements to avoid competition. In a 1978 ruling,
the Comptroller General clearly stated, “For all practical purposes,
the obtaining of goods and services from a NAFI is tantamount to
obtaining them from a nongovernment commercial source.”

Despite this clear ruling to the contrary, the graduate school
nonetheless received and accepted interagency agreements. In fact,
the graduate school was the focus of a Federal grand jury in 1985
in connection with the abuse of such agreements. In this case, the
Army had bypassed the competitive procurement process and pur-
chased items such as a microwave oven, a bar stool, an exercise
machine, all under the guise of an interagency agreement with the
graduate school for educational services.

In a ruling that sprang from the grand jury probe, the Comptrol-
ler General used even stronger words than he had in this 1978 rul-
ing and directed them squarely at the USDA Graduate School. And
I quote: Graduate school of the Department of Agriculture, as a
NAFI, is not a proper recipient of interagency orders from govern-


143

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10

Numerous organizations have conducted studies on contracting out. In

1984, the Grace Commission recommended contracting out and estimated that
$4.6 billion a year could be saved by using private contractors to perform the
commercial activities currently accomplished in house by federal employees,
while at that time OMB estimated the savings at up to $3 billion annually.

Earlier this year, the Heritage Foundation issued a report, “cutting the

Deficit and Improving Services By Contracting Out" which stated:

"Contracting out government services to the private sector offers
the new Congress the winning opportunity to make substantial cuts
in federal spending - as much as $9 billion per year - without
reducing essential constituent services."

The recently released report of the Commission on the Roles and

Missions of the Armed Forces, know as the "White Commission", indicated
that in the Department of Defense

“at least 250,000 civilian employees are performing commercial-
type activities that do not need to be performed by government
personnel ... we are confident our recommendations for greater use
of private market competition will lower DOD support costs and
improve performance. A 20 percent savings from outsourcing the
Department's commercial-type workload would free over $3 billion
per year for higher priority defense needs ... We recommend that
the government in general, and the Department of Defense in
particular, return to the basic principle that the government should
not compete with its citizens."

The issue of government competition with the private sector has become

so pervasive that the 1986 White House Conference on Small Business adopted
as one of its leading planks:

“Government at all levels has failed to protect small business from
damaging levels of unfair competition. At the federal, state and
local levels, therefore, laws, regulations and policies should ...
prohibit direct, government created competition in which
government organizations perform commercial services ... New
laws at all levels, particularly at the federal level, should require


141 ’

training which is agency unique or for which security
arrangements preclude the use of outside trainers. Nevertheless,
the downsizing of government, especially administrative

positions, will lead to more training being accomplished through
outside vendors.

Extent of Transfer

The value of the prior contractual obligations which the Graduate
School is fulfilling for OPM is about $8.6 million.

OPM has/or will surplus all unneeded space, facilities, equipment
and furniture in accordance with GSA regulations. GSA will
dispose of the space and equipment in accordance with their
procedures. OPM will not transfer any space, facilities,
furniture or equipment to the Graduate School.

The estimated value of the assets to be turned over to GSA cannot
be calculated until they are finally surplussed. We will provide
you with that estimate when it is available.


29

Testimony of Thomas F. Dungan, Jr., Management Concepts Inc.
Hearing on OPM Privatization of Training Services — July 26, 1995

the fact that this practice is prohibited by the FAR itself

A 1978 ruling of the Comptroller General stated
“for all practical purposes (, ..) the obtaining of goods and services
from a NAFIis tantamount to obtaining them from non-government

commercial sources."

"Additionally, of course, 2 NAF] may compete in, and be awarded a
contract under, a competitive procurement unless otherwise precluded

by its charter from doing so."?

Despite this clear ruling to the contrary, the Graduate School nonetheless received and accepted
interagency agreements. In fact, the Graduate School was the focus of a federal grand jury probe in
1985 in connection with the abuse of such agreements (see Attachment 2). In this case the Army had
bypassed the competitive procurement process and purchased items such as a microwave oven, a bar
stool and an exercise machine -- all under the guise of interagency agreements with the Graduate

School for "educational services."

258 Comp. Gen 94.


98

There are some problems with this. First, it assumes we could
deliver these professional employees like so many hostages. Second,
insofar as the $5 millon figure is concerned, it assumes that the
FPMI had made a legitimate offer and could buy whatever.

Let’s assume for a second that they could, Mr. Chairman. Let’s
look at the particular numbers and put it in the correct context.
The $5 million would reflect 10 percent of the profits to be made.
That would be $50 million in profits in 36 months.

Now, assuming that you could take that base, you require—and
Tm going to assume very generously that they’re an extremely com-
petent company, and they could put together a 10-percent profit
margin out of this base. It means they would have to move to hav-
ing a $500 million business base with a 10-percent profit to gen-
erate this in 36 months.

Now, let’s put it in context, Mr. Chairman. OPM at this time is
talking—we’re talking about $40 million a year. In a 3-year period,
that would be $120 million, operating on the assumption, Mr.
Chairman, that that remain constant, the business remain con-
stant. In that, we’re losing $2.5 million a year.

But let me assume if the burdens of government were taken off
the organization, that could be balanced out, and that was con-
stant. Mr. Chairman, what we're talking about then, we’re ex-
pected to believe, if you will, that a corporation with fewer than 20
full-time people will go into a diminishing marketplace nationwide,
acquire a new staff 800 to 1,000 percent larger than it presently
is, increase the business of $40 million a year that’s losing money
into a $500 million success story generating 10 percent profits.
That’s called La-La Land, Mr. Chairman. That is not an offer.

To bring it back, though, to put it even in its context in La-La
Land, which would take us both to Hollywood—that’s what they do
with movies all the time. They promise you a bit of the profits if
you invest, Mr. Chairman. The largest grossing films in recent
American history often never show a profit, because every bucket
of caviar and magnum of champagne and limousine is billed into
it so that we never see a profit, although the income may be simply
spectacular.

So I would really like to get this $5 million in focus so that we
understand that maybe it was put in with tongue-in-cheek, but I
notice that it has had a recurring theme to it. And I just want to
suggest, Mr. Chairman, it’s not real by any reasonable business
standard. That’s all.

And I’m not meaning to ridicule the People who put it forward,
but it just isn’t a business deal, sir. And I would never suggest for
a moment that it could be seriously considered.

So, Mr. Chairman—well, I guess I have said—I would be less
than candid if I didn’t think it was highly unlikely that we were
going to be a success story and we were ever going to see any addi-
tional moneys coming in. We're talking, again, since 1990, we have
lost $17 millon in this enterprise.

Nevertheless, I am told that OPM met with the officials of FPMI.
And they were always free to try to recruit our training staff. And
in fact, by the way, they did hire three of them. That we under-
stand as of today. But the vast majority of employees chose to work
elsewhere. They voted with their feet, if you would, Mr. Chairman.


140

Conflicting Responsibiliti

OPM has responsibility for overseeing all civil service laws,
rules and regulations including those relating to training
provided to Federal employees. Training is just one area where
OPM has maintained an operational program and an oversight
responsibility for that program. We do not believe there is an
inherent conflict between direct delivery of training and our
Governmentwide responsibility to oversee training. Furthermore,
OPM's direct training delivery role is becoming much less
extensive due to privatization.

Also, OPM has created an organizational entity, the Office of
Merit Systems Oversight and Effectiveness (OMSOE), which is
charged with ensuring that government human resources management
programs, including training, are carried out in accordance with
applicable laws and the merit system principles. This is an
independent organization that reports to the Director of OPM.

While we remain ready to expand oversight of agency training
programs should it become necessary, there have not historically
been significant problems in this area. The primary
responsibility for determining the types and methods of training
to be provided and for evaluating the results of training rests
with the head of each agency. We take our oversight role very
seriously, but attempting to monitor closely every aspect of
every training program offered at every agency is not feasible,
nor is it a wise use of the limited resources available. Rather,
we set broad standards and guidelines for agencies, including
OPM, to follow. The independent nature of OMSOE should allow it
to exercise any oversight necessary without internal conflict or
compromise. Our commitment is to ensure that any training
delivered by OPM meets all applicable laws and that it focuses on
the goals of improving individual and organizational
effectiveness.

OPM has not encountered problems meeting the standards and
guidelines. If such a problem should arise the independent
nature of the OMSOE should enable us to deal with the situation
without any conflict of interest.

Scope of Privatization

Each agency will have to make decisions on what training should
be conducted by its' own employees and what training should be
contracted with vendors be they private companies, individuals or
governmental entities. Commercial vendors provide a substantial
portion of government training already either through contracts
with agencies or through individual training requests. It is
likely that agencies will decide to provide some "in house”


91

2 WI ihe Gri he is init
ravi iv in: i

npetition?

Federal managers and training personnel are not required to avail themselves of services of the
Graduate School. It is only one option for them The Graduate School's strategy is to provide
high value for our federal customers and, therefore, for the US taxpayer. The School does not
use full-time staff for instruction. We contract with individuals and organizations as independent
contractors Therefore, we are continually evaluating potential instructional resources to find the
best value -- a balance of both cost and quality.

The Graduate School (including the OPM units) represent approximately 8 percent of total
government training Most training is done by the agencies themselves (about 57 percent of
training instances in FY 1992) with 10 percent done by other goverment agencies, including the
School The remainder (33 percent) is done by the private sector, colleges, universities and non-
profits There is constant competition among all segments for scarce training dollars, judgements
con which are made by managers who are purchasing the training services, The existing
marketplace for federal taining is very competitive, and the market factors impact quality and
cost

In order to ensure quality, the Graduate School collects student evaluations on all its courses.
These are closely monitored in order to improve the quality of instruction and to select future
independent contractors. In addition, the School regularly seeks feedback from agencies on its
services, and incorporates the feedback into continuous improvement efforts.

‘Question; Would a stronger oversight role for OPM be necessary to compensate for the
lack of market pressure to improve quality?

With existing Small Purchase and Training Act procurement procedures, there is strong market
competition among training sources with pressure for continued cost effectiveness and quality
improvement, However, we fully recognize and support OPM's continuing responsibility for
overseeing the quality of the federal workforce and how it is developed. The School is proud of
the quality and value of our training services and we are pleased to have OPM and others provide
oversight


nu

strict government reliance on the private sector for performance of
commercial-type functions. When cost comparisons are necessary
to accomplish conversion to private sector performance, laws must
include provision for fair and equal cost comparisons. Funds
controlled by a government entity must not be used to establish or
conduct a commercial activity on U.S. property.”

This year's White House Conference on Small Business, which met here
in Washington last month, again made this issue one of its top priorities. Its
plank stated that Congress should enact legislation that would prohibit
government agencies and tax exempt and anti-trust exempt organizations from
engaging in commercial activities in direct competition with small businesses.

In a recent report, “Listening to America", th¢’Republican National
Committee’s National Policy Forum, said:

"In reducing the size and scope of government, it is time for
Washington to learn from the lessons of the state and local
governments. In Indianapolis, Jersey City, Dallas, Charlotte and
Philadelphia, city governments under Democrat as well as
Republican administration are+turning to privatization to do more
with less. In some cases, governments are getting out of the
business of doing things they never should have done in the first
place. In other cases, private companies compete with public
employees to provide service at the highest quality and the lowest
cost.

"The federal government can learn much from the new breed of
mayors and governors who are responding to the call from their
friends and neighbors to put government back in the hands of the
people who found it, to rethink the role of government; to get out
of businesses it doesn’t belong in ...

On June 15, the House overwhelmingly adopted my amendment to the
Defense Authorization bill which establishes both a statutory policy and
implementation mechanism for contracting out in the Department of Defense.
The text of my amendment is attached to my statement.


97

Early this year, we set several goals for the privatization process
to keep the training programs together, if possible, to provide a na-
tional delivery capacity and, thus, to have a seamless transition
that would involve no disruption or additional cost to our cus-
tomers.

Therein is the essence in every mandate to our employees and
everything else which formed the nucleus of what the baseline was
for us, to give our employees a chance to work together in a new
organization if that was what they wanted and at the same time
to move quickly to prevent further financial loss to the public treas-

ry.

In order to meet those goals, we worked closely with the affected
training staff to help them explore their options and decisions af-
fecting their lives and their careers. The fact that some 220 tal-
ented training specialists were leaving OPM did not go unnoticed.
Some private training firms expressed interest in hiring some or
even all of our employees.

Some firms thought they could buy our training program, just as
someone might buy a hardware store or a baseball team. There
were two problems with this. First, we had no legal authority to
sell our training program. And second, we really had nothing to
sell, because basically, the real talent we’re talking about and the
real value we had went up and down in the elevators every day,
Mr. Chairman.

The training program’s one great asset was, quite frankly, its tal-
ented employees. They were free agents. Private firms were free to
recruit them. They were not ours to sell. The employees believed
that there was strength in numbers, and many of them negotiated
together with existing firms and asked us to help them to do that.
We did that at their request, Mr. Chairman.

Did we have other assets? Sure. We had course materials we had
developed, but they had little value, because private firms routinely
obtained them under the Freedom of Information Act for no cost
beyond copying fees. We had some existing contracts, but once
privatized, our customers would be free to honor them or not as
they chose.

We had some used furniture, computers, office space and the
like, but they were government property and not really ours to sell.

In his letter of July 19th, Chairman Mica spoke of a proposal
that would have paid the government $5 million for the training
program and asked why we had given away the resources when
such an offer existed. That specific proposal came from FPMI Com-
munications, which we are told has about 14 full-time employees,
many of whom are former government employees, so we know that
there’s excellence in the corporation.

One of the partners, Dennis Reischl, did, in fact, send us a fax
which expressed a wish to—and I quote—“purchase” training pro-
grams. Specifically, his fax proposed to—and now I quote again—
“pay to the Federal Government in consideration for the named
business units 10 percent of all pre-tax profits FPMI derives from
its combined company operations in the first 36 months following
the transfer of the OPM training units up to a cumulative maxi-
mum payment of $5 million.”


102

STATEMENT BY
HONORABLE JAMES B. KING
DIRECTOR, OFFICE OF PERSONNEL MANAGEMENT

before the

SUBCOMMITTEE ON CIVIL SERVICE
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
UNITED STATES HOUSE OF REPRESENTATIVES

at a hearing on
PRIVATIZATION OF OPM/S TRAINING PROGRAMS

JULY 26, 1995

Mr. Chairman and members of the subcommittee:

I thank you for this opportunity to provide testimony
about the Office of Personnel Management’s recent privatization of
its non-residential training programs. We believe this to be the
first major privatization of its kind to be carried out by this or
any other administration.

Permit me, Mr. Chairman, to give the subcommittee sone
background on this important move.

OPM has been carrying out interagency training programs
since soon after the passage of the Government Employees Training
Act in 1958.

Last year, the OPM training programs that we have now
privatized earned some $40 million. They represented about 4% of
the total training received by government employees, with our
remaining programs, other federal agencies and private training
companies carrying out the other 96%.

These private firms have certain advantages over a
governmental training program that is intended to be self-
sustaining. They have far more flexibility in hiring and can much
more easily expand or contract in response to market conditions.
They can rent office space as they wish. They can protect their
teaching materials under the copyright laws, and otherwise protect
their innovations by legal means.

We are required to use the GPO, while private training
companies can use faster and cheaper private printers. They have a
larger customer pool, in that we train only federal employees and
they also train the general public. They can accept cash from
students and we can’t. They have far greater flexibility in
purchasing and greater freedom to reward and compensate their
employees.


118

privatization at the hearing on the privatization of OPM’s Office
of Federal Investigations on June 15, 1995. At that same
hearing, we also learned that although a humane gesture, the
investigators want no part of it. The employees of the training
function -- let’s just say -- have been less vocal than the
investigators. 1 believe the USDA Graduate School option was

a contributing factor to their silence and acceptance.

It is no secret that | am not an advocate of priv

izing
government functions. For some reason, we have been
induced to believe that the private sector, because it’s the
private sector, offers efficiency that cannot be matched by
government. | have yet to be convinced of this.

| do not, however, want to confuse this effort with other
privatization efforts, particularly those using OMB Circular A-
76 guidelines. OPM'’s training services merger with the USDA
Graduate School is not "true privatization” in the context of
the definition that has evolved over the last several months. |
hope this is not the main focus of this hearing. There are a

number of other issues to explore without focusing on a moot

2


65

To state the obvious, this is the wrong way to go about privatizing and
downsizing OPM's training operation—or any other operation, for that
matter.

What is the right way, then? Is the only alternative, as Director King implies,
to "inhumanely" dump OPM's employees on the street and leave them to fend
for themselves? Obviously not. There is a considerably better solution readily
available, as we repeatedly advised Mr. King in our initial contacts with
OPM.

To begin with, we would never advocate simply dumping OPM’s employees on
the street, labeling them as a liability on the public. Indeed, as former federal
employees ourselves, the last thing we'd advocate is inhumane treatment of
anyone who has served the government well and faithfully. Quite the
contrary.

We know how many hard-working, talented people are in that agency. And
we know what it is like to go through a major career disruption and all the
uncertainty and anxiety associated with it. We know it all too well, having
started this business, literally, from our kitchen tables—with the investment
of our life savings. But, having stepped outside the government, we also know
how many other options are available to these employees than most of them
realize.

What we advocated to Mr. King—and continue to advocate today—is that
OPM truly privatize by simply getting out of the business, thereby leaving
the private vendors who already provide all the actual training to deal
directly with agencies, without the intervention of a broker. That would open
the federal training market. And, far from leaving OPM employees
unemployed and without prospects, it would accomplish just the opposite.

Opening this $30 million a year market to genuine competition would cause
two things to happen. First, the companies already in the market, such as
ours, would quickly move to expand. Second, other new companies would
spring up, responding to obvious new opportunities. Both would need

14
FPMI Communications, Inc. + 707 Fiber Street * Huntsville, Alabama 35801-5833


71

But how could I not know it? I had experienced it. And when I
was experiencing it, I didn’t quit then and come to petition to Con-
gress to change things just for me. And I’m perfectly willing to play
now the hand that I’m dealt now, whatever the Congress does or
doesn’t do.

I mentioned that we don’t think of OPM and the USDA Grad
School _as competitors because they don’t compete. And that is
right. But they are certainly a big fact of life in our environment.
Our business is beginning to succeed in that context for the very
reason that we do compete and that we are competitive. We and
they are qualitatively different animals.

We have the natural advantage any economist would predict for
a competitive organization. Our prices are lower for equivalent
training, and I mean hundreds of dollars lower per person.

We provide an absolute money-back guarantee. We are flexible,
and we will go where the customer needs us, saving the customer
additional hundreds of dollars per person in travel and per diem.
In short, we are low-cost, high-quality, completely reliable, respon-
sive, customer-friendly, and finally, entrepreneurial, which is why
I could not resist putting this commercial in this statement.

Turning specifically to the question before you, should they be
competitive? Should the playing field be leveled? The answer is
really largely a matter of philosophy. And it’s your call, not mine.
I have my own views, of course, and I’ve already mentioned impor-
tant advantages, including advantages to my company.

But I do not delude myself that it’s your job to make my life easi-
er. You must determine the public interest, and I’m not going to
tell you what it is in this case, because I don’t know it as well as
you.

I have known about the USDA Grad School for most of my ca-
reer, but I’ve had no occasion to work with them. I have never un-
derstood them, even why they were established. I can conceive of
gain but no loss whatsoever, actual or theoretical, from the revoca-
tion of their noncompetitive privilege.

In the case of OPM, I can also conceive of much gain, but in their
case, a potential loss. The 1996 edition of the OPM management
development center catalogue contains a statement by Director
James King. I quote: I regard governmentwide executive develop-
ment as provided by the Federal Executive Institute and the Man-
agement Development Centers as a corporate resource and one of
OPM's core functions, end quote.

Continuing the quote, “We serve not only our agency customers,
but also the President by providing executive branch leadership for
managing the government.” I understand him to say that training
really should be delivered by the government.

It is a truism, of course, that competition in the production and
delivery of goods and services is in the public interest, absent an
overriding reason to the contrary. Previous Congresses have made
laws and gave OPM their preferential status at the expense of the
lower cost, efficiency and responsiveness that they could have got-
ten from the private sector.

I assume they considered their reasons sufficient at the time. If
you conclude those reasons still exist with the same force as before,
then it makes no sense whatsoever to privatize them now. That is,


16

ing, the General Services Administration Regional Office Building,
and the Federal Judiciary Building. In addition, the USDA Grad-
uate School has the ability to enter into interagency agreements
with other Federal agencies without—let me say that again—with-
out complying with Federal regulations which private businesses
must follow.

By ghoosing, to transfer its training function to the USDA Grad-
uate School, OPM is choosing to unfairly compete with the private
sector and closing off, in my opinion, an area that would absolutely
thrive if competition was allowed in the free market. The Federal
Government was never meant to be in the business of competing
with the private sector, as I said earlier, and OPM’s training serv-
ices are not inherent government functions and duplicate what’s al-
ready provided for in the private sector.

And I should point out to this committee that nearly 90 percent
of current Federal training is provided by private contractors. But
unfortunately, in this case, OPM is way behind the curve and I
think in many cases, frankly, tried to fight and to buck that trend.

This arrangement, in my opinion, between OPM and the USDA
Graduate School is not privatization. By refusing to consider all
possible cost-saving options, including an open, competitive bid,
OPM is denying taxpayers the opportunity to both save money and
to simultaneously really downsize the government.

OPM has also denied free market access to Federal training sec-
tors, and the bottom line is that privatization is meant to open op-
portunities to the private sectors, not, in my opinion, as this agree-
ment was done, to deny them. And I'll submit the rest of my state-
ment for the record, Mr. Chairman.

[The prepared statement of Hon. Scott Klug follows:]


99

Mr. Mica’s letter also asked about some estimates for the cost of
privatization that were given in a paper our staff prepared back in
February. I must say, those figures were highly tentative and were
based on assumptions we would no longer make in the face of
knowledge rather than guesses. We learned a great deal since
those estimates were first made. No matter what we did, there
were large, fixed costs.

Based on the information we now have, we estimate that the ac-
tion we took cost about $3.5 million less than it would have cost
to simply have terminated the training staff. I am submitting de-
tailed explanations of those particular figures for the committee.
These savings came because we moved faster than anticipated.

Let me add something here, Mr. Chairman. We had been losin;
over $300,000 a year on average. Mr. Chairman, pardon me. I sai
$300,000—a month. That’s approximately a million and a quarter
in a year. We're losing almost $10,000 a working day.

So when we accelerate the pace, Mr. Chairman, in making our
decisions and moving forward to get people off the payroll and get
this program away from the government under our management,
we are saving substantial amounts of money for the taxpayers. And
that’s somethi I don't think always comes through. Because
sometimes, people don’t always understand that deferred costs are
the savings you make by not spending.

I would like to make it very clear that every day, our career em-
ployees saved substantial money and also because we didn’t need
any capitalization, any feasibility studies, or outside consultants,
and because the action we took resulted in less of an outlay for un-
employment compensation, outplacement and retraining, and liti-
gation of employee actions, which can be very costly, although they
always seem to be hidden.

In short, the privatization that we achieved saved the taxpayers
at least $3.5 million, while also helping our employees to do what
we felt was best for their careers in serving our customers’ best in-
terests on their terms, our customers’ terms.

Mr. Chairman, I would also like to add that what we're also
doing is precedent-setting. And we're setting a tone in government
that must be downsized. I think we're in universal agreement. The
question is, can that be done in a humane and decent fashion. And
I think we have shown that can be done. And again, we never lost
sight of the bottom line, and that is the service to the American
people.

our letter also asked about the training unit’s revolving fund
debt, which now totals about $16 billion, Mr. Chairman. We're
working with OMB to determine the most efficient way of resolving
that deficit, as well as with the staff of both House and Senate Ap-
propriations Committees. It is clear that we are no longer in a
downward spiral of having good money chasing after bad.

As the training staff explored its options, they came to believe
the two most viable options were to merge with an existing non-
appropriated fund instrumentality such as the graduate school and
for them to create an employee stock ownership plan, or an ESOP.
We brought experts to brief the employees on an ESOP.

After hearing them, our employees felt that an ESOP might not
be feasible from their perspective. And most of them preferred to


21

Mr. Mica. Just a couple of quick questions, if I may. There has
been a sort of “Gentle Ben” mentality in the Federal Government
that nobody gets fired, that we try to place everybody. And one of
the alternatives has been the ESOP’s or employee participation
programs in taking over the “privatization” of some function.

I think from a practical standpoint, we should do our best to try
to accommodate employees. Would you be opposed to a situation
where we could give an opportunity for employees to compete to
gain this activity if we had a more level playing field?

Mr. Kua. Absolutely. And if you look at privatization across the
United States, I think you find in many States and in some cities—
Indianapolis in particular—that’s exactly the kind of management
style that has been used to say, “We’re not going to preclude gov-
ernment employees from getting these contracts, and we’re going to
allow, them to compete; and if they compete and win, they get the

eal.”

That’s an idea that, for example, has been used in a number of
communities with sanitation services. If you can compete and gov-
ernment employees can put together 4 package that beats the pri-
vate sector, you should get the job and absolutely, rightfully so.

It’s frankly part of the debate that went on in this very institu-
tion over our famous barber shop and beauty shop: Should the peo-
ple who run the barber shop and beauty shop who are on the Fed-
eral payrolls today be precluded from competing for those contracts
and for running those operations in Congress? Absolutely not.
Should the deal be wired for them? Absolutely not, as well.

I would suggest, Mr. Chairman, part of the decision we have to
make, it seems to me, as the board of directors for the U.S. Govern-
ment, is what ultimately our goal has to be. And I think our goal
has to be to deliver the most cost-effective services to our constitu-
ents. And in some cases, unfortunately, that may mean making de-
cisions in terms of staffing and personnel.

One example from one other country. New Zealand several years
ago decided to corporatize its post office. It has cut its work force
in half by roughly 40 percent. It used to lose, the New Zealand post
office, about $300 million a year. It now makes $400 million a year.
And in a statement that every single American can identify with,
in the last 18 months, the New Zealand post office has lowered the
price of its stamps three times.

So clearly, we have an obligation to Federal employees who have
served us well. But ultimately, I would argue, there’s a fundamen-
tally important obligation to our taxpayers to deliver the services
as cheaply and as efficiently as possible.

Mr. Mica. You mentioned that we're the board of directors. And
we're trying to run the place like that. But we're also a legislative
body, and you have to set the rules and legislation by which these
transitions are made. Do you have a model or something that you
could suggest that you’ve seen specifically as far as a legislative di-
rective that would incorporate some of your concerns?

Mr. Kuuc. No, I haven’t. And, frankly, one of the great frustra-
tions is not only the Federal Government in many ways behind the
State governments in this case. We’re behind much of what the
rest of the world has done in privatization initiatives. And I think
that’s always a very delicate situation, especially when you see


50

Mr. Mica. I thank you. I didn’t mean to cut you off, but we do
have a series of votes coming up. I want to try to get Mr. Reischl
in before the votes, and then we will recess for a series of four
votes. We'll be gone for at least a half hour or more.

Mr. Reischl, if you’ll go ahead. When the bell goes off, you'll have
another additional 2 to 3 minutes. We'll let you proceed. Welcome,
and thank you.

Mr. REISCHL. Thank you, Mr. Chairman and members of the
committee. We greatly appreciate our opportunity to be here this
afternoon. I’m going to shorten my comments and deviate slightly
from them, because I see no point in retreading ground that has
already been covered. I’m quite sure you've picked up a number of
the points already.

Several things I would like to say. We’re a small company that
has been in business now for 10 years. And we produce a variety
of training materials, instructional materials, and publications that
we sell to various Federal agencies. In the course of doing that, our
primary competitor has been the U.S. Office of Personnel Manage-
ment.

And, of course, in dealing with them, we have learned a lot about
what it’s like to deal with a federally sponsored business, one that
has, as Mr. Dungan has just addressed, the advantage of not hav-
ing to compete for business, for one thing, and second of all, having
the enormous advantage of having inside access to its customer
base.

These combine for an enormous competitive advantage, obvi-
ously. But one of the things that I wanted to address today in talk-
ing about the problems with having any government entity, I
think, being a private, profit-driven business, mixing governmental
privilege, if you will, and position with a profit motive, is that we
found to our dismay over the last 10 years that even with those ad-
vantages, al] too often, we found OPM officials in different parts of
the country seem to feel it absolutely necessary to engage in what,
for lack of a better term, I’ll simply call what it is, coercive tactics.

Tm going to skip over this part, since I have 2 minutes. It’s cov-
ered in our longer submission, and we’ll pick that up. Let me jump
right to what I think to be the biggest problem we see with this
transfer, if you will.

And it really comes off something Mr. Dungan started to address
near the end of his presentation. And that’s just this, that in mov-
ing this operation over there, we have—I’ll put this bluntly—you’re
creating or allowing to be created if it stands the worst nightmare
I can imagine for a small, private firm.

We will have sitting over there an operation that can chameleon-
like contend 1 day it’s a government entity with the purpose of
avoiding competition, avoiding taxes, having insider access to the
customer base, being able to sidestep the ethics rules that restrict
the kinds of things we’re able to do, such as having Federal em-
ployees sit on our boards of directors, that sort of thing—it can
avoid all of those things, can avoid most public scrutiny and much
congressional scrutiny as a NAFI, and yet they’re after a profit mo-
tive.

This is extremely difficult to compete with, gentlemen and Mrs.
Morella. It’s a very, very difficult kind of a thing to confront. I don’t


95

Mr. Bass. Very well. Well, thank you very much, Mr. Hudson.
There are no other members of the subcommittee here to ask ques-
tions. I've completed the questions that I have for you. And I would
like to thank you very much for coming up here this afternoon to
testify before us.

Should we leave the record open for any written questions that
we may have submitted to you in hopes that you might be able to
answer them in writing, in case there are other members of the
subcommittee that wish to participate?

Mr. Hupson. OK.

Mr. Bass. With that, I thank you very much for your time.

Mr. Hupson. Thank you.

Mr. Bass. Before you sit down, we would like to welcome Mary
Michelson, Carol Okin, and our friend Jim King, whom I’m gettin;
to know. I didn’t realize when I took this assignment how often
was going to be seeing you here. It’s a pleasure to see you here
again. And as is customary testifying before this committee, could
you please raise your right hand and repeat after me.

[Witnesses sworn.]

Mr. Bass. Let the record show that the witnesses answered in
the affirmative.

Thank you very much for being here today. And without any fur-
ther ado, Jim, if you would like to proceed with your testimony.

STATEMENT OF JAMES B. KING, DIRECTOR, OFFICE OF PER-
SONNEL MANAGEMENT, ACCOMPANIED BY CAROL OKIN;
AND MARY MICHELSON

Mr. KinG. Mr. Chairman, I do want to thank you for this oppor-
tunity to provide testimony about the Office of Personnel Manage-
ment’s recent privatization of its nonresidential training programs.
We believe this is the first major privatization of the kind to be
carried out by this or any other administration.

Permit me, if you would, Mr. Chairman, to give the subcommit-
tee some background on this important move. OPM has been carry-
ing out interagency training programs since soon after the passage
of the Government Employees Training Act of 1958. So it’s about
87 years, Mr. Chairman.

Last year, the OPM training programs that we now have
privatized earned some $40 million. They represented about 4 per-
cent of the total training received by government employees with
our remaining programs and other Federal agencies and private
training companies carrying out the other 96 percent.

These private firms had certain advantages over governmental
training programs, and it’s intended to be self-sustaining. By the
way, we were operating under what’s called the “revolving fund,”
Mr. Chairman. So it’s supposed to be run as a private sector oper-
ation as far as funding goes, but it’s de facto government, because
all of the people in it get their salaries through appropriated money
and are civil servants. That’s just a point of clarification.

And they have far more flexibility, quite frankly, in hiring and
firing and can much more easily expand or contract in response to
changing market conditions. They can rent office space as they
wish at market prices, Mr. Chairman. They can protect their teach-


33

Testimony of Thomas F. Dungan, Jr., Management Concepts Inc.
Hearing on OPM Privatization of Traming Services —- July 26, 1995

The Solution
Members of the subcommittee, private industry should, in the interest of fairness, be given an
opportunity to compete on a full and open basis for OPM's $72 million training backlog The USDA

Graduate School is no more entitled to this gift than is Harvard University.

Second, because the USDA Graduate School is not a government entity, it should be required to
compete on a level playing field with its competitors. Section 1669 of P.L. 101-624 should be

repealed

What would happen if we level the competitive playing field, and change the terms of the merger to

require the USDA Graduate School to compete for OPM's $72 million backlog ?

= awider array of training services available to the federal sector at better prices,

TM a training community that is quicker to respond to the needs of the marketplace:

® a broader tax base due to a more robust market for private training providers, and
= agovernment that is leaner and more efficient because it meets its training needs with

resources that already exist in the commercial marketplace

I thank you for your time and attention, and I'll be happy to answer any questions you may have.

(attachments follow’)


133

Auachment 2
THE RETIREMENT WORKSHOP

SEMINARS * WORKSHOPS + PERSONAL PLANNING

P.O 0x 21101 PHILADELPHIA PA I9L1¢ (218) 824.3697

~~ COPY

On July 1, OPM ended its training business and in the spirit and intent of privatiza
you will now be able to utilize the most cost effective method of providing training for
agency/activity, while stili maintaining the quality educational experiences that you have
scheduled in the past,

My pariner, Audrey |. Manley, and 1 will not be associated or affiliated with any other
public, non-profit, or private enterprise that will be providing training We will be offering.
training directly 10 you

Over the years the success of the retirement seminars has been the quality of instructors
instructors who not only have the depth of subject knowledge but the educational techniques to
design and present the complex issues with clarity and understanding, Until now you had to go.
through a third party to obtain these services, No more third parties, you now have direct access,
eliminating any "go-berwecns", and greatly reducing your costs,

‘The response to the May survey overwhelming requested that the courses be designed 10
be more cost effective and provide only the most important elements of reuremenvjvb separation
planning - Financial Planning, CSRS/FERS Benefits. Social Security, and Wills & [states - the
‘outline of courses in the enclosed brochure reflects this request,

In order to respond to your budget needs we have eliminated the "frills" and most of the
overhead expenses. The fee for the two day courses will be $3,500, and the one day courses
will be $1,500. This will include all expenses, (except air fares if needed). There will be no
restrictions set on the number of participants you can schedule for the on site courses

The enclosed will give you more details of our teaining proposals. look forward to our
continued success. My partner and I stand ready « help you implement your agency/act
teaining goals and objectives for any scheduled retirement courses for the remaining of this fiscal
year, and those in the planning stages for fiscal "96.

Sincerely,

Manning [1 Mosley Uf
General Manager


WW
CONGRESSMAN SCOTT KLUG’S
TESTIMONY BEFORE
THE HOUSE GOVERNMENT AFFAIRS
AND OVERSIGHT
SUBCOMMITTEE ON CIVIL SERVCE
ON THE OFFICE OF PERSONNEL
MANAGEMENT’S
WORKFORCE TRAINING SERVICES

JULY 26, 1995


61

pressure, government entities do not hesitate to abuse their position and
status to protect their business interests.

The most obvious abuse of power to protect parochial interests, of course, is
the propensity of agencies to write the very rules of competition to advantage
themselves. A prime example of that was OPM's authoring of both legislation
and regulations requiring agencies, absent exigent circumstances, to
purchase training services from it.

A more current example is the USDA Grad School's slick efforts to exempt
itself from the competitive bid requirements by burying the exemption deep
in the bowels of the USDA appropriations bill.

But even on a day-to-day basis, we soon discovered that when faced with
competition—even from an operation as small as ours—federal businesses
quickly resort to abusive uses of position, authority, and whatever coercive
power might be available, in order to win or retain a business advantage.

For example, agency training officers in several regions told us that OPM
officials had advised them they might have trouble passing its dreaded
Personnel Management Evaluation inspections if they used private training
vendors. This sort of thing is inevitable, we believe, when the fox gets to rate
the sufficiency of the security arrangements the chickens have made.

In other instances, OPM officials told agencies that we had plagiarized OPM
training materials. That the claim was ludicrous, particularly since the
higher quality of our materials is one of our few advantages in this rigged
market, made no difference. The mere assertion hurt our reputation with
potential customers—as it was obviously intended to do.

We've also been told by numerous freelance instructors—and several former
OPM officials—that OPM officials routinely threatened to blacklist
freelancers from all future OPM contract work if they worked for any private
sector competitors. The theory being, of course, that if one can cut off the

10
FPMI Communications, Inc. + 707 Fiber Street * Huntsville, Alabama 35801-5833


130

Page 2

Many of the responses were so illogical that we are convinced that the confusion
Caused by this secret agement hernween OPM and the USDA Graduated School was done
on purpose in order to keep the monopoly they enjoyed Mere is a sample of the
responses from federal employees responsible for purchasing goods and services:

"We don’t want to upset OPM by cancelling the current agreements."
we have this verhal agreement. so we think we should honor it.”
“Vm not sure we can legally change the agreement now "

Now, according to testimony given by the Director of OPM, any contracts that
existed before the "privatization" could be reevaluated. His words, We had some
existing contracts, but once we privatized our customers would be free t honor them
or not, as they chose”

Our concern is that the federal employees will continue to take the path of least
resistance when it comes to contracting out services; the "Interagency Service Agrcement'.
This is one of the most abused administeative tools on the books, and the LISDA Graduate
School should not be allowed to have it, Also my understanding of the Federal
Acquisition Regulation (FAR 6.101), is that it requices “full and open competition in
soliciting offers and awarding goverament contracts”

The following are specific instances where contracting offices have taken “the path
of least resistance" when they could have reevaluated existing contracts, but didnot
because of the Interagency Agrcement that OPM had befare "privatization", and the
Graduate School currently has

The Training & Development Branch, (US. Army), Bayonne, New Jersey paid the
Graduate School $5,900 for a Pre-Retirement Seminar held on July 25-27, and the training
course was limited to 25 participants without additional costs. Our firm's pricing for the
Pre-Retirement progeam is $3,500 with no restriction on the number of participants. This
same branch had another Pre-Retirement Seminar scheduled for August, and they used
the same higher cost provider, this time they paid $7,900 for 35 participants

The Human Resources Office, (Naval Air Station), Patuxent River, Maryland paid
the Graduate School $4,400 for a Pre-Retirement Seminar held on fuly 11-12, and the
course was limited to 25 participants without additional costs, Again our firm’s pricing
for the program is $3,500 with no restriction on the number of participants. “This same
agency has scheduled additional Pre-Retirement Seminars for August and still refuses to
consider a more cost effective method of purchasing the service

The Directories of Civihan Personnes, (Army Garrison), Frederick, Maryland paid
$5,900 to the Graduate School for a Pre-Retirement Seminar held on August 8-10, limited
to 25 participants without additional costs. Again our firm's pricing for this progeam is
300 with no limit on the number of participants



114

Ms. OKIN. Between now and the end of the fiscal year, we have
notified GSA that we are going to relinquish the space that we oc-
cupy and that we are going to surplus the materials and equipment
that we use. It is my understanding that the Department of Agri-
culture will enter into and negotiate with GSA for use, rental, tak-
ing over of that equipment.

But we have done, I believe, what we are expected to do when
we are ceasing to do or perform or use equipment and space and
have taken steps to make that happen. What happens after Octo-
ber 1st is really the purview of the grad school.

Mr. KING. But we’re not paying for it anymore, which is the
other bonus.

Ms. OKIN. That’s right. Correct. We are being reimbursed by the
grad school for those expenses for the remainder of this fiscal year.

Mr. Bass. I guess my follow-up question is, then, with the under-
standing that this is privatization, in essence, what you're talking
about here, then, is transferring—is again sort of an in-house
transaction between OPM and GSA for a fixed—for certain fixed
assets that might not normally be available to anybody else in the
outside world who is trying to compete to contract or provide serv-
ices.

I guess my overall question is, is this another example of sort of
nonprivatization of this whole transaction?

Mr. KiNG. Well, Mr. Chairman, I guess it would be almost like
someone coming to you—at this moment, Walt Disney, I think,
since I used a Hollywood analogy, is in a capsule where he has
been frozen at some incredible below zero temperature on the as-
sumption he’s not dead, he’ll be coming back.

Now, I would merely suggest, Mr. Chairman, in this case, we
have got 220 people that no longer at the end of the day, no longer
will work for the government. They don’t draw any money from the
government directly. By the way, your own Congressional Budget
Office will tell you, they’re no longer FTE’s. They have left. They’re
going to be fully competitive as of October 1st, I’m told.

But my particular situation that we were faced with is, how do
we move toward privatization, the first priority being, how do you
continue to serve the government and the taxpayer, both from the
money point of view and from the customer service standpoint? I
think we have achieved that with singing success. In the process,
we're able to be humane with our employees, Mr. Chairman.

And at the end of the day—and we're talking about a total of 90
days and $5 million—we will have successfully transferred out a
program that does become competitive, does go into the full field
and be competitive. And if there are some unfair advantages in
that, that’s someone else’s particular set of concerns.

Ours were, that was a methodology which could be done and the
only methodology open to us where it could be done successfully,
cleanly, and legally. But at the end of the day, Mr. Chairman,
there are 220 employees who were on the Federal payroll who
aren’t there, very simply.

They’re not drawing down any benefits. They’re not drawing
down retirement rights. They’re not drawing down pensions in that
sense or building pension rights. And we all know the implications


116

transferring or the activity that we did that we hope now will be
taken on by the grad school.

So I disagree quite strongly with the significant competitive ad-
vantage that the interagency agreement authority conveys. It’s
there. It is a tool. But it certainly isn’t the total way in which
OPM—when it was doing its business or, I assume the grad school
as it will continue to do business—would use to have that signifi-
cant unfair advantage.

One other point, and I’ll just add this very, very quickly. When
I managed this program, I heard frequently from the line officials
who were out there in the regions delivering the product something
that I heard this afternoon. I heard our people saying, “We are at
an unfair disadvantage. We’re not on a level playing field with the
private sector vendors. We can’t compete with them in prices. We
can’t compete with them in speed.”

And so it’s a very interesting dimension, to be sitting here listen-
ing to both sides of the argument, because I think there have been
some problems with the Federal community feeling that they were
at an unfair disadvantage with the private sector vendors, as well.

Mr. KiNG. But, Mr. Chairman, this kind of a hearing truly does
help to take a look at that field, whatever it is, and to create the
climate that’s very positive and I think will serve the American
people. And that’s one of the reasons I was so pleased that I was
able to be with you today. And I do thank you and the committee.

Mrs. MORELLA. Could I just ask one final question? You men-
tioned the Brookings Institution. And I’m wondering why all of the
nine people who were with the Government Affairs Institute chose
the Brookings Institution?

Mr. Kina. I believe it was money.

Mrs. MORELLA. Money?

Mr. KING. It was a motivator. And I’ve heard that sometimes in-
fluences decisions in the private sector. It doesn’t in the public sec-
tor.

Mrs. MoRELLA. In the public service, we don’t think about that.

Mr. Kinc. That’s what I’ve heard. Now, I can’t vouch for it.

Mrs. MorELLA. Thank you.

Thanks, Mr. Chairman.

Mr. Bass. Thank you very much, Mrs. Morella.

Thank you very much to all three of you for appearing here
today. We appreciate your testimony. And with that, we will close
this subcommittee hearing.

(Whereupon, at 5:18 p.m., the subcommittee was adjourned, sub-
ject to the call of the Chair.]

[Additional material submitted for the hearing record follows:]


one wunomen Foxeru concnees

Congress of the United States
Wouse of Representatives

COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
2157 Ravausn House Orice BULOING.
Wasnincrou, OC 20815-6123

‘The Honorable John L. Mica
Chairman, Subcommittee on Civil Service
Opening Statement
Subcommittee Hearing on OPM Privatization - Training
Suly 26, 1995

Good aftenioon. This hearing will provide an opportunity for the Subcommittee (0 assess
the Office of Personnel Management's privatization initiatives in the area of raining. OPM's
initiative was in response to a National Performance Review cecommendation and, together with
the proposal to create an employee stock ownership plan out of the Office of Federal
Investigations. was intended to save approximately $30 million over five years

“There is no doubt ahout the commercia! nature of training of federal employees. OPM's
540 million per sear training program Was established as a reimbursable activity. similar to
commercially conteacted training provided by a variety of other agencies, commercial
Sreanizations. think tunks. and educational rnstituions--from trade schools through some of the
nation’s leading gradtate schools

‘On May 16. the Oifice of Personne] Manayement and the U.S. Department of Agneulture
Graduate School signed a memorandum of understanding transferring OPM's Workforce
Training Services to the Graduate Sehool. eHeetive July | ofthis year. As of the end of June,
nowt of the remaining training staff had theie federal employ ment terminated, and began working
for the Graduate School The Graduate Schoo! also acquited the training obligations formerly
held by OPM, as well as fists of students. advertising information, certain leased space, training
‘equipment, software, and other assets

In developing cost analyses of five options for the privatization of the training programs.
OPM does not appear to have considered sale to a commercial fim, Yet this transition has
demonstrated the commercial vaue of these training activities.

THOPM had desired lo achieve full privatization of the training function, at least one
opportunity as presented One of the witnesses who will estify today delivered an unsolicited
proposal to OPM offering 85 million to acquire mailing lists. addresses of students. and 2
Testunation as OPM's successor inthe delivery of accredited traning for federal employees. It's
Very unusual in tight budgetary times for any federal agency t0 give away a resource when
private companies are willing to pay fort. This hearing will enable the Subcommitiee to gain a
better understanding of OPM's rationale for this decision

‘although OPM described this initiative as “privatization,” she function is only getting
part of the way to the private sector. The Graduate School, 38 a nonapproprited fund
Pistrumentality of the Department of Agriculture. is still part of the government The Graduate



93

Mr. Bass. Thank you very much, Mr. Hudson. I'll start by asking
a question about the issue of privatization. You cite in your testi-
mony 7 U.S.C. section 5922, which “authorizes Federal agencies to
enter into interagency agreements with the school for training and
services incidental thereto.” You reported “The Secretary of Agri-
culture has issued regulations governing the graduate school and
appoints a general administration board to oversee its affairs.”

You mention that as a government entity, the graduate school
cannot bid on training contracts set aside for small businesses. You
testified that your efforts at continuous improvement rely heavily
upon feedback from agencies and describe your organization as
“one of several government training facilities.”

You noted that for tax purposes, the graduate school is an entity
of the U.S. Government that is not subject to Federal income tax
and is not required to file Federal income tax returns. I guess my
question would be, why would anyone describe this transfer as “pri-
vatization” rather than a shift between agencies?

Mr. Hupson. Well, my understanding on that is that—and essen-
tially, I would believe that Mr. King and others from OPM may
have a response on it, but that essentially, it is following the in-
structions in reinventing government, and that is part of the proc-
ess. Going through the NPR’s decision tree, you'll note that there
is a privatization option.

Essentially, the graduate school is a nonappropriated fund in-
strumentality. It fits or is described maybe more a little bit like a
government corporation, or we sort of fit in that box, if any box,
on that decision tree. So in a sense, that’s following the NPR’s
route for privatization.

As you will see in our testimony, we’re very clear that we are a
government entity. It is a very special, very unique government en-
tity, I think one that has provided a lot of wonderful service over
the years. But it is very unique, and its status is often misunder-
stood.

Mr. Bass. What portion of USDA Graduate School students are
employees of Federal agencies or the government of the District of
Columbia?

Mr. Hupson. Of the prior grad school units, approximately 80
percent would be government employees. And of the units transfer-
ring in, almost 100 percent would be. The 20 percent that are not.
would be mostly in our evening programs, which are open to the
general public and attended by others that might be friends or fam-
ily or co-workers or people who are in the Washington, DC, area.
So most of that 20 percent nongovernment would be evening
courses.

Mr. Bass. Do the agencies provide payment to the graduate
school, or do they reimburse employees for their training expenses?

Mr. Hupson. Most of the training that occurs is daytime train-
ing, daytime seminars. And most of that is paid directly by the
agencies to the graduate school in the form of either contract pay-
ments if it’s a contract or what we call a “182,” which is a govern-
ment form where government agencies purchase essentially seats
in a seminar from us or from any vendor.

Mr. Bass. With most students coming from agencies and most
payments coming from reimbursements by those agencies, wouldn’t


38

Revolving Fund Entity
Notes to Principal Statements

F. ADVANCES .

on-Federal advances are principally advances to employees for official travel. Federal advances are
primarily to the General Services Administration (GSA) for services to be provided at a future date.

G. PROPERTY AND EQUIPMENT

The buildings in which Revolving Fund programs operate are provided by GSA, which charges OPM
@ rate that approximates the commercial rental rates for similar properties. Property and equipment
costing $5,000 or more with an estimated service life over two years or greater are capitalized and
depreciated. @ulk purchases of lesser-value items that aggregate more than $50,000 are also
capitalized. Equipment with an acquisition cost of less than $5,000 is expensed when purchased.

OPM-developed ADP software thst constitutes major systems improvements, i.e., significantly
improves operations (such as new modules or subsystems) or significantly extends the software's life
(for example, major redesigns), costing $5,000 or more with an estimated service life over two years,
is capitalized and amortized. The capitalized cost includes ries and benefits of agency staff for
development. modification, testing, and installation as well as other direct and indirect costs incurred
during development.

Expenditures for property and equipment are recognized as expenses when the asset is consumed in
operations. Equipment is depreciated using the straight-line method over the estimated useful life of
the property, which ranges from 3 to 10 years.

H. ANNUAL, SICK, AND OTHER LEAVE

Annual leave is accrued as it is earned, and the accrual is reduced as leave is taken. Each year, the
lance in the accrued ennual leave account is adjusted to reflect current pay rates. Sick lezve and
ather types of nonvested leave are expensed as taken.

|. DEFERRED REVENUE

Deferred revenue represents funds received from customers in advance of services being performed
and reimbursements earned, primarily for background investigations and for training management
assistance and organizetionsl development services. For background investigations services,
customers are billed when OPM receives the request to perform @ background investigation. The
recognition of revenue from advance billings is deferred until cases are completed. For training
management assistence and organizational development services, customers are billed based upon &
signed interagency agreement. The recognition of revenue from advance billings occurs as services
‘are provided under the agreement,

J. CONTINGENT LIABILITIES

OPM is @ party in various administrative proceedings, legal actions, and claims brought by or against
it. In the opinion of OPM management and legal counsel, the ultimate resolution of these proceedings,
actions, and claims will nat materially affect the financial position or results of operations of the
Revolving Fund.

kK. INVESTED CAPITAL
Invested Capital represents U.S. Government resources initially invested in the Revolving Fund to

commence operations plus the net book value of assets transferred from other Federal agencies
without reimbursement.

“a 3 Financia! Statements - FY 93


125

page 2.

FULL TIME OFFERS MADE,
FULL TIME OFFERS ACCEPTED.

ORGANIZATION PART-TIME OFFERS MADE
‘AND PART-TIME OFFERS ACGEPTED
LOCATION ‘TOTAL EMPLOYED

ATLANTA REGIONAL TRAINING CENTER 14 13 o o 13, =
‘CAREER DEVELOPMENT PROGRAMS, 14 a1 3 1 12 ae
WASHINGTON, D.C.
CHICAGO REGIONAL TRAINING CENTER | 15 14 ° o 4
DALLAS REGIONAL TRAINING CENTER 18 2 1 1 8

NATIONAL INDEPENDENT STUDY 3 13 ° ° 8
CENTER, DENVER
PHILADELPHIA REGIONAL TRAINING 16 14 0 0 14
CENTER
‘SAN FRANCISCO REGIONAL TRAINING 1" 10 1 1 1 fee
CENTER bee
WASHINGTON TRAINING CENTER, 26 2 ° C) 2 pees
ROSSLYN. VA paid

ee Ee ae
EUROPEAN TRAINING PROGRAM, 4 oO ty) 0 oO a
GERMANY (a)
GOVERNMENT AFFAIRS INSTITUTE (b) A 0 A 0 0

TOTAL 437 408 5 3 abl

(a) Final decision on the European Training Center has been extended until December 31, 1995, 2
(©) All9 Government Affairs Institue staff members accepted offers from Brookings Insttute =



100

join an existing program of excellent reputation, rather than risk
the uncertainties of starting a new one. For that and other reasons,
the possibility of joining the well-known and highly respected
USDA Graduate School was the option most employees favored.

The graduate school was founded, as you know, almost 75 years
ago and has grown into a center for continuing education that
serves some 50,000 students a year. And in 1990, the Congress
gave the graduate school the authority to enter into agreements
with Federal agencies.

As I understand it, the graduate school receives no appropriated
money and supports itself through tuition fees. Its employees are
not covered by Federal personnel law. They have private health in-
surance and retirement plans, and their benefit package does not
directly go through appropriated funds.

The graduate school is very interested in hiring many of our
staff. Acting on behalf of our employees, we entered into discus-
sions over the terms of such an arrangement. On May 16th, we and
the graduate school signed a memorandum of understanding. It
provided that the graduate school on July 1 would take over OPM’s
interagency training obligations. By the way, those are worth about
$5 million, Mr. Chairman.

The graduate school agreed to interview all of our training em-
ployees who were interested in employment and to make written.
offers of full-time employment at levels comparable to existing staff
and with its usual benefits package, to about at least, I believe, 134
of our employees.

This agreement was implemented on July 1st. The graduate
school made the 134 offers. Actually, they exceeded the 134 offers.
And thus far, over 100 of our former employees have accepted those
offers. Nine others accepted offers from the Brookings Institution,
and others took jobs elsewhere in government or in the private sec-
tor or retired.

So far, 192 of 220 employees, 87 percent, Mr. Chairman, have
successfully completed their career transition. And we are continu-
ing to work with the remaining 28 people. But most of all, we also
achieved a seamless transition our customers needed and wanted.
OPM’s customers can now take the same high-quality courses as
before, taught by excellent instructors at the same or similar insti-
tutions.

For the record, Mr. Chairman, the graduate school took over
these elements of our work force training service, the career devel-
opment programs, the Washington Training Center, the National
Independent Studies Center, and the regional training centers in
Atlanta, Chicago, Dallas, Philadelphia, and San Francisco.

We did not privatize the Federal Executive Institute or our two
management development centers, because we believe that the
Federal Government, like any major corporation, cannot, should
not surrender control of its management executive training and the
maintenance of excellence by setting high standard, thereby being
a model for the Federal executive development and leadership, both
in the private sector and in the public.

In closing, Mr. Chairman, this privatization is a success story.
The right thing was done for our employees. It was done quickly.
It was done at minimal cost to the taxpayers in the short run, real


4l

Page 53662 follows
As indicated above, the Department of Agriculture cites the Economy Act, 31 U.S.C. Sec. 1535,
and the Government Employees Training Act, 5 U.S.C. Sec. 4104 (1982) as authority for the
“imeragency agreements" here under review. These two statutes, although not interchangeable, are
substantially similar in some respects. The first statute authorizes reimbursable orders for goods or
services between agencies or major organizational units within agencies. The second starute
authorizes reimbursable agreements between agencies for training services.

‘This Office consistently has taken the position that interagency or intra-agency agreements are not
appropriate vehicles for transactions between NAFIs and Government agencies. We conclude that
this position is valid whether the transaction in question is purportedly based on the Economy Act
or on the Training Act.

‘The leading case in this area is $8 Comp.Gen. 94 (1978), wherein we considered the propriety of
procurement of services and merchandise by the Army from Army-related NAFis through the use of
“intra-Army orders." In that decision, we observed:

“Although the NAFIs are recognized as being Government activities, they differ significantly from
other Governmental activites, particularly with respect to budgetary and appropriation requirements.

sence

"We believe that it is these differences, rather than the stams of NAFIs as Government
insrumemalities, which must be controlling here. In all three cases, what is involved is the transfer
of moneys from the Army's appropriation accounts to the accounts of the NAFls over which there
is no direct control either by the Congress (through the appropriation process) or this Office (through
the account settlement authority of 31 U.S.C. 71, 74 (1970)). ‘Thus, for all practical purposes from
an appropriation and procurement standpoint, the obtaining of goods and services from a NAFT is
tantamount to obtaining them from non-Governmental, commercial sources." $8 Comp.Gen. at 97-98

Accordingly, because “obtaining goods and services from a NAF is tantamount to obtaining them
from non-governmental commercial sources," a regular purchase order rather than an intra-agency
or interagency order should be used when services are furnished by a NAFI to an appropriated find
activity. 58 Comp.Gen. at 98-99. See also B-199533, August 25, 1980 (Army acted improperty in
purchasing services from NAFI without contract or regular purchase order processed through
contracting official); B-192859, April 17, 1979 (disposition form, amounting to inter-office
memorandum, is not proper vehicle for transaction between NAFI and Army).

Page 53663 follows

‘We have recognized that sole source procurement through a NAFI may be permissible in certain
ircumstances such as when there are “organizational or fictional reasons which dictate the
impracticability of having services furnished by other than a NAFT" or when orly a NAFI can provide
‘goods and services in “extreme exigency situations.” 58 Comp.Gen. at 98, However, where such
procurements are justified, "appropriate sole-source justifications” and the use of regular purchase
orders are required. 58 Comp.Gen. at 98-99. See B-148581, et al, September 2, 1980 (fact that
‘NAFI had regular supply channel and established transportation and warehouse system for items to