16

And then, what kinds of services? And a third part of the ques-
tion—are there any models for this, as far as State governments?

Mr. Cox. Well, first of all, the 10 percent is really conjecture.
There have been estimates of anywhere from 5 to 10 percent that
have been made. But there are arguments about how you would
calculate that. The area that I’m most familiar with, which is about
a third of State function and two-thirds local function, is public
transit service, where the number is, in fact, just a little bit over
10 percent at the moment.

So there’s plenty of room to go. You'll find some services where
a large percentage of services are contracted out and some where
very little is. But I mean, we’ve got welfare administration being
contracted out in some places. We would argue that you can com-
petitively contract virtually everything but the legislation function
and contract management.

We would not propose contracting out Congress. Now, with re-
spect to models—I hope that I won a friend——

Mr. Mica. We don’t want to put that to a vote.

Mr. Cox. No, no. I guess with the new Congress, it may be a dif-
ferent issue. In terms of models, there are some proposed models
around that have not been implemented yet in the United States.
One is a process which we call petition of interest process, whereby
you would, rather than mandating a percentage of contracting
out—because one of the problems as you look at government is,
how does a legislative body determine what should be contracted
out; it’s very difficult.

So what you do instead, through the petition of interest process—
a bill that got through both houses in Arizona, but was vetoed by
Governor Mofford a few years ago, and is being considered now in
a couple of States—a petition of interest process would have you
basically say to the private sector, challenge us on specific services;
private sector, if you think you can do the service better, send us
a petition of interest saying we would like to provide your janitorial
service, your welfare administration, whatever.

Send that in, and then a board would take a look at that; see
whether or not the company was a valid company that had the fi-
nancial capability and the technical capability to do it. And once
that was established in the affirmative, if it were, then you would
go out to competitive bidding for the process. Now, there are some
other models that are being used around the world.

As you may or may not know, the Local Government Act of 1988
in the United Kingdom required the contracting out of six specific
county government and municipal government services. The results
out of that have been very, very good. And indeed, one of the things
that happens in contracting out is, the public service becomes mucl
more competitive, too, and it lowers its cost. And in a lot of cases,
you have public agencies, their own workforces winning the con-
tracts.

In New Zealand, Socialist Finance Minister Roger Douglas
moved the country, in the 1980’s, strongly toward markets. And
what they did through—I can’t remember the name of the act now,
but it was an act having to do with local government. Essentially
what they did is, they required local government units to, what


37

There is no question that the government must have a minimum
level of technical, management and administrative talent and skill
in order to intelligently manage its affairs, including overseeing the
range of external organizations—contracting out and nonprofits
and all other players—in an effective way, given the government
stewardship imperative that exists when you are a government
manager.

Finally, the third piece of that paradigm is the contractors them-
selves. If you know what's inherently governmental; if you’ve taken
prudent steps to make sure you have the core capability, then ar-

bly everything else is subject or eligible for contracting out. And
that is our basic thesis. We do not favor, at the Federal level, pub-
lic-private competition.

We stay with first principles and say that the government should
not be competing with the private sector. And in particular, the
cost comparison methodology or cost comparison tool that’s been
used primarily in the A~76 world, is an analytically badly flawed
tool that should not be used under any circumstances, even if the
Congress and the executive branch decide to continue some form of
public-private competition.

As with the preceding speaker, we would say that cost compari-
son methodology must be dramatically upgraded. It is simply not
providing a level playing field in today’s world. Specifically, it just
does not faithfully recognize, other than very marginal elements of
Federal Government overhead. So you can’t get an apples-to-ap-
ples, valid, equitable comparison.

Td like to suggest to you, or respectfully suggest that in looking
at privatization as a public policy strategic issue, that you be cau-
tious about forms of privatization other than direct contracting out,
which has a proven track record and a high level of acceptability
and satisfactory performance over time. We have seen emerge,
within the administration and within certain quarters of the Con-
gress, interest in government corporations; civil service; buyouts of
organizations; schemes called franchising, and others.

jome of these may be appropriate to certain circumstances.
Many are rather tenuous because they involve long-term under-
writing or subsidization of markets for organizations like govern-
ment corporations—the Amtrak type of situation—which incurs, for
the government, long-term obligations and very uncertain situa-
tions, and never fixes the total responsibility and the liability for
performance in a purely private sector organization.

Because government corporations, in particular, are half public
and half private sector in their pathology, if you will. I don’t want
to overly repeat again what was said by previous speakers, but we
are very concerned about the civil service workforce and the profes-
sional and morale aspects of how a privatization transition will im-
pact them. We would urge you to consider prudent measures, of
which there are many good candidates, to assure that that transi-
tion is humane, is professional, and is carefully managed.

And certainly one clear idea that has merit is to build concrete
specific incentives into contracts that would award contractors who
hire government employees and hire them in a reasonable way;
and conversely, punish them if they are not forthcoming in that re-
gard. The next issue is that of legislative impediments. I know


33

or problems in the system, the reports often bear little resemblance to the rhetoric
that is used to describe them.

For example, in 1990, the Department of Defense Inspector General released a re-
port which, according to opponents of contracting out, proved that contracting was
costing the government more than it was saving.

However, a close reading of the report revealed two critical, and unassailable
facts: over 90% of the contracts studied were saving money—an extraordinary suc-
cess rate for any government program; and where money was not being saved, the
reasons almost always had to do with changes in the scope of work, changes in the
Department of Labor wage determinations, new regulations, particularly in the en-
vironmental arena, and more—none of which were related to contractor performance
and almost all of which would have had a virtually identical impact were the work
being performed in-house.

In another case, the Office of Management and Budget released what it called its
SWAT Team report on service contracting. Opponents of contracting were quick to
jump on the report as further evidence of the insidious nature of contracting. But
what, in the final analysis, were the key findings of the report?

The oversight and management of some service contracts was inadequate; the
rules governing allowable costs were unclear and often inconsistently applied; and
there is no evidence of widespread fraud and abuse by contractors.

Certainly, the SWAT Team report identified problem areas that must be ad-
dressed—primarily, it must be pointed out, on the government side of the table. But
it was hardly what one might call a chilling indictment of service contracting.

In addition, we must remember that GAO reports are routinely misrepresented
by opponents of contracting. For instance, last year’s report on advisory and assist-
ance contracting, a small Siscreet segment of overall government service contract-
ing was hailed as a report on service contracting as a whole. GAO specifically stat-
ed that it did not draw any conclusions from its investigation, and even acknowl-
edged that there are many instances in which such contracting is desirable—wheth-
f, it is immediately cost effective or not. These facts were, unfortunately, largely

ost.

Here, as in all aspects of life, a simple warning is warranted: read the fine print,
because if you don’t, you might be inappropriately swayed by the headlines which,
all too often, offer less than the whole story.

CONCLUSION

Mr. Chairman, we have an extraordinary opportunity before us. It is an oppo!
tunity on which we can capitalize—much to the long term good of the nation’s tax-
payers, or one we can allow to pass without taking the aggressive and forward-look-
ing action that is possible. In the spirit of change that today so predominates, not

on Capitol Hill but across the nation, I urge you to push forward and not let
this opports nity pass.

M nks for your attention and I will be happy to answer any questions you
might have.

April 18, 1995
The Honorable John L. Mica, Chairman
Subcommittee on Civil Service
House Committee on Government Reform and Oversight
U.S. House of Representatives
336 Cannon House Office Building
Washington, D.C. 20515

DEaR CHAIRMAN Mica:

I first want to thank you on behalf of the members of the Contract Services Asso-
ciation of America (CSA) for the opportunity you provided me to testify before your
subcommittee on April 5, 1995. I greatly appreciated the chance to outline for you
and the other members of the subcommittee, the issues CSA, as the nation’s oldest
and largest association of government service contractors, have identified as those
that will most impact our collective ability to enhance the efficiency—and reduce the
cost—of providing government services.

1 wanted also to take this opportunity to clarify and reiterate some of the key is-
sues that were raised at the hearing. It is my hope that the hearing represented
not an end, but a beginning, and that we, therefore, will have additional opportuni-
ties to discuss the many important aspects of the issue.

* Public/Private Competitions: Should government agencies compete with private
contractors?


42

According to GAO data, other federal employees will move to other agencies. Some
may even start their own businesses, selling services to the government. Even with
confidence that these natural transitions will occur, we believe government-wide
mechanisms need to be developed in order to assure fairness and order as the
workforce transitions.

In urging contractors to retain federal workers in areas where contractors will be
used, PSC recommends that the government develop initiatives for offering contract
incentives. For example, giving source selection points to the company with a plan
for keeping existing employees or waiving regulatory requirements may provide
positive incentives without producing disincentives that would result in effects con-
trary to those desired.

LEGISLATIVE IMPEDIMENTS TO CONTRACTING OUT

The committee asked that legislative barriers to contracting out be noted in this
testimony, I have cited a few laws that have proven to cause negative effects on our
PSC members.

The Federal Workforce Restructuring Act (P.L. 103-226), as you heard last week
from GAO’s witness, Steven Nye, can be cited as a contracting out prohibitor. The
Jaw prohibits an agency from using contractors to perform functions previously per-
formed by a federal employee which was lost in personnel reductions.

The FY'95 DoD Authorization Act (P.L. 103-701, 10 USC 24101) requires a cost
comparison be performed before entering into contracted advisory and assistance
services (CAAS), if DoD has employees who can perform such work:

The so called 60-40 Rule applies to DoD Services Depots. Where Depots must per-
form 60% of their work with Bepots employees, contracting out no more than 40%
of total requirements to the private sector, as required in 10 USC 2466.

More than legislation prohibiting contracting out, the lack of statutory policy out-
lining the proper balance including a role for the private sector inhibits contracting
out.

A growing phenomenon needs to mentioned as a deterrent to contracting out. As
agencies have been budgeted less money for operating expenses, many companies
have had fewer opportunities in the federal marketplace. Compounding the problem,
companies have been experiencing a growth in competition from an “entrepreneur-
ial” government. Frequently, agencies will market their services to other agencies,
the same services done by tax-paying companies via competition. The transactions,
which are frequently done by Interagency Agreements, has prevented private com-
panies from proposing for new projects and even have forced them out of performing
in traditional markets.

The Office of Personnel Management, for example, last year developed a brochure
to outline the services they could provide to agencies for a fee including workforce
restructuring services and labor management teambuilding consulting. In the Envi-
ronmental Protection Agency, contractors were replaced by federal employees to
maintain supplies in research’ labs and drive boats, not exactly functions inherently
governmental in nature. The Department of Agriculture travels internationally at
taxpayers’ expense to seek work from international customers. This activity is in di-
rect competition with a tax-paying U.S. small business, which pays for travel with
company profits. DoD Depots are competing for maintenance and repair workloads
of other agencies.

RECOMMENDATIONS.

Statutory Policy—A statutory licy for contracting out with emphasis on using
the private sector is needed. Without a law on the books and an emphasis for fed-
eral managers to use the private sector unless the services are inherently govern-
mental, there is little incentive for the federal employees to make decisions to con-
tracting out instead of performing in house. This is the single most critical factor
for stimulating increased contracting out.

Self-Perpetuating Process—Three self-perpetuating processes for contracting out
should be put into place: a privatization commission to recommend potential areas
for private sector use, (2) continued federal personnel ceilings or reduction goals as
a catalyst for more contracting out, and (3) a “top ten list” to be submitted to Con-
gress annually identifying potential areas for contracting out.

Removal of legislative disincentives—The laws cited in this testimony and that of
other witnesses should be repealed, so as to allow maximum flexibility in utilizing
private sector resources.



10

1991. Federal civilian employees are now paid, on average, 45 percent more
than private employees.

Federal workers are compensated, on average, at least 30 percent more than
above state and local government workers. If federal employees were compensated
at the same average rate as state government employees, nearly $25 billion would
be saved annually.

Inside the beltway, there is the perception that federal workers are less well paid
than private sector employees doing similar work. This is based upon federal sur-
veys that are frankly incomplete, misleading and outrageous in their results. The
federal surveys are limited to wages—as if the more expensive federal fringe bene-
fits have no value—as if the extra paid time off has no value—as if superior federal
security has no value.

American Legislative Exchange Council research indicates that, where federal
government and private employee wages start out equal, inherent federal employ-
ment advantages create 50 percent greater value over a career for government em-
ployees. This amounts to a nearly $600,000 advantage for government workers who
start at the same rate of pay as private workers.

‘And then there is productivity. The lack of competitive incentives allows govern-
ment staffs to become larger than necessary. ALEC has identified substantial vari-
ation in productivity among state governments.

‘ALEC estimates that, when all advantages of government employment are consid-
ered, including sub-market productivity, it is possible that government employment
costs exceed market rates by nearly 75 percent.

In the competitive market, customers determine employee compensation. Private
companies do not have the freedom to artificially raise employee compensation. In
the private sector, the prices that customers are willing to pay for goods and serv-
ices constrain how much will be available for employee compensation, investment
and distribution of earnings to stockholders (including employee pension plans). A
company that raises employee compensation above levels that customers are willing
to pay will lose market share and eventually close, taking with it the jobs of employ-
ees and the investment of owners.

COMPETITIVE CONTRACTING

The realization that government employee compensation often exceeds market
rates has led to an increasing use of competitive contracting.

Competitive contracting is the provision of a public service through a competi.
tively awarded contract. It has been used for decades by private and public organi-
zations to ensure that goods and services of a defined quantity and quality are pro-
duced for the lowest possible cost.

The public agency seeks competitive bids to provide a particular public service.
The public agency establishes quality and quantity specifications. The competitive
market responds to the invitation of the public agency, and one or more producer
is selected to provide a specific service for a period of time. The public sector retains
policy control over the service, while the competitive market produces the service
under public scrutiny.

‘There are five basic steps in the process:

1. The public agency seeks competitive proposals to deliver a specific quality
and quantity of service for a defined period of time.

2. The public agency may submit its own cost proposal, capturing all attrib-
utable costs, and subject to the same terms and conditions that apply to private
proposals.

3. A contract is awarded to the lowest responsible and responsive public or
private proposer who demonstrates an ability to provide the same quality and
quantity of public service at a cost lower than that of the public agency,

4. Contractors, public or private, that fail to provide the service as specified
are financially penalized or replaced.

5. New competitive proposals are sought in sufficient time to award a new
contract for service commencing at the expiration of the contract. New competi-
tive proposals are sought regardless of whether the incumbent contractor is @
private company or the public agency itself.

Competitive contracting does not necessarily result in private operation of public
services. It merely requires that the public service be provided according to the spec-
ifications of the public agency for the lowest possible cost. titive contracting
removes the present bias toward in-house public service provision and replaces it
with a results-oriented approach in which the lowest cost qualifying proposer, public
or private, operates the service.

petitive contracting reduces public costs in three ways:



70

ment is determined to contract out assignments to contractors who have been prov-
en to be less effective and less efficient?

Let me make one thing perfectly clear and unmistakably understood: Federal em-
plovees do not fear competition with service contractors. What federal employees
ear is a contracting-out process that is intentionally crafted to keep them from com-
peting.
9. Federal Employees Must Be Allowed To Challenge Agencies’ Wasteful Contracting-

Out Schemes

In the past, representatives of federal employees like AFGE had used collective
bargaining grievance procedures to force agencies to comply with the requirements
of A-76. e union contracts stood as a safeguard against cost-inefficient service
contracting decisions. However, a recent court decision held that a union could only
contest contracting-out decisions in an agency’s internal appeal system, a process
that often does little more than rubber-stamp management’s decisions. Con-
sequently, there is no longer any effective forum to report the failures of agencies
to comply with important federal acquisition regulations. | urge the Members of the
Subcommittee to include in any reform of the OMB Circular A~-76 process a provi-
sion that would expressly allow unions to use a negotiated grievance procedure to
challenge violations of the Circular.

10. Contract Administration Must Finally Be Taken Seriously

ably, “contract administration” is the biggest misnomer in the federal govern-
ment’s entire lexicon. It is rare that any such “administration” ever occurs, and,
even when it does, the so-called administrators usually don’t know anything about.
contracts. Service contracting personnel concentrate their efforts on the awarding of
contracts and the obligation of funds, not the oversight of contractor performance.
As OMB itself reported, agencies believe that they are contracting for mission-essen-
tial services; as a result, most of their contract administration efforts focus on en-
suring that they receive the required services with costs often becoming a mere pe-
ripheral concern.!! In addition, most contract administration is not done by con-
tracting officers who are skilled in determining whether the service was actually
rendered for the price specified in the contract, but rather by program officers, who
are merely determined to have the service rendered, regardless of cost.12

As GAO has recommended, senior managers must be made accountable for con-
tract administration.!3 Also, the federal government must train more contract offi-
cers. Refusal to do so for fear of incurring additional expense is a classic example
of being penny-wise and pound-foolish. It does the taxpayers no good for an agency
to award a contract in pursuit of greater efficiency only to lose those savings be-
cause of poor or even non-existent contract administration.

Much of the refusal to take contract administration seriously stems from the per-
nicious notion held by many senior agency managers that oversight isa frill, an op.
tional extra that can be discarded during times of austerity. Wrong! It’s precisel
during times of austerity that we must redouble our efforts to eliminate the massive
amounts of waste, fraud and abuse in service contracting. For all of its occasional
advantages, service contracting does have extraordinary disadvantages, the difficult
and expensive problem of monitoring contractor performance being only the first
and foremost of those problems. Contract administration is one of the costs of doing
business with contractors. It’s that simple. And because it is a cost, contract admin-
istration should also be included in any cost comparison analyses.

11. The Use of Wasteful Cost-Reimbursable Contracts Must Be Abandoned

Contractors have insufficient incentives to provide quality service for the lowest
cost under the current payment system. The federal government uses two basic pric-
ing arrangements for purchasing services: fixed-price contracts and cost-reimburs-
able contracts. Fixed-price contracts require a contractor to assume responsibility
for performing the agreed upon work at an established price. Cost-reimbursable con-
tracts, on the other hand, reimburse contractors for all allowable costs incurred, and

MOMB, Summary Report of Agencies’ Service Contracting Practices (January 1994), p.v.
“Contractin inel concentrate on the award of contracts and the obligation of funds.”

12 Jbid. “Contract administration, particularly in most civilian agencies, 1s conducted by agency
program sta(T and not by contracts personnel. The program staffs are often ill-trained in con-
tract administration.”

13 GAO, FEDERAL CONTRACTING: Cost-Effective Management Requires Sustained Commit-
ment (GAO/T-RCED-93-2) (December 1992), p. 13. “The persistence of contract management
problems and the inattention to contracting audits indicate a need for top agency managers to
Intervene, raise the level of concern throughout the agency and see issues through to resolu-
tion.”



52

a. Giving them priority consideration for available positions within the agency;

b. Establishing a Reemployment Priority List and a Positive Placement Program;

c. Paying reasonable costs for training and relocation which contribute directly to
placement;

d. Coordinating with:

(1) The Office of Personnel Management to ensure adversely affected employ-
ees have access to Government-wide placement programs, including the ‘OPM.
operated Displaced Employee Program (DEP) and the Interagency Placement
Assistance Program (IPAP); and

(2) The Department of Labor on private sector job opportunities; and

e. Consistent with post employment restrictions, advising adversely affected em-
ployees that they have the right of first refusal for employment on the contract in
Positions for which they are qualified and assisting them in applying for such em-
ployment.

3. Agencies should notify affected employees as soon as possible of an impending
cost comparison study and periodically keep them informed of its progress.

4. Guidance on employer-employee relationships and other personnel matters that
affect Federal employees involved in contracting situations can be obtained from the
Office of Personnel Management.

While the above mentioned “right of first refusal” is indeed a positive element in-
cluded in the Circular, it still provides no real guarantees to federal employees like-
ly to be displaced when an agency decides to contract out _a particular government
service. In testimony before this Subcommittee last. week, GAO Director of Planning
and Reporting, L. Nye Stevens states that although GAO had not done any recent
work on the question of what happens to displaced federal workers under the A-
76 program, several studies conducted in the 1980’s may provide the following in-
sight:

“For example, in a 1985 report on the program’s impact in DOD, we found
that the majority of federal workers whose jobs had been contracted out ob-
tained other federal employment, most often at the same installation. We found
that of 2,535 DOD employees we sampled who worked in activities that were
contracted out in fiscal year 1983, 74 percent had found other government jobs,
most often at the same installation; 7 percent went to work for the contractor;
5 percent were involuntarily separated; and most of the remaining 14 percent
resigned or retired. Of those who obtained other government positions, about 56
percent received lower grades, and about 44 percent received the same or higher

ades.”

Subsequent GAO follow-up with those employees who had been involuntarily sep-
arated or went to work with contractors revealed that over half were reemployed
with the federal government; over half indicated that they had received unemploy-
ment compensation and/or public assistance; and 53 percent who went to work for
contractors said that they received lower wages, with most reporting that contractor
benefits were not as good as their government benefits.11

It is critical to note, as GAO does, that the current downsizing environment may
not provide the same opportunities for displaced federal employees to find employ-
ment in another government job.!2 This point is further illustrated by GAO’s review
of OPM’s interas acy placement program established to assist separated employees.
“According to OPM, etween the program’s inception in December 1993 and Septem-
ber 16, 1994, from’an inventory of 2,018 registrants, agencies made 204 job offers.
Among other things, OPM attributes the low number to the fact that agency
downsizing has substantially reduced the number of vacancies.'4

Under Circular A~76, federal employees also have a right to appeal to their agen-
cy within 15 days of the contract announcement. NTEU has long been concerned
that 15 days is by no means sufficient time for a local union to use its limited re-
sources to try to put together an adequate appeal package. The procedure does not
authorize an appeal outside the agency or a judicial review.

Section 7(cX6) of OMB Circular A-76 which functions as an additional safeguard
against cost-inefficient service contracting decisions, also serves as an employee pro-
tection. The provision prohibits the conversion of in-house functions to contract,
“solely to avoid personnel ceilings or salary limitations.” In the past, unions have
used collective bargaining grievance procedures to report such violations. However,
a recent court decision held that a union could only raise Section 7(cX6) violations

31GAO, GOVERNMENT CONTRACTORS: An Overview of the Federal Contracting-Out Pro-
gram (GAO/T-GGD-95-131) (March 1995) p. 6.
32GAO, GOVERNMENT CONTRACTORS: An Overview of the Federal Contracting-Out Pro-
gram, (GAO/T-GGD-95-131) (March 1995) p. 6.
13 Ibid. p. 6-7.


50

In these times of fiscal constraint, it is simply unconscionable for the government
to waste money in this manner. This is more troubling when it becomes apparent
that if service contracts were subject to the cost analyses in Circular A-76, this
money would not have been wasted. The March 1994 GAO Report cited above recog-
nized this point, and specifically recommended that OMB extend the A-76 cost com-
parison requirement to advisory and assistance services. NTEU supports this posi-
‘ion.

NTEU strongly believes that subjecting service contracts to Circular A-76 would
address a major shortcoming in the contracting process. However, some agencies re-
pet that even when they are able to demonstrate through studies that it would be
less expensive to perform the work in-house rather than contract it out, they are
not authorized to hire additional | government personnel.? Apparently, although there
is no room in their personnel budgets, there is plenty of room in procurement budg-
ets to accomplish the work. “Agencies often assume that additional government per-
sonnel will not be authorized and, therefore, there is no alternative but to contract
for needed services. Several agencies requested that they be given more flexibility
with respect to determining whether work should be performed by agency or con-
tractor staff. Examples were reported where the government (based on the agencies
projections) could save several millions of dollars by performing functions directly
rather than having them performed by contract.” 10

It is ironic to note that even tighter restrictions on hiring federal workers are in
fact leading to what has been shown to be more expensive contracting out of serv-
ices. Strict caps should not be manipulated to justify increased contracting out
of services. Under this scenario, reinvention would be limited to a ledger paper
change—the procurement column having a far larger debit and the FTE column in-
dicating a decrease in government employees.

OMB should review the cost effectiveness of bringing contracted work in-house
when there aren’t sufficient FTEs to perform the work. 'U recommends that the
Committee seriously consider the fact that more flexibility with the budget limita-
tion on FTEs is necessary when it can be demonstrated through studies that it
would be less expensive to perform the work in-house but government personnel
ceilings prevent that decision. Only when it is clearly understood what work an

mney is to perform can the appropriate level of staffing be realistically determined.

Infortunately, however, FTE downsizing requirements continue to be driven with-
out this critical evaluation or an appropriate assessment of the types of employees
and the appropriate number needed to provide essential services in an efficient and
effective manner. NTEU strongly believes that agencies should be given the flexibil-
ity to use their budgetary resources so that funding for contracting-out purposes
could be used to hire additional FTE if a cost analysis indicates that it would be
more efficient to conduct a particular service in-house.

NTEU is also concerned that again because ‘of agency personnel ceilings, once a
function goes to a contractor it cannot be converted back to in-house because of FTE
ceilings. Fn testimony last October before the Civil Service Subcommittee of the
House Post Office and Civil Service Committee, GAO stated: “GAO believes that
agencies should have the flexibility to accomplish their work in the best, possible
manner and should not be constrained by arbitrary personnel ceilings, which could
be counter productive and inefficient in certain circumstances. Agencies should de-
termine if contracting out for services or using government employees is more ad-
vantageous. To make the best decision for the government, agencies need informa-
tion that permits managers to make meaningful decisions. Cost comparisons and
consideration of non cost factors can provide such needed information.”

‘As the government attempts to reinvent itself, it will become even more important
that contracting out of government functions also be used only when truly shown
to be more cost effective. As agencies attempt to downsize and offer employees in-
centives to leave federal service, they should not be allowed to then contract out the
work of the former employee. Under current A-76 procedures, a cost comparison is
required for functions of 10 or more FTE. However, Section 5(g) of the Federal
Workforce Restructuring Act requires the President to take appropriate action to en-
sure that agencies do not convert the work of employees included in the proposed
272,900 reduction target or of employees who accept buyouts to contract per-
formance, unless a cost comparison demonstrates a financial advantage to the gov-
ernment. Therefore, if one FTE is identified for contracting out, a cost comparison
must be conducted. This important provision should be maintained.

Without appropriate service contract reform, downsizing is likely to continue to
lead to an increase, not a decrease in federal spending. In view of the current tide

°OMB, Summary Report of Agencies’ Service Contracting Practices, (January 1994), p. V.
wibid.


56

that is the SEC, the IRS, and the procurement cost principles—you
must allocate every penny of overhead or you are committing fraud.

So it’s a black and white situation. But to try to answer your
question, if it is the ultimate decision to continue in some degree
cost comparisons, then it is well within the reach of the govern-
ment to commission some independent, highly qualified organiza-
tion, like perhaps one of the best business schools in the Nation,
to look at two or three representative government agencies and lit-
erally force them, analytically force them, into a full direct and in-
direct cost—that is, an overhead and direct cost—model, and in the
process get much better estimating relationships or estimating
methodology than we have today.

Real simple. It’s just that we haven’t had the collective will to
do that, and we've continued, through the A-76 and the Defense
Department depot and other enterprises, with a rather flawed sys-
tem that politically and professionally is not accepted by the com-
Taunity.

Mr. Tosias, Mr. Mica.

Mr. Mica. Mr. Tobias.

Mr. Topas. The A-76—I’m stunned to hear that we shouldn’t
have cost comparisons; that we should just do it, we should just ac-
cept the fact that it would be cheaper without any evidence. But
that aside, what’s compared in A-76, when the comparisons are
computed in-house—personnel costs, all personnel costs, all pay, all
benefits; material and supply; other specifically attributable costs;
overhead costs; cost of capital; one-time conversion costs; and a
total.

The contract performance cost; the contract price; the contract.
administration; the gain or loss under the disposal or transfer of
assets; and then the contractor gets to deduct—gets to deduct—the
Federal income tax that they would pay as a result of getting the
contract. So I don’t think these folks are disadvantaged in this
arena. And second, the idea that, when government is computing
its costs, that it doesn’t include the cost of rental is just not accu-

rate.

GSA charges everybody a SLUC fee, and that’s what goes into
the comparison. I said it right, “SLUC,” a SLUC fee. And they
charge, actually, about, oh, I think it’s somewhere around 25 per-
cent over the actual cost to take care of the building. So I don’t
think that the costs are excluded from this process. And I think
that the A-76 is very comprehensive in what it includes.

So I think that the issue is, whether or not Congress requires,
in this $12 billion arena, particularly, that costs be compared and
that Federal employees get an opportunity to compete and get back
work that goes out.

Mr. Mica. I'll defer now to my ranking member, who’s been wait-
ing patiently. Maybe we can get back to some questions in a mo-
ment. Thank you. Mr. Moran.

Mr. Moran. Thank you, Mr. Chairman. Mr. Tobias, you feel com-
fortable with the A-76 comparison, or would you make changes to
it if you had your druthers?

Mr. Tos1as. You know, I think that the main problem with the
A-76 process is the speed with which it’s done. I think that that’s
the real problem, and as a result, very few people are satisfied with


60

In the private sector, that would be cause for immediate legal
suit. That’s stealing an entity, and with most organizations, the
sum is greater than the individual parts. And if you buy up the

arts, then you lose the value of the contracting firm. I couldn’t be-
lieve that that happened, and I think we need to get into that. But
there are extremes on both sides.

There are abuses on both sides. I think what we need to do is
to come up with some criteria where we can reach the closest to
consensus that it is fair that it takes into consideration not just the
quantitative aspects, but the qualitative considerations as to what
is in the long-term best interest of the Federal Government, and
ultimately the American people.

As was said, this is a very controversial area. But I’m glad that
you're taking it on, Mr. Chairman. And I think it’s imperative that
we take it on, given what I think is a rush to downsize as much
for political reasons as to accomplish any long-term savings and
personnel reductions. But we're going to have to figure out how

est to contract out in a way that is fair to the people and consist-
ent with our other responsibilities that we have a legislative re-
quirement to carry out.

We have the right people here, and I would hope that we can
have—that this is not the only time that you sit down at the table
together. We have conflicting perspectives and interests, but rep-
resenting both interests in my district, I can see that there are a
number of areas where there can be some common agreement. And
some of the external factors kind of force that agreement I think,
such as the downsizing.

But again, I’ve taken a lot of my time, Mr. Chairman, I appre-
ciate the fact that you’re having the hearing and the opportunity
to get some of this important information and perspective on the
record.

Mr. Mica. Well, I thank the gentleman, and maybe if we could
get Mr. Tobias to consider moving into your district, we could get
all thtee of you together.

Mr. Tosias. I'll give that serious thought, Mr. Chairman.

Mr. Mica. But all kidding aside, we do appreciate your line of
questioning and also your response. There were a couple of areas
where I just might ask a question or two. I think at least two of
the panelists talked about removing statutory constraints or re-
strictions. I think there’s some reference to section 5(g), and some
bad experiences, I guess, with EPA.

Would the two of you gentlemen, Mr. Engebretson and Mr.
Concklin, comment for a moment about what you think needs to
be done on removing some of these constraints? Mr. Engebretson.

Mr. ENGEBRETSON. If I could just do one other thing, and that
is to add to my Congressman’s remarks. And that is that yes, there
are abuses on both sides, no question about that; and we'd be the
first to admit it. There are bad apples in every barrel, and we know
that as well. But we still have one basic question and that is there
are many positions that could be contracted out.

We're not sure why they have to be done by the government. And
I can give you some examples, such as motorpools or vehicle main-
tenance. We just don’t understand why vehicles have to be main-
tained by government employees, when the private sector can do it


48

percent of the government personnel-related costs and 25 percent of the acquisition
of any new capital assets required to fulfill the task. Also, commercial activities of
Tess than 10 Full Time Equivalents (FTE), research and development functions, and
non-recurring activities are exempt from the cost comparison requirements of the
circular.

In contrast, however, service contracts, including “advisory and assistance” (con-
guiting) services which GAO estimates that the federal government spent almost
$12 billion on in FY 19921, are subject to OMB Policy Letter No. 93-1 which pro-
vides detailed guidance on managing and controlling the use of service contracts in-
gluding advisory and assistance contracts. Although the OMB Policy Letter No. 93-
1 emphasizes cost-effectiveness and provides guidance on managing and controlling
the use of service contracts, it does not specifically require agencies to develop a cost
comparison between contractor and in-house performance.? GAO has reported that
its analysis of studies by GAO, the Department of Energy and the Department of
Defense suggest that cost comparisons can be a useful management tool for assist-
ing government agencies in deciding how to acquire needed services in the most cost
effective manner.’ NTEU strongly believes that this sort of cost comparison and
analysis is a critical element that should be explicitly indicated in the rules govern-
ing all service contracts.

ile OMB Circular A-76 does in fact require agencies to conduct a cost analysis
to determine the most cost effective approach for providing certain commercial serv-
ices, agencies, unfortunately, often disregard this rule. In a January 1994 report en-
titled Summary Report of Agencies’ Service Contracting Practices, OMB itself re-
ported that cost analyses and independent government estimates are not performed
yy many agencies prior to renewal, extension, or recompetition of existing contracts.
OMB further concedes that in far too many instances, cost estimates are not even
prepared prior to entering into new contracts.

‘A common criticism of the A-76 program is that it is burdensome, time-consuming
and complex. Depending on an agency's workload and financial accounting systems,
the development of the historical data necessary to prepare a performance work
statement may take considerable time and effort. At DOD the study time has nearly
doubled to an average of more than four years since the late 1980's. During this
process, employees do not know their future employment status and employee mo-
rale and productivity declines. In fact, the President's Council on Management Im-
provement reported that “. . . agencies believe that the A-76 savings do not com-
pensate for the aggravation, loss of staff productivity, reduced staff morale and at-
EStion that result from doing a study.” The three step process requires a major in-
veatment of time and effort and relies heavily on the procurement process to com-
plete. This presents the Subcommittee with yet another opportunity to improve on
the current process.

Last month, the GAO released its latest report criticizing federal contracting out
procedures. The February 1995 report entitled Defense Contract Management, aptly
points out that contractors have a responsibility to support their shareholders by
maximizing profits. GAO reports that “Serious DOD financial control weaknesses
have resulted in large and numerous erroneous and in some cases, fraudulent pay-
ments to defense contractors. During a 6-month period in fiscal year 1993 defense
contractors returned to the government $751 million, and in fiscal year 1994, they
returned $975 million, most, of which appears to have been overpayments that were
detected by the contractors.” The report further states that weaknesses in contractor
procedures for identifying and excluding unallowable costs from overhead submis-
Fons have contributed to DOD inappropriately reimbursing contractors for unallow-
able overhead costs. During fiscal year 1991-1993, DOD auditors questioned about
$3 billion in contractors’ overhead charges.

it is clearly the responsibility of the Congress to properly protect the government's
and taxpayers’ interests, and this responsibility demands a thorough review by this
Committee of the federal dollars spent on contracting out of federal services that
can be accomplished at less expense by federal workers. The current emphasis on
acquisition reform and the recently passed Federal Acquisition Streamlining Act of
1994 are positive steps toward strengthening the acquisition system. However, as
the above referenced GAO report states, these actions can be successful only by en-
suring the integrity and faimess of the procurement and contracting process.

Lax management and ineffective oversight of contracts also continues to plague
many federal agencies. As a result, contractors are receiving bonuses for mediocre

1GAO, GOVERNMENT CONTRACTORS: Measuring Costs of Service Contractors Versus
Federal Employees (GAO/GGD-94-95) (March 1994) p. 1.

2Ibid. p. 2.
aia.”


20

where it’s contracting out about 40 percent of its service. Contract-
ing out on average, about 3 or 4 percent, one could, over a longer
period of time, use attrition to protect the albeit bloated and unfair

enefits of current transit workers who make double the market
rate for unionized workers in the same industry.

One could protect them by just converting to competitive con-
tracting through the driver attrition rate—just don’t hire new driv-
ers at. $16 and $18 an hour. Hire them at the competitive rate—
unionized, nonunionized rate—and you could affect the economies
over a 10-year period very easily. And what’s happened in San
Diego, where they have done this, their costs have actually gone
down, relative to inflation, about 30 percent since 1979.

And at the same time, the public transit agency now has a deal
with the amalgamated transit union whereby its new drivers, for
contract services, it’s able to hire at competitive rates. And it’s now
bidding successfully against private carriers. So there is a model
out there. The problem is, I believe, with respect to that particular
issue, the Congress needs to repeal 13(c) and take away the bar-
riers to going further, with respect to that kind of a conversion.

Mr. Mica. All right. Thank you for responding to the questions
that I had. I see our ranking member is back. Mr. Moran, we've
had additional testimony while you were gone, relating to some of
the statistics that Mr. Cox gave the subcommittee. And I note that
you were concluding your business on the floor, but yield to you
now for any questions you may have for the witness.

Mr. Moran. Thank you, Mr. Chairman. Mr. Cox has put plenty
of testimony in the record. If I were to ask questions, some of his
responses are more than likely to be duplicative, and we have sev-
eral witnesses after Mr. Cox. So I think at this point, in the inter-
est of efficiency of these hearings, that I’ll defer any questions.

Mr. Mica. I would like to thank you, Mr. Cox, and let me see if
Mr. Bass has any questions.

Mr. Bass. No questions, Mr. Chairman.

Mr. Mica. Again, we thank you for your testimony. I know I
questioned you at length, and appreciate your responses. We may
have some additional questions from panel members who are not
with us this afternoon. We'll leave the record open, and hopefully,
you can respond.

Mr. Cox. I'd be very happy to.

Mr. Mica. Thank you.

Mr. Cox. Thank you.

Mr. Mica, We've had a request from a Member, and I always try
to accommodate them. Our delegate from the District of Columbia,
Eleanor Holmes Norton, has asked to testify before the committee.
And I'd like to welcome her to the Civil Service Subcommittee; she
serves on our full committee. Welcome, and we'll offer you this op-
portunity to comment now.

STATEMENT OF HON. ELEANOR HOLMES NORTON, A REP-
RESENTATIVE IN CONGRESS FROM THE DISTRICT OF CO-
LUMBIA

Ms. Norton. Thank you very much, Mr. Chairman. I very much
appreciate your looking into the contracting area. As it turns out,
it is the cost of government that has seen the least inspection, and,


38

you've had submitted for the record and heard several already
today. I won’t overly digress into that, except to say that there are
a number of them; they’re perverse; they are narrow; and they're
completely contrary to the freedom that a public sector policymaker
and manager ought to have to manage their agency, irrespective to
the degree to which they may ultimately privatize all or parts of
that agency.

There is one aspect of government behavior that I want to allude
to because, as was noted by a previous speaker, it’s a disquieting
development, and I think it needs to be dealt with. And that is that
some government agencies are going the other way; that is, they
are tending to in-source work or increase their Federal employee
count by canceling ongoing and successful contracting out issues.

The best example of that is the Environmental Protection Agen-
cy, which has embarked on that in a very arbitrary and destructive
way. They are in fact increasing their civil service population at
the expense of long-term research and development contractors
who have performed for them in distinguished fashion with no de-
fensible rationale. And there are other manifestations which we
can provide for you.

Finally, in terms of recommendations, we recommend three
things. First of all, that the Congress pass an unequivocal law that
affirms and endorses privatization as public policy which we want
to take seriously and embark on and move down that path in a real
way. Second, we recommend that either through a legislative impe-
tus, or perhaps at the executive level, that there be created a self-
perpetuating process, because the cultural resistance to privatiza-
tion is more than obvious in the history of A-76 and similar enter-
prises.

And in thinking about such a self-perpetuating process, there are
at least three ideas that we would commend to you. One is some
variation, some careful variation, of what the Department of De-
fense has done with their Base Realignment and Closing Commis-
sion, which has a self-animating or self-perpetuating characteristic
to it that has worked rather well. Second is, continued and judi-
cious use of ceilings and reduction goals to provide stimulus to
downsizing and right sizing.

And third is requiring all agencies—and this is only an exam-
ple—but all agencies to include in their budget submission, and
price in their budget submission each year, their top 10 privatiza-
tion targets that they intend to effect in the next year or two or
three. And finally, we would urge you to remove this cluster of
statutory disincentives to privatization that’s been well documented
here today.

In summary, we think the Nation is on the threshold of a fun-
damental transformation in how we are thinking about and how we
are acting on the balancing of responsibilities between the public
and private sector, moving into a privatization era. The notion of
limiting the doing functions of government to those things that are,
in fact, inherently governmental we think is thoroughly sound and
thoroughly feasible.

The ultimate result for all of us will be saving of money and im-
provement in performance. And we commend you for your thought-


69

this determination would be the end of the story: an important service is delivered
in the most cost-effective manner possible; the nation’s taxpayers enjoy a small vic-
tory against waste; the federal government uses the cost savings to address other
pressing needs; contractors, finally spurred on by real competition, become leaner
and more efficient service providers; and federal employees overcome a biased pub-
lic/profit comparison process and are justly rewarded for their quiet competence.

‘Aithough that, is how the story should end, it doesn't always work out that way
because of the federal government’s stubborn determination to snatch defeat from
the jaws of victory. Yes, even when the publiciprofit comparison process required by
OME Circular A-76 shows that it would be more efficient to render a service in-
house, the federal government often still insists that the service be contracted out—
cost savings be damned!

As OMB itself reported early last year, several agencies—including the Depart-
ments of Agriculture, Health & Human Services, Housing and Urban Development
(HUD), State, Education and Treasury, as well as the Environmental Protection
Agency—said ‘that they each could have saved several million dollars by performing
functions directly rather than having them performed by contractors but did not do
so because either their requests to OMB to take on the necessary full-time equiva-
Jents (FTEs) were refused or the agencies were so sure such requests would be re-
fused that they were not even submitted.

As the Report of the National Performance Review clearly states, the federal gov-
ernment must avoid using FTE controls to produce downsizing because that tech-
nique is “frequently arbitrary (and) rarely account(s) for changing
circumstances . . . Organizations that face new regulations or a greater workloa
don’t get new FTE ceilings. Consequently, they must contract out work that could
be done better and cheaper in-house.”® Yostead of FTE controls in isolation, Con-
gress must define the scope of an agency’s mission. Only when it is understood what
work an agency is to perform can the appropriate level of staffing be realistically
determined, PTE controls and arbitrary stall reduction targets cannot possibly lead
to right-sizing.

If the federal government is ever to become a better shopper for services, it is ob-
vious that senior managers must be given much greater flexibility in using their
budgetary resources so that funding for service contracting can be used to hire addi-
tional FTEs in the event a public/profit comparison process indicates that it would
be more effective and more efficient to render a particular service in-house.!

If I might be permitted to make a personal aside: Nothing in all the years that
I have worked to advance the interests of federal employees and their families has
made me so angry as the federal government’s inexplicable determination to con-
tract out a service even when it’s been proven that the service could be more effi-
ciently rendered in-house. As I discussed earlier, federal employees have made ex-
traordinary sacrifices in order to reinvent the federal government and make it more
effective and more efficient. But why should federal employees make all those sac-
Tifices to become the leaner and more capable service provider if the federal govern-

OMB, Summary Report of Agencies’ Service Contracting Practices, (January 1994), p.v.
“Agencies often assume that additional government personnel will not be authorized and, there-
fore, there is no alternative but to contract for needed services. Several agencies requested that
they be given more flexibility with respect to determining whether work should be performed
by agency or contractor staff. Examples were re where the government (based on the
agencies’ projections) could save several millions of dollars by performing functions directly rath-
er than having them performed by contract.” In the report's Appendix 2, p. 30, OMB rej
that it was the consensus of the agencies it surveyed that “OMB needs to review the cost effec-
tiveness of bringing contracted work in-house when there aren't sufficient Full-Time Equivalents
(FTEs) to perform the work. More flexibility with the budget limitation on FTEs is necessary
when it can be demonstrated through studics that it would be less expensive to perform the
work in-house but government personnel ceilings prevent that decision.”

Although this alarming information in OMI's report is often ignored or brushed off by the
agency's own officials when testifying before Congress, it was corroborated last week in GAO's
testimony. “(W)e have found that the personnel ceilings set by OMB frequently have the effect
of epeouraging agencies to contract out regardless of the results of cost, policy, or high-rink stud-
ies.” General Accounting Office, GOVERNMENT CONTRACTORS: An Overview of the Federal
Contracting-Out Program (GAO/T-GCD-95-131) (March 29, 1995), p. 12.)

°Report of the National Performance Review, Creating A Government That Works Better &
Costs Less (September 1993), p. 19.

1To achieve the A-76 program's goal, our work has shown that once agencies consider the
comparative costs of contracting-out versus using in-house personnel and relevant noncost fac-
tors, the agencies then need to have the flexibility to have the work performed in the most cost-
effective manner. Because of the federal downsizing in process, agencies may lack the necessary
flexibility to perform activities in the manner that is most beneficial to the government.” (Gen-
eral Accounting Office, GOVERNMENT CONTRACTORS: An Overview of the Federal Contract-
ing-Out Program (GAO/T-GGD-95-131) (March 29, 1995), p. 14.)



CONTRACTING OUT: CURRENT ISSUES

WEDNESDAY, APRIL 5, 1995

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

The subcommittee met, pursuant to notice, at 1:55 p.m., in room
311, Cannon House Office Building, the Honorable John Mica
(chairman of the subcommittee) presiding.

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

Staff present: George Nesterczuk, staff director; Daniel Moll, sen-
ior policy director; Garry Ewing, counsel; Ned Lynch, professional
staff; and Caroline Fiel, clerk.

Mr. Mica. If I could have your attention, I'll call the meeting of
the Subcommittee on Civil Service to order. We have delayed a few
minutes as our ranking member was making remarks on the floor.
Several of our other Members are engaged in the debate on the
floor at this time and several committee markups are going on this
afternoon. But welcome to our guests and witnesses to this sub-
committee hearing.

I'll start with some opening remarks. Today, we resume delibera-
tions that we began last week when we heard from the General Ac-
counting Office and the Office of Management and Budget. It’s ob-
vious from that initial hearing that a significant number of govern-
ment employees are engaged in functions that could be cost-effec-
tively performed in the commercial marketplace.

Government agencies must concentrate their resources on core
policy and authoritative functions. Wherever possible, Federal
agencies should utilize the competition afforded by the private sec-
tor, and try to utilize that competition in support of commercial
and administrative activities. While that principle served as a
standard for the executive branch for 40 years, practice and prin-
ciple do not always coincide, as we’ve seen.

I was encouraged that the Office of Management and Budget
reaffirmed support for the Principle I just spoke about, and I hope
we can work with them and other agencies to make contracting out
a more substantial part of our efforts to achieve genuine reform in
government. However, the apparent foot-dragging in the contract-
ing out process—where major agencies take many years to com-
plete routine management studies—serves neither government
agencies nor the public interest.

I'm concerned about the lack of reliable data to evaluate con-
tracting policies that have been in place for 40 years. I’m also dis-
appointed that the Office of Personnel Management appears to

(D


72

14, Agence; Managers Must Audit Their Contractors’ Bills as If They Were Spendi1
fae loney They pens
Agency managers must conscientiously audit the work of their contractors to en-
sure that the government pays no more than what it should for the services it pro-
cures. As GAO reports, “(i)ndependent audits show millions of dollars in unallow-
able and questionable costs have been charged that do not contribute directly to the
agency's intended mission.” ® And during just a six-month period in FY 93, defense
contractors returned to the government $751 million, and in FY 94 they returned
$957 million, most of which appears to have been overpayments.!® If those gigantic
sums are being returned, would it be too cynical to ask just how much money is
being kept?
Requiring agencies to systematically audit a representative number of their con-
tracts will keep the government from overpaying and being overcharged and help
to provide service contractors with the incentives necessary to improve their work.

15, Agency Managers Must Prevent Service Contractors From Taking Federal Prop-
erty and Using it as Their Own

Better auditing will also allow the federal government to recover the expensive
materials and equipment agencies purchase or their service contractors. Imagine
for a moment that you are a homeowner who has determined that it would be more
effective and more efficient to hire someone to paint your house than to do the work
yourself. And imagine that after hiring this person, presumably in possession of the
requisite skill and ability, you pay her the money needed to procure the materials

equipment necessary’ io perform the service, i.e., paints, brushes, trucks, lad-
ders, smocks, etc. Then, imagine that after completing your assignment, this splen-
didly-equipped painter keeps the materials and equipment you provided for the
painting of your house, and then prooeeds to use those supplies for her own benefit.
ell, something very much like that happens in too many federal service contracts
because the law does not specifically provide for the return of such materials and
juipment, and neither do most contracts.
ir. Chairman, what would you say if I told you that billions and billions of dol-
Jars in government property had mysteriously disappeared? Would you think that
1 was telling fou about some episode of “The X Files” in which kleptomaniacal
aliens visite Barth, filled up their shopping bags with federal property and then
zoomed back to the faraway but newly-enriched planet they call home? Unfortu-
nately, the losses suffered by the federal government are not the figment of a
science fiction screenwriter’s lurid imagination.

Several years ago, the House Committee on Government Operations reported that
more than $40 billion worth of materials and equipment purchased by the federal
government for use by contractors in the performance of their services was still in
the possession of those contractors.2° The report noted that, in many cases, contrac-
tors had improperly used this federal government property to perform commercial
work unrelated to the contract. In addition, accord ing to the report, some of that.
property had even been sold back to the government. Well, I think we've all dealt
with the proverbial parasitical neighbor who borrows a lawnmower, rake or some
other garden implement which he ean't be persuaded to return without dire threats
of criminal prosecution, but at least he never tried to sell us back our own property!
Clearly, many contractors will continue to have sticky fingers until Congress insists
that agencies use tougher audits to clean up the mess in contracting.

‘The findings of that 1985 Congressional report have not been followed up on by
the executive branch to determine whether these inept management practices have
been corrected and the wasteful giveaways stopped. Last year, however, GAO re-
ported that almost $75 million of government property had been lost by a single con-
tractor at just one DoE facility.2! Even worse, that $75 million figure is only the
tip of the iceberg. As GAO reports, “this amount represents only what the contractor
reported to DoE as missing. We believe that figure probably understates the actual
amount of missing property, in light of our detailed review of property management.
at the (facility).” Where are Rush Limbaugh and the rest of the radio shock show
hosts when you really need them?

18GAO, FEDERAL CONTRACTING: Cost-Effective Contract Management Requires Sustained
Commitment (GAO/T-RCED-93-2) (December 1992), p. 11.

29 General Accounting Office, Defense Contract Management (February 1995), p. 6.

29 House Report 99-139 (May 21, 1985).

21GAO, Managing DOE: Government Property Worth Millions of Dollars Is Missing (GAO/T-
RCED-94-309) (September 1994).


71

are often used when the assignment is poorly-defined or subject to change. But, as
GAO reported, cost-reimbursable contracts “provide contractors with little incentive
to control expenses and place a considerable administrative burden on the federal
government to oversee, control and identify inappropriate costs.”!4 Quite simply,
cost-reimbursable contracts give contractors a built-in incentive to low-ball the cost
and then collect even larger fees as the contract’s costs rise.

Clearly, the federal government needs to eliminate the use of co imbursable
contracts whenever possible. OMB should require that an agency justify enterin;
into any cost-reimbursable contract. It should go without saying that the federal
government is the most important shopper in the services marketplace.

‘Accordingly, the federal government should use its extraordinary leverage to
make the best possible deal, especially during times of austerity. If that means get-
ting tough with contractors and insisting that they take a fixed-price contract in-
stead of a cost-reimbursable contract, so be it. Surely the nation’s taxpayers deserve
no less than that. Besides, the need for cost-reimbursable contracts will be greatly
obviated if SoWs are sufficiently-detailed and written with an appreciation for con-
tingencies.

12. Senior Managers Must Check the Work Before Paying Their Service Contractors’
Billion Dollar Bills

At no point in the process is the lack of adequate oversight more costly than when
it’s time for the federal government to pay the bill. As OMB reported, agencies do
not always review the effectiveness and efficiency of the services performed by con-
tractors prior to the issuance of making payments.! The federal government seems
to be that rarest of shoppers: one who doesn’t care what it gets as long as it spends
a lot. AFGE members cannot relate to that sort of attitude, and neither, I suspect,
do the rest of the nation’s taxpayers. Mr. Chairman, if you had a bill in excess of
$100 billion, I know you’d check to see if the work had been done to your satisfac-
tion. So why doesn’t the federal government?

Clearly, senior agency managers need to be reminded that the goal of awarding
a contract is to have a service performed in an effective and efficient manner, A con-
tract is a means to an end, not an end in itself. Agencies should be required, as
part of the contract administration process, to review the service contractor’s per-
formance prior to payment to ensure that it achieved the requisite levels of effective-
negs and efficiency. Failure to do so will provide contractors with no incentives to
improve upon their work.

13. Bonuses Must Be Used as Rewards for Superior Work, Not as an Entitlement
Program for Underachieving Contractors

In my dictionary, “bonus” is defined as something given in addition to what
due. I can only conclude that some senior agency managers are using another di
tionary because GAO reports that bonuses are being given out to contractors who
have only just met contractual requirements, and even to some who have fallen
short, often grievously so.16 As Gad points out, if bonuses are awarded automati-
cally, they reduce the contractor's incentive to provide timely, high-quality work.!7
OMB should promulgate rules that provide senior agency managers with sufficient
guidance to make responsible decisions when deciding whether to award bonuses.

bonus should be given as a reward for superior performance, not as part of some
government entitlement program for service contractors, no matter how
underachieving.

14GAO, FEDERAL CONTRACTING: Cost Effective Contract Management Requires Sustained
Commitment (GAO/T-RCED-93-2) (December 1992), p. 3.

35 OMB, Summary Report of Agencies’ Service Contracting Practices (January 1994), p. v.

16 GAO, FEDERAL CONTRACTING: Cost-Effective Contract Management Requires Sustained
‘Commitment (GAO/T-RCED-93-2) (December 1992), p. 8. (GAO) found that EPA had granted
interim award fees to contractore whose performance was rated as less than satisfactory at the
‘end of the contract. (GAO's) 1988 report disclosed that 6 contractors in (its) sample of 11 that
had received a less than satisfactory overall performance rating earned between 29 and 45 per-
cent of the available award fees . . . Similarly, in (GAO's) 1989 review that included six DOE-
award fee determinations, the contractors’ environmental performance was rated as satisfactory
or better. As a result, these contractors received the majority of the available award fees even
though they had been cited for repeated Resource Conservation and Recovery Act (RCRA) viola-
tions. For example, one of these contractors was cited by EPA and a state for 17 RCRA viola-
tions yet received an ‘excellent’ rating for environmental management.”



74

18. Congress Must Insist That OMB Document the Actual Size of the Burs i
Service Contractor Workforce f geoning
The most distressing aspect of this crisis in contracting is that we just don’t know
how big the crisis really is because we just don’t know how big the contractor
workforce really is. Considering that the federal government now spends at least a
whopping $105 billion per year on thousands and thousands of labor-intensive serv-
ice contracts, the contractor workforce is somewhere between 1,000,000 and
2,000,000 employees. Pm sorry 1 can’t provide the Subcommittee with’a precise fig-
ure, but then our friends at OMB can't provide one either—and that’s their job. ‘And,
absent the force of legislation, the light of truth will never begin to shine on what
has been shrewdly dubbed the “shadow fovernment.” As points of reference, how-
ever, the Members of the Subcommittee should keep in mind that the 2,017,167 em-
ployees who make up the entire federal workforce earn a combined $75.3 billion in
salary per year.?5 Officials at OMB talk often about making the federal government
run more like a business. But is there a single firm in the private sector that fails
to keep any records about a mushrooming subset of employees who make up any-
where from one-third to one-half of its total workforce? I very much doubt it. In pre-
vious hearings, Mr. Chairman, you have shown great interest in this matter, and
T urge you and your staff to aggressively pursue that inquiry.

19. Congress Must Recognize That Federal Employees and Service Contractor Em-
ployees Ultimately Work for the Same Employer
As part of the reinvention initiative, OMB is charged with supervising the
downsizing of the federal government's workforce. At ihe risk of sounding fike a
New Age Prophet, I urge the Members of the Subcommittee to take a holistic view
of the federal government’s workforce. The overall federal workforce is made up of
federal employees and contractor employees. Federal employees and contractor em-
ployees are ultimately part of the same workforce.
low, reinvention requires that almost 272,900 federal employees be separated
from the federal government’s workforce during the next five years. At the same
time, however, service contracting will continue to be the fastest growing area of
federal procurement. Consequently, one part of the federal government's overall
workforce is shrinking, while the other part is growing. But since the contractor
workforce is shrouded in secrecy, its phenomenal evel of growth goes unnoticed, al-
lowing OMB to point to the reduction in the number of federal employees and claim
that the federal government’s workforce is actually shrinking. However, we know
better. Downsizing federal employees while upsizing contractor employees only
wrongsizes the federal government’s overall workforce and capsizes the American
taxpayers. In fact, absent the sort of service contracting reform we've been talking
about here today, downsizing OMB-style will lead to an increase, not a decrease, in
federal spending. This is reinvention? No, this is ridiculous!

20. Congress Must Take the First Step Towards Service Contracting Reform by Re-
ducing Contracting Expenses by 10 Percent, Saving the Taxpayers $50 Billion
but Without Reducing Services

Considering the phenomenal level of growth in federal service procurement in re-
cent years and the apparent lack of interest of the executive branch in even broadly
defining the parameters of this very serious problem, it is imperative that Congress
take the lead in dealing with the crisis in contracting. Therefore, I urge the Mem-
bers of the Subcommittee to begin that important process by working to achieve a
10% reduction in the federal government’s service contracting expenses. Such an ini-
tiative will not just save the nation’s taxpayers over $50 billion during the next five
years, but it will also ensure that agencies only resort to service contracting when
the work cannot be performed more effectively and more efficiently in-house.

To see the effect such a reform would have, let’s take a closer fook at the Depart-
ment of Energy (DoE), a mere shell of an agency in which service contracting has
been allowed to run amok—partly as a result of an FTE ceiling which has forced
much wasteful service contracting.26 In FY 93, almost four-fifths of DoE’s $24 billion
budget went towards paying off service contractors.2? Almost $11 billion was used
to provide compensation for the massive service contracting workforce.28 Dok’s fed-

25 OPM, Pay Structure of the Federal Civil Service (March 31, 1993), pps. 12-13.

28 According to GAO, DoE is one agency in particular which has been forced to take a cost
savings-be-damned policy on service contracting because of its in-house personnel ceiling. (Gen-
eral Accounting Office, GOVERNMENT CONTRACTORS: An Overview of the Federal Contract-
ing-Out m (GAO/T-GGD-95- 131) (March 29, 1995), p. 12.

# Inside Energy/with Federal Lands (March 6, 1995), p. 2.

28 Ibid.


31

functional areas that are not vital for the company to perform, and to concentrate
instead on those things that are genuinely central to the company’s business.

Now it also appears that Congress is taking seriously that same message. Thanks
to the efforts of people like yourself Mr. Chairman, Congressman John Duncan, au-
thor of HR 28, and Congressman Scott Klug, this issue is achieving a prominence
that just a year ago was unthinkable.

RECOMMENDATIONS.

In order to ensure that we don’t miss the opportunity before us, I would like to
make a few specific recommendations that we hope will be included in any legisla-
tive initiatives that might emerge from these hearin,

First, we recommend that the Congress create a high-level, independent commis-
sion to conduct a full and comprehensive review of all federal statutes and regula-
tions that could be standing in the way of progress on the contracting-out front.
Such obstacles would include the obvious—such as statutory prohibitions on con-
tracting for firefighting and guard services—and the less obvious, such as FTE
floors, unfair or unworkable competitive requirements, etc. Such an audit, if prop-
erly conducted, would go a long way toward identifying additional specific steps the
Congress needs to take to enable the kind of management changes and innovations
that are necessary.

Today, the government contracts for a substantial amount of services; but we have
only scratched the surface. For example, the Office of Management and Budget esti-
mates that there ere some 250,000 FTE that could be considered for possible con-
tract. At an average annual savings of $10,000 per position—also an OMB figure—

that means the potential exists for $2.5 billion in savings per year . . . or more
than $12 billion over five years. It should be noted, however, thai other comprehen-
sive reports, including the Grace Commission, placed the number of that

should be contracted at nearly 750,000, meaning the savings could be as high as
$30 billion or more over five years.

Clearly, where savings of that magnitude are concerned, we cannot afford to be
complacent. As such, the commission should also be charged with surveying the vast
array of functions and services now performed by the government and i lentifying
perhaps by general category, those that. are truly commercial in nature and should
thus be contracted out.

Second, Congress must repeal Section 5(g) of the Federal Workforce Restructuring
Act of 1994. Section 5 (g) requires that whenever @ government manager wants to
consider contracting out an existing government function, a cost comparison study
must be conducted. Section 5(g) was conceived and passed as a means of preventing
additional contracting out. It represents a wholly impractical, outrageously costly,
and totally ineffective approach to efficient management and must be removed.

Third, it is time to recognize that our whole system of public-private competition
is in need of substantial repair. As many of you know, the contracting of recurring
government services is principally covered by OMB Circular A-76, which establishes
a process of cost comparisons and management studies designed to justify—or not—
the conversion of existing functions to contract.

A-76 was designed specifically to enhance the rights and opportunities available
to existing federal workers. Indeed, the system established under A-76 allows the
existing workforce an opportunity to propose a new, maximally efficient approach
to its functions—known as the Most Efficient Organization, or MEO—which, in the
end, effectively serves as the government's bid, if proposals are eventually solicited
from the private sector. In such cases, the winning private sector offeror must beat
the government’s bid by 10%.

Unlike proposals from the private sector, MEOs are not subjected to any of the
past performance or other subjective, historical data that are considered so vital in
the evaluation of private sector bids. Moreover, the costs included in the MEOs are
based on a government accounting system that is functionally incapable of account-
ing for all costs, particularly indirect costs such as management salaries, capital and
overhead. On the other hand, private sector bids must include all such direct and
indirect costs.

The playing field, in short, is wildly tilted away from the private sector. In the
past there haa been little interest in leveling it—primarily because the private sec-
tor still wins close to half of all A-76 competitions. That apparently fair balance has
served to dilute any interest in making the kind of changes that will at least im-
prove the playing field. We think that attitude must change.

Furthermore, in those instances where the decision is made to retain the work
in-house, there is rarely, if ever, a follow-up audit to ensure that the government
is managing to the MEO. Considering that the average MEO study recommends a


17

they called, corporatize into direct service organizations and com-
pete in the market.

So they would compete against private companies for contracts.
In the long run, they might even compete in the market. And actu-
ally what they did there, in a somewhat unique approach, is, they
actually made them taxable as well, because they recognized that
when you provide services to public agencies, you’re actually fore-

roing tax revenues. So there is that model, as well, that has been
leveloped outside the United States.

Mr. Mica. One of the problems we've had at the Federal level is
that we have operated with—I guess you're familiar with the A—
76 circular. ‘And. we see that you have some opportunities, sort of,
to lead the horse to water; but they’re not drinking very often. And
one of the things that we may consider is some legislation in this
area. Do you think that you need legislation and then, say, a com-
bination of rules to implement this? What would be your rec-
ommendation from the models you've seen?

Mr. Cox. Well, in fact, there’s a third model that is sort. of com-
ing up in a lot of services in Europe and Australia and New Zea-
land at this point—something I would refer to as the policy-only
body kind of approach. It’s something that the Advisory Commis-
sion on Intergovernmental Relations recommended a few years ago,
but nothing has happened with.

A basic approach whereby you would essentially take away—you.
would basically set up agencies or tell your agencies that you may
do only policy, you may do only administration; and require them
to virtually purchase all of their service—whether from a public or-
ganization or a private organization. And what this has done—es-
pecially in transit in Europe—is create a situation where you've got
administrative bureaucracies who now have an incentive to save
the public’s money.

Because your problem, you see—why the A-76 process doesn’t
work very well, and why there’s been such resistance to contracting
in public agencies at the State and local government level—is, here
yeu are, you say to a public manager, we are going to reward you

ased upon the size of your budget and the size of your staff. Well,
no rational public manager is going to come in and tell his boss
that he can provide the service less with a private contractor.

It’s a prescription for disaster, with respect to your career. So
what you do is, you create a situation—and it’s very theoretical, I
know, at this point—but you create a situation where you basically
limit the scope of your agencies to policy and administration, and
force them to go outside for virtually everything they do, which will
create more of a mentality that gives the taxpayers a chance, with
respect to these organizations.

r. MICA. We’ve talked a bit about contracting out, but what
about providing opportunities for employee groups or unions or
other representative bodies to bid on this work?

Mr. Cox. Oh, they should, Mr. Chairman. Indeed, they ought to
be allowed to do that. The English example and a lot of the Euro-
pean models and New Zealand and Australia—that is a part of the
process. One of the people—I don’t know if you’ve had Ron Jensen
from Phoenix talk to you yet, but you may want to listen to him.
He administers a bunch of work the city of Phoenix does. And


23

It seems to me that the other side of wanting to make sure that
we are putting work where it can be done most efficiently and with
the least cost, is insuring ourselves that that, in fact, will happen.
We have no way of knowing that now. We have an unchecked,
unmonitored contracting out system. I believe that the case for con-
tracting out will be stronger and the morale of Federal workers
would Be better if, in fact, we could say, we know what we're doing:
and when we contract out, we know we're getting the best deal;
and we know a sufficient amount about contracted out employees
so that no question of fairness can be raised. Thank you very much,
Mr. Chairman.

1 (The prepared statement of Hon. Eleanor Holmes Norton fol-
lows:

PREPARED STATEMENT OF Hon. ELEANOR HOLMES NORTON, A REPRESENTATIVE IN
CONGRESS FROM THE DistRICT OF COLUMBIA

Today I am introducing four bills to bring some accountability and cast a search
light on the elusive, stealth “shadow government.” This government we cannot sce
is the proliferating ‘and largely unmonitored private contract service sector and work
force from which the federal government procures services. Although a huge $105
billion Goliath, this sector has emerged unscathed and uncut at a time when deficit
reduction has spared few others.

fact, service contracting constitutes the fastest growing area of federal procure-
ment. In the 1980's, federal officials acted as if they wanted to contract out the en-
tire government. From FY 1989 to FY 1992 alone, before the Clinton administration
came into office, the number of contractors doing business with the government rose
from 62,819 to 82,472. Over that same period, the amount of money shelled out to
contractors of all kinds mushroomed from $184 billion to almost $200 billion. Serv-
ice contracts alone account for $105 billion of the $200 billion spent each year on
outside contracts.

This is a government-created and financed monster that the OMB itself concedes
is out of control. How extraordinary, then, that in a budget which has left no visible
stone unturned, this large federal expenditure has remained hidden in the shadows
and has not contributed a single dollar of mandated cuts to deficit reduction, as fed-
eral agencies and employees have. How remarkable that, despite a government-wide
effort to promote efficiency, we have not considered the inefficiency of guaranteeing
contractors an invulnerable chunk of tax dollars.

The Clinton administration, to its credit, has worked hard to make service con-
tractors more responsive—for example, by proposing new performance-based stand-
ards for existing service contracts. How surprising, then, that the budget the Con-
grese is now considering proposes no cuts in funds allocated for service contracts—

us leaving untouched a huge source of potential savings—while demanding contin-
ued sacrifices from the career work force that makes up the “visible government.”
Thus far, the shadow government has not registered beneath the green eyeshades
of budget cutters, including the Congress.

The time is long past due for overhauling contracting practices. With the four bills
Tam introducing today, I hope to help begin the process of re-inventing federal con-
tracting just as the reat of our government is being re-invented.

FULL FEDERAL PAY RAISE

My first bill would cut $2 billion in federal agency funds for service contracts and
make this money available for pay raises that are due federal employees next year.
Federal employees are again being required to give up part of their statutory pay
increases while, again, contract employees paid from the same federal budget re-
main untouched. The intent of my first bill is to eliminate the raw discrimination
that allows the government to seck sacrifices from civil servants because they are
where we can see them but to give immunity to contract employees because they
are out of sight.

Beyond the discrimination against career employees who are denied modest in-
creases promised by statute, current contracting practices are fundamentally bad
business. According to a March 1994 GAO report, issuing service contracts and hir-
ing consultants actually costs federal agencies more than using federal employees.
In three of the nine cases analyzed by GAO, agencies could have saved over 50 per-
cent by keeping the work in-house.


19

That is to say, the old public cost of operating the same service was
150 percent more than the private competitive cost.

Now, that obviously is the high end of the scale. But those are
very legitimate concerns, and one has to be very careful to make
sure that you understand, as you put this process forward, that it
is public services you are trying to obtain. And you are trying to
obtain the best in public services, and you just have to be careful
about that.

Mr. Mica. Well, you talked about transportation, and I guess if
you look back at public transit, most of it was really privatized and
people were making a profit. Then it fell into the category where
more people were taking automobiles and became less profitable,
and has been steadily subsidized more and more by the public sec-
tor.

And then some of the standards which you spoke to, also have
distorted the process. For example, I think you mentioned section
13(c). This is a tough one, because people are not willing to come
forward and say, I’m willing to take less as far as compensation;
I’m willing to take less as far as benefits; or I’m willing to throw
overboard this 13(c) security and protection blanket that’s been put
in, which makes change extremely difficult.

Amtrak is an example where, we're into that category. We've got
three-quarters of a billion dollars, I guess, subsidy, and we now
find ourselves really mired down in trying to make changes. You
have the employee groups and others really protesting any
changes. So, is crises and complete failure and breakdown and
bankruptcy the only way we're going to get this changed? Or is
there any example, or is there any model you've seen that we can
use to help bring this about in a reasonable fashion?

Mr. Cox. Well, first of all, let me comment on your first point
about how transit was privatized before. It wasn’t; it was a regu-
lated market, owned by—it was a utility. And one of the main rea-
sons that the private transit operators failed was the unwillingness
of regulatory agencies to provide inflationary rate increases. And I
can tell you since public transit has become public, there is no such
restraint.

And in fact, right now you have major suits going on with bus
rider groups in Los Angeles, trying to overturn fare increases be-
cause they are so displeased with the ability of the public agencies
to control the fares. And what happened, even with a monopolistic,
regulated market in the private sector, the productivity was declin-
ing. It has declined at more than twice the rate since the public
takeover. But you get to the point of, obviously nobody who has a
privilege wants to give it up.

And I think one of the things, if we are serious about solving our
budget deficit crisis—and I realize this is not a very political thing
to say—but one must be prepared to start saying no to the people
that have unfair privileges. This Congress is not guaranteeing, to
the average wage earner out there, 6 years severance pay when
they get laid off the job. So I would argue from a philosophical
standpoint, we ought not to do that.

But in terms of models, there are some in addition. San Diego,
for example, has, over the last 15 years, moved from a situation
where it was contracting out virtually none of its transit service to


32

Perggnnel reduction of roughly 15%, the failure of the government to manage to the
O represents an extraordinary cost to the taxpayer.

With all that in mind, we believe the time has come to revisit the whole question
of cost comparisons and public-private competitions. We recognize that such com-
petitions will not be entirely eliminated, but believe they should be strictly limited
to those few functions that fall into a gray area in that they are not entirely com-
mercial but nor are they “inherently governmental.” In no other cases are such pub-
lic-private competitions justified, particularly in light of the inherent flaws in the
current cost comparison processes,

Additionally, we recommend that a credible, high-level outside resource, either the
commission I Spoke of earlier or a major business school, be tapped by Congress to
study the broad issue of public private cost comparisons, and develop a system that
will create a streamlined cost comparison process and make the appropriate adjust-
ments to government cost estimates to make them fairer and more accurate.

Fourth, it is time to stop allowing agencies to refederalize contracted work with-
out any justification for doing so. Mr. Chairman, not a day foes by that I do not
get a call from a member company informing me of yet another case in which the
company has been informed that the contracting activity is terminating some or all
of the positions covered by a contract, and bringing the work done by those positions
back in-house.

Under the A-76 process, all refederalization decisions are supposed to be accom-
panied by a cost comparison, to justify removing work from the private sector—the

ackbone of our economy—and returning it to the public sector—the size of which
we all agree needs to be reduced. But A-76 is only a circular, it does not have the
power of law, and it must be specifically enforced by OMB whenever such cases
arise. Therefore, we ask that if you develop legislation dealing with the broad ques-
tion of contracting-out, you include in it provisions to guard against such arbitrary
actions.

Fifth, we believe more needs to be done to assist federal workers who might be
affected by a decision to contract. All too often we hear the refrain that contracting-
out is the cause of massive job loss. Yet the evidence is quite to the contrary. Ac-
cording to figures offered by OMB over the years, less than 5% of the workers af-
fected by a decision to contract end up involuntarily unemployed. Most go to work
for the contractor, while most others take other positions in the government, opt for
private sector opportunities, or retire.

Yet despite the reality, the federal employee unions have done a very effective job
of convincing many peopie that contracting-out is a jobs issue.

t is not.

Let’s be honest about it. All federal workers whose positions are converted to con-
tract have the right of first refusal for all jobs with the contractor. As well, most
contractors want to hire qualified members of the existing workforce because it
would be senseless to go to the trouble of training and bringing in a whole new
workforce. Moreover, despite the sensational allegations that contractors pay un-
fairly, low wages and no benefits, the fact remains that on most service contracts
the Department of Labor, using prevailing, local wage data, tells contractors how
much they must pay for each position, what benefits must be offered and so forth.

Nonetheless, it is not a painless process. Some existing employees are adversely
affected by a decision to contract. To help those employees, we recommend that the
government develop a more aggressive and effective retraining and re-placement
service. The costs of such a program pale in comparison to both the savings avail-
able from contracting and what might be the costs associated with an individual re-
ceiving public assistance. As a matter of fact, it might make sense to fund such an
effort out of the anticipated savings from contracting—the amount, as I said, would
be miniscule, compared to the savings, if the government were to take the kind of
serious steps we recommend.

Bringing government under control, reducing its cost and size, and enhancing its
efficiency will, unavoidably result in reductions in personnel. That is, of course, al-
ready happening.

But as we seek to continue that process, and make further, important. progress,
we can and we must also preserve the rights, and address the needs, of the hai
working federal employees who, through no fault of their own, happen to be caught
in a system that simply doesn’t work.

Finally, let me close with a comment or two on the ever-present issue of “dueling
reports”. Many Members of Congress have asked me why there seem to be so man}
conflicting reports in government about the success of contracting out .. . witl
some singing its praises and others purporting to show contracting doesn’t work.

The short answer is that there are not actually that many conflicting reports.
While most reports cited by the opponents of contracting may identify weaknesses



14

Mr. Cox. $600,000.

Mr. Mica. $600,000?

Mr. Cox. Almost $600,000, that’s right.

Mr. Mica. For every employee?

Mr. Cox. That would be for this prototypical employee, starting
out at age 25 at the average private wage.

Mr. ltca. And they would end up with $600,000 more in the full
package?

Mr. Cox. That’s right.

Ms. More LA. Will the chairman yield?

Mr. Mica. Yes.

Ms. MorELLA. Mr. Cox, I respectfully have some concerns with
your statistics. Would you supply this committee with that. report?

Mr. Cox. I'd be very happy to.

Ms. MORELLA. Because we're in an area where we have locality
pay to the very contrary to what you say, because there is that 30
percent gap between the public and private sector. I would appre-
ciate it, thank you.

Mr. Cox. If I might, Mr. Chairman, and I appreciate that—we
will be most happy to supply that. One of my basic points is,
though, that the problem with the whole locality pay thing is that
it is based upon wages only. It does not take into consideration a
number of inherent benefits of Federal employment.

I mean, better fringe benefits are a monetary advantage. Better
security is a monetary advantage. More paid time off is a monetary
advantage. But anyway, we'll provide that, and would be most in-
terested in any criticism you might have.

Ms. More... Thank you, Mr. Chairman.

Mr. Mica. Well, it looks like we have a vote. If you wouldn’t
mind, we will probably recess for about 20 minutes. We'll come
back about quarter of, Secause you presented some testimony here
that I think the ranking member and other Members would tite to
question further.

We will recess until about quarter of, and then reconvene.

Mr. Cox. Fine.

Mr. Mica. And I thank you for your patience.

[Recess.]

Mr. Mica. If we can, I would like to reconvene here. And I apolo-

ize, we had not one vote, but two votes. And part of the mission
that we're seeking to accomplish is done, and now there will be
about 4 hours of debate. We’ve got plenty of time, Mr. Cox, if you're
available for the next 4 hours here.

Mr. Cox. It would be a pleasure.

Mr. Mica. I’m expecting the ranking member to return momen-
tarily, and several of the other Members. In the meantime, if I
may, I'd like to continue on the line of questioning that we started
about some of the statistics that you brought before the subcommit-
tee today. One of the items we were talking about was the amount
of compensation over the tenure of employment.

And I think you said, on average, $600,000 more for Federal. Did
you have any statistics—well, first of all, is that against the private
sector, or is that against State and local?

Mr. Cox, If I might, Mr. Chairman, let me make sure it’s com-
pletely understood. What we did was a strawman analysis. We


3

16. Congress Must Level With the Taxpayers About Just How Much Service Contract-
ing Really Costs ($105 Billion+)

Isn't it time that contractor expenses were listed as a line item in the federal
budget, instead of being scattered here, there and everywhere throughout the eye-
straining fine print of that massive tome? As Everett Dirksen is said to have ob-
served, a billion here, a billion there, and pretty soon you're talking about real
money. Well, $105 billion, the extraordinary sum the federal government spends
every year on services of varying quality and timeliness from contractors, is real
money by enyone’s definition?” Displaying prominently the staggering grand total
for service contractor expenses as a line item in the federal budget will do much
to bring the crisis in contracting to the attention of policy-makers and taxpayers
alike.

17. Must Require Service Contractors to Make the Same Sacrifices That
Federal Employees Have Already Made to Save Money for the Taxpayers and Re-
luce ti ficit

As Members of the Subcommittee know, federal employees have already shoul-
dered a disproportionate share of the burden of deficit reduction. Reductions in fed-
eral employee compensation from 1981 to 1994 have already saved the federal gov-
ernment almost $170 billion, according to figures compiled by OMB and the Office
of Personnel Management (OPM).?5 And, of course, 272,900 federal employees will
lose their jobs through downsizing over the next five years.

But while federal employees have been making one sacrifice after another, year
after year, in order to achieve deficit reduction and advance the reinvention of gov-
ernment initiative, service contractors have been digging deeper and deeper into the

yublie purse, In fact, OMB reported earlier this year that service contracting is the
Ristest ‘growing part of federal procurement, now accounting for more than one-half
of the $200 billion spent each year by the government for goods and services.2+

If Dickens had been alive today and interested in public policy he might have re-
ferred to this strange turn of events as a tale of two workforces. For the contractor
workforce it is the best of times. Even in the face of mounting concern over massive
cost overruns and shoddy work, funding for the contractor workforce grows and
grows. But for the federal workforce it is the worst of times, Despite making the
sacrifices necessary to bring about dramatic improvements in the effectiveness and
efficiency of service delivery, federal employees must still engage in a Sisyphean
struggle every year merely to secure the wage increases guaranteed to them by law.

This is wrong! When will Congress insist that contractors emulate the example
of federal employees by shouldering their fair share of the burden of deficit reduc-
tion in order to advance the national interest? What possible rationale can there be
for treating similarly-situated workforces so very differently? What reasons can be
advanced to support reductions in the more efficient and the more effective federal
workforce and, at the same time, increases in the more costly and the more wasteful
service contractor workforce?

220MB, Summary Report of Agencies’ Service Contracting Practices (January 1994), p. iv, In
his testimony before your Subcommittee last week, Mr. ‘Chairman, OMB Deputy Director for
Management John Koskinen estimated a “total of approximately $108 billion in service contracts:
in 1994.” Please keep in mind that both the 108 ion and the $105 billion figures are
based on information from calendar year 1993. Considering that service contracting is the fast-
est-growing part of federal procurement and one of the fastest-growing expenses in the entire
federal budget, those figures are likely to constitute significant underestimates. Based on off-
the-record conversations with OMB's policy analysts, the actual amount the federal government
currently spends on service contracting is probably in excess of $125 billion. The Professional
Services Council, in its recent testimony’ before the Subcommittee on Government Management,
Information and Technology, House Committee on Government Reform and Oversight, erro.
neously stated that the grand total of federal service contracting “was approximately 70 billion
dollars.” (Statement of the Professional Services Council on Privatization, March 14, 1995)

2 Federal Government Service Task Force, “Changes Affecting The Pay And Benefits Of Fed-
eral Employees” (January 1993). This chart was assembled by a respected legislative service or-
8: ation, using data compiled by OMB and OPM. Its accuracy has been verified by GAO. The
chart reveals, year-by-year, some fourteen different types of cuts in compensation for federal em-
ployees, including: 1) reductions in scheduled pay increases; 2) delays in scheduled pay ii
creases; 3) reductions in health benefits; 4) Medicare tax increases; 5) elimination of paid holi-
di from lump sum pay-outs; 6) revised computations of GS pay from 2080 to 2087 hours; 7)
elimination of 1% add-on to retiree COLAs; 8) revision of minimum benefits for disability retire-
ment; 9) repeal of look-back annuity guarantee provisions; 10) semi-annual to annual COLA ad-
justments; 11) limitation of COLAs to one-half of the Consumers Price Index for retirees under
age 62; 12) delays in COLAs from June to December; 13) revision of eligibility requirements for
disability retirement; 14) sequestration of COLA required by the Deficit Reduction Act.

% OMB, Summary Report of Agencies’ Service Contracting Practices (January 1994), p. iv.



58

But Mr. Cox suggested that virtually any government activity
can be done 40 to 60 percent more cheaply, I gathered, in the pri-
vate sector, That’s generally too high. I haven’t seen any experience
that would support that, but what—Mr. Concklin, you probably
have | some figures on that. What studies do you have that
would—.

Mr. CONCKLIN. The data is as much anecdotal as it is statistical.
So I want to carefully qualify that and make sure that’s under-
stood. But I would offer to you one significant data point that I
think, in part, responds to your question. The U.S. Air Force, it is
my understanding, has been the most aggressive and has gone
through the largest volume—dollar volume and body-count wise—
the largest amount of A-76 contracting.

Now I heard their Deputy Assistant Secretary testify last week
that, across a very large universe—I think it was something over
400 million, if I recall the number—of service contracts, many con-
tracts, they have saved approximately 20 percent through going
through the process; and importantly, 60 percent of that universe
of Air Force contracts were contracted out. The remainder, presum-
ably, based on a cost comparison study and other factors, a decision
was made for the remainder to retain them in house. But that is
a real world sample, and I believe it’s the biggest single sample at
an agency level. Certainly the State and local testimony galore sug-
gests that it’s clearly in the 15 to 30 percent range, if you look at
municipalities. Mr. Engebretson.

Mr. ENGEBRETSON. Also, Congressman Moran, I made a state-
ment—the Wall Street Journal did some investigation on April
1993, and they also stated that it was a 25 percent average. And
so I think that number is pretty close, around 25 percent.

Mr. Moran. Mr. Tobias.

Mr. Tosias. You know, this kind of number and this kind of an-
ecdotal evidence, and even the GAO reports, I think, are irrelevant
to the basic policy consideration. Unless Congress says, we’re going
to get rid of—that we’re going to adopt Mr. Cox’s approach, which
is the only thing that we fave in the Federal Government are those
people who are policymakers and those who are overseeing con-
tracts, the issue is, it seems to me, in each instance, who can do
it cheaper; who can do it better?

And let the competition figure that out. Let the competition de-
cide who can do it better; who can do it in a more satisfactory fash-
ion—the Federal employees or the private sector. And in that
sense, we wouldn’t have to rely on averages; we wouldn't have to
rely on anecdotal evidence. We would have the hard facts to evalu-
ate on a case by case basis.

Mr. ENGEBRETSON. I would like to remind my colleague that this
is about a 50-50 split right now. About half of the work stays in
house through the competition process, and the other half goes to
the private sector.

Mr. CoNncKLIN. And I'd also like—and I'll be brief—but I'd also
like to correct Mr. Tobias. What I stated is not anecdotal. The Air
Force experience is empirical and documentable. It is not in any
sense anecdotal, and it’s the biggest universe of data that we know
about.


6

Coincidentally, I also served three terms on the Los Angeles
County Transportation Commission, as an appointee of Mayor Tom
Bradley; and out of that, became a consultant, and have spent a
number of years working in issues of privatization and competitive
contracting around the world, largely in public transit.

Some of what I’m going to say to you this afternoon you may not
have heard before. It may sound rather unusual to you, but I want
to go through it anyway because I think there’s some issues that
you may not have heard before with respect to contracting and why
it is that government costs are always higher—are often higher
than they need to be. And I would also suggest that the comments
that I make as regards government employment are not meant in
any way to criticize employees.

To the extent that the government employment system in the
State and Federal levels results in higher costs than are necessary,
it is a systemic problem, not a problem that can be traced to the
employees themselves. But as you are aware, there is considerable
cost around the country in the States, localities, and in the Federal
Government with respect to the cost of government.

In the private sector, you get ahead, you succeed, you make prof-
its by paying no more than necessary for the factors of production,
whether those factors are labor, materials, capital, supplies, or
whatever. In government, however, it doesn’t work that way be-
cause the market generally does not operate in government, except
to the extent that government uses competitive bidding for some
things like consultant contracts and supplies and that kind of
thing.

It certainly doesn’t work that way with respect to labor. The
Nobel Laureate, Frederich Hayek said, “The competitive price can-
not be known until there is competition.” And that, I would sug-
gest, Mr. Chairman, is the problem in government employment and
in government services at the moment. There is no competition.
The Economist, the British news weekly, one time put it this way,
that the role of government should be to “spend each dollar to the
best effect. Individuals do that day after day, so do companies.
They succeed, more or less, because they face choices as customers
and competition as producers. The minimum duty of a State should
be to replicate such choice and competition in its own affairs, so
that the billions it raises in taxes achieve the high-sounding aims
it sets for itself.”

I would suggest, Mr. Chairman, and members of the subcommit-
tee, that government ought to be seeking to pay no more than nec-
essary for those services that it provides. at is the public pur-
pose of government employment; it is the public purpose of govern-
ment spending. Let me digress a little bit, though, into the area of
government employee compensation. We at the American Legisla-
tive Exchange Council have done a good deal of research on this
issue.

And largely, as you know, the employment is a major cost of gov-
ernment services in the State and local government level. Govern-
ment employee compensation represents about 60 percent of the
operating costs of government. You've all heard how private sector
workers have seen their wages and benefits stagnate over the last


29

Let the marketplace, which in our industry is enormously com-
petitive, do what it does best. Fifth, we must do more to assist Fed-
eral employees whose positions are affected by the decision to con-
tract. All too often, we are told that contracting out leads to mas-
sive job loss, when the data simply doesn’t support this myth. Talk
to any one of our member companies, and they will tell you that
they prefer to hire incumbent workforces because it saves training
and relocation time and money.

As well, effective government employees have the right of first
refusal on all positions available under a contract for work that is
being converted. But some percentage of the workforce will be neg-
atively affected. And they, frankly, deserve more retraining and re-
placement support from their agency than is currently available.
Finally, let me offer a thought on the questions of the so-called
dueling reports.

I’m often asked by Members of Congress why there seem to be
so many reports offering so many disparate conclusions as to the
effectiveness of contracting out. My answer is simple: the vast bulk
of reports reach strikingly similar conclusions—contracting out
works well, particularly where there is effective oversight and man-
agement of the contract by the government.

In many cases, the reports most often cited by opponents of con-
tracting actually bolster our contention that the record is far better
than the rhetoric. For instance, in 1990, the Department of Defense
inspector general report was much heralded because it seemed to
conclude that contracting out was costing the government more
than it was saving. But a closer reading of the report made it clear
that 90 percent of the contracts studied were successfully saving
the government money—a remarkable rate of success for any gov-
ernment program.

And of those few that were not achieving cost savings, the rea-
sons were mostly due to changes in the scope of work; the advent
of new regulatory requirements; increases in the wage determina-
tions; or other factors unrelated to contractor performance. This is
precisely the same conclusion reached by the DOD inspector gen-
eral in a report on cost growth commercial contracts, which was re-
leased just last week. And by the way, I have a copy Mr. Chair-
man, if you’d like to have it.

Likewise, the OMB SWAT team report of a couple of years ago
focused on the need of better government management of its con-
tracts and more consistent application of cost rules. The report spe-
cifically found no evidence of widespread contractor fraud or abuse.
In short, the report identified weaknesses, but was hardly a
chilling indictment of contracting. Simply put, as elsewhere in life,
one must always read the fine print and not rely solely on the stat-
ed conclusions or sensational headlines.

Mr. Chairman, we have an extraordinary opportunity before us.
In the spirit of change that today so predominates not only on Cap-
itol Hill, but across the Nation, I urge you to push forward and not
let this opportunity pass. My thanks for your time and attention,
and I will be happy to have any questions that you may have.

(The prepared statement of Mr. Engebretson follows:]


65

ing and how the: night be resolved through drastic reform of the OMB Circular
A-76 process. AFGE has worked to improve service contracting for over 20 years,
so I am eager to use this important forum to discuss our own comprehensive service
contracting reform proposal.
ile not reflexively opposed to contracting-out, federal employees are working
and middle class taxpayers who are sadly familiar with both the extraordinary
growth in service contracting expenses as well as the consistent and documented in-
ability of service contractors to perform work in a cost-efficient manner. As the
clearly shows, the federal government is contracting-out more and more, but
the American le are gettin; Fess and less. AFGE members can’t help but find
a bitter irony in this newfound determination sweeping Capitol Hill to sell off large
chunks of the federal government to politically well-connected firms in the private
sector. After all, the federal workforce hasn’t been this small since the Kennedy Ad-
ministration. At the same time, service contracting is the costliest part of federal
rocurement and one of the Fastest-growing expenses in the entire federal budget.
Kecording to official government estimates, federal service contracting now costs the
‘American taxpayers well over $100 billion every year. Nevertheless, there are some
Members of & ss who don’t believe that’s enough and want to drastically in-
crease the federal government's contracting-out expenses.!

Let me say that I did not submit this statement in order to regale members of
the Subcommittee with the shocking details of the latest service contracting scandal.
That service contractors have managed to perpetrate significant abuses in virtuall
every federal agency into which they have been given entree, and that these si
cant abuses have resulted in massive cost overruns and shoddy work are not opin-
ions but facts, established in report after report from the non-partisan General Ac-
counting Office (GAO) as well as the Office of Management and Budget (OMB).? The
latest independent corroboration of the crisis in poatrecting came from a GAO Peper
released just last year, inconspicuously entitled GOVERNMENT CONTRACTORS:
Measuring Costs of Service Contractors Versus Federal Employees. This report sur-
veyed nine studies on service contracting and found that in each case savings, often
substantial, could have been realized if the work had been done in-house.

But now is not the time for federal employees to rub their hands with glee and
exclaim triumphantly, “I told you so! This is what happens when the federal govern-
ment turns over some of its most important functions to often unseasoned, profit-
hungry outsiders with little or no oversight.” Rather, now is the time for federal em-
ployees and their representatives to work with Congress to ensure that agencies are
required to make better-informed and more fiscally-responsible decisions about serv-
ice contracting. In that spirit of cooperation, Jet me now present AFGE’s own com-
prehensive service contracting reform proposal.

1. Just as Government Must be Reinvented so Must Federal Service Contracting

If I might paraphrase the words of the architects of the reinvention of government
initiative, while we clearly don’t need more service contracting, we do need better
service contracting. And better contracting will come about only if there is real and
genuine competition between contractors and federal employees for the federal gov-
ernment’s service assignments. This competition would invigorate both groups of
service providers, inspiring them to do their best work, and empower the federal
government to make the choices that would best serve the nation’s taxpayers and
service beneficiaries.

Competition is something my membership knows from first-hand experience. As
part of the reinvention initiative’s attempt to bring the lessons of the private sector
to public service, federal employees and the methods by which they perform their
work have undergone complete and thorough examinations. In the constant pursuit
of efficiency and effectiveness, many old ways and patterns have been tossed aside
in favor of new ideas and techniques. As the Members of the Subcommittee know
well, federal employees have made numerous sacrifices in order to advance the
reinvention of government initiative, the loss of 272,900 jobs over the next five years
being only the most prominent. But federal employees are determined to use the in-

. . . I believe that in the next four years it should be possible to contract out more than
filly percent of the services and activities of the federal government.” (Opening Statement. of
the Chairman of the Subcommittee on the Civil Service, Representative John L. Mica, Hearing
‘on Contracting Out (March 29, 1995).

2“Numerous Inspector General and General Accounting Office reports, Congressional hearings
and internal agency studies have documented contract performance problems ai i
tract overruns.” (Testimony of John Koskinen before the House Subcommittee on
Hearing on Federal Policies Related to Contracting Out (March 29, 1995), p. 3.)

3GAO, GOVERNMENT CONTRACTORS: Measuring Costs of Service Contractors Versus
Federal Employees (GAO/GGD-94-95) (March 1994).



67

roblems emerge, new laws are made, or improved technology becomes available.

lowever, it is much harder to bring about change in a contractual relationship since
the requirements must be spelled out in advance and then reduced to legally en-
forceable language.

But if Congress really wants agencies to write better SoWs, then senior managers
should be required to consult in advance with the people who know better than any-
one else what it takes to get the job done. And, with apologies to political scientists,
journalists, political appointees, and even Members of Congress, those experts to
whom I’m referring are, of course, rank-and-file federal employees, the men and
women who actually perform the work.

Finally, it cannot be emphasized strongly enough that the drafting of SoWs is an
inherently governmental function. Such work must not be left to contractors because
of the obvious conflicts of interest involved. According to OMB, the in-house capabil-
ity to develop adequate SoWs at the Department of State has so atrophied that the
work must be contracted out.5 While this is a situation ripe for satire, it is also
cause for concern. After all, the farmer doesn’t often ask the fox how high he thinks
the fence around the henhouse should be.

4. Agency Managers Must Stop Ignoring Cost Comparison Requirements

I wish I could report that SoWs were the only weak link in the chain, However,
the methods by which the federal government determines whether to contract out
services are in even greater need of reform. OMB Circular A-76 does require agen-
cies to compare estimated contract and in-house costs for the specific work to be per-
formed to determine the more cost-efficient, approach. Unfortunately, agencies often
disregard this rule. As OMB itself reported, cost analyses and independent govern-
ment estimates are not performed by many agencies prior to renewal, extension, or
recompetition of existing contracts. And in far too many instances, OMB must
admit, cost estimates are not even prepared prior to entering into new contracts!”

Tf Congress genuinely wants to reduce service contractors’ billion dollar bills, then.
federal employees must be allowed to compete for service assignments. Clearly, such
competition is impossible if senior managers are not required to perform cost com-
parison requirements before deciding whether to contract-out.

5. Contracting Must Create Genuine Cost Savings and Quality Improvements

What sort of cost savings are we after when we contract out a service in order
to achieve greater efficiencies? Let’s face the facts: far more often than not the cost
savings resulting from a service contracting decision can be attributed in large
measure to the contractor's providing her employees with low wages and few, if any,
fringe benefits. Ultimately, the federal government should award contracts for only
two reasons: 1) The contractor has devised a more effective and a more efficient wa}
of providing a service than that-employed by the agency, or 2) the contractor's
workforce possesses expertise that cannot be found in the agency’s federal
workforce.

A contractor who uses the same methods or level of expertise as the agency in
rendering a service but is shown in a cost-comparison process to be the more effi-
cient service provider merely because she pays her employees next to nothing cre-
ates no program efficiencies.

© Do we really want agencies to save money by taking it from the battered wallets
and torn purses of the ever-expanding number of contractor employees toiling at or
near the minimum wage?

© Do we really want to give contractors powerful incentives to provide their em-
ployees with the lowest salaries and fewest benefits possible?

© Do we really want the federal government to become a silent partner in sweat-
shop operations scattered across the nation?

* Shouldn't the federal government's role actually be to encourage providers,
whether they be federal employees or contractor employees, to come up with better
and more ingenious ways of performing important services?

OMB, Summary Report of Agencies’ Service Contracting Practices (January 1994), p. 5. “The
State Department indicated that in-house capability to develop adequate SoWs is so lacking that
they now find themselves in a position where they have to resort to contracting for such serv-
ices. State says they would prefer to do SoWs in-house, but do not have the trained personnel
in-house to perform this function.”

OMB, ‘Summary Report of Agencies’ Service Contracting Practices (January 1994), p. v.



68

6. Effectiveness—Quali Work and Timeliness of Delivery—is Just as Important
a Consideration as Pleioney in Deciding Whether to Contract-Out Po

Of course, a service provider must do more than perform an assignment at low
cost. The quality of the work and the timeliness of the delivery are just as important
considerations. Consequently, the Somparison between contractors and federal em-
ployees must include quality and timeliness as well as cost. Only if the comparison
is broadened to include all factors relevant to performance will the federal govern-
ment make the best choices for service assignments.

Let’s move from the general to the specific. The Department of Defense (DoD) pe-
rennially recommends abolishing the prohibition on contracting-out fire fightin,
functions on its installations. Congress has always rejected this initiative for several
very good reasons. Federal fire fighters don’t just perform fire suppression work.
They provide fire prevention, hazard mitigation and abatement, and emergency

al services. They are also trained to respond to airplane crashes and nuclear
and biological incidents.

Do employees of the typical fly-by night fire fighting contractor have such varied
and specialized skills? What about the frequently volunteer fire fighters in nearby
municipalities? I doubt it. Historically, fire fighter contractors suffer from high em-
ployee turnover, a phenomenon which’ significantly drives up the costs of processing

e security clearances necessary to work on sensitive DoD installations. Finally,
contractor fire fighters have consistently proven unable to respond in a timely man-
ner to fire fighting emergencies, as required by DoD and OSHA regulations.

Because the lives of soldiers and civilians are at stake, because expensive military
hardware is at risk, and because only highly-trained fire fighters are capable of per-
forming tasks as varied as emergency medical services and responding to nuclear
incidents, Congress has steadfastly prevented Dol) from cutting corners by contract-
ing-out fire fighting functions on its installations. “You get what you pay for,” goes
that old maxim. And when Members of Congress talk casually about contracting-
out important federal services, they should understand that getting what agencies
paid for usually means the American people not getting what they need.

Mr. Chairman, some of the witnesses you have permitted to testify today will no
doubt refer to this sound policy of relying on skilled and seasoned federal fire fight-
ers exclusively as a “barrier” to contracting-out. As the facts would indicate, it might
be more accurate to refer to the moratorium as a “safeguard.”

7. Contracts Must Not Be Renewed Reflexively

1 also urge the members of the Subcommittee to consider whether the public/profit
comparison should include an additional consideration: whether the market for this
particular service will remain competitive for the foreseeable future. Frequently, a
contractor who wins a significant government service contract acquires such an ad-
vantage over his rivals that the latter are forced to significantly retrench or even
ge out of business, thus greatly reducing the competitiveness in that particular mar-

‘et. The absence of healthy competition removes the incentives necessary for the
contractor to provide timely and effective service; consequently, the estimated cost
savings realized under the contract usually vanish.

When the contract comes up for renewal, the contractor, having established a mo-
nopoly, is able to demand a larger fee the second or third time around. By then,
however, the federal government’s own bargaining power is significantly reduced
since the federal employees who used to perform the service in question have often
been se] ited or dispersed, their valuable expertise lost. If the service contractor
knows that the contract will be renewed without further review, what incentive will
there be to reduce or eliminate the unnecessary expenses he charges to the federal
government? ;

The best way to keep the market for service assignments competitive is to require
that agencies conduct another public/profit comparison at the time of contract re-
newal. Contracts should not be reflexively renewed. As time passes, it is often the
case that more effective and more efficient ways are devised to deliver services. As
many municipalities have discovered over the last several years, for reasons of effec-
tiveness and efficiency, it makes sense to bring contracted-out services back in-
house. After all, if a contractor can deliver a service more cheaply than the federal

ernment and make a profit, the government can probably find a way to deliver
that service as economically as a contractor, but without sacrificing timeliness and
customer satisfaction.

8. FTE Ceilings Must Not Be Allowed To Force Wasteful Service Contracting

The most aggravating part of the public/profit comparison, however, is what hap-
pens alter a determination has been made that it would be more cost-effective for
the service in question to be performed by federal employees. One would think that



26

Ms.. Norton. Yes. I think you misunderstand. I have no prob-
lem—I think you're talking about my buyout bill. My buyout bill
would not keep a Federal employee from going to work with a con-
tractor. My buyout bill is aimed at the clear intention of Congress
to downsize the Federal workforce. And all it would say is that you
cannot buy out Federal employees—let us say you bought out 10
Federal employees, and you substituted 10 contracted out employ-
ees.

That would not be a downsizing of government. But it would not
say that if, in fact, a Federal employee is bought out, that that em-
ployee couldn’t shop around the Beltway to find other employment.

don’t believe that we’re at odds. My legislation would not bar any
Federal employee from seeking——

Mr. Moran. Good, I’m glad we've clarified that. And I think
there may be some Federal managers who need that-clarified as
well; that that is not your intention. That is certainly appropriate
and consistent with your intent that people who leave the Federal
Government would be able to contract to the Federal Government.

Ms. Norton. And remember what we said, we said you couldn’t
replace the people we had cashed out with new people. So if you
can’t replace them with new people coming into the civil service,
you don't want to leave a loophole to replace them with bought out
people.

Mr. Moran. That's right.

Ms. Norton. But the freedom of the individual to continue to
earn a living in any way that person sees fit, I would fully endorse,
as you indicate. And by the way, I think the previous witness—the
chairman, I think, referred to this—as well talked about competi-
tion between Federal workers and workers on the outside. One of
the things I'd like to see us do more of is something that the States
and counties apparently are beginning to do more of. And that is,
before they contract out, they essentially allow their own employees
to bid as well, to compete with the private sector.

Now, that’s one way to get people in the kind of competition that
I think makes a lot of sense. And I do think that the lack of a bot-
tom line in any bureaucracy, in any government, does make it
harder to make it efficient. If in fact you say to government em-
ployees, look, we found we can do this cheaper on the outside; let’s
see what you have to say, I think you impart in a creative and, I
think, legitimate way, some notion of competition that would make
some sense.

And I think some experimentation of that kind in the Federal
sector would be worth it.

Mr. Moran. Thank you, Ms. Norton. Thank you, Mr. Chairman.

Mr. Mica. Again, I want to thank you for your testimony and
your comments relating to the legislation you've introduced, and for
your participation here today. We look forward to having you work
with our subcommittee because we have some tough chores and
tasks ahead, and you can be a valuable part of and contributor to
that process. So thank you so much for being with us.

Ms. Norton. Thank you, Mr. Chairman.

Mr. Mica. Now I would like to call our next panel forward. We
have Gary Engebretson, who’s president of Contract Services Asso-
ciation; Bert Concklin, president of Professional Services Council;


78

ADVANCE WARNING OF SEPARATION

Agencies may issue a Certification of Expected Separation to employees when the
agency expects to separate them within 6 months by RIF. This notice allows employ-
ees to register early for outplacement and retraining services provided through their
agency, OPM, and the Job Training Partnership Act administered by the Depart.
ment of Labor. By law, Federal employees are entitled to 60 day advance notice of
RIF separations.

JOB TRAINING PARTNERSHIP ACT (JTPA)

A Department of Labor program which disburses funds to the individual States
to provide readjustment and retraining services for individuals who are involuntar-
ily separated from employment, Services may include career counseling, testing, re-
training, placement assistance, support services and financial counseling to eligible
employees both before and after the RIF.

SEVERANCE PAY

Continuation of pay for up to 1 year for eligible employees separated by RIF using
a standard formula based on length of service and age.

UNEMPLOYMENT COMPENSATION

A program administered by the Department of Labor, through agreements with
state governments, which provides weekly income for a limited time period to eligi-
ble separated Federal employees.

REFUND OF UNUSED ANNUAL LEAVE.

Separated employees receive a lump-sum payment for accrued annual leave. (Em-
ployees may generally carry over 240 hours of annual leave each year.)

Employees are entitled to have their sick leave recredited if reemployed in the
Federal service, or have it added to their total service if eligible for annuity benefits
under the Civil Service Retirement System.

PAYMENT OF RELOCATION EXPENSES

Title 5, United States Code, Section 5724(e), and Federal Travel Regulations pre-

jared by the General Services Administration state that in a RIF or transfer of
Function. expenses may be paid in whole or part by the agency from which the em-
ployee transfers or by the agency to which he/she transfers.

RETIREMENT

Discontinued Service Retirement—A discontinued service or involuntary retire-
ment provides an immediate annuity for employees who are separated by RIF pro-
vided they have at least 20 years of service and are age 50, or have at least 25 years
of service regardless of age.

Refunds—Separated employees who are not eligible to receive an annuity may re-
ceive a refund of retirement contributions.

Deferred Annuity—Separated employces who have completed 5 years of creditable
civilian service, but are not eligible to receive an immediate annuity, may defer
their annuity until age 62 or when eligible.

Using Annual Leave to Gain Retirement Eligibility-Employees close to being eli-
gible for retirement when a RIF separation occurs, may be able to stay on the rolls
(beyond the date of separation) if they have enough annual leave to carry them over
to the date they become eligible for retirement.

FEDERAL EMPLOYEE HEALTH BENEFITS (FEHB)

Employees who retire on an immediate annuity whether voluntarily or as the re-
sult of a RIF may continue their enrollment in the FEHB program if all other en-
rollment requirements are met. |

Employees who are displaced due to a RIF action may continue their health insur-
ance for 18 months past the RIF separation date provided they pay both the em-
ployee and Government shares of contributions plus any additional administrative
costs.

Employees who separate and are not eligible for an annuity may convert their
health insurance to an individual coverage and pay the full cost.


3

We shall also hear from Mr. Bert Concklin, president of the Professional Services
Council, Mr. Gary Engebretson, president of the Contract Services Association, and
Mr. Robert Tobias, president of the National Treasury Employees Union. It is my
hope that our witnesses today can provide additional insights into the Federal Gov-
ernment’s activities related to contracting in recent years. We welcome their partici-
pation and look forward to their suggestions for improvements.

Mr. Moran. I'll figure out something to say, Mr. Chairman. I’m
glad that you made mention of the rule. I trust you’re going to be
voting against that thing. But that’s where we came from, and
there is clearly ——

Mr. Mica. Between now and the vote, I'll consider your sugges-
tion.

Mr. Moran. With every due consideration, that’s what we tell
some of our constituents when they raise issues that we know we
are not going to be able to address in the way they want. Mr.
Chairman, this is a terribly important area—the issue of contract-
ing out. As you know, I have been very much opposed to setting
arbitrary workforce reduction goals. I don’t think that’s the way to

lo it.

I think what we should be doing is, carefull: analyzing what
functions the Federal Government does not need to be performing
because they can be performed more effectively and efficiently by
lower levels of government, or even by the private sector. And
when we determine what functions don’t need to be carried out at
the Federal level, and which positions thus become expendable, we
can then determine what workforce reduction goals would be re-
sponsible to make, and how much savings we can achieve.

That’s not the way we have gone about this exercise. And so
many people are being put in the position of having to do much
more with far less resources at the Federal level. I was interested
to see an article, just within the last week, that showed that we
have actually increased, in my congressional district, the employ-
ment base. It’s gone up by about three employees for each Federal
position that has been reduced.

I don’t think that we should be reducing the workforce at the
rate that we are. But my most important goal is to ensure that peo-
ple who have the skills and the education, and particularly the
dedication, to perform the work that makes this country so pros-
perous, peaceful, stable, progressive, that those people’s talents be
available for the benefit of this country.

You know, there is no Federal workforce that is more effective
and efficient and less corrupted in the world than the American
civil service. And despite all the problems that we find with what
some people would call bureaucrats in a derisive way, the reality
is that the American people are better served by the Federal
workforce than any population in the world is served by its na-
tional public workforce.

But aving said that, I want to make sure that we don’t impede
the ability of the government to be able to contract with those per-
sonnel and with those organizations that can provide the services
that are necessary. And that, in fact, since we are required now to
pay for the crime bill, pay for deficit reduction, pay for unemploy-
ment compensation, everything else that we funded | by offsetting it
against this $20 billion we were going to save by reducing the Fed-
eral workforce, since that is inevitable that it will be done, it be-


2

have no record, or not an adequate record that we've seen, of as-
sisting the Federal employees it’s directed to aid under the OMB
Circular A-76. This function of OPM must be improved or better
defined, possibly by. future legislation.

Our witnesses this afternoon provide a variety of perspectives on
the potential that contracting out may strengthen the partnership
between commercial organizations and activities, and our Federal
Government agencies. Mr. Wendell Cox, director of State legisla-
tion and policy for American Legislative Exchange Council, will

rovide, first, an overview of the success achieved by State and
local governments who have opted to shift functions to the private

sector.

We shall also hear from Mr. Bert Concklin, who’s president of
the Professional Services Council; Mr. Gary Engebretson, president
of the Contract Services Association; and Mr. Robert Tobias, presi-
dent of the National Treasury Employees’ Union. It’s my hope that
our witnesses today can provide additional insights into the Fed-
eral Government’s activities related to contracting that we’ve seen
over the recent years.

We welcome their participation, and look forward to their sugges-
tions for improvements. We're pong to hear from Ms. Eleanor
Holmes Norton, Delegate from the District of Columbia, who has
expressed a desire to present brief testimony and remarks before
our subcommittee at some point this afternoon, when she can get
over to the hearing. And with those brief opening statements, I
would like to now defer—and I’m pleased to see, having arrived
fresh from the floor and heated debate over the pending rule—the
distinguished gentleman and my colleague and working companion
on the subcommittee, Mr. Moran. Do you have an opening state-
ment, sir?

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

PREPARED STATEMENT OF HON. JOHN L. Mica, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF FLORIDA

Today we resume deliberations that we began last Wednesday when we heard
from the General Accounting Office and the Office of Management and Budget. It
is obvious from that hearing that a significant number of government employees are
engaged in functions that could be cost-effectively performed in the commercial mar-

etplace.
‘Government agencies must concentrate their resources on core policy and authori-
tative functions. Wherever possible, Federal agencies should utilize competition of
the private sector for commercial and administrative support. While that principle
served as a standard for the executive branch for forty years, practice and principle
do not always coincide. I was encouraged that the Office of Management and Budget
reaffirmed support for the principle, and hope that we can work with them to m:
contracting out a more substantial part of efforts to achieve genuine reform in gov-
ernment.

However, the apparent foot-dragging in the contracting-out process, where major
agencies take many years to com] Tete routine management studies, serves neither
government agencies nor the public interest. I am concerned about the lack of reli-
able data to evaluate contracting policies that have been in place for forty years.
I am also disappointed that the Office of Personnel Management appears to have
no record of assisting the Federal employees it is directed to aid under OMB Cir-
cular A-76. This function of OPM must be improved or better defined by legislation.

Our witnesses today provide a variety of perspectives on the potential that con-
tracting may provide to strengthen the partnership between commercial organiza-
tions and government agencies. Mr. Wendell Cox, Director of State Legislation and
Policy will provide an overview of the success achieved by State and local govern-
ments who opted to shift functions to the private sector.


15

said, let us take a private worker doing the same work as a Fed-
eral worker, starting at the same pay at age 25, and let’s go
through a 40-year period. Now, what we do not know is what,
truly, is our Federal worker’s pay in wages relative to the private
sector.

You've got the pay agents report that says, on average, that pri-
vate workers are paid 23 percent less. You've got a CBO report
that says 12 or 13 percent. You’ve got other academic research that
says Federal worker wages are 3 percent less than the private sec-
tor; others, as much as 40 percent more. So what we did is we said,
let us take—we’re not making a statement with respect to the aver-
age, because I would argue that the present mechanisms for trying
to determine Federal pay are really very flawed, and nobody truly
knows what they are.

So we said, if we could assume they are the same, what would
the difference be? We're not making a charge or making an allega-
tion that on average it’s $600,000 more. We’re saying that if we
had two workers starting and running through a career, startin,
at the same wage rate, the Federal employee would have $600,00!
worth of value additional over a career.

Mr. Mica. Now, you also—and again, I don’t want to take any
words out of your mouth, but maybe you could explain for the sub-
committee—you said the comparison of compensation, and then you
also said that’s more, and then you said the benefits are more. Is
that correct? I think your term was more liberal benefits in the
Federal sector.

Mr. Cox. Right.

Mr. Mica. And how does that compare with the private sector?
And then the liberal benefits you spoke of and compensation, how
does that compare in State and local governments, as far as your
study?

Mr. Cox. OK. When we talk about compensation, first of all, we
mean the total monetary compensation, including wages and em-
ployer paid benefits. In the private sector, on average in the United
States, the benefit load on top of wages is a little bit less than 20
percent. In State and local government, it’s in the range of 22 to
23 percent, maybe 24 percent. And I'd have to calculate it. But the
Federal number is over 30 percent.

For example, if you take a look at the total compensation for a
Federal civilian employee in 1991, it was $46,100. The total wage
was——

Mr. Mica. What was that again?

Mr. Cox. $46,164. The total wage was $34,724; that’s 30-some
percent over the wage.

Mr. Mica. Thirty-six percent?

Mr. Cox. Yes, very significant. I mean, it’s not quite double, but.
it’s significantly above the private and even above the State and
local government rate.

Mr. Mica. You also referred to the State and local governments
getting into more of the contracting out. I guess the local govern-
ments have had more of a history for this for municipal type serv-
ices. And the State services are also being increased in this area.
You said, I think, it was approaching 10 percent of the activities
or functions. What are these numbers; can you elaborate on them?


5

I look forward to today’s testimony, and hope to gain from the experience of our
witnesses."I thank the Chairman,

Mr. Mica. I thank the gentleman. I also have an opening state-
ment from the chairman of the full committee, Mr. Clinger, and
without objection, will make that part of the record; and also a
copy of formal statements by the ranking member. We’ll make that
also part of the record, without objection.

{The prepared statement of Hon. William F. Clinger, Jr., follows:]

PREPARED STATEMENT OF Hon. WILLIAM F. CLINGER, JR., A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF PENNSYLVANIA

Mr. Chairman, I am pleased to be here today to participate in your second hear-
ing on the Federal government's commercial activities and contracting policies. I
wanted to be here for your first hearing but was unable to break away from other
Committee business.

But as you know, Federal government reform is a priority issue for the Committee
on Government Reform and Oversight. Last year, we were successful in enacting
comprehensive legislation to streamline and simplify the Federal procurement sys-
tem. In February, the Committee held its first oversight hearing on that new law.

‘This Congress, we have an opportunity to continue the efforts begun last Congress
on procurement reform and other Federal government reforms. I have introduced a
bill, (H.R. 1038), along with Chairman Spence of the National Security Committee
and Chairman Gilman of the International Relations Committee, which will be the
foundation for the Committee’s procurement reform initiative.

I want to thank you, Mr. Chairman, for holding these hearings and focusing on
an important, aspect of how the government goes about acquiring needed goods and
services. An important characteristic of the American model of government is that
the government, in carrying out its responsibilities, should rely on the tax-paying
private sector before it uses or expands governmental resources. Certainly now, as
we review the appropriate role that government ought to play, we must consider
and promote reliance on the private sector wherever and whenever possible.

Perhaps we can consider a general policy statement regarding the government's
reliance on the private sector when we proceed with our next round of procurement
reform legislation. Certainly the current administrative policy, reflected in OMB
Circular A-76, affirms that the “Federal government will not start or carry on any
commercial activity to provide a service or product for its own use if such product
or gervice can be procured from private enterprise through ordinary business chan-
nels.

T hope these hearings will identify key issues which we can consider as we move
forward with our efforts to further reform the Federal government.

Mr. Mica. Now, if I may, I'd like to call on our first witness this
afternoon, Mr. Wendell Cox. Mr. Cox, if you’d come up. Mr. Cox is
the director of State legislation and policy, the American Legisla-
tive Exchange Council. If you wouldn’t mind standing for a mo-
ment, it’s the custom and practice of our subcommittee to swear in
our witnesses.

[Witness sworn.]

Mr. Mica. With that, we welcome you and apologize for the
delay. We may have a vote or two here, but we look forward to
your testimony; and again, welcome to our panel.

STATEMENT OF WENDELL COX, DIRECTOR OF STATE
LEGISLATION AND POLICY, AMERICAN LEGISLATIVE COUNCIL

Mr. Cox. Thank you, Mr. Chairman and members of the sub-
committee. I am Wendell Cox, director of State legislation and pol-
icy for the American Legislative Exchange Council, or ALEC.
ALEC is a group of State legislators. We have about 3,000 State
legislator members, both Democrats and Republicans. We're dedi-
cated to the Jeffersonian ideals of limited government, individual
liberty and the free market.


80

NON-FEDERAL EMPLOYMENT INCENTIVE PILOT PROGRAM

The Secretary of Defense may establish a pilot program to pay up to $10,000 re-
training and relocation incentives to non-Federal employers to encourage them to
hire and retain DOD employees affected by RIF.

VOLUNTARY SEPARATION INCENTIVES PAYMENTS.

DOD may offer voluntary separation incentive payments (buyouts) to employees
until September 30, 1999, pow

CAREER TRANSITION SERVICES AVAILABLE IN SOME AGENCIES

Some agencies use internal transition assistance programs to help their displaced
employees. These programs are not available in all agencies and locations. Some
agencies use in-house employee assistance specialists, personnelists and trainers;
others contract with private sector firms which specialize in outplacement and ca-
reer transition.

Typical services provided include:

Transition Centers/Skills Clinics—both in headquarters and field activities.

Comprehensive Job Vacancy Information:

—Automated Federal Job Opportunity Bulletin Board (FJOB)
—Automated Labor Exchange (State Employment Service)
—Federal Job Information Touch Screen Computer
Private Sector Employment Information Vacancy Listing
Job Search Information:
—-Job Resume Books/Articles
—Job Search Videos
Career Transition Workshops/Training:
—Individualized Job Development
—Interviewing Strategies
—Resume Preparation Programs
—Mounting an Effective Career Search
—Building Networks
—Dealing with Placement Agencies and Search Firms
—Retraining or Reskilling Programs
—Retirement Planninj
—Starting Your Own Business Planning
—Decision Training
—Personal Financial Planning
Person-to-Person Counseling:
—Group Career Counseling
—Job Clubs
—Individual Career Counseling (Peer or Professional)
—Employee Profile Development (Occupational, Career Aspiration, Career Plan-
ning)
a Diagnostic Assessment Tools (Tests): Abilities, Skills, Interests
—Retirement Planning and Assistance
—Spouse Assistance
—Job Matching
—Employee Assistance Counseling

3. Does the 2,018 employees registered in the IPP on September 16, 1994, reflect
all Federal employees separated involuntarily during this period, or only those sepa-
rated as result of Circular A~76 studies?

The 2,018 employees registered in the IPP on September 16, 1994, reflect employ-
ees who requested OPM’s assistance due to involuntarily separation by RIF, refusal
to relocate with a transfer of function, recovery from a workers compensation injury,
or ability to return to work after retiring with a disability, Employees whose func-
tions are contracted out receive RIF notices. OPM provides placement assistance to
any Federal worker who receives a RIF notice regardless of the reason for the RIF.
We do not monitor reasons for RIFs, and are therefore unable to provide the specific
number of RIF-ed employees registered in the IPP due to contracting out.

OPM and agencies have certain obligations toward veterans occupying restricted
positions whose functions are contracted out under Circular A-76. Therefore, veter-
ans separated from those positions (i.e., guards, elevator operators, messengers, and
custodians) are provided assistance through the IPP. No one has registered in the
IPP due to this reason.



83

resource center for local agenc; employees so that they could, on their own, pursue
a job change and hopefully reduce the need for or the number of employees affected
by a RIF. The partners also agreed that if McClellan Air Force Base was affected
by another major RIF, the Center would return to being strictly an outplacement
center.

Together, the SADA, McClellan Air Force Base and OPM operate the FOCUS cen-
ter to help displaced employees, with OPM being administratively responsible for
the program. The State of California's Employment Development Department also
provides a staff member to assist employees with their job searches.

SAN FRANCISCO, CALIFORNIA

The OPM San Francisco Service Center uses its job information mini-van as a mo-
Bile outplacement center. The mini-van is designed and equipped to assist agencies
undergoing downsizing related activities. OPM Service Center staff are able to work
directly from the vehicle providing information to employees on transfer, reinstate-
ment, employment opportunities, OPM Interagency Placement Program registration
and general employment counseling services.

TWIN CITIES, MINNESOTA

The Federal Employment Council, a subcommittee of the Federal Executive
Board’s Equal Employment Opportunity Committee, recently implemented an Infor-
mal Outplacement Assistance program. The referral program is designed to assist
candidates in the Twin Cities metropolitan area whose jobs may be threatened by
reorganization or downsizing.

Employees who have serious concerns about their job security may complete a reg-
istration form and submit it to the Federal Employment Council. The Council main-
tains a computerized list of applicants, Agencies who have vacancies may request
a list of status candidates who have indicated an interest in the appropriate occupa-
tion. Participation is voluntary for both the employee and the employer.

Upon referral, the agency may contact the individuals to request an application/
resume and verify that both appointment eligibility and qualification requirements
are met.

WASHINGTON, DC

In Washington, D.C., the Interagency Advisory Group (personnel directors of Ex-
ecutive Branch agencies) has formed a Career Transition Committee which is look-
ing to develop strategies for sharing outplacement and transition services across
Federal agencies.

[Note —To reduce publication costs, the subcommittee has omitted from the
record a report entitled, “New Directions, Improving Transistion Assistance for Fed-
eral Employees Affected by Downsizing.” A copy of the report may be found in the
subcommittee files.

ce)


21

in a real sense, least justification. By saying that, I don’t mean to
imply that contracting out is never justified. On the contrary, I
think we all live in the real world, where State after State and city
after city now contract out parts of what used to be a public mis-
sion.

I certainly recognize that, particularly in this day and age, our
obligation is to get the best deal for the taxpayer, so long as we
don’t cut corners unfairly and so long as we are not unfair to our
own workforce in some way. I have today dropped into the hopper
four bills. They are bipartisan; Ms. Morella is my chief cosponsor.
And those bills are aimed simply at helping us to understand what
we need to know about contracting out, even as we have insisted
on accountability from our own employees.

Mr. Chairman, I think you would be shocked at how little we do
know about this extraordinary expense of the Federal Government.
It caught my attention last year when I recognized that $105 bil-
lion of Federal Government money goes to contracting out for serv-
ices alone, and nobody can tell you anything about it. It's a virtual
shadow government that is out there working—whether poorly or
well, I do not know; I’m not here to criticize them.

I’m only here to say I don’t know enough about them, given the
size of that amount. Now, I got interested in it first because we
were, as is our custom, failing to give Federal employees their full
raise. Now, I am the first to say I represent Federal employees.
And so part of my job is, of course, to look out for Federal employ-
ees. They have a statutory raise that is due them, and they usually
don’t get the full amount.

But then I noticed that while virtually every—this was last year,
last session—while virtually every sector was taking some sacrifice,
this huge mission was taking no sacrifices; not $1 of sacrifice. It
seemed strange to put off of the screen such a large amount. For
example, between 1989 and 1992—and I will merely summarize my
testimony, Mr. Chairman—between 1989 and 1992, the number of
contractors doing business with the government rose from 62,819
to 82,472.

During the same period, the Federal workforce remained mostly
constant and, of course, had begun to go down. During that same
period, we did, in contracting out, $184 million in 1989 to $200 mil-
ion by 1992. I mean, this is a fast-growing cost of the government.
It’s such a fast-growing cost that it would pique almost anyone’s
curiosity. This is government-created work. I’m talking now, serv-
ice contracts.

So what we have here is what some have called a shadow gov-
ernment. These are folks who get their paycheck from the same
place that civil servants get theirs. The difference is that we insist
upon holding civil servants accountable. And while I see no reason
why people in the private sector should be held accountable in pre-
cisely the same way as in government, we certainly ought to know
more about this large amount of money and how it’s used than we
now know.

The Clinton administration, when it came in, said that they
thought service contracts were out of control. It was something
they didn’t know anything about. And they have begun to do some-
thing; they have proposed new performance-based standards for ex-


CONTRACTING OUT: CURRENT ISSUES

HEARING

BEFORE THE

SUBCOMMITTEE ON
CIVIL SERVICE

OF THE

COMMITTEE ON GOVERNMENT
REFORM AND OVERSIGHT
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
FIRST SESSION

APRIL 5, 1995

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

ee

U.S. GOVERNMENT PRINTING OFFICE
94-072 CC WASHINGTON : 1995

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
ISBN 0-16-047747-6

3


44

Inherently Governmental
"Funcdons

Inber- oly Governmental
y— Facstions

Government CoreTM
“= Copabliy

Inberently Governcrental
= Functions
Geseenment “Core”

Interently governmental function should be
pertcrmed by government employees only.

As a subset of inherently governental
functions, the government must keep a
‘core capability.” That is the technical,
management, and administrative in house
knowledge and skis to conceive, caceute,
and oversee contract activity

All other turctions should be contracted out
to te private sector


8

with respect to quantity of service, the quality provisions, those
kinds of things. And second, the second principle is that you must
foster a competitive market. A private monopoly is no better than
a public monopgly.

That means you want broad information out to the entire mar-
ket; you want to limit the length of time that contracts are given
for; you want to limit the size of contracts so that there’s a maxi-
mum amount of competition; you want to allow no price negotiation
after the contract is let. That way you have no such things as the
rightly concerned low-balling concern. And if the public agency or
Federal workforce is competing, they need to compete on the same
basis that the private contractors compete.

At the State and local government levels, more than 100 services
are now being contracted out. There is much more to go. I suspect
that less than 10 percent of the services at the State and local gov-
ernment level are contracted out at this point. Probably, it’s even
less than that. There is considerable potential for contracting out
and saving more money at the State and local government fevel.
And there certainly is potential at the Federal level as well.

As I conclude, let me also quickly digress and raise a concern
about the kinds of requirements that you at the congressional and
Federal level put on State and local governments to preclude con-
tracting out at the State and local government level. Perhaps one
of the most egregious Federal requirements is Section 13(c) of the
Urban Mass Transportation Act, or the Federal Transit Act, which
requires public transit agencies that lay off people for efficiencies
in economies to give them 6 years’ severance pay, which is more
than the average American receives—6 years at the most.

These requirements have, through the Department of Labor, sys-
tematically kept agencies from contracting out for service. But even
more than that, and more destructively, they have stopped minor-
ity entrepreneurs from starting services to improve the mobility in
our inner cities. I suggest to you, Mr. Chairman, that in apartheid
South Africa, minority—actually majority there—black entre-
preneurs were able to start services wherever they want and make
money and become entrepreneurs—something we deny our people
through a provision that I would consider one of the largest Fed-
eral unfunded mandates in the country—Section 13(c) of the Fed-
eral Transit Act.

The basic problem in government with respect to services is that
the costs are not determined in the marketplace, and they cannot
be determined in the marketplace without the application of com-
petition. The analysis I gave you a few minutes ago that suggested
Federal employees may be as much as 50 percent overpaid, should
be scrutinized with as much as question as any other analysis. The
fact is, administratively, we cannot determine market prices.

In the final analysis, it is why the Soviet Union died. And I
would suggest, the real answer, in the long run, is to move all of
government—as much of government as we can—to the market so
we can guarantee the taxpayers that we are paying no more than
market rates for what it is we are getting. Bringing government to
market will be just as difficult, I Believe, as bringing the market
to the Soviet Union and to the communist bloc—not an easy proc-
ess, but a process for the taxpayers that we must do.


7

20 years. From 1980 to 1991, private employee wages and benefits
went up about 3 percent on average in the United States.

State and local government employment wages and benefits went
up $4.78 for each average $1 increase in private employee pay. At
the Federal level, it was about $4.56. In fact, at this point, the av-
erage Federal employee makes about 45 percent more than the av-
erage private employee, and about 30 percent more than the aver-
age State government employee.

Now you have all seen, over the years, the various reports that
come out of the Federal Government that try to suggest or have
suggested that Federal Government employee compensation is
below that of the market. I would suggest to you that what we've
seen of those studies suggests that they are incomplete and, in fact,
that their results are outrageous.

Those studies do not include fringe benefits. They do not include
the fact that government employees—Federal government employ-
ees have defined benefit retirement programs that are very expen-
sive. They do not take into account the more liberal paid time off
that is available to Federal employees. And most importantly, they
don’t deal with the security issue.

The fact is, Federal Government employment is secure. The U.S.
Government is not going to merge with Canada and lay off half the
staff. But private employees see that happening all the time. We
have done an analysis, which we would be happy to provide the
committee, to suggest that, if you take two employees starting off
at age 25 and assume that they work for 40 years, and you start
them at the same wage rate in the private sector and in the Fed-
eral Government, you will see the Federal employee make about 50
percent more in value, when you consider the value of security and
the value of the extra time off and that kind of thing—on average,
about $600,000 over a career.

Now, back to competitive contracting and privatization. The ge-
nius of competitive contracting is that the government, the public
agency, retains full control. It is not that the private sector is bet-
ter than the public sector, it is that competition produces better re-
sults than monopoly. Around the country, State and local govern-
ments have been competitively contracting for years; cost savings
ranging generally from 15 to 50 percent, some cases of 75 percent.

Surveys of public administrators have said that cost savings
occur in 98 percent of the cases. And we would argue, it should be
100 percent, because if youre not going to save money, you
shouldn’t privatize. Second. the competitive market puts competi-
tive incentives into government itself. And you see the cost curve
of government going up less when government does more competi-
tion—sort of the ripple effect on the rest of government services.

And finally, something that a lot of people never consider, is that
the private contractors pay taxes, which public agencies do not pay,
which reduces costs even more. It is important, though, as you con-
sider privatization and contracting out, that you do it in such a
way that you achieve good public results. And I would suggest that
there are two prima principles of competitive contracting.

The first is that the public agency, or the Federal Government
in this case, should remain in full policy control. It should decide
what services are being contracted out; what are the provisions


57

it. Federal employees are not satisfied because everybody knows
that an A-76 study is being done and it takes a long time. And ev-
erybody is nervous and wondering if they’re going to be able to
keep their job or not.

The private sector is upset because it’s competing for work that
it may or may not get over an extended period of time. So if I were
to change one thing in the process, it would be to figure out how
to do it faster than it’s done today. I think that’s a real critical
need.

Mr. Moran. But you would not change it substantively. You'd
change——

Mr. Tostas. I would not change it substantively. I would not. I
would expand its coverage to include service contracts, which are
not currently covered.

Mr. Moran. Mr. Concklin, Mr. Engebretson, do you have a struc-
ture for what you would replace the A-76 with?

Mr. CONCKLIN. Yes, we have what you could at best call a con-
ceptual structure. And the reason we don’t have a specific or design
level structure is, you cannot do that unless you can get inside a
government agency and go through the process of looking at all—
and I apologize if this sounds tutorial—but all of the functions and
all of the money and putting them into one bucket which would be
called program or direct charge type activity, and another bucket
which would be the support or overhead activity, and then seeing
what the numbers look. like; and from that process—which is ex-
actly what a complex corporation goes through constantly—from
that process develop some much more accurate estimating relation-
ships that would indeed remove the current situation, where things
that are general purpose, like a Pentagon—and there are countless
similar examples—are treated as free goods or sunk costs and do
not get flowed down in a fractional sense and incorporated as over-
head in the thing—the motorpool or whatever the thing is that is
the subject of potential contracting out.

But it’s not rocket science; it’s relatively easy to do by qualified
people. It just hasn’t been done.

Mr. ENGEBRETSON. I'd also like to remind my colleague, Mr.
Tobias, that not too long ago, the study process, as I’ve said in my
epening statement, went as long as 9 years at one point. I would
like to remind him that this is now a 24-month, for a single func-
tion, and 48-month for a multifunction, which means the process
has moved a little bit faster. But if you will read my testimony,
we're saying that we want the study process closed even tighter—
12 months for a single function, and 24 months for a multifunction.

We think it could be done in that amount of time. And once that
happens, then everybody is saving dollars, the government in-
cluded.

Mr. Moran. My impression is that most often the decision is
made whether or not to contract out, and then the agency goes
through a perfunctory process to do an A-76 to hit whatever their
objectives are. And I don’t know that’s the case. I don’t have any
scientific experience, empirical—well, I have empirical, I don’t have
any scientific, statistical analysis. But it’s been my observation that.
the decision whether or not to contract out is generally made first,
and then the A-76 is done.


40

ence, advanced academic preparation, and intensive on-the-job training. Areas such
as systems management, operations research, engineering, training, and other busi-
ness sciences are good examples of areas of specialization. Ongoing commercial as
well as government projects enable a company to retain hight; qualified personnel
and state-of-the-art capabilities, These resources stand ready for the government to
tap into as needed through contracting out.

lexibillty. The government enjoys great flexibility by using services contractors.
The government quickly can acquire or expand needed expertise, use it for a limited
period of time, and then swiftly discontinue its use. The government only pays for
the highly specialized service, while the service is needed. Instead of hiring a full-
time workforce for tasks which may not be long term, contractor workers can sup-
plement the workload peaks and when lulls occur, the contract can expire. This a]
proach allows an agency to tailor workforce expenditures to their specific need, w:
out carrying full-time cost burdens in times when there is less than full-time de-
mand.

In the private sector, contracting out (commonly referred to as outsourcing) is a
common practice which meets with great success. Whether calling upon accountants
during a busy tax period or supplementing computer specialists as a network is
being installed or adding help to support a major conference, the private sector adds
to its efficiency with short-term help not carried on employee payrolls after projects
are completed.

Utilization of the private sector also allows the government “technology flexibil-
ity.” As technology focuses change, government managers cannot always redirect ex-
isting employees to focus on new technologies, due to civil service personnel rules
and organizational rigidity. For example, if a DoE research scientist. specializing in
alternate fuel research is asked to make a minor change and transfer his focus to
even another renewable energy technology, he cannot be required to make the shift.
By contrast, it is commonplace for a contractor to respond instantaneously to the
governments directive, shifting from one to another technology focus.

Competition. As the single most dominant factor in cost savings, competition
brings market forces into play, where cost consciousness is rewarded and ineffi-
ciency punished. The federal procurement system is extremely competitive, demand-
ing that services contractors compete against each other in order to win a contract.
It is a rare occasion when a contractor is not in intense competition. As a result,
competition provides cost containment pressures, allowing the government to obtain
the best value for its dollars. Firms must be creative, value conscious, and cost com-
petitive in order to win competitions in the federal marketplace.

Real-life examples of competition in today’s market can yield millions of dollars
in savings, as was the case recently in an army base operations and maintenance
contract, when $1 million was saved through a recompetition. The incumbent com-
pany was forced to develop innovative approaches and lower cost solutions in order
to win the contract again. The average profit margins for professional services are
a low 2%-4%, illustrating the role of campetition ‘in maintaining low cost profiles
to the taxpayer. In addition to cost savings, competition of ideas and solutions is
occurring among professional services, allowing @ government manager to choose
from many ideas, not merely the ones developed inside the government.

In continuing value and success in the use of the private sector, PSC recognizes
the importance of proper management and contract oversight. We ‘sincerely believe
that the majority of contracts are operating in a functional, value-added way. Occa-
sional stories of abuse or mismanagement are heard, frequently resulting from inad-
equate contract management and lack of meaningful communication between the
government and contractors, but they are the exception not the rule, and should be
addressed appropriately.

BALANCED MODEL FOR CONTRACTING OUT.

Despite the success found today in contracting out, there continues to be tension
between the private sector and the government as to the amount of work and func-
tions that should be performed in house by government employees or in the private
sector by contractors.

Policy institutions, including The Procurement Roundtable, a nonprofit group of
40 former high-level acquisition officials, have advocated various conceptual ap-
proaches to the issue. The Procurement Roundtable argues that the very term “con-
tracting out” is a misnomer, since it connotes or presumes that all functions “be-
long” to the government in the first place. The group maintains that such an as-
sumption is inaccurate, and the “right” to performance should not be automatically
accrued. to the government. Therefore, they argue, the real issue is not whether a


81

4. How many people were hired by Federal agencies during this period and do
your records identify the job series of the separated employees and the record of
agencies’ hiring during that period?

During the period from December 1, 1993 to September 16, 1994, approximately
15,000 hires were made by Federal agencies.

Top Fifteen Occupation Series
IRIF-ed tn All Agencies Fiscal Year 1994)

Rank ari-eg Ocean, Seti Occupations
418 aul Sewing Machine Operator
262 1810 Investigator
23 4204 Pipefitter
238 5334 Marine Machinery Mechanic
210 3806 Sheet Metal Mechanic
2 ud Machinist
168 og Secretary
167 3820 Shipfiter
136 2604 Electronic Mechanic
150 2805 Electrician
143 ‘0802 Engineering Technician
126 0303 ‘Miscellaneous Clerk & Assistant
118 3105 Fabric Worker
113 3708 Welder
105 4102 Painter

‘Source: OPM Central Personnel Data File

Top Fifteen Occupation Series
[tor Now Hires In All Agencies Fiscal Year 1994)

wank lon Ou Sees Oecpatns
45 0007 Correction Officer
669 0610 ‘Nurse
525, 0318 ‘Secretary
476 0326 Office Automation
410 0621 Nursing Assistant
389 1896 Border Patrol
370 0105 Social Insurance Adm.
362 0334 Computer Specialist
323 0962 Contact Rep.
al 0301 Misc, Admin.
237 0855 Electronic Engineer
233 0303 Miscellaneous Clerk & Assistant
233 1340 ‘Meteorology
230 0185 Social Worker
228 0602 Medical Officer

‘Source: OPM Central Personnel Oata File

Our records show that displaced employees generally do not have the same occu-
pational skills required for jobs in other Federal agencies. For example, of the top
15 occupations in which Ris occurred, only 2 were among the top 15 occupations
with the most new hires,

5. Do your records indicate any effort on the part of OPM to provide additional
training for separated employees? If so, please describe those measures. If not,
please explain?

Agencies may retrain employees for placement within the same agency or in other
Government agencies. Additional assistance, including retraining for placement out-
side the Federal Government, is available through programs administered by the
Department of Labor. Under the Job Training Partnership Act, individual States re-
ceives funds from the Department of Labor to provide retraining assistance to dis-
placed Federal workers.

& Do you have any additional information that you might provide to describe
OPM’s efforts to monitor the A~76 program's effects on Federal employees?



28

long-term best interests. Three, contracting out is a valuable man-
agement tool that plays an integral role in helping the government
downsize and rightsize, without eliminating important services.

Thanks to the efforts of people like yourself, Mr. Chairman, and
Congressmen John Duncan and Scott Klug and others, Congress
appears to be ready to get serious about this issue. And we stand
ready, of course, to work with you. I would like to offer a few spe-
cific and, we think, important recommendations that we hope will
be included in any legislative initiatives you might pursue.

First, we recommend that a high-level commission be formed to
review all Federal statutes and regulations to identify any obsta-
cles to contracting out that may exist. The commission should also
be charged with surveying the vast array of functions and services
now performed by the government, and identifying those that are
truly commercial in nature and should thus be contracted out. The
potential savings are very significant.

Depending on which analysis one chooses to use, those savings
could be anywhere from $12 billion to $36 billion over 5 years.
Clearly, with savings of that magnitude, we can ill afford to be
complacent. Second, Congress must repeal Section 5(g) of the Fed-
eral Workforce Restructuring Act of 1994. 5(g) requires that a cost
comparison be conducted if the positions to be contracted will be
counted toward the agency’s share of the 272,000 FTE reduction
mandated by the act.

The requirement is impractical, ill-conceived and outrageously
costly. The manpower to comply with it simply doesn’t exist, and
the budget. could. never support compliance. This brings me to our
third recommendation. It is time to recognize that the whole sys-
tem of public-private cost comparisons is in need of substantial re-
pair. Under OMB Circular A-76, a cost comparison process is es-
tablished for use whenever a government entity contemplates con-
verting to contract a function with more than 10 FTEs.

While the A-76 was designed as a means of protecting the inter-
ests of the Federal workers by providing them an opportunity to es-
sentially bid against private contractors, the cost comparison proc-
ess simply does not work. Government accounting systems do not
allow the full accounting of all overhead and other indirect costs in
a manner as comprehensive as required of the private sector. As
such, the playing field is far from level, and it must be fixed.

To achieve that, we recommend that a complete independent
analysis of current cost comparison methodologies be conducted.
The goal will be to determine how those processes can be stream-
lined, adjusted to the account for real government costs, and uti-
lized more fairly. Fourth, we must take steps to prevent the arbi-
trary refederalization of contracted work.

Not a day goes by, Mr. Chairman, that I do not get a call from
a concerned company that has been informed by a customer that
some of their contracted positions are being brought back in house.
Under A-76, such refederalization is supposed to be preceded by a
comprehensive cost comparison. But often, no such comparison is
conducted. More importantly, if a contract is not performing ade-
quately and an agency feels it could achieve greater savings than
are currently being realized, that contract should be recompeted.


45

Mr. Mica. We thank you for your testimony, and at this time
would like to call on a gentleman who is becoming a regular at our
panel, Mr. Robert Tobias, president of the National Treasury Em-
ployees’ Union. Welcome.

Mr. Topias. Thank you, Mr. Chairman. I really appreciate your
providing us with the opportunity to testify. I start with the propo-
sition today that the public is entitled to full and fair competition
between the employees of the Federal Government and the private
sector, to determine who can produce the service at the least cost
with the highest customer satisfaction.

Mr. Mica. You might want to pull the mic up just a little bit clos-

er.

Mr. Tosias. Thank you. Maybe I'll repeat that, because I think
it’s important. I start with the proposition that the public is enti-
tled to full and fair competition Setween the employees of the Fed-
eral Government and the private sector, to determine who can

roduce the service at the least cost with the highest customer sat-
isfaction. I think it’s the responsibility of Congress to create a com-
parison process between the private and government sector free of
the erroneous predisposition that the private sector can do it bet-
ter, faster, cheaper and so forth.

What we've been hearing today is, I think, kind of interesting so
far—somehow that the national economy will benefit if we contract
out work that’s performed by Federal employees currently; or that
the government ought enact a policy to eliminate Federal jobs and
contract them out or privatize them.

But it seems to me that the issue for the public is not who per-
forms it, but whether it’s performed at the cheapest possible cost
with the greatest customer satisfaction. So I believe that enacting
a policy which contracts out jobs or eliminates services and gives
them over to the private sector without knowing whether or not it
would cost more would be very, very irresponsible. And especially
in light of the reports that GAO has put out in the last 2 years,
which reveal that the contracting out has cost the government sig-
nificantly more than the work performed by Federal employees.

Second, it is the responsibility of Congress, I think, to require
that a cost comparison is conducted every single time. Well over
$12 billion—this is not nickels and dimes, but $12 billion in service
contracts are not subjected to OMB Circular A-76; they’re just
done. They’re gone; they’re out there. We don’t know whether they
cost more, the same or less. There wasn’t any competition there.

And finally, Congress must ensure that Federal agencies can
bring work back in the Federal Government when the Federal Gov-
ernment can prove that it can do it cheaper. This is now very, very
difficult because once the work goes out, the FTEs are lost and the
work is performed outside no matter what the cost happens to be.
It seems to me that Congress has to allow agencies to manage their
resources and their products in a way that allows them to produce
it at the least possible cost, rather than placing arbitrary caps on
FTES, which often requires work to be performed no matter the
cost.

The goal must be to shrink the government debt, not shrink the
government. The idea that, in terms of rightsizing, we would elimi-
nate 272,900 jobs and then substitute other private sector workers


27

and Mr. Robert Tobias, the national president of the National
Treasury Employees’ Union. Gentlemen, if you wouldn’t mind, it’s
the custom of the subcommittee to swear in our witnesses.

[Witnesses sworn.]

Mr. Mica. Welcome, I thank you for your patience. You've sur-
vived a rule vote, a very contentious previous question vote, and an
unscheduled witness. And we look forward to your testimony before
the subcommittee. I’m going to start with Gary Engebretson, presi-
dent of Contract Services Association. Welcome, again.

STATEMENT OF GARY ENGEBRETSON, PRESIDENT, CONTRACT
SERVICES ASSOCIATION; BERT CONCKLIN, PRESIDENT, PRO-
FESSIONAL SERVICES COUNCIL; AND ROBERT TOBIAS, NA-
TIONAL PRESIDENT, THE NATIONAL TREASURY EMPLOY-
EES’ UNION

Mr. ENGEBRETSON. Mr. Chairman, thank you. Also I would like
to say thank you to my Congressman, Congressman Moran. I live
in his district, and so it’s also interesting to be testifying before
your own representative here at the committee. Mr. Chairman,
members of the committee, my name is Gary Engebretson. ’m
president of the Contract Service Association of America, the Na-
tion’s oldest association of government services contractors.

Our more than 200 member companies perform support services
of all kinds, from basic maintenance to sophisticated technical op-
erations, for most agencies of the Federal Government, as well as
scores of State and local governments. Indeed, our industry is
gratified that the issues surrounding privatization and contracting
out are receiving such serious and close attention in the 104th Con-
gress.

It is our hope that this attention and consideration will lead to
the kind of assertive, forward-looking steps that will enable the
government to fully realize the enormous benefits available
through a well-run comprehensive program of contracting out gov-
ernment services. Let me first clarify the terms of this discussion.
Indeed, the terms Privatization and contracting out or outsourcing
are often used as if they are synonymous; but they are not.

Privatization refers to the government divesting itself of basic
control, and sometimes ownership, of an asset or a function. Con-
tracting out, or outsourcing, is a relatively straightforward concept,
whereby the government simply retains a private sector provider to
perform the work, with all ownership and control remaining vested
with the government.

Both of these concepts have been discussed with increasing fre-
quency. But I’d like to limit my remarks today to the contracting
out, since it is the more common. In discussing contracting out,
three facts are clear: one, contracting out saves money. As the Wal
Street Journal reported in April 1993, the government saves an av-
erage of 25 percent per year per contract. Two, the national inter-
est is best served by an aggressive program of contracting out. In-
deed, our entire economic system is Bau on the well-founded belief
that a strong and dynamic private sector is the key to our Nation’s
economic vitality.

Thus, to the extent the government is performing commercial
type services it is competing with the private sector in our Nation’s


64

T am convinced that the contract controllers’ lack of training, which is only thirty
days, generates safety (problems. The FAA asserts that the contract controllers are
certified by the FAA. The point I would make is that the FAA makes the certifi-
cati If the FAA wants to certify these controllers with thirty minutes on the job
training, as Congressman Lightfoot Teported in a transportation appropriations
hearing this month, then they will and they have. Thirty days provides approxi-
mately eight to ten hours of on-the-job training. There is no question that the stand-
ards have been lowered. Mr. Hinson testified at the same appropriations hearing
that FAA controllers receive much more training than contract controllers. In fact,
FAA controllers receive anywhere from three to six months of training at the Acad-
emy and anywhere from six months to two years on the job training plus classroom
training and refresher courses.

The FAA asserts that contract towers are subject to the same types of periodic
evaluations as FAA towers. The truth is that FAA towers are evaluated twice a
year, regionally and nationally, on over 240 factors while contract towers are evalu-
ated only once every two years on only 68 factors. An evaluation of the non-federal
personnel tower, Stewart Tower, New York, revealed a serious lack of compliance
with FAA regulations and procedures. I quote, “Interviews were conducted with al-
most all facility personnel and with several individuals who utilize the Stewart Air-
port. This process indicated that there are serious and fundamental problems with
the air traffic operation in the Stewart area. It is alleged that operational errors
and deviations occur fairly often and are covered up. The most recent significant in-
cident concerned an aircraft that took off while vehicles were sweeping the runway.
It is alleged that they missed each other by less than a hundred feet. Neither the
Airport anager, nor anyone else associated with this event, forwarded the informa-
tion to the FAA.” While this tower was not one of the first twenty-five FAA towers
to be contracted out but one that was contracted out years ago, this evaluation
speaks to the fact that safety suffers at privatized airports. Coverups and large scale
deviations do not occur in FAA towers. The problem as I see it, Mr. Chairman, is
that the FAA has a poor performance record on contract oversight. The problems
cited would substantiate this.

‘Another safety problem with the contract tower program as designed is the dis-

arity in drug and alcohol testing. Current FAA controllers are subject to random
rug and alcohol testing on a yearly basis. Contract controllers are drug tested for
a period of five years and, if they test negative for those five years they are there-
after exempt. This lack of consistent FAA oversight is an accident waiting to hap-

pen.

For national security reasons, NATCA believes that one unified national air space
system is far superior to the fractured system we now have as a result of the con-
tract tower program.

I urge this committee to seriously consider terminating the contract tower Rake
gram for safety reasons until an investigation can be conducted. The lives of thou-
sands of travelers are at stake. The current contract tower program was a hastily
conceived idea which complied with the Administration’s National Performance Re-
view. While NATCA supports reinventing government, we do not support
reinventing safety. It is time to take a serious look at the effects of this program.
Your committee has the power to stop further towers from being contracted. Well
over seventy Members of the House signed a letter last November asking the FAA
to terminate the program and reprogram the FY 95 funds appropriated for this pur-
pose. You have the congressional support you need to take action.

‘Thank you for the opportunity you and your committee have afforded the air traf-
fic controllers to address our concerns. I know that you will carefully consider the
statement put forward. For this we are grateful. We wu this committee to hold
further hearings on this issue so that problems associated with public safety can be
scrutinized. Thank you.

PREPARED STATEMENT OF JOHN N. STURDIVANT, NATIONAL PRESIDENT, AMERICAN
FEDERATION OF GOVERNMENT Employees, AFL-CIO

INTRODUCTION

Mr, Chairman and members of the Subcommittee: My name is John Sturdivant,
and I am the National President of the American Federation of Government Em-
loyees, AFL-CIO. While I obviously would have preferred to testify in person be-
fore your Subcommittee, I appreciate the opportunity to at least submit for the
record the views of the over 700,000 federal employees across the nation represented
by AFGE concerning the ever-mounting problems associated with service contract-


4

comes particularly important that we have the flexibility to be able
to contract with professional services, with organizations, with peo-
ple that can provide the services that we need; and that we achieve
the kind of fair and responsible balance between the Federal
workforce and the private sector that is necessary to ensure the ef-
ficient use of taxpayers money and the most effective use of the re-
sources that we provide to the Federal Government.

So I’m glad we're having these hearings. They’re important hear-
ings. I think they are going to show us that we have good people,
both in the private contracting sector as well as, certainly, within
the Federal workforce. And it is up to us to do what we can to
make sure that their talents are fully available and appreciated
and used by both the Executive and legislative branches.

So I appreciate the hearing, Mr. Chairman. I appreciate the op-
portunity to participate in it, and look forward to the testimony of
our witnesses.

Mr. Mica. Well, I thank the gentleman both for his opening com-
ments and for his sincerity in trying to do the best job possible to
address some of these issues. This morning we met with the Vice
President—myself and Mr. Moran, several other Members, Mr.
Clinger, and Miss Collins. The administration, the Vice President,
has expressed a similar willingness to work together when we face
downsizing, when we face civil service reform, and some of the
other issues that are going to hit us.

ain, I thank you for your comments and your willingness to
work with me on those issues. And I’ll yield now to the vice chair-
man, Mr. Bass.

Mr. Bass. Thank you, Mr. Chairman. And I want to apologize
initially for failing to be present at this morning’s hearing. As you
can probably tell, I am suffering from laryngitis, which, in this line
of business, is a serious disability. I’m very pleased that we're hav-
ing these hearings today, and I want to commend you for calling
them.

As has been said by both you and Mr. Moran, as we look at alter-
natives to the traditional structure of government that we have
today, I think it’s important that we consider contracting out of
services to be a priority, but only so long as that priority makes
government work better, more efficiently, and smarter.

So I will be interested, in the course of these hearings today, to
hear what our witnesses have to say about this process in that
light. So with that, Mr. Chairman, Y thank you very much, and
yield back.

[The prepared statement of Hon. Charles F. Bass follows:]

PREPARED STATEMENT OF Hon. CHARLES F. Bass, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF NEW HAMPSHIRE

Mr. Chairman, I would like to thank today’s witnesses for taking the time to ap-
pear before this Committee. We will be continuing a very important discussion
today and building on last week’s hearing on the same topic. At issue is federal pol-
icy regarding the contracting out of services.

It is appropriate that we are holding these hearings at a time when we are re-
evaluating the scope and role of the federal government. In the future, I expect that
we will turn more and more toward the private sector to perform activities currently
performed by the government. This will require clear guidelines on systematic cost
comparisons and a thorough understanding of the potential pitfalls we may encoun-
ter.


18

they've developed, rather carefully, a public-private competition
model. The basic idea being to recognize we're not saying that pub-
lic employees are less efficient than private employees. SWe're only
saying that world records, for example—if I can use an example of
track; I’m an old track man. The fact is that the 4-minute mile
would never have occurred without competition.

And so, competition makes us all better, whether we're in the
private sector or the public sector. And this model of public-private
sector—something that comes out, by the way, very strongly in
Vice President Gore’s National Performance Review Reinventing
Government—is a very valid thing. And obviously, public unions,
public employee work groups ought to be allowed to compete, ought
to be encouraged to compete.

In the long run, one would hope that you would create a situa-
tion whereby you would be able to corporatize these organizations
and sell them to the public employees, which has been done in a
lot of countries.

Mr. Mica. Another problem that we had show up in our last
panel with OMB is that OMB has a responsibility to oversee and
prescribe some of the parameters for these functions being
privatized. And one of the problems that we found is that the:
weren't able to create any models to quantify the task, or qualify
the task, and then, also, to evaluate performance.

Is there any way we can judge once—you get into this what you
want to get in, what you want done; and then when it’s performed,
to review it and analyze and see if the performances measure up
and if you’re getting your dollar’s worth.

Mr. Cox. Well, yes, that’s a real problem. Because I would sug-
gest, if one cannot do that in specifying the contract for private
suppliers to bid on, I would question whether government has the
capability of evaluating its performance, with respect to public em-
ployees that it employs. And one of the most difficult problems, as
yo indicate, in privatization and contracting out of services, has

een the difficulty of specifying the task.

And indeed, the privatization process has given government, in
a lot of cases, the ability to, for the first time, really specify the
task. But depending on the kind of task, you can have standards
with respect to any number of kinds of performance issues. You
ought to try to have the administration be as nonprescriptive as
possible and flexible as possible.

With respect to those things you're very interested in, again, sim-
ple thing is, you go back to public transit. And I realize the world

as more in it than public transit, but you’re concerned about on-
time performance; you're concerned about meeting schedules;
you're concerned about the buses being clean—any number of
things like that. And what you do is, you can set up processes
whereby contractors pay penalties when they fail to perform up to
those standards, which creates an additional financial incentive for
them to provide better service.

And I mean, the experience has been really stunning in some
places. In Los Angeles, Price Waterhouse, the accounting firm, has
reported that the contracting out of a major bus system in the San
Gabriel Valley section of Los Angeles has saved 60 percent. The
service is better and the quality is better and the safety is better.


82

In January 1995, OPM published regulations to help affected workers earlier in
the downsizing process. Agencies may now issue a Certification of Expected Separa-
tion to employees when the agency expects to separate them within 6 months by
RIF or contracting out. This notice allows employees to register up to 6 months be-
fore separation for placement and retraining programs administered by an agency,
OPM, and the Department of Labor.

OPM extensive study of transition assistance resulted in several recommendations
to improve assistance provided to displaced employees. We found that a wide range
of tools and strategies is necessary to best help affected workers. The recommended
new initiatives are built around three major themes:

. empowering RIF-ed employees to take charge of their own careers through
a new model of transition assistance which provides:

—placement assistance and selection priority from their own agencies through
mandatory inplacement programs;

—interagency job search assistance; and

—selection priority in other agencies when they apply and are well qualified.
improving transition support for employees by giving all Federal agencies ac-
cess to the same kinds of tools and assistance programs, including:

—earlier assistance under the Job Training Partnership Act;

—studying the feasibility of continuing the employer share of health benefits
after separation at agency discretion to facilitate placement of employees in the
private sector;

continuing access to agency counseling and employee assistance programs for

up to one year after a RIF;

—cross-agency buyouts to create placements; and

—authority for agencies to use a full range of professional transition services
including fee for placement assistance.

* developing new incentives for public and private sector employers to use on
a discretionary basis to hire displaced Federal workers, inclading:

—vouchers for retraining/relocation;

—no-cost tryouts;

—-FTE ceiling relief for the first year after a displaced worker is hired; and

—new probationary period when an agency modifies qualifications to hire a dis-

placed employee from another Federal agency.

These initiatives represent significant new directions in employee outplacement
assistance programs. Some will require legislative approval by Congress. Others can
be implemented by regulations, executive orders or local agreements. To gain more
experience with these new approaches, some may best be tested on a local basis or
implemented as models to gauge their effectiveness. OPM intends to pursue such
initiatives vigorously.

7, Can OPM provide examples of cities where Federal Executive Boards or other
interagency organizations have facilitated transitions for people affected by contract-
ing decisions?

‘0 expand the availability of outplacement help to displaced employees, OPM is
working with agencies to establish interagency assistance centers which provide
help to any Federal displaced worker. The following are examples of innovative
interagency programs at the local level:

SACRAMENTO, CALIFORNIA

Currently, OPM has a partnership with Federal agencies to operate such a center
at McClellan Air Force Base, California, for displace poplovees in the greater Sac-
ramento area. This project has been well received and OPM is extending its efforts
to other areas in the country, especially those severely affected by downsizing and
restructuring.

The Sacramento Depot Activity (SADA) was identified for closure by the
Base Realignment and Closure Commission. To assist in the outplacement of its em-
ployees during the downsizing, the SADA opened a Future Opportunities, Career
Bnd Ultimate juccess (FOCUS Center. The Center offers a variety of services rang-
ing from computerized employment application programs to extensive job vacancy
listings for public and private sector positions.

Tn anticipation of other agencies facing downsizing and knowing the extensive
start-up costs to establish an effective outplacement center, OPM proposed continu-
ing operation of the FOCUS Center as a transition assistance and career resource
center to help all displaced Federal Government employees in the area.

The Center’s mission is two-fold: 1) to act as an outplacement center for Depot
employees who are looking for employment and other Federal employees from local
agencies who are in receipt of a reduction in force notice; and 2) to serve as a career



55

When the government manager decides that they want to do an
A-76 program, they announce to Congress that they're going to do
a study. In years past, there were times when they would announce
the study, and then 5 years later, they would start it. Today, of
course, they can’t do that, with the 24-month, 48-month rule.

When they start the study, they go through the process of evalu-
ating each one of the positions that would be contracted out. Then
they put together what is called a most efficient organization, or
an MEO. The MEO is then what drives the process to determine
the positions that are going to be contracted out, and also what the
cost will be; meaning that the government will use that MEO to
put their price together.

They do this and then they have the DCAA the auditor come in
and audit this MEO to see if prices are right, et cetera. And then
they put it in a vault and lock it up. And they use, then, this MEO
and the process to put the RFP together for the private sector. The
private sector then of course goes through its evaluation of the
RFP; puts its proposals together; and then submits their proposals
to the government.

The government will evaluate the process, meaning the technical
capabilities of the company as well as the price. And once that com-
pany has been selected that they're going to compare with the gov-
ernment MEO then they pull the government’s MEO, or most effi-
cient organization proposal out of the safe and they compare it. As
you probably well know, at that point, the contractor has to beat
the government proposal by 10 percent.

That's basically how it works. The process itself does have built
in competitions and also the things that could make it work. We
know that the process has problems. We're the first ones that will
agree with this, for the simple reason that we have some members
in our organization that say, I don’t want to bid the A-76 RFP. But
3 years later, if it’s a l-year, 2-year project or a 4-year renewal
project, then they will bid it on recompetition.

They won’t take the chance of that first time, because startup
and changing over to the private sector is sometimes difficult. How-
ever, our members hire, because of right of first refusal, as high as
75 and 80 percent that have been employed by the government.

Mr. Mica. Did you want to comment, Mr. Concklin?

Mr. CONCKLIN. Yes. First of all, I want to reiterate that we
strongly oppose the continued use of cost comparisons, but then I
want to respond to your question. And I would hope to demystify
the cost comparison debate. The current cost comparison methodol-
ogy—and intelligent people disagree on this, but most agree, I
think—that it has a built-in bias against contractors, on average
that’s probably in the 10 to 20 percent range, because the govern-
ment’s budget and accounting system, unlike the private sector,
does not—does not—fully allocate overhead.

The Pentagon has a sunk cost. When the Department of Defense
looks at a motorpool 8 levels down in the DOD vertical organiza-
tion, the multibillion dollar cost of the Pentagon does not get allo-
cated down into the cost for that motorpool in some fractional way.
If you're doing the comparable thing and it’s Martin-Marietta, with
a 10-level deep organization, bidding on that motorpool, by law—


79

FEDERAL EMPLOYEES GROUP LIFE INSURANCE (FEGLI)

Employees who retire on an immediate annuity may continue their enrollment in
the FEGLI program if enrollment requirements are met.

Employees who separate and are not eligible for an annuity may convert their life
insurance to individual coverage and pay the full cost.

SPECIAL PROGRAMS AND BENEFITS AVAILABLE ONLY TO DEPARTMENT OF DEFENSE
EMPLOYEES

In addition to the other benefits and services listed above, the following benefits
and services are available only to Department of Defense employees. Many of these
benefits have been authorized under special legislative provisions in annual Defense
Authorization bills passed over the last few years.

PLACEMENT ASSISTANCE

DOD Priority Placement Program (PPP)—An internal DOD mandatory placement
program which provides placement rights for separated DOD employees to other va-
cant positions within DOD. When a vacancy occurs, DOD components must consider
displaced DOD employees who have matching skills and grades before filling the va-
cancy through other means. Most internal personnel movement is prohibited if a
qualified displaced DOD employee is available.

Defense Outplacement Referral System (DORS)—DORS was developed to assist
DOD civilian and military workers and their spouses. This program is administered
jointly by DOD and OPM. DORS provides public and private sector employers lists
of DOD workers who match skills needed for employers’ vacancies. The program is
open to all DOD employees and employers, but there is no requirement to use it.

JOB TRAINING PARTNERSHIP ACT (JTPA)

Assistance available for job search or retraining may begin 2 years prior to RIF
separation for DOD employees working at components listed on Base Realignment
and Closure lists, instead of the maximum 180 days authorized for other employees.

OUTPLACEMENT SUBSIDY

In addition to the option available to all agencies, GSA has permitted DOD to au-
thorize relocation payments for employees who are:
—in receipt of a Certificate of Expected Separation;
—in receipt of a notice or proposed separation as a result of RIF; or
—in particular occupational series and grades designated as surplus by DOD,
when it is determined that their voluntary transfer to another Federal agency
would create a vacancy for an employee in receipt of a notice of expected or pro-
posed RIF separation. (Payment for this particular action is not available for
non-Defense agencies.)
DOD policy allows payment of up to $20,000 in these cases.

UNLIMITED ANNUAL LEAVE CARRYOVER

To encourage retention until closure, DOD employces located at installations des-
jgnated for closure may carry over unlimited anaval leave beyond the normal 240
jour cap.

ADVANCE NOTIFICATION PERIOD

A 120-day RIF notice period (instead of the usual 60 days) is required for DOD
employees at activities anticipating 50 or more separations.

EXTENDED FEDERAL EMPLOYEE HEALTH BENEFITS (FEHB) COVERAGE

Employees enrolled in the FEHB Program may elect to continue enrollment for
18 months following separation with the agency continuing to pay its share and any
additional administrative costs. Employees would continue to pay their share.

FULL CONSIDERATION
Non-DOD agencies are required by law to give full consideration to qualified dis-

placed DOD employees before selecting a candidate from outside the agency for a
vacant position.


62

the opportunity to submit this statement on the contracting out of Level 1 VFR tow-
ers.

Iam fully aware of the severe budget constraints the federal government is under
and the genuine desire of Congress to make strides in balancing the federal budget
and reducing the size of the federal government. I am concerned, however, that the
margin of aviation safety may be lowered in the effort to give the taxpayer economic
relief and less burdensome government. 1 am submitting this statement in an effort
to bring to the attention of this able committee a practice exercised by the FAA
which affects public safety. While NATCA applauds the Congress’ efforts at budget
Teducion, we do not believe that aviation safety should suffer in any way in these
efforts.

The FAA has been forced to make the questionable choice of contracting out Level
1 towers for budgetary reasons. Level 1 towers are towers which rely on “Visual
Flight Rules” and controllers working in these towers are responsible for the flow
of air traffic within a five mile radius. VFR control towers (Level 1’s) are not
equipped with radar but many experience a high volume of general and commercial
traffic. For instance, in just three of the towers on the 1995 hit list, Hyannis, Mas-
sachusetts has a total of 62,863 commercial operations per year and Lihue, Hawaii
has 42,474 and Key West, Florida a total of 28,194. When you add general aviation
operations to these figures, Hyannis totals out at 125,412, Lihue at 57,686 and Key

fest at 94,511. The aircraft using these facilities range from Cessna 150’s to Boeing
77's. The Level 1 controllers work the aircraft that carry hundreds of thousands
of tourists, families and business men and women every year.

We have come to a sad point in aviation history where the FAA feels that it can
no longer provide air traffic control services to certain areas of the country, makes
a lone determination to contract out such services, conducts no A-76 cost benefit
analysis and escapes scrutiny for their actions. This situation exists in part because
of the failure of OMB Circular A-76.

In April of 1993, prior to any formal notice to the National Air Traffic Controllers
Association (NATCA), the FAA determined to contract out one hundred of its Level
1 towers. NATCA requested formal notification. This request was repeated on
January 13, 1994 with a specific request for verification of compliance with OMB
Circular No, A—76’s cost comparison analysis. The FAA replied that information re-

arding A-76 cost comparison data was not available. NATCA later found that the
information was not available because the FAA had granted itself a waiver of the
cost benefit analysis requirement. The ostensible “waiver” of the Circular require-
ment, issued on January 12, 1994, was six months after the FAA’s decision to con-
tract out. The FAA claimed that they had concurrence with the OMB A-76 coordina-
tor. In connection with an expedited arbitration on this issue, the OMB official
claimed that no coordination or concurrence of any kind had occurred between the
FAA and OMB regarding any waiver of the Circular’s requirements. Even if the
FAA had complied with the Circular’s waiver requirements, certain mandatory deci-
sion-making required by the Circular cannot be waived.

Circular requires agencies to review all of its activities to determine which
are “governmental functions” under the OMB’s definition and which, therefore, may
not be legally contracted out. The FAA should have reviewed all of its activities to
determine which were “governmental functions”, made a determination as to which
were “commercial activities: and then determined whether a “commercial” activity
must be performed by government employees for “national defense” purposes.

‘The FAA did not adhere to the mandatory decision-making process in the Circular
as described above. The failure of the FAA to comply with the requirements of OMB
Circular No. A-76 was noted in District Court litigation in the Northern District
of Ohio between NATCA and the FAA. This litigation continues on appeal. Because
of the waiver provision and the lack of enforcement mechanisms for compliance with
the Circular’s requirements, NATCA believes that there is a fundamental flaw in
AAT6. An ay ney ray waive its obligations under the Circular, defeat the essential
purpose of the Circular and escape scrutiny.

laving made the determination to contract out these facilities, in October of 1994,
twenty-five towers were contracted out to private air traffic companies. Some of
these companies have ties to former FAA officials who were involved with the con-
tracting decision. After just three months some of these companies had major prob-
Jems with the level of controller competency. Some of the controllers had to be re-
trained because they did not know the local terrain; did not know standard phrase-
ology, and were giving confusing and potentially life threatening instructions to pi-
lots. Since most of these facilities now operate for long periods of time with only
one controller on duty, pilots have complained to the FAA about coverage and serv-
ices, Recently, in Hagerstown, Maryland, the FAA was forced to require the contrac-


35

be applied to government “bids” to make them more accurate and 2) how the

8 itself can be streamlined and made far more simple. This is a natural,
and unavoidable, companion to the recommendation above (on limiting study
times) and an issue that goes to the very heart of the whole debate.

3) Remove all direct and indirect barriers to contracting, including FTE floors,
specifically special interest prohibitions (such as prohibiting the contracting of
firefighting and guard services at Dol)—services routinely contracted in other
agencies).

‘4) Prohibit government agencies from competing with the private sector for
work at other government agencies. As you may know, some government enti-
ties, such as arsenals, labs, military depots, etc., are allowed to compete with
the private sector for similar workload at other agencies. Such policies are both
unfair—since the government has a clear advantage competing against private
providers—and contrary to the broad national interest.

Mr. Chairman, we are both appreciative and mindful of the leadership you are
demonstrating on these important issues. I sincerely hope I, and my staff, will have
additional opportunities to work with you and your staff, as the search continues
for the most appropriate and effective means of achieving the goals we share.

My thanks once again for your time and attention and I will look forward to work-
ing with you to find ways to'save the taxpayers dollars.

Sincerely,

Gary D. ENGEBRETSON,
President.

Mr. Mica. Mr. Engebretson, we thank you for your testimony.
We'll turn now to Mr. Bert Concklin, president of the Professional
Services Council.

Mr. CoNCKLIN. Thank you very much, Mr. Chairman. And I want
to mimic the preceding speaker, and also acknowledge my grati-
tude at being here in front of my Congressman, Congressman
Moran. The Professional Services Council is a trade association
which represents the high technology and professional services
community and is, in fact, the second oldest trade association, to
the preceding association, since we're in the business of denoting
age today.

I am Bert Concklin. I’m the president of the association. And
first of all, I'd like to commend the committee for your wisdom and
courage in undertaking this most complex and controversial issue.
And T mean that very, very sincerely. This is a decades-old issue
which remains in a state of tension. Let me just say a word or two
about professional services. Professional services are the fastest
growing sector, many of the components in the two-digit growth
range both in terms of sales and job creation, in the U.S. economy.

And it is, in fact, the dominant sector in generating a positive
trade balance in a situation where we have a perennial net nega-
tive trade balance, Our assets are people. We do not manufacture
physical things. We have people as our resources, and therefore we
are, in many very fundamental respects, more sensitive to the de-
velopment and the state of employment and everything else having
to do with people as members of organizations who have very criti-
cal and challenging missions in today’s competitive economy.

Our particular association represents approximately 300,000 peo-
ple worldwide, The business constituted of that group of companies
and employment is in the range of $23 to $25 billion annually. I
want to speak very briefly to the value of contracting out. Contract-
ing out has many attributes, but it has three key attributes which
I think are noteworthy as you consider contracting out as a privat-
ization strategy along with other potential strategies.


xi)

eral employees received slightly more than $1 billion in salaries and wages.” As
one Dok official said in trying to make sense of the agency’s one-sided workforce,
“Basically . . . the only way of making a significant dent in DoE’s budget will be
to require substantial reductions in contract. personnel.”3° But how will that be pas-
gible when, on the one hand, FTE ceilings prevent the agency from bringing work
back in-house where it can be performed by reliable, cost-efficient federal employees
and, on the other hand, certain Members of Congress demand that the federal gov-
ernment contract-out over the next four years more than fifty percent of the services
it currently provides? To say that DoE’s senior managers face a challenge would be
to engage in understatement on a grand scale. And let's remember that this sorry
situation is in no way unique to DoE.

To the agency’s credit, Secretary Hazel O’Leary and her staff are attempting, how-
ever haltingly, service contractor reform. Whether their effort will prove to be a
model for other agencies remains to be seen. However, we can say that no elaborate
schemes or strategies were necessary to begin to deal responsibly with the agency’s
own crisis in contracting. Instead, Secretary O’Leary merely hinted to DoE’s arm
of service contractors that their contracts would no longer be automatically renewed.
The results? Service contractors offered to reduce their billion dollar bills by 15%
to 20%:

Imagine the savings that would be generated if the federal government insisted
that service contractors at every agency cut that much waste, fraud, and abuse out
of all their contracts! If taking the first step towards real service contracting reform
is that eaay, why is Congress sitting by idly while the crisis in contracting in every
agency grows ever larger? Mr. Chairman, you and your colleagues deal every day
with that wearisome conundrum: how to reduce the deficit without cutting impor-
tant services? Well, here's your answer: cut service contractors’ expenses by impos-
ing a ten percent reduction on their billion dollar bills—without any effect on their
ability to deliver services.

I realize that federal service contractors with their well-placed friends in the legis-
lative branch and their overflowing campaign funds wield enormous influence on
Capitol Hill, far more than the working and middle class Americans who belong to

ral employee unions like AFGE, but for how much longer can Congress manage
to resist the irresistible? To paraphrase a British statesman from earlier in this cen-
tury, federal service contractors should be squeezed, as a lemon is squeezed—until
the pips squeak. My only doubt is not whether there is enough juice in those lemons
to meet a significant fraction of our deficit reduction needs, but whether Congress
will ever get around to squeezing them hard enough.22

CONCLUSION

In closing, Mr. Chairman, I'd like to put the contracting-oul/privatization mania
sweeping Capitol Hill I spoke of earlier in perspective. In the pitched, partisan bat-
tles taking place these days in our Nation’s Capitol, there are few public policy ob-
jectives that unite Americans on the right, middle, and left segments of the political
spectrum. One such objective that is gathering increasing bipartisan support is the
need to abolish corporate welfare. Last month, the libertarian Cato Institute, the
moderate Democratic Leadership Council, and Secretary of Labor Robert Reich held
an extraordinary joint media conference to press Congressional lawmakers like
yourselves to take’a long, hard look at costly taxpayer subsidies to politically well-
connected businesses.

Corporate welfare—estimated by the Cato Institute to be more than $86 billion
per year and by the Democratic Leadership Council to be almost $265 billion annu-
ally—includes a wide variety of ingenious but completely taxpayer-subsidized give-
aways, everything from income tax exemptions worth more than $18 billion over
five years for firms doing business outside of the U.S. to subsidies for ski resorts
and casinos in some of America’s toniest towns. But, as The New York Times point-
ed out, “little is being done to curb (corporate welfare) practices.” “Why?” you might
ask, Well, according to the newspaper's account, “Many of them are popular with

specter of competition’ at DoE has proved so frightening that “some contractors (have
offered) to reduce costs by 15 percent to 20 percent .. . ‘If implied competition will do that,
imagine what real competition will do,’ (a senior agency official) quipped.” (The Washington
Post, “Energy Dept. Plans Competition for Big Contracts (July 7, 1994), p. A24.)

22'The Germans, if this Government is returned, are going to’pay every penny; they are going
to be squeezed, as a lemon is squeezed—until the pips (seeds) squeak. My only doubt is not

whether we can squeeze hard enough, but whether there is enough juice.” Sir Eric Geddes
OAT 19a7)


36

The first of these is expertise. The very nature of the competitive
services economy today is one of constant churning, constant mov-
ing forward; particularly in the high technology areas such as in-
formation technology, environmental technology, health sciences
and many other similar fundamental areas in the economy. In
order to be successful in this most competitive business, all our
firms have got to stay on the cutting edge so that they are practic-
ing current technologies and current problem solving techniques
that are world-class, in order to be competitive both in the national
and in the international economic domains.

The second major attribute, which goes more to the heart of the
tension between public and private sector balancing of responsibil-
ity, is flexibility. Contracting out offers close to 100 percent flexibil-
ity in the sense that you can hire a contractor; you can modulate
the contractor’s effort in terms of telling them to add people, reduce
people or, in fact, discontinue effort because the mission or the
function is no longer required.

I will not abuse you by conducting a lecture about the intrac-
tability of bureaucracies or public sector organizations. I’ve spent.
approximately 40 percent of my lifetime as a public sector em-
ployee. But it is very, very difficult, given the personnel rules as
well as the organizational cultural aspects of big public sector orga-
nizations to match the kind of flexibility that is afforded by the pri-
vate sector.

A third and final attribute is competition, which has been al-
luded to already in this hearing. And the answer there is very sim-
ple. Competition causes people to be efficient and effective; efficient
in the sense of being economic and cost-effective because you have
to do that in order to successfully compete for business, be it public
sector or commercial or international; and effective in the sense of,
if you don’t do the work very well, your past performance is scored
low and you simply don’t continue to participate in that market.

I want to observe just in passing, having talked about those at-
tributes, that we do not say that the private sector is perfect in
every aspect. There have been instances where there have been
problems with contracting out. My colleague alluded to the OMB
study, the so-called SWAT team study. That was ostensibly, be-
cause there were problems with services contracting. But I want to
echo what he said and repeat the notion that 90 or more percent
of the printed findings and the associated activity focused on the
government’s contract management, not the behavior and conduct,
of the services contractors.

Shifting now to how to think about the contracting out issue in
terms of the policy paradigm, or a strategic approach, we have not
originated, but we have embraced what I think is the logical way
to look at that equation. And it involves three steps, or three
blocks, if you will. The first is, there is a range of activity that I
think most intelligent people would agree is inherently govern-
mental.

The OMB has published a policy document that very clearly sets
out what is inherently governmental and, in fact, what is not in-
herently governmental, and some criteria in decision rules about
how to navigate through that situation. The second part of that
policy paradigm is poor capability.


51

of deregulation, NTEU is concerned that efforts may be made to amend section 5(g)
to require Rerfarmance of cost comparisons for functions of 50 or more FTEs. Agen-
cies would be allowed to go directly to contract, avoiding a cost comparison, for func-
tions of 49 or fewer FTE. This approach is contrary to the recommendations of NPR
and the GAO, and would lead to widespread contracting to avoid personnel ceilings.
IMB Circular A~76 specifically prohibits the contracting out of “inherently gov-
ernmental” services. Such services were subsequently defined as “those which are
so intimately related to the public interest as to mandate performance by govern-
ment employees.” Concerns have been raised for many years about what constitutes
an “inherently governmental” function. Senator David Pryor (D-AR), the former
chairman of the Senate Subcommittee on Federal Services, Post Office and Civil
Service, once questioned the use of contractors and consultants performing certain
vernment functions and referred to them as “the Shadow Government.” Senator
r cited instances where contractors/consultants have prepared Congressional
testimony; drafted memos for the signature of top agency officials; researched Free-
dom of Information requests; drafted internal agreements; and written agency regu-
lations.

In response to the Senator’s request for a GAO investigation of this matter, the
GAO found that some service contractors appear to be administering governmental
functions. The report, entitled Government Contractors—Are Service Contractors
Performing Inherently Governmental Functions? further stated that: “The major
reasons contributing to agencies use of contractors to administer functions that may
be governmental in nature are the lack of authorized federal positions for employees
or the lack of federal employees with sufficient expertise to do the work.”

OMB’s Office of Federal rement Policy subsequently issued a policy letter in
1992 giving guidance on functions which must be performed by government officials
and employees and what kinds of functions may be performed by private contrac-
tors. The letter indicated that OMB firmly believes that agencies need a “sufficient
number of trained and experienced staff to manage government programs

roperly . . . the greater the degree of reliance on contractors, the greater the need
for oversight by the agencies.” NTEU strongly supports this position.

NTEU also believes that non cost factors also need to be considered when deciding
whether to contract out. The GAO report entitled Government Contractors—Meas-
uring Costs of Service Contractors Versus Federal Employees (GAO/GGD-94-95)
states the following:

For a cost comparison of contracting out versus using federal employees to be
a useful management tool for agency decision makers, OMB also needs to con-
sider other non cost factors. These include the difference between the quality
of services offered by federal versus contractor employees; the timeliness of
services available; the availability of federal employees to do the work; the
value of flexibility in responding to variable work requirements; and whether
the services needed are short-term, nonrecurring in nature, or of a longer term.

NTEU supports this position.

If there is to be any true reinvention of the federal government through
downsizing and other reorganization efforts, NTEU views reforms in the current
contracting-out process as a necessary step toward achieving that goal. As federal
employees continue to make sacrifices to bring about improvements in the effective-
ness and efficiency of service delivery, the Congress ought to be fully aware of the
exact nature of the “shadow government” of federal service contractors. It is only
fair that they too follow the example of federal employees by shouldering their fair
share of the burden of deficit reduction as well.

FEDERAL EMPLOYEE PROTECTIONS:

In the Subcommittee’s March 29, 1995, letter of invitation, you specifically re-
quested that my testimony include “a discussion of protections provided for federal
employees displaced as a result of contracting decisions, including any guarantees
related to wages, benefits and/or working conditions provided by law.” In addition
to those protections addressed earlier in my testimony, I wish to highlight the fol-

lowing:

The “Policy Implementation” supplement to OMB Circular No. A~76, Chapter 3,
page I-18 states the following with regard to “Personnel Considerations”:

I, Adversely affected Federal employees are employees identified for release from
their competitive level by an agency in accordance with 5 CFR Part 351 and Chap-
ter 35 of Title 5, United States Code, as a direct result of a decision to convert a
Government commercial activity to contract performance.

2 Agencies shall exert maximum effort to find available positions for adversely af-
fected employees including:


24

BUYOUTS

My second bill would plug a gaping hole in the landmark buyout legislation we
have only just passed. Congress went to extraordinary lengths to ensure that civil
servants who were bought out with cash could not be replaced and that the result-
ing 272,000 reductions in the federal work force would be permanent. However, as
it stands now, the buyout law would allow untold numbers of contract employees
to take the places of bought-out federal employees—substituting shadow govern-
ment employees for career employees. My bill would amend the Federal Workforce
Restructuring Act to prohibit agencies from contracting out work previously done by
buyout recipients.

COST COMPARISONS

The reason most often touted for contracting out work is that it is cheaper. The
March 1994 GAO study contradicts this assumption, and an OMB study released
in January 1994 shows that the cost-saving assumption is often not even tested.
Federal agencies do not compare the costs of contracting with the costs of doing
work in-house. My third bill would require agencies to make these cost comparisons
and would prohibit any agency from entering into an outside service contract if the
services could be performed at a lower cost by agency employees.

SIZE OF CONTRACTING WORK FORCE

One of the chief obstacles to regulating the contracting work force has been the
absence of information on the extent of that work force. In 1988, for example, Con-
pest passed legislation requiring agencies to significantly cut service contracts.

lowever, a subsequent GAO report found that there was no way to know if the
agencies had actually complied with the legislation. My fourth bill requires OMB
to develop a government-wide system for determining and reporting the number of
non-federal employees engaged in service contracts.

All four of these bills would provide more systematic ways for monitoring and con-
straining the expenses associated with contracting out of services—just as we have
insisted for federal ncies and employees. Efficiency and deficit reduction must
not stop at the door of the federal agency. We need to ring the shadow government
into the full light of the day so that the sacrifices demanded in the name of re-in-
venting government may be shared by all employees and by every area of govern-
ment.

SUMMARIES OF SERVICE CONTRACTING BILLS INTRODUCED BY CONGRESSWOMAN
ELEANOR HOLMES NORTON

1. The first bill cuts $2 billion in Federal agency funds for service contracts and
makes this money available for pay raises that are due Federal employees next
year. Federal employees are again being required to give up part of their statutory
pay increases while, again, contract employees paid from the same Federal budget
remain untouched. The intent of this bill is to eliminate this inexplicable discrimina-
tion.

2. The second bill amends section 5g) of the Federal Workforce Restructuring Act
of 1994, (Public Law 103-226) to prohibit an agency authorized to offer voluntary
separation incentive payments under that Act from contracting out, in whole or in
part, the duties previously performed by an employee who separated upon receiving
such a payment. This is to ensure that no substitution of shadow government em-
ployees for career employees occurs. .

3. The third bill prohibits any Executive Branch agency from entering into a serv-
ice contract if the services to be procured under the contract can be performed at
a lower cost by employees of the agency. It requires agencies to perform cost com-
parisons (contractor cost v. in-house cost) when deciding whether to contract for a
service. The requirement applies to contracts entered into after the date of enact-
ment.

4. The fourth bill requires the Director of the Office of Management and Budget
(OMB) to develop a government-wide system for determining the number of persons
employed by non-Federal Government entities providing services under service con-
tracts awarded by agencies in the Executive Branch of the Federal Government. It
also requires ‘OMB to submit an annual report to the Congress indicating the num-
ber of such persons providing services and the number with jobs comparable to
those of career Federal employees providing services to agencies.

Mr. Mica. We thank you for your interest and your comments.
I have not had an opportunity to review in detail the contents of


54

or using government is more advantageous, and managers should be given the
flexibility to obtain needed services from the best possible source.

* OMB Circular A-76 should be revised to reflect standardized costs instead
of relying on excessive historical data in determining the most efficient organi-
zation.

The Circular should also be modified to allow sufficient time for federal em-
loyees to appeal an agency's decision to contract-out. Also along this vein, the
committee should consider allowing the use of a negotiated grievance procedure

to resolve such issues as when an agency abuses its authority by contracting-
out simply to avoid personnel ceilings.

‘* Congress should ensure that inherently governmental functions are not per-
formed by private contractors.

This concludes my prepared statement. Again, I thank you for the opportunity to
testify before the Subcommittee today, and I am pleased to answer any questions
you may have.

Mr. Mica. I thank all three of you gentlemen for your com-
prehensive testimony, and would like to ask a couple of questions.
One of the problems that we have had is trying to develop some
basis on which to do comparisons. I think Mr. Tobias just spoke
about full and fair competition and a comparison process that does
allow us to evaluate whether we can do things cheaper in the pri-
vate sector versus the public sector.

From a business standpoint, and having come from the business
world, it would seem to me that technically you could do it cheaper
in the public sector because you don’t have to make a profit. In the
private sector, your motivation for being in business or enterprise
is to make a profit and a return on your investment. In trying to
get this full and fair competition that Mr. Tobias spoke about, the
comparison process seems to be very difficult. Maybe I could ask
the three of you to just comment on how we could best achieve
that.

Mr. ENGEBRETSON. First, in the cost comparison process, the big
problem that many times when you compare the contractor’s pro-
posal versus the government proposal you're going to find that
they’re comparing bananas ard apples. And I use bananas because
everybody says oranges and apples, but in this case, it’s bananas
and apples.

The reason for that is, and maybe the best way J can explain it
is, we did some investigation within the transit industry as to how
more contracting could be done, And we visited with the manager
who was going to make the decision whether they would move for-
ward with contracting, started talking about the cost comparison
and just the simple issue of the facility and they were doing their
work within this facility.

We said one of the problems is, if you’re going to compare costs,
is that you don’t pay rent on this facility, and our companies would
have to pay rent on this facility. And the comment was made to
me, well, the building is free. Now, first of all, Mr. Chairman, I
don’t know of any buildin that’s free, if he considered it free it was
only because they didn’t have to pay rent because of the fact that
it was federally owned.

But in our cost comparison process, we do have to have those
rental costs. The other thing I'd like to comment on for just 1 sec-
ond, if I may, and that is the process we go through when we do
an A-76. And I want to do it very quickly so you get the overview
of how it works.


63

tor to hire additional staff. In Brownsville, Texas, a flying school decided to move
its operations because touch and go’s were limited due to scarce staffing.

NATCA has serious reservations with regard to the safety and national security
of the privatizing of Level 1 towers. It is clear that the FAA has lowered the stand-
ards of these facilities. I cite examples which support NATCA’s contention that the
standards under which these towers operate are not the same as FAA towers and
potentially present safety problems to general aviation and commercial pilots.

mentioned above, in New Haven/Groton, Connecticut towers and in Hagers-
town tower, problems cropped up which required the FAA to come back into the fa-
cility to retrain and add staffing. NATCA learned of these problems from private
pilots and FBO’s based in these communities. These are just two examples of irreg-
ularities but should NATCA or Congress conduct an investigation, similar problems
in the other 23 facilities might be found. Only twenty-five facilities have been con-
tracted out thus far. Twenty-five more are scheduled for this summer. We must ask
ourselves if these problems will exist in the future when more facilities hit the chop-
ping block. Additionally, the next group of towers to be privatized are not towers
with litle air traffic or relegated to only general aviation. As stated above, in the
next twenty-five to be privatized, Key West, Florida and Hyannis, Massachusetts
are popular tourist destinations with heavy annual commercial traffic,

‘ith regard to the New Haven and Groton Connecticut towers, they went private
in September of 1994. In November of 1994, pilots in that area commenced a com-
puter network campaign to communicate their concerns about the safety of these
towers after the conversion. I quote a woman who was the vice president of a flying
club in that area, “The controllers do not know local landmarks. Reporting over
Lake Gallard, which is the largest lake around, about seven miles from the airport
and quite humongous, gets a ‘Huh?, where's that? I think, outside of the blaring
errors which don't just compromise safety, but will eventually be the cause of some
accident here, the non-professional lingo is getting to me. It is now 2¥2 months since
they started working traffic as ‘official controllers’ and they aren't getting it yet.
Yesterday, arriving VFR, the controllers was very clearly in over his head. I imagine
there’s a piece of paper somewhere that says that the new controllers are suffi-
ciently trained, but I’m here to tell you—It’s pencil-whipped.”

In another pest from another general aviation pilot, he states, “The tower control-
ler sounded like he was grasping for standard terminology but he never found
it... not one of the tower's transmissions used standard terminology, and few
came at the expected time or in the expected order. Until now, I never realized just
how professional the former tower staff was! If we ever get a student returning from
hie first solo cross-country, at the same time as the United 737 approaches, were
going to have some seriously scary stuff going on.”

In Hagerstown, Maryland, a pilots reports “Called for VFR taxi to active runway.
Our call went unanswered by ground control. The ground and local control was com-
bined at one position because you could hear the controller talking to aircraft in the
air. The controller cleared two aircraft to land but did not have the aircraft in sight
and another aircraft had checked on downwind. The controller was trying to locate
them. Trying five times to get an acknowledgement from him, I tried him on the
tower frequency for taxi, but go no response. It took 10 minutes to get a taxi clear-
ance. I was the only aircraft on the ground and looking 4p at the tower, I could
see only one controller in the tower cab. Upon departure, a Hawker 125 was cleared
to depart right behind me, so I asked the controller if I can offset to the right so
the jet departure could have a clear departure path. He approved it, then ‘ran’ the
jet right behind us, giving the right turn on course right behind us.”

¢ FAA was 80 concerned that the safety problem would reach the media that
meotings were held to talk with the pilot groups in those areas. The FAA admitted
at the New Haven mecting that the controllers did not receive adequate training
but the next day told a joint NATCA/FAA contract committee that the next twenty-
five towers to be privatized would only receive the same thirty day training pro-
gram. I bring these problems up as an example of the safety concerns we have with

ese towers.

A study, of the first twenty-five contracts conducted by an outside consultant hired
by NATCA concluded that there are numerous hours when only one air traffic con-
troller (and no supervisor) will be on duty. The consultant also noted that the Area
4 contractor indicates that during such times (when only one ATC is on duty) some
temporary restrictions may be imposed. This means that touch and go operations
will be suspended. As stated above, a flying school relocated from privatized
Brownsville airport to Harlingen because their touch and go operations were lim-
ited, Without a doubt, services are being cut back in privatized towers. This affects
the local community economically and in essential air service.





43

SUMMARY OF THE CHALLENGE

In summary, we believe the nation is on the threshold of a fundamental trans-
formation in how we think about and define the role of the federal government.
Limiting governments “doing” functions to those which are truly inherently gover
ment, and systematically privatizing the rest, will yield profound benefits. The ulti.
mate result: saving money and improving government performance. We urge you to
get involved now by enacting into law an unequivocal] commitment to privatization.



41

function should be “contracted out,” but whether the government can claim the issue
to be inherently governmental. °

defining a model for contracting out, historically, PSC has taken the lead in
promoting a framework involving a three-tiered approach for a meaningful public
and private balance.

We believe the above model reflects the right solution to enhance the use of pri-
vate companies and achieve the proper role of government. To date, the closest at-
tempt to frame this public vs. private issue has been in OMB Circular A-76 and
OFPP Policy Letter 92-1. Even with these existing regulatory policies, a well-exe-
cuted contracting out plan is rarely undertaken at the top levels in government and
maximum contracting out is not achieved. A Congressional mandate, to be used as
a guideline for agencies and the private sector, is needed to display leadership and
intent to an otherwise floundering policy.

{NoTE.—The model referred to can be found at end of statement.)

PUBLIC/PRIVATE COMPETITION

If the PSC model is applied, the issue of public/private competition is no longer
a factor. Contracting out can be executed in a manner consistent with the views es-
poused by this Committee. Public/private competition is contrary to the first prin-
ciple that the government should not compete against its taxpayers. This committee
has rightfully asked the key question: if the public sector can compete for the work,
is it an appropriate function for the government to be performing? We believe that
the proper role for the government is not to compete against the private sector. Civil
servants should be employed to carry out inherently governmental functions only.

Among the arguments for using the PSC model, inherent flaws in the government
cost comparison methodology making public/private competition infeasible. One
problem is in the governments ability to state its full costs, due to the “uniqueness”
of their accounting system. In addition to not providing a level playing field, other
problems exist in cost comparisons being used as the determinant in contracting
out; they slow the process and ignore best value thrust. Many ask, how do we fix
this problem and make it fair? For as long as I have followed this issue, this point
has been raised, debated and brushed aside as too difficult. Only to have the issue
raised again, debated again and dismissed again.

At this foint in history, cost comparison studies have shown no serious profes-
sional credibility as a primary mechanism for determining whether or not to con-
tract out. Rather, its use contributes to nonproductive political debate, and does
nothing to stabilize and balance the public policy environment. PSC recommends re-
fraining from conducting public/private competitions, instead adopt a framework for
determining the appropriate role for government and optimal use of the private sec-

r.

OTHER PRIVATIZATION SCHEMES

In moving to embrace the overall theme of privatization, of which contracting out
is one option, we believe it is very important to keep foremost in our minds a series
of qualifications. First, privatization is not a stand-alone solution. Alterations in
government culture, infrastructure and tools are necessary to be successful. And sec-
ond, contracting out is the most immediate high-payoff option in an effective privat-
ization strategy. Other more exotic schemes such as public corporations, franchising,
and civil service employee buyouts all entail significantly higher risks and greater
degrees of continued government subsidization of markets and operating budgets,
as illustrated by the Postal Service or Amtrak experiences.

TRANSITIONING THE CIVIL SERVICE WORKFORCE

Apprehensions within the civil service about contracting out are understandable.
Companies are experiencing similar rightsizing, as they adjust to a new global econ-
omy. IBM is laying off tens of thousands employees and defense giant mergers have
left thousands of scientists and technical professionals looking for jobs. Federal em-
Ployees are not alone in facing the uncertainty about the future.

8 in these cases and others, a similar transition can be expected in the civil serv-
ice workforce. Many employees will find positions in the businesses taking over the
functions previously performed in the government. While we do not have hard sta.
tistical data, PSC companies’ workforces are made up of large percentages of civil
servants, due to their knowledge of the federal marketplace. It is not unusual for
the private sector to pick up 80%-100% of the workforce, when contracting out oc-
curs. In one particular case, a services company took over mailroom functions, keep-
ing 100% of the existing workforce, 80% of whom were minority employees.


66

novations of the reinvention initiative to make the federal government a more effec-
tive and efficient instrament for the delivery of services.

Unfortunately, our contracting counterparts have yet to be reinvented. Unlike the
federal workforce, they have undergone no complete and thorough examinations.
Unchallenged by real competition, they still cling tenaciously to outmoded processes
and attitudes. Hence, the crisis in’ contracting.

2. The Federal Government Must Finally Become a Cost-Conscious, Quality-Con-
scious Consumer

Any customer who insists on spending freely in a marketplace despite not know-
ing what he really wants, despite not caring enough to bargain for the best. deal,
despite not understanding how to determine whether he received that for which he
paid will be taken advantage of. And that’s true whether the marketplace is the
strip mall down the street from where you live or the mythical one where the fed-
eral government buys needed services. When the customer is lazy and ignorant but
free-spending, the merchant simply has no incentive to provide effective and effi-
cient service at reasonable prices. And that is the problem with the federal service
marketplace today.

In order to make service contractors more competitive, the federal government
rust become a better shopper. Firs, the federal government must decide precisely
what services it wishes to buy. It must then bargain aggressively for the bid that

romises to deliver the most effective and the most efficient service, whether it be
from federal employees or a contractor. And, finally, the federal government must.
determine whether the service provider selected lived up to the terms of the con-
tract. One truism after another, you may be saying to yourselves. And you're right,
of course. However, those three truisms are still considered novel concepts by far
too many senior managers in too many agencies.

3. Agency Managers Must Prepare Better Statements of Work

The contracting process is flawed from the very start. As OMB has reported,
Statements of Work (SoWs), the forms used to describe specifically the services to
be contractually procured, are frequently so poorly-written that it is difficult to de-
termine the agency’s requirements or the standards against which performance is
to be measured.‘ Sometimes, bad SoWs are caused by senior managers who are less
than certain themselves about just what services they wish to contract out. Often
times, however, the cause is simply sloppy drafting. In fact, some contract officers
will use the same forms over and over again, even after they are long out of date.
Whatever the cause, federal employees and less-established contractors are left at
a disadvantage vis-a-vis the more established contractors, usually the ones who
have acquired “inside knowledge” from hiring senior managers with special personal
connections.

Sloppily-drafted SoWs reduce competition for service assignments between federal
employees and contractors. And if there is less competition, whatever cost savin;
estimated to be realized through service contracting quickly vanish, while the prob-
lems associated with contract administration and quality control loom ever larger.

For example, a contractor often appears to be the efficient alternative in the cost,
comparison process only because the SoW failed to include all of the different as-
signments that had been required of the federal employees who had been perform-
ing the work. Once the contract's been signed, however, the agency has little lever-
age with the contractor. And when the uncompleted assignments begin to pile up,
senior managers have two choices: 1) negotiate an additional agreement with the
contractor, i... give even more money to the contractor and lose whatever savings
had been collected from the decision to contract-out; or 2) use seasoned, reliable fed-
eral employees from other offices or installations to get the job done right. Either
way, contracting-out winds up costing more, an expensive lesson the taxpayers need
not have had to learn,

Another problem with many SoWs is that they fail to anticipate contingencies. No
one expects a contract officer to be a latter-day Nostradamus, but the SoW should
fe drahed with some understanding of how the assignment’s requirements might
change over the term of the contract, something that occurs with some frequency
in government. Of course, this is one of the disadvantages of service contracting.
When work is done by federal employees, requirements can be changed in the event

4OMB, Summary Report of Agencies’ Service Contracting Practices (January 1994), p.v. The

"Auhe atatements-of work used to describe the specific tasks or services to be

red by contract are frequently so broad and imprecise that vendors are unable to deter-

mine the agency's requirements. As a result, competition is limited and performance cannot be
assessed.”



ll

1, Lower costs through provision of service at no more than the competitive
rate (the “going” rate). Cost savings of 15 to 50 percent are frequent, with occa-
sional savings of up to 75 percent. Touche Ross reports cost savings in 98 per-
cent of cases.

2. Lower direct public service costs as public agencies improve their cost per-
formance in response to the competitive environment. Competitive contractin;
not only results in lower costs for the public services competitively contracted,
it also induces improved internal public cost performance. This “ripple effect”
has been identified in various public services, including solid waste collection,
public transit, fire protection, and other services. Public employee unions
negotiated competitive wage and benefit packages in response to competi
contracting.

3. Lower net costs as a result of tax revenues paid by private contractors on
the public services they operate.

‘There are two fundamental principles of competitive contracting of public services:

1. The public agency should retain full poliey control, determining which serv-
ices are purchased, establishing quality and safety standards, administering
contracts, and monitoring service performance:

2. The public agency should foster a competitive market. The maintenance of
a competitive market is crucial to the success of competitive contracting. Private
monopoly should not be tolerated any more than public monopoly. Fostering a
competitive market requires:

a. Wide participation and full disclosure of information, so that all potential
interested proposers have sufficient information to submit’a proposal if they de-
sire.

b. Limitation of contract duration (usually no more than five years including
renewal options).

c. Limitation of contract size, so that smaller companies have an opportunity
to participate.

Cost control through a requirement for fixed price proposals, and prohibi-
tion of price negotiation after contract execution.

e. No public agency specification of labor arrangements except compliance
with applicable state and federal law.

f. The public agency should compete in the process under the same terms as
the private proposers and should include all attributable costs.

Competitive contracting saves money not because the private sector is superior to
the public sector; competitive contracting saves money because competition induces
lower costs than monopoly. Services provided by private contractors are no less pub-
lic than the same services that are provided by public agencies themselves, because
the public agency remains in complete control.

At the state level, more than 100 services have been competitively contracted. But
even so, there remains substantial opportunity to increase competitive contracting
and reduce the costs of government.

Unfortunately, the federal government itself sometimes puts barriers in the way
of state and local governments that seck to implement more cost effective service
delivery mechanisms. A Particularly egregious example is the special labor man-
dates in the Federal Transit Act (Section 13c). The bs Department of Labor has
repeatedly withheld federal grants pending the capitulation of transit agencies to
union demands. The perniciousness of these labor provisions is illustrated by the
six year severance payment obligation for transit employees dismissed because of ef-
ficiency measures. This mandate has been used to prohibit competitively contracted
transit service and unsubsidized transit services. This hae retarded transit job cre-
ation. Particularly onerous is the fact that minority entrepreneurs have been sys-
tematically denied the opportunity to initiate services and that residents in low in-
come communities have been denied the improved mobility that such services would
have provided, all as a result of this egregious federal mandate.

CONCLUSION

The administrative mechanisms for controlling the costs of government have
failed, and are beyond repair. The answer is not better administrative systems, it
is direct application of market forces, especially through competitive contracting. All
governments, state, local and federal’ need to be brought to the market,

The transition of government to the market will be, in many ways, as difficult as
the transition from statist. monopoly economies to market economies in eastern Eu-
rope and the former Sovict Union, But the transition from costly monopolistic gov-
ernment service provision to competitive service provision is necessary.


53

in an agency’s internal appeal system. Unfortunately, the agency internal appeal
system often does little more than rubber-stamp manzgement’s decisions and there
is, therefore, no longer an effective forum in which to report the failures of agencies
to comply with this important federal acquisition regulation.

As the Subcommittee considers reforms to the Circular A-76 process, NTEU urges
you to include a provision that would expressly allow unions to use a negotiated

ievance procedure to resolve disputes over such issues as when an agency abuses
its authority by contracting out services merely to avoid personnel ceilings. In addi-
tion to lengthening, possibly to 30 days, the period of time within which employees
can appeal an agency’s contracting-out decision, the Circular should also be ex-
panded to permit employees to appeal such a decision outside the agency system
and allow as well for a judicial review.

CONCLUSION:

Given the emphasis on labor-management partnerships and decentralized decision
making in recent years, some might suggest that contracting out concerns might be
better addressed at the respective agency levels. NTEU has attempted to work in
partnership with various federal agencies where excessive contracting-out robs the
American taxpayer of the best possible return on his or her tax dollar. One such
example is the Federal Deposit Tasurance Corporation (FDIC), where the Corpora-
tion’s own internal studies have demonstrated in the past that FDIC employees not
only outperform outside contractors by exceeding collection goals and bringing in
more money, they also provided significant savings by performing these asset liq-
uidation tasks in a less costly manner. NTEU continues to work with the FDIC to
curb what we see as excessive contracting-out by the FDIC and the Resolution Trust
Corporation, with moderate success. Clearly, however, the Congress and OMB work-
ing to implement a clear national standard of guidelines that apply to agencies
across the board would significantly increase efficiency as well as the economic ben-
efits that would accrue to the federal government as a whole.

In summary, NTEU proposes the following recommendations:

Congressional Budgets and Appropriations Bills should indicate line-items
for contracted services. Prominently displaying the staggering totals for service
contractor expenses in this manner will do much to bring the crisis in contract-
ing to the attention of policy-makers and taxpayers alike.

* NTEU concurs with the GAO recommendation that the A~76 cost compari-
son process should be used before contracting out any government service, in-
cluding advisory and assistance services which can currently be contracted out
without a cost comparison. Cost comparisons have been an effective tool for the
government and afford some modicum of fairness to jts employees.

» Congress should maintain provisions in the Workforce Restructuring Act.
which require cost comparisons for commercial functions ef all sizes.

* There must be increased oversight of contractor performance if the Congress
is indeed serious about streamlining federa) expenditures and eliminating
waste, fraud and abuse. Agencies should conscientiously audit the work of their
contractors to ensure that the government pays no more than it should for the
services it receives.

« In addition to the cost comparison, other non-cost factors should also be con-
sidered in determining whether to contract out or perform certain activities in-
house. These include the difference between the quality of services offered by
federal versus contractor employees; the timeliness of services available; the
availability of federal employees to do the work; the value of flexibility in re-
sponding to variable work requirements; and whether the services needed are
short-term, non recurring in nature, or of a longer term and recurring.!4

Agencies should be allowed to recompete for contracted work and be allowed
to raise their FTE level to convert back to in house.

. ncies should have the flexibility to accomplish their work in the best
possible manner and should not be constrained by arbitrary personnel ceilings
which can sometimes prove counter productive and inefficient. Budgetary flexi-
bility should be granted to allow funding for contracting-out purposes to be used
to hire additional FTEs if cost analysis indicates it would be more efficient to
conduct a particular service in-house. As efforts to “re-invent” government go
forward, Congress should be careful not to send a conflicting message to Agen-
cies by encouraging them to increase efficiency while at the same time imposing
hard personnel caps. Agencies should determine if contracting out for services

GAO, GOVERNMENT CONTRACTORS: Measuring Costs of Service Contractors Versus
Federal Employees, (GAO/GGD-94-95) (March 1994) p. 7.


59

Mr. Moran. I don’t have any question about those numbers. And
in fact, those numbers are what I would expect it to be—15 to 25
percent. And I do think there’s some overhead that is not figured
in. But I would go beyond what Mr. Tobias lists as the criteria.
With the Air Force, for example, there are security considerations.
There is a need to retain a certain number of personnel with the
kind of expertise, with the kind of loyalty, with the proven dedica-
tion to accomplishing a mission that you can’t rely upon if you be-
come dependent upon the private sector.

So I do think—and I think that goes beyond defense intelligence
functions. It really would be the case in virtually every Federal ac-
tivity. You want to make sure that there is a certain pool of em-
ployees with institutional knowledge; with a certain level of loyalty
and dedication; with the skills that you may need. There is a value
to having people available immediately when you need them, and
also when decisions are made during the process of recommendin;
to the chief executive, ultimately, through OMB and so on, an
through the legislative process.

You need a certain number of people who are able to bring their
experience to the table in decisionmaking. So I think we need to
go some steps beyond simply making the decision whether or not
to contract on the basis of the most efficient way to carry out a
function. And it worries me in some areas that we may be giving
up that kind of security, that pool of people that we may 1 day
peed, even though we don’t necessarily need them on a day to day

asis.

And we can’t be sure that we’re going to have that pool of per-
sonnel or expertise if we only contract them when we decide that
we need them, because not only is there a lag time, there’s a cer-
tain question of whether you're going to be able to get them. When
we entered the Vietnam War, the person with the greatest exper-
tise on Vietnam in the early—well, actually, even 1959—was not
in the State Department.

He had been let go, and he was selling refrigerators in New York
City. That was not where he should have been, and in the long run,
it would have saved us a heck of a lot of money if we had had the
most knowledgeable people working for the State Department. But
that wasn’t so much downsizing, and a result of the McCarthy era.

But I could find other cases where we have paid a price for not
having a pool of employees. So even if we can quantify the dif-
ference, and even if it is clearly a cost savings, there are other con-
siderations to make. It’s a judgment call. I’m aware of any number
of cases where there has been deliberate underbidding on, particu-
larly, cost-plus contracts. And then we wind up being stuck, being
committed down a road and dependent upon a contract we wind up
paying much more than ever was anticipated.

But I’m also aware of some cases—and Mr. Concklin alluded to
it—of this refederalization. There’s one case with EPA that is, as
far as I’m concerned, it’s outrageous; when a contract was made,
the personnel had been performing it for 20 years. And then 1
month after it was renewed, EPA decided they were going to buy
up the employees, thereby taking away the value that this contrac-
tor offered to the government.


13

Mr. Mica. Are the managers, administrators, and supervisors
getting the bulk of this, or is there some differential?

Mr. Cox. Well, the studies that have done—and we have not
done this. Obviously, this would be a very expensive study, and no-
body has really done a good comprehensive study including all the
benefits and so on beyond the wages that are received by public
and private employees. Simply nobody has done that.

But the general view is that, in the lower levels of government,
the difference—you tend to have government employees paid more
than private sector employees. And obviously, as you go further up.
you get to a position where, in fact, private employees are paid
more than public employees. The President is paid $200,000 and
Lee Iacocca was paid $20 million.

Mr. Mica. How recent is your information?

Mr. Cox. This is 1991 information. The 1994 information—and
this is out of the Department of Commerce and Department of
Labor, these data—shows approximately the same relationship.

Mr. Mica. So, the latest information confirms this?

Mr. Cox. Generally speaking.

Mr. Mica. You gave another statistic. And again, if you could
elaborate on it—you said public employees, Federal public employ-
ees, and you talked about 50 percent more. Is that adding in bene-
fits?

Mr. Cox. Yes. What we did—well, first of all, all of my testimon
includes the employer cost of the fringe benefits. I don’t deal wi
wages alone, and I think that is the fatal flaw in the program that
the United States——

Mr. Mica. These first figures you gave include——

Mr. Cox. Employer paid benefits as well.

Mr. Mica. OK. And then you jump to 50 percent. What was the
difference, then, between the 50 percent? Is that over the term of
employment?

Mr. Cox. No, what it is—first of all, one has to be careful just
basically saying, OK, let’s compare the entire private sector, the en-
tire public sector, because you don’t know the eb descriptions and
the way that the various categories fall out. That was just given
to give you a focus in terms of understanding of how much better
paid Federal workers are, or State workers are, than the people
that are paying the taxes.

The second figure, the 50 percent figure, is an attempt to get at
the comparability issue by basically setting up a strawman kind of
situation, where you say, OK, let’s start two workers at the average
private wage at age 25; let’s apply the Federal benefits rate and
the private benefits rate; let’s apply a security percentage; let’s
apply the average rate of increase; and let’s apply the differences
in terms of time off.

In order to try to get an idea of a situation where, if you had two
workers doing the same jobs—one public, one private—what would
the difference be at age 65? And the difference is that the Federal
worker would come out about 50 percent ahead as a result of the
inherent advantages of public employment, even though the wage
rate would have been the same in the beginning.

Mr. Mica. Then you used a figure of, over the total time of em-
ployment, an average——


CONTENTS

Hearing held on April 5, 1995 .
Statement of:
Cox, Wendell, director of State legislation and policy, American Legisla-
tive Council
Engebretson, Gary, presi ssociation; Bel
‘oncklin, president, Professional Services Counci |; and Robert Tobias,
national president, the National Treasury Employees’ Union .
Holmes Norton, Hon. Eleanor, a Representative in Congress from the
District of Columbia
Letters, statements, etc., submitted for the record b;
Bass, Hon. Charles F., a Representative in Congress from the State
of New Hampshire, prepared statement of .
Clinger, Hon. Willies ¥P Jr, a Representative in Congress from the
State of Pennsylvania, prepared statement of
Concklin, Bert M., president, Professional Services Council, prepared
statement of
Cox, Wendell, director, State legislation and policy, American Legislative
Exchange Council, prepared statement of ...
Engebretson, Gary D., president, Contract Services Association of Amer-
ica, prepared statement of
Holmes Norton, Hon. Eleanor, a Representative in Congress from the
District of Columbia, Brepared statement of ..
Krasner, Barry, national president, National Air Traffic Controllers Asso-
ciation, prepared statement of
Mica, Hon. John L., a Represe:
Florida:

3 for and answers from OPM

ment Employecs, ‘AFL-CIO, prepared ’statement of
Tobias, national president, National Treasury Empl oyees
Union, prepared statement o|

feta)

27
20


34

This is an issue that really has two, conflicting dimensions, both of which are im-
portant and fundamental to the discussion. As such it is important that both per-
gpectives are understood, so that the most appropriate and workable solutions are
found,

In short, there is the practical/political aspect to the question (to deny employees
an opportunity to compete for the work could negatively impact employee morale,
productivity and loyalty) and the sound policy aspect (whenever the government
competes with the private sector, our broader national interest—the enhancement
of a vibrant private, rather than public, sector is hurt). As you search for ways in
which to address the issue in a manner that adequately deals with both points of
view, I would like to offer a few observations:

1) When the unions talk about employees competing with the private sector,
the implication is that if those employees lose the competition, or are denied
the right to compete, they will lose their jobs. Yet the reality is that most con-
tractors prefer to hire the existing workforce—be it government or that of the
incumbent contractor—because doing so saves time and money that would have
to be devoted to hiring and training a new workforce.

In addition, when a decision to contract a function is conducted via proce-
dures established under OMB Circular A-76, the existing federal employees are
given a right of first refusal for all available jobs with the contractor.

In other words, such competitions do not represent “win or lose” propositions
for government employees—the system is designed in such a way as to protect
their interests.

2) As I stated in my testimony, the current system of cost-comparisons is fun-
damentally flawed because the government accounting system is incapable of

roducing accurate cost estimates of in-house performance. The system simp]

8 not allow for full accounting of all indirect costs—including capital and sal-
aries, The net result is that the government is making “buy/no buy” decisions
based on incomplete data, a problem which is clearly costing the taxpayers more
than is warranted.

Thus, to the extent the government will continue to have cost comparison re-
quirements, it is vital that we come to grips with the issue of how those com-
parisons can be improved and streamlined.

3) To the extent resources are being unnecessarily committed to “commercial
activities” (i.e., those functions of government that are not “inherently govern-
mental” and for which a competitive, private marketplace exists), the govern-
ment’s ability to more fully focus on its core responsibilities is affected. For in-
stance, if, within the limited budgets available, the Border Patrol is doing work
in-house (such as fleet maintenance, or information systems, or facilities man-
agement) that could be contracted to the private sector, there is less money (be-
cause we know that contracting saves an average of 25% per contract) available
to put more officers to work patrolling borders.

« Removing Barriers to Efficient Management: Is legislation needed to encourage
and incentivize additional contracting of government services?

CSA believes that the Congress can and should take the leadership role in remov-
ing all impediments to efficient and flexible management in the government, includ-
ing removing all obstacles to contracting-out. This is not to say the Congresa can
or should pass legislation that would force a set amount of contracting to take place.
Rather, it is to say that Congress can and should ensure that the system encourages
and allows government managers to manage in the most efficient manner possible.
This, unfortunately, is not the case today.

Specifically, CSA’ believes any effort to encourage the contracting of government
services must include these elements:

1) Statutory limits on cost comparison studies (to the extent such comparisons
are going to continue to be required or allowed) must be shortened from the cur-
rent 24 months for a single function and 48 months for a multiple function, to
12 months and 24 months respectively. If such legislation is passed, and accom-
panied as well by a requirement that once studies are announced they proceed
Without interruption, we believe the process will become far more “user friend-

As many GAO and other studies have indicated, # principal cause of the lack
of aggressive conversion to contract of government services is the drawn out and
costly study process. By limiting study times it will do a lot to improve the sys-
tem and make it more acceptable to those government managers who must
work within the process.

2) Address the cost comparison issue (as suggested above) through the author-
ization of a credible, independent resource (such as a major business scl to
study the process and recommend 1) how a factoring or scoring formula might


76

politically. influential businesses and other groups that are heavy contributors to
oth Republicans and Democrats.”

Should the taxpayers, whose backs are already straining from having to support
“politically influential businesses and other groups that are heavy (campaign) con-
tributors” now be required to take on the additional burden of propping up an ever-
expanding army of service contractors that possesses connections and influence but,
as the record show, often offers little in the way of effectiveness and efficien:
Members of Congress, if they are genuinely interested in saving money for the ti

ayers, reducing the deficit, and putting American businesses back on the free mar-
et, must give very serious consideration to that. question before selling off large
chunks of the federal government to politically well-connected private sector opera-

rs.

Contracting-out advocates often claim that we have much to learn from local gov-
ernments. How right they are! Unfortunately for them, those lessons are the oppo-
site of what they intended for us to learn. According to the International City/Coun-
ty Management Association, “The first signs of discontent with service contracting
are already visible: several local governments have reestablished themselves as the
principal liverers of services formerly contracted out, and more will no doubt fol-
low their example. Among others, Phoenix, Arizona, and Arlington, Virginia, have
found that contracted services can be delivered in-house and at less cost than
through contracting out by establishing more efficient and effective service delivery
systems than those that existed when the services were originally contracted to the
Private sector.” 99

In fact, public policy analysts have even coined a term to describe this welcome
development: “publicization.” The logic behind publicization is both simple and irref-
utable: if a private contractor can deliver a service more cheaply than the federal
government and make a profit, the federal government can robably find a way to

leliver that service as economically as a private contractor, but without sacrificing
timeliness and customer satisfaction.

The real lesson we must learn from our friends at the local level is that the more
management and labor work together as partners to identify problems and craft so-
lutions in accordance with the common goals of productivity, efficiency, and quality
customer service, the less tempted some politicians will be to waste the taxpayers’
money contracting-out important federal services. AFGE’s members are committed
to working with the Administration and Congress to make the federal government.
the world’s ultimate service provider and a source of pride for the citizens it serves.
We would welcome the active and sincere involvement of the Members of this Sub-
committee in that process.

That concludes my testimony. Thank you again, Mr. Chairman, for allowing me
the opportunity to submit this material for the record. I would be happy to answer
any questions Members of the Subcommittee may have about the views expressed
herein about the federal government's crisis in contracting.

QUESTIONS FROM Hon. JOHN L. MICA AND ANSWERS FROM JAMES B. KING,
DIRECTOR, OFFICE OF PERSONNEL MANAGEMENT

1. What system does the Office of Personnel Management have in place to monitor
the right of first refusal and ensure contractor compliance?

Under Federal Acquisition Regulations, when an agency’s functions are contracted
out, its employees are afforded rights of first refusal to work for contractors who
succeed in winning cost competitions conducted under Circular A-76. As part of the
overall procurement process, individual agencies are responsible for monitoring and
enforcing contractor compliance with these rights. OPM’s responsibilities do not ex-
tend to contractor compliance with procurement regulations.

2. What measures has OPM taken to implement protections for federal employees
adversely affected by contracting out decisions, such as priority consideration for po-
sitions within the agency, establishing reemployment priority lists, paying reason-
able costs for training and relocation, and coordinating with the OPM to provide
Governmentwide placement programs?

In contracting out situations, agencies must follow reduction in force (RIF) proce-
dures if any employee will be downgraded or separated as a result of the agency's
decision to contract out. Affected workers have the right to compete for retention.
For those employees who are separated from Federal employment due to RIF rea-
sons, including contracting out, a wide range of transition assistance is available.

33 International City/County Management. Association, Service Contracting: A Local Govern-
ment Guide, p. 186.


22

isting service contracts. But very frankly, the President’s budget
also doesn’t do anything about service contractors.

If you say to Federal workers, you will not get your full statuto’
pay increase, you might say to contractors, we want you to cut, let’s
say, 1 percent from what you have been charging us, and transfer
that money to Federal workers and give them some greater per-
centage of their statutory pay cut. I guarantee you this: If you told
service contractors, who are used to competing, to tighten your belt
to the extent of 1 percent, they'd tighten it so fast to keep that con-
tract that the government would save a lot of money in a very
short period of time.

So I have introduced four bills. One, of course, does deal with the
Federal pay raise. It would cut $2 billion in Federal agency funds
for service contracts, and make the money available to pay Federal
employees more of the aycheck that our statute says they are due.
And may I say, Mr. Charman, I don’t think you can, year after
year, say to a workforce, we're not going to give you what we say
we're going to give you, without having a affect on that workforce
that I don’t think anybody wants to have.

In effect, it’s a give-back. If you say you’re due 2 percent a year
and every year you say, but I’m only going to give you 1.1 percent,
after a while, you demoralize that workforce. We ought to come up
either with a Better way of doing it, or we ought to give these peo-
ple their pay raise. My second bill plugs a hole—and a large hole,

think—in our buyout legislation.

In that legislation, we say, I think quite appropriately, that civil
servants who have been cashed out, bought out, cannot be replaced.
And yet there’s nothing in the existing law to keep an agency from
replacing bought out employees with contracted out employees. If
that’s the case, then we have not downsized the Federal workforce.
We have simply substituted one kind of an employee for another
kind of employee. And I can only think of this as an oversight. I
think it ought to be corrected.

My third bill would have agencies do what you would think they
would already do as a matter of cost; and that is simply to cost out
whether they save any money by contracting out. And in fact, this
kind of costing out is not systematically done. We know that be-
cause of a 1994 GAO study. And this study looked at 9 or 10 agen-
cies and found that work that they had contracted out was being
done for more than that work could have been done in the agency.

And that means somebody has just gotten in the habit of con-
tracting out work. That’s contracting out more of taxpayers’ money
than, in those cases that the GAO discovered, were necessary. And
my final bill would have us do what surely is the beginning point
of understanding this process—simply to find out how many folks
are out there; what is the extent of this workforce?

In 1988, Congress passed a bill requiring the agencies to signifi-
cantly cut service contracts. So the idea of cutting service contracts
js not new. But then when Congress asked GAO to find out if
they’d done it, GAO said that there was no way to know if the
agencies had actually complied with the bill. So my fourth bill
would require OMB to develop a governmentwide system for deter-
mining and reporting the number of non-Federal employees who
are engaged in service contracts.


COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
WILLIAM F. CLINGER, JR., Pennsylvania, Chairman

BENJAMIN A. GILMAN, New York
DAN BURTON, Indiana

CONSTANCE A. MORELLA, Maryland
CHRISTOPHER SHAYS, Connecticut
STEVEN SCHIFF, New Mexico
ILEANA ROS-LEHTINEN, Florida
WILLIAM H. ZELIFF, J., New Hampshire
JOHN M. McHUGH, New York
STEPHEN HORN, California

JOHN L. MICA, Florida

PETER BLUTE, Massachusetts
THOMAS M. DAVIS, Virginia

DAVID M. McINTOSH, Indiana

JON D. FOX, Pennsylvania

RANDY TATE, Washington

DICK CHRYSLER, Michigan

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

WILLIAM J. MARTINI, New Jersey
JOE SCARBOROUGH, Florida

JOHN B. SHADEGG, Arizona
MICHAEL PATRICK FLANAGAN, Illinois
CHARLES F. BASS, New Hampshire
STEVEN C. LATOURETTE, Ohio
MARSHALL “MARK” SANFORD, South

Carolina
ROBERT L. EHRLICH, JR., Maryland

CARDISS COLLINS, Minoie

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
York

PAUL E. KANJORSKI, Pennsylvania

GARY A. CONDIT, California

COLLIN C. PETERSON, Minnesota

KAREN L. THURMAN, Florida

CAROLYN B. MALONEY, New York

THOMAS M. BARRETT, Wisconsin

GENE TAYLOR, Mississippi

BARBARA-ROSE COLLINS, Michigan

ELEANOR HOLMES NORTON, District of
Columbia

JAMES P. MORAN, Virginia

GENE GREEN, Texas

CARRIE P. MEEK, Florida

FRANK MASCARA, Pennsylvania

CHAKA FATTAH, Pennsylvania

BERNARD SANDERS, Vermont
(Independent)

JAMES L. CLARKE, Staff Director
KEVIN SABO, General Counsel
dJuprrH 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, Virginia
BERNARD SANDERS, Vermont (Ind.)
FRANK MASCARA, Pennsylvania

Ex OFFICIO

WILLIAM F. CLINGER, JR., Pennsylvania

CARDISS COLLINS, Minois

GEORGE NESTERCZUK, Staff Director
NED LYNCH, Professional Staff Member
CAROLINE FigL, Clerk

ay


46

to do that work, I think, is an inconsistent Policy. We're not talking
about small change in terms of what's contracted out. Mr.
Koskinen testified last week that $108 billion was spent last year
on contracted-for services.

Now, the average Federal employee pay and benefits are around
$40,000 a year. Now, applying that to the $108 billion we pay to
outside contractors, the government is supporting a 2.7 million
workforce, or 700,000 more private sector employees than public
sector employees. Rather than the predisposition to contract out,
the available evidence indicates that the Federal employees are
currently performing services at least at the same cost as the pri-
vate sector, and probably cheaper.

I cite, for your information, a GAO report that came out in
March 1994. And at page 23, I wish Mr. Cox was here so he could
take a look at this, because what it does is to compare the con-
tracted out work and the salaries that were paid to People who
were performing that work and compared that to those who were
doing the work before it was contracted out.

And for example, this was a DOE, Department of Energy report,
and it showed a junior engineer being paid at $20.83, which in-
cluded pay and benefits—$20.83 an hour—and the same person in
the private sector was paid $48.44 an hour; and the senior engineer
paid even more. So I think that there is ample evidence around
that it is not automatically cheaper for work to be contracted out.

Now, after studying contracts over a period of years, GAO testi-
fied to this committee that “GAO cannot prove or disprove that the
results of Federal agencies’ A-76 decisions have been beneficial and
cost-effective.” Now, why would we willy nilly start contracting out
when it can’t be proved that it’s going to be cheaper? And there’s
a great deal of evidence that the costs are not properly compared
in advance; contracts are not adequately administered to monitor
the costs or outcomes; and contractors arbitrarily increase costs in
the out years of contracts because they know that the work cannot
be taken back.

In report after report, GAO announces that the government pays
too much to the private contractors. In the 1994 report I men-
tioned, GAO reviewed 9 contracts and found between 26 and 53
percent could have been saved, performing the same work using
Federal employees. Now, we're not talking about marginal savings
here, we're talking about real savings.

While it’s true that the private sector has downsized and in-
creased its efficiency in general, so has the Federal Government. I
believe that if Congress requires fair cost comparisons when con-
tracts are initially contemplated; requires those comparisons be
done every time and at every renewal, you ensure that the public
receives its product at the lowest possible cost. And I believe that
the work will remain with the Federal workforce.

Thank you very much, Mr. Chairman.

[The prepared statement of Mr. Tobias follows:]

PREPARED STATEMENT OF RoBERT M. Tostas, NATIONAL PRESIDENT, NATIONAL
‘TREASURY EMPLOYEES UNION

Mr. Chairman, Mr. Moran, Members of the Subcommittee, | am Robert Tobias,
National President of the National Treasury Employees Union (NTEU). On behalf
of the over 150,000 federal employees represented by NTEU, I appreciate the oppor-


30

PREPARED STATEMENT OF Gary D. ENGEBRETSON, PRESIDENT, CONTRACT SERVICES
ASSOCIATION OF AMERICA

Mr. Chairman, Members of the Committee. My name is Gary Engebretson and
I am the President of the Contract Services Association of America, the nation’s old-
est association of government service contractors. Our more than 200 member com-
panies perform support services of all kinds—from basic maintenance to sophisti-
cated technical functions—for virtually every agency of the federal government as
well as scores of state and local government entities.

I am pleased to be here and greatly appreciate the committee's interest in con-
tracting-out. Indeed, as an industry we are gratified that the issue is receiving such
serious attention in the 104th Congress, and we are hopeful that this Congress will
take the kind of positive and assertive steps forward that will enable the govern-
ment to reap the many rewards available through a well run, comprehensive pro-
gram of contracting government services.

DEFINITIONS

Let me start by clarifying some of the terms of discussion and debate. The terms
privatization and contracting-out or outsourcing are being used more frequently now
than ever before, sometimes as if they are synonymous . . . but they are not.

When we speak of outsourcing or contracting-out, we are Speaking of a procedure
whereby the government contracts with a private entity to provide services that
would otherwise be performed by government personnel. In such cases, all control
and ownership remains with the government.

When we speak of privatization, we are typically speaking of a process by which
the government divests itself of basic control—and sometimes ownership—of an
asset or function, effectively turning that asset over to the private sector through
any one of a number of methods.

know there is much discussion in the Congress today of privatizing some govern-
ment functions—the FAA, Postal Service, and more. I, however, would like to focus
my comments on contracting-out, since it is the more common of the two.

CONTRACTING-OUT

In discussing contracting out, or outsourcing, three facts stand out:

One, contracting out saves money. As the Wall Street Journal Teported in 1993,
despite all the overblown reports alleging malfeasance and scandal, the reality is
that the government saves an average of 25% per contract over the cost of in-house
performance.

Does that mean that all contracts save money? Of course not. As in any business
venture, there are failures. But by and large, when all is said and done, the govern-
ment’s contracting out program saves real money.

Two, the nation is best served by an aggressive program of contracting out. In-
deed, our entire economic system is built on the well-founded belief that a strong
and dynamic private sector is the key to our nation’s economic vitality. Thus, to the
extent the government is performing commercial-type services, for which there is a
competitive, private marketplace, it is competing with the private sector and, even
more significantly, with our nation’s best interests.

Three, contracting-out should not be viewed as a necessary evil, but, rather, as
a valuable and positive management tool that plays an integral role in helping the
government downsize and rightsize in the most reasonable and efficient
manner . . . and without eliminating important services.

Without contracting as an option, current budgetary and FTE pressures would un-
doubtedly be worse. think we all recognize the importance of bringing the size and
cost of government under control, as painful as it may be. And contracting-out is
vital to our ability to do so,

This is not a simple issue. It has many dimensions. But in November, the Amer-
ican people expressed quite clearly their distress with the system as it now exists.
And polls continue to show that the real reinvention of government is a high prior-
ity with the American people and an issue with real resonance beyond the beltway.

This is a message that state and local governments have received and are taking
seriously. Today, the state and local government service contracting market can be
measured in tens of billions of dollars; most experts predict that within ten years
it will be measured in the trillions.

It is a message that corporate America has also received and taken seriously. All
across the nation, companies are looking carefully at what they do, and what they
need to do, and outsourcing an ever increasing amount of their support functions.
‘The most innovative and successful companies have made a decision to stay out of


39

ful examination of this issue, and thank you again for the chance
to be here today.
[The prepared statement of Mr. Concklin follows:]

PREPARED STATEMENT OF BERT M. CONCKLIN, PRESIDENT, PROFESSIONAL SERVICES
COUNCIL,

On behalf of the Professional Services Council (PSC), I would like to express our
appreciation for having the opportunity to testify today on the experiences of con-
tracting out in the federal government. I am Bert Concklin, president of the Profes-
sional Services Council, a national trade association providing a policy voice for the
technology services industry. Let me begin by commending this Committee's effort
to seek a public policy which balances public and private sector resources. PSC’s
more than 135 companies and associations have direct interest in having continued
opportunities to sell their expertise to the government. And in a global economy in-
creasingly dominated by high technology and information systems, we believe the
government has an equal interest in utilizing the evolving technology and expertise
of the private sector for performing services to meet those challenges. We believe
each sector has an important role and look forward to a more productive partner-
ship, as those roles are understood better.

THE PROFESSIONAL SERVICES INDUSTRY

Let me take just a minute to describe the professional services industry. The in-
dustry can be described best by its employees, because in the services business, our
people are our companies’ assets. Our sector’s products are ideas and. problem-solv-
Ing techniques, primarily in the form of specialized knowledge to assist customers
in solving technical, management and operational problems. Professional services
companies are made up of dedicated career professionals, who are proud to be work-
ing for practical solutions to government, commercial and international customers’
problems. PSC members employ over 290,000 men and women across the country
and around the world—computer scientists, research specialists, training profes-
sionals, physicists, engineers, quality control specialists, financial and accounting
experts—specialists in their fields offering state-of-the-art solutions and innovative
expertise to government and other customers.

verall, the services industry has been one of few engines of growth and job cre-
ation throughout the 90s. Growing an estimated 10% per year, and employing over
6 million people. The services industry last year added a $49 billion surplus to the
overall U.S. balance of trade, out performing goods by over $18 billion. Many of
these export businesses started, and some continue, through contracting with the
federal government.

ELEMENTS OF THE PSC TESTIMONY

1) Value of Contracting Out,

2) Outline of a Model for In-house Performance vs. Contracting Out,
3) Transitioning the Civil Service Workforce,

4) Legislative Impediments, and

5) Recommendations to Congress.

VALUE OF CONTRACTING OUT

Initiatives in rightsizing the federal workforce, deep cuts in agency budgets, Na-
tional Performance Review and other reinventing government initiatives fave cre.
ated a need to explore alternate approaches in delivering federal government serv-
ices. Now, the new Congress, through Subcommittees such as this one is taking an
aggressive approach to bring about change to achieve more cost effective and effi-
cient services for taxpayers dollars. PSC believes a balanced and well managed con-
tracting out policy, which enables the government to capture the value of the coun-
try’s services entrepreneurs, is essential.

‘The federal government has been engaged in successful contracting out through-
out its history, with increased levels in recent decades. Early on the government un-
derstood the value of tapping into the resources at the private sector businesses,
universities, and nonprofit organizations to supplement its own workforce. Let me
outline the key features for success that make utilization of the private sector at-
tractive. Among the many features, specialization and expertise, flexibility of
workforce, and competition for contracts are the most distinctive.

Expertise, Services contractors provide specialization and expertise to government
customers. Contractor skills are acquired typically through hands-on field experi-


25

the legislation you’re proposing, along with my colleague, Ms.
Morella. But there are several areas that we will be addressing.
The buyouts is one area where we will be having a hearing in the
future, and we welcome both your suggestions, your legislative rec-
ommendations and your participation in that process.

We're also concerned about giving em loyees the opportunity to
compete, as you heard maybe at the end of the questioning of our
last witnesses. Also, we’re equally concerned that we don’t have a
good data base, or quantifying or qualifying base of what’s going
on right now, either from GAO or from OMB; and how to evaluate
the service and value received for contracting out that is now oc-
curring or proposed.

So we will be looking at some of these areas. We welcome your
participation, your suggestions, and we'll look at the legislation. I
thank you for coming, and I'll defer now to our ranking member,
Mr. Moran.

Mr. Moran. Thank you, Mr. Chairman. Ms. Morella, we agreed
with the Vice President this morning, and I was not surprised. I
know that your goal is the same as mine—to get the highest qual-
ity work done for the least cost, and to address what we believe to
be this Nation’s priorities in the most representative, responsible
manner. But given the fact that 272,900 Federal employees are
going to be cut from the workforce—and it’s going to be done, we
can’t stop it—many of those will have an opportunity to find em-
ployment in this area by contracting with the Federal Government.

And I say that despite some policies which mitigate against that;
in fact, some legislation that you, I understand, support that that
should not be done. The reality is, it’s going to be done because
while we have cut the workforce, we haven’t cut Federal activities,
the responsibilities that the Federal Government still has to carry
out various programs.

And it seems to me, since history shows that a pendulum swings
back and forth, that it’s probably in the long term health of this
area for people to be able to contract with the Federal Government,
particularly Federal civil servants who choose buyouts or who leave
the Federal Government, but wish to be able to continue to make
their expertise and experience and knowledge available to the pro-
grams that they were at one time part of, and still are committed
to

So I’m not as anxious to put up barriers to contracting out be-
cause I think our principal responsibility is to provide jobs and a
healthy economy to our constituency. And while I have more con-
fidence in the Federal Government and the Federal workforce than
the majority of the House of Representatives today, I think that
may change 1 day.

And in the meantime, I don’t want for us to lose some of the best
and brightest people that are currently Federal employees because
there were no jobs available and, in fact, we set up barriers to their
employment in the private sector within the Washington area and
within the same kind of activity area where they have chosen their
careers.

So I have misgivings about what appears to be the thrust of your
legislation. Do you want to respond to some of that?


9

I would suggest that the role of government, again with respect
to employment and respect to spending, is to spend no more to pro-
vide government services than is necessary. Thank you very much.

[The prepared statement of Mr. Cox follows:]

PREPARED STATEMENT OF WENDELL Cox, DIRECTOR, STATE LEGISLATION AND
POLICY, AMERICAN LEGISLATIVE EXCHANGE COUNCIL

My name is Wendell Cox. 1 am Director of State Legislation and Policy for the
American Legislative Exchange Council (ALEC). I was appointed to three terms on
the Los Angeles County Transportation Commission by Mayor Tom Bradley, serving
from 1977 to 1985. I have consulted in the United States, Canada, Australia, New
Zealand and Europe on competitive Contracting.

ALEC is a bipartisan organization of state legislators, with over 3,000 state legis-
lator members. ALEC is dedicated to the Jeffersonian values of individual liberty,
limited government and the free market.

BACKGROUND ON COMPETITION

In recent decades there has been increasing concern about the cost of rnment,
and at every level of government, there have been serious budget difficulties. The
problem is not fundamentally a revenue problem—it is a cost problem. Government
revenues have risen substantially—and so have the unit costs of government

In the private sector, people and commercial enterprises succeed by paying no
more than necessary for what they buy. Businesses pay the market rate—it pays
no more than necessary—for labor, supplies and capital. The competitive market
works to minimize factor costs. In government, however, the situation is different.
While government uses the competitive market to obtain various goods and services,
the competitive market is not applied to the factors of public service production. The
result is higher than necessary costs. And government costs that are higher than
necessary is government waste.

The problem is lack of competition. Government costs are determined in a non-
competitive environment. As Nobel Laureate economist Frederik Hayek put it,

The market price cannot be known until there is competition.

And government has a special obligation to exercise stewardship over the re-
sources it compels from people. This is not so in other sectors of the economy. People
are not forced to purchase specific goods and services in the market. They are able
to exercise personal choice. No such choice exists with respect to taxation. Govern-
ment’s financial obligation to the people, is

+ +, to spend each (dollar) to the best effect. Individuals do that, day after
day. So do companies. They succeed, more or less, because they face choices as
consumers and competition as producers. The minimum duty of a state should
be to replicate such choice and competition in its own affairs, so that the bil-
lions it raises in taxes achieve the high-sounding aims it sets for itself.!

The public purpose (or objective), then, of government spending is to provide for
government services at a cost that is no higher than necessary. The imperative to
spend no more than necessary is intensified by the federal budget deficit, which

reatens the living standards of future generations.

Around the world, governments are using competitive contracting to apply market.
forces to government services, and with overwhelmingly positive results.

THE EXCESS COST OF GOVERNMENT EMPLOYMENT

However, before providing an overview of competitive contracting, it is appro-
riate to review an important root cause of higher than necessary government serv-
ices costs—excessive public employee compensation. Government employee com-
pensation is the largest component of state and local government budgets—rep-
resenting 60 percent of operating costs.
ALEC’s America’s Protected Class scries shows that, while private employee com-
pensation has stagnated, government employee compensation has risen steadily.
Average state and local government, compensation, increased 16.0 percent
from 1980 to 1991 (inflation adjusted)—$4,78 for each $1.00 received by the av-
erage private sector workers. State and local government employees are now
paid, on average, 10.3 percent more than private employees.
The average federal civilian worker has received $4.56 for each $1.00 in com-
pensation increase for the average private sector worker between 1980 and

1 “Britain's Underclass,” The Economist, May 23, 1987.


61

and do it very efficiently. Or we can go into ground maintenance,
or we can go into building maintenance, we can go into food serv-
ice.

Many of these items don’t get into the category that you were
talking about, about the policy process, et cetera. And I think that
they should be contracted out. The private sector is very competi-
tive. And our industry is so competitive that it sometimes scares
me or sometimes I even ask the question, why they’re even in this
business, because it’s so competitive.

But I think that there are areas that more contracting should be
done, and the private sector could do a good job for the govern-
ment. And I would urge that the Congress take a look at these re-
spective areas.

Mr. Moran. Those are the areas that local governments have
tended to contract out, to privatize.

Mr. ENGEBRETSON. Right, yes, right. Now, in reference to impedi-
ments, Mr. Chairman, there is quite a long list. And of course,
some of these have been addressed through some other areas,
meaning that, as you know, FASA I, and FASA II is in the stream
now. There are some issues that are going to be addressed in acqui-
sition reform.

Also, we understand some items are going to be addressed in
DOD authorization that will streamline the process as well. I think
probably the best answer would be through the administrator of
OFPP, Steve Kellman—we've been working on what they call per-
formance-based contracting. And as you may know, Mr. Concklin’s
council and CSA are two of the associations that have signed on
to this process.

And that, again, is streamlining the process. So I think the best
way to answer the question, Mr. Chairman, is, there are some im-
pediments. And we do have a list of some of them here. But there
are more that could be given to you that could be discussed in de-
tail for the future.

Mr. Mica. I want to thank you, Mr. Engebretson. Mr. Concklin,
Tm going to have to be a little bit discourteous——

Mr. CONCKLIN. No problem.

Mr. Mica [continuing]. And ask you if you wouldn’t mind re-
sponding, and Mr. Tobias, in writing, if you could, to that.

Mr. CONCKLIN. Sure, be glad to.

Mr, Mica. I’ve been called for two votes in another committee
and they're waiting on me right now.

Mr. CONCKLIN. OK.

Mr. Mica. We thank you for your participation. We will have an
additional hearing, we hope, on contracting, and we hope that
you'll continue to assist us. And with that, I declare this meeting
adjourned.

ereupon, at 4:45 p.m., the subcommittee was adjourned, sub-
ject to the call of the chair.]

[Additional information submitted for the hearing record follows:]

PREPARED STATEMENT OF BARRY KRASNER, NATIONAL PRESIDENT, NATIONAL AIR
TRAFFIC CONTROLLERS ASSOCIATION

Mr. Chairman and members of the Subcommittee, I am Barry Krasner, President
of the National Air Traffic Controllers Association which represents over 15,000 of
our nation’s dedicated air traffic controllers who work for the FAA. Thank you for


77

Under OPM regulations, agencies maintain Reemployment Priority Lists through
which former agency employees separated by RIF receive reemployment consider-
ation. Agencies are prohibited from filling positions from outside the agency ifa dis-
placed agency employee is qualified and available. In our report, we have rec-
ommended that legislation be passed to require that agencies give priority consider-
ation to their displaced employees even: when filling positions rom within the agen-
cy. OPM currently does not have the authority to block internal agency movement
or require that agencies operate mandatory inplacement programs.

OPM operates a Governmentwide Interagency Placement Program (IPP) which
provides displaced employees special employment consideration for vacancies in
other agencies over candidates who have never held a Federal position.

In a transfer from one agency to another because of a RIF, relocation expenses
may be paid in whole or part by the agency from which the employees transfer or
by agency to which he transfers, as may be agreed upon by the heads of the agen-
cies concerned.

‘Agencies may retrain employees for placement within the same agency or in other
Government agencies. Additional assistance, including retraining for placement out-
side the Federal Government, is available through Department of Labor programs.
Under the Job Training Partnership Act, individual States receive funds from the
Department of Labor to provide pelraining assistance to displaced Federal workers.

fn January 1995, OPM published regulations to help affected workers earlier in
the downsizing process. Agencies may now issue a Certification of Expected Separa-
tion to employees when the agency expects to separate them within 6 months by
RIF or contracting out. This notice allows employees to register up to 6 months be-
fore separation for placement and retraining programs administered by an agency,
OPM, and the Department of Labor.

The following is a comprehensive list of programs and benefits currently available
to employees displaced as a result of a decision to contract out work. These benefits
are also available to employees reached for RIF actions for other reasons. Also in-
cluded is a list of those benefits and programs available only to Department of De-
fense displaced employees and a list of transition services now provided to employ-
ees in some agencies and locations.

GOVERNMENTWIDE PROGRAMS AND BENEFITS AVAILABLE TO EMPLOYEES SEPARATED BY
REDUCTION IN FORCE

PLACEMENT ASSISTANCE

Interagency Placement Program (IPP)—A pre-and post-RIF program adminis-
tered by OPM to give employees who were or will be separated priority reemploy.
ment. consideration for positions in other Federal agencies over applicants who do
not have Federal status when agencies fill jobs from competitive examinati

‘Reemployment Priority List (RPL)--Primarily a postRIF program administered
hy individual agencies that gives separated employeds priority for vacancies in their
former agency over candidates who are not agency employees.

MODIFICATION OF QUALIFICATION REQUIREMENTS

Agencies may modify qualifications standards for inservice placement actions of
RIF-ed employees if the agency determines that the employee can successfully per-
form the work of a position even though the employee may not meet all OPM quali-
fication requirements .

JOB INFORMATION

Career America Connection—-A touch tone telephone system which provides up-
to-date job information.

Federal Job Opportunities Bulletin Board—A computer-based bulletin board sys-
tem which provides general and specific employment information, current worldwide
Federal job opportunities, and salary and pay rates. This information is also avail-
able through OPM Federal job information touch screen computers which are pe-
based systems that use touch screen technology to provide job seekers with daily
updated worldwide Federal employment information at the touch of a finger. Key
features include: current worldwide Federal job opportunities, information on the
hiring process, general and specific employment information, and the capability for
individuals to request application materials.

_ Federal Employment Information Centers—OPM Federal Employment Informa-
tion Centers are located throughout the United States to provide up-to-date informa-
tion on Federal employment opportunities.


47

tunity to present testimony today as the Subcommittee continues its examination
of critical issues related to the Federal government's contracting-out practices.

Over the years there has been significant congressional inquiry into the federal
government's contracting-out practices, as well as countless studies conducted by
agency Inspector Generals, the Office of Management and Budget (OMB), the non-
partisan General Accounting Office (GAO) and others. Numerous reports continue
to demonstrate that service contractor abuses can be found in virtually every federal
agency that has been studied, sometimes resulting in massive cost overruns and in-
adequate erformance. While the concept of the A-76 cost comparison analysis has
been justifiably praised for imposing some needed safeguards, the process itself still
holds some problems.

Mr. Chairman, this hearing is timely, and the issues being addressed here today
are compelling. At the same time that agencies. are being asked to downsize, the
number of contractors doing business with the federal government and their costs
are rising. A January 1994 OMB report entitled Summary Report of Agencies’ Serv-
ice Contracting Practices, reported that service contracts are the “fastest growing
area of government procurement, accounting for $105 billion annually of the govern-
ment’s $200 billion FY 1992 procurement program.” Moreover, the report states that
from fiscal year 1989 to fiscal year 1992, the number of contractors doing business
with the government, rose from 62,819 to 82,472. In testimony before this Sub-
committee last week, OMB Deputy Director for Management, John Koskinen, stated
that in FY 1994 service contracts represented a total of approximately $108 billion.
‘These statistics are especially alarming when one considers that some contracts may
be initially awarded without any cost analysis. In its January 1994 report, OMB fur-
ther stated that cost analyses and independent government cost estimates are not
performed by many agencies prior to the renewal, extension, or even re-competition
of existing contracts.

Mr. Chairman, federal employees and the methods by which they perform their
work have undergone complete and thorough examinations in recent years as
reinvention efforts attempt to bring the lessons of the private sector to public serv-
ice. The loss of 272,900 jobs over the next five years represents only the most. promi-
nent of the “Reinventing Government” initiatives—federal employees have made nu-
merous other sacrifices in order to meet deficit reduction goals, and they continue
to adopt new ideas and techniques in pursuit of greater eificiency. Unfortunately,
our contracting counterparts have yet to undergo such a thorough re-evaluation and
the crisis in government contracting continues.

In order to alleviate this crisis and achieve the goal of a truly effective and effi-
cient government, there must be an increased commitment by the federal govern-
ment to make choices that best serve American taxpayers and service beneficiaries.
By creating a level playing field that allows for genuine competition between con-
tractors and federal employees, government can ensure that the best possible job is
done and enhanced quality, economy, and productivity are achieved

‘As both the Congress and Administration explore ways to effectively streamline
the functions and operations of Federal Agencies across the board, this important
issue must be thoroughly examined and considered. As this process goes forward,
federal employees on the front lines often know best how federal services are, or are
not, delivered; and they are willing to work with Congress to ensure that agencies
are required to make more fiscally-responsible decisions about service contracting.
1 am pleased to present to you today the views of NTEU’s membership concerning
the growing problems associated with service contracting and how they might be re-
solved through effective reform of the OMB Circular A~76 process.

OMB CIRCULAR NO. A~76: MAJOR ISSUES AND CRITICISMS

As you are aware, the Office of Management and Budget (OMB) Circular No. A~
76 establishes the federal policy regarding the performance of commercial contract-
ing activities, OMB defines “commercial activity” as one which is operated by 8
federal executive agency and which provides a product or service which could be ob-
tained from a commercial source. Performance of commercial government activities
by outside contractors is subject to OMB Circular A-76, which requires a cost com-
parison of performing work in-house by government employees versus performing
work by private contractors. The stated goal of the Circular is to “achieve econom!
and enhance productivity through competition.” This is to be accomplished throu;
comparing the costs of performing commercial activities in-house by Federal employ-
ees with the costs of obtaining the same services from private contractors, and se-
lecting the most economical alternative. Before approving a conversion from in-
house to contract performance on the basis of costs, OMB Circular No. A~76 has
established cost margins which must be exceeded. The cost margin is equal to 10



49

performance and are charging the federal government for millions of dollars in costs,
such as employee parties, tickets to sporting events, and alcoholic beverages, that
are either unallowable or questionable.t These and other federal contracting out
costs represent a black hole that this body has an important obligation to review.

Contract oversight clearly represents another key area desperately in need of re-
form as efforts to streamline federal expenditures and eliminate instances of waste
and fraud go forward in this Subcommittee. Concerns have continuously been raised
about contract oversight, especially since once a function goes to contract there is
little oversight on the contractor's performance or cost overruns. In testimony enti-
tled “Federal Contracting—Cost-eflective Contract Management Requires Sustained
Commitment” (GAO/T-RCED-93-2), GAO concludes the following:

With the budget deficit and other financial commitments that the federal gov-
ernment faces, it cannot afford to ignore the potential cost of poor contractor
oversight. For many years federal agencies have increasingly relied on contrac-
tors to carry out needed activities. Unfortunately, in all too many instances, fed-
eral agencies have abdicated to their contractors the responsibility for ensuring
that contractors perform quality work cost effectively.

Unfortunately, service contracting personnel continue to concentrate their efforts on
the awarding of contracts and the obligation of funds, however the equally impor-
tant oversight of contractor performance often becomes a peripheral concern. NTEU
supports GAO's recommendation that senior agency managers must be made ac-
countable for contract administration.5 Contract administration becomes one of the
costs of doing business with contractors, and it should therefore be included in any
cost comparison analyses.

Furthermore, in the absence of healthy competition, the incentives necessary for
a contractor to provide timely and effective service are greatly diminished. Having
established a monopoly, the contractor is often able to demand a larger fee the sec-
ond or third time around when a contract comes up for renewal. By then, however,
the federal government’s own bargaining power is greatly reduced since the employ-
ees who once performed that particular service have long since been separated or
dispersed and their valuable expertise lost. Often, more efficient ways of delivering
services can be developed over time. If a service contractor knows that his or her
contract will be renewed without further review, the federal government loses the
competitive edge and the incentive for that contractor to reduce or eliminate the un-
necessary expenses he or she charges to the federal government. NTEU strongly be-
lieves that contracts should not be automatically renewed in this manner. In addi-
tion to improving contract management as I have suggested, agencies should also
conscientiously audit the work of their contractors to ensure that the government
Pays no more than it should for the services it receives.

the March 1994 GAO report entitled, Measuring Costs of Advisors and Assist-

ance Service Contractors Versus Federal Employees, the GAO found that the federal
government could save millions of dollars by performing functions directly rather

an allowing them to be performed by private contractors. GAO reviewed nine pre-
vious studies comparing the cost of using contractors rather than federal employees
to perform necessary government functions. The findings were alarming. For exam-
ple, an audit of Air Force service contracts disclosed that the Air Force paid $4.7
million in additional costs for certain contractor work in fiscal year 1990, and could
have saved up to $6.2 million if the work to be performed under the optional years
of the contracts reviewed were performed in-house. A Department Of Defense
(DOD) Inspector General report on certain consulting services contracts estimated
that DOD agencies could save about $26 million from fiscal years 1992 to 1996, by
gradually reducing their service contracts by 60 percent. The report further esti-
mated that contracting costs were between 21 and 40 percent higher than in-house
performance.” Another study of 11 Department of Energy (DOE) service contracts
estimated that that Department could have achieved savings ranging from 3.1 to
55.4 percent, with an average of 25.4 percent if the work were done in-house.

+GAO, FEDERAL CONTRACTING: Cost-effective Contract Management Requires Sustained
Commitment (GAO/T-RCED-93-2) (December 1992), p. 1.

®GAO, FEDERAL CONTRACTING: Cost-Effective Management Requires Sustained Commit-
ment (GAO/T-RCED-93~2) (December 1992), p. 13. “The persistence of contract management
problems and the inattention to contracting audits indicate a need for top agency managers to
Intervene, raise the level of concern throughout the agency and ece issues through to Tesolu-
pion.”

*GAO, GOVERNMENT CONTRACTORS: Measuring Costs of Service Contractors Versus
Federal Employees (GAO/GGD-84-95) (March 1994) p. 26.

. p. 25.
SIbid. p. 24.



12

April 10, 1995
Representative John L. Mica,

Chairman, Committee on Government Reform and Oversight

United States House of Representatives

2157 Rayburn House Office Building

Washington, DC 20515-6143

DEAR CHAIRMAN Mica:

Thank you for the opportunity to share our views with the Committee on Govern-
ment Reform and Oversight Subcommittee on Civil Service on April 5.

‘As you may recall, our testimony that federal workers are better paid than pri-
vate workers raised interest among the members of the subcommittee. Enclosed is
a copy of our report America’s Protected Class: The Excess Value of Public Employ-
ment.

Based upon the questions that were asked, we would like to emphasize the follow-
ing points:

The system for determining federal pay comparability is unreliable. Admit-
tedly it is difficult, if not impossible to administratively establish market rates
(whether wages or prices). But, worse, the federal system falls far short of even
the minimum that should be required of an administrative compensation deter-
mination system. Employer paid fringe benefits are not included, despite the
fact that federal employer paid benefits are considerably above those of private
employees and those of state and local government. Other advantages of federal
employment, such as superior security and extra paid time off are not a part
of the pay determination. The federal pay determination system is a disservice
to both Congress and America’s taxpayers.

Various research reports have estimated substantially different results with
respect to federal employee wages than are produced by the federal pay deter-
mination system (these are noted in America’s Protected Class: The Excess
Value of Public Employment).

Even if the federal pay methodology were unquestioned with respect to wage de-
termination, the inherent advantages of federal employment would still produce a
substantial monetary advantage for federal employees.

We would be pleased to provide you with any additional information.

Sincerely,

WENDELL Cox
Director, State Legislation and Policy

P.S. For your information, I have enclosed an “op-ed” from the April 7 Wall Street
Journal, ‘which raises additional concerns about the value taxpayers are receiving
from federal employment.

(NoTE.—To reduce publication costs, the subcommittee has omit-
ted from the record a report entitled, “America’s Protected Class:
The Excess Value of Public Employment.” A copy of the report may
be found in the subcommittee files.]

Mr. Mica. Thank you for your testimony and for the interesting
statistics you gave us today. And I might, if I may, just ask a cou-
ple of questions about some of the statistics. Now, you said that the
average Federal worker earns 45 percent more than the private
sector, and then 35 percent more than the average worker in State
and local government. Is that correct? .

Mr. Cox. It was 30 percent more than the State. I’m sorry if I
said 35, I erred.

Mr. Mica. Thirty percent more?

Mr. Cox. Yes. _
Mr. Mica. And is this a cast in all Federal workers, or is it some
catego!

2
Mr. COX. No, it is all. It would include everyone from minimum
wage workers to people that are making millions of dollars as
CEOs of big companies.
Mr. Mica, Did your study break that down? I mean, are we pay-
ing certain levels a disproportionate amount?
Mr. Cox. No.