59

vatization decision. And that’s why I showed the chart I did. It’s
not a question of whether you privatize or not. As you know very
well, Mr. Chairman, it’s the options that the employees have fol-
lowing privatization.

Because at the end of the day, privatization means people are
laid off their jobs. And the question was, what direction would we
go? And that’s the humane side. The other one was that the issues
came up on the public interest side almost instantly. And I know
Ms. Lattimore has worked directly with it, and I want to ask her
to speak to this. But the organizations that we service responded
immediately that they shared with us their concerns that were pro-
fessional. Ms. Lattimore.

Ms. LaTrimore. A lot of the evolution of the ESOP not only ad-
dressed the human side in terms of alternative employment for em-
ployees that would be separated from the Federal service as a re-
sult of the privatization decision, but also reflected a number of our
agencies which I think you heard from directly, and saw copies of
letters they sent to me that they were extremely concerned about
any undue disruption as a result of privatization.

y were concerned that there was no single entity that could
pick up our 30-plus thousand investigations and give them the
same Product in the same timely manner at the same quality level
that they had gotten accustomed to; and were very much inter-
ested, if we were moving to privatization, as they understood the
executive branch decision to be, how we could work to replicate as
close to the status quo, outside of the Federal sector, as possible.

And that was one of the factors that played into the decision of
how we moved to privatization.

Mr. Mica. Well, one of the things that disturbs me—in the evo-
lution you say that you're trying to save these people’s jobs. They
are not really pleased with being a part of this, it appears; and
don’t feel that they've been a part of helping make the decision to
create this new entity.

Mr. Kinc. Mr. Chairman, I think, again, it’s been blurred. And
the blurring is that a number of our employees are convinced that
if there’s no ESOP, there will be no privatization. But we actually
asked them the direct question—which was, if this is privatized,
would you rather go to the street or would you rather work and
own your own corporation?

And in that, the response was that well over 70 percent said that
they’re willing. We weren't asking, by the way, and we never pre-
tended to—

Mr. Mica. But so far, it says you need commitments from half
the investigators.

Mr. KiNG. That’s correct.

Mr. Mica. Where are we now?

Ms. LaTTIMORE. The commitment to actually go to work for the
ESOP is significantly further down the road. The trustee that was
engaged to formulate an employee owned company structure, part
of the charter of that trustee is to develop not only the structure
of the company, but to develop the kind of hard base data, which
is types of compensation, types of benefits, types of structure.

Mr. Mica. Well, have you generally asked, do you want in?


123

Subject Interview

Required in all cases and shall be conducted by trained security,
investigative, or counterintelligence personnel to ensure full
investigative coverage.

An additional personal interview shall be conducted when
necessary to resolve any significant information and/or
inconsistencies developed during the investigation. In
departments oz agencies with policies sanctioning the use of
the polygraph for personnel security purposes, the personal
interview may include a polygraph examination, conducted by
a qualified polygraph examiner.

Birth
dependen: certification cf date‘an place of birth received
irectly from appropriate registraticn authority.

verification of
recistratien
y mendezs,

egalsstatus is also required.
3

fication of most recent or mest significant
ndance and/or degree/diploma within the scope of
inve: cigatt fon via sealed transcript received directly from the
tion. If all education is outside of the investigative
the last education above high schocl level will be

verified.

Enpleynens A

Direct verification through records if all periods of employ-
ment within scope but in any event most recent two (2) years.
Personal interviews of two agsFces (Supervisor/coworkers) for
each employment of six mont or shall be attempted.

the event that no employnent ex ax months, interviews of
supervisor/coworkers shat All periods of
unemployment in excess’ js shall be verified
through records and/or leral/military
service and type of disck: fied.



25

threat to the property or safety of others.

- Tllegal use of narcotics, drugs, or other controlled
substances, without evidence of substantial rehabilitation.

-. Knowing and willful engagement in acts or activities
designed to overthrow the U.S. Government by force.

- Any statutory or regulatory bar which prevents the
laveu employment of the person involved in the position in
question.

OPM and agencies consid following additional factors to the

the
extent that they deem these factors pertinent to the individual
case:

- The kind of position for which the person is applying
or in which the person is employed. including the degree of
public trust or risk in the position.

- The nature and seriousne:

of the conduct.

- The circumstances surrounding the conduct.

+ The recency of the conduct.

~ The age of the person involved at the time of the

- Contributing societal conditions.

- The absence or presence of rehabilitation or efforts
toward rehabilitation.


154

The process begins with, and to a great extent relies on,
the accurate self-reporting of biographical information
presented by the candidate for employment or continued security
clearance eligibility. (We update an employee’s security
clearance every five years using the same standards applied to
candidates for employment.) This information is transmitted to
specialists in the Bureau of Diplomatic Security's Personnel
Security and Suitability Division, who are responsible for
reviewing the initial submission and tasking leads for

investigation to agents in the field.

The investigative process is carried out by both
contractors and Special Agents of the Bureau’s Diplomatic
Security Service (DSS) in the United States and abroad.
Because we are a foreign affairs agency, a large number of
applicants and employees have lived and traveled overseas as
well as domestically. The combination of Regional Security
Officers (RSOs) abroad and special agents and contractors
domestically is an efficient and cost-effective mechanism for
performing background investigations. Our RSOs also perform a
significant portion of the investigative checks overseas for
candidates for employment by other federal agencies. Field
offices supervise 250 contractors who are hired on an
individual basis to work exclusively on such investigations.
In addition, the approximately 160 DS special agents who are

assigned to the field offices primarily for conducting criminal


149

a subject's federal and/or state offenses, arrests, and
dispositions.

Private investigators working under contract, however,
generally do not have access to such systems. Individual
agencies contracting for investigative services must secure
their own NACS. In some instances arrangements have been
made for OPM to conduct the requested NACs. Significant
findings from the NACs are generally shared with the private
investigators, who are instructed to perform the fieldwork
necessary to verify or confirm any significant leads
developed.

We do not have information on the extent to which contractor
investigators have experienced difficulties obtaining records
from state and local law enforcement agencies, bureaus of
vital statistics, etc. However, we do note that some
agencies (e.g., the Department of State and the Drug
Enforcement Administration) provide contractors with
credentials that identify them as special investigators, but
do not expressly identify them as contract personnel.

OPM currently has agreements with several states to provide
OPM investigators with data from their information systems.
Generally these agreements are entered into pursuant to 5 USC
9101, which provides that upon request by OPM (or other
identified federal agencies) federal, state, and loca
criminal justice agencies shall make available information
regarding the criminal histories of individuals whom OPM is
investigating. From our reading of this section it is not
clear whether these agreements would be transferrable.

Investigators have reported that both private contractors and
other agencies fail to meet OPM's standards for background
investigations, requiring substantial reworking of
investigative reports. By what measur
investigations deficient? Do these de! nek
material shortcomings in the security, suitability,
public trust adjudications affecting federal employ:
no, is there cause for concern about th
deficiencies? If ma
deficiencies, are there difficulties in OPM's testimony that
agencies are complying with overall standards for such
adjudications?

OPM reviews investigations for adherence to standards that
are incorporated in the OPM Investigator Handbook. For
example, the fieldwork portion of an investigation might be
deemed deficient if it did not cor a Apecitied
did not resolve questions that aros ches might be
deemed deficient if the agency did not Tequest all
appropriate searches.



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 SHADEGG, Arizor

MICHAEL PATRICK FLANAGAN, Illinois
CHARLES F. BASS, New Hampshire

STEVE C. LATOURETTE, Ohio

MARSHALL “MARK” SANFORD, South

Carolina
ROBERT L. EHRLICH, JR., Maryland

JR, Pennsylvania, Chairman
CARDISS COLLINS, Illinois
HENRY A. WAXMAN, California
TOM LANTOS, California
ROBERT E. WISE, Jr., West Virginia
MAJOR R. OWENS, New York
EDOLPHUS TOWNS, New York
JOHN M. SPRATT, Jr., South Carolina
LOUISE McINTOSH SLAUGHTER, New

01

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, Washington,

JAMES P. MORAN, Virginia
GENE GREEN, Texas

CARRIE P. MEEK, Florida
FRANK MASCARA, Pennsylvania
CHAKA FATTAH, Pennsylvania

BERNARD SANDERS, Vermont
(Independent)

James L, CLARKE, Staff Director
KEVIN SABO, General Counsel
duprrt 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

CONSTANCE A. MORELLA, Maryland

JAMES P. MORAN,
BERNARD SANDERS, Vermont (Ind.)
FRANK MASCARA, Pennsylvania

Ex OFFICIO

WILLIAM F. CLINGER, Jr., Pennsylvania

CARDISS COLLINS, Illinois

Georce NesTERCZUK, Staff Director
NeD Lyncu, Professional Staff Member
CAROLINE Fie, Clerk
CepRICK HENDRICKS, Minority Professional Stoff

ap


119

of paperwork. It is indeed painful to be faced with the prospect of losing a federal job and being forced to
compete for employment in the private workptace.

We do feel, howaver, that the other side of the matter must be considered. One reason that wo feel the
ESOP feasibility study, financed by OPM, is so flawed is that it never addressed the private enterprise
side. The authors of the study did not contact ADC, Lid.. or to our knowledge, any of our competitors.
We were not asked for information on the numbers of investigators we have under contract, the number
cases we have done, nor for any other type af information or input we could have provided. indeed, we
were not informed such a study was even being conducted until after it was completed.

‘Another point we hope this Subcommittee addresses is the wisdom of allowing the wolf to own the
chicken coop. It is, after all, OPM's OF! that created the huge deficits that led the Vice President to the
conclusion that the investigations could be handled more economically by outside contractors. If ADC,
‘Ltd. and other background investigations companies are put out of business by an ESOP sole-source
guarantee, who will then be around to help ESOP out if it cannot do the job, or falls hopelessly behind in
the workload, or in any number of other ways runs into problems?

11 ESOP is guaranteed a sole-source monopoly, how wil price and quality be controlled? Our
understanding of the American free markat system is that compotion drives prices down and quality up.
Without competition, how will the Goverment be assured of high quality and reasonable prices? We have
‘only ESOP's word that it will try to keep the prices as low as possible. But those prices at their best will sti
ibe much higher than what the free marketplace can provide. If ESOP is not able to meet al ofits financial
obligations, what recourse does it have but to keep raising its prices? It won't be allowed to go out of
business because it will have aliminated all the competition that would have baen able to bail them out.

‘As a taxpayer, why do wa have to foot the bill for a Government set-up such as this. Think about it, Wo are
all paying for the Federal Government to finance a feasibility study, do a business plan, arrange for cheap
financing for a new business that puts existing firms that can do the work cheaper ... out of business.
‘Then we pay to give this new “private” company free fumiture, office equipment, and computers, We
arrange for the cheapest rates for office space. We then “hire” the very people who put the plan together.
We guarantee them that their salaries and benefits will stay virtually the same as in the previous
goverment jobs. We arrange it so their customers will have to pay before the service is provided so as to
keep the cash flowing. And to top it off, we guarantee that we will squolch any and all possible competition
for up to five years.

‘We ask you: What business would not want to and could not operate under these conditions?


68

as agencies pay for these, and the tighter their budgets become, the
closer look they take at what level of investigation and at what
price of investigation they want.

Mr. Moran. So some of them have done it, some haven't.

Ms. LaTTIMoRE. I don’t believe it’s been a widespread look-see.

Mr. Moran. OK, so——

Mr. KING. But we do have a menu they pick from, Mr. Moran,
of what you get and what it costs.

Mr. Moran. What level of intensity of background check you get?
And it varies in price.

Mr. KING. That’s correct. There is a computer check that you’re
familiar with.

Mr. Moran. Yes.

Mr. KiNG. And you can get the computer check done very, very
inexpensively. And then you get into the up to Q clearance, et
cetera.

Mr. Moran. Sure. And they make that determination. But it
strikes me that we ought to do a department—a governmentwide
analysis of whether the background checks that are currently being
conducted are appropriate to the functions and necessary. Although
with the downsizing, we may want to wait until we see what’s left
to do that. But it would seem that that’s one step that might have
been conducted before doing this.

The other thing that I want to ask about, if it’s all right with
you, Mr. Chairman, I'll bring that up either now or I can wait until
a next round of questioning. But there’s a vast disparity between
what OPM estimates is the cost savings, what OMB estimates is
the cost savings—or the expense, I should say, of ESOP. And actu-
ally, I think there’s probably about three different estimates.

And although OMB has told us how they went about theirs, I
think they also need to tell us why the OPM estimate of $55 mil-
lion is not—well, let’s see, OPM’s estimate that privatization will
cost $55 million, why that’s not a—why you don’t agree with that
figure. Because I gather you don’t agree with that figure. So do you
want to get into that, or do you want to—let’s just find that out.

Mr. DESEVE. Sure, I’d be happy to.

Mr. Moran. Are you sure this is going to save money, what we’re
doing here, Mr. Deceive.
wt DESEvE. Mr. DeSeve. I wouldn’t try to deceive you, Mr.

oran.

Mr. Moran. DeSeve. I don’t mean to be—I shouldn’t be. Deceive,
that’s not a fair thing to say. Mr. DeSeve.

Mr. DESEVE. The people at OMB were very disturbed when they
heard their new controller was going to be called Deceive. They
didn’t think that was good at all. The senior staff told me that I
was in big trouble. Yes, I am satisfied that it’s going to save money;
and I want to deal with your question in two parts. One is the cur-
rent problem within the revolving fund—whether we privatize,
whether we ESOP, whether we continue the progress that we cur-
rently have.

The current problem is the largest segment, and I can’t quote a
precise number. I’ve heard different estimates, and we're working
right now with OPM to verify what the exact amount is. But that
deficit is ultimately going to have to be liquidated. It was a deficit


152

PREPARED STATEMENT OF RONALD A. REAMS, DIRECTOR OF INVESTIGATIONS AND
COUNTERINTELLIGENCE, BUREAU OF DIPLOMATIC SECURITY, U.S. DEPARTMENT OF

STATE

Mc. Chairman and Subcommittee Members:

I am pleased to have the opportunity to present the
perspective of the Department of State on the subject of
personnel security and suitability determinations related to
federal employment. It is absolutely essential to our national
security and to the conduct of good government that federal
agencies have in place effective mechanisms to determine the

reliability and trustworthiness of their employees.

The Department of State’s background investigation program
serves two needs: suitability and security. Investigations
performed by the Bureau of Diplomatic Security (DS) provide the
Department a basis for determining both an individual's
suitability for employment and eligibility for access to

classified information.

The foreign policy and national security mission of the
Department requires that very high standards be met for
suitability for employment. The standards are set out in the
Foreign Affairs Manual (3 FAM 100), which incorporates the
requirements of pertinent executive orders and statutes. They
require that candidates for employment be of excellent

character and professionally qualified. National security also


79

Mr. Moran. I understand that, Mr. DeSeve, and I suspect that
they would be willing to lose money in the initial years to put OPM
out of business. Because then, the Federal Government becomes
dependent upon those firms in the private sector who have the ca-
pacity to do these background checks. But after they put OPM out
of the business at doing these checks, and they have all the busi-
ness, then they can make up for the loss in the initial years.

The Japanese Government does that all the time to us. We have
that in many—

Mr. DESEVE. We would have to—

Mr. Moran [continuing]. Of these privatization efforts, that is
done. What?

Mr. DESEVE. We would have to call the Justice Department at
that point, because it would be acting in restraint of trade. We
hope that an open, free, competitive market would produce a good
result for the Government, as opposed to a bad result.

Mr. Moran. But, you know, there’s nothing illegal about that. If
I were going to do this, that’s just what I would do. I’d underbid,
as they have done so, to make sure that they force this policy deci-
sion their way—to privatize. Because we can look at these initial
numbers and achieve substantial savings in the initial years. They
would be willing, if they've got some large firms bankrolling them,
to take a big loss in the initial years, to capture a substantial share
of the market.

And then they more than make up for it in the out years, be-
cause we're dependent upon them. I think that’s a legitimate con-

cern.

Mr. DESEVE. It could be. I hate to sound like a Republican, but
what we try to see is——

Mr. Moran. Are you a Republican?

Mr. DESEVE. No, sir, I’m not a Republican, and therefore, I hate
to sound like one. Mr. Mascara knows some of my political ante-
cedents.

Mr. Moran. That wasn’t appropriate, I know.

Mr. DESEVE. I apologize for being at all partisan, Mr. Chairman,
but I think the argument here is that free and open competition
with many providers—this is not a business that has, like an auto-
mobile manufacturing company, very high entry. It’s ‘possible, with
appropriate capitalization and an appropriate skill mix, to begin in
a fairly small area, providing, in that geographic area, an inves-
tigation service.

So we believe that capitalism will work very much to the Federal
Government’s advantage in this circumstance. And we think that’s
both a Democratic and a Republican notion.

Mr. Moran. No, I understand that. But I just hope that some of
these assumptions are not Pollyanna-ish. We're really playing hard
ball when we let people go, disrupt their entire lives. And we give
up an important function of the Federal Government on the as-
sumption that the private sector will take it over.

And I jest hope we don’t get ourselves in a situation where we
become dependent upon firms that don’t have the commitment that
Federal employees have, getting the job done; really whose prin-
cipal objective is making profit, it is not performing the function.


ot)

Perhaps there are those who believe we should simply have
cut loose the investigations unit’s employees, but we do not
believe that would be fair to our employees, to our customers, or
to the taxpayers.

An ESOP is the privatization option that allows a nearly
seamless transition for our customers and does not disrupt or
compromise the integrity of our process or our product.

Moving to an ESOP is a cost-effective way to streamline
this service, to preserve an efficient investigative network, and
to provide opportunities for about 760 outstanding workers.

Moreover, given the historical integrity of our
investigations program, and the technological advances we have
made, I do not believe it would be wise or prudent to simply
abandon these employees.

For all these reasons, it is in the public interest to
award a sole source contract to this ESOP company during its first
several years as an independent operation.

The privatization plan has led to concerns about the
safeguarding of information, process and systems. We therefore will
maintain a staff to carry out policy and oversight responsibilities
on the new entity, including ownership and protection of our data
base and records, and to assure adherence to Privacy Act
requirements.

This will be similar to the Department of Energy's
arrangements in nuclear development or the Department of Defense
when it builds the Trident submarine or the Patriot missile.

Mr. Chairman, as we carry out this privatization, all of
us -- at OPH, in the administration and Congress, as well as the
employees involved -- are charting new territory as we seek new
ways to streamline government.

We are attempting to do what is best for the taxpayers,
for our customers, and for our employees.

We have acted in good faith, trying to balance our
concern for valued employees and the needs of our customer agencies
with the demands -- from the President, from Congress, and from the
American people -- for a smaller federal government and a more
cost-efficient federal government. :

Ms. Lattimore and I will be glad to take your questions.
+E


128

I believe Mr. Saunders was testifying. And if you could continue,
sir, we'd appreciate it.

Mr. SAUNDERS. OK, I'll pick up where I left off, which is about
halfway through my testimony. OPM has two other consistent
themes. An experiment in the mid-1980’s with private industry was
a fiasco, and private industry does not have the access to various
data bases that OPM enjoys. The fiasco was 10 or more years ago.
It’s time to put it to bed. ivate investigative services have come
a long way since then.

On the second point, the suggestion seems to be that we conduct
our investigations on some kind of Mickey Mouse credential, not
recognized by data custodians. In fact, our Government clients pro-
vide us with suitable credentials, identifying our agent as perform-
ing official duties on their behalf. For example, we have more than
450 field agents who carry a picture credential, identifying them as
investigators under contract to the Department of Justice, author-
ized specifically to conduct BI’s for DEA.

ve access to all local and State police records, various Fed-
eral repositories, the Federal Records Center in St. Louis, and all
of the repositories with one exception, to which OPM has access.
The one exception is the FBI’s National Criminal Indices, NCIC.
However, Government agencies are or can be electronically on-line
with NCIC, and they like to do this simple check themselves, as
one of their preliminary screening checks. Our local police checks
are an excellent back-up or double check, complementing the NCIC,
because neither one of them is an infallible source.

For some years now, going back to the Civil Service Commission,
OPM has been operating on a “charter” that requires the Govern-
ment to employ OPM to conduct its BI’s. There are many who
think that charter is not very clear, and in any event, was not in-
tended to establish a monopoly for OPM. In fact, a lot of agencies
simply. elect not to use OPM. These include the State Department,
the FBI, Department of Defense including NSA, the CIA, and oth-
ers. In addition, DEA, Small Business Administration, National
Labor Relations Board, Commerce, FBI, Customs and others are
contracted or have been contracted out for their BI’s. OPM reluc-
tantly granted waivers permitting contracting out on petition by
these agencies.

Why did these agencies want to contract out? Because OPM did
not meet their timeliness needs. Now OPM is stating that under
ESOP, these waivers will be rescinded. Never mind that the aver-
age SSBI price in the private sector is less than half of that which
OPM charges. Varicon has consulted legal counsel on both OPM’s
alleged charter and the sole source aspect of ESOP. As noted
above, the legal opinion on the charter is that it is shaky at best.

As for the sole source, legal counsel opines that it is a clear viola-
tions of the FARS, and is therefore illegal. If it flies, it will surely
be tested in court. In its study, the ESOP contractor states quite
emphatically that OPM is the only entity capable of coping with
the Government’s BI case load, but that it cannot and will not sur-
vive without a sole source arrangement that requires the Govern-
ment to employ them.

Is this what privatized means? This sounds like the same old
game being played in a different uniform. If OPM, or Newco, as


134

and GAO—your waiver to contract out is terminated; you come
back home, sweetheart, back to ESOP. And they're going to do the
same to him.

Mr. Bass. OK. I have no further questions, Mr. Chairman.
Thank you very much, all three of you, for your fine testimony.

Mr. Mica. Mr. Clark, did you want to respond to any of that
quickly? You’ve got about a minute.

Mr. CLarK. Yes. In no way do I want to imply that the contrac-
tors are prostitutes. I think that’s an overreaction to what I said.
I do have 20 years’ experience in this business myself, and I have
extremely long-term experience working with contractor investiga-
tors. And I know what those problems are. And the problem is that
the measure of success, in conducting a background investigation,
is not the bottom dollar.

The measure of success, in conducting a background investiga-
tion, is whether or not you develop information relevant to the indi-
vidual’s suitability for sensitive Government employment. And con-
tractors are paid on the basis of how many cases they complete.
The more cases they complete, the more money they make. And
there is no consideration given to the amount of issue information
developed.

In fact, there is often times a disincentive to develop serious is-
sues, because it takes time and it takes effort to identify and re-
solve issues. And that costs money.

Mr. Mica. Well, I want to thank each of our panelists. Unfortu-
nately, again, we have another interruption. As it will be necessary
to conclude the panel and this hearing at this point. First of all,
I want to thank you again for your patience—particularly Mr.
Clark, who’s come from Colorado, and Mr. Cordova, who came from
New Mexico, at private expense—to be with us and testify. We ap-
preciate so much your participation.

This is probably one of the most in-depth hearings of this issue,
at least in my memory in Congress, of this issue, and it is an im-
portant issue. We need to find some solution and work together
and try to expend taxpayer dollars and resources and keep Federal
public trust and inherent Government responsibilities properly at-
tended to. But I do appreciate your participation.

We have additional questions which we will submit to you. And
we would ask that you respond in writing. Your response will be-
come part of the complete record of this hearing, and also part of
the actions and procedures that are taken by Congress to resolve
some of these issues. So again, on behalf of the subcommittee, we
appreciate each of you and your participation in this hearing.

We will leave the record, without objection, open for 2 weeks, to
entertain additional testimony. There being no further business to
come before the Civil Service Subcommittee, I declare the meeting
adjourned. Thank you.

[Whereupon, at 1:45 p.m., the hearing was adjourned, subject to
the call of the Chair.]

[Additional material submitted for the record follows:]




14

who have independent investigative authority, and the Department
of Defense, receive their background investigations from us.

Mr. ENGLISH. OK.

Ms. Lattimore. As well as their automated record checks. Those
agencies that seek their background investigations in the private
sector or do them themselves or secure them from Defense still pull
automated records checks from OPM, through our Boyers facility.

Mr. ENGLISH. You're proposing, under this ESOP proposal, to
give Newco sole source authority. Does that basically limit the au-
tonomy anyway, of these agencies?

Ms. LaTTIMORE. In dialog with the agencies we’ve had, it doesn’t,
in a sense, limit the autonomy. The agencies that we’re talking
about, that have so far been supportive of us in working this
ESOP, understand that the ESOP does the business, as long as the
ESOP lives up to the contractual performance requirements. If
they’re delivering the quality with the timeliness and not signifi-
cantly changing their cost, then they stay with that.

They are not bound by any legal or contractual obligation to give
work to the Newco, via OPM, if the Newco was not performing. It
would be performance-based.

Mr. KiNG. And that’s where the public interest rests with us, and
the actions all followed from that.

Mr. ENGLISH. Yes, I understand. So it is a limited monopoly, but
it is still—

Mr. Kina. And for a restricted period of time, sir.

Mr. ENGLISH. OK, for a restricted period of time. And after that,
what contingency plans would you have if Newco fails?

Ms. LATTIMORE. We've looked at that. The alternatives are not
as acceptable to our customers. But we would have to work with
them for a combination of delegation and/or OPM seeking another
contract source to replicate that network.

Mr. ENGLISH. OK, Ms. Lattimore, do you have a contingency plan
if Newco fails?

Ms. LaTTIMORE. The contingency plan that we have worked with
the agencies, and told the agencies in our work group, we would
move toward is finding another contract source. We have not had
a definitive plan finished, because our customers are not very anx-
ious to work on that. But they do know that would be the ap-
proach.

Mr. ENGLISH. OK, reclaiming my time. I appreciate that. How do
you plan to construct this contract in a way that will guarantee the
quality and the security of investigations?

Ms. LaTTIMORE. The requirements that we currently have for the
gathering and packaging and transmittal and maintenance of infor-
mation would be the same requirements that we would place on
the new company. The methods by which the company would per-
form investigations for us would be the same methods that we cur-
rently employ.

We are not proposing to lower standards; we're only talking
about changing the source of the staff to perform the work.

Mr. ENGLISH. Sure. But you'll in effect, though, have less control
by contracting this out?

Ms. LaTrimore. I don’t think so. We do a large measure of qual-
ity control and review now, and we would propose to continue to


32

Indicate any agencies vho:
such investigations is un
er counseling.

Gelegation of authority to conduct
review and systematic monitoring

All agencies with delegated authority are subject to review
and monitoring. There are no agencies currently deemed to be
in noncompliance with standards.


103

'STIMON} MICI cc}
V: IVESTIGi
STATES OFF; OF IE!
INVESTIGA’ Si Ti
VEN. NR] TEE HE
CIVIL SERVICE

THURSDAY, JUNE 15TH, 1995

I wish to thank the Subcommittee for allowing me to come here
today and speak to you on this very important matter. I am
presently a member of the Federal Investigators Association. I
have twenty years experience working as an investigator,
supervisory investigator, adjudications officer, and program
analyst. I have worked both at headquarters and in the field.
During OPM’s contracting efforts in the mid-1980s, I served as
technical administrator, responsible for oversight and integrity
control. I am here as a representative of FIA to speak on behalf
of many investigators and supervisors of the investigations program
who are concerned with the privatization plan.

I have come here today to express grave concern about OPM’s
stated goal of privatizing its investigative function. Whether
this is attempted by way of the proposed ESOP or by simply shutting
down the program and farming the work out to’ individual
contractors, the result will be the same: taxpayers’ dollars will
be wasted, a necessary, quality government entity will be
obliterated, and the general integrity and security of the
government will be weakened.

Patricia Lattimore, Associate Director for Investigations, has
stated openly in the Federal Times that the attempt to privatize is
not motivated by cost. Of course it isn’t. There would be no way
to defend it on that level. By OPM’s own figures, it will cost $55
million to privatize by way of ESOP, and $93 million to privatize
by shutting down the program. The only estimated cost savings that
OPM has ever suggested will be realized by doing this is $30
million over five years. When you consider that the investigations
group is currently working its way out of its revolving fund
deficit at the rate of about $1 million each month, and that the
remainder of that deficit will more than likely have to be written
off if privatization occurs, the disparity between the estimated
savings and the total cost becomes even more alarming. At a time
when Americans are demanding that the government use the same
fiscal common sense and restraint that all citizens must in their
personal affairs, how does OPM propose to explain to them that they
intend to veliminate a function, currently a model of cost-
efficiency, and in so doing will spend at least $25 million dollars


39

Bow was the contractor for the fei

ibility study selected?

We obtained a directory for the ESOP Association, and our
procurenent office sent solicitations to the five firms in the
local area listed in the Directory as specialists in feasibility
and design, and to another local firm with actual experience in
transitioning a government operation to an ESOP.

Four of the six firms responded, and a contract was awarded to
the firm which had both the highest technical evaluation score
and lowest price. The procurement for the trustee was handled
similarly, with solicitations sent to 30 firms identified as
trustees in the ESOP Association Directory.


164

supportive of OPM’s charges. He then made a disparaging comment about DEA.

T have noticed in recent months, and especially in the week since the hearing, that OPM
seems to be paying an inordinate amount of attention to reviewing our cases. They are nit
picking them to death and sending them back to our clients with observations that for the
most part lack any substance or common sense.

All of this is reminiscent of tactics that OPM has displayed consistently over the past several
years - arrogance and intimidation. It was in evidence the other day at the hearing with the
supporting cast of OPM investigators, who would serve us better on the street, rather than
sniggering and sneering behind the witnesses.

I hesitate to burden the Subcommittee with this stuff, but I must admit that the two
encounters afier the hearing have weighed heavily on my mind

1 am including two documents, one written by Varicon in 1992 and the other by OPM in
1993, which shed some light on past allegations of deficiencies in our work by OPM. I'm
also sending along a couple of news articles, one of which clearly contradicts OPM’s position
at the hearing on the competence of private industry.

Sincerely,

abet FS) bevy —

Herbert F. Saunders
President


64

tomers, the agencies, on this. And that was where the public inter-
est hooks in.

Everything else triggered from that. How do we maintain the
continuity, is that not correct—and still meet our customers’ de-
mands, which were legitimate.

Mr. Mica. We had fir. DeSeve testify that we might look at giv-
ing flexibility to agencies to almost go their own way, and to actu-
ally contract out privately or conduct some of this investigative re-
sponsibility in house. Mr. DeSeve, am I taking this out of context?

Mr. DESEVE. No, sir, you’re not.

Mr. Mica. OK. Was that explored?

Mr. Kina. Looking at the private sector?

Mr. Mica. Well, two things. One, if we gave the agencies flexibil-
ity and they could conduct some of the activities—and some al-
ready do some of this in house—and allow them the flexibility to
conduct separate contracting with private vendors for the service.

Ms. LaTTIMORE. In the discussions that I’ve had with our agen-
cies in regular and intermittent meetings, none of the—the major-
ity of our customers do not want to pursue that route. And that
was part of the shaping of the decision as to how we developed our
implementation plan. With the Department of Energy; looking at
a number of our interfaces with Justice, including, as we said, in
various meetings with our director with the President—

Mr. Mica. But one of the factors here may be that it could be
done at less cost to the taxpayers, either in house or contracted out,
if the agencies were given the flexibility.

Ms. Lattimore. That’s the —

Mr. KING. We asked them what they wanted, Mr. Chairman, is
that not correct?

Ms. LATTIMORE. We pursued the full delegation to the agencies.
In several meeting sessions with them, the majority of our cus-
tomers felt that the ability to replicate doing what OPM does for
them now, within their agencies, and the need to deal with mul-
tiple contractors was not in their best interest, and would be more
costly.

And several of the letters we got from our major customers stat-
ed that. They didn’t have an interest in pursuing it.

Mr. Mica. But you did not conduct any specific review of what
those costs may be?

Mr. KiNG. Mr. Chairman, what we tried to do, again, in the con-
text of the interest of our customers, and maintaining that inter-
est—which we viewed as a major public interest area—that was
the driving force. There was no alternative because our customers
told us they did not want that alternative. Would that be a fair
statement?

Ms. LatTiMorE. Yes.

Mr. Mica. Again, I’ve been in business, and you can ask your
customer what they want, and a lot of them want Cadillacs; but
they only have beer budgets. Here we have the taxpayer paying the
tab, and it doesn’t appear to me that a number of options were ex-
plored. And maybe this is where Mr. Moran left off, because it
seems that a lot of this is just directed on high.

And then you had to justify the directive. Mr. Moran, you've re-
turned. Did you want to continue?


148

ENCLOSURE ENCLOSURE

1. The Department of Energy testified that the Atomic Energy Act
requires that its background investigations be conducted by
either the FBI or OPM. Would an amendment of the Atomic
Energy Act .be required to enable conduct of these background
investigations by an organization operating under contract?

The pertinent provisions of the Atomic Energy Act, found at
42 U.S.C. 2165, state that OPM is to conduct background
investigations of employees and contractors or licensees, and
that OPM is to refer any investigation which reveals that an
individual is of questionable loyalty to the FBI. (See
sections 2165(a), 2165(b) and 2165(d).) A literal reading of
these statutory provisions suggests that the background
investigations are to be conducted only by OPM personnel.
Unfortunately, the legislative history of these provisions
does not provide guidance as to whether the conduct of
background investigations by a contractor would satisfy the
purposes of those provisions,

In these circumstances, we believe that in order to eliminate
uncertainty regarding this matter and to reduce the
possibility that the authority of contractor personnel to
conduct these investigations could be challenged, a
preferable course of action would be for Congress to amend
the statute to provide expressly that the investigations may
be done by contractor personnel.

, state, and local law
enforcement agencies and bureaus of vital statistics might be
reluctant to provide records to investigators conducting
investigations under contract to federal agencies, even
though they currently provide such records to investigators
employed by federal agenci: Private firms testified that
they are currently able to gain credentials from federal
agencies that provide access to the relevant records, and
that similar credentials could be made available to other
investigators working under contract to provide background
Services. From your research, do investigators working under
contract havi ious difficulties gaining access to relevant
records? Is there anything about the proposal to privatize
OPM's Office of Federal Investigations that might jeopardize
this access?

Certain agencies such as DOD, FBI, and the INS have
computerized information systems that are queried during the
background investigation process. These are referred to as
national agency checks (NACs). For example, the FBI's
National Criminal Information Center can provide a record of


35

Describe the procedures by which the decision (to privatize OPM
investigations) was reached.

The National Performance Review (NPR) reinvention initiative
pertaining to OPM's investigations program recommends that OPM
decentra ize authority to conduct background investigations to

rtments and agencies. The recommendation of the

Rational Performance Review DOJ12: Streamline Background
Investigations For Federal Employees, September 1993, state:
ary 1994, OPM should repeal relevant sections of the
regulation and issue appropri: implementing instruction:
Federal departments and agencies would have full and complete

authority te conduct or to otherwise accomplish background

investigations...*

On December 19, 1994, it was announced by the Administration that

OPM would be privatizing ite training and investigations
functions.


67

structures of managing people, and yet we have an absolutely free
market that we rely on for our income. Would that be a fair analy-
sis of where you find yourself every day?

Ms. LATTIMORE. Yes.

Mr. Kina. So we have the worst of all worlds, as it were.

Mr. Moran. I’m still trying to picture you up to your nostrils in
mud.

Mr. Kine. Did I leave you in the middle of the mud, Mr. Chair-
man?

Mr. Moran. Yes, well, I got to the flood and the mud and the
sludge and trying to breathe through your nostrils. But now I'm
trying to make the connection with OPM. Why are you up to your
nostrils at OPM?

Mr. KinG. Because we have certain fixed costs which are our em-
ployees, and the ebb and flow of the market. The market has been
volatile. Within the governmental structure that we operate in, we
lack the flexibility to be responsive to that market. And the major
areas, the areas that have in fact been done in the private sector,
can be done non-governmentally and done well if there is super-
vision and oversight exercised.

You were right on target, Mr. Moran. We had historic difficulties,
and that’s what led the issues. The chart we showed you, those are
the areas that that supervision is being done. You identify that,
you identify where the problems are, and you can take corrective
action.

Mr. Moran. OK.

Mr. KiNG. But it takes a much, much smaller unit to do that
than the non-governmental side.

Mr. Moran. I understand that. But we've taken two major steps
that were obvious steps, have been achieved. The consolidation was
already there. But that’s the first thing you would do. The second
is to figure out a business plan, how to get it to pay for itself. Then
the third thing, it seems, is to scrub all the requirements in the
first place. I mean, you read all these management manuals and
so on, and they say the first thing you do is to figure out whether
the—not whether you can reach the top rung of the ladder, but
whether the ladder is actually leaning against the right house.

And I’m not sure that we have taken that step, first, to deter-
mine how much investigation background checking do we need to
do; whether the taxpayers really need to pay for all that is cur-
rently being done? Have we done that analysis?

Ms. Lattimore. We have looked at whether or not the manner
in which we conduct investigations is the most cost effective. And
that was part of the formulation of our business plan. We have not
done a programmatic or policy scrub of whether or not we need to
do less investigation, because that determination is usually left to
the agency with the national security or the public trust position
to determine whether or not they need an investigation and what
level of investigation they need.

Mr. Moran. Yes. I have a suspicion that the agencies haven’t
really done that—that kind of scrubbing analysis.

Ms. LATTIMORE. Some of that occurred, which was part of the is-
sues that led to our last year’s reduction with the precipitous drop
in workload. Not all of it, but a lot of it was budget driven. Because


104

over their own projected savings?

OPM recently spent $100,000 on a study which determined that
it would be feasible to move the current investigative function
into a private, employee-owned company (ESOP). Is it really
feasible, though? This Subcommittee should already have in its
possession a copy of the feasibility study. It is a vague document
which makes bold assumptions about legal and legislative matters
for which it offers no reasoning. But what I am particularly
concerned about is the recent vote OFI staff members were asked to
partake in, and the manner in which the results of that vote are
being manipulated. Staff members were asked to vote "yes" if they
wanted OPM to continue to pursue privatization via an ESOP, or to
vote “no” if it was their desire that privatization should occur by
simply going out of business. while it is true that about 85% of
those responding said "yes", this should not be taken as anything
resembling an endorsement of the idea by the employees. From
talking to investigators around the country, it is clear that many
of those who voted in the affirmative wrote qualifying statements
on their ballots. Let there be no doubt that there is virtually no
support among program employees for this privatization proposal.

This is impertant because OPM has been continuously reassuring
the agencies that because of this favorable vote, on January 1,
1996, there will be an ESOP staffed by some 700 or so former OPM
investigators and staff ready to provide them with a "seamless"
transition from public to private sector investigations. In
reality, it is unlikely that this will occur. From talking to
investigators in the field, it is apparent that a significant
number are waiting for the outcome of these hearings, in
anticipation that in their wake, they will finally know whether or
not privatization will occur. If it appears that it will occur,
many who have not already done so will start looking for new work.
‘They will do so for financial concerns as well as for philosophical
ones. As people leave, deadline dates on cases will be missed, and
the revolving fund couid well reverse its current trend and start
spiraling downward into deeper debt. If this occurs, agencies will
be forced to contract out their investigations on very short
notice, utilizing whatever resources are available with out regard
to the caliber of the contractor.

This brings me to contractors. I did not come here today to
denigrate any person or company desiring to do business with the
government, or that has done business with the government in the
past. Nor do I seek to imply that having the government contract
out some of its work is by definition a bad idea. However, I
believe that time and events have shown in several different ways
that contracting out security investigations simply does not work.

I am sure that the members of this Subcommittee are aware of
OPM’s efforts to contract out several thousand investigations in
the mid-1980s. At that time, OPM had a significant backlog, and it
was determined contractors were necessary to help alleviate it.
OPM granted contracts to four private sector companies to conduct


167

Based upon a review of the investigations cited for
discrepancies by OPM and the actual number of
investigations returned to VI for further investigation,
i.e., 10 out of 1542 (.0065) it would not appear "the
vast majority of Varicon International investigations did
not meet OPM standards".

Varicon believes that the representations made by
OPM regarding the management and administration of the
contract by Varicon are unjust, grossly exaggerated and
border on libel.

Signature

bused?


126

Mr. Bass. Thank you very much, and I appreciate your testi-
mony. It’s significant, and I think may have required some delib-
eration on your part as to whether or not you wanted to be as
strong in your testimony as you have been. And I appreciate your
candor and your honesty in presenting the position of your busi-
ness in what might be a relatively sensitive situation, with respect
to your relationship with the Federal Government—the fact that
you do work for them.

Now, we have about 9 minutes left, before I need to vote in the
House. Mr. Saunders, do you think you can do your testimony in
4 minutes? Or should we recess and wait until after —

Mr. SAUNDERS. I'll go as far as I can and see what happens.

Mr. Bass. OK, than! yu very much. We'll recognize you, sir.

Mr. SAUNDERS. fou very much. My name is Herb Saun-
ders. I am President and CEO of Varicon International, a Falls
Church, VA, security firm whose primary business is providing per-
sonnel investigative or background investigations to U.S. Govern-
ment clients. [ have more than 40 years of experience in this busi-
ness—30 with Government; since my retirement in 1984, another
11 with Varicon.

Our company has been conducting all of the Drug Enforcement
Administration’s BI’s for the past 4 years, and last Fall, won a
competitive award to do the same for the General Accounting Of-
fice. Additionally, over the past 8 years, we have conducted BI’s for
the U.S. Customs Service; the Bureau of Census, its parent organi-
zation, the Department of Commerce; and the Small Business Ad-
ministration.

I greatly appreciate the opportunity to express my views on the
OPM proposal to create an ESOP. To in with, let me make a
couple of points. Let me say that those of us who do this kind of
work within the private sector welcome additional, legitimate com-
petition. It keeps prices in line, and keeps us on our toes, profes-
sionally. Second, the feasibility study, conducted at taxpayer ex-
pense, for OPM by ESOP Advisors Incorporated, is grossly flawed.

ile the contractor spoke to everybody at OPM from the garden-
ers to top management, they spoke to none of us in private indus-
try; nor did they resent evidence of any interviews with our Gov-
ernment clients. Despite this major flaw, the contractor cavalierly
concluded that private industry, is not professionally capable of
meeting the standards that OPM meets, and that we cannot cope
with a high volume of cases.

Let’s look at both of these points. The ESOP report states that
only OPM can handle the considerable volume of BI’s generated by
the Government. They note that OPM has a grand total of 440
agents: Varicon has about 1,000 agents, distributed throughout the

Inited States. The mathematics of this seem relatively simple, and
Varicon is just one local small company.

Three of our closest local competitors have agent networks of
comparable or greater size; that’s just in this area. There are com-
panies like us scattered throughout the United States. Typically, a
request for proposal from the Government for investigative services
draws responses from 40 to 50 companies.

On occasion, OPM has referred to us in industry as rent-a-cops.
In an analysis of 712 of our investigators, in response to an


40

Describe workforce participation in the development of this
initiative -- including any organized involvement of the OPM

Partnerahip Council or any other organization representing OFT
staff.

Members of the Investigations Partnership Council have been
fully involved in the proce: A member of this Council is
also a member of the OPM Executive Partnership Council, and

t that body informed. We recently concluded an effort
blish an Employee Liaison Committee, responsible for
communicating employee int to the trustee structuring
the Employee st (ESOP). Investigators and

P
Supervisory Investigators chose their own representatives for
the Committee.

Representatives from AFGE Local 32, representing central office
employ: and from APGE Local 2450, representing employees at

our Federal Investigations Processing Center at Boyers, PA, have
been menbers of the workgroup involved in the proce



87

Mr. Chairman and Members of the Subcommittee:

We are pleased to be here today to discuss the Office of
Personnel Management’s (OPM) proposed privatization of its
Investigations Service, which was formerly known as the Office of
Federal Investigations. As you know, OPM is considering
privatizing this function through the establishment of a private
corporation to be owned by former Investigations Service
employees through an Employee Stock Ownership Plan (ESOP). The
stated purposes of OPM’s privatization initiative are to (1)
permit agencies more autonomy in meeting their investigations
needs, and (2) achieve cost savings through increased competition

among providers of investigative services.

As you requested in mid-April, we are reviewing this proposal in
order to assist the Subcommittee in its deliberations on OPM’s
plans. Both the proposal and our review of it are preliminary,
and my remarks today are based on work we have been able to do in

the past 6 weeks.

Thus far, an OPM contractor has completed a feasibility study, at
a cost of about $108,000, which indicated that this type of
activity could be converted to a private sector operation.
However, the contractor's study said that the potential for

future success of this proposed new company could only be

essed after the preparation and analysis of a detailed


commas
on JAMES P. MORAN
GOVERNMENT REFORM FT OF MA
'AND OVERSIGHT
sar our exes ; poehenting
vom Congress of the United Btates — womsrorcemvan
on Pouse of Representatives
Een reanens ‘Bashington, WE 20515-4608

SuRCOMMATTEE OW
wEMSRoS Statement of Representative James P. Moran
‘on Privatization of the OPM Investigations Program
Subcommittee on Civil Service
dune 15, 1995

Mr. Chairmen:
I appreciate your having this hearing today.

I am concerned about the decision to privatize the Office of
Federal Investigations and the impact this decision will have on
future federal background investigations. The problem I have
with this proposal is that it does not appear to have been
adequately thought out and considered before being proposed. I
first heard of this initiative in February when the President
submitted bie first budget to Congress. It was part of the
Reinventing Government Phase II initiative where the Vice
President proposed that every agency examine ite different
functions to determine whether they are inherently governmental
or could better be performed by the private sector. Like Phase I
of Reinventing Government, Phase II made a broad policy
announcement and then offered a sacrificial cow to show that the
licy was actually being followed through. In Phase I, the
crificial cow were the 252,000 federal employees. In Phase II,
it is the OPM Investigations.

‘There are functions of the federal government that could and
should be privatized. There are functions that could be devolved
to state and local governments. But there are some functions
that are inherently government and must stay within the federal
government. Bither way, whether the decision is to privatize,
devolve, or retain we must know exactly what we are doing and
what the consequences of our actions will be.

As Ma. Latimore testified yesterday, there were
approximately 39,000 background investigations conducted by OPM
last year alone.’ There were app: tely 5,817 investigations
performed by private contractors working for’ those agencies with
ted authority in FY93. While I do not doubt that the
private contractors do theif heat to provide accurate
Tavestigations, Ido not think they can absorb 39,000 additional
investigations on January 1, 1996.

I algo do not think the agencies which represent OPM's
current clientele have the resources or the training to accept
the responsibilities that will be thrust on them by this


OUTSOURCING OF OPM’S INVESTIGATIONS
PROGRAM

THURSDAY, JUNE 15, 1995

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

The subcommittee met, pursuant to notice, at 9:10 a.m., in room
2154, Rayburn House Office Building, Hon. John L. Mica (chair-
man of the subcommittee) presiding.

Present: Representatives Mica, Bass, Moran, and Mascara.

Ex-Officio member present: Representative Clinger.

Also present: Representative English.

Staff present: George Nesterczuk, staff director; Ned Lynch, pro-
fessional staff; Caroline Fiel, clerk; Adya Denysyk, intern; Cedric
Hendricks, minority professional staff; and Jean Gosa, minority
staff assistant.

Mr. Mica. Good morning. I’d like to call this meeting of the Civil
Service Subcommittee to order. I apologize for being late; I’m work-
ing on the art of being at two places at once, and haven't quite ac-
complished that objective. But this morning, we're going to have
our second hearing on the privatization of OPM’s ice of Federal
Investigations.

This is our second day of hearings relating to policies and proce-
dures poverning background investigations for Federal employ-
ment. I believe that yesterday's hearing provided essential back-
ground information that demonstrated, for this subcommittee, that
other Federal agencies—OPM customers—have serious concerns
about the security and suitability of applicants for Federal employ-
ment. And background investigations can provide useful informa-
tion to resolve questions about employment qualifications.

We know from previous GAO reports that Federal agencies cur-
rently contract with private firms for approximately 20 million
worth of investigation services annually. In its written statement,
the Department of State reported conducting many of its back-
ground investigations through personnel service contracts with
independent investigators. Even the Department of Defense, with
substantial security concerns, contracts for approximately 5 percent
of its background investigations. We learned yesterday that the
costs of background investigations can vary widely, with the De- .
fense Investigative Service estimating its full background inves-
tigation costs were somewhere in the neighborhood of $1,750
apiece; where OPM estimated its costs at around $3,300 per case.

(wD


150

The following table summarizes the results of OPM's review of
investigations that were prepared in part or entirety by
contractors for five agencies. These investigations were
reviewed by OPM during the period June 1, 1994, to June 9,
1995. It should be noted that deficient investigations could
be the result of contractor and/or agency performance.

Total Investigations | Investigations
investigations found found
reviewed adequate deficient
822 274 548

According to officials from OPM's Office of Federal
Investigations, investigations deemed deficient are returned
to the agency to be corrected. To the extent that
deficiencies were noted and corrected by agencies prior to
adjudication, such deficiencies should not have resulted in
shortcomings in the adjudications affecting employees. This
may have been the basis for OPM's testimony that agencies are
complying with overall standards for adjudications.

According to OPM officials, OPM has and will continue to
review all investigations that are prepared in part or
entirely by contractors.

. As a major element of its strategy to privatize, the Office
of Personnel Management proposed to notify Congress of a
“public interest" exemption from the "full and open
competition" requirements of the Competition in Contracting
Act. How frequently has this notification procedure been
used? Under what conditions have such “public interest"
exceptions been permitted? If the Congress disapproves of
the sole source procedure, what avenues are available to stop
such a contract award after due notice? Your re: should

8] ve
wato” established by the Supreme Court in INS v. Chada

spon:
pecifically address the limitations upon a "legisla!
(1983).

We are in the proc of working with the Federal Procurement
Data System to determine how often the public interest
exception to full and open competition has been used and
under what conditions. As agreed upon with your office we
will provide that information under separate cover once it is
obtained.

The information available to us thus far indicates that the
public interest exception is rarely used. First, unlike the
other exceptions to full and open competition which may be


42

What is the anticipated workload of the new corporation, and what
revenues might this vork be expected to generate?

Revenue projections start with current client accounts as a base,
and assume there will be virtually no growth in the most costly
investigations over the next few years. Certain lesser inv
gations are projected to increase by St per year in number for
the first two fiscal years (FY 1996-7), and then flatten out.

The low-level, intially aut. a investigations are projected
to be a growth area with increases in number projected at 5% per
year.

Projected revenues range from about $76 million in the first year
to about $81 million in year five.


161

il ADC, LTD.
| 1919 San Mateo NE = Alhuquerque. New Mexico $7119)
505.268.5800 # FAN 08 285

Tuesday, June 20, 1995,

‘The Honorable John L. Mica, Chairman
‘Subcommittee on Civil Service
‘Committee on intergovermental Affairs
2187 Raybum House Office Building
Washington, DC 20515-6143

RE: Privatization of OPM Investigative Functions

Dear Congressman Mica:

Congressman Mica, we at ADC, Ltd. want to take this opportunity to thank you personally for giving us the
opportunity

have been friendly, knowledgeable, accommodating, and most of
from the private sector who have had experience in Washington interfacing with various goverment
functionaries have occasionally gone home feeling that their reception was less than friendly.

I would like to comment on some observations, statements, and concerns related to your recent hearings
‘on the above-referenced topic, as follows:

1. OPM officials keep bringing up the shoddy work that was performed by some private contractors in
1985, This, however, is totally irrelevant to the current situation, for two reasons. Few if any of the
contractors presently providing these services to federal agencies were involved in the 1985 contracts,
and the situation today differs vastly from what it was ten years ago (there are many more qualified
‘contractors now with experienced investigative staffs and excellent track records, including ADC, which
began doing this kind of work in 1991). OPM itself contracts with a number of our Associate
Investigators for background work!

2. OMB and GAO both reported to your committee that they anticipated a savings of from $14 to $30
million over five years with the new ESOP, However, if contractors such as ADC, Ltd. are given the
opportunity, you can be assured that the taxpayers will realize a much larger saving. As another
respected politician once said, “A milion saved here and a milion there and pretty soon we're taking
real money!" | suspect that if OMB and GAO had a litle more time to crunch their numbers, they
would reveal an even higher savings if the work was accomplished through true privatization,
without support from govemment funding to get the contractor started. They haven't compared their
ESOP cost estimates with ADC’s cost proposals submitted to GAO, SBA, the NLRB, U.S. Customs,
‘and the State Department.

| get the distinct impression that the whole concept of an OPM ESOP, as outined by OPM's officials, is
rather like the tail wagging the dog. By the officials’ own admission, most of OPM's field investigators
don’t believe in the ESOP plan or trust that Newco will solve the govemment'’s problems. My idol,


73

facility. And I appreciate Mr. King being here. He has previously
visited my office, and has offered me some insights into this proc-
ess. As I shared with Mr. King when he appeared in my office, I
have perhaps a limited background, but one that does involve pri-
vatization.

I was the chief internal auditor of the third largest city in our
State. I served nationally on the privatization council as a member.
And also, I worked on a number of privatization issues in city gov-
ernment when I was there. So, as I shared with Mr. King when he
was in my office, some things about this privatization process, as
it applies to OPM, really puzzled me. And Id like to flesh those
out.

First of all, I am still unclear, having reviewed this process, what
the rationale is for privatization. Now, Mr. King, you’ve made it
very clear this was not your decision. This was something that was
directed by the White House. This is something that they formu-
lated. And you’re probably in a poor position to give complete in-
sight on what their rationale was for doing it.

But is there any rationale here, beyond cost savings? :

Mr. Kina. Yes, indeed. We identified, and it has been identified
on an ongoing basis, as an activity that can be done in a non-gov-
ernmental setting.

Mr. ENGLISH. That can be done, or done better?

Mr. KING. It can be done as good as. And that is in a non-govern-
mental setting. And we believe, to respond to that, that it can be
done in that setting with minimum disruption to the customers, if
the employees themselves do it.

Mr. ENGLISH. OK. Well, Mr. King, as you know, I think that any
-time you privatize a Government activity, you need to meet several
tests. And I'd like to explore that a little bit. One of the tests is
that you have to be able, in certain sensitive services, and I think
the OPM investigative service is certainly a sensitive service. The
Government has to be able to retain enough control to guarantee
certain policy objectives.

And I’m not sure that the case has been made that you will be
able to do that in the long haul. But let me jump to autonomy. Mr.
Deceive—or is it DeSeve? I’m sorry.

Mr. DESEVE. It is DeSeve, Mr. English.

Mr. ENGLISH. Mr. DeSeve.

Mr. DESEVE. From Monroe County, PA.

Mr. ENGLISH. Outstanding. The other end of the State, a fine
area.

Mr. KiNG. Gateway to Erie County.

Mr. ENGLISH. Mr. DeSeve indicated in his testimony that this
would increase the autonomy of agencies that are the consumers of
this service. However, I understand from your testimony that agen-
cies already have the option of going elsewhere for these investiga-
tive services. So don’t they have a measure of autonomy already?
Isn’t there competition already built in?

Mr. Kinc. Somewhat limited, but let Ms. Lattimore—

Ms. LATTIMORE. There are currently five agencies that operate
under delegation from OPM to seek their investigations from the
private sector. The remainder of those, with the exception of a few


82

Mr. Mica. OK, and that’s capped at a half a million dollars?

Ms. LaTTIMore. That’s right.

Mr. Kina. And that’s probably, as you know, Mr.Chairman,
that’s the bargain of the year.

Mr. Mica. And then we have $108,000 for the feasibility study
on top?

Ms. LaTTIMoRrE. That's correct.

Mr. Mica. Those are the costs to date. We’ve got a lot of money
invested in this, and I’m not ready to have it all go down the tubes.
I know you've been handed a not very tasteful task, and you're try-
ing to find a humane solution. You’ve already RIF’d 500 people,
and J think you're trying to give an option of employment within
the Government, with a sole source ESOP plan.

Actually, if this doesn’t work, and if it turns out that this is
going to cost us more, I can tell you, we're going to be right back
here and look toward some other, what I consider, true privatiza-
tion. The investigators need to get with you all, and come up with
some agreement on how to make this thing work in a cost-effective
manner.

And then if you’re going to have an ESOP, it better be very lean
and mean and cost effective, because I'll figure out a way to get
some true competition from the private sector, or eliminate the pro-
gram. So I’m not here to pull the rug out from underneath you, but
there are still many unanswered questions. We've got a big invest-
ment in this, and a lot of people are hanging out there.

There are more questions, and we’ve already had you here for
2¥2 hours. And we will submit additional questions and ask for
written response both from the minority and the majority. So at
this time, I will excuse the panel. Thank you for your participation.

Mr. DESEVE. Thank you, Mr. Chairman.

Mr. Kinc. Thank you, Mr. Chairman.

Mr. Mica. I look forward to working with you.

Mr. Kine. Mr. Chairman, we look forward, also, in keeping the
committee advised and the subcommittee advised as anything addi-
tional occurs. We’d like to just keep you advised on an ongoing
basis.

Mr. Mica. We need that communication, and we'll work with
you. I will excuse the panel, and call our next panel. Panelist Mr.
Timothy Bowling, who’s the Associate Director of the Federal
Human Resource Management Issues for the General Accounting
Office. Mr. Bowling was with us yesterday. Do you have anyone ac-
companying you, Mr. Bowling?

Mr. BOWLING. Yes, I do. I'll be accompanied by Alan Belkin of
our General Counsel’s office, and Deborah Taylor, of our Account-
ing Division.

Mr. Mica. All right. And if you could remain standing, and I'll
swear you in. Raise your right hand.

[Witness sworn.]

Mr. Mica. Welcome back, Mr. Bowling, and thank you for your
patience. And we now open the floor to your testimony.


OUTSOURCING OF OPM'S INVESTIGATIONS
PROGRAM

HEARING

BEFORE THE

SUBCOMMITTEE ON CIVIL SERVICE

OF THE

COMMITTEE ON GOVERNMENT |
REFORM AND OVERSIGHT

HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
FIRST SESSION

JUNE 15, 1995

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

a

U.S. GOVERNMENT PRINTING OFFICE
38-530 CC WASHINGTON : 1997

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

ISBN 0-16-054284-7
3



108

the immediate need for wholesale and total contracting efforts by
the agencies. The result of this, as I said‘earlier, could be
devastating within the government’s personnel security offices.
Personnel security officials will need to quickly find contractors
who can handle the workload OPM had been doing for them. The
pressure to find an alternative investigative source could cause
these decisions to be made in a haphazard manner. Currently, OPM
conducts about 40% of all background investigations, and
contractors do about 5%. Will these companies be able to fill this
void? Additionally, agencies may need to hire more employees to
act as contract administrators, and they will need to develop their
own systems for monitoring the investigative process. This will,
no doubt, cost even more tax-payer dollars.

I come before you today to voice the heartfelt concerns and
convictions of OPM’s dedicated investigative workforce. It stands
today as a model of quality and cost-efficiency. Its workforce is
one of the finest anywhere in government service, and has been
hailed by Director King as among the "best and the brightest". Yet
Mr. King, despite all objections, insists on going through with the
privatization plan. In the interest of our Nation’s security and
the integrity of the Federal Government, I implore you to stop this
plan in any way you can, and in so doing send a clear message that
although we all realize that government needs to be reformed and
reinvented, it is the mission of this Congress to ensure that our
national security and public trust interests are not jeopardized.

I wish to thank the Subcommittee for allowing me to come here
today to speak on these important issues, and I would be happy now
to answer any questions the Subcommittee might have.


131

most precious nuclear secrets, should that individual not also be in-
vestigated by a Federal entity? Is not the risk just as great?

Mr. Mica. But the vast bulk of Federal employees are not deal-
ing with nuclear secrets. Even the Department of Defense testified
that they contract—and they do deal with national security—but
they contract out 5 percent of their activities. Do you see a role for
private contracting of certain services? Or are you all, your organi-
zation, opposed to any contracting of these services?

Mr. CLARK. Private contracting has played a supportive role in
the overall Federal effort in conducting background investigations.
For example, the Office of Personnel Management has had a per-
sonnel investigations contract support program in place for a num-
ber of years. And this is similar in nature to the type of work that
the gentlemen on either side of me do.

'e hire retired Federal employees, specifically investigators, FBI
agents, and others of similar qualifications, to do these investiga-
tions. We have found that the level of success with these investiga-
tors is less than what we see with our own federally employed peo-
ple.

Mr. Mica. How do you measure success? I mean, if we looked at
some of the activities that have been farmed out by DOD to private
contractors, is there any record to state in a factual manner that,
in fact, these investigations are conducted in a less comprehensive
fashion or that they’ve had problems with the employees? Is there
some record of this?

Mr. CLaRK. I can’t speak to the Department of Defense’s experi-
ence, but I can speak to the experience I’ve seen myself. And that
is that I know personally of situations of people that I have super-
vised who completed long and distinguished Federal careers, and
once they became contractors, they were susceptible to the tempta-
tions offered by being paid on a piece meal basis.

Mr. Mica. Well, you heard my charge to the Director, Mr. King,
that if this doesn’t work—Well, first of all, I think we spent so
much money on this effort and the administration is trying to do
this in a way that they consider humane, with those that they
haven't fired. We will do our best to try to see that they include
ou in the process. But if this doesn’t work, the alternative may not

as desirable for your group. Because as Mr. Moran said, and Mr.
King, everyone is doing things in a different fashion today. Some
of the activities that we took for granted years ago aren't there
anymore. And job security isn’t there anymore as we once knew it.
the Federal Government is changing too, and will be a part
of that change. Two gentlemen are here who advocate the private
sector really taking a larger role in investigations. What role, Mr.
Cordova and Mr. Saunders, do you see OPM evolving into in this
process—because there will be certain functions by a governmental
entity, and then there will be certain oversight and managerial and
professional responsibilities, and some inherently governmental re-
sponsibilities?

But what do you see as the proper role of OPM in this, Mr. Saun-
ders? And then Mr. Cordova.

Mr. SAUNDERS. I see a couple of roles for OPM. One is to con-
tinue to be paramount in the setting of policy, the standards that
apply to the coverage for background investigations. I see no reason


159

Questions for the Record Submitted to Ronald A. Reams
by Chairman John L. Mica
Subcommittee on Civil Service
Committee on Government Reform and Oversight
June 23, 1995

QUESTION 1
Would you prefer to see OPM privatize its Investigative
Services Program through creation of an ESOP, or would you

prefer that OPM retain this program in-house with its current
operating structure?

ANSWER

The Department of State supports National Performance
Review (NPR) efforts, and we are working closely with the
Office of Personnel Management to ensure that proposed reforms
regarding the Office of Federal Investigation are implemented
in a manner consistent with the Department's responsibilities

and procedures.




109

Mr. Bass. Thank you very much, Mr. Clark. Let’s proceed with
Mr. Cordova. Before you proceed, sir, I’d just like to thank you for
coming so far. You hail from Albuquerque, NM.

Mr. Corpova. Thank you, sir.

Mr. Bass. And we dust want the record to show that we’re most
grateful for the sacrifice that you’ve made to present important tes-
timony here today. So with that, you are recognized to proceed.

Mr. Corpova. Thank you, Mr. Chairman. It’s quite an honor for
us to be here. However, we do have an office at Falls Church to
serve the needs of the District of Columbia. However, I did fly to
Baltimore on Southwest, Saturday night. It’s a pleasure, and I
want to thank you for allowing the private sector to tell our story.
And I’m going to read to you, sir, a letter that we have sent to the
chairman, Mr. Mica:

Dear Congressman Mica, ADC, Ltd.’s perspective on the creation of an ESOP to
conduct bac ind investigations, as proposed by the Office of Personnel Manage-
ment under the auspices of a new corporation called Newco, would have and has
the same impact on the U.S. taxpayer as Congress would do in endorsing a new $3
bill with the value of the present $1 bill. Ladies and gentlemen, this ‘OPM so-called
Newco is nothing but a false economy. It doesn’t make sense. ADC, Ltd. has pro-
vided these same services to the Department of Commerce at a 30 percent to 40
percent savings to the U.S. Treasury, which belongs to the taxpayers, on a 35-day
turnaround. ADC investigators are all experienced former OPM, FBI, DIS, Customs
and INS investigators, with an average of 20 years’ experience in their careers.
They are all cleared by DIS. These investigators that |, Ltd., has, and our com-
petition has, are all loyal Americans who have and are performing the same iden-
tical services for OPM and other Federal agencies.

Mr. Chairman, we did not invent the wheel at ADC or our com-
petition. We just lubricated it and became more efficient, after we
learned from OPM and the FBI and the other agencies that were
contracting out for services. We just expanded on it. We then went
on to such things as UPS and Fed Ex to be more efficient, instead
of moving people around.

Vice President Gore has discussed the need to privatize many
governmental functions, which include this one. We in the private
sector can offer opportunities to those OPM investigators desiring
employment with us or the other firms. OPM has handicapped this
industry with their reluctance to give authority to Federal agen-
cies. n the authority has been given to some agencies, the pri-
vate sector has performed satisfactorily at a saving to taxpayers.

I realize that in the 1980’s, there were some problems. It was a
wholesale, fire sale procurement to relieve a backlog. I happened
to have a firm in Albuquerque. We were very involved with the Of-
fice of the Inspector General with research and development at
Sandia, Los Alamos, and Livermore. And I realize what the gen-
tleman, Mr. Clark, has mentioned.

I was one that turned them in—these other firms that were
doing shabby work. Let’s not paint the new firms, that are doing
the work right, with the same brush. It’s not fair for us. It is un-
American for a Federal agency such as OPM to sole source and
blackmail the rest of the Federal agencies’ needs to one firm as
proposed by OPM officials. Why should all the Federal agencies be
at the mercy of ESOP?

With no competition, this will drive up the prices that OPM is

ing the agencies for this service. It would be like a monopoly
where this so-called Newco would be untouchable and unaccount-


30

Describe procedur:
criteria that vou!
grams.

for oversight of th
be used to indicate

delegations, including
ies in such pro-

Agencies with delegated authority are provided a copy of the
OPM Investigator's Handbook, which sets forth guidelines for
conducting personnel security background investigations. During
the first year of a delegation, OPM works closely with the
agency, providing a 100% review of contractor-completed inves-
tigations to ensure they meet OPM standards.

Additionally, under Executive Order 10450, OPM uses its
appraisal of the agency personnel security and suitability
programs to conduct a more comprehensive review of the
effectiveness of the investigative program. A written report
with recommendations is furnished to the agency.

OPM uses specific criteria to assess other agency programs:

-_ The extent to which investigative reports satisfy OPM
standards for adequacy, completeness, scope, and coverage.

> The degree to which manuals and Investigator instructions
that relate to conducting background investigations meet OPM
standards.

> The type and amount of training or assistance provided to
Investigators.

- Agency/contractor timeliness in completing investigations.

- The extent to which the agency is complying with provisions
of the Privacy Act as it relates to the use of pledges of con-
fidence and unwarranted invasions of privacy.

= The extent to which the agency has complied with the
guidelines with regard to selecting, training, and supervising
its Investigators.

- The extent to which the agency is carrying out its
responsibilities of assuring that contracted investigations
meet the same standards as those conducted in house.

- Agency compliance with OPM reporting requirements.

- Agency procedures used to monitor the integrity of
contractor-produced investigations.

- Agency procedures used to ensure contract Investigators
have had the requisite investigation.

Procedures for review and evaluation of investigations conducted
under delegations of authority:


89

on what constitutes an inherently governmental function.
Following our report, OMB issued guidance in September 1992
supplementing OMB Circular A-76 to assist agencies in determining
what functions fall within that category.? This guidance

defines an inherently governmental function as an activity "that
is so intimately related to the public interest as to mandate
performance by Government employees. These functions include
those activities that require either the exercise of discretion
in applying Government authority or the making of value

Judgements in making decisions for the Government.”

The guidance states that gathering information for or providing
recommendations to an agency are not normally inherently
governmental functions. It also includes an illustrative list of
functions that are considered to be inherently governmental and
states that activities that commit an agency to a particular
decision or course of action are inherently governmental. The
guidance specifically identifies the selection of individuals for
federal government employment as an example of a function that

would be considered inherently governmental.

Based on the OMB guidance and our analysis, it appears that
investigative functions confined to the gathering and reporting

of information to federal agencies could legitimately be

70MB Policy Letter 92-1, "Inherently Governmental Functions,"
September 23, 1992.

3


84

ment, or eligibility for clearances should be made by Federal offi-
cials.

Concerning the feasibility of the proposed ESOP, the ESOP advi-
sor’s feasibility study makes the point that a business plan describ-
ing the implementation of the ESOP has not yet been developed.
As a result, several issues regarding the feasibility of the ESOP
have not been fully addressed. Although OMB estimated a $30 mil-
lion savings by privatizing OPM’s investigative and training func-
tions, it is uncertain whether the proposed ESOP would achieve
greater financial stability and cost savings for the Government
than OPM’s current method of providing investigative services.

Also, based on OPM Inspector General reports and our analysis,
the deficit that has been attributed to the investigation service re-
volving fund, about $30 million, is questionable. Previous IG re-
ports have noted several deficiencies in the management of OPM’s
investigative activities. For instance, the IG reported that OPM has
not been able to accurately forecast its investigative workload and
adjust staffing levels accordingly.

Also, the IG noted that OPM’s investigative services have been
burdened with an excessive share of OPM’s overhead charges. The
amount of overhead allocated to the investigations function has a
considerable effect on the fund’s financial position; and in all likeli-
hood, has contributed to the fact that, with the exception of Fiscal
Year 1991, OPM has consistently reported a deficit for investiga-
tive services every year since 1986.

Because of issues such as the above, it is difficult to determine
whether greater cost savings could result from privatizing this ac-
tivity than would result from improved management, with the ap-
plication of a more realistic overhead charge. ‘Also, care needs to be
taken to be sure that OMB’s savings estimate is clearly understood.
OMB’s estimate is not based on an analysis of how costs could be
reduced or revenues could be increased by privatizing the inves-
tigative function.

Rather, the $30 million figure was derived by estimating the sav-
ings from privatizing both OPM’s investigative and training func-
tions. According to OPM, this figure was arrived at by assumi:
that annual savings would be 4 percent of OPM’s investigative an
training expenses, including overhead, over a 4-year period. OMB
said the 4 percent figure was based on rates of savings found in
earlier studies, as they’ve testified earlier today.

Using Fiscal Year 1994’s investigations operating expenses of
$88 million as the base in applying the 4 percent annual savings
figure, we estimated that the investigation’s portion of the savings
would be about $14 million, over a 4-year period. Additionally, this
reported savings could be inflated, since the $88 million would
have included some amount of questionable overhead charges.

We also noted that OMB’s methodology did not include estimated
conversion costs of approximately $54 million; contract costs of
$108 million, and now the trustees fee to complete the feasibility
study and prepare the management plan; and contract costs that
would be incurred by the trustee in developing the business plan.

Another unanswered question concerns the willingness of State
and local law enforcement agencies to share data with a private or-
ganization, such as the proposed ESOP. We have been told by all


12

And we do propose to give these workers the tools to succeed on.
their own. So I must say to the members of the subcommittee, if
you believe in downsizing, we believe it must have a human face.
The sole source contract is the gate to an employee-owned oper-
ation. It is the only option that will give us a viable organization—
us being the Federal Government—as well as a seamless transition
into the future and continuity of service to our customers.

Everywhere you talk about reinvention, about more effective,
more efficient government. But do we really want to do something
about it? Is privatization to be rhetoric or reality? We would like
it to be a reality. And we ask for your support on a well-planned
humane and good faith proposal that we have put forward to you.
If streamlining is the way of the future, Mr. Chairman, then let us
get it right, now at the very start.

And that’s why, Mr. Chairman, these hearings are so significant.
We speak of thousands of people being affected at the very base of
their lives—their jobs. We understand that. And the question be-
fore us is that if we’re going to downsize, if that’s what we’re look-
ing at in government, will we give the employees the ultimate eco-
nomic empowerment to contro! their lives once that decision has
been made?

It is not the ESOP that privatizes them, it is the question of, if
we're going to privatize, do we support our Federal employees, and
do we have a responsibility to them? That is the issue that we'll
discuss, and that will be the context in which we'll try to be respon-
sive to all of the questions that have been raised by all of the par-
ties. And I’d like to thank you, Mr. Chairman. And we'd like to an-
swer any questions you or the subcommittee may have.

The prepared statement of Mr. King follows:]


54

The feasibility study supporting the ESOP initiative contended that no legislative authority
would be necessary to implement this plan. Please summarize your legal thinking
supporting this conclusion.

After the President determined that OPM would privatize the investigation function, the Director
of OPM exercised his discretion in carrying out the President's directive by deciding to pursue
the possibility of contracting with an ESOP corporation owned by individuals who are now
employees in OPM's Investigations Service. In furtherance of this decision, the Director
determined to contract with an ESOP trustee to perform the tasks necessary to establish the
ESOP corporation. We determined that OPM may undertake each of these steps within its
existing statutory authority.

With respect to contracting for performance of the investigation function, Government agencies
have the inherent authority to contract for the performance of functions, unless specifically
prohibited from doing so by law. Our analysis of the statutes that underlie OPM's
responsibilities for investigation services did not reveal any prohibition or specific restrictions on
OPM's ability to contract with the private sector for the performance of this function. Further,
OPM s regulations related to investigations specifically recognize that agencies may contract,
with the private sector to perform this function when it is delegated to them, and agencies have
been doing so for years. In fact, for a period in the 1980's, OPM did so as well. Thus, the
decision to contract out the investigative function does not require legislation.

‘With respect to contracting with an ESOP trustee to establish an ESOP corporation, we
determined that no statute prohibited OPM from contracting for these services and that
expending funds to enter into such a contract was a necessary expense pursuant to applicable
fiscal law authority. We believe that the expenditure of funds for the ESOP trustee will
contribute materially to OPM's exercise of its authority to perform investigations and the
effective privatization of this function by implementing the decision to pursue the ESOP option,
by addressing the need to provide a seamless transfer of this function while ensuring no
disruption in service or deterioration in the quality or timeliness of investigations, by sustaining
employee morale and productivity to continue outstanding performance of this function until it is
privatized, and by addressing OPM's legitimate personnel administration obligations to treat our
employees in a responsible and humane fashion during this process. Therefore, OPM’s decision
to contract with an ESOP trustee does not require legislation.

With respect to restricting competition for OPM's contract for investigations, the study to
determine whether it would be feasible to pursue the ESOP option concluded that an ESOP
would be feasible, but only if the ESOP corporation does not have to compete initially for the
investigation services contract. Pursuant to the Competition in Contracting Act, OPM believes
that it would be in the public interest for OPM to procure investigation services from the ESOP
corporation without competition, that is, through a sole source contract, Thus, OPM's decision to
:ompetition for a contract to perform its investigations function also would not require
Hainer



111

Honorable Frank R. Wolf 3

As stated, we have had no contact with Varicon International.
We cannot account for any information provided Varicon
International about our review of Varicon’s investigations
conducted for DEA. We also have no independent knowledge of
the total number of cases Varicon has completed for DEA. We
do not review Varicon cases until DEA has accepted them as
complete from Varicon. By written agreement with OPM, DEA is
required to send us, within 30 days of completion, a copy of
each case conducted by Varicon. Thus, we rely on DEA to send
us completed Varicon cases for review, and any information we
have convayed to DEA about Varicon cases is based entirely on
the actual number of cases we have reviewed.

In addition, our oversight of DEA’s investigations program is
not limited to cases conducted for DEA by Varicon, but
encompasses cases completed by other contractors and DEA
itself. Regardless of whether DEA itself or a contractor has
completed a case, our review focuses on the case file DEA
sends us, and we report our findings to DEA to identify any
probli with the overall operation of DEA’s investigative
program.

We began receiving completed Varicon cases from DFA for review
in January 1992. on July 9, 1992, we provided DEA the results
of our review of 91 cases, including 46 completed by Varicon
International. The other 45 cases were completed by DEA’s
prior contractor, Sahlen and Associates, a successor YY
to Sahlen known as SGS, and by DEA itself. All the cases were
clearly marked to show whether a specific contractor, or DEA,
conducted the investigation. At no time did OPM represent to
DEA that Varicon International conducted all these cases. We
found deficiencies in 45 of the 46 Varicon cases.

We found 21 of the 45 cases to be deficient because certain
required national agency checks vere not conducted. Although
these omissions caused the cases to be deficient, DEA, not

varicon International, was responsible for obtaining these
checks.

Another 10 deficient cases did not contain the results of
required law enforcement agency checks. On August 14, 1992,
DEA notified us that it had not provided sufficient
documentation of State and local law enforcement agency checks
that DEA had conducted in the cases provided to us.

The remaining 14 cases required additional work by Varicon
International to meet OPM standards. We provided DEA a
written analysis of each case we returned as deficient.



96

information is available on whether this scenario might occur or

on whether the ESOP employees would be willing to move.

In summary, Mr. Chairman, sufficient work to support the position
that the ESOP proposal 1s a good one has not yet been done. In
this regard, I will also point out that present plans do not
appear to us to offer alternatives to the ESOP proposal or
provide satisfactory analysis of the potential effect of an

unsuccessful ESOP.

Mr. Chairman, this concludes my prepared statement. I will be
pleased to respond to any questions you or the members of the

Subcommittee may have.

(966666)

10


170

Honorable Frank R. Wolf 2

OPM is not a party to any contracts between other Federal
agencies and private sector entities for investigative
services. We have no relationship or dealings with such
entities, including Varicon International. We work
exclusively with the Federal agency involved.

In the past, OPM has approved agency requests to contract for
investigations because OPM itself was unable to provide timely
investigative services to the agency. Given the sensitive
nature of this work, OPM never intended to allow agencies to
contract for investigations permanently. Our authorizations
have been short-term, generally for a period of one year,
although we did renew them when warranted.

OPM is now meeting its timeliness standards for completing
investigations and expects to do so for the forseeable future.
We continuously monitor our own performance and, depending on
our workload and staffing situation, may decide not to renew
agency contracting authorizations beyond the end of Fiscal
Year 1993. On September 17, 1992, when we renewed DEA’s
contracting authorization through the end of Fiscal Year 1993,
we advised DEA that we planned to cancel agency authorizations
to contract for investigations effective September 30, 1993.

OPM conducts investigations for other agencies on a
reimbursable basis. In 5 U.S.C. 1304, Congress established a
revolving fund for OPM to finance investigations and certain
other functions OPM performs reimbursably for other agencies.
The statute requires OPM to conduct these activities, to the
maximum extent feasible, on an actual cost basis over a
reasonable period of time. Monies appropriated to other
Federal agencies for investigations are paid into the
revolving fund as the agency requests OPM investigations. OPM
draws against this fund to pay salaries and other expenses
incurred in performing our investigative function. The
statute requires us to set rates adequate to recover the
expense of operations.

We received no Department of Justice request in October 1992
for OPM approval to send cases on the Department’s attorneys
to Varicon International. However, in June 1991, we did
receive a request from the Department’s Executive Office for
United states Attorneys (EOUSA) to contract out using DEA’s
contractor. At that time, DEA was in the process of selecting
a contractor and, in July 1991, contracted with Varicon
International. On September 3, 1991, we denied EOUSA’
request because we were able to handle its projected workload
ina timely manner. We have provided investigative services
to EOUSA since then.



rh)

do that. Because our commitment to the customers is that we
would ensure that the product they receive is not of a lesser qual-
ity.

Mr. ENGLISH. OK. A couple of specific points. One is, Mr. King,
I kind of interpreted from your remarks that you're not pushing
the ESOP vote by the employees at Boyers as particularly signifi-
cant. Because, after all, wasn’t it true that the employees were only
given about 10 days to review a 56. page document? And the issue
wasn’t privatization as much as, would they prefer an ESOP to
just——

Mr. Kina. Yes. And by the way, Mr. English, there’s two ques-
tions there. I realize it was 56 pages, but there was a summary
available; people were aware of what was being done. Ten days was
the time period. There were no surprises there. But the question
that’s come up—there’s been two questions. One you asked directly,
and on the other, we never once—and if I’ve done it, then I owe
everyone an apology—never once did I want to suggest that the
vote on the ESOP in any way reflected a support of privatization
by our employees. I’ve got to make that absolutely crystal clear.

Mr. ENGLISH. I appreciate your doing that, because in our local
media, it was reported in a way that intimated that. And I’ve
talked to the employees, and I know that that was not the case.
And I’m grateful to you for making that point clear.

Mr. KiNG. And I wanted to thank you, because you were one of
the early folks who brought that to my attention, and I’m very
grateful. I wanted to have the record reflect that, Mr. English. The
other challenge—and you've reiterated one that’s come from vir-
tually everyone. And it’s the assumption of failure on the ESOP’s
part. I really and truly have to reject that.

We have excellent people. One of the difficulties, the major dif-
ficulty that we’re having is that we have a basically privately fi-
nanced operation operating with every Government restriction,
with all of the costs and the overhead, trying to function in a fluid
marketplace at this moment, which makes it next to impossible to
function effectively with concrete shoes in entering the Boston Mar-
athon.

Our people have been wearing their concrete shoes and doing a
heck of a good job. This is not a criticism. If we release the genius
that’s in this organization and put it into the private sector and
give it a chance, the same as we would nurture a simple tree we
were planting. If we gave them the same courtesy we'd given in
horticulture, to our human beings, we will have a success that we'll
point to with pride.

And the individuals in here will have a future that is not just
bright, but brilliant. And that’s what I’m genuinely concerned
about.

Mr. ENGLISH. Mr. King, assuming the ESOP goes forward, for
Newco to survive in the long term, isn’t there a very strong likeli-
hood that the Boyers facility itself will have to be eliminated? I
mean, it’s a single facility. Is servicing a national audience or a na-
tional constituency—won’t it be very difficult to have just one facil-
ity?

Mr. KiNG. I would dare say that the facility is up there, but your
question is excellent. If I had to lose a part of my anatomy, I might


36

Planning documents that calculate the e projected savings
as a result of this privi nd the methodology
ciated vith those calculations:

The projected savings figure:
Management and Budget. inated & savings to the
Government of $30 atTiten o over 5 ; beginning in FY 1997,
through privatization of OPM's inv tigations and training
units. OMB can best comment on the methodology.

ere developed by the Office of



48

Describe plans for the transition of th
the "new corporation," to other positio:
and/or other outplacement Stance thet will be provided.

Every program employee not being retained by OPM will receive a
job offer from the new corporation. Those who accept will be
Separated from OPM under reduction-in-force (RIF) procedures, and
will become employees of the new corporation on the day following
the effective date of the RIF. Those who do not accept a job
offer will also be separated through RIF action.

We intend to work with those who decline the job offer by giving
them outplacement tools, and by facilitating their outplacement
efforts by allowing them to adjust their regular work schedules
for outplacement activities, interviews, and the like.


117

‘One reason as to why ADC, Ltd. has so many investigators under contract is that we have already begun
staffing up to handle an expected increase in Federal investigative contracts. The Vice President of the
United States said in his 1993 National Performance Review that “By January 1994, OPM should repeat
elevant sections of the regulation and issue appropriate implementing instructions... Federal
departments and agencies would have full and complete authority to conduct or otherwise accomplish
background investigations, for example, through contractors, using criteria established by OPM; SCFR
736.201(a) and (b)26 would be repealed... OPM would be required to compete with other providers of
investigative services to conduct investigations”.

President Clinton endorsed the National Performance Review. However, for some unknown reason,
OPM not only did not comply, but actually began to ‘cirde its own wagons’ and pull back existing
contracts... as well as to tell Government agencies they no longer were permitted to contract out
background investigations. OPM expressed that it was afraid too much work previously assigned to the
‘OFI would be going to private contractors if agencies were permitted a choice in the matter. OPM stated
‘that it did not want to have to cut back on its workload or its personnel and that as a consequence it would
1no longer permit agencies to make competitive bids for their background investigative work.

As a consequence, OPM withdrew its “delegation of authority to conduct background investigations” from
the Department of Commerce. ADC, Ltd. lost the contract as well as the ablity to compete for more
Federal investigative contracts. (OPM called a meeting with all Federal agencies and told them they were
1no longer allowed to use contractors to do their investigative work.) Other private investigation firms have
similar stories. Some have managed to fight OPM to keep existing contracts, but the entire industry is in
danger of extinction if the delegation of authority continues to be denied or if ESOP is granted a sole-
source contract by OPM.

The OPM ESOP Feasibility Study suggested that ESOP should be granted sole source because no one
else could handia such a workload of background cases and that agencies expressed concern about the
uncompleted background investigations at the time OF! would “go out of business”. ADC, Ltd. contends
that there are sufficient private firms to pick up the new case load and finish the incomplete investigations
in an orderty transition. The most extensive investigations are required to be completed in 35 days.

What effects would this measure have on your company and others in the
investigations industry?


53

jures have you taken -- and/or do you propose -~- to
ni

about the quality of investigations during
510d?

We do not anticipate any drop in quality because the
will be doing the same work, although for a different

employe!
We expect to incorporate our existing standards into the contract
specifications with the new company.

We have promised our customers that they will be involved in
the transition process, and that ve will work together to ensure
they remain satisfied with the high-quality product they
currently receive.



138

something is wrong with this equation. 1 hope OPM and
OMB are prepared to work the math for the subcommittee.

As | mentioned earlier, OPM plans to transform the
investigations organization into an ESOP. The operative word
in ESOP is “employee.” Like many of the members of this
subcommittee, | have heard from OF! employees who have
expressed opposition to this action. | have serious doubts
that an ESOP can survive, not to mention start, with this
amount of employee dissension. In their report, ESOP.
Advisors, Inc., echoes this concern: “Current OPM-OFI
employees do not yet support the privatization
process...unless a substantial portion of the OPM-OFI
workforce chooses to accept employment from Newco,
Newco will not be able to provide the necessary services,
and will not be a viable enterprise.”

At yesterday's hearing, we heard or received written
testimony from two of OFI’s customer agencies. I've also
received letters from other OFI customer agencies. These

organizations are very satisfied with the services received


49

What planning has OPM initiated on behalf of its employees, both
in terus of tho ikely to be eligible for participation in the
new corporation and in terms of the functions planned to be
retained within the agency after this initiative ia completed?

OPH employees involved in the operation of the investigations

unit will have right of first refusal for positions with the new
corporation. We plan to retain functions associated with policy
and oversight, contract management, control and maintenance of

the investigations main frame, data base and investigative
records.



78

seeing the security background checks of Federal Government per-
sonnel?

Mr. ENGLISH. No, but I thought we ought to be reassured on that
point, Mr. Moran.

Mr. Moran. Controller DeSeve, let me get back to the question
I had asked. Two things—in your answer about the differences in
cost, you suggested that there will be one-time costs for termi-
nation and so on. There was an implication that all those one-time
costs might not have been included in your analysis that this pri-
vatization would save $30 million at OPM.

Are we comparing apples and oranges? OPM’s estimate of the
$93 million in costs versus $30 million savings that OMB has—you
may not include those one-time costs in your savings analysis.

Mr. DESEVE. Sir, again, let me just separate the costs, and it
might answer the question. The $30 million of some costs, as far
as the revolving fund’s history, I don’t believe is the cost of the
transaction. It simply represents an historic cost that we'll have to
deal with regardless. In selecting a 4 percent privatization savings,
we believe we were recognizing, on a very conservative basis, what
the savings would be, including termination costs; changeover costs
for agencies moving into new contracts, potentially overlapping con-
tracts; training for the agency employees.

A whole host of factors Ted to the judgment to take a 4 percent,
rather than some higher number. So while we didn’t sit down and
do a big spread sheet that had all the analyses, it was the result
of knowing that those costs would exist. We weren’t ignorant of
those costs, but we didn’t sit down and do the exact math that led
to that.

Mr. Moran. So you're not necessarily disagreeing with OPM’s
analysis?
ai” DESEVE. No, we're not disagreeing with OPM’s analysis at

Mr. Moran. They may check, they just may not be comparable
figures.

Mr. DESEVE. They are what caused us—those costs are what
caused us to take a very conservative, rather than a more liberal
projection of the ultimate cost savings, because we knew they had
to be recognized.

Mr. Moran. Now, let me ask you, Mr. DeSeve, how much profit
margin did you figure that, if it was contracted out, not ESOP, but
if it was contracted out, how much money would go into the profit
for the firms that would actually be doing it?

Mr. DESEvE. That’s something we really can’t know in a sense
of, if you were a contractor—and as I understand it, there are
many contractors who do this business, and we would expect other
contractors, potentially, to come into the marketplace, who aren’t
in the marketplace now. What we are hoping for is very low profit
margins by those contractors——

Mr. Moran. Sure.

Mr. DESEVE [continuing]. As they bid aggressively to gain a foot-
hold in a market that’s newly opening. We didn’t make any specific
estimate of what their profit margin might be. But we, again, want
them to be lean and mean, as they bid on the Government’s busi-
ness. In fact, we hope they would lose money.


88

business plan. OPM has recently awarded a contract for the
services of a trustee who, among other things, is responsible for

developing this business plan.

There are two basic questions to be addressed with regard to
OPM’s privatization initiative. First, should the investigative
function be considered "inherently governmental" or can it be
appropriately performed by a non-federal organization? Second,
if it is determined that this function can be appropriately
Performed by a non-federal organization, is conversion to an ESOP

feasible?

L VE FUNCTION INHERENTLY GOVERNME!

The Federal Acquisition Regulation, which is the primary federal
procurement regulation governing the acquisition of supplies and
services, provides that a contract may not be awarded for the
performance of an inherently governmental function (FAR

37.102(b)).

In November 1991, we issued a report on our evaluation of whether
service contractors were performing inherently governmental
functions.? We recommended that the Director, Office of

Management and Budget (OMB), clarify OMB’s guidance to agencies

x

ernment Contra: A ice Contractors Performin:
inberentiy Governmental Functions? (GAO/GGD-92-11, November 18,
1.)

2


43

In the absence of a formal business plan, what is t!
these projections?

basis for

These projections were developed by the contractor conducting
the feasibility study, using information from a business plan put
together by program staff in May of last year and various other
data such as agency estimates, cost reduction opportunities, etc.


129

they plan to call themselves, is so exclusively capable, why do they

need a sole source to survive? Given a monopoly, what incentives

will Newco have to cut its unreasonable costs and meet specific

agency timeliness deadlines. Quite casually, the ESOP feasibility

states that after 3 years or 5, if Newco so determines, the ESOP

yal be prepared to enter the marketplace on a truly competitive
asis.

The facts are that none of us can sit out there for 3 years, never
mind 5, watching Newco feed itself on the work it takes away from
us. When Newco is ready to compete fairly, we will long since have
been buried, and there will be no competition of any sort—a fact
surely not lost on Newco.

And finally, having alluded only briefly to costs, we should note
that in a May 1993 letter to Senator Robb—one of many letters
generated by an abortive OPM attempt to rescind DEA’s waiver to
permit contracting out—Judge Bonner, then DEA’s administrator,
stated that Varicon, my company, should be allowed—and these
are quotes—‘should be allowed to continue conducting DEA’s BI’s”
and concluded “any action other than that would not be in the best
interest of DEA, the Department of Justice, or the taxpayer.” Judge
Bonner noted in the same letter that Varicon had saved DEA, at
that point in the contract, over $4.7 million in BI expenditures,
compared to the cost of OPM services. I might add that we were
then 2 years into the contract. We are now 4 years into the con-
tract. It would appear that we have saved DEA, over a 4-year pe-
riod, somewhere in the vicinity of $8 million or $9 million, in com-
parison with that which would be expended with OPM.

Individual agencies in the U.S. Government should have the
right to choose the entity, whether it be Newco or somebody else
who best meets their BI needs, in terms of professional capability,
ability to meet timeliness, and cost. There are many private sector
investigative companies who are meeting standards, who collec-
tively can cope with a case load in a timely manner, and whose
costs are reasonable.

What, then, is the basis for a sole source? As stated in the begin-
ning, if Newco wishes to join the marketplace and compete for work
with the rest of us, we welcome them. There seems to be enough
to go around. Once again, thank you for the opportunity to express
my views.

Mr. Mica. We thank you, again, for your participation, and espe-
cially for your patience, all of our panelists today. I have several
questions. First of all, Mr. Clark, could you tell me the process by
which OPM has consulted the Federal investigators that remain in
your association, as they’ve implemented this ESOP plan and the
change that’s being proposed?

Mr. Cark. There has been no consultation in terms of whether
or not the employees are in favor of the ESOP proposal, versus re-
maining a Federal entity. We have been told that the function will
be transformed to an ESOP, and that our options, or their options,
now, are to either go along with the concept or simply have no al-
ternative.

Mr. Mica. As that was developed, you were just told that this is
the case and that you go alo: Have you been consulted at any


113

In response to the House Committee on Goverment Reform and Oversight's Subcommittes on Civil
Service's request, ADC, Ltd. is pleased to provide our perspective and views on the proposal by the
Office of Porsonnel Management (OPM) to create an employes stock ownership program (ESOP)
company (referred to as Newco) to parform background investigations of Federal employees.

Is this practice consistent with your understanding of Federal Acquisition Regulations?

‘ADC, Ltd. is a proponent ot the competitive process for awarding contracts and welcomes tha
establishment of private organizations to compete with us on an equal basis. However, the methods
proposed to create and sustain Newco do not meet the requirement for separation of Government from
the private sector.

‘ADC, Ltd.'s understanding of Federal Acquisition Regulations is that by sole-sourcing to a newly
privatized company (the former Office of Federal Investigations), OPM is violating the mandate of the
Competition in Contracting Act of 1984, since “ull and open competition” is being denied. Furthermore,
ADG, Ltd. disagroes on OPM's basis for sole-sourcing this contract, the premise that “the agency's need
for the services is of such an unusual and compelling urgency that the Goverment would be seriously
injured unless the agency is permitted to limit the number of sources from which it solicits bids". ADC and
many other private companies are fully qualified to perform the same background investigations
conducted by OPM and are currently providing these servicas to many Governmental agencies.

OMB Circular A-76 (revised August 4, 1983) states that “in the process of goveming, the Government
should not compete with its citizens. The competitive enterprise system, characterized by individual
freedom and initiative, is the primary source of national economic strength. In recognition of this principle,
it has been and continues to be the general policy of the Goverment to raly on commercial sources to
‘supply the products and services the Government needs.”

ADC, Ltd.'s attorneys advise that “there exists no statutory nor executive authority granting OPM sole and
exclusive jurisdiction over competitive service personnel investigations”. It has tong been recognized that
‘Government Agencies have their own obligations with respect to hiring and review of personnel. (See
Jason v. Summertield 214 F.2d 273 (1984).

OPM's own feasibility study of the ESOP also points out some serious legal questions. On page 29, task
4, number 3, the authors of the study admitted that “individuals we interviewed in the OPM general
‘counsel's office expressed the concem that it may not be possible to issue such a contract under the


122

20622

THE WHITE HOUSE
WASHINGTON

. October 21, 1991

NATIONAL SECURITY DIRECTIVE 63

MEMORANDUM FOR THE VICE PRESIDENT
THE SECRETARY OF STATE
TRE SECRETARY OF THE TREASURY
THE SECRETARY OF DEFENSE
THE ATTORNEY GENERAL
THE SECRETARY OF COMMERCE
THE SECRETARY OF ENERGY
DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET
CHIEF OF STAFF TO THE PRESIDENT
ASSISTANT TO THE PRESIDENT FOR NATIONAL
SECURITY AFFAIRS 7
DIRECTOR OF CENTRAL INTELLIGENCE
CHAIRMAN, JOINT CHIEFS! OF STAFF
DIRECTOR, FEDERAL EMERGENCY MANAGEMENT AGENCY
DIRECTOR, OFFICE OF PERSONNEL MANAGEMENT
DIRECTOR, INEORMATION-SECURITY OVERSIGHT OFFICE
soe oS
le Scope Background sip vertisastons

ant and costly investigative practices

Rout the Executive branch, I direct
sum investigatAve scope and standards be
adopted by all agencies and departments for access for Collateral
nal Security Information and Sensitive Compart-

Top Secret/Na

mented inf:

Scope

Past ten (0) years ox to age 18, whichever is less. ,
2

Expansion of invessfearion 4

aw
The investigation may be expanded“as thecessary, to resolve
issues and/or address employment” standards unique to individual

agencies.

7 cheek

Checks on subject and speus £ investigative and

criminal history files o£ the Federal Bareau of Investigation,
Fos

including submission of Fisyerp: on the subject,
and such other national agencies#{DCH¥, INS, OPM, CIA, etc.)

aS appropriate to the individualis=background.
91 [€5630

W32723



127

submitted a while ago, we noted that among them were 323 retired
professional investigators—meaning a minimum of 20 years of ex-
perience—from the Army, Air Force, and Navy; 143 retired FBI
agents; 132 retired DEA agents; 63 from Customs; 45 retired DIS;
30 Secret Service; 18 Department of State; and among those scat-
tered throughout a variety of other agencies, 5 from OPM. I should
say that lately we have been receiving lots of OPM applications,
most of them do not meet our requirements, failing to have at least
five recent years of Federal experience conducting BI’s on the
streets.

Among this group of 712, 361 have B.A. or B.S. degrees; 84 have
M.A. .S.; there are 33 A.A. degrees; 13 law degrees; and 5
Ph.D.s. Fluency in 24 foreign languages is found within our inves-
tigative corps. Does this sound like a rent-a-cop program to you?

The scope of coverage to be conducted in a BI is not up for grabs.
OPM does not operate under very specific guidelines while private
industry plays with a Ouija board. The scope of investigative cov-
erage is dictated by the extent of access required to classified mate-
rial, and is mandated by Federal statutes, Executive orders, and
national directives. Thanks to National Security Directive 63, pro-
mulgated several years ago by the Bush administration, the same
standards now apply throughout the Government. For example, the
bread and butter clearance for access to top secret is a single scope
BI—SSBI, a 10-year investigation with epecific coverage clearly
identified. This coverage applies to each SSBI, governmentwide. In
its contracts with private industry, the Government enumerates
precisely what investigative coverage is required for each category
of case. Failure to meet requirements puts the contractor at major
risk, since the contract is written for a base year and up to four
option years, and can be terminated for cause by the Government
at any of the option renewal points.

In testimony on the Hill several years ago, OPM stated that it
had reviewed several hundred of Varicon’s DEA cases and all were
found to be deficient in coverage. What they did not mention was
that the “deficiency” in each case was a lack of a credit check and
a national agency check, an NAC. This was simple dissembling, for
they knew full well that our contract with DEA specifically states
that we are not to do credit or NAC’s; that DEA would handle them
internally. It is quite common that an agency will do one or more
preliminary checks before assigning field coverage, to eliminate
those who obviously should not be processed.

Mr. Bass. Mr. Saunders?

Mr. SAUNDERS. Yes.

Mr. Bass. We're going to recess now for 20 minutes. I have 4
minutes to get to the House floor for my vote. We will recess now
for 20 minutes, and we'll reconvene at that time. The subcommittee
stands in recess.

[A brief recess was taken.]

Mr. Mica. Again, I want to take this opportunity to apologize to
our witnesses. As you know, there have been some changes in the
Congress, and we eliminated proxy voting and other things that
now require us to be in two places at once. We appreciate your pa-
tience, and I also wanted to thank my colleague, and the vice chair-
man of the subcommittee, for his assistance and indulgence.


151

approved by lower level employees or officials, 41 USC 253
(c) provides that the public interest exception may only be
used when the head of the agency responsible for the
Procurement makes a determination that full and open
competition 1s not in the public interest in the particular
acquisition concerned. The authority may not be delegated.
Moreover, Congress must be notified in writing of this
determination no less than 30 days before award of the
contract. In addition, the Federal Acquisition Regulation
states that the public interest exception may be used only
when none of the other exceptions to full and open
competition applies.

The public interest exception was in neither the House nor
Senate versions of the Deficit Reduction Act of 1984, which
contained the Competition in Contracting Act of 1984 (CICA).
It was added by the Conference Committee, which emphasized
that it viewed the exception as a tool to be used only in
rare cases.

With respect to avenues available to Congress to prevent the
award of a contract based upon the public interest exception,
the only certain action, in our view, would be the passage of
a law precluding the agency from making the award. The
requirement that Congress be notified in advance of the
planned use of the public interest exception to justify a
contract award is a type of “report and wait" provision that
is permissible under Immigration and Naturalization Service

Chadha, 462 U.S. 919, 935, f.n. 9 (1983). Here, the

eport and wait" provision prevents OPM from awarding a
contract until it reports to Congress and waits the required
period of time. Once the 30-day period has elapsed OPM would
have authority to award the contract unless a law precluding
OPM from doing so had been passed in the interim.

Such a statute might take several forms. For example, a
Provision could be enacted prohibiting OPM from contracting
these services out. Alternatively, Congress could enact an
appropriation restriction prohibiting OPM from making any
payments on a contract with any private contractor. One
House of the Congress, however, could not prevent OPM's
action as the Supreme Court has declared the use of the
one-House veto unconstitutional (Chadha, supra). In Chadha,
the Supreme Court addressed the constitutionality of the
one-House veto after the House of Representatives passed a
resolution overruling the Attorney General and mandating the
deportation of an immigrant. The Court found that neither the
House nor the Senate, on its own or together with the other,
could exercise legislative power unless the standards in
Article I of the Constitution were followed. These standards
require that in exercising legislative power, both the Houses
have to pass a bill which then must be presented to the



155

-4-

investigations and protective security functions also spend a
relatively small portion of their time on background

investigations.

All DS agents are formally trained in the conduct of
personnel investigations. Anyone applying for a position with
DS as a contract investigator must have had prior federal
service in the conduct of personnel investigations. We ensure
the integrity of our program by regularly auditing the

performance of our investigative personnel.

The contractors are predominately former FBI agents
familiar with the specialized requirements of personnel
investigations. They do not make policy decisions, determine
the scope of investigations, or adjudicate the completed
investigations. They receive their taskings from the Special
Agent in Charge (SAC) of one of our eight field offices. The
SAC is responsible for providing oversight and ensuring quality
and timeliness. This arrangement has been extremely cost
effective allowing the Department to purchase services
virtually anywhere in the country (often miles from any field
office) and to pay only for the time spent providing that
service (with virtually no overhead). We are routinely able to
deliver a full field background investigation of the scope

specified in NSD 63 within 90 days.


CONTENTS

Hearing held on June 15, 1995.
Statement of:

Bowling, Timothy P., Associate Director of the Federal Human Resource
Management issues, General Accounting Office, accompanied by Alan
Belkin, Office of General Counsel, General Accounting Office, and
Deborah Taylor, Accounting Division, General Accounting Office .

Clark, Michael, Federal Invest tors Association; Arthur Cordova,

Ltd.; and Herbert Saunders, Varicon

King, James B., Director, Office of Pe igement, accompanied
by Patricia Lattimore, ‘Assistant Director, Office of Personnel Manage-
ment, and Lorraine Lewis, General Counsel, Office of Personnel Man-
agement; and and G. Edward’ DeSeve, Controller, Office of Management
and Budget ..

Letters, statements, etc., submitted for the record by:

Bowling, Timoth: PB, Associate Director of the} Federal Human Resource

Management issues, General Accounting Office, prepared statement

Clarks, ‘Michael, Federal investigators Association, prepared statement

contove, Arthur, ADC Ltd., prepared statement of
King, James B., Director, Office of Personnel Management, prepared
statement of ..
Lattimore, Patricia, Assistant Director, Office of Personnel ‘Management,
information concerning deficient investigations ....
Moran, Hon. James P., a Representative in Congress from the State
of Virginia, pre ared state statement of
Reams, Director of Investigations ‘and Counterintelligence,
Bureat wu of Diplomatic Security, U.S. Department of State, prepared
ment of

ait

100

10


145

investigations program is to assure national security and the integrity of the
Federal workforce. The ultimate goal of business is to make a profit. Even
though it may be possible to make a profit and still do a good job, greater
profits can be realized by cutting comers in areas where the risk of detection
is small. Therein lies the risk.

“Additionally, do you believe that any measures could be taken to reduce
the number of deficiencies detected in investigations conducted by private
contractors? If OPM pursues the Administration’s decision to privatize
this function, what remedial measures would be necessary to reduce such
deficiencies?”

Unfortunately, I foresee no measures that can be taken to reduce the number
of deficiencies in contractor completed cases. As outlined above, I believe
there is compelling evidence that the very structure of contracting this work
provides the fundamental explanation for the increased number of deficiencies
and integrity issues.

During the hearing I was especially troubled by the testimony offered by
several of the witnesses in favor of contracting out background investigations.
‘These individuals expressed the conviction that if background investigations
were to become totally privatized, the Government would ultimately benefit
by having companies competing for work by offering lower prices than their
competitors.

I fear these witnesses may be right insofar as competition is concerned. One
of the surest ways to get a Government contract is to be the low bidder.
Introducing cutthroat price competition to an area as sensitive as conducting
background investigations is an invitation to scandal. Contractors will be
forced to cut as many corners as possible to reduce their costs. Cutting costs
in conducting background investigations most often involves making
compromises in the quality of the investigative product. This will almost
assuredly lead to practices such as: contacting sources by telephone rather
than in person, deciding that following up on certain issues “really is not that
important”, not sending an Investigator to an area requiring travel expenses,
and equally dangerous practices.

In conclusion, I reiterate there is a history of failure in contracting out
background investigations. The Administration, OPM, involved agencies,
and investigations companies have failed to articulate why any future


106

conduct investigations on a contractual basis. Most of these
individuals are retired government employees with experience in the
investigative field. Many have had distinguished federal careers.
Their activities are monitored by local supervisory investigators,
and it has been their experience that deficiency rates among these
investigators, although not as high as the figures mentioned
previously for company contractors, outweigh that of OPM
investigators significantly. I have personally worked with some of
these contractors. I believe the higher frequency of such conduct
in the contractor workforce is attributable directly to the
temptations offered by going to a system where one is paid
pieceneal.

One final concern I have about the use of contractors is their
access, or potential lack thereof, to certain sources of
information. In recent months, investigators have been informed by
many law enforcement agencies, state and local governments, and
other organizations that they have policies of not providing any
information whatsoever to anyone other than law enforcement
officials and OPM investigators. ‘Those who say they would often
indicate that there would be a fee charged for the information
which OPM investigators are not required to pay. How then would
this vital information be obtained? We do not know. Recently, one
of OPM’s supervisory investigators was told by one of his former
investigators, now working as a contractor that he obtains these
records (forbidden to him as a private contractor) by simply waving
his contractor credentials quickly past the gaze of record
custodians and assuming the authoritative air of a federal
investigator. We certainly hope this conduct is not wide-spread,
but how are we to know?

In addition to record sources, investigators have been
learning of late that persons are reluctant to speak to private
contractors about personal matters concerning themselves, their
friends or their relatives. They worry about the security of the
information they are providing as well as the integrity of the
investigator and his/her firm. Simply put, we have found that
individuals would feel more comfortable discussing potentially
sensitive information with representatives of the federal
government than of private firms. There may or may not be any
grounds for feeling this way, but the fact remains that the feeling
is out there. And, as any investigator knows, without the
cooperation of the public, investigations can become almost
impossible to complete.

It would seem, then, that if history teaches us anything about
this issue, it is that security investigations are done best and
most reliably when they are done by federal employees.

It is significant for the Subcommittee to bear in mind that
the vast majority of personnel security professionals who have
weighed in on this issue are opposed to privatization. These
individuals are the experts in the personnel security field and
have felt compelled to write some very pointed letters to OPM


66

Now, having been in the executive branch from 1968 to—for at
least, I guess, it was about 10 years, and then kicked around in the
Federal Government. I have a strong suspicion that if in fact the
agencies were conducting this function themselves, which could
well have happened when it was originally decided, just to let each
agency do their background checks, the way the CIA and the secu-
rity agencies do it now, that the recommendation would have been
to consolidate at OPM.

I mean, that would have been a common sense recommenda-
tion—let OPM do all the background checks, because they have the
expertise. We could do co-location of function, consolidation of func-
tion, all those great terms. And then we could have come forward
and had a great story to tell. That has already been done. The con-
solidation, which makes a lot of sense, has already been achieved
at OPM. It’s there where I think it ought to be.

Then the next step would be to come up with a business plan,
to show that if the function is done at OPM, and it charges the
agencies what they would normally have to pay for these back-

und checks, then let’s see how we could make a profit, or at
least break even for the taxpayers, by consolidating this function.

And I think that was done, too. Wasn’t that done last year? That
study to come up with a business plan for the investigation staff—
how they could——

Mr. KING. Well, we did one. Ms. Lattimore did one for the agen-
cy, yes.

Mr. Moran. For OPM, you mean?

Mr. KING. Yes, for OPM. We did our business plan.

Mr. Moran. And it showed that you can—I think, right now,
aren’t you just about bre: even, or maybe even showing a little
bit of a profit; is that possible?

Mr. Kinc. Well, when you say right now, this month, yes. If
you're talking about, say, the last 12 months, which might be a
question that might be asked of a business, no, we still haven’t bro-
ken even on an average across. We’re making about $1 million a
month, above costs, at this moment. We are still below breaking
even for the year.

Mr. Moran. Well, how old is the plan?

Mr. KiNG. Pardon?

Mr. Moran. How old is the plan, the business plan?

Ms. LATTIMORE. It’s about a year.

Mr. Kina. A little over a year.

Mr. Moran. It’s only a year? Well, in most business restructure
and reorganization plans, you do it over a period—the period in
which you achieve your recommendations lasts a couple of years,
doesn’t it?

Mr. Kinc. Well, Mr. Moran, we were in free fall. Or, to come
back to "the oda plain, we were standing up to our nostrils in
water on the flood Plain lain of investigation. The river withdrew; we
started to clean up mud, the sludge, and get the machinery op-
erating again. And now what we're doing is praying the high water
doesn’t come back.

There are the costs—and I think that’s where, Ed, you were talk-
ing about the sa We continue to remain vulnerable because
we're heavily ves! in people. We have all of the Government


52

What justification is offered for es apiishing & new competitor
in a market with numerous existing busine:

Pursuing the ESOP option will ensure offers of employment for
program employees who will be separated from government service.
The transition from public to private will not disrupt the

level of service currently provided to our customers. And,
according to the feasibility study, none of our agency customers
believe that there exists an alternative contractor or
contractors with the trained staff able to pick up the OPM
caseload and satisfy the large numbers of case closings required,
let alone maintain investigative integrity.



173

WRN FIST 6 Seer Ty

The Fiasco at OPM |

By Mike Causey

water Pou Sl rte

‘he cash crunch that

triggered the firing of

500 top federal
investigators came from a
long festering “system falreTM
tocommunicate and manage
‘workloads, according toa report
on the Office of Personnel
‘Management.

problem
were the end of the Cold War
and changes by the Clinton

government 7
the report by the OPM inspector
general said,

Although the inspector
‘general's report deals with one
ofthe smallest and least sexy
agencies, officials say it could
have been written about dozens
‘of larger operations that get part

‘The layotfs—including some
watch of OPM Director Jim

"Rain cakon op OPM tip
stall, reassigning nearly half the

‘courting—or conning—OPM's
tunion and often berates career
‘managers or leaves them.

_-fwisting in the wind.

But the rezort says OPM’s
problems began long 2
the bg buldtp of i investgntos

hires, rechecked employees on
the payroll and looked at
backgrounds of contract
‘employees. It provides the
service for federal agencies on a
“revolving fund” basis with the

violating a law that bars agencies
from spending money they doo't
have.

Revolving fund agencies have
‘trouble controling workload and
income. Their customers have
litle incentive to provide
accurate information. Congress
makes the problem worse by
habitually missing budget
<deadtines so agencies don't know
‘whether they must hire, fire,
beef up or stim down.

‘Although this is hardly steamy

business would do well to ly
hhands on a copy of this inspector
general's report.
Lead Poisoning

This supposed tobe almost
impossibie to fire a government
employee unless he shoots
somebody atthe office. But in a
recent case reported by the
Federal Labor Management and
Employee Relations Consultant,
the threat of mass murder—and
the ase of aici sured

a Departruent of

Tranatonatn ‘mechanic from
his job.

The employee allegedly made
threats against supervisors that

“hot piece of lead” for the bosses
and that they would get the
‘same treatment as “the [enemy]
an Vietnam." He had a history of
Uhreats, and once he put a gun to
his son's head,

‘The Merit Systems Protection
Board upheld the firing, saying
thatthe department had tried to
help the worker in the past and
that he clearly presented a
danger to co-workers.



101

shown in several different ways that contracting out security inves-
tigations simply does not work.

Members of this subcommittee are aware of OPM’s efforts to con-
tract out several thousand investigations in the mid-1980’s, and the
serious problems associated with that effort. While this past experi-
ence does not necessarily guarantee that the same abuses will
occur should the contracting of investigations again be done on a
large scale, it shows that the risk is there.

T would like to bring to the committee’s attention that OPM re-
views contractor completed reports as part of its overall quality
control effort. Profiles of the contractors’ record of quality exist
within the Office of Personnel Management, and show that the de-
ficiency rate of contractor completed reports is higher than those
of OPM investigators.

The committee should also consider the issue of contractor access
to certain sources of information. In recent months, investigators
have been informed by law enforcement agencies, State and local
governments, and organizations that they have policies of not pro-
viding information to private contractors. This problem alone will
compromise a contractor’s ability to develop serious issue informa-
tion relevant to agencies.

We also believe there will be public concern about the security
of the information provided to contract investigators. Simply put,
we have found that individuals would feel more comfortable dis-
cussing sensitive information with the Federal Government. It
would seem, then, that if history teaches us anything about this
issue, it is that security investigations are done best and most reli-
ably when they are done by Federal employees.

‘hreats to national security today come not only from the de-
fense and intelligence areas, but also from areas such as economics,
technology, industry and energy research. The executive branch
agencies that deal with these issues are exactly the ones for which
OPM provides investigative services. In the wake of the Aldrich
Ames scandal, several top level U.S. officials expressed the opinion
that Americans should not be surprised that the spy game still con-
tinues, even after the end of the cold war.

Recently, the President called for the hiring of over 1,000 new
border patrol agents to protect our borders. Their background in-
vestigations are done by OPM. We've also been informed that in
the wake of the Oklahoma City bombing, new Federal protective
service officers will be hired nationwide to increase security at Fed-
eral buildings. Even despite a decrease in Federal hiring, investiga-
tive field offices around the country now have on hand a very high
workload.

I come before you today to voice the heartfelt concerns and con-
victions of OPM’s dedicated investigative work force. It stands
today as a model of quality and cost efficiency. Its work force is
hailed by Director King as among the best and the brightest. In the
interest of our nation’s security, and the interest of the Federal
Government, I ask this committee to exercise its oversight role by
sending a clear message that although we realize the Government
needs to be reformed and reinvented, it is the mission of this Con-
gress to ensure that our national security and public trust interests
are not jeopardized.


26

Identify any lave or policies (from any source) that might impede
the effectiveness of background investigations.

varying requirements of each jurisdiction and repository for
submission to gain access to records. For example, each state
has different requirements for how to describe the subject in
order to obtain BVS records. Each may require a different
release form or different releases for different types of
records. Some may require different fingerprint cards. Some
require submission of their request form for some records and may
not respond to our automated inquiry form.

varying state policies/laws on expungement/sealing of criminal
records, and a trend toward easy expungment of drug and alcohol-
related records (which are pertinent in security/public
trust/suitability investigations) impede the ability to develop
accurate assessment of patterns of criminal behavior. This is
particularly apparent with the treatment of crimes under various
“youth Offender" laws, where we are unable to use such
information to establish what is clearly a pattern of criminal
behavior.

Lack of a consistent policy among the state/local jurisdictions
on how to manage and release criminal history records impinges on
the efficient and effective gathering of this information. This
is becoming more apparent as we try to develop a program to
assist other federal agencies meet the requirements of the
National Child Protection Act of 1993.

OPM's (and DIS') designation as a “non-criminal justice" agency
for purposes of the Security Clearance Information Act (SCIA)
makes access to criminal records limited. For example, use of
NCIC to obtain rapid access to FBI records is limited to national
security positions, but is not available for public trust or
other "employment" inquiries. Similarly, access to the
Interstate I tification Index (III) is limited to national
security positions. This limitation also applies to how we are
viewed and treated by state and local jurisdictions, many of
which view us as no more than another employment inquiry. This
is particularly aggravating to investigations for law enforcement
positions such as Border Patrol Agents, Prison personnel, etc.,
where weapons are carried and public safety is at stake, or in
suitability investigations where ability to use derogatory
information is critical to taking action.

Because of a desire to avoid litigation, conflict, violence,
etc many sources, both individual and corporate, hesitate to
cooperate in providing information.

Obtaining coverage overseas through State Department, and other
agencies as appropriate, is unpredictable at best. There is not
enough work to juseity OPM presence, but State/other agenc:
cannot meet our timeliness standards at the expense of their
normal workload.



22

Provide a detailed description of differences between criteria
invoked to ermine security and suitability clearance iss

Suitability determinations made under Part 731 are distinct
from determinations of eligibility for assignment to, or
retention in, sitive national security itions made under
Executive Order 10450 or similar authoriti

1, Security clearance criteria concern employment and retention
of persons in national security positions that involve preserving
and protecting the nation's military, economic, and productive
strength, including the security of the Government, from all acts
likely to weaken or destroy the United states.

Security clearance criteria are outlined in E.0. 10450, which
specifies the factors that should be considered when determining
whether the employment, or retention in employment, of indi-
viduals in the Federal service is clearly consistent with the
interests of the national security.

The security determination is an individual agency
responsibility. E.0. 10450 requires that all Federal employees
be reliable, trustworthy, of good conduct and character, and of
complete and unswerving loyalty to the United States. Agency
heads must establish security programs to assure that the
employment or retention of all civil ployees is clearly
consistent with the interests of the national security. The
Order states such information shall relate, but shall not be
limited, to:

a. Depending on the relation of the government employment
to the national security

- Any behavior, activitie

. or associations which tend
to show that the individual is not

liable or trustworthy.

- Any deliberate misrepresentations, falsifications, or
omissions of material facts.

- Any criminal, infamous, dishonest, immoral, or
notoriously disgraceful conduct, habitual use of intoxicants to
excess, drug addiction, or sexual perversion.

- Any illness, including any mental condition, the
nature of which in the opinion of competent medical authority
may cause significant defect in the judgment or reliability of
the employee, with due regard to the transient or continuing
effect of the illness and the medical findings in such ca

- Any facts which furnish reason to believe that the
individual may be subjected to coercion, influence, or pressure
which may cause him to act contrary to the best interests of
the national security.



105

these investigations. The results of this contracting experience
were disastrous. The companies estimated that they would be able
to complete over 40,000 cases in the specified time-frame, but were
only able to produce 3,330. All four companies submitted reports
which were rated deficient by OPM at the overall rate of 44%, while
during that same year OPM investigators had a deficiency rate of
under 1%. Each company submitted reports found later to have been
partially or entirely falsified. A total of 135 such reports were
found. In the end, this fiasco cost the tax-payer $1.3 million,
and actually increased OPM’s backlog due to time spent
reinvestigating contractor reports.

While this past experience does not necessarily guarantee
that the same abuses will occur should the contracting of
investigations again occur on a large scale, it shows that the risk
is there.

What of contractor performance since the late 1980s? As a
matter of policy, many of the agencies which have been granted
delegations by OPM to conduct their own background investigations
routinely send the finished reports to the Federal Investigations
Processing Center (FIPC) for microfilming. At FIPC, they are
subject to review to see if, as is mandated by the delegation
agreements, they meet OPM standards for quality (these are the same
standards that must be met by OPM investigators). When a report is
found not to be up to these standards, it receives a deficient
rating and is sent back to the agency to be redone. OPM keeps
records of these deficient reports, and from time to time compiles
profiles of how agencies/contractors are performing over specified
time periods. I have brought with me today some of these profiles.
For the sake of brevity, I will summarize only one in my testimony.
In the interest of fairness, I will not mention either the agency
involved or its contractor by name. However, their identities will
be provided to this Subcommittee upon request.

OPM reviewed 208 background investigations done at a
particular agency from 9/27/93 to 4/20/94. Of those 208 reports,
106 were rated deficient by OPM standards. Of those 106, 76 had
been completed by one contracting company, 4 by another, and 28 by
agency personnel. Of the 80 deficient reports done by contractors,
only 22 were rated that way due to incomplete National Agency Check
items, or other inquiries which contractors cannot do. The
remainder were deficient due to incomplete or inadequate field work
on the part of the investigator doing the case. Upon the
Subcommittee’s request, further profiles such as this one can be
made available, and they will also show high rates of deficiencies
in contractor reports. I think that before any thought is given to
allowing the wholesale contracting out of this sort of work,
issues such as this must be fully addressed.

One final example of how privatizing investigations has not
worked as well as we may have hoped is OPM’s PICS (Personnel
Investigations Contracting Support) program. Occasionally, during
times of heavy workloads, OPM has hired individual persons to


162

President Lincoln, once said that a divided house cannot stand. This applies to the ESOP. Newco is
like a thief at night. hoping to go unnoticed _| wonder if OPM s Inspector General approves of the OPM
staff being on the federal pay‘oll for lobbying | thought that OPM's mission was. pertermng
background investigations, not lobbying? No wonder their OvemeadiG&A is so high. with so many
employees puting in non-productie hours

4, When asked at the nearing why he had criginally looked at Newco to provide privatized investigative
services, OPM’s Director, Mr. King. said he believed it (the ESOP) was the humane thing to do,
presumably as an alternative to laying off his entire investigative staff It seems to Nave escaped his
Notice that existing private sector firms employ investigators with the same persistent habit of eating
and providing for their families as OPM’s investigators,

5, It is also quite apparent that OPM has not yet gotten the message about a leaner and more
accountable and productive government. They have spent over haif a milion dollars of the taxpayers’
money to reinvent the whee! | wonder how many background investigations could have been
performed with the man-hours and funds spent, which were in effect unauthorized expenditures.
‘There is another old New Mexico proverb which, translated into English, says “The chicken that eats
e995 will continue eating eggs even if you cut off its beak.” Once an agency acquires bad spending
habits, itis unrealistic to expect it to change just because it changes its name have to get rid of
it! OPM is constitutionally incapable of being truly cost-effective, their pattem is to spend, spend, and
spend some more. They are very liberal with the taxpayers’ money. unlike most private sector fis,
which have to be frugal in order to be competitive and turn a respectable profit

have great respect for those elected officials who really look out for the taxpayer and try to get the most
Public benefit out of the federal expenditures they authorize. Congressman Mica, you and your
Committee can rest assured that we at ADC will continue to maintain our excellent record for providing
Quality services, as cost-effective as we can make them. We and our professional background
investigations staff will never do anything to embarrass you, your Committee, or any goverment agency
All we ask is to be allowed to compete on the same level field with other private sector firms and Newco.
That's the American Way and the only ethical way. Please give us the opportunity to prove our ability!

‘Again, thanks for honoring ADC by allowing us to participate in the democratic process. This was the fist
time | have been able to do so at that level. | hope you wil allow us to provide any additional information
you might need or do anything else that wil help you carry out your job. Congressman Mica, our
Congratulations to you and your staff for the way you handled everything ~ | know you have the nght
recipal

Sincerely,
Lite Ln)
President


165
November 5, 1992

Mr. John F. Ryan

Special Agent

Chief, Personnel Security Unit
Drug Enforcement Administration
Washington, D.C. 20537

Dear Mr. Ryan:

During early August, 1992, Varicon International
(VI) was verbally advised by the Drug &Enforcement
Administration, Office of Security Programs (PSR), that
they had received the results of a case review conducted
by the Office of Personnel Management (OPM) staff on
Varicon completed cases under Contract No. 91-C-0040.

OPM cited alleged discrepancies that had been noted
in VI completed background investigations beginning with
DEA Case Number 91-3106, (returned completed to DEA on
November 13, 1991), through Case Number 92-0390,
(returned completed to DEA on March 23, 1992). By that
date, March 23, 1992, a total of 730 background

investigations had been completed and returned to DEA by
Varicon.

The total number of investigations with noted
discrepancies was 49, with the number of aggregate
discrepancies totaling 87.

Approximately three weeks later (August 26, 1992),
Varicon staff personnel were given access to peruse and
copy the noted discrepancies at DEA Headquarters and
review the completed investigations. A separate response
was promptly prepared by Varicon for each investigation

and discrepancy and submitted to DEA to assist in their
response to OPM.

A total of ten of the cited investigations were
returned to Varicon on 9/16/92 for additional
investigation. All were completed, at no charge to the
Government, within the mandated time requirement. (See
attachment)


169

UNITED STATES:
OFFICE OF PERSONNEL MANAGEMENT

WASHINGTON. D.C. 20418

1993,
JAN 27 007
Honorable Frank R. Wolf
Member, United states
House of Representatives
1651 Old Meadow Road mont
Suite 115 Ris)

McLean, Virginia 22102

Dear Representative Wolf:

This is in response to your recent letter on behalf of your

constituent, Herbert F. Saunders, who is President of Varicon
International.

Since 1953, the United States office of Personnel Management
(OPM) and its predecessor, the United States Civil Service
Commission (USCSC), have had the authority and responsibility
for the Federal civilian personnel security program
established by E.O0. 10450. In that order, the President gave
OPM the primary responsibility for investigating persons
entering or employed in the competitive service, which
includes most Government positions. Each department or agency
is responsible for investigations for other positions, but all
departments and agencies may use OPM investigative services by
agreement.

In practice, most agencies obtain their investigations from
OPN because they lack an investigative staff. Those that have
competitive service positions and conduct their own
investigations, such as the Departments of State and Defense,
do so under delegated OPM authority. Since November 1965,
when the President directed Uscsc to formulate and issue
standards of acceptable investigative coverage for Federal
civilian employment, we have set these standards.

Pursuant to E.0. 10450, OPM also has Governnentwide oversight
responsibility for the Federal civilian personnel security
program. In this regard, OPM evaluates agency personnel
security programs, including investigative programs, and
reports its findings to the agency concerned. Agencies need
OPM authorization to contract with the private sector for
competitive service investigations. As part of its oversight
function, OPM evaluates contractor~conducted investigations to
ensure that established standards are met.


34

Describe current funding and personnel dedicated to these
functions as well as plans for establishing and maintaining
oversight of private sector organisations and/or individual
contractora performing these functions in the future.

Generally, our oversight and integrity-maintenance roles
are supported by appropriated funds. Currently, this amounts
to approximately $3.5 million annually for 66 FTE.

We are committed to maintaining a policy and oversight function in
OPM. There will be a cadre of individuals carrying out on-sii
appraisals of agency operations. It has been the agency's
responsibility to oversee the managenent of their contracts, and it
is not anticipated this will change in the future. Although our
responsibility will not include the oversight of contractors per
se, we will still be responsible for the oversight of agencies
which, among other things, will include how they manage their
investigations contract.



105

VARLEONCy> THREE SKYLINE PLACE, SUITE 20095201 LEESBURG PIKE #FALLS CHURCH VA22061
INTERNATION mes

TELEPHONE. (703) 98-0800
FACSIMILE (703) 48-2871

June 27, 1995

John L. Mica

Chairman, Subcommittee on Civil Service
Committee on Government Reform and Oversight
2157 Rayburn House Office Building.
Washington, D.C. 20515-6143

Dear Mr. Mica:

Subsequent to preparing my memorandum of 26 June, I received yours of 23 June posing
two specific questions.

My earlier memorandum addresses one of these questio OPM intentions regarding
delegations of authority to contract out for background investigations. If indeed OPM has no
current plans to terminate contracting delegations of authority as they expire, nor to cease
issuing new waivers to permit contracting, then this is presumably a policy adopted after
May 15, 1995 when applicable statements were made by OPM, albeit not by Ms. Lattimore.

I should also note that page 8 of the feasibility study supporting "Newco" states that "market
conditions are positive” for ESOP, that "Customer demand surveys indicate that this increase
in demand may continue for at least two years, as certain agencies and functions such as the
Drug Enforcement Administration (DEA) and Immigration and Naturalization Service expand
employment.” You may recall that our company presently conducts DEA’s background
investigations and we are in the final option year of that contract.

As for the "public interest” exception to the Competition in Contracting Act, I believe that
OPM's proposed use of this exception is inappropriate, if not illegal. In fact, page 29 of the
feasibility study states that the OPM General Counsel's office "expressed the concern that it
may not be possible to issue a sole source contract under the existing provisions of CICA."

As [noted in my testimony, our access to informal legal advice has suggested to us that the
OPM ESOP may very likely not qualify for the "public interest” exception to the
Competition in Contracting Act. The consensus seems to be that the required justification by
OPM will have trouble addressing/proving, among other things; the description of efforts
made (0 ensure that offers were solicited from as many sources as practicable, a listing of the
sources that expressed an interest in the procurement, and most difficult, an assurance that
cost will be fair and reasonable.



115

Are private firms able to meet the standards established for federal background
Investigations?

The concep! of using private companies to perfarm official goverment background investigations is nat
new. ADC, Ltd. has successfully provided hundreds of background investigations under a contract with
the Department of Commerce since October of 1991. During that time, ADC has also provided contract
investigations for the U.S. Small Business Administration and the National Labor Relations Board. The
work we perform for these agencias meets or exceeds the investigative requirements sat forth in the
contracts with these agencies. Our work has been praised a3 being more timely than OPM's, more
responsive to the client agency's needs, and consistently less expensive. We have pertormed this work
ft up to halt the cost charged by OPM to each agency under the OPM revolving fund. Other private
background investigation firms have similar success stories going back to the early 1880s and continuing
through today.

A big reason for these success stories Is that privata companies not only meet standards established for
Federal background mvestigations, they often exceed them. ADC, Lid. and other companies must maat
ail the requirements contained in National Security Directive 63 and each Govemmental agency's
Statoment of Work, which explains whet is expected of the comractor performing the work, Private frms
ae governed by the same standards for Federal background investigations and followed by OPM. ADC
and other private companies have provan that they are able to meet and exceed the standards
‘established for faderal background investigations. Our Investigators are as well-trained and experienced
as OPM investigators. ADC only hires investigators who have at least five years of fedaral investigative
‘experience with agencies such as OPM, the Secret Service, the FBI, and the DEA. Our investigators are
required to have the same Secrat coerances as OPM Personnel. The credentials carried by our staff are
the same as thase issued to OPM's investigators and are provided by the agency which holds the
contract. These credentiais allow ADC's investigators accass to the seme flee and records as OPM's stat,
including al federal and private personnel folders, pofice record depositories, security files, Bureau of Vital
Statistics and Division of Motor Vehicles records. Furthermore, ADC's investigators follow the same
manuals and directive (National Security Directive 63) ag OPM.

OPM defines the standards that are followed by ADC and other private companies. OPM has always been
Closely involved with private contractors by reviewing the Reports of Investigations (FOls) that are
submitted by the pnvate companies, ensuring that the raports are completed based on OPM guidelines
and meat OPM standards,

Furthermore, Faderal agencies have been satistied with the work performed and completed by the private

3


136

plans (ESOP), service contracts, and franchises. Federal
agencies are using the NPR privatization flowchart and
guidelines to determine what they should or should not
privatize.

OFI, a privatization target of the Administration, provides
a full-service investigations program to 4,800 US
Government offices in 80 agencies throughout the
continental US and overseas. In FY 1994, it completed
about 150,000 cases. OFI conducts background
investigations for two reasons: (1) to provide a basis for
agencies to determine whether a person should be granted a
security clearance, and (2) to provide a basis for determining
a person’s suitability for Federal employment.

in December of 1994, James King, Director of OPM,
announced that he would privatize the organization's
investigative and training functions. After preliminary
research conducted by internal staff, OPM hired ESOP
Advisors, Inc., to determine the feasibility of transforming the

investigative function into an ESOP. In its report, ESOP

2




58

penses. This figure is $101.721 million for training, and $88.133
million for investigations, which total $189.854 million. We did not
adjust for training activities that might remain at OPM, as those
decisions were not made until sometime after the budget had been
sent to Congress.

Calculating 4 percent of the $189.854 million gave us an annual
savings estimate of $7.594 million. Allowing for some reduction in
volume that might be anticipated due to decreased demand for in-
vestigation work because of the governmentwide staffing reduc-
tions, we rounded down to $7.5 million.

Further recognizing that it would take a full year to implement
the proposals, we did not show savings beginning until fiscal year
97. fiscal year 97-2000 Budget Authority and Outlay savings
estimates totaled $30 million. The $7.5 million was rounded down
for the first 2 years to $7 million, and rounded up, for the last 2
years, to $8 million.

I want to point out clearly that these assumed savings make no
judgment about the quality or effectiveness of the staff who cur-
rently conduct OPM’s personnel investigation programs. Rather
they reflect the fact that there are inherent seasonalities and struc-
tural inefficiencies that drive costs in this program.

Staff levels of trained investigators’ overhead cannot be quickly
adjusted to widely shifting workload demands. Others may be able
to overcome these flexibilities with an enlarged client base and less
overhead. Let me reiterate that these savings estimates were just
that—estimates based on prior experience, with studies of moving
work from the Government to the private sector; and even then,
making very conservative judgment on the amount that might be
re:

I believe that it is a reasonable estimate. It may be that even
greater savings will be realized as agencies become more experi-
enced in making their determinations themselves on how to best
meet their needs. This concludes my statement. I would be happy
to respond to any questions the committee may have.

Mr. Mica. you, Mr. DeSeve, and again, Mr. King. Gentle-
men, I'm trying to sort out some of the history of the ESOP. Where
did the ESOP generate? Was that OPM?

Mr. KING. Quite frankly, in December when we were told that
this was going to be privatized, I inquired at that moment whether
privatization included an option—first, Mr. Chairman, quickly, a
small chunk of history. Virtually all—well, all of the King family
in the whole world is buried in Lawrence, MA. Lawrence was a city
created to make textiles. It was built on the Merrimac River to use
water power.

When that resource of both water and people and the textile in-
dustry moved—and it moved south—they shut the mills down. And
nobody was given any option. The mills still sit there; they're par-
tially used. The town of Ludlow which I came from was a jute mill.
And when it closed, there was no option; we all went to the street.
1 think my thought was, how do we avoid that with our investiga-

rs?

And very simply, I turned and said, is there any objection to hav-
ing these folks take over their own business and operate it? And
that was the original idea. It was not part, at any time, of the pri-


112

Page 2

and unaccountable. It's like having only one general merchandise store to serve all the
needs of the residents of DC.

ADC, a smail business, takes the common sense approach to doing business. We have
‘over 700 cleared, experienced investigators under contract; they are located in every
state of our great nation and its possessions, and this ADC staff can meet and exceed
the needs for background investigations in an efficient, economical manner, along with
firms such as Varicon, MSM, MVM, and others. The supply and demand will result in a
savings for the overburdened taxpayer. Competition brings out the best price and
service. That's the American way; it's the only way that makes sense!

OPM's effort to establish an ESOP is really only a change in name; Newco will have the
same staff, give them the same seniority, wages and fringe benefits; and maintain the
same wasteful, costly administrative structure. Without a new, creative, cost-effective
management approach, Ladies and Gentlemen, Newco is the same old wolf in sheep's
clothing. With value-added, let's let the private sector use their expertise and also
‘strengthen our economy; small business and private enterprise are what make America
strong. You can rest assured that federal agencies will be able to meet their background
investigation requirements with the best business approach from the private sector.

Sincerely,

otesh Gaon’

President

ADC/Imq


16

select one of my limbs or fingers. I would not recommend my brain.
The brain exists in Boyers. It is our history; it is our corporate cen-
ter, as far as our intelligence goes. And everything feeds to that as
a center. Am I overstating that, Ms. Lattimore?

Ms. Lattimore. No.

Mr. KiNG. So the Boyers location—everything is flexible, as you
know. But we have found first, it serves its purpose. We have a
staff up there that brings both intelligence and dedication that,
really, if it were in the military, they would receive awards in the
form of medals.

Mr. ENGLISH. That’s powerful praise, sir.

Mr. KING. It’s true, and by the way, it’s deserved.

Mr. ENGLISH. I just have a couple more quick questions, with
your indulgence. I understand, Mr. King, that there was an A-76
cost savings comparison that was done in this case.

Mr. KING. Yes, sir.

Mr. ENGLISH. And that the—what calculations were done to dem-
onstrate that the ESOP venture saved money?

Mr. KING. I said yes, sir, but I was saying yes, sir, and looking
at my colleague from OMB. Ed?

Mr. DESEVE. Right. I testified earlier, there was no cost compari-
son done.

Mr. ENGLISH. OK.

Mr. DESEVE. So, just to clarify.

Mr. ENGLISH. So there’s really no credible argument here, based
on hard data, that there is an actual cost savings as a result of
doing this?

Mr. DESEVE. What OMB has tried to testify is that in our budget
estimating process, and when I was told that folks at GAO called
it potentially conjectural, we thought that was high praise at OMB
from GAO; which doesn’t happen very often. No, we did not con-
duct an A-76 review, and the data is based on budget estimates.

Mr. ENGLISH. OK. And again, I would make the point that in any
credible privatization process that I’ve ever been involved in, there
was a coherent and very careful estimate of whether there was ac-
tual cost savings. And the only privatization that I’ve seen done
successfully were those which actually had demonstrated cost sav-
ings. But that’s neither here nor there.

ne other question I had, with regard to the ESOP, I saw that
on June 9, OPM announced the award of a contract to Marine Mid-
land, to serve as a trustee facilitating the organization of the
ESOP. What are the responsibilities of the Marine Midland com-
pany?

Ms. LaTTIMoRE. Marine Midland, along with American Capital
Strategies as a financial firm, and Arnold & Porter as a law firm,
have been chartered with working to formulate, incorporate and set
up the new company; to formulate benefits packages; to formulate
compensation plans; to formulate a structure for the company to
operate in, working in conjunction with a 12-member, plus equal
number of alternates, employee liaison committee to develop the
necessary enabling tools to form the company, as well as to develop
a package that would be sent in behalf of the company to the po-
tentially separated employees on which they could base the deci-
sion as to whether or not they would join the company.


28

the standards used to evalu
nd programs at other agenc:

background investigations

Executive Order 10450, Executive Order 10577, OMB Circular A-130,

5 CFR Parts 731, 732, and 736, and manuals dealing with the
conduct and adjudication of investigations provide the

standards by which other agency programs are evaluated.


94

officials from the Departments of Justice and the Treasury said
they would be reluctant to share sensitive data with private

contractors.

Although we have not yet had the time to do extensive work in
this area, we thought it was important to call this matter to
your attention during these oversight hearings. To provide a
definitive answer to this question, it would be useful to
evaluate the experiences of agencies, such as the Customs Service
and the Drug Enforcement Administration, that have contracted out

for investigative services.

ee i st_in an ESOP

The success of an ESOP could be adversely affected if employees
from OPM‘s Investigations Service do not participate in the new
organization to the extent OPM anticipates. The contractor that
performed the feasibility study has stated that a substantial
portion of OPM’s investigative staff would need to participate in
the ESOP if it 1s to function effectively. However, we have
found no clear evidence that sufficient OPM employees would be
willing to participate in such an endeavor. In this regard, the
OPM feasibility study pointed out that, historically, the process
of transferring commercial functions performed by federal

employees to the private

ctor has been slowed by strong

resistance from federal employees.


proposal. As OPM has shown in the past, there are problems and
deficiencies found in contracted out investigations. The
majority of these are caused by the agencies not following
through and investigating those areas the contractor cannot.
Contractors cannot obtain National Agency Check information such
as FBI fingerprints and name checks, Defense Clearance and
Investigations Index, Bureau of Vital Statistics verification,
and confirmation that the applicant has registered with the
Selective Service. Can we be sure that some of the smaller
federal agencies, facing different budgetary constraints of their
own, will be able to do these checks? This is a questions that
should have been asked in February.

I understand the interest in creating an Employee
Stockownership Plan. I appreciate the commitment OPM has made to
its employees and its constituents. But I fear that the ESOP
will not succeed and that we may be setting these employees up
for failure. The ESOP can only succeed if it absorbs all of the
current OPM investigations workload. It will get this contract
only if it is sole-sourced. As we heard yesterday, this sole-
sourcing will immediately generate a law suit that will tie up
the contracts. There have also been indications that an effort
will be made to prevent any sole-sourcing in FY1996
Appropriations. Thia is going to make it more difficult for the
employees and the constituent agencies that rely on these
investigations.

One of my concerns is that there has never been a fall back
plan on which we could rely if the ESOP proposal fell through.

As far as I am aware, there has never been any point in which OPM
was able to make the decision on whether they should go through
with the privatization plan or not. The privatization proposal
came from above and OPM only has the responsibility to carry it
out. This is not the way to properly reinvent government.

Again, I appreciate your holding this hearing today and I
look forward to the testimony of our witnesses.


77

The trustee serves as the trustee on behalf of the employees mov-
ing to an ESOP, if the ESOP survives, with a fiduciary responsibil-
ity.

Mr. ENGLISH. So Marine Midland has a great deal of significance,
then, in this transfer.

Ms. LATTIMORE. As a trustee.

Mr. ENGLISH. And that’s a very sensitive role. Now, I understand
Marine Midland is a subsidiary of HSBC Group, which stands for
Hong Kong Shanghai Banking Corp, Ltd., which is an international
banking and financial | organization, based in Hong Kong. Marine
Midland, I believe, is 48 percent owned by HSBC.

Given the fact that Hong Kong is going to be turned over to
China in 1997, is there any significance to that?

Mr. KING. To the best of my knowledge, in looking at the Marine
Midland Bank Inc.’s information sheet, they're a New York based
holding company, and a wholly owned and indirect subsidiary, as
you've suggested. It’s located in Buffalo, NY, and it seems to have
320, I believe, branches in New York, and another 300 ATM’s,
which become your friendly automated teller.

From what we were led to understand by all of the parties in-
volved, they'd bring talent and skill. I don’t believe that their par-
ent holding company was to play any particular role in this. Are
you aware of that?

Ms. LATTIMORE. No.

Mr. Kina. And I believe they don’t necessarily, as we understand
the 300 banks in New York, and the commercial loans that they
make that go into the billions across America. So I didn’t see them
being any more compromised in this particular business than they
would have in, say, something far more delicate, like in working
with one of the electric boat companies in Groton, CT, where we
build the Trident submarine, which is probably the most secret of
all of our operations.

Mr. ENGLISH. Well, Mr. King, that’s most reassuring. And I ap-
preciate tha testimony here today. Let me simply say for the
record, Chairman, that I continue to be deeply skeptical of this
process. There has been no demonstrated savings from this spin-
off. I believe there are major questions remaining about this ESOP.
I believe the People who have testified here today have done their
best to defen: roposition.

But unfortunately, I am concerned that this service, in being
spun off and being contracted out, could, under certain cir-
cumstances, not be guaranteed in the future. And I believe that is
a very serious public policy issue that the administration did not
take into account in pushing this privatization. Thank you, Mr.
Chairman.

Mr. Mica. Well, we thank you, Mr. English, both for your inter-
est and also for sharing with us your experience and knowledge on
this issue. Mr. King, you’re getting better. I like the analogy with
the limbs and the brain; the seedlings were very good, too. ould
like to yield, at this time, to the ranking member.

Mr. Moran. Thanks, Mr. Chairman. Boy, that’s a new twist that
you brought UP Mr. English. Since Hong Kong is going to be taken
over by the Chinese Communist government shortly, you’re sug-
gesting we might have the Chinese Communist government over-


83

STATEMENT OF TIMOTHY P. BOWLING, ASSOCIATE DIRECTOR
OF THE FEDERAL HUMAN RESOURCE MANAGEMENT ISSUES,
GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY ALAN
BELKIN, OFFICE OF GENERAL COUNSEL, GENERAL AC-
COUNTING OFFICE, AND DEBORAH TAYLOR, ACCOUNTING
DIVISION, GENERAL ACCOUNTING OFFICE

Mr. BOWLING. Thank you, Mr. Chairman. With your permission,
Tl read a shortened version of my statement, and. submit the full
text for the record.

Mr. Mica. And we will submit, without objection, your full state-
ment for the record. Thank you.

Mr. BowLinc. Thank you. I’m pleased to be here today to discuss
the Office of Personnel Management’s privatization of the inves-
tigation service, through the establishment of the employee stock
ownership plan. The stated purposes of OPM’s privatization initia-
tive are to permit agencies more autonomy in meeting their inves-
tigations needs, and achieve cost savings to increase competition
among providers of investigative services.

Thus far, an OPM contractor has completed a feasibility study,
as you pointed out, at a cost of $108,000, which indicated that this
type of activity could be converted to a private sector operation.

lowever, the contractor study said that the potential for future
success of this proposed new company could only be assessed after
the preparation and analysis of a detailed business plan.

OPM has recently awarded a contract for the services of a trust-
ee who, among other things, is responsible for developing this busi-
ness plan. There are two basic questions to be addressed with re-
gard to OPM’s privatization initiative. First, should the investiga-
tive function be considered inherently governmental, or can it be
appropriately performed by a non-Federal organization.

And second, if it is determined that this function can be appro-
priately performed by a non-Federal organization, is conversion to
an ESOP feasible? The Federal Acquisition Regulation, which is
the primary Federal procurement regulation governing the acquisi-
tion of supplies and services, provides that a contract may not be
awarded for the performance of an inherently governmental func-
tion.

In September 1992, OMB issued guidance supplementing OMB
Circular A~76 to assist agencies in determining what functions fall
within the category of inherently governmental functions. This
guidance states that gathering information for, or providing rec-
ommendations to an agency are not normally inherently govern-
mental functions.

It also includes an illustrative list of functions that are consid-
ered to be inherently governmental, and states that activities that
commit an agency to a particular decision or a course of action are
inherently governmental. The guidance specifically identifies the
selection of individuals for Federal Government employment as an
example of a function that would be considered inherently govern-
mental.

Based on the OMB guidance and our analysis, it appears that in-
vestigative functions confined to the gathering and reporting of in-
formation to Federal agencies could legitimately be privatized.
However, decisions regarding an individual’s suitability for employ-


5

et request. And as the chairman of the full committee, I appreciate
and welcome the administration’s efforts to make Government
more efficient and less costly. And I think the committee has estab-
lished a pattern of being in cooperation with the administration on
some of these efforts.

Over the coming months, this committee has been designated to
play a critical role in transforming the Federal Government and re-
defining the roles and relationships of Federal, State, and local gov-
ernments. And I hope to continue to work in cooperation with the
executive branch as we meet this challenge. At this time, I will not
dismiss any serious proposals to restructure the Federal Govern-
ment.

We will privatize, eliminate, downsize, and devolve where that
activity is appropriate. Nevertheless, merely downsizing for the

of downsizing and privatizing for the sake of privatizing is
neither responsible nor practical. We have to ask ourselves basic
tough questions about each proposal to transform the Federal Gov-
ernment.

For instance, is the program a necessary function of the Federal
Government, due to Constitutional, national security, or cost effi-
ciency considerations? Can the private sector or another level of
government do it more effectively? Will we be sacrificing or improv-
ing the quality of services? Are we truly saving the American tax-
payers money, or just reshuffling responsibilities?

‘hese are just some of the questions that members of this sub-
committee have been and will continue to be asking, with regard
to the administration’s ESOP proposal. I, myself, do have a number
of questions about the proposal, and I hope that today’s hearings

ill put to rest my concerns, or at least that we'll get some answers
to some of the concerns that the chairman has raised and others.

Nonetheless, let me run down a list of just some of my concerns.
First, I question the cost savings associated with the plan, as Mr.
Mascara has done, and as Mr. Mica has done. To my knowledge,
no formal cost analysis has been conducted. The administration
claims it will save $30 million, which is 4 percent of the traini:
and investigation’s budget. As Chairman Mica mentioned, O.
standards require functions to remain in house, if contracting out
does not yield 10 percent savings.

If in fact we are pursuing illusory savings, why are we wasting
our time? Second, I’m concerned that no business plan exists, in
particular. A number of agencies have expressed reservations about
the proposal because they feel the quality of service will suffer.
What. will be OMB’s role in assuring that the new organization
maintains the quality standards of investigative services that Fed-
eral agencies have come to expect?

Third, the promise of a sole source contract to the new organiza-
tion troubles me deeply. To attract employee support for OPM’s
plan, and to ease employee concerns about the viability of a
privatized Office of Federal Investigations, a commitment has been
made to award a sole source contract to the new corporation to con-
duct background investigations for all Federal agencies. And this
arrangement would flout Federal acquisition regulations, which re-
quire all large Government contracts to be competitively bid, ab-
sent some overwhelming reason to grant a waiver in that regard.


ll

IL ADC, LTD.
=
1919 San Mateo NE + Albuquerque, New Mexico 87110
‘505-265-5800 + FAX 505-265-4876

June 12, 1995

The Honorable John L. Mica, Chairman
Committee on Intergovernmental Affairs
336 Cannon House Office Building
Washington, OC 20515

RE: Privatization of OPM Investigative Functions
Dear Congressman Mica:

ADC, Ltd.'s perspective on the creation of an ESOP to conduct background
investigations as proposed by the Office of Personnel Management under the auspices
of a new corporation called Newco has the same impact on the U.S. taxpayer as
Congress endorsing a new $3 bill with the value of the present $1 bill. Ladies and
gentlemen, this OPM so-called Newco is a false economy, It doesn't make common
sense. ADC has provided these same services to the Department of Commerce at a 30 -
40% savings to the U.S. Treasury, on a 35-day turnaround. ADC Investigators are all
experienced former OPM, FBI, DiS, Customs, and INS investigators with an average of
20 years in their careers. They are all cleared by DIS. These are loyal Americans who
have and are performing the same identical services for OPM and other federal
agencies.

Vice-President Gore has discussed the need to privatize many government functions,
including this one. We in the private sector can offer opportunities to those OPM
investigators desiring employment with us. OPM has handicapped this industry with their
reluctance to give authority to federal agencies. When the authority has been given to
some agencies, the private sector has performed satisfactorily at a saving to the
taxpayers. With the commendable efforts by the U.S. Congress to reduce the cost of
government, let the private sector save 30 to 40% of federal funds and assist you
members of Congress in reducing the deficit, not create another expensive bureaucracy
such as exists today. It is un-American for a federal agency such as OPM to sole source
and blackmail the rest of the federal agencies' needs to one firm as proposed by OPM
Officials. Why should all the federal agencies be at the mercy of ESOP (Newco)? With
fo competition, this will drive up the prices that OPM is charging the agencies for this
service. It would be like a monopoly where this so-called Newco would be untouchable


81

ment employees or through the contractor employees, the party
that would be sued and looked to be held responsible would be the
Government. And in OPM’s case, we would turn to the Department
of Justice to represent us, whether that suit took place in State
court or Federal court.

Mr. Mascara. So then the private agency then has immunity
from prosecution or from being sued, because they're working at
the behest of the Federal Government?

Ms. Lewis. Well, there is also an examination of—frankly, it
ends up, as in many legal matters, perhaps being fact-specific. It
may very well depend on exactly what is the conduct that is being
alleged to be unlawful. One of the examinations the Justice Depart-
ment clearly would do, is whether the contractor is acting within
the scope of the contract, basically being alleged to act unlawfully
while performing the business of the Government.

So if the conduct being alleged is outside that scope, then per-
haps, again, it would be a fact-specific matter, the contractor would
ultimately be the liable party.

Mr. Mascara. I have a son that’s a lawyer, and that was the
exact answer he would have given me had I asked him the ques-
tion. So I see what you mean, Mr. King, about you didn’t know
what answer you were going to get to an impromptu question. Get-
ting back to Ms. Lattimore, you can get that information?

Ms. Lattimore. I will certainly get it to you.

Mr. Mascara. I think we should have some sense of the number
that are deficient, the number of cases.

Ms. LaTtimor_. I will get that to you today.

Mr. Mascara. Thank you. Thank you, Mr. Chairman.

Mr. Mica. Just a coup le of final questions. I think GAO is testify-
ing shortly that the ESOP feasibility study cost was $108,000; is
that correct?

Mr. KING. That’s correct. That’s averaging it up. But for $260, ac-
tually $259 and I think about 92 cents.

Mr. Mica. What’s the cost of the contract awarded to Marine
Midland?

Mr. KING. The cost on that would be—it was $250, wasn’t it?

Ms. LATTIMORE. It’s capped at $250 cost, and the expenses
would——

Mr. Mica. $250,000?

Ms. LATTIMORE. Yes.

Mr. Mica. And what about for Arnold & Porter?

Ms. LaTTIMORE. No, see, the——

Mr. Mica. Is that included?

Ms. LaTTIMoRE. The trustee costs are capped at $250,000. The
total cost of the contract, with travel expenses and working with
our employees will not exceed a half a million, will not exceed
$500,000 capped.

Mr. Mica. $500,000?

Mr. KING. Yes.

Ms. LaTTIMoRE. Right.

Mr. Mica. And that includes Arnold & Porter’s fees, and Marine
Midland’s fees, and there was another firm?

Mr. Kine. Right.

Ms. LaTTIMORE. American Capital Strategies.


107

decrying this proposal. Unfortunately, there have been efforts of
late to silence these views by those who are mandated to follow the
Administration’s lead on this issue. In a 6/7/95 memo from
Director King to the President’s Management Council, he said it was
necessary for the "Administration to speak with one voice" on the
privatization issue. It would be wrong to move forward without a
complete understanding of the overwhelming concerns in the
personnel security community. Although no formal surveys have been
done, people have consistently told OPM investigators that they can
not believe the government would seriously consider contracting out
what they believe is an inherently governmental function. The
Federal Investigators Association has written a letter to
Representative Gingrich opposing this move, and it is clear that
many on The Hill are skeptical of the idea as well.

Even faced with the groundswell of opposition from the
personnel security professionals, OPM continues to press ever
onward in a hurried and sometimes haphazard effort to bring this
plan to fruition.

Before I conclude, let me address one final point. ‘There
appears to an attitude among some that, owing to the end of the
Cold War and a decrease in federal hiring, the need for security
investigations has lessened significantly. In 1993, OPM‘s
Washington area investigators received a briefing by a counter-
intelligence expert from the Department of Energy. He presented
information showing that the need for such activities has not
lessened, and has even perhaps increased. Threats to national
security today come not only from the defense and intelligence
areas, but also from areas such as economics, technology, industry,
and energy research. The Executive Branch agencies that deal with
these issues are exactly the ones for which OPM provides
investigative services. In the wake of the Aldrich Ames scandal,
several top level U.S. officials expressed the opinion that
Americans should not be surprised that the spy game still continues
even after the end of the Cold War. Recently, the President
called for the hiring of over one thousand new border patrol agents
to protect our borders. Their background investigations are done
by OPM. We have also been informed that, in the wake of the
Oklahoma City bombing, many new Federal Protective Service officers
will be hired nationwide to increase security at federal buildings.
OPM also investigates them. And, despite a decrease in federal
hiring, investigative field offices around the country now have on
hand a very high workload.

In concluding, let me touch on one point I alluded to earlier.
Investigations staff around the country can see the writing on the
wall. They realize that this series of hearings will go a long way
in determining their fate, if they do not decide it outright. I
can not stress strongly enough the fact that should this
Subcommittee send anything less than a strong statement that it
intends to oppose the privatization plan and to work to stop it,
I fear that within a short period of time, the organization will
implode as staff members take jobs elsewhere. The result will be


92

charges of $18.3 million were applied, the fund’s revenues

exceeded expenses by $6.5 million.

Because of issues such as the above, it is difficult to determine
whether greater cost savings could result from privatizing this
activity than would result from improved managemert or the
application of a more realistic overhead charge. Also, care
needs to be taken to be sure that OMB’s savings estimate is
clearly understood. OMB‘s estimate is not based on an analysis
of how costs could be reduced or revenues could be increased by
privatizing the investigative function. Rather, the $30 million
figure was derived by estimating the savings from privatizing
both OPM‘s investigative and training functions. According to
OMB, this figure was arrived at by assuming that annual savings
would be 4 percent of OPM’s investigations and training expenses,
including overhead, over a 4-year period. OMB said the 4 percent
figure was based on rates of savings found in earlier studies on

the results of contracting out other federal functions.

Using fiscal year 1994’s investigations operating expenses of $88
million as the base and applying the 4 percent annual savings
figure, we estimated that the investigations’ portion of the
savings would be about $14 million over a 4-year period.
Additionally, this reported savings could be inflated since the
$88 million would have included some amount of questionable

overhead charges.




60

Ms. LATTIMORE. The question placed to the employees of whether
or not you want in, specifically, and will you join this ESOP, would
be asked somewhat later in the trustee’s process, when the employ-
ees are given all the pertinent information regarding the formula-
tion, the structure of an ESOP, in terms of the specific job offer.
But that would not come until the trustee had developed that
structure, developed the compensation and benefits package, so
that the employee would have something positive and concrete in
front of them to respond to.

Mr. KING. So, Mr. Chairman, we were operating on the other
side of the decision. If I could once more—the decision had been
made, Mr. Chairman, to privatize. The question was, would it be
an employee owned organization, or would we put the employees
on the street?

Mr. Mica. You basically made the decision it would be employee
owned and you give sole source.

Mr. KinG. But the confusion has been continuously, Mr. Chair-
man, that if you stop the ESOP, you stop privatization. Mr. Chair-
man, I think the overwhelming jority of our employees said,
well, if that’s the case, then we woul 1 prefer to stay for the ESOP.
But we would prefer to be on the Government payroll. Nobody
questions that.

That decision was made by the President, and I’ve been asked to
carry it out, Mr. Chairman. And what we’re saying is, would we
like to give the opportunity, the real opportunity, and in the public
interest, to give our employees an opportunity to manage their own
business. And that’s really what that discussion was.

We have made up the matrix of the organization. By the way, we
had several questions that came up in each one. ere does the
public—where do the agencies, our customers who represent that

ublic interest—here are the numbers on the suitability question
for civil service employment for personnel security.

And Pat, you went through this. And we said, what’s intrinsically
governmental, and then what could be done in the private sector
if it were supervised and directed? And everything falling below
this red line, and that shows us very simply, below the red line
could be done on some contractual "Basis. It could be done in a
privatized context.

Everything above that, we believe, is intrinsically governmental.
So it’s in two parts, and they’re directly related. And they’re dif-
ferent from civil service employment as opposed to the personnel
security issues.

Mr. Mica. Well, I think you've shed a little bit of light on some
of your procedures and thought processes in getting to this point.
There are other questions, you know. The question of reinventing
government isn’t just to move things around; it’s to try to provide

etter services. And in looking at privatizing, if the private sector
can accomplish this at a lower cost, I’m not sure if that’s been a
consideration.

Mr. DeSeve, you testified that you’ve looked at some of the costs
involved here. And I think you also gave an example of the study
that went to the Public Works and Transportation Committee. Has
there been any cost comparison or effort to look at what the private
sector can perform these services for?


56

Mr. Mica. Thank you, Mr. King. We’re Boing to call now on Mr.
Edward DeSeve, Controller of the Office of Management and Budg-
et, for his comments; and then we'll get back to questions. Wel-
come, Mr. DeSeve.

Mr. DeSeve. Thank you very much, Mr. Chairman. Mr. Chair-
man, members of the committee, I’m G. Edward DeSeve, the Con-
troller of the Office of Management and Budget, Office of Federal
Financial Management. I’m pleased to have the opportunity to tes-
tify before the committee. Your letter of invitation asks that OMB
appear to provide detailed estimates of the savings to be realized
from privatizing the Office of Personnel Management’s background
investigations and training programs.

As you are aware, the President’s fiscal year 1996 budget in-
cluded a $30 million governmentwide savings estimate for this Re-
inventing Government Phase Two initiative. You also asked for a
description of the methodology used to calculate these savings. Be-
fore addressing the specific questions posed by the committee, I
would like to provide an overall perspective on the context of this
initiative.

The President has demonstrated a strong commitment to creat-
ing government that works better and costs less. The National Per-
formance Review Phase One was the most visible example of the
President’s commitment to this goal. The September 1993 NPR re-
port and subsequent actions by the agencies under phase one clear-
ly showed the American people and the Congress that we could
streamline, downsize, reengineer work processes, empower Federal
employees, and focus more on customers. We showed that this
could be accomplished by measuring performance and emphasizing
accountability. Much was done during that phase.

However, we recognize that such a major challenge in reinvent-
ing government could not be a short-term or one time effort. For
the fiscal year 1996 budget presentation, the President asked his
senior advisors and the departments and agencies for bold, new,
creative ideas about how to further improve services.

One result was the singling out of five agencies that had pro-
posed particularly appealing strategies to meet the President’s re-
quest. Of these agencies, one was the Office of Personnel Manage-
ment. Their proposal transforms OPM from an agency that is a
provider of training and background investigative services to one
that will concentrate its attention on policy direction and oversight
of more diverse and competitive sources of these needed services.

OPM will continue to provide leadership and oversight of the
100-year-old merit system, to ensure that Government continues to
operate with an open and competitive, merit-based, non-political
civil service. By privatizing the investigation and training func-
tions, OPM estimates that it will cut its own work force by about
one-third. But since the work performed by OPM in these two func-
tions—including administrative support—is financed entirely
through reimbursements from agencies that request the services,
there is, in our view, little actual savings to be realized within
OPM’s own budget resources by this proposal. There are, however,
some savings to be realized by individual agencies that would have
increased flexibility in shopping the private sector marketplaces for
these services.


18

as for a BI, but designed to provide an advance notification of
the results of the subject interview. This allows for the
granting or denial of a waiver to bring an individual on board
for training. (Now used exclusively for INS/Border Patrol cases.)

- Minimum Background Investigation (MBI). Conducted for
placement into positions at the Noncritical-Sensitive or Moderate
Risk level. It includes the NACI, credit search, and personal
interview,

Variations of the above are conducted to cover situations where
there has been a break in service or because of movement from a
lower to a higher sensitivity or risk level,

Incumbents of positions designated Special-Sensitive or Critical-
Sensitive must have a periodic reinvestigation five years after
placement and each succeeding five years. OPM has three products
to meet agencies’ periodic reinvestigation needs:

- Periodic Reinvestigation (PRI). Consists of the NAC,
credit search, personal subject interview, and local law
enforcement coverage.

- Periodic Reinvestigation-Residence (PRIR). Adds three
years of residence coverage to the PRI.

- Periodic Reinvestigation-SBI (PRIS). Adds personal source
and NSD-63 coverage items to the PRI. It is the periodic
reinvestigation available to meet NSD-63 criteria.

Investigative products generally aimed at suitability:

- Special Agreement Check (SAC). A limited investigation (or
series of checks) conducted on a subject, done only through
special agreement between OPM and an agency. The SAC provides an
alternative procedure by which an agency can obtain searches
specific to its particular needs.

- National Agency Check and Inquiries (NACI). This is the
minimum investigation prescribed for federal competitive service.
It includes the NAC and a five-year investigation by inquiry,
covering subject's residence, education, employment,
references, and local law enforcement.

- Applicant Suitability Determination (ASD). This
investigation results when an application submitted to an
examining office for a competitive service appointment is
referred to OPM because a question of suitability is raised
during the application review process. If OPM determines there
is a serious suitability issue that needs to be resolved, further
investigation (which may include a NACI, correspondence, phone
calls, record search, or personal investigation) is scheduled.

~ NACI Suitability Determination (NSD). This investigation


AT

Describe the level of support for this initiative among nesbers
of the current OFI staff, as well as your agency's pl.
recruit sufficient participation to ensure the viability of thts
new corporatio

Many of the current staff of our Investigations unit have vocally
opposed the decision to privatize the program, regardless of the
means used. The makeup and structure of the new corporation, as
well as its relationship to OPM, have yet to be determined.

These issues will be resolved during negotiation between OPM and
the trustee. It will fall to the trustee to determine the level
of support needed to go forward, make job offers to current

ployees, and handle any imbalance between staff and workload.



51

Identify the advantages and disadvantag

of
decisive fac

3 favoring the ESOP alternative.

Elimination of investigations at OPM would satisfy the
Administration's NPR goals of providing agencies more flexibility
in how they meet their investigation needs. | However, this
alternative would eliminate OPM's policy, oversight, coordination
and guidance roles, disconnect our central records repository
(SII), database interface, and automated linkages, and would

Severely disrupt the timeliness and service levels enjoyed by our
customer agencies.

oh, and the

Delegating investigative fieldwork to agencies, while maintaining
our Proc jing Center at Boyers, Pennsylvania, would create a
greater need for private industry investigative services, but
would shift investigative and administrative responsibilities to
agencies and create a service disruption as above.

Establishing OPM as a contract manager would keep OPM in a policy
and oversight role and vould minimize the need for other agencies
to change their operations. A downside would be the
disappearance of existing liaison channels and unpredictable
vendor costs and servic

Privatization would not occur by creating a government
corporation and was not seen as meating the Administration
objectives from the NPR. Nor was the alternative of consolidated
government investigations. They were not further pursued.



80

And that’s the basic difference. And that is a profound difference
issue, really, in the whole privatization effort.

And the one other question that I've had throughout this is, if
there is a successful effort to stop ESOP—and I think there will be
an effort, I know there will be an effort to stop ESOP, to say it’s
illegal to sole source. If that is successful, which it may very well
be, are you going to force privatization of the investigation’s func-
tion?

Mr. DESEvE. I think we're going to sit and talk with Mr. King
about what all the options are at that point. But I certainly hope
we won't be faced with it.

Mr. Moran. Well, I think it’s a very real possibility, and I think
we need to be prepared for that. And I’d like to know what you
would do if that happens. Thank you, Mr. DeSeve.

Mr. Mica. It may be “Mr. Deceive;” he said he was not a Repub-
lican. Mr. Mascara.

Mr. Moran. You know, he does do a very good job. We shouldn’t
be giving them all that flack, you’ve been very articulate and pro-
fessional.

Mr. DESEvE. Thanks, Mr. Moran.

Mr. Mascara. Mr. DeSeve is a very honorable person. I’ve known
him for a number of years, and very capable. I have one more ques-
tion. Is it part of the responsibility of OPM to look at investigations
that are done by other agencies that are contracted out, and to
evaluate those investigations?

Ms. LATTIMORE. Yes, we do appraisals and assessments.

Mr. Mascara. And if you do, do you have a number or a percent-
age of those investigations that were deficient?

Ms. Lattimore. I do not have a current number, but I can cer-
tainly get you the results of the most recent year’s appraisals that
we've done, and share them with you, sir. I don’t have it off the
top of my head.

The information referred to follows:]

For the period June 1, 1994, to June 9, 1995, OPM review of investigations per-
formed or contracted out by other agencies under authority delegated by OPM
showed the following:

Number of investigations reviewed: 822
Number deemed deficient: 548 (67%)

Mr. Mascara. I appreciate it, Ms. Lattimore. Is there a concern
about potential litigation in the event that the investigations were
improper somehow, or information was not correct, and that litiga-
tion could result as a result of a faulty investigation? Is that a pos-
sibility? Would the Government, or the private agency doing the in-
vestigation be subject to litigation?

Ms. Lattimore. If the private agency were performing investiga-
tions for us, OPM could be liable, because they would be acting as
our agent in that regard.

Mr. Mascara. Well, does that somehow make them immune to
a lawsuit for liable—

Ms. LATTIMORE. Counsel?

Mr. KING. I love getting counsel to make a spontaneous response,
Mr. Mascara; I hope you’re more successful than I’ve been.

Ms. Lewis. Mr. Mascara, because the investigations are being
performed on behalf of the Government, either directly by Govern-


142

At this point, I would like to address your specific questions and concerns,
To assure responsiveness to your areas of inquiry, I will first quote from your
letter to me and follow with my response.

“We were especially troubled by reports of deficient investigations
submitted by private contractors. These deficiency rates do not appear to
be consistent with the Administration’s testimony that agencies sustain
adequate programs to provide for the security, suitability, and public trust
determinations associated with federal employment. How do agencies
rectify the deficiencies that they find?”

The deficiency rates provided in my testimony to the subcommittee come
from historical data maintained within OPM’s Office of Federal
Investigations. That information should still be available from OPM.

Agencies that have utilized OPM’s investigative services have relied on OPM
to take the appropriate measures to assure the integrity and quality of the
investigative product. Thus, agencies have had no need to establish their own
controls. While I have no survey to report concerning integrity and quality
control measures undertaken by agencies utilizing the services of contract
investigations companies, my sense tells me that there are very few such
controls in place. Establishing and operating an effective quality and integrity
control operation for background investigations is a function requiring
ongoing vigilance.

Deficiencies in conducting background investigations can take several forms.
There can be deficiencies in the areas of integrity, issue development and
resolution, and investigative coverage. The Office of Federal Investigations
at OPM has earned its reputation among the personnel security community for
the integrity and caliber of its investigative reports. The investigators and
managers of this program are very proud that in its history of conducting
literally hundreds of thousands of investigations, there has not been even a
single spy scandal involving an OPM- investigated individual. This has been
true even though OPM has been the sole provider of background
investigations for the Department of Energy's nuclear weapons program for
many decades.


135

STATEMENT OF THE
HONORABLE CONSTANCE A. MORELLA
HEARING ON
OPM INVESTIGATIONS: PRIVATIZATION
SUBCOMMITTEE ON CIVIL SERVICE
JUNE 15, 1995

Since the privatization of OPM’s Office of Federal
Investigations (OFI) will serve as a test case for coming
privatization initiatives, it is important to take a critical look
at the methodology and consequences of privatization at this
juncture. Although | am unable to participate in this hearing
because of a scheduled mark-up of a bill in my subcommittee
on technology, | am very grateful to Chairman Mica for
having a hearing that provides a forum for discussing the
issues that surround privatization, including taxpayer costs,
privatization models, and employee and customer support.

As you know, the Administration and this Congress have
discussed the use of privatization as a strategy for reducing
the size of government, both its programs and personnel, and
for reinventing government. The National Performance
Review (NPR) has issued a report that outlines various

privatization options, including employee stock ownership

1


13

STATEMENT OF
HONORABLE JAMES B. KING, DIRECTOR
OFFICE OF PERSONNEL MANAGEMENT

before the

SUBCOMMITTEE ON CIVIL SERVICE
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
U.S. HOUSE OF REPRESENTATIVES

at an oversight hearing on

POLICIES GOVERNING BACKGROUND INVESTIGATIONS
FOR FEDERAL EMPLOYEES
AND THE
OFFICE OF PERSONNEL MANAGEMENT’S PROPOSAL
TO CREATE AN EMPLOYEE STOCK OWNERSHIP PROGRAM
TO PERFORM RESPONSIBILITIES CURRENTLY WITHIN
THE OFFICE OF FEDERAL INVESTIGATIONS

JUNE 15, 1995

Mr. Chairman, I thank you and the subcommittee for this
opportunity to testify on the privatization of OPM’s Office of
Federal Investigations.

Permit me to begin with a quotation from the futurist
Alvin Toffler which I believe puts what we at OPM are doing in
context, both as to the process and our goals:

"our moral responsibility is not to stop the future, but
to shape it, to channel our destiny in humane directions, and to
ease the trauma of transition."

Mr. Chairman, OPM and its predecessor, the Civil Service
Commission, have been carrying out investigations since the 1950s.
We provide this service on a reimbursable basis, within a revolving
fund. In recent years we have served about 100 agencies.

Ms. Lattimore yesterday discussed the scope of the
investigations program, and we have provided written responses to
the questions you sent us. Today she and I will respond to your
questions about implementation of the decision to privatize.

The investigations program is supposed to operate on a
businesslike, self-sufficient basis, but because of changing market
conditions, over nearly a decade, its revolving fund had
cumulated a deficit that, at the end of FY 1993, had reached $24
million and was still rising.

We were staffed to conduct more than 60,000 personnel
investigations a year but were actually carrying out only about
40,000.


137

Advisors determined that the investigative function was a
good candidate for becoming an ESOP, but hedged on an
endorsement for the success of this entity.

In general, | am not a supporter of privatization,
including the outsourcing of government functions or the
ESOPing of Federal employees. 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. In the 1980’s, OPM’s experience with
contracting out a portion of its investigative work shows the
inverse. The results of this action were a decline in the
quality of investigations and an increase of $1.4 million in
costs.

OPM and OMB have estimated savings of $30 million
over five years by privatizing OPM’s investigations and
training functions. Yet, the cost of privatizing the
investigations function alone is estimated over at $50 million.

| was once an English professor, but even I can see


55

Please summarize the legal thinking supporting this initiative that would justify other than
full and open competition for any functions intended for privatization. To what extent
were any cost-benefit comparisons conducted consistent with requirements of OMB
Circular A-76? If none were conducted, what justification would support the proposed
sole-source contract?

The Competition in Contracting Act (CICA) allows other than full and open competition when
the agency head determines that it is necessary in the public interest to use a method other than
the competitive procedures, and the agency notifies Congress in writing of its determination not
less than 30 days before the award of the contract. Under this exception, competition may be
limited to the minimum extent required by the public interest. Although a formal determination
and notification have not yet been done, OPM believes that employing a procurement method
other than full and open competition in the privatization of investigation services would be
necessary in the public interest.

Following the President's decision to privatize the investigation function, OPM explored the best
means to implement this decision. OPM was particularly mindful of the need to continue
uninterrupted the service of conducting background investigations, the uncertainty whether
adequate sources are available to provide the high quantity and quality investigations required,
the need to maintain employee morale to ensure continued employee productivity, and the need
to treat OPM employees as humanely as possible. The Director of OPM determined that the best
manner to achieve these goals was to pursue forming an employee stock ownership plan (ESOP)
for the Investigations Service employees whose positions will be eliminated by the privatization,
and then, contracting for investigation services with the corporation formed by the ESOP.

Accordingly, OPM has commissioned a feasibility study to determine whether it would be
feasible to pursue the ESOP option. The conclusion of this study is that an ESOP would be
feasible, but only if the ESOP corporation does not have to compete initially for the investigation
services contract. Based upon these factors, OPM believes that it would be in the public interest
for OPM to procure investigation services from the ESOP corporation without competition, that
is, through a sole source contract.

With respect to any cost-benefit comparison, as part of the initial review, OMB developed
estimates of government-wide savings to be realized by privatizing OPM's investigation and
training functions, Under the unique and groundbreaking approach presented here -- that is,
proceeding with privatization by contract with an ESOP corporation ~- OMB has informed OPM
that no further cost analysis is required of OPM pursuant to OMB Circular A-76 in order to
proceed.


2

This range indicates that even if OPM were to retain the func-
tion, some effort should be made to bring its costs into line. While
both agencies that appeared before us yesterday supported the ad-
ministration’s initiative to create an Employee Stock Ownershi
Plan—ESOP—with the Office of Federal Investigations, I thin!
that it’s important to put on the record the qualifications that
agencies have written in response to our invitation to testify.

For example, the Department of Energy reported to us that it is
developing a state-of-the-art automated integration of personnel se-
curity and other data bases, which rely upon a linkage to the OPM
Federal Investigations Processing Center. The statement from the
Department of Energy Deputy Secretary William White, which ar-
rived after yesterday's hearing, emphasized, and I quote:

If the FIPC should be disrupted, either through direct dismantlement, or through
an inability to receive a suitable investigative product from the Office of Federal ta.

vestigations, this innovative automation effort will fail. This will be at a cost of not
only millions of dollars, but also at an incalculable cost in lost productivity.

The record appears clear that background investigations related
to Federal employment can be done by private sector organizations.
It appears equally clear, however, that any decision about creati.

a new organization to conduct these investigations should be base:
in a rational business plan that is consistent with the Govern-
ment’s own standards for cost comparisons, while it incorporates
other planning factors and legislative requirements.

From all appearances, the administration’s planning in this re-
gard appears to be deficient. According to the only estimate on the
record, the administration’s fiscal year 1996 budget has forecast
that OPM’s privatization initiatives relating to investigations and
training will save $30 million over 4 years. That amounts to 4 per-
cent of the combined training and investigations budget.

By standards established in OPM Circular A-76, a proposal to
contract out a function must show a 10 percent savings, or the ac-
tivity must remain in house. There is no evidence on the record,
however, that a cost comparison has been completed. Indeed, OPM
Associate Director, Patricia Lattimore, will be quoted by another
witness today as stating that cost is not the issue.

If cost is not the issue in a proposal that purports to save $30
million, we have to ask, what is the issue? On April 1st, I wrote
to the General Accounting Office to request that the GAO review
business plans and evaluate any projected savings associated with
this proposal. In May, OPM published a request for a proposal
seeking a private contractor to develop a business proposal.

That contract was awarded last week. This apy to me that
6 months after a leading proposal was announced, its initial plan-
ning phases are just beginning. Even though the planning for the
development for an ESOP appears to be in beginning phases, news
reports associated with the announcement of the contract claim
that if the ESOP is going to succeed, it will need commitments
from half the investigators by August.

In effect, then, investigators are being asked to make firm com-
mitments to a proposal that, from all available evidence, is on rath-
er shaky round. Indeed, so far, this proposal has all the earmarks
of sort of an “Alice in Wonderland” tale, that gets more curious
with every question asked. The answers on the record are less than


114

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163

VARIC ON > RIC. re SHOLNE PLACE LTE Seo LEERUAG IEA FALE CUNO WAZA
INTERNATION
re.conone cn moe

FACSIMILE 703) 848-7873

June 26, 1995

John L. Mica

Chairman, Subcommittee on Civil Service
Committee on Government Reform and Oversight
2157 Rayburn House Office Building
Washington, D.C. 20515-6143

Dear Mr. Mica:

As I was departing the OPM hearing on June 15, 1995, two incidents occurred that bothered
me. After reflecting on both of them for a few days, I concluded that 1 should document
these events with the Subcommittee.

The first occurred just as 1 was preparing to exit the hearing. An OPM officer, whom I had
observed was supporting the OPM team, approached and quite firmly advised me that I had
lied in response to a question from Mr. Bass, that Ms. Lattimore of OPM had not recently
stated in a meeting with OPM’s Government clients that under ESOP, those agencies with
current waivers to contract out would not be granted waiver renewals, and that no new
waivers will be granted.

The specific meeting I was referring to was held at OPM on May 15, 1995 to brief OPM’s
Government clients on where OPM is heading with ESOP and what the future portends.
Two of these clients, unknown to each other, reported to us after the meeting that in
response to a specific question, OPM stated that no additional requests to contract out would
be approved. Those with a current contract would be allowed to run the contract out until
completion, but after that, all contracts would be awarded to the new ESOP "Newco" for a
five year period. This, of course, is not inconsistent with OPM’s continuous theme
articulated in the ESOP feasibility study that Newco will require a sole source climate to be
successful.

In rechecking my sources, I find that OPM is technically correct. Ms. Lattimore did not
make the statement because she wasn’t there. The senior OPM people who were present,
ran the meeting and answered questions were John Lafferty, Phil Gasiewicz of Boyers, John
Crandall and an unidentified female. I am assured that one of them made the statement
above, presumably speaking on behalf of supervisor Lattimore

The other incident occurred just after I left the hearing room, when a young OPM officer
approached and quite belligerently and vociferously stated that he or his people review our
work and it is indeed mostly deficient, despite my statement to the contrary in my testimony.
1 commented that DEA's analysis of OPM’s allegations of Varicon's deficiencies was not


72

cancies are occurring, we are making the job offers to those folks,
on the basis of seniority and their skills, to bring them in and keep
them within the Federal family. So we're trying to minimize any
disruption to them.

Mr. Mascara. Well, the Government could not have chosen a
better person to make the case, Mr. King. I have the utmost re-
spect for you and admiration about the way you go about your job,
and the sense of fairness that you have. But after 2 days of hear-
ings, I’m still not convinced that we have sufficient data to move
forward. There were so many question marks yesterday, at least.
T’ve been in and out of here today.

There are so many question marks. Why are we moving so quick-
ly? Why don’t we get the questions answered that we need to have
answered? The numbers are soft. Nobody can assure us that those
numbers are hard numbers, as it relates to savings. And I’m just
a little bit perplexed about why we are moving on an issue that
we're not sure about, what the outcome, the final results will be.
Thank you, Mr. Chairman.

Mr. Mica. Thank you, Mr. Mascara. We are trying to find some
of those answers with this hearing. And just a little personal coun-
sel to Mr. King and Ms. Lattimore. Instead of using the analogies
of wallowing in the mud and the sludge, I suggest that, for Mr.
Moran’s benefit, you use an analogy that you are driving a little,
inexpensive, American-built pick-up truck. And you have the ad-
ministration breathing down your neck, telling you which path
they want you to go.

And you're trying to change the tire, in fact, all the tires, while
it’s going down the highway at 55 miles an hour. And you're trying
to provide services to these agencies in investigations to the tune
of what, 3, 000, a month, to get to the 39,000 of the heavy- -duty. kind.
And then . You ’ve got almost 8,000 to 16, 000 a month in the inves-
tigative side.

So I think that might be a better analogy than wallowing in the
mud and the sludge.

Mr. KiNG. The principal difference, though—and I couldn’t agree
more on the day to day operation, Mr. Chairman. The principal dif-
ference, though, is that once you put new tires on the vehicle,
there’s a reasonable assurance you won’t have to change them
again, during your stay on the truck. I can assure you we're going
to be flooded again on our flood plain of management in the future.

So we have both the truck, but the flood plain stays.

Mr. Mica. He’s got to get back in that mud.

Mr. KiNG. We're trying to move it to higher ground, so we can
protect everybody.

Mr. Mica. You're not only trying to change the tires, you're try-
ing to redesign the model. But going to yield, if I may, my next
round of time to Congressman Pht. English. I’m amazed at how
many people represent Boyers Federal Investigative Processing
Center, including the chairman of the full committee. But I'll yield
to Mr. English for a round of questions. He may have some insight
on this issue.

Mr. ENGLISH. Thank you, Mr. Chairman, and I appreciate the op-
portunity to appear. with’ this subcommittee question this
panel. I have the privilege of representing, physically, the Boyers


aT

Assessment of exorbitant user fees to access record repositories
at state and local level, and the varying methods of access and

waiver policies slow the investigative process and increase it's
cost.


70

So as we put in the hands of those agencies the flexibility, which
we will do after the period of the sole source is over—and again,
that’s another element for negotiation. I don’t want to comment on
whether that’s 3 months, 6 months, 9 months, a year. I don’t know
what it is; that’s an element for negotiation along the way. At that
point is when the big savings will kick in.

As I suspect you will hear from private sector vendors, they be-
lieve that they can significantly underbid OPM. We'd love to see
them try, but I’d love to see the ESOP, on the other side, get lean
and mean and find a way to compete in that same marketplace.
And it’s that competition over the 5-year period—again, we're not
looking about today or tomorrow—we estimated no savings in the
first year. But it’s a 5-year framework that we look at.

And we fully believe that the things that the Chairman talks
about, in terms of flexibility, in terms of long-term benefit, will kick
in for the agencies in the 40 percent of the work that isn’t currently
in the agencies’ hands now, either in-house or under contract. So
that’s our expectation. I believe it’s consistent with what the direc-
tor is trying to do.

Mr. KING. There’s one other thing, Mr. Moran, I should add. The
taxpayers do, in fact, underwrite the private sector that’s presently
out there with investigators because as you look at them, and they
have so stated, they are retired Government employees, at some
level of Government, who receive their health care from the tax-
payer, get their retirement from the taxpayer, and get their life in-
surance from the taxpayer.

So virtually all of the benefits package that we see in the private
sector is paid for by the taxpayer. So it is not something that is
merely being passed on in costs; it’s being absorbed as a secondary
thing by the taxpayer. And I know that the candid testimony from
the private investigators reflected that a number of those folks are
really stringers, as you would, that they were on tap and on call.

And virtually all of them have a wonderful tradition of service
in our Government. And therefore, they come with their entire tax-
payer-paid benefit package that they carry in, and therefore can
work at the level that we’re talking about; because we have that
extra subsidization from taxpayers.

Mr. Moran. Well, that’s very interesting. And thank you, it’s
very good testimony, Mr. DeSeve. Thank you, it’s very knowledge-
able. I just hope that we—well, let me go on to Frank at this point.

Mr. Mica. I would like to now yield to Mr. Mascara.

Mr. Mascara. Thank you, Mr. Chairman. Permit me to be a bit
parochial at this time, Mr. King. I received a letter earlier this year
of a concern of the Boyers, PA, facility, wherein it was indicated
that that operation would not be affected materially. Could you en-
lighten me what would the status be?

Mr. KinG. It would be affected. By the way, there are two parts
to our Boyers facility. There’s our area that manages our retire-
ment, as you know, and then the area on the security side. Ms.
Lattimore, would you like to respond?

Ms. Lattimore. We would continue to keep the operation func-
tional, at the Federal Investigation Processing Center in Boyers,
those activities which are viewed as inherently governmental,
which are suitability decisions, handling falsification fraud cases,


146

wholesale contracting out of backgrounds will be any more successful than
past efforts. They have also been unable to establish any cost savings to the
Government as a whole. I fear further trips down this path will lead to even
greater abuses than those already experienced. The ultimate cost will be
compromising our national security and diminishing the integrity of the
Federal civil service.

Thank you once again for providing this opportunity to express the views of
the OPM investigative workforce in this critical public policy issue. We
would be pleased to provide any other information the Subcommittee might
need.

Sincerely,

fitch ff:

Federal Investigators Association

CFI Ww. Elusgon Ave
Zittle bon eg gor)


63

[A brief recess was taken.)

Mr. Mica. We'll reconvene this hearing, and in just a few min-
utes, I anticipate my colleagues will return. In the meantime,
maybe I could get back to a couple of the questions for Mr. King
and Mr. DeSeve in the genesis of an evolution of the ESOP plan.
You showed me from one of your several charts, Mr. King, that you
had identified what were inherently governmental functions or
non-governmental functions that could be accomplished by just
about anyone.

What kind of surprised me was that there was no attempt to
identify these functions that could be accomplished by anyone to
the private sector. Was there any effort at all to examine if the pri-
vate sector could accomplish some of these functions?

Mr. Kinc. A number of those functions have been done in the
private sector for several years, Mr. Chairman. I believe Pat, I
think you could——

Ms. Lattimore. In terms of, did we look at passing the body of
work that’s currently within OPM directly to the private sector; is
that the question?

Mr. MICA. Well, some of the functions shown on your chart where
you drew your line.

Mr. KING. There was investigate, fact-gathering, data entry, and
records maintenance on one side. Then investigate, fact-gathering,
data entry, and records maintenance on the other. Those things on
both sides, we believe, could be managed outside in non-govern-
mental areas, Mr. Chairman.

Mr. Mica. But there’s been no attempt to get any figures as to
what it would cost to conduct those functions in the private sector
as opposed to the public arena.

Ms. Latrimore. As we moved through our implementation plan-
ning process for that, the things that we were looking at as guiding
parameters were, one, that privatization was a decision that had
already been made; that we were moving to privatize, which meant
that our employees would be separated from the rolls by the end
of the year.

The other parameter that we were looking at is whether or not,
since this work had to be privatized and the privatization resulted
in separation, there was a manner in which we could privatize that
would allow these employees to take over this work in the private
sector. And that was one of the goals that we looked at; along with
the third goal of replicating the existing network for quality and
timeliness as our customers requested.

So as we were looking to craft a privatization vehicle, those were
the guiding parameters. So if we were looking at it in terms of,
does this provide an alternative form of employment for Govern-
ment employees that are going to be separated; and would it allow
them to take the work there to continue as close to quality and
time that our customers already had, it didn’t factor in looking for
another entity or another source to deliver the work.

Mr. Kine. Well, it was partially—it was not partially, it was en-
tirely driven by our own customers, who said they were looking for
continuity and a seamless transition, if a transition was going to
be coming. So what we first were being responsive to was our cus-


20

Each year OPM makes limited, high-level inquiries to verify the
accomplishments of those recommended.

~ Post Appointment Arrests. If the FBI Identification
Division Records receives an arrest record, and there is an
indication that OPM previously conducted an investigation on the
subject, the FBI refers the arrest record to OPM. OPM determines
the current employing agency, and forwards the information to the
agency for appropriate action.


37

Describe the procedures through which this approach is being
implemented.

Upon learning from the privatization feasibility study that an
ESOP would allow continued employment for our employees, and
could be implemented through a transition which would essentially
be transparent to our customers, we decided to pursue this course
of action. We are following the process laid out by the study
contractor, which now calls for securing a trustee to establish
the new company.

The trustee will be responsible for incorporating the new
company, developing plan, financial structure, capital
structure, and obtaining financing commitments. Concurrently,
OPM will be developing the policy, oversight and contract manag
ment operation which will remain with the agency.



157

individual can be entrusted with sensitive information. Thus,
missing information preventing the Department from establishing
either continuity of identity or character can be grounds on

which to deny suitability or a security clearance.

Former employers have expressed concerns to us about
potentially being held liable if a subject of an investigation
discovers through a Privacy Act request that derogatory
information in the subject's file was provided by the former
employer. Confidentiality can be provided to anyone providing
derogatory information, and our investigators routinely ask
sources if they would like to avail themselves of such
confidentiality. Similarly, financial, medical and travel
arrangement businesses or institutions occasionally prohibit
access to their records absent receiving a specific liability
release. However, the effect of such a release is to delay

rather than impede our ability to investigate.

In conclusion, the main objectives of personnel
suitability and security investigations are to establish an
individual's general character, integrity, and trustworthiness,
as demonstrated by past conduct and their acceptance of
responsibility. This process permits the Department to assess
the probability that the individual will perform his or her

duties faithfully and responsibly, and will hold in confidence,


57

I should note here that the primary objective of this privatization
proposal was to permit agencies more autonomy in meeting their
training and investigation needs. NPR specifically recommended
this in its reports on the Department of Justice and Treasury.
Many agencies are already using their own internal staff for con-
tracting out for investigations. Likewise, agencies customarily meet
the bi of their training requirements from sources other than
OPM. OPM currently provides about 40 percent of agency back-
ground investigations and less than 10 percent of all training, gov-
ernmentwide.

Nor did it reflect any concerns about the quality of the work
OPM was currently providing. Cost saving considerations were sec-
ondary to the principal objective. But nonetheless, necessary for
purposes of the fiscal year 1996 budget presentation. OMB was
asked to develop the specific savings estimates to be included in
the President’s budget. We did so in the following manner.

OMB and GAO have consistently found that savings resulting
from individual OMB Circular A-76 cost comparisons average up
to 20 or 30 percent or more. And if I may digress, I went back to
a specific recent study by GAO, and I refer you to a May 1994
briefing report to the Ranking Minority Member, Subcommittee on
Investigations and Oversight Committee and Public Works and
Transportation of the House of Representatives, which is a detailed
discussion of the public and private mix for particular real estate
related services.

In this, the GAO finds first that low contractor bids for activities
contracted out were 39 pereent less than Government cost esti-
mates, oa its face, that b as the truth x of the statement that it's

percent or more in the savings from contracting out. How-
ever, they further go on to say, on average, the low contractor's bid
for particular custodial services was 50 percent less than the Gov-
ernment estimate, while their estimate for maintenance services
was only 2 percent less than the Government estimate.

So we have here a broad range, within this icular GAO
study, depending on the type of function involved, for the exact per-
centage of savings that one might use. This range holds true
whether the function ends up being performed by the private sector
or with in-house resources. In-house savings result from efficiencies
identified in preparation for competition with the private sector.

For the second objective of determining cost savings, we assume
that privatization of OPM’s training and investigation service
would result in savings from the increased level of competition, and
hence the lower price for these services, that agencies would real-
ize. We noted that OPM’s training and investigation services were
already fully reimbursed services to existing customer agencies.

Most of savings, therefore, will be realized not by OPM, but
by the neies themselves, as they seek competitive service pro-
viders. We selected a very conservative 4 percent, on which to base

yvernmentwide savings estimates, despite higher rates of savings
found in earlier A-76 studies. Any savings generated in excess of
the 4 percent estimate could well be used by the agencies to invest
in new technologies or to meet other requirements.

We estimated at total dollar volume of the two OPM business
lines, training and investigations, using 1994 actual operating ex-


23

b. Commission of any act of sabotage, espionage, treason,
or sedition, or attempts thereat or preparation therefor, or
conspiring with, or aiding or abetting, another to commit

or attempt to commit any act of sabotage, espionage, treason,
or sedition.

¢. Establishing or continuing a sympathetic association
with a sabotaur, spy, traitor, seditionist, anarchist, or
revolutionist, or with an espionage or other secret agent or
representative of a foreign nation, or any representative of a
foreign nation whose interests may be inimical to the interests
of the United States, or with any person who advocates the

use of force or violence to overthrow the government of the
United States or the alteration of the form of government of
the United states by unconstitutional means.

d. Advocacy of use of force or violence to overthrow the
government of the United States, or the alteration of the form
of government of the United States by unconstitutional means.

e. Knowing membership with the specific intent of furthering
the aims of, or adherence to and active participation in, any
foreign or domestic organization, association, movement, group,
or combination of persons (here: fter referred to as organiza-
tions) which unlawfully advocates or practices the commission of
acts of force or violence to prevent others from exercieing their
rights under the Constitution or laws of the United States or of
any State, or which seeks to overthrow the Government of the

United States or any State or subdivision thereof by unlawful
means.

f, Intentional, unauthorized disclosure to any person of
security information, or of other information disclosure of which

is prohibited by law, or willful violation or disregard of
security regulations.

g. Performing or attempting to perform his duties, or
otherwise acting, so as to serve the interests of another
government in preference to the interests of the United states.

h, “Refusal by the individual, upon the ground of
constitutional privilege against self-incrimination, to testify
before a congressional committee regarding charges of his
alleged disloyalty or other misconduct.

2. Adjudication for s to classified national security
information (E.0. 12958). Access to national security informa-
tion classified TOP SECRET, SECRET, or CONFIDENTIAL is granted
by individual agencies under £.0. 12958, which requires persons
granted access to be trustworthy and to have a need for access
to the information to accomplish a lawful, authorized Government
purpose.



144

completed tiseir Federal careers with honorable reputations. Even though the
contractual nature of their employment precluded me from supervising them
with the same scrutiny given to my regular employees, I found two of these
individuals to have falsified numerous reports of investigation. Both
individuals were immediately terminated, but the government incurred tens of
thousands of dollars in extra costs by reinvestigating their cases. I also found
the general quality of work completed by the contractors to be notably
inferior to that of my regular investigative staff.

My experience working with contractors is not unique. I know of other
Supervisory Investigators who had experiences similar to mine. Those
involved in OPM’s Quality Control program likewise have similar
experiences to share over the dangers inherent in working with contractor
investigators.

I believe there is a common thread that links the historical problems seen with
contractor investigators. Regular employees are paid a salary and earn the
same amount of money regardless of the number of cases they complete.
Contractor investigators are paid on the basis of how many cases they submit.

It is beyond dispute that it takes more investigative time (and therefore more
money) to develop and resolve issues and to provide the kind of overall
coverage that results in a quality investigative report. OPM ingrains in its
investigators that their primary focus must always be on producing a quality
investigative product which provides all the information necessary for the
customer agency to make an informed adjudicative decision. Regardless of
any other pressures of the job, quality must be their paramount concern.

Compare this to the working conditions of the contract investigators who are
paid solely on the basis of the number of cases completed. It does not take
them long to understand that completing cases without issues and with
minimal coverage is more profitable to them than developing and resolving
serious issues. Most of them are honest and honorable individuals who do
not allow the profit motive to interfere with their professional responsibilities.
Nevertheless, a system that is structured to provide greater financial reward to
those who churn out the most work is fundamentally flawed.

The decision on whether this function should be performed by Government or
business can be examined by drawing a distinction between the ultimate goals
of each. The ultimate goal of a Government operated background


90

privatized. However, decisions regarding an individual’s
suitability for employment or eligibility for clearances should

be made by federal officials.

1S_CONVERSION TO AN ESOP FEASIBLE?

A business plan describing the implementation of the proposed
ESOP has not yet been developed. As a result, several issues
regarding the feasibility of an ESOP have not yet been fully

addressed.

Cost Savings Are Uncertain

Although OMB estimated a $30 million savings by privatizing OPM’s
investigative and training functions, it is uncertain whether the
proposed ESOP would achieve greater financial stability and cost
savings for the government than OPM’s current method of providing
investigative services. Also, based on OPM Inspector General
(1G) reports and our analysis, the deficit that has been
attributed to the Investigations Service revolving fund--about

$30 million--is questionable.

Previous IG reports have noted several deficiencies in the
management of OPM’s investigative activities. For instance, the
IG reported that OPM has not been able to accurately forecast its

investigative workload and adjust staffing levels accordingly.


172

Honorable Frank R. Wolf ry

We have not provided DEA the results of any case reviews since
July 9, 1992. We find it more useful to report periodically
on the results of our review of a significant number of cases
to enable meaningful interpretation of the data. since
January 1992, DEA has sent us a total of 364 cases for review,
including cases conducted by Varicon, other contractors, and
DEA itself. This number does not approximate the total number
of cases, about 1500, that Varicon states it had completed for
DEA by mid-September 1992 when, according to Varicon, DEA
reported that OPM had reviewed all of Varicon’s cases, and
that the vast majority of them did not meet OPM standards. In
fact, at that time, we had reported a total of 45 deficient
varicon cases to DEA. In July 1992, we also concluded our
review of 67 DEA cases that we found to be acceptable. We do
not have readily available data that shows how many of these
67 cases were Varicon cases.

We hope this information is helpful to you. Should you need
additional information, or if there are any questions, please
contact Charlene Luskey, Acting Director of our Office of
Congressional Relations.

Sincerely,

nn JY afte
Deputy Associate Virector
for Investigations


44

Describe the procedures used to date for notifying the Office of
2 igations' workforce of progr on this initiative.

On December 22, 1994, three days after it was announced that the
Training and Investigations Units of OPM were to be privatized,
we issued a memo to all program employees. This memo, the first
in a continuing series, announced the Administration's decision,
and asked each employee for their input as to how the Unit might
best re-create itself to operate successfully outside OPM. To
date, we have issued 16 memos to the workforce on this
initiative.

A nationwide telecon, with participation of 30 Investigator
locations, was held on April 26, 1995. Most of the two-hour
sion was dedicated to answering employee questions.



85

three State law enforcement agencies we have contacted so far that
if the function is privatized, they would be reluctant to provide
ESOP investigators access to the criminal history records of per-
sons who are under investigation. According to these officials, they
were concerned that they would have no control over what a pri-
vate organization would do with such information once it had been
obtained.

Similarly, at the Federal levels, officials from the Departments of
Justice and Treasury expressed some unwillingness and reluctance
to share sensitive data with private contractors. The success of an
ESOP would be adversely affected if employees from OPM’s inves-
tigation services do not participate in the new organization to the
extent that OPM anticipates.

The contractor that performed the feasibility study has stated
that a “substantial portion” of OPM’s investigative staff would be
needed to participate in the ESOP if it is to function effectively.
And we've heard earlier today that they are estimating that 50 per-
cent would be needed. However, we have found no clear evidence
that sufficient OPM employees would be willing to participate in
such an endeavor.

In fact, over 200 employees have contacted us thus far to express
their opposition to privatization. Also, we are not aware of any
work that has been done to determine whether the physical loca-
tion of the employees who elect to join the ESOP would be compat-
ible with the investigative workload the ESOP is expected to have.
Currently, OPM investigators work either out of OPM regional of-
fices or their homes. If only a small number of investigators elect
to stay in an area where there is a large investigative workload,
or vice versa, persons from other areas might be asked to relocate.

No information is available on whether this scenario might occur,
or on whether these employees would be willing to move. In sum-
mary, Mr. Chairman, sufficient work to support the position that
the ESOP proposal is a good one has not yet been done. In this re-
gard, I will also point out that present plans do not appear to us
to offer alternatives to the ESOP proposal, or provide satisfactory
analysis of the potential effect of an ‘unsuccessful ESOP.

Mr. Chairman, this concludes my prepared statement. I will be
pleased to respond to any questions you or the members of the sub-
committee may have.

(The prepared statement of Mr. Bowling follows:]


176

‘As was illustrated in the hearings, there are many private companies who are capable of
professionally conducting the government's background investigations. Historically, OPM’s
Prices have been two to three times that charged by private industry. With no competition in
the past, OPM has consistently escalated prices. “Newco,” with what promises to be a large
overhead, is not likely to cut costs either, without competition.

We think that “public interest" is best served when government agencies are permitted to
contract for services through the competitive process, As stated at the hearing, we welcome
"Newco" as a fully competitive partner in the market place. It will be good for business and
good for the government. And if OPM is as good as it purports to be, and we are as
incompetent as they portray us, they are likely to win the lion’s share of the competition
anyway.

As for your final question regarding litigation, if OPM pursues the sole source route for
"Newco," Varicon intends to team with another local competitor to bring a legal challenge
against OPM

Thank you for the opportunity to present additional data.

Sincerely,
President


62

the President announced on the 19th of December that this area
was to be privatized, both our training and our investigations, sir.

Mr. Moran. And that was as a recommendation from you, which
was in response to a request to tell us what you can privatize. Did
you have some kind of quota to privatize?

Mr. Kinc. No, sir.

Mr. Moran. You didn’t. But it did come—the initial rec-
ommendation came from you.

Mr. KING. No, sir.

Mr. Moran. OK, so it came from the White House. And who
came up with this initial kernel of an idea that investigations
should be privatized?

Mr. Kin. I think by looking at it, it looks——

Mr. Moran. Yes, but who, who?

Mr. KING. It operates from the private sector. It came out of “re-
invention.”

Mr. Moran. OK, so it came from the Vice President’s office?

Mr. KING. Yes, sir.

Mr. MorAN. Somebody in the Vice President’s office decided it
should be privatized?

Mr. KING. I think that was the encouragement, sir.

Mr. Moran. What I’m getting at Mr. King, and to be perfectly
frank, I think you've done a terrific, professional and compas-
sionate effort to make the best of a difficult situation. And I’m not
being critical of you. What I want to figure out is, who decided that
it should be privatized; and the level of their understanding of the
function at the point at which they decided to privatize.

Because at the point at which they decided it needed to be
privatized, then everything else gets set into motion. And what
really happens within the Federal Government is that everybody
backs into a decision. They tell you why it’s a great decision, Mr.
President, or Mr. Vice President. They give you all the numbers.
OMB is very adept at that—giving you numbers to support what-
ever your conclusion is.

I suspect that had the conclusion been differently, they could
have gotten compelling numbers to prove why the decision not to
privatize was a wonderfully insightful decision.

Mr. DESEVE. We appreciate your confidence in us, Mr. Moran.

{Laughter.]

Mr. Moran. I worked with OMB directly in the executive branch,
for many years, and I have nothing but respect for your ability to
back into a decision with all the numbers that you might ever want
to have available to you. Do you want to vote first, Mr. Mica, then
come back?

Mr. Mica. Mr. Moran, GAO has a similar talent. We'll hear from
them in a minute, but we don’t want to leave out anyone from de-
served recognition.

Mr. Moran. I’m familiar with that talent, too.

Mr. Mica. But we have a little less than 10 minutes. Why don’t
we recess for 15 minutes? We'll run over, vote, and then come back,
if that’s acceptable; and then you can continue.

Mr. Moran. Great.

Mr. Mica. Thank you.

Mr. Kin. Thank you, Mr. Chairman.


86

Privatizing OPM Investigations: Implementation Issues

Summary Statement by
Timothy P. Bowling, Associate Director
Federal Human Resource Management Issues

As requested by the House Committee on Government Reform and
Oversight’s Subcommittee on Civil Service, GAO is reviewing OPM’s
proposal to privatize its investigative function. OPM is giving
consideration to the establishment of a private corporation owned
by former employees of its Investigations Service through an
Employee Stock Ownership Plan (ESOP).

OPM’s privatization initiative raises two basic questions.
Should the investigative function be considered "inherently
governmental", or can it be appropriately performed by a non-
federal organization? If it is determined that this function can
be appropriately performed by a non-federal organization, is
conversion to an ESOP feasible?

With regard to the first question, certain aspects of the
investigative function do not appear to be inherently
governmental and, therefore, could be legitimately privatized.
However, decisions regarding an individual’s suitability for
employment or eligibility for security clearances should be made
by federal officials.

A business plan describing the implementation of the ESOP has not
yet been developed. Therefore, several issues pertaining to the
feasibility of the proposed ESOP have not yet been addressed.
First, it is unclear whether there would be cost savings as a
result of this privatization effort. Second, it is unclear
whether ESOP employees would have the same access to sensitive
data maintained by federal, state, or local law enforcement
agencies as is currently available. to OPM investigators. Third,
while employees have indicated a willingness for OPM to obtain
additional information about forming an ESOP, there is no
information available on whether they would be willing to
eventually become a part of the proposed organization. In short,
sufficient work to fully demonstrate that the ESOP proposal is a
good one has not yet been done.


121

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124

Referen: -

Four required (at least three of which are developed). To the
extent practical, al] should have social knowledge of subject
and ccllectively span the entire scope of the investigation.

As appropriate, additional interviews may include cohabitant(s),
ex-spouses, and relative(s). Interviews with psychological/
medical personnel are to be accomplished as required to resolve

issues.

Neighbertocd

Interviews with neighbors for last five years if residence
exceeds six months. Confirmation of current residence shall

be accomplished regardless of length’to include review of rental
records if necessary. In the event no residence exceeds six
interview of neighbors should’ be undertaken.

chs,

gis

cation ef the subj
locations where s
led school fer six

biectshas resided, been enployed, or
jsAths or more for the last seven (7)

A check of appropriate Police records covering all locations
where subject has resided, been employed, or attended school for
six months or more during the scope of investigation, to include
tt residence regardiess of duration. In the event that no
idence, employment, or education exceeds six menths, local
agency checks should be performed.

sbl =

Ey
ooh

Verification of divorce(s), vankzipecy, ete., and any other court
(civil or criminal) actions togwhieh=subject has been or is a
party within the scope of in ae fon, when known or developed.

Investigations satistyf ZA MaeGscandards specified above
are transferable betweemiagencies and shall be deemed to meet the

investigative standards SESE tgs togesllateral Top Secret/



31

once completed by contractors or as required for agency
personnel, background investigations conducted under delegations
of authority are submitted to OPM. The investigations are
reviewed/evaluated following the guidelines set forth in the OPM
Investigator's Handbook, NSD-63, and DCID 1/14, as applicable to
the specific type investigation conducted. The reviewer prepares
an evaluation of each case, identifying whether it is acceptable
(meets OPM or other appropriate standards), acceptable with
comments (not deficient but could be improved), or deficient
{does not meet standards). If the investigation is deficient, a
form is prepared showing the specific work needed to bring the
case up to standard.

If the investigation is acceptable or acceptable with comment,
the investigation is then microfilmed and a copy of the evalu-
ation is referred to the submitting agency.

If the investigation is deficient, the case is returned to the
submitting agency for rework. When the revised/corrected report
is submitted, it is reviewed for completeness. If found accept-
able, a new evaluation is prepared, feedback is given to the
submitting agency, and the investigation is microfilmed.

Periodically, a report is prepared outlining the results, by
agency, of the review process. The report is furnished to

the Appraisal Officers who deal with the agency. The report
includes data which outlines numbers of investigations reviewed,
number acceptable, acceptable with comment, and deficient, and
specific deficiencies noted.


When the investigation has been completed, it is reviewed
by the SAC and submitted to our Personnel Security and
Suitability Division for evaluation. Any adverse issues are
referred to the personnel officials who make final suitability
determinations. Once an applicant or employee has been found
to meet our suitability standards, the case is returned to the
Bureau of Diplomatic Security for a clearance eligibility
determination. In addition to its primary function, the
thoroughness of our suitability screening process is
undoubtedly an important reason why the Department has had to

take few adverse security clearance actions.

During the security clearance process, all final
determinations and policy decisions are made by government
employees ultimately responsible to the Assistant Secretary

for Diplomatic Security.

The Department is generally not prevented by statute,
federal policy, or judicial precedent from collecting
background information sufficient to make suitability and
security determinations. However, many private corporations
have policies or practices that preclude their responding to
personnel related inquiries. For sensitive positions, it is
not enough that there be an absence of disqualifying
information; there must be enough known positively about an

individual to allow a reasonable determination that the




7

had, and that came up yesterday—where we have tried to contract
it out, almost 10 years ago, and it was an absolute unmitigated
failure. We asked for over 40,000, 42,000, I think, background
checks to be conducted, and about 3,300 were conducted; and most
of those were pretty poorly done.

So I would not want to contract out something with that kind of
experience behind us. I think we ought to be very careful before we
do that. Now, the ESOP is a creative concept. I’m not sure that it
is going to work in the manner in which we would hope it would.
And I have some ‘problems with the fact that we pulled back the
delegation to the Commerce Department and all.

That is the purpose of this hearing today, to get a sense of how
the new creative approach might work. But I think we owe some
responsibility to the OPM employees who have conducted them-
selves in a very professional, very satisfactory—and I could prob-
ably use a much, and should use a much more generous term than
that—manner throughout their employment.

And those are the people that we clearly need, and I would not
want to see them lost to the Federal Government. Because there’s
no way of telling when, and to the extent to which, we might need
their services in the future. So with that, Mr. Chairman, let’s go
ahead and hear from the people who are charged with making this
responsibility and carrying out this responsibility and making
these recommendations. I’m glad that you have the right people be-
fore us this morning, and that you’re having the hearing. Thank
you, Mr. Chairman.

[The prepared statement of Hon. James P. Moran follows:]


139

from OFI. However, they, with the possible exception of
those bound by law to use the investigative services of
Federal agencies, would probably use the ESOP, unless a
better source were Identified. Yet, there are still unresolved
questions on what the privatization of OFI will mean for
customers. Do the use of private contractors mean higher
prices as investigations are reworked to correct mistakes?
Will a private contractor’s limited access to sensitive
information lead to inferior investigations and potential
security problems for Federal agencies and taxpayers? These
questions need answering.

In addition, it is my understanding that no Federal
agencies has been transformed successfully into an employee
stock ownership plan (ESOP). Investment bankers and other
experts suggest that to perform a solid analysis of the
viability of an ESOP and then create it takes considerable
time -- in some cases, years. | feel OPM may be rushing this
privatization to the detriment of its employees and its client

agencies who depend on quality investigative services.


147

GAO

‘Caled States
General Accounting Office
‘Washington, D.C. 20848.

General Government Division

8-261751

August 22, 1995

‘The Honorable John L. Kica

Chairman, Subcommittee on Civil Service
Committee on Government Reform and Oversight
House of Representatives

Dear Mr. Chairman:

This letter responds to your June 23,1995, requ
additional information follow-on to our recent
testimonies regarding OPM's plan to privatize its
investigations function.

tor

‘As we note in the accompanying enclosure, we are working
with the Federal Data Procurement System to determine how
often, and under what conditions, the public interest
‘exception to.full and open competition has been used.
a upon with your office, we will provide this

Anformation under separate cover once it is obta:

As

If you have any additional questions concerni:

ng OPM:
planned privatization effort, please call se on (202) Si2-
7680.

Sincerely yours,

‘Timothy P. Bowl!

Associate Director, Federal Management
‘and Workforce Issues

Enclosure


153

requires that access to classified information be restricted to
employees who can be relied upon to protect that information.
The latter determination is based on security factors contained
in the Foreign Affairs Manual (12 FAM 230) and common
adjudicative guidelines now in use throughout most of the

Federal government.

The standards for suitability and security derive in large
part from EO 10450, which was originally issued in 1953.
Although amended several times since, EO 10450 has been a
remarkably stable platform on which the Department's and indeed
the entire Federal Government's personnel security and
suitability policies have been based. The executive order
provides minimum standards and procedures governing the
employment and retention in employment of persons in the
federal service. It requires that persons employed in federal
service be reliable, trustworthy, of sound judgment and not the
subject of derogatory information that would be inconsistent

with national security.

Fundamental to both security and suitability
determinations is a process which incorporates personnel
background investigations of all employees. This investigative
Process must be completed within a reasonable period of time
and be of sufficient scope to provide a basis for both

suitability and security determinations.


46

Describe the r supporting fhe speed involved in conducting

period between publication
ity ly’ Fequest for responses indica-
vest In adéitionel inrorgation on the part of field

The goal, privatization by January 1, 1996, vas set by the
Administration. The contractor doing the feasibility study
developed a recommended process and timeline to meet the goal.

The ESOP evolved as an alternative privatization vehicle as a
result of the feasibility study. A quicker way to achieve priva-
tization would be to shut the unit down of a date certain.

In response to the concerns of our employees and of our
customers, we chose to pursue a course of action which may allow
continuation of Investigations work by all, or most, of the
current employees in a non-Government organization.



6

If the Federal Government cannot competitively bid out our in-
vestigation contracts, how are we expected to save money?

Finally, despite efforts to solicit employee support for the pro-
posal, many employees are resistant to the proposed changes. The

‘ederal Investigations Processing Center in Boyers, PA, is located
just outside my congressional district, and many of the employees
are my constituents. And I’ve heard from as many as 100 employ-
ees or more at the Boyers facility, who are strongly—I repeat,
strongly—opposed to the plan.

So the success of the ESOP initiative hinges on em: lovee support
and participation. If experienced investigators and OFI staff leave
for other Federal jobs or private sector employment with estab-
lished investigative firms, the quality of service of investigations
will suffer; or worse, the new corporation will fail.

Mr. Chairman, these are among my top concerns with the admin-
istration’s privatization proposal. I look forward to listening and re-
viewing today’s testimony, and hope some of my questions and
yours will be answered, and some of our fears eased. And again,
I commend you on holding these very important hearings.

Mr. Mica. Thank you, Mr. Clinger, and I'd like to welcome our
first panel this morning. We have Mr. James King, the Director of
Office of Personnel Management; Mr. Edward DeSeve, Controller of
the Office of Management and Budget. Ms. Lorraine Lewis, OPM
General Counsel; and also Pat Lattimore, who was with us yester-
day, who oversees this program.

As is customary, ladies and gentlemen, if you could please stand
I'll swear in our witnesses. Raise your right hands.

{Witnesses sworn.]

Mr. Mica. If you don’t mind, we’ve been joined by our ranking
member, and he may have some opening comments, as he gets his
papers together here. We would like to welcome him and see if he

is some opening salvos.

Mr. Moran. Well, I can actually wing it, Mr. Chairman, without
getting the papers together here, I think. I appreciate your yielding
to me. The investigations function of the Office of Personnel Man-
agement is an unusual one. I don’t think it fits in the traditional
blocks of organizational theory, because it’s not something where
you can predict a normal day in and day out workload.

You would assume that it would lend itself to contracting out,
since it is the kind of function where you may have extraordinary
demands on people for two or 3 months, and then not so for an-
other year or so. And the period that we're in right now, you
wouldn't think that there’s going to be a lot of buildup; that in fact
most of what we're doing is downsizing.

But there have been periods when there's been extraordinary de-
mands made upon the OPM people. I think that the Office of Per-
sonnel Management investigations staff has done a very good job.
And they are probably the only professionals who could perform
that job in as satisfactory a manner and professional a manner as
they have. The problems with contracting it out may not appear
evident on the surface. But there are several.

One, of course, is access to the kinds of sensitive information that
the Government has, that private contractors would not and should
not have access to. Another problem is the experience that we’ve


40

Provide a detailed account of the cost of this privatisation
effort to date, including the Esor feasibility study, the soli
tion of a tru the anticipated
pla
and any other cost factors anticipated in this transition

OPM paid $107,740.08 for the feasibility study. It is
the effort involving the trustee, including the development
of a business plan, will cost less than $500 thousand. As of
April 26, 1995, costs associated with separation of current
employees were projected to be $11.8 million.


120

tn conclusion, We wish to say that we strongly feel the American free enterprise and open competitive
system is the finest in the world. We are a part of this system and ask you not to force us out of business
by forbidding us to compete. We have no fear of competing fairly with ESOP. We wonder, however, why
ESOP fools it must have every unfair advantage to compete with us. We ask you to deny ESOP sole-
source and to treat this “New Company” that the OPM ESOP feasibility study envisions, as the private
‘company it purports itself to be. We cannot help but believe that the American taxpayer will benefit from
this choice.


19

results from the agency-requested NACI conducted on an applicant
or appointee. If serious suitability issues develop that need to
be resolved, further inguiries through correspondence, phone
calls, record search, or personal investigation are made to
develop the issues sufficiently to consider any effect on the
hiring or retention of the individual.

- Reimbursable Suitability/Security Investigation (RSI). If
an agency needs investigation beyond the scope of a routine OPM
investigative product, it may request OPM to conduct a
Reimbursable Suitability/Ssecurity Investigation. The RSI focuses
on the specific issue(s) requiring resolution, and does not,
provide overall coverage like a NACI/BI type investigation.

OPM conducts a variety of investigations to administer the merit
system effectively and enforce Civil Service rules and
regulations. In most cases, a merit system investigation is
conducted to determine whether an applicant, appointee, Federal
employee, or other person under OPM's jurisdiction has violated
the provisions of any applicable Federal statute or Civil Service

regulation (5 CFR) affording protection to the Federal Civil
Service.

Merit system investigations may examine the following issues:

Impersonation or collusion in exam;
Irregularities in appointment to Federal service;
Solicitation of a declination of applicants/eligibles;
Purchase or sale of public office;
Perjury before an OPM Investigator or other OPM official;
False statement in application or related papers;
Submitting or altering official documents;
Lost, stolen, misplaced, or mutilated test material;
Compromise of test security or irregularities by officials
in testing procedures; and

- Other investigations deemed reasonable to investigate
matters which circumvent or threaten the merit system.

Other Types of Investigations:

> Trust Fund Investigations. OPM receives requests for
different types of investigations under a special agreement with
its Retirement and Insurance Service (RIS). In these cases, the
objective is to locate someone and either verify that they are

alive and/or obtain certain information or documentation from
them.

> SES Distinguished Executive Rank. 5 USC 4507 provides for
nominating SES career appointees for the rank of Distinguished
Executive, for sustained extraordinary accomplishments. Receipt
of this rank entitles the individual to a lump sum payment of
$20,000. OPM has the responsibility of reviewing such
recommendations and providing recommendations to the President as
to which agency-recommended appointees should receive such rank.


14

To stop the hemorrhaging, I had no choice but to carry
out a reduction in force which eliminated about 443 jobs for
investigators and support staff.

We then developed and implemented a business plan to put
the investigations unit back on a sound financial footing, and
hoped for a stable market for our work and high productivity from
our professional staff.

Last December, the President announced plans for the
second phase of the reinvention of government. These plans included
the privatization of OPM’s investigations and training units.

Let me note that the privatization of our training unit
is being accomplished by its transfer to the U.S. Department of
Agriculture Graduate School. The Graduate School, which receives no
federal funding, is offering jobs to about two-thirds of the unit’s
approximately 200 employees.

OPM set three criteria for the privatization of the
investigations unit.

First, to do what was best for the American taxpayer, by
streamlining government and reducing the number of federal
employees.

Second, to continue to provide high-quality service to
our customers.

Third, to do what was best, and most humane, with regard
to our employees.

These criteria led us to an Employees Stock Ownership
Plan (ESOP), which could permit our existing employees to continue
to do the work in the context of an employee-owned, non-
governmental organization.

In March of this year, we contracted for a study of the
feasibility of such a privatization. The study concluded that an
ESOP owned by the investigation unit’s employees was feasible, but
only if guaranteed OPM’s business for a period of time.

our employees, while generally not in support of the
original decision to privatize, expressed interest in the ESOP
option, if there was to be privatization.

We have recently awarded a contract to a trustee to work
with the employees and represent their interests in the development
of an ESOP, As you know, we have provided details of this
transaction to the subcommittee. Additionally, as we pursue
privatization, we will take all steps necessary to ensure that our
employees avoid potential conflicts of interest.

2


3

impressive, and there are many indications of an administration at
odds with itself in this process of reinvention.

From the beginning, the administration has trumpeted the con-
cept of employee empowerment, and encouraged the reinvention of
government to proceed from the bottom up, working through part-
nership councils. Few people seem more isolated from this proposal
than the employees. Not only has this subcommittee and the chair-
man heard from many investigators, often using official fax ma-
chines and letterheads and other public expense communications,
but many Members have received complaints about the tactics used
to fenerate an appearance of support for this proposal.

‘rom all evidence provided to us, these efforts have been futile.
And support from investigators appears to be almost non-existent.
On the basis of what I’ve seen so far, I find no basis for the Con-
gress to encourage anyone to proceed with this endeavor. We are
holding this hearing to enable the administration to put on the
table some of the answers to the questions that trouble everyone
who examines the process.

We'll also provide the GAO an opportunity to evaluate several di-
mensions of the fiscal, legal, and procedural claims being made for
this unique proposal. Today’s hearing also provides an opportunity
for private business firms and the private sector and for represent-
atives of Federal investigators to give us additional perspectives on
these issues. I look forward to this session, and hope it we can
complete this morning’s business and obtain some better answers
to questions that we've posed during the last 6 months.

And it is an important hearing, because we have literally hun-
dreds of people’s careers and livelihoods at stake, and also tens of
millions of taxpayer dollars. So we do look forward to the process.
With those comments, I see we have the chairman of our full com-
mittee with us, and Mr. Chairman, would you mind if I yielded
first to our single minority member here, the distinguished gen-
tleman from Pennsylvania, Mr. Mascara; because I think he has
another appointment. Mr. Mascara.

Mr. Mascara. Thank you very much. Thank you, Congressman.
Clinger. Good morning, Mr. Chairman. Looking out over our panel
of witnesses this morning, I’m getting a real sense of deja vu. I
only wish the situation had changed overnight for the better, but
Tm afraid that is not the case. As I indicated quite clearly yester-
day morning, I’m deeply troubled by the whole idea of privatizing
OPM’s Office of Federal Investigations.

The most basic questions about how this effort would work have
not been clearly answered. No one seems to know whether the es-
tablishment of an ESOP would actually save any money. And per-
haps more importantly, no one seems to know whether the Govern-
ment could still count on receiving reliable quality professional
background checks. My staff had been briefed on the GAO testi-
mony, but I must say, what we are going to hear this morning is
much more troubling than I had anticipated.

GAO officials will testify that not only is the $30 million savings
figure, estimated by the Office of Management and Budget, based
on very flimsy assumptions, but also that the deficit attributed to
the OFI’s revolving fund—the primary Teason for privatizing—is
questionable. According to GAO, OPM been assigning an exces-


132

why OPM should not continue to review, in an oversight capacity,
the work that is done by private contractors. They do that now. I
might say that they do it with an excessively fine-tooth comb, for
quite apparent reasons at the moment.

But nevertheless, we can live with that. So I see them continuing
to set policy and reviewing the work of the private contractors. At
random, select 25 cases or 125 cases from an agency that is con-
tracting out, and take a look at them and see whether they meet
standards. And if they don’t, decide what to do about it. And third,
I see OPM continuing to stay in the business at Boyers, which is
at least a national agency check business.

That's an efficient product. I believe it’s done quite cheaply; it’s
done in one location. And I think it would be a good opportunity
for all Government agencies to decide that they could work with
OPM at Boyers for the national agency check; and then if they
chose to, to contract out with private industry, whether that be
Newco without a sole source contract, or me or him or whoever—
there’s lots of us out there.

Mr. Mica. Mr. Cordova.

Mr. CorDova. Mr. Chairman, the way we look at it, from ADC
Ltd., is very similar to Varicon. We know that there is a need for
OPM in the policy and the oversight. And to make sure, OPM,
being that we're so involved with research and development from
the great State of New Mexico, I measure OPM as being more or
less like DOE would be in a field operations office—overseeing the
laboratories.

We're talking about national security here, your honor. And I feel
that OPM could very well be benchmarking the work that the
firms, such as ADC Ltd., Varicon, and Newco—they’re welcome to
go on the street and compete against us; we’d welcome it, so we all
can compete against MVM. They are competing against us.

But there has to be a benchmark. And I believe that OPM could
very well be in the policy, with the United States Code, with you
elected officials in Congress, setting the policies so that there can
be a benchmark. In going back to OPM, they reviewed 100 percent
of our cases, your honor, that we performed at Department of Com-
merce. Our work was better, by their own admission, than their
own investigators, where they reduced it to 10 percent of the re-
view.

Our standards—we have to my left, my project director, Larry
Smith, who is second to none in background investigation. He’s
truly expert. But there could be firms out there also, sir, that could
need to be hit upside the head. And believe me, ADC Ltd. is not

ing to tarnish our reputation. But we need to be respectful to

PM’s policies.

Mr. Mica. Well, thank you, and I'll yield now to Mr. Bass, the
vice chairman, for questions.

Mr. Bass. Thank you very much, Mr. Chairman. And we again,
are in the process of a vote, I’m going to ask two questions, in the
interest of time, so that we can conclude, if possible. To Mr. Saun-
ders and Mr. Cordova, I was wondering if you’d be good enough to
give this subcommittee the benefit of your observations or response
to Mr. Clark’s observations concerning Mr. Mica’s question on Fed-


110

able. It would be, ladies and gentlemen, like having only one gen-
eral merchandise store to serve all the needs of the residents of the
District of Columbia.

ADC is a small business; it takes the common sense approach to
doing business. We have over 700 cleared, experienced investiga-
tors under contract. They are located in every State of our great
Nation and its possessions. With this ADC staff can meet and ex-
ceed the needs for background investigations in an efficient, eco-
nomical manner, along with firms such as Varicon, MSM,
and others.

The supply and demand will result in a savings for the overbur-
dened taxpayer. We want to help ie Members of Congress to cut
the waste in taxpayers’ dollars. Competition brings out the best
price and service. That’s the American way. It’s the only way that
makes sense. I hope that this committee does not deprive the pri-
vate sector of our dream of doing business the American way.

OPM’s effort to establish an ESOP is really only a change in
name. Newco will have the same staff, give them the same senior-
ity, wages and fringe benefits, and maintain the same wasteful, ad-
ministrative structure. Without a new, creative cost effective man-
agement approach, ladies and gentlemen, Newco is the same old
wolf in sheep’s clothing. With value added, let’s let the private sec-
tor use their expertise and also strengthen our economy.

Small business and private enterprise are what make America
strong. You can rest assured that Federal agencies will be able to
meet their bac! und investigation requirements with the best
business approach from the private sector. We at ADC, Ltd. know
all about national security. We’re very involved in the national
labs, and involved in research and development.

It amazes me, Mr. Chairman, that there is so much being raised
on this OPM issue. What about the Marines, the Air Force, the
Navy, the U.S. Army—people that are being downsized? Those peo-
ple are really in national security, your honor. And I really want
to thank the news media, on behalf of ADC, Ltd., for bringing this
thing and keeping it alive. Little businesses like "ADC, ‘Lit ., We
don’t have the resources of all the people that OPM has, as they
had here today.

The GAO talked about overhead and G/A—General Administra-
tive costs. Believe me, our G/A is dirt cheap, compared to OPM’s.
Thank you, your honor.

(The prepared statement of Mr. Cordova follows:]


69

that came about because of the fluctuations that Mr. King talks
about. And at some point, he will run back into deficit. He had to,
as you may remember, RIF—reduce in force—more than 400 em-
ployees, because his employees are inherently full-time Govern-
ment employees.

The competitors against which the OPM folks would compete ap-
propriately use employees, in the communities in which they're
based, who have experience in investigations, but don’t have the
same kind of long-term, full-time responsibility that an inherently
governmental organization has. So dealing with the issue of, how
do we solve the revolving fund problem that accumulated over
many years is an issue that we face, regardless of whether we con-
tinue, whether we privatize, or whether we do an ESOP.

And we've been working with OPM to solve that. It’s at least $30
million, and maybe more, of the $55 million you cite. The balance
of the estimates that you cite are related to potential. And I use
the word potential—potential severance cost, potential unemploy-
ment costs. We don’t know what those will be. If in fact we were
to continue to run the revolving fund like a business, it will need
to shrink over time.

The size of the force is going to need to shrink. Will we do that
shrinking of the force through a RIF again? Will we do it through
attrition; will we do it through a buy-out? We don’t know. But as
you mentioned earlier, there are going to be inherently fewer back-
ground investigations because we're not hiring. So therefore, over
time, there are going to need to be fewer background investigators.
Again, whether we go to an ESOP, whether we go to a privatiza-
tion, or whether we continue in place, there will be a need for some
termination costs.

And I can’t tell you what it would be, under which scenario. I
also hope, and would encourage Mr. King—and I’m sure he will—
that he negotiate hard in the formation of the ESOP, so that a por-
tion of the costs may be ameliorated from the Federal Government.
If someone is not truly unemployed, but in fact, there’s a transition
to an ESOP, that they agree that they'll move very nicely across
that framework. We encourage them to do that.

But it’s part of a very complicated negotiation that will have
many facets. One of the—there are two questions that haven’t been
asked here, but I want to answer them anyway. One is, why wasn’t
a cost comparison done, No. 1? And No. 2, the question you asked,
how do you look at savings in the out years?

What I see in the ESOP is what Mr. King has testified to, is a
humane transition for the employees. That humane transition in-
volves a period of time. OMB used a 1-year period of transition in
their estimates. At the end of that 1 year, these employees will be
subjected, as part of the ESOP, to the entire marketplace. I go back
to your consolidation example.

We're honestly trying to move away from consolidation. We’re
trying to move away from the large centralization of functions.
Competition is so much better; information exchange is so much
better. The ability of the agencies to manage their work is so much
better than it was 10 or 15 years ago, partly because of the tremen-
dous improvements in communications technology and understand-
ing.


24

Suitability is a requirement for Government employment that
refers to a person's character, reputation, trustworthiness,
and fitness as related to the efficiency of the service. To

be suitable, a person's employment or continued employment must
be reasonably expected to promote the efficiency of the service.
A reasonable expectation that a person's employment will not
promote the efficiency of the service is established when an
adverse connection, or nexus, is shown between the conduct in
question and the performance of the person or the agency's
accomplishment of its mission.

The basic suitability disqualification factors and additional
considerations used in making competitive service suitability
decisions are found in $ CFR 731.202(b) and (c). Each agency
is responsible for setting standards for determining suitability
for excepted service positions.

In determining whether its action will promote the efficiency
of the service, OPM or an agency to which OPM has delegated
authority shall make its determination on the basis of:

~ Whether the conduct of the individual may reasonably
be expected to interfere with, or prevent, efficient service in
the position applied for or employed in;

- Whether the conduct of the individual may reasonably
be expected to interfere with, or prevent, effective
accomplishment by the employing agency of its duties or
responsibilities; or

- Whether a statutory or regulatory bar prevents the
lawful employment of the individual in the position in question.

Any of the following reasons may be considered a basis for
finding an individual unsuitable:

= Misconduct or negligence in prior employment which
would have a bearing on efficient service in the position in
question, or would interfere with or prevent effective
accomplishment by the employing agency of its duties and
responsibilities.

- Criminal or dishonest conduct related to the duties to
be assigned to the applicant or appointee, or to that person's
service in the position or the service of other employ

- Intentional false statement or deception or fraud in
examination or appointment.

- Refusal to furnish testimony as required.
- Alcohol abuse of a nature and duration which suggests

the applicant or appointee would be prevented from performing the
duties of the position in question, or would constitute a direct


143

‘The reason OPM has been able to maintain a sterling reputation for the
quality and integrity of its investigative products is due to its unswerving
commitment to quality and integrity control. Integrity contro! has been
assured by means of effective supervision of investigators. Supervisory
Investigators regularly re-contact individuals to assure: (a) the investigator
interviewed the source, (b) that the investigators were professional in
appearance and demeanor, and (c) that the substance of what they were told
during the interview was accurately reported. Supervisory Investigators also
conduct Comprehensive Work Performance Analyses of investigators. This
entails taking a representative period of work and comparing the
investigator’s notes and work claims against reports of investigation and other
reporting documents to assure accuracy and integrity. Supervisory
Investigators also will accompany investigators into the field to personally
observe their interviews,

The quality of work is assured by close review of investigative reports.
These reviews are conducted both by the first line supervisor as well as by a
central review function. All of these monitoring tools are conducted for the
purpose of assuring that investigative reports produced by OPM meet the
highest quality and integrity standards.

I feel confident that no private contractor comes close to matching the internal
integrity and quality controls used by OPM. The contracting companies
generally maintain a central office with no close supervisory relationship to
the investigators. They rely on recruiting former Federal investigators to
conduct their work, pay them on the basis of how many cases they produce,
and hope that they do not succumb to the lure of making money at the
expense of completing quality investigations.

As I stated in my June 15 testimony, I have many years of service as an OPM
Supervisory Investigator and supervised about 100 Investigators. During
those years, none of my Investigators was ever found to have falsified
investigative reports, suppressed derogatory information, or to have engaged
in any other conduct that would lead me to question the integrity of their
investigative work.

During these same years, I had first line monitoring responsibility over about
20 investigators working as private contractors under OPM’s Personnel
Investigations Contracting Support (PICS) program. These individuals were
most often retired OPM, FBI, and other Federal agency Investigators who


10

Mr. Mica. Thank you, Mr. Moran. Again, welcome Mr. King. It’s
good to see you again. Yesterday, we tried to look at some of the
oversight background of this issue. Mr. Mascara jumped the gun a
little bit, and got into some of your plans which we wanted to hear,
and other members did, too. But Ms. Lattimore handled it very
well. She said that the program was so messed up that only you
could explain it. So we’re glad that you're here today, and we look
forward to your explanation. We'll have to check the record to see
if those were her exact words. Welcome, Jim.

STATEMENTS OF JAMES B. KING, DIRECTOR, OFFICE OF PER-
SONNEL MANAGEMENT, ACCOMPANIED BY PATRICIA LATTI-
MORE, ASSISTANT DIRECTOR, OFFICE OF PERSONNEL MAN-
AGEMENT; AND LORRAINE LEWIS, GENERAL COUNSEL, OF-
FICE OF PERSONNEL MANAGEMENT; AND G. EDWARD
DESEVE, CONTROLLER, OFFICE OF MANAGEMENT AND
BUDGET

Mr. KING. Thank you, Mr. Chairman, and thank you, Chairman
Clinger, for being here, also Mr. Moran and Mr. Mascara and the
subcommittee. It really is an opportunity for us to testify on the
privatization of OPM’s Office of Federal Investigations. You have
my prepared statement, Mr. Chairman. I believe you’ve distributed
it to the committee.

Mr. Mica. Without objection, we'll enter that as part of the
record.

Mr. KING. And you also have our detailed answers to your very
specific questions. And if you would be kind enough to account that
for the record, sir.

Mr. Mica. That will also be part of the record, without objection.

Mr. KING. Thank you, Mr. Chairman. At this time, and with your
permission, Mr. Chairman, I'd like to open with a much briefer
statement. The futurist Alvin Toffler said something that sums up
much of what we at OPM are trying to accomplish. And I quote,
“Our moral responsibility is not to stop the future, but to shape it,
to channel our destiny in humane directions, and to ease the trau-
ma of transition.”

And that, essentially, will be the context in which I would speak
today, and will reflect back on that; and hopefully will respond to
your specific questions and concerns as expressed through you from
a number of witnesses and other sources that have come to you.
Mr. Chairman, we are here to talk about the future of Government.
Everyone agrees there must be change.

The President believes that; the Congress believes that; this com-
mittee believes that; and the voters, in two past elections, have
shown that they want change, and that clearly includes a smaller,
more efficient Federal Government. President Clinton made clear
his commitment to change in 1993, when he commissioned the Na-
tional Performance Review, known as NPR, and then endorsed its
historic call for government that works better and costs less.

As you well know, this administration has begun a massive
downsizing of the Federal Government. More than 100,000 jobs
have been eliminated already, as well as many other reforms, to
make the entire Government serve our customers—the American


41

July 7, 1995

The Honorable John L. Mica

Chairman

Subcommittee on Civil Service

House Committee on Government Reform and Oversight
2157 Rayburn House Office Building

Washington, DC 20515-6143

Dear Mr. Chairman:

Thank you for your June 23, 1995 letter requesting information additional to
that provided in my testimony at the June 15 subcommittee hearing.. On
behalf of the OPM Investigators, we sincerely appreciate the opportunity to
express our serious reservations over the administration’s plans to privatize
this important function.

‘The issue of privatizing background investigations is one of serious import to
our nation since any miscalculation could have negative repercussions
impacting national security and the overall integrity of the Federal civilian
workforce, The subcommittee hearings clearly established that OPM’s
decision to privatize background investigations was made without the kind of
study and deliberation required before enacting such a profound policy
decision.

Specifically, there was no A-76 review conducted to establish whether
privatization would result in savings to the government. There was no prior
consultation between OPM and its customer agencies about this proposal
which has obvious and serious repercussions on their personnel security
operations. No analysis was done to determine whether private industry has
the expertise and qualified staff to assume responsibility over a program
requiring a nationwide network of trained investigators. Additionally, the
decision was made without consideration to the history of quality and
integrity problems that have plagued privatization efforts, both past and
Present.


29

Describe OPM’s role in the coordination of policy oversight

and program nt of background investigations within
the executive branch.

Executive Order 10450 authorizes OPM to make a continuing study
of the manner in which the Order is carried out by the
departments and agencies, for the purpose of determining
deficiencies in the program which might directly or indirectly
weaken the national security. It requires that OPM recommend
means to agencies to correct deficiencies in agency security
programs.

Executive Order 10577 gives OPM the authority to issue rules and
regulations to investigate the qualifications and suitability of
applicants for positions in the competitive service; evaluate the
effectiveness of agencies’ personnel policies, programs, a
operations; ensure enforcement of the civil service laws, rules
and regulations, and applicable Executive Orders.

OMB Circular A-130 authorizes OPM to establish personnel security
program policy covering positions involved in the design,
storage, retrieval, access and dissemination of information for
federal computer /ADP syst.

5 CFR Parts 731, 732, and 736 cover OPM's regulations on making
personnel suitability investigations and designating public trust
positions, national security requirements, and personnel
investigations guidelines.

OPM's policy oversight responsibility is carried out by the
Investigations Service appraisal staff which conducts on-site
appraisals at agency headquarters and field locatio:

to
determine the effectiveness of their security and suitability
programs.



166

In the review of the remaining 39 investigations the
following discrepancies were cited by OPM.

* Eighteen (18) investigations, requested
police checks in Maryland and New York City.
These two jurisdictions will not conduct record
checks for contract investigators.

* In thirteen (13) investigations, the reported
discrepancies were in fact completed.

* In six (6) investigations, vy, school or

governmental policy would not allow interviews or
records to be obtain ined.

* In five (5) investigations, the discrepancy noted
by opm did, in fact, comply with DEA quidelines.

* In four (4) investigations, the required
information was obtainable only through
verification of available records.

* Faget (4) investigations, the post recent
8. cant education was report as required
xather than all education as cited.

* In two (2) cases, the cited discrepancy was not
required by DBA.

* In two (2) cases required information was
obtained but inadvertently, left off of the
report.

Varicon has been told that a recent OPM letter to
DEA stated that this OPM review revealed that OPM had
found a significant number of investigations with major
deficiencies and that the vast majority of Varicon cases
did not meet OPM standards. OPM has stated that they
will continue to monitor all of Varicon's background
investigations during the remainder of the year.

Two independent sources have stated that OPM has put
DEA on notice that they intend to cancel DEA's background
investigation contracting authorization effective
September 30, 1993. (Copy attached).

Between October 28, 1991, and September 30, 1992, VI
has completed a total of 1542 investigations with an
average turn around time of 26 days for SSBI's and 19
days for PRI's.


98

Mr. BOWLING. Well, I think one of the reasons for sticking with
the current investigative work force would be to rely on seasoned
Federal employees who have performed these functions satisfac-
torily by all accounts over the years, and continue to have them
performing them. To the extent that they would be performing
them, I think that would probably ameliorate some of the risks
that you might have by going to someone who has not performed
that function before.

Mr. Mica. Just a quick question or two on the impact of private
markets. Private investigative firms will testify today that OPM’s
proposal to withhold delegation of authority to contract for inves-
tigations would devastate their business. Is that an accurate as-
sessment of what you think the impact would be on the private
markets?

Mr. BOWLING. We haven't actually looked at the potential impact
on private markets. It’s an interesting question and I’d look for-
ward to hearing their answers. But we have not looked into that
issue.

Mr. Mica. OPM’s current investigative work force, as you know,
is about 750 to 800 persons, and we know that some private firms
are much larger. If OPM wanted to conduct competitive contracts
for these investigations, could these employees find appropriate
openings, do you believe, in other private firms?

Mr. BowLING. That’s a very good question. Again, that’s one of
the unanswered questions that makes one a little concerned as to
exactly what level of work force will be available to OPM when it
contracts for the ESOP. Certainly, there’s some indication that
many of the employees are seeking employment elsewhere in the
Federal Government or the private sector.

Mr. Mica. Well, you've heard comments today that some people
either want to block the ESOP, or some people think the ESOP will
fail. What do you think our alternatives are’

Mr. BOWLING. Well, I think that’s probably one of the most im-
portant questions that’s been asked today. Given that there isn’t an
enormously high level of assurance that it will succeed, there’s a
real question, both in the point of view of what happens to the Fed-
eral workers, and also what happens to the contracting of this
porkload, and whether it will be done to OPM standards and so
‘orth.

Those questions would need to be resolved earlier in the process
rather than later, if one wanted to have a sense of confidence that
something wouldn’t slip through the cracks in the event of a failed
ESOP proposal.

Mr. Mica. I’m going to yield now to the vice chairman of our sub-
committee, and ask him also to take the chair. I’ve got another ob-
ligation, and I hope to return shortly. Mr. Bass, do you want to as-
sume the chair and the questioning? Thank you.

Mr. BOWLING. Thank you, Mr. Chairman.

Mr. Bass [presiding]. Thank you very much, Mr. Bowling, for ap-
pearing here today. And obviously, as you know, just because the
entire committee is not present doesn’t mean that we're not going
to be studying with great care the answers and information that's
presented to us today. I just have a couple of questions. This is an


140

1 do want to be clear that | support privatization when
there are clear and proven cost savings and efficiencies
achieved. | cosponsored a bill, introduced by
Congresswoman Eleanor Holmes Norton, that would require
agencies to perform cost-benefit analyses before contracting
out services and that would prohibit any agency from
entering into an outside service contract if the services could
be performed at a lower cost by agency employees. It is my
wish that OPM apply these standards in privatizing its
investigative service.

Mr. Chairman, | would hate for us to find out that the
ESOP created is indeed a fable -- a “RIF” in sheep’s clothing.
This would serve no one. This concludes my remarks.

Again, thank you, Mr. Chairman, for calling this hearing.


91

Also, the IG noted that OPM‘s investigative services had been

burdened with an excessive share of OPM’s overhead charges.

Our work confirmed the 1G’s finding that OPM appeared to be
charging an excessive share of overhead to investigative
services. Although this activity requires a low level of
oversight and is intended to be self supporting, we found that
the cost of common OPM services such as staff support were
charged to investigative services based on a flat rate rather
than on the actual cost of the services provided. To illustrate,
under OPM’s current methodology, the overhead allocation rate is
determined based on the Investigation Service’s total expenses as
a percent of OPM’s total budgetary obligations. During fiscal
year 1994, this calculation yielded a rate of 19 percent for
total overhead charges--a percentage that we consider to be high
in view of the low level of common services and oversight
attention required for this activity.

The amount of overhead allocated to the investigations function
has a considerable effect on the fund’s financial position and,
in all likelihood, has contributed to the fact that with the
exception of fiscal year 1991, OPM has consistently reported a
deficit for investigative services every year since fiscal year
1986. During fiscal year 1994, for example, the fund reportedly

incurred an $11.8 million deficit. However, before overhead


ll

people—better. Among the concepts the National Performance Re-
view has embraced is that of privatization.

I think that’s totally consistent with your hearings in March of
this year, in which you talked about contracting out, which is also
another phrase for privatization in some form or another. At the
President’s request, Federal agencies have taken a hard look at
themselves. And as a result of these deliberations, last December,
as a second phase of the reinvention of government, the President
announced that large parts of OPM’s training and investigations
functions would be privatized.

We're here today to discuss the privatization plan for our inves-
tigations unit. We are breaking new ground, Mr. Chairman, as you
so well know. But this plan was not hastily arrived at. We have
sought from the first to do it as right for our employees, for our
customers, and for the American taxpayers. We view it all as being
in the public interest.

We have talked with our employees. We have talked with our
customers. We have sought expert advice in the form of in-depth
feasibility studies that concluded that Puvatization in the form of
an employee stock ownership plan, or ESOP, if you will, can work;
but only if guaranteed OPM’s business for a period of time. We
have awarded a contract to a leading bank to develop the ESOP

plan.

And it will team with an equally distinguished law firm and in-
vestment banking firm to carry out this responsibility. We have
kept our employees informed every step of the way. Some have dis-
agreed with the plan. Some have resisted it. But they have been
consulted and informed all the way. We are Proceeding with all de-
liberate speed; with the speed the American people demand; and
yet one thoughtful step at a time, making sure we build a solid
foundation.

We've thoroughly examined and continue to examine the legal
and administrative issues that surround this action. We believe it
can succeed, but only if the new organization is given the help it
deserves. Let me stress this point. the ESOP cannot work without
the sole source contract that we propose. Therefore, if there is no
sole source, we gut the idea of ESOP, and ESOP is the other end
of privatization.

If you would, Mr. Chairman, I just have a very, very simple
chart, because sometimes I think that the idea is that the decision
on privatization is on this side. The sole source and employee own-
ership is here. And the other option is that they work for another.
So if you will, Mr. Chairman, we’re talking ESOP, but it’s the other
side of the decision.

And therefore, the employees’ option really would be they either
have an organization—which is the ultimate empowerment—their
own organization to run and be properly structured and supported.
Or they go to work and go to the street and hopefully get hired by
a contractor, doing the same work.

So we’re not discussing the ESOP as a necessary part of privat-
ization. What we're talking about is ESOP as the extension after
the decision has been made. And we'll talk more to both of those
as the chair wishes. We do not propose to put these employees out
on the street. We do not propose economic Taoism.


97

Mr. Mica. Thank you, Mr. Bowling, and welcome back. A couple
of questions in the area of cost justification. First of all, do the cost
estimating procedures—that you described OMB using for ESOP—
conform to your understanding of generally accepted government
accounting principles?

Mr. Bow inc. It is common, at least relatively common, for OMB
to use the sort of principles that they have employed in this case
in estimating cost savings for budgetary purposes. Obviously, it
falls far short of what an A-76 study would supply, in terms of
analysis.

Mr. Mica. You have described the estimated costs of a transition
to an ESOP as $54.5 million. Have you developed, or are you aware
of any cost comparisons for transitions to any other approaches to
contracting for investigation services?

Mr. BowLinG. We are not aware of any other studies of that sort.

Mr. Mica. From what you’ve seen, do OPM investigators have
enough information to make an informed decision about this pro-
posal now?

Mr. BOWLING. As far as knowing or having a very high level of
confidence that the ESOP proposal would be likely to be successful
at the end of 3 years, I would say sufficient information is not
available at this time for people to be comfortable that there’s a
high level of confidence that would happen. Certainly, it could suc-
ceed. It’s not by any means obviously doomed. But on the other
hand, the analysis that one would prefer to see, in terms of the
costs and the pricing and customer base and so forth, hasn’t been
performed yet.

And without that, it’s really something of a step into the dark.

Ms. TayLor. Mr. Chairman.

Mr. Mica. Yes.

Ms. TAYLOR. If there’s one thing I could add to that. The feasibil-
ity study that was performed said that the current work force
knowing how to do these background investigations, how to do it,
would be vital to an ESOP succeeding. This was the reason for the
sole source agreement, so that these people would have a customer
base. If that sole source agreement falls through, I think there are
questions of whether an ESOP would have viability.

Mr. Mica. OPM has indicated that it would need commitment
from their investigators by August. Could the information that they
will need be completed in that time, in your judgment?

Mr. BowLING. I suppose it could be. } am not aware that they’re
working under that schedule. I understand that they have every in-
tention of completing a business plan before the decision is finally
made—or the actual privatization decision would be made at the
end of the year. But I also understand that if people are asked to
commit in August, it may be quite possible that that information
would not be available to them.

Mr. Mica. I want to discuss some of the deficiencies in previous
contracts. You testified yesterday that OPM had difficulties in its
administration of contract investigation programs 10 years ago.
And we heard comments about that today from some of the other
members. Have you seen any indication of procedures adopted in
planning for this transition, that would address some of the dif-

culties they experienced then, or are you familiar with them?


102

I wish to thank the subcommittee for allowing me to come here
today to speak on these important issues. And
now, to answe

would be happy,
er any questions the subcommittee might have.
{The prepared statement of Mr. Clark follows:]


118

‘ADC and other companies in the investigations industry would be seriously affected if OPM restricts or
eliminates our ability to provide background investigation support to Governmental agencies. ADC, Ltd.
already operates with a handicap in today's marketplace because it is a smal business and is minority -
‘owned. Forbidding competition for background investigations contracts is not only unfair, but it would
tipple us to near the point of destruction. ADC would be forced to scale back or eliminate this entire
sector of our business. Newco would thrive and expand with Governmental financing at the expense of
the private investigation companies. ADC, Ltd. and other firms would not be able to stay in the
background investigation business for the ESOP thrae to five sole source period without any contracting
possibilities.

‘The 700 investigators ADC, Ltd. has under contract would also be denied work. Additionally, thera would
be no practical way for ADC, Ltd. or any other business to come back in three to five years and be
competitive again with ESOP. Their three to five year monopoly would feave them firmly entrenched in
the marketplace. Furthermore, since OPM would maintain the final say on contracts, it is possible some
type of favoritism would be given to a “company” comprised of former OPM investigators who fled
‘unemployment to form that very company.

(On a broader front, the American Way and the American taxpayers would be the biggest losers.
Entrepreneurship and business competition would suffer a major setback. Government agencies would
be forced to continue paying higher rates for the same services that could be provided by the private
‘sector.

Are there eny other concerns of which the Congress should be aware in evaluating this
proposal?

ADC, Lid. and the other private companies have demonstrated that they are capable of performing the
investigations per OPM standards and guidelines. These companies have delivered the same or better
‘service as OPM and have provided a 30-40% savings compared to OPM's costs. ADC, Lid. and the other
firms have amply demonstrated our ability to provide excellent, cost-effective background investigations
‘services by using investigators who are former OPM, DIS, or FBI employees. We have performed the work
at no risk to the national security and at a reasonable, competitive cost to the taxpayer.

‘The OPM ESOP employees are being given a golden parachute al taxpayer's expense. Although we
sympathize with the massive lobbying effort the potentially displaced OF investigators and their families
have been staging, we ask that you not be swayed by their numbers and their sometimes inaccurate flurry


65

Mr. Moran. Yes, actually, since I had just started.

Mr. Mica. We have a little team effort here. We'll beat upon you
in a dual fashion.

Mr. Moran. Oh, we're not beating up on them, no. I suspect that
the people we want to beat up on may not be in the room today.

Mr. Mica. That’s right.

Mr. Kina. Don’t bet on that, Mr. Moran.

Mr. Moran. But I appreciate the segue there, Mr. Chairman,
and since I had just started phrasing my question, I would just as
soon continue for a little while longer. The issue I was getting at
was the initial decision to privatize. And it does seem as though
it probably came from the White House. And I wouldn’t be at all
surprised if it originated outside the White House by people who
have very much a vested interest, even beyond a political interest,
in privatization.

It may be the same process that has been occurring in some of
our State legislatures. I bought into that, actually, because it’s so
seductive, with the Medicare program. We have these proposals
where elderly people may have to sacrifice a bit. They won't get the
choice they get, in terms of providers. And they won't get, perhaps,
as high a quality or as frequent a service.

But everybody has to give a little, and so we go into managed
care with the Medicare program. They’re trying that with the Med-
icaid program and all. And some of our initial numbers—and you
may be interested to know this, Mr. Chairman—the initial num-
bers are showing that it is true that the elderly are giving up some;
the poor are giving up a fair amount of quality and frequency of
medical services.

So that happened. But the savings didn’t occur, which is real
strange. And yet when we look at the composition of the numbers,
it turns out that the amount that was projected to be saved has
actually gone into the profit margin of the managed care companies
that are providing the care. I don’t want to get too far off the track,
but I think there’s an analogous situation here.

The stockholders for the managed care firms got the profit, which
was the reduction, in some cases, not all, but in some cases, the
reduction in the quality and quantity of services saved money, all
right. But that money didn’t accrue to the taxpayer; it actually
went to the firms that were managing the health care. So they had
a vested interest, and it’s working for them.

But it’s not working for the taxpayers; it is not working for the
recipients. We may have a similar situation here. I wouldn’t be at
all surprised if this original idea came from some of the private in-
vestigation firms that stand to make some profit; the very ones,
possibly—I don’t know this, this is conjecture—but it could be the
very ones that did such a miserably poor job in assuming that re-
sponsibility for carrying out the background checks in the mid-’80’s.

That’s why I mentioned that at the beginning; that when we did
try to privatize it, and they said that they could do 42,000 checks,
and they come up with 3,500, and then it was a lousy job they did,
even with many of those 3,300. That should serve as some experi-
ence, and give us some indication of the credibility of perhaps the
people who stand to benefit the most from this policy.


71

the ability to oversee the performance of records gathering, records
filing, and the data system.

We would see that being performed, we propose, by the ESOP,
with adequate Federal oversight and onsite Federal oversight and
management, but with the bulk of the work force being—ulti-
mately, the source of the work force being drawn from the ESOP.

Mr. Mascara. I heard Mr. DeSeve mention the words commu-
nication technology. My question is, we have a major investment
in technology, computer technology. And if we engage in an ESOP,
or privatization, how do we utilize that communications technology
that we currently have and use in the investigation process?

Ms. LATTIMORE. Our proposal is that that technology and that
system, with our interfaces with FBI, with Defense, and with the
Department of Energy, as well as with the network of investiga-
tors, through the laptop computers, that the system would not
change. It would become, in a sense, Government-furnished equip-
ment that the ESOP or whomever—and we're proposing it’s
ESOP—would use to perform the work that we need done and to
transmit it to what is basically our processing hub in Boyers.

Mr. Mascara. So the people in the private sector, or those people
who would engage in an ESOP, then that technology would be
made available to them from the Federal Government?

Ms. LaTTIMoRE. Yes. They would collect data that’s fed into our
basic system via a laptop system, as is currently done. And the ac-
tual data entry, files maintenance, record retention, and those
types of activities would be performed by staff that we would draw
from the private sector.

Mr. KinG. And that’s why we're a bit—I believe it was you, Mr.
Mascara, mentioned that we would be—that the investigators on
an ESOP would be excluded from police files, et cetera. I don’t
know who gave you this bit of information, but it isn’t correct. Be-
cause it can be done through the supervisory and our professionals
at OPM on the part that would be supervising this particular orga-
nization. Those records would be open in that network. So we
would not be excluding our ESOP, if that were there.

Mr. Mascara. Getting back to the Boyers, do you know how
many people would be affected at the Boyers facility?

Ms. Lattimore. We have about 275 now. I would envision that
we would have no more than 25 Federal employees residual staff
there. And the balance of staff, we would plan to grow from the pri-
vate sector, via the ESOP

Mr. KiNG. And obviously that means that everyone who is there
would have a job.

Mr. Mascara. So it would be a 250 person ESOP?

Mr. KING. Yes. We don’t see any dramatic downsizing at this
time, do you, on anything?

Ms. Lattimore. No, the proposal would include that all employ-
ees that were given notices of separation, if the ESOP was success-
ful in sales, would receive an offer of employment. They get a right
of first refusal.

Mr. KING. The other thing, Mr. Mascara, is that we are sensitive
to a number of people who have a long-term concern about their
employer. We have working literally across the cave—we work in
a cave, literally—another unit that belongs to us that, and as va-


16

Masten

JUN | 2 1995

Why are (background investigations) conducted?

So that objective determinations may be made with respect to
the employability of an individual or the granting or denial
of a security clearance, pursuant to requirements contained
in executive order, statute, and regulation.


160

Questions for the Record Submitted to Ronald A. Reams
by Chairman John L. Mica
Subcommittee on Civil Service
Committee on Government Reform and Oversight
June 23, 1995

QUESTION 2

Does your agency have delegated authority to utilize
private contractors for background investigations? If so,

a. When and why did you request the delegation?

ANSWER

Yes, the Department of State has been delegated authority
to utilize private contractors for background investigations.
The original delegation was requested in 1981 and the request
is resubmitted annually.

b. What is your level of satisfaction with the timeliness,
quality, and cost of the investigative reports you have
received from private contractors?

ANSWER

The Department of State is very pleased with the
performance of its contract investigators and believes the
contractor contribution is the most efficacious use of
Federal funds. We are confident of the integrity of our
program because the Bureau of Diplomatic Security periodically

audits the performance and conduct of its investigators.


99

issue that I have not had an opportunity to study in as great a
depth as I would like, but I plan to.

Yd just like to ask you, in its feasibility study, the ESOP advisors
counseled one of the first things that the ESOP would have to do
would be to hire a marketing professional to diversify the client
base served by this investigative work force. Is it consistent with
your projections of a declining workload relating to the reductions
in Federal employment? Is this consistent?

Mr. BowLinG. I would say that it’s important, for that reason,
that a business plan be put together that would provide that sort
of customer base analysis through the future. GAO has not done
that, but I would think that this would be an important component
of the business plan that the trustees are supposed to be putting

together.

. Bass. All right. If this business were diversified, wouldn’t it
be an expenditure of tax funds to capitalize a new competitor in the
private market that provides background investigation?

Mr. BOWLING. It’s an interesting issue. I don’t know that I have
an answer to that. I think that’s one of those questions that would
have to be resolved by OPM and I understand that a number of
those questions are under review there.

Mr. Bass. OK. I have one last.question, dealing with sole source
contracting. OPM has indicated, in response to our questions, that
it would notify Congress of an exception from competitive require-
ments of the competition and contracting act to accomplish its sole
source contract. you aware of any such exceptions being filed
previously? And if so, under what conditions?

Mr. BOWLING. Well, in discussions with our general counsel’s of-
fice, it appears that they are rarely filed, but have been in the past.
We have only run across a very small number, in polling the gen-
eral counsel’s office at GAO, that we’ve even been aware of. So it
can be done, certainly. It is, however, quite rare.

Mr. Bass. Under what conditions would it occur?

Mr. BowLinc. If none of the other of the seven possible justifica-
tions are appropriate then the general interest provision could be
applied. The criteria for what constitutes the general interest is
somewhat vague. Tll ask my attorney to correct me if I’m wrong
on that. That’s the reason they asked for that justification to be
provided by the head of the agency, and then sent to the Congress
for the 30-day waiting period.

Mr. BELKIN. Right. Mr. Bowling has said, the public interest
exception is, I think, our experience is that it’s rarely used. There
are some added protections when it is going to be exercised. There’s
a requirement—this is the only of the seven bases for sole source
procurement, the only one that requires determination by the head
of the agency, as well as advanced notification to Congress, is the
public interest exception.

I think, generally speaking, it would be something that is a mat-
ter of discretion for the agency head. But the determination has to
be made by him, cannot delegated, and an explanation of that
must be provided to the Congress.

Mr. Bass. And last, under the current situation, under current
conditions, would GAO be in a position to recommend that granting
of a waiver?


21

What policy guidance does the office of Personnel Management
provide to agencies regarding the conduct of investigations
and subsequent adjudications?

The framework for OPM guidance is provided in 5 CFR Parts 731
(Suitability), 732 (National Security Positions), and 736
(Personnel Investigations). Part 731 establishes criteria for
making determinations of suitability (adjudications) for
employment in positions in the competitive service. It provides
risk designation and investigative requirements, and sets forth
the procedures to be followed when OPH proposes to take or
instruct an agency to take a final suitability ineligibility
action against an applicant or appointee.

Part 732 sets forth requirements and procedures which each agency
shall observe for determining national security positions pur-
suant to Executive Order 10450 -- Security Requirements for
Government Employment (April 27, 1953). The Order requires
agency heads to designate positions "sensitive" based on
national security considerations, requires appropriate inves-
tigations, and grants oversight responsibility to OPM.

Part 732 also provides for sensitivity level designations,
investigations tied to these levels, and periodic
reinvestigations to determine whether the continued employment of
the individual in a sensitive position is clearly consistent with
the interests of the national security.

Part 736 specifies certain requirements for personnel

investigations conducted by OPM, and for those conducted under
delegated authority from OPM. The requirements apply to both
suitability and national security investigationa. Unle
provided otherwise by law, responsibility for the investigation
of persons entering or employed in the competitive service, or

by career appointment in the Senior Executive Service, rests with
OPM.

We will be amending 5 CFR parts 731, 732, and 736 to incorporate
more specific guidance formerly contained in the Federal
Personnel Manual, Other guidance is made available in the form
of handbooks or manuals, and through periodic meetings and
training courses.

Onsite guidance is furnished under our Security Appraisal
function, through which we appraise agency compliance with
program standards, and offer assistance to help them carry out
their personnel security responsibilities.



50

What management alternativ
subcontracts, agency dele
on the current proposal?

were consid (e.g.
tions, or others) before

We looked at five alternatives, ranging from total elimination of
investigations at OPM, to creation of a consolidated organization
within the government to conduct all background investigations.
In between were the delegation of investigative fieldwork to
agencies, OPM as a contract manager, and privatization into a
government corporation. Subcontracts did not receive serious
consideration because of previous unsatisfactory performance by
subcontractors, and because it would reverse many of the
beneficial technological advancements we have established in
investigating and reporting.



95

To date, OPM Investigations Service employees have expressed an
interest in having OPM obtain more information about the ESOP,
but nothing more. The positive expression of interest about
exploring the ESOP idea is not surprising, given the fact that
OPM’s Associate Director for Investigations, in a memorandum to
investigations staff dated April 20, 1995, stated that this
function would be spun off to the private sector by the end of
1995. The memorandum also said that if there was not enough
interest in exploring the ESOP privatization option,

privatization by some other means would occur.

There is no information available on whether staff who indicated
a willingness to have OPM explore the ESOP idea would have that
same willingness to become a part of it. In fact, over 200
employees have contacted us to express their opposition to

privatization.

Also, we are not aware of any work that has been done to
determine whether the physical location of the employees who
elect to join the ESOP would be compatible with the investigative
workload the ESOP 1s expected to have. Currently, OPM
investigators work either out of OPM regional offices or their
homes. If only a small number of investigators elect to stay in
an area where there is a large investigative workload or vice

versa, persons from other areas may be asked to relocate. No


33

Describe current plans defining the continuing responsibiliti
for oversight of the investigative functions performed for
other agencies, the maintenance of security and suitability

standards as vell as to maintain the integrity of the merit
aysten.

OPM plans to continue an oversight role pursuant to 5 CFR 731, 732,
and 736. OPM will have a presence in assuring that agencies are
acting responsibly in carrying out their obligations,

We will continue to support the integrity of the merit system
through our suitability operation. Although a good deal of the
applicant/appointee suitability screening has been or will be
delegated to agencies, OPM will retain jurisdiction over matters
involving fraud or falsification.



168

INVESTIGATIONS RETURNED TO VARICON

Case Date Originally Date of Date Received Date Returned
Number = Returned to DEA OPM Review By Varicon to DEA
91-3123 11-13-91 02-20-92 09-16-92 09-28-92
91-3255 11-25-91 02-07-92 09-24-92 10-15-92
91-3319 11-13-91 03-11-92 09-17-92 10-05-92
92-0014 12-11-91 03-25-92 09-17-92 09-28-92
92-0090 12-10-91 03-09-92 09-23-92 09-29-92
92-0101 12-24-91 05-14-92 09-17-92 10-28-92
92-0125 01-14-92 no date 09-24-92 10-05-92
92-0216 01-31-92 05-12-92 09-15-92 10-15-92
92-0223 01-10-92 03-18-92 09-17-92 10-15-92

92-0390 03-20-92 05-13-92 09-24-92 10-05-92


133

eral Government involvement and the deficiencies in potentially
private companies taking over the investigations.

Mr. SAUNDERS. Well, frankly, throughout this process—and I’ve
been contending with this in one form or another for the past three
or 4 years—I find it an appalling arrogance to suggest that only
the Federal Government has the capability to conduct a back-
ground investigation. I find it appalling to suggest that a retired
Federal employee, former investigator, would be prostituted by the
fee for task benefit, or whatever was described to me.

I am a former Federal employee. I spent 30 years serving my
U.S. Government, and I’m not prostituted by the marketplace, and
Tm not incompetent all of a sudden because I’m no longer a Fed-
eral employee. Our employees exceed, as best I can tell, the experi-
ence level of virtually every investigator I have ever met from the
Federal Government, specifically, the OPM.

Our people are all looking at 25 or 30 years of background expe-
rience—criminal investigation, fraud investigation, personnel back-
ground investigations—all been on the street for 30 or 35 years.
And they’re hard to fool. They’re hard to fool, and they’re capable;
and they’re not prostituted by the money process. It’s appalling to
me that I hear over and over again that only OPM is capable of
doing this work.

If they’re the only people capable of doing it, why do they need
a sole source arrangement? It will be apparent to almost anybody
that only if OPM can do this, give it to them.

Mr. Bass. Mr. Cordova, your observations.

Mr. Corpova. I believe that Mr. Clark has made a point. His
point is that contractors are second-class citizens. Your honor,
we're not second-class citizens. We’re honest, loyal, hardworking
Americans that can deliver a product second to none. By OPM’s
own admission, ADC Ltd.’s product was better.

We are very involved in national security, at least in our firm.
And this would be like your committee, your honor, telling the U.S.
Air Force that it’s now being downsized, and forcing all the Amer-
ican citizens to fly the Air Force planes; and what is TWA and Con-
tinental going to say? That’s what OPM is trying to tell you.

Mr. Bass. I have one last quick question for Mr. Saunders. You
mentioned in your—maybe it was extemporaneously—that you
thought that development of the ESOP would take business away
from your industry. What is the difference between having an
ESOP and having the current system? Why would you lose, nec-
essarily, any more business under the ESOP than you would under
what exists today?

Mr. SAUNDERS. That’s a good question. The agencies with whom
we are now contracted have been granted a waiver, under some du-
ress, by OPM, to contract out with us. That specifically is DEA,
Small Business, and GAO. Those are my three U.S. Government
contracts now. Ms. Lattimore, in a meeting at OPM of all of the
Government agencies, the past 2 weeks or so, was asked the ques-
tion, will those Government agencies who now have waivers to con-
tract out be permitted, under ESOP, to continue contracting out?

And the answer was, no; all waivers will be rescinded and no fur-
ther waivers will be granted. So what they’re saying is, when they
get ESOP, they’re going to say to my three customers—DEA, SBA,


17

Describe the current workload of the office of Federal

tigations co:
security questions, suitability qu
in federal employment applications or otherwi
protecting the integrity of the merit syste,
of investigations conducted by your agency.

concerned with
y other types

We project receipt of about 39,000 background investigations this
year, which would put us at or slightly above last year’s number.
In addition, we will process a total of about 270,000 of the
other-than-background investigations shown below. The workforce
currently numbers 760. Of this number, 424 are field
Investigators.

Investigative products generally aimed at security include:

= National Agency Check (NAC). Done as part of another
background investigation. In most instances, when other
investigative agencies do their own investigations, OPM conducts
the NAC portion for them. The basic NAC consists of a search of
the Security/Suitability Index (SII) with retrieval of related

fingerprint search; search of the FBI's Records Management
Bivision; and search of the Defense Clearance and Investigation
Index (DCII) with retrieval of related files. Additional

searches, such as credit, are available by request for an
additional cost.

Background Investigations are compilations of information,
obtained from a combination of the NAC with a credit search, and
personal and record sources, covering an individual's background
for a specified period of time. Coverage includes the subject's
residence, education, employment, references, and local law
enforcement. Coverage is based on the type of background
investigation being conducted, determined by the level of
sensitivity or risk of the position being sought or held.

- Single Scope Background Investigation (SBI). The minimum
investigative standard for granting individua!
Secret national security information and Sen
Information (SCI). Coverage requirenents are
National Security Directive 63, si

gned by President
October 21, 1991. The scope of the investigation is 10 years.

- Background Investigation (BI). Conducted for placement
into positions at the Noncritical-Sensitive, Critical-sensitive,

Moderate Risk, or High Risk level. Scope of the investigation is
5 years.

- Limited Background Investigation (LBI). Conducted for
placement into positions at the Noncritical-Sensitive, Moderate
Risk, or High Risk level. Scope of the investigation is 3 years.

- Preliminary Background Investigation (PBI). Same coverage


61

Mr. DESEVE. No, sir, there has not.

Mr. Mica. Did you look at the private sector? We've got some fig-
ures. Just take the number of investigations and we divided them
and we came up with a certain amount. And Ms. Lattimore testi-
fied, and others testified as to costs. Did you do cost comparisons
in the private sector?

Mr. KinG. Well, with the private sector, the costs——

Ms. LATTIMORE. We did not do a direct cost comparison with the
private sector as part of this process.

Mr. Kinc. But part of the costs aren’t shown. Mr. Chairman, if
I could use an analogy, as alien as that is to me. What you think
of is building on a flood plain. We had a business on a flood plain.
The floods come, we’re told, once every 100 years. What we have
discovered is that they don’t come every 100 years; we are hit regu-
larly by a flood, and we have been since 1986, where we can’t re-
spond to the market.

This kind of an organization is basically a private enterprise with
Federal employees. It’s totally a revolving fund; you get paid for
what you do. It can’t be responsive in that sense. It carries enor-
mous burdens of governmental costs, and yet we talk about com-
paring it to the private sector. It plain isn’t fair to do that. But sec-
ond, in the inability of this kind of an organizational structure, to
respond to the market, we get wiped out.

e ran up this enormous deficit in large part because we
couldn’t respond to our market when almost 80 percent of our costs
are basically people tied. And we don’t have the flexibility of man-
aging people. So what we're doing is saving the taxpayers money
by doing what we're talking about. Because downstream, we're not
going to have that happen again.

This will be managed in another context, under Federal super-
vision, with the highest standards and delivery; and by people who
are motivated and tied directly to making the program successful.
And after a short transition period, that will be established, so that
it is going to go into a bid system. So the entire look-see is in the
public interest right from the get-go.

And that public interest is served by having an ESOP. And that
ESOP won't go unless there’s a sole source contract.

Mr, Mica. I have some additional questions, but I can’t take all
the time. I want to yield to the ranking member at this time, and
T'll come back. Mr. Moran.

Mr. Moran. Thank you, Mr. Mica. Whose idea was it that this
had to be privatized in the first place? It wasn’t your idea initially,
was it, Mr. King?

Mr. Kinc. Mr. Chairman, it was from the reinvention. The feel-
ing was that we were to all look at how we could move work into
non-governmental areas, and to examine each of our programs for
that. This seemed to be a logical decision because, well, two rea-
sons. One was, as we indicated on the chart, that some of this work
could be done in the private sector. And then second, that it had
continued problems because of its financing, which was an anchor
on the organization to be as productive and to reflect the profes-
sionalism and the ability of the people who were in it.

So that was it in large part. But the Vice President and the
President, through reinvention, suggested or announced, actually—


130

point in whether there should be any input from your organization
or your current investigators as to how this activity is structured?

Mr. CuarK. To the best of my knowledge, there has not.

Mr. Mica. There has not. Let me ask you this, also previous to
the ESOP plan, there were about 500 investigators that were
RIF’d. Has OPM established any type of a transitional arrange-
ment to help or assist these individuals who have been RIF’d to
find other employment or to find other positions in the Federal
Government?

Mr. CuarK. There was such an effort. Sixty days prior to the ef-
fective date of the reduction in force, employees were allowed to job
seek on official time. And they were given some assistance in iden-
tifying Federal vacancies that might exist, and there were job coun-
selors designated. Some employees did find employment through
that assistance; most did not.

Mr. Mica. Most did not. What percentage of those who were
RIF’d have now gone into private investigative work; do you have
any idea?

Mr. CLarK. I have no idea.

Mr. Mica. What percentage have gone into other types of Gov-
ernment employment; do you have any idea?

Mr. CLarK. A certain number have found employment at other
Federal agencies.

Mr. Mica. Twenty-five, 50 percent?

Mr. CuarK. I don’t have the data, sir.

Mr. Mica. The ESOP plan that has been proposed, right now
that’s really the only proposal on the table. If you have this edict
from on high and you have an agency implementing it, what other
alternative did the investigators see other than to join this new en-
tity that’s been created or being proposed to be created here?

Mr. CuarK. Frankly, there really is no other alternative. I be-
lieve, as the Director, himself, testified earlier, that the decision is
to go with the ESOP or nothing. The investigative work force be-
lieves very strongly that the decision to privatize this function has
been made in haste and without due deliberation.

We would hope that the Congress would take a second look at
this issue, and determine whether or not this should, in fact, be an
inherently governmental function.

Mr. Mica. Did you see the chart that Mr. King held up? He said
some of these activities we view as being able to contract out, and
others he felt were inherently governmental. Do you see any activi-
ties that can be contracted out? Do you agree with his conclusions?
And what do you see as inherently governmental in this type of
Federal investigations function?

Mr. CLARK. Well, I do strongly believe that conducting back-
ground investigations for sensitive Government jobs is, in fact, an
inherently governmental function. I would ask what the general
perception of the committee would be that if the next time a Su-
preme Court va takes place that this be conducted by a pri-
vate company? I doubt there would be much support for that.

By the same token, the next Secre' of ite, I think, will
probably be investigated by the FBI, a Federal entity. By the same
token, if you have someone who has direct access to our Nation’s


14

‘counsel's office expressed the concem that it may not be possible to issue such a contract under the
‘existing provisions of CICA (competition In Contracting Act) , which requires a full competitive bidding
process for all government contracts, with a tew relative narrow exceptions”.

tt is known that Goneral Counsels in the Office of Management and Budget and the Goverment
Accounting Ottice have their own questions of legality conceming the creation of the ESOP with a sole-
‘source contract. These agencies should be contracted directly for their own perspectives.

Is the number of firms currently conducting background Investigations such that 9
restricted market is necessary?

ADC, Ud. does not bolieve that restricting this market is necessary or desirable. ADC is one of many
private companies that conducts investigative work and performs the same background investigations
provided by OPM. Some of the companies currently providing background investigations are ADC, Lid.,
Varicon Intemational, MSM, and MVM. The ESOP study revealed that OPM has 440 investigators,
assuming all of them are available and wiling to work for Newco. ADC has over 700 experienced Associate
Investigators, and Varicon has over 500; that's over 1200 investigators, plus others who may be available
because they will no longer bo employed by OPM. Furthermore, many other firms are interested in this
work, as demonstrated by bidders lists and submissions for recent solicitations for background
investigation support. With approximately 9,000 experienced and credentialed investigators already
providing services in the U.S., ADC, Ltd. cannot understand the feasibly study's contention that there is
not sufficient time for private sector firms to expand their investigative staffs to handle federal background
requirements once OPM is no longer avallable. in addition, the Association Of Former Inteligence
Officers has 2,900 members and other potential sources for investigative staff are the Association of
Former Agents of Naval Investigation Service and the Association of Former Agents of the U.S. Secrot
Service. Since all the firms performing background investigations have cleared, credentialed
investigators already providing these services itis clear that national security s not a valid issue.

‘The suggestion that Federal background investigations be tumed over to a private company created by
OPM with sole-sourcing is also disturbing, considering the fact that numerous viable and proven
‘companies specializing in Federal background investigations already exist. If a true free-market place is
allowed to exist, this number wil, in all likelihood, continue to increase.


116

‘companies. For example, in a Washington Times article dated Juty 8, 1994 (see attached), the Secretary
‘of Commerce stated that he was satisfied with ADC's services and had hoped to extend DOC's contract
with ADC. However, without authority from OPM to use private companies to do its background
investigations, Commerce was forced to rely on OPM investigators.

A list of Government agencies that have been or are currently being supported by private background
investigation firms include:

Customs Service

‘Drug Enforcement Agency
Government Accounting Ottice
‘Small Business Administration

Air Force

National Labor Relations Board
*Peace Comps

*State Department

“Federal Bureau of tnvestigations
“Agency for Intorational Development
“Central Intotigence Agency
“Office of Personnel Management

(These agencies currently contract diractly with private investigators)

Would existing firms be able to perform the amount of work that Is currently performed
by the Office of Federal Investigations?

‘ADC, Ltd. and the aforementioned private companies can perform the amount of work that is currently
being performed by the Ortice of Federal investigations. ADC, Ltd. has proven this by having met the
needs of specific agencies such as the Department of Commerce and the National'Labor Relations Board.
ADC, Ltd. provided these agencies with quality ROI's in a cost-effective and timaly manner. ADC, Lid. has
‘more than 700 investigators currently under contract. These contractors have at least five years Federal
investigative experience. Some are former OPM investigators; other are former FBI, CIA, Drug
Enforcement Agency, Treasury, and other Government agency investigators. They ara highly trained and
geographically located in every state and tertitory in the Union. There are over 3,000 experienced and
credentialed investigators already providing background investigation services for private firms in the U.S.


4

sive amount of overhead costs to the OFI operations; approximately
}9 percent in fiscal year 1994, a figure GAO considers to be very
ig}

Moreover, this high overhead rate is apparently a major reason
why the OFT fund has reported deficits since 1986. Further, GAO
says OPM’s methodology did not take into account some basic
costs, such as severance pay and unemployment. If this wasn’t bad
enough, unfortunately, GAO found several other major problems
that could, by themselves, stop this proposal in its tracks—a notion
which I frankly think might be the wisest move at this point.

State law enforcement necies contacted by GAO made it very
clear they would be unwilling to share sensitive information and
criminal records with private groups such as the proposed ESOP.
The Departments of Justice and Treasury officials also told GAO
they would be reluctant to share information with such a
privatized operation. That’s a question I raised yesterday during
the question period.

Another major problem is that OFI employees are upset and
angry, to put it mildly, and are currently in no mood to join the
proposed ESOP work force. Apparently, the ESOP will n acom-
mitment from 50 to 75 percent of the current work force, to make
the ESOP fly. GAO politely says this kind of sign-up rate is basi-
cally a pipe dream, and is not going to happen.

GAO itself heard from more than 200 OFI workers, all express-
ing their displeasure at the OPM plan. The testimony Mr. Clark
will present can only be described as the potential straw that
breaks the camel’s back. It paints a most disturbing picture. As I
indicated yesterday, I simply do not understand why OPM officials
are refusing to look at any other solutions to this dilemma.

I appreciate the fact that Director King is following budget or-
ders set down by OPM and the White House. But this whole situa-
tion is like a car being driven down a road at night without its
headlights on—it is bound to crash. Again, I implore my colleague
to stop this flawed effort now. This whole situation needs to be re-
evaluated before it is too late.

The good and hardworking OFI employees, who have by all ac-
counts served their country well over the years, deserve better
treatment. And as the chairman indicated, I must leave for a while,
duty calls. I have a Veterans Committee mark-up, and will be look-
ing at the Agent Orange bill. So I ask you to bear with me, and
Tl be back shortly. Thank you very much, Mr. Chairman.

Mr. Mica. Thank you, Mr. Mascara, and I'd like to yield now to
our chairman, Mr. Clinger.

Mr. CLINGER. Thank you very much, Mr Chairman. I commend
you for holding this series of hearings on a very critical and con-
troversial proposal. The subcommittee, as I understand it, will con-
tinue to hear testimony today on the administration’s proposal to
privatize the investigations and training functions of the Office of
Personnel Management. In particular we'll be looking at creating
the ESOP that you referred to, with the Office of Federal Investiga-
tions, so that current employees would continue to carry out their
functions as an employee owned, non-governmental entity.

This proposal is one of the administration’s reinventing ern-
ment initiatives, which were included in the fiscal year 1: budg-



93

We also noted that OMB’s methodology did not include:

* estimated conversion costs of approximately $54 million
comprised primarily of the deficit ($30 million),
severance pay and unemployment assistance for
terminated employees ($9.8 million), and the cost of

completing work in process ($11 million);

. contract costs of $108,000 to complete the feasibility

study; and

@ contract costs that will be incurred by the trustee in

developing the business plan.

Access to certain data d_pose a problem for ate

investigators

Another unanswered question concerns the willingness of state and
local law enforcement agencies to share data with a private
organization such as the proposed ESOP. We have been told by all
three state law enforcement agencies we have contacted so far
that if the function is privatized, they would be reluctant to
provide ESOP investigators access to the criminal history records
of persons who are under investigation. According to these
officials, they were concerned that they would have no control
over what a private organization would do with such information
once it had been obtained. Similarly, at the federal level,

7


38

How was the phi
veloped?

4 approach to implementation of this strategy

It was the opinion of the contractor performing the ibility
study that, absent a pl successful operation in
the private market of the new entity is highly problematic. The
phased approach will give the new company time to learn how to
operate as a private business, and establishes reasonable future
prospects for the company which are necessary for recruiting and
retaining employees

The phased approach also satisfies many of the concerns of our
customer agencii Two of our largest customers have said that
such an approach is the only mechanism by which they could
reasonably assure that their concerns can be addressed.



158

even under adverse circumstance, matters of official business

which require discretion and affect national security.

I appreciate having an opportunity to outline briefly how
we at the Department of State seek to meet those important
objectives, as well as to address specific issues being

examined by the Subcommittee.


125

National Security Information and Sensitive Compartmented
Information. No further investigation or reinvestigation prior
to revalidation every five years will be undertaken unless the
agency has substantia! information indicating that the trans-
ferring individual may not satisfy eligibility standards for
clearance ez the agency head determines in writing that to accepr
the investigation would net be in the national security interest
of the United States.

Notes

Immediate family -- spouse, parents, brothers, sisters, children,
and cohabitant of the individual requiring access.

3
48
a 3

all

!
h |


100

Mr. BOWLING. No, we would not be in the position of doing that.

Mr. BELKIN. And what I would add to that, we certainly are not
ina position now to take a position with respect to that. We
haven't seen the basis for the determination. And perhaps more im-
portantly, if a sole source procurement is exercised on that basis,
it’s something that could be the basis for a protest that would be
filed with us that we would be ruling on in due time. And we cer-
tainly couldn’t take a position on that now.

Mr. Bass. OK, fine. That’s all I have. There being nobody else
here to ask any questions, I will thank all three of you very much
for appearing here today. We appreciate your testimony, and take
it all under consideration.

Mr. BOWLING. Thank you very much.

Mr. Bass. You're very welcome. Our next panel, the third panel,
will be Michael Clark, from the Federal Investigators Association;
Arthur Cordova, from ADC Ltd., Albuquerque, NM; and Herbert
Saunders, from Varicon in Falls Church, VA. As is customary in
testifying before House committees, I would like you to take a
quick oath. Please raise your right hands.

[Witnesses sworn.]

Mr. Bass. Thank you. We'll start by recognizing Mr. Clark.

STATEMENTS OF MICHAEL CLARK, FEDERAL INVESTIGATORS
ASSOCIATION; ARTHUR CORDOVA, ADC LTD.; AND HERBERT
SAUNDERS, VARICON

Mr. CLarK. Thank you, Mr. Chairman. I have submitted a com-
plete statement for the record, and I would now like to issue just
a brief summary.

Mr. Bass. Thank you.

Mr. Ciark. I wish to thank the subcommittee for allowing me to
come here today and speak to you on this very important matter.
I am presently a member of the Federal Investigators Association.
I have 20 years’ experience working as an investigator, supervisory
investigator, and adjudications officer. During OPM’s contracting
efforts in the mid-1980’s, I served as technical administrator, re-
sponsible for oversight and integrity control over these contracts.
And I saw firsthand the kinds of problems inherent in contracting
out this vital function.

I am here as a representative of the Federal Investigators Asso-
ciation to speak on behalf of many investigators and supervisors of
the investigations program who are concerned with the privatiza-
tion plan. I have come here today to express concern about OPM’s
goals of privatizing its investigative function.

Whether this is attempted by way of the proposed ESOP or by
simply shutting down the program and farming the work out to in-
dividual contractors, the result will be the same—taxpayers’ dollars
will be wasted, a necessary Government quality entity will be oblit-
erated, and the general integrity and security of the Government
will be weakened. da 4 de-

not come here today to denigrate any person or compan:
siring to do business with the Government, or that has done busi-
ness with the Government in the past; nor do I seek to imply that
having the Government contract out some of its work is, by defini-
tion, a bad idea. However, I believe that time and events have


41

What is the total estimated cost of this strategy?

As of April 26, 1995, the estimated cost of privatization through
an ESOP is $54.4 million, of which $30.2 million represents the
deficit in the revolving fund associated with the Investigations
Program. Immediate program shutdown would cost approximately $86
million. ‘The difference between the two figures lies primarily
in two areas -- an increase in the current revolving fund deficit
dua to a decrease in revenue, and the disposition of furniture

and equipment expense which has not yet been resolved under an
ESOP.