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37

for the buy-outs, RIF’s would have been necessary in that fiscal
year. Twelve said that they would have needed RIF’s in 1995.

The results of our February 1995 survey of 28 non-Defense agen-
cies showed that 25 agencies were targeting their workforce reduc-
tions toward specific positions in fiscal year 1995. The most fre-
quent targets, those identified by 14 or more of the agencies re-
sponding, included headquarters staff, supervisors and managers,
employees in grades 14 and above, regional office staff, and employ-
ees in occupational series that included such fields as acquisition,
personnel, accounting, and budgeting.

As part of our longer-term study for the subcommittee, we will
examine Government-wide data to determine whether buy-outs
were actually made in these targeted positions.

The strategy used to implement the buy-out authority was based
on the goals of the NPR. These goals included a reduction in over-
head staff by 50 percent and an increase in the supervisor to staff
ratio from 1:7 to 1:15 by the end of this century.

So that agencies would accompany their downsizing of manage-
ment reforms consistent with these objectives, the President di-
rected each Federal agency to submit a streamlining plan to OMB.
Through a series of detailed memos and bulletins, OMB provided
the heads of executive agencies with information on how to prepare
these streamlining plans. OMB officials said the quality of the
plans played an important role in OMB’s decisions to approve or
disapprove of the buy-outs.

While the administration was initially disappointed with the
quality of many of the streamlining plans, OMB officials told us
that. their quality has since improved. Since the data on agencies’
use of the buy-outs is not yet available, it is really too early to tell
conclusively whether the agencies are in fact following these plans
when implementing the buy-out authority.

Most Federal agencies that offered buy-outs in fiscal years 1994
and 1995 are planning to reduce their staffing levels from the 1993
enacted base through fiscal year 1996. Nevertheless, data from
OPM and the President’s fiscal year 1996 budget show that four
large agencies offered buyouts—Education, Energy, Justice and
EPA—that were expecting to receive staffing increases through fis-
cal year 1996.

Staffing levels have increased in these agencies due generally to
shifts or increases in agency missions as a result of new programs
mandated either by the administration or by Congress. At Energy
and EPA the increase is also the result of an effort to convert work
performed by contractors to work performed by Federal employees.

Because agencies are continuing to downsize, it is too early to
say conclusively how they are compensating for reduced staff or
how their productivity has been affected. In our contacts with agen-
cies, some reported maintaining or improving services by initiating
reinvention efforts while others said that they were experiencing
adverse effects. In considering these reported successes and short-
comings, it is important to note once again that our information is
preliminary and we will be looking at it in greater detail in coming
months. Moreover, this information was obtained primarily from
headquarters officials, and a different picture may emerge as we


33

However, OPM has said that the attrition rate in Government is at an all time low.
And, many Federal employees, including those in my district, speak openly against
acoepting ‘an early retirement option (without incentive) because of the two percent
penalty.

Recently, we have heard that some Federal workers, who were eligible for a regu-
lar optional retirement or an early retirement option, did not retire because they
were wailing to be bought out. 1 hope our panel members will address this pho-
nomenon.

On the other hand, a RIF, although an effective way to reduce staff, has severe
operational, economical and emotional consequences for agencies and their workers.
OPM, updating figures from a General Accounting Office report, found that if an
employee earning $36,000 in FY 94 retired early on December 31, 1993 and received
a $25,000 severance incentive, the agency avoided net RIF costs of $8,300.

‘Now that we have more experience with buyouts, we need to revisit these figures
and determine if they are still applicable. Today’s witnesses should be able to ad-
dress this and other cost/benefit issues.

‘As most people here could attest, the current RIF rules are no friend to an agen-
cy’s succession plans, workforce planning strategies, or employee morale. Experts on
organizational development suggests that it could take years before an agency recov-
ered from a reduction in force.

I was a supporter of the buyout legislation. And, like my colleagues on this Sub-
committee, I hope that this hearing will provide objective information on the effec-
tiveness of the buyout initiative, particularly its integration with agency streamlin-
ing plans and other human resources strategies as well as its economic impact
across Government.

The lessons learned today, including those we acquire from our friends from the
rivate sector, may provide @ strong framework and benchmark for reshaping the
uyout initiative, especially if this body decides that new authorization is needed

to help meet agency streamlining goals.

In addition, although not the major focus of this hearing, I hope some information
is brought to light on transition and outplacement strategies that respond to organi-
zational needs, while minimizing the trauma workers will experience if RIF-ed. | be.
lieve this is truly an important issue—one this subcommittee should perhaps hold
hearings on in the near future—because there is a human side to downsizing.
Again thank Chairman Mica for having this hearing, and I look forward to hear-
ing from our witnesses.

Mrs. MoRELLA. I am concerned about, as we do the downsizing,
as we come up with Reinvention I, Reinvention II, the fact that in
the budget resolution, even though there is nothing in concrete,
there are possibilities of consolidations, eliminations. I am con-
cerned about what is happening with these people who are making
America run—again, that scientist at NIH that is isolating the
colon cancer gene and the breast cancer gene, that is a Federal em-
ployee; that person in the FAA who is checking our security, that
is a Federal employee. I know a lot of the questions have been
posed and answered, and I may have a few more to submit to you
in the record for your response, but there is one I could ask now,
and that is, could you tell us what OPM’s role is now in assisting
agencies in integrating the buy-out plans with streamlining strate-
gies, particularly since a number of streamlining plans were not ac-
cepted by OMB Yefore the buy-outs were offered?

Mr. KING. Yes. First, I would like to apologize through the chair
to the member. I was presumptuous, so please forgive me for my
comment.

Mrs. MoreE.La. Oh, Mr. King, please.

Mr. Kine. And also to the chair.

Let me—I think on the streamlining, OMB and their manage-
ment unit had been working with the agencies in relation to
streamlining, and we have raised the personnel issues that affect
streamlining, and since we are dealing in a people business we



42

showed that 25 agencies were targeting their workforce reductions toward specific
positions in Fiscal Year 1995. The most frequent targets (those identified by 14 or
more agencies) included headquarters staff, supervisors and managers, employees in
grade levels 14 and above, regional office staff, and employees in occupational series

at included such fields as acquisition, personnel, accounting, and budgeting. As
part of our longer-term study for the Subcommittee, we will examine government-
wide buyout data to determine whether buyouts were actually made in these tar-
geted positions.

Further control over separations is provided by the Workforce Restructuring Act,
which, as noted above, allows agencies to defer separating those employees whose
services will be temporarily needed to ensure the performance of an agency’s mis-
sion. These deferred buyouts must be taken no later than March 31, 1997. According
to OMB data, over 6,200 additional non-Defense employees are expected to take de-
ferred buyouts in Fiscal Years 1996 and 1997.

MANAGEMENT OF THE BUYOUT AUTHORITY

The strategy used to implement the buyout authority was based on the goals of
the National Performance Review (NPR). These goals included a reduction in “over-
head” staff by 50 percent (including supervisors, personnel specialists, budget spe-
cialists, acquisition specialists, and accountants and auditors) and an increase in the
supervisor-to-stafT ratio from 1:7 to 1:15 by the end of Fiscal Year 1999.

that agencies would accompany their downsizing with management reforms
consistent with the NPR's objectives, the President directed each federal agency to
submit a streamlining plan to OMB. Through a series of detailed memos and bul-
letins, OMB provided the heads of executive agencies with information on how to
prepare these streamlining plans. OMB officials said the quality of the plans played
an important role in OMB's decisions to approve or disapprove agencies’ buyout re-
quests.

In September 1994, OMB issued internal guidance to its reviewers on how to
evaluate agency streamlining plans. OMB instructed them to ensure that each
streamlining plan made sense programmatically, met FTE guidance, and was based
on sound analysis. Further, if an agency was not meeting one or more of the NPR

als, reviewers were to ensure that the agency justified its reason for not meeting
these goals and explained what it was doing instead to streamline and improve pro-
gram performance.

The guidance also contained a checklist of critical factors that were to be consid-
ered when reviewing the streamlining plans. Assessments of the streamlining plans
for each major agency were to be included in passbacks to agencies and in the budg-
et presentations to the President.

‘ile the administration was initially disappointed with the quality of many of
the streamlining plans, OMB officials told us that their quality has improved. Since
final data on agencies’ use of the buyouts are not yet available, it is too early to
tell conclusively whether agencies are following their streamlining plans when im.
plementing the buyout authority or whether targeted populations actually received

uyouts.

FOUR AGENCIES THAT HAVE INCREASED IN SIZE USED THE BUYOUT AUTHORITY AS A
RESTRUCTURING TOOL

Most federal agencies that offered buyouts in Fiscal Years 1994 and 1995 are

lanning to reduce their staffing levels from the 1993 enacted base through Fiscal

‘ear 1996. Nevertheless, data from OPM and the President’s Fiscal Year 1996
budget show that four large agencies that offered buyouts—the Departments of Edu-
cation, Energy, Justice; and the Environmental Protection Agency (EPA)—were ex-
pected to receive staffing increases through Fiscal Year 1996. (See table 2.)

TABLE 2.—Planned FTE Additions and the Number of Buyouts Offered at Agencies Experiencing Staff
Increases

‘umber of

FY buyuts granted
Agency 1983 bases buts granted

through FY 1996 SNA ogges

EdUCBtIOM ne — ee Less than 50 812
Energy . 200 3,000 (est)

WIC once 9,800 130


10

wide attrition rate averaged 7.9 percent, but in fiscal year 1992
that figure had declined to 5.2 percent, and in fiscal year 1993, it
was as low as 2.9 percent, Mr. Chairman. We attribute this decline
in attrition to a sluggish economy. People feared they couldn’t find
a new career either in the public or the private sector.

When the Department of Defense began using its buy-out author-
ity in 1993, the attrition rate in Government increased for the first
time in 5 years. White-collar retirements almost doubled from 1.4
to 2.7 per 100 employees; blue-collar retirements did more than
double from 2 to 5.5 per 100 employees. In short, the buy-outs were
instrumental in jump starting departures from Government on a
voluntary basis.

Mr. Chairman, your letter asked whether we thought the Federal
Workforce Restructuring Act was an appropriate model to be used
when agencies face substantial personne] reductions. Obviously, we
feel that the buy-out program has been an effective tool. However,
it was never anticipated that the program would be permanent.
These incentives were seen as an instrument the Government could
use for a specific period of time to achieve specific workplace goals.

We are not advocating a new Government-wide buy-out program.
We are currently looking at a variety of programs to assist in the
humane downsizing of agencies. If an agency’s specific buy-out pro-
gram is included, we believe it should be modeled on the 1994 Re-
structuring Act. It should be targeted, it should be budget neutral,
it should be used to avoid RIF’s, and it should include program con-
trols including the requirement for an FTE reduction in each buy-
out. There should be Government-wide standards to avoid the con-
fusion and inequity of different agencies offering different pack-

ages.

Should such a program be authorized, Mr. Chairman, I believe
OPM, on the basis of our recent experience, can play a valuable
role in its design and successful implementation.

What I’m saying, Mr. Chairman, in answer to your rhetorical
question as the hearing started, we see the buyout program as a
boon by any standard, Mr. Chairman, and we would be glad to re-
spond to any of your questions or the questions of the committee,
sir,

[The prepared statement of Mr. King follows:]

PREPARED STATEMENT OF JAMES B. KING, Director, OFFICE OF PERSONNEL,
MANAGEMENT

Mr. Chairman and Members of the Subcommittee.

Thank you for giving OPM this opportunity to comment on the Government-wide
program of separation incentive payments—or buyouts—which we played a key role
in designing and implementing.

I'am accompanied this morning by Leonard Klein, our Associate Director for Em-
ployment, who worked closely with the buyout program.

Mr. Chairman, during the 1980s, private industry popularized the use of buyouts
as a way of achieving downsizing in a manner that was humane and conducive to
employee morale and productivity.

T don't believe anyone would argue that private employers offered buyouts only
for the benefit of their employees—they offered them because they were also good

usiness.

The same has been true in government.

The first government buyout program was begun in 1991 for the benefit of mem-
bers of the armed services who faced cutbacks at the Department of Defense.

Late in 1992, legislation was passed that made buyouts available to civilian em-
ployees of the Defense Department.



70

Robert Ellis, vice president of corporate marketing of the Wyatt
Co., two distinguished private sector firms. As is customary in our
subcommittee in oversight and investigations, if you would stand
and raise your right hand to be sworn in.

[Witnesses sworn.]

Mr. Mica. Thank you. Let the record reflect that the witnesses
answered in the affirmative, and, again, welcome, gentlemen. We
are thankful for your patience and also for your contributions. You
both represent distinguished firms in the private sector that are
knowledgeable in these areas, and we welcome your testimony.

First, would like to call on Dr. Peter Scott-Morgan of hur
D. Little Co.

STATEMENT OF PETER SCOTT-MORGAN, DIRECTOR OF MAN-
AGEMENT CONSULTING, ARTHUR D. LITTLE, INC.; AND ROB-
ERT ELLIS, VICE PRESIDENT OF CORPORATE MARKETING,
THE WYATT CO.

Dr. Scott-Morcan. Mr. Chairman, members of the subcommit-
tee, thank you for the opportunity to appear today to discuss the
implementation of the Federal Workforce Restructuring Act of
1994,

There are many relevant lessons for the Federal restructuring to
be drawn from the experiences of the so-called re-engineering of
corporate America. In general, although most companies that have
implemented downsizing and/or restructuring have achieved sig-
nificant short-term productivity improvements, many of the really
fundamental changes sought for sustained growth, things like gen-
uine teamwork, creativity, innovation, customer orientation, those
sorts of things have not been sufficiently forthcoming. In addition,
many companies are now suffering from what, if you like, is a
change fatigue—at the one time they need to be able to continue
to change ever faster and remain ever more responsive. The ap-
proach taken to restructuring turns out to be critical in removing
the risks from these problems, and I would like to start by just
looking at some of the unacceptably high failure rates which we are
starting to see in corporate America.

My colleagues and I published a survey a year ago on managing
organizational change using a weighted national sample of 350
U.S. executives across 14 major industries to just see how leading
organizations were actually coping. I have subsequently held indi-
vidual discussions with over 100 CEO’s and top managers to flesh
out the findings of that survey, and the pattern that emerged I
would like to run through now.

Practically every company these days is trying to implement
major change, and, what is more, nearly all of them expect to go
through another major corporate change within the next Few years.
They are all expecting wave upon wave upon wave of change for
the foreseeable future. And yet in the survey less than one-sixth of
the executives were really happy with the results that they had
achieved. Almost 40 percent were actually very unhappy, claiming
that everything was far too slow, far too patchy. Almost 70 percent
experienced unanticipated problems and side effects. And the most
striking common denominator of all of those failures is lack of real-
ism, a lack of pragmatism in dealing with the human aspects of the


52

ample, would the Administration want a payback provision? How would the Admin-
istration want to treat the impact on the retirement systems of affected employees?

‘We would support the extension of buyout authority so long as:

—buyouts were extended to individual agencies on an as-needed—as opposed
to governmentwide basis (unlesa a new administration or legislative proposal
similar to the Federal Workforce Restructuring Act requires large, government-
wide reductions, in which case a governmentwide buyout program would prob-
ably be more efficient);

—employees would be involuntarily RIFed if buyouts were not offered to and
accepted by a sufficient number of employees;

youis were used as early as possible in the fiscal year to maximize pay-
roll savings;

—the enactment of legislation authorizing buyouts and the buyout window it-
self occurred as close to one another as possible to prevent sharp declines in
turnover rates as employees wait for a sweetener to leave;

—buyouts are adequately planned (eg. targeted when necessary to specific
occupations, grade levels, localities, etc.) To ensure that agencies have the prop-
er gual mix necessary to carry out their missions after the buyouts were over;
an

—the policies, procedures, and goals of any buyout programs have been ade-
quately communicated to employees (i.e., to minimize the likelihood of com-
plaints, appeals, and reduced morale).

If Congress decides to enact buyout legislation, we believe it should consider in-
corporating or adapting some of the language used in the Federal Workforce Re-
structuring Act to help ensure that future buyouts are financially advantageous (or
at least budget neutral) to the government.

For example, Congress should consider language such as that contained in section
4 of the Act that helps pay for retirements resulting from the buyouts. Further,
Congress should consider including language similar to sections 5(f) and 5(g) of the
Workforce Restructuring Act. Section 5(f) ensures that positions are eliminated for
each buyout that is accepted, while 5(g) prohibits any increase in the procurement
of service contracts, as a result of workforce reductions under the Act, unless a cost
comparison shows these to be beneficial to the government. Other provisions of the
Act that should be considered include the requirement to repay the buyout if a per-
son returns to federal service (even under a personal services contract) within 5

ears of separating from the government, and the provision that calls for the track-
ing and reporting of relevant data on employees who take buyouts.

Quality of the Workforce

1, Our discussion during, the hearing raised numerous questions about the quality
of the workforce that would remain after restructuring. Please describe any methods
and measures used by your agency to evaluate workforce quality. Have you assessed
the impact of the Federal Workforce Restructuring Act in these terms?

We have not assessed the impact of the Federal Workforce Restructuring Act in
terms of the quality of the workforce that remained after downsizing. However, in
1988, we issued a report that described how a study of workforce ality could be
done. (See “Federal Workforce: A Framework for Studying Its Quality Over Time”
(GAO/PEMD-88-27, Aug. 4, 1988). While workforce quality is important, consider-
ation should also be given to measuring agency performance. If agencies are meet-
ing or exceeding benchmark performance measures (such as those required by the
Government Performance and Results Act), there may be a correlation between the
two, we believe that agency performance—not employees’ knowledge, skills, and
abilities per se—is what matters most to taxpayers.

Mr. Mica. We thank you and will now ask Mr. Jim Blum, Con-
gressional Budget Office, for his response.

Mr. BLUM. ank you, Mr. Chairman and members of the sub-
committee. I’m pleased to participate in your review today of the
government’s experience with voluntary separation incentives au-
thorized by the Federal Workforce Restructuring Act of 1994.

With your permission, Mr. Chairman, I will briefly summarize
the remarks in my prepared statement and ask that that be sub-
mitted for the record.

Mr. Mica. Without objection.

Mr. BLUM. In accord with your letter of invitation, Mr. Chair-
man, the prepared statement addresses three specific questions.



50

4. In your testimony, you examined how four agencies actually increased in size
despite using buyouts as a restructuring tool in downsizing. Did you find that the
policy objective and the program expansions in these agencies justified their inabil-
ity to reduce their workforce despite extensive use of buyouts?

Four large agencies—the Departments of Education, Energy, and Justice, and
EPA—are expected to receive staffing increases through Fiscal Year 1996. While
stalfing levels increased at these agencies largely as a result of new programs man-
dated by the administration or Congress, we did not analyze whether these pro-
grams justified the agencies’ decision not to reduce their workforces.

5. In your testimony, you mention that the U.S. Fish and Wildlife Service (FWS)
experienced a number of adverse effects due to downsizing. Did you determine how
the FWS could have more effectively handled downsizing? Was the original restruc-
turing plan they submitted to OMB rejected, or did it at least raise concerns that
their plan might not be successful?

‘As noted in our testimony, these adverse effecta occurred at a FWS regional office.
We did not determine how FWS could have more effectively handled downsizing, nor
do we know whether similar problems were experienced by other FWS offices.

The FWS streamlining plan was not submitted directly to OMB, but instead was
submitted to the Department of the Interior (DOI) and incorporated into the Depart-
ment’s plan. According to FWS and DOI, OMB did not raise concerns that the
plan might cause problems.

6. Can you draw any conclusions that can be applied across-the-board as to wh
some agencies were successful in coping with downsizing and some experienced ad-
verse effects?

Since our review of agency downsizing is in progress, it is too early to draw any
broad conclusions about why some agencies have been more successful than others
in coping with the effects of downsizing. However, as we have stated in the past,
strategic and workforce planning are essential to’ reduce the likelihood of future
goals and the work it will, do, Workforce planning establishes the skills organiza.
tions will need in order to do that work and those skills that are no longer required.
While agency streamlining plans typically included the steps being taken to flatten
hierarchies, reduce headquarters staff, and pare management control structures,
they were often less clear as to the kinds of skills agencies would need and how
agencies would be able to carry out their missions with fewer employees.

Monitoring Continuing Growth

1. In certain agencies, we are continuing to see plans for growth even in the face
of substantial staff reductions at other agencies. Is anyone, to your knowledge, re-
viewing the skills and qualifications of Federal employees who are being separated
to compare their skills with these growing agencies? Would such a program be use-
jul?

We are not aware of anyone who is specifically matching the skills of separated
employees with the skills needed by growing agencies. However, OPM recently pre-
pared a report which examined more effective means of transitioning RIFed workers
to new jobs. The report found that the types of jobs being reduced in the federal
government differ significantly from the new vacancies being filled. Of the top 15
occupations in which RIFs occurred, only 2—secretary and miscellaneous clerk/as-
sistant—were among the top 15 occupations with the most new hires in fiscal year
1994. The report noted that many of the occupations common to agencies are also
prime targets for future reductions (administrative, budget, personnel, and procure-
ment, for example). This would likely make potential matchups even more unlikely
in the future.

Whether such a program would be useful is problematic. OPM’s automated Inter-
ay ney Placement Program (IPP) essentially performs this function electronically for
RiFed employees.

Introduced in December 1993, the program requires agencies to consider IPP reg-
istrants whenever they fill vacancies by competitive examination from outside the
federal workforce. Despite wide publicity and registration information given to each

Fed employee, fewer than 25 percent of displaced employees register for the pro-
gram. Although the system has received high marks for quick and efficient referral
of candidates and the number of referrals and job offers is high, the program places
relatively few workers. Registered candidates frequently decline job offers or do not
respond to agency inquiries.

2, Is GAO aware of any agencies that have developed, monitored, or approved
training programs to address the needs of the post-buyout organizations? Because
our private sector witnesses both will testify that they believe such future oriented
training is vital to the success of buyout programs, would GAO support systematic
approaches to such training?



56

savings over the long run, assuming the employment reductions are permanent.
Each method also has advantages and disadvantages.

Laying Off Employees

Layoffs have low initial costs compared with other methods and offer the advan-
tages of speed and directness. Most of the costs of Jayofts cover payments to sepa-
rated workers, the largest being for severance pay. Firing employees, however, is
the approach most damaging to morale. Agencies also cite the disruption associated
with layoffs that occurs because employees in jobs abolished during layoffs can re-
place one another, causing a ripple effect through the workforce.

Imposing a Hiring Freeze

Instead of laying off workers, an agency may choose to impose a freeze on hiring—
that is, forgo replacing some or all of the employees who leave for retirement or for
other reasons. The Department of Defense has relied primarily on that method in
the substantial downsizing of its civilian workforce. Since the department has had
the authority to provide separation incentives, about a third of the workers who
have left have done so as a result of a separation incentive.

A hiring freeze avoids many of the negative consequences of layoffs. Among the
major disadvantages of the approach, however, is that it is slow—agencies must
wait for the desired number ol people to leave voluntarily. In fact, the major cost
associated with a freeze on hiring 1s the salary and benefits the government contin-
ues to pay as it waits for employees to leave federal service, Agencies may also have
difficulty reaching their goal for employment reductions if turnover drops. Finally,
agencies may have to transfer workers if those who leave are not in the jobs that
are being abolished.

Offering Early Retirement

Another approach to cutting employment is to encourage early retirement. Like
hiring freezes, this approach avoids the negative effects of layoffs and can have low
near-term costs. The government’s practice has been to allow employees faced with
layoffs to retire with pensions at an earlier age and with fewer years of service than
are normally required. Employees who have at least 20 years of service and are at
least age 50 may take early retirement under the federal program, as may employ-
ees of any age who have at least 25 years of service. Under normal circumstances,
in contrast, an employee covered by the Civil Service Retirement System cannot re-
tire until at least age 55. Early-retirement pensions are reduced by 2 percent for
each year an employee retires before the age of 55. Generally, the Office of Person-
nel Management has responsibility for granting agencies authority to use the early
retirement option.

‘The government has rarely used the early-retirement option. But when it has, as
many as one of every five employees who have been offered early retirement has
taken the option. More recently, however, agencies have had some difficulty encour-
aging large numbers of employees to do so.

SEPARATION INCENTIVES AND THE RETIREMENT SYSTEM

We were also asked to consider the impacts of the Federal Workforce Restructur-
ing Act on the financing of the federal retirement system. Based on preliminary
data from the Office of Personnel Management, about 13,000 separation incentives
offered in 1994 went to employees taking normal or early retirement.

A fuller understanding of any long-term consequences of those separations will
have to await final reports on retirements under the incentive program. However,
we do not anticipate any major consequences on retirement financing, for three rea-
sons. First, using separation incentives will not change the total number of employ-
ees who retire, and the differences in the timing of retirements that do occur are
likely to be small. Second, for the 5,500 employees who took early retirement, agen-
cies were required to deposit with the retirement fund an amount equal to 9 percent
of final salary. That payment covers the long-run cost to government of early retire-
ment as estimated by the Office of Personnel Management. Finally, the Federal

forkforce Restructuring Act required agencies to make four annual payments of
$80 per employee to the retirement trust fund to offset increased retirement costs
in the short run.

CONCLUSION

Our analysis suggests that separation incentives may be an effective way to re-
duce employment and limit layoffs. In addition, separation incentives can be tar-
geted to specific kinds of jobs for purposes of restructuring a workforce. In the near
term, such efforts will have costs that may exceed those of other methods of reduc-


60

May 31, 1995
Honorable Jesse Helms
irman
Committee on Foreign Relations
United States Senate
Washington, DC 20510

Dear MR. CHAIRMAN:

The Congressional Budget Office has prepared the enclosed cost estimate of the
Foreign Relations Revitalization Act of 1995, as ordered reported by the Senate
Committee on Foreign Relations on May 18, 1995.

The bill would affect direct spending and thus would be subject to pay-as-you-go

rocedures under section 252 of the Balanced Budget and Emergency Deficit Control

ct.
If you wish further details on this estimate, we will be pleased to provide them.

Sincerely,
JUNE E. O'NEILL
Enclosure
cc: Honorable Claiborne Pell, Ranking Minority Member

CONGRESSIONAL BUDGET OFFICE COST ESTIMATE

May 31, 1995

1. BILL NUMBER: Unassigned

2. BILL TITLE: Foreign Relations Revitalization Act of 1995
. BILL STATUS: As ordered reported by the Senate Committee on Foreign Rela-
tions on May 18, 1995.

4. BILL PURPOSE: The bill would consolidate U.S. foreign affairs agencies by
abolishing the Arms Control and Disarmament Agency, the United States Informa-
tion Agency, and the U.S. Agency for International Development and transferring
their functions to the Department of State. The bill would authorize appropriations
in fiscal years 1996, 1997, 1998, and 1999 for State Department operations, con-
tributions to international organizations, broadcasting and cultural exchange acti
ties, and various other activities and agencies.

5. ESTIMATED COST TO THE FEDERAL GOVERNMENT:
{By tiscal year, in billions of dalars]

199519961997 199819992000

DIRECT SPENDING
Estimated Budget Authonty ee
Estimated Outlays .... o 6 9 3 6 #
SPENDING SUBJECT TO APPROPRIATIONS ACTION
Spending Under Current Law

Budget Authority/Authorizations* + 6979 249-259 26827728
Estimated Outiays . 7315 1799 759433297288
Proposed Changes

Estimated Authorization Levelt. — 6337 5971 5,554 5400 0
Estimated Direct Loan Obligations .... —~ 2 to toio
Estimated Outlays . — 5080 5,630 5,497 5,360 1,007
Spending Under the Bill

Estimated Authorization Levelt on 6.979 6,586 6,230 5,822 5678 284
Estimated Direct Loan Obligations. — 1 1 1 21 0
Estimated Outlays@ = 7,315 6,839 6,390 5,990 5,657 1.290

* Less than $500,000.

+ Amounts for fiscal years 1996 through 2000 are permanent authorizations subject to appropriations action.

‘The 1995 figure is the amount already approprated
ee tt include increased obligational authority or outlays associated with the change in the scoring of lease-purchases required by

The costs of the bill fall in budget functions 150 (international affairs), 300 (natu-
ral resources and environment), and 800 (general government).

6. BASIS OF ESTIMATE

The estimate assumes enactment of the bill and appropriation of the authorized
amounts for each fiscal year. CBO used historical spending rates for estimating out-
lays.


48

OPM data indicates that buyouts can increase retirements. According to OPM,
about 5 percent of those eligible for early retirement would actually retire under an
early out authority; adding the financial incentive of a buyout increases this per-
centage to about 25 percent.

5. Does the decrease in personnel officer-to-staff levels necessarily represent rede-
signed administrative processes? What exactly do these new supervisor-to-stalf ra-
tios mean? Have we merely renamed titles and kept staff performing the same func-
tion? Do the numbers truly relate to the NPR goals of eliminating layers of manage-
rial and supervisory roles, or have we merely reshuffled them instead?

The decrease in personnel officer-to-staff levels does not necessarily represent re-
designed administrative processes. As noted in our testimony, the Environmental
Protection Agency (EPA) indicated that reducing personnelists, budget, and acquisi
tion experts did not make sense given the workload and expertise needed to rede-
sign administrative processes and streamline the organization. According to EPA,
the agency’s present personnel officer-to-staff ratio is 1:100, while the goal rec-
ommended by OPM is 1:65.

However, in our limited work to date, we have noted that agencies are generally
accompanying these reductions with some types of reinvention efforts. In our May
17 testimony, we noted that the Department of the Interior accompanied its person-
nel staff reductions with “reinvention” efforts aimed at empowering managers with
more decision-making authority in the personnel process and increased reliance on
reengineering and automation of personnel processes. Related work we are doing
has shown that the Department of the Army and the Internal Revenue Service are
streamlining their personnel functions by consolidating personnel activities in re-
gional centers. In addition, the Department of Health and Human Services has de-
veloped an automated system that allows employees to update their personnel files.
The Department of Housing and Urban Development plans to achieve a 50 percent
reduction of personnel specialists through automation and standardization. As part
of our ongoing effort, we will continue to evaluate how agencies are meeting these

goals.

‘The NPR recommended increasing the average federal government supervisor-to-
staff ratio from 1:7 to 1:15, the latter being the average at those private sector orga-
nizations analyzed by the NPR. The NPR sought to increase the federal ratio to
make better use of employee talents, improve productivity, and remove a layer of
oversight that was considered as not adding any value to customers.

While most of the agency streamlining plans we reviewed addressed the NPR ob-
jectives, some agencies have increased their supervisory span of control by convert-
ing some supervisors and managers to non-supervisory roles.

6. How susceptible are agencies to use the buyout authority to target employees
beyond the NPR goals, such as targeting staff outside the higher-leve management

sitions? Have streamlining plans branched out beyond those areas targeted by the
Ripe? If so, what criteria have governed the extensions?

The use of buyout authority to target employees beyond NPR goals varies by
agency. There is no rule limiting buyouts to -targeted employees; each agency
determines what positions will be covered. In determining eligibility for buyouts,
agencies are required to use objective, equitable criteria, such as geographical loca:
tion, occupational groupings, or agency components.

In practice, the streamlining plans have gone beyond offering buyouts to NPR-tar-

ted areas. For example, the Department of Housing and Urban ‘Bevelopment and

e General Services Administration (GSA) offered buyouts to almost all employees.
The National Aeronautics and Space Administration targeted buyouts to hea
quarters and those field installations most affected by the space station redesign.

7. Because agencies are continuing to downsize, you state it is too early to say
conclusively how they are compensating for reduced staff levels or how productivity
has been affected. Yet you testified that the buyout program was successful in help-
ing agencies meet their workforce reduction goals while reducing the need for RIFs.

gt

In light of this, what are your comments on authorizing buyouts for possible depart-
ment consolidation in the future? What are the conditions under which future
buyout programs could be successfully implemented?
perly targeted buyouts should be based on strategic and workforce planning
to determine organizational needs. The following are some factors that should be
considered as significant to a successful buyout. program:
—Buyouts should be authorized on an agency-by-agency basis rather than
across the board.
—Strategic planning should precede the buyout program. For example, to
help determine which programs/functions are essential to the agency’s mission
and which may be eliminated


20

Mr. Kinc. Mr. Chairman, if I could, through the chair, I don’t
disagree with what the comment and the observation is.

I think first we should appreciate the fact that we have been
through 100,000 personnel actions, and, as Mr. Klein suggested,
there is basically—we haven’t ended up with anything in special
counsel, zero in EEOC, and zero in—what was the third area now?

Mr. KLEIN. In Merit Systems.

Mr. Kine. Merit Systems Protection.

I understand—no, no; please, if you would, I’m just setting the
platform so I can respond-——

Mr. Moran. OK.

Mr. Kinc [continuing]. I'll try to be responsive.

Mr. Moran. Everybody is happy. I agree with that.

Mr. KING. No, no. This agency that I represent went through
RIF’s, substantial RIF’s, and let me tell you what I heard at that
time. I heard at that time that RIF’s destroy diversity, RIF’s take
the best and the brightest and drive them from government, so
what I’m suggesting is, what we are doing here is balancing on the
job, not on the individual, identifying jobs that should be done dif-
ferently and that those jobs can be redesigned and reconfigured
and reengineered to meet the new needs of the agency and do it
in a way that is totally humane and responsive.

Now, there may be managers out there—and I don’t doubt this
for a moment—who didn’t take either the spirit or the law itself
to heart or to mind and maybe acted somewhere in an imprudent
fashion, but I honestly do believe that this method helps us to
maintain the integrity.

The second thing. is, though, I have extraordinary confidence in—
we are not just talking about young people, we are talking about
very experienced people who are waiting and are prepared to take
over the leadership for the next generation of Federal employees.
I have a great deal of confidence in our succession setups in vir-
tually all of the organizations I’ve seen.

So I share your concern. I genuinely do hear what you are say-
ing. We just haven’t seen it manifest itself in this particular pro-
gram.

Mr. KLEIN. I might add, there are a couple of reports that we
might provide that might help here. Your concern is a good one. We
have had the concern from a number of sources for a number of
years, the last 4 or 5 years, that we are not recruiting the best peo-
ple, that somehow the quality of the recruits today is not what it
used to be and that there is a disparity between the more senior
people and the more junior people.

We have had our psychologists do several large studies of sci-
entific, clerical, and administrative professions to see if that in fact
is true. We went back over 30 years and looked at numerous fac-
tors like their rank in class when they graduated and their grade
point average, the number of patents they produced, the perform.
ance ratings by their supervisors, the number of books they might
have written, et cetera, and the end result was, there was no dif-
ference, that the civil service today had the same quality quotients
as it did 30 years ago.

It is just, I think, part of our perception, and I have that problem
myself, that I somehow see the juniors coming in, they aren’t quite


38

contact line employees, union officials, and field staff as part of our
longer-term effort.

ery briefly, several agencies we contacted told us they were
using a variety of strategies to cope with the workforce reductions.
These strategies included restructuring work, using automation
more extensively, and redeploying staff. For example, headquarters
officials from the Department of the Interior told us that the agen-
cy has reduced its personnel staff by about 860 positions or about
one-half. To maintain personnel services, the human resource office
has, “reinvented”—and that is their term—its missions so that its
personnelists now act as consultants to agency managers while the
managers themselves are being given the authority to develop posi-
tion descriptions, advertise positions, rate and rank employees, and
make hiring selections.

In reviewing the effects of the buy-outs, we were also told of in-
stances how downsizing had adversely affected the agencies. Most
of these appeared to result from agencies trying to do the same or
more work with fewer people. For example, representatives of a re-
gional office in the U.S. Fish and Wildlife Service described a num-

er of adverse effects of downsizing at its various program offices.
In the Federal Aid Program Office, officials noted that the office is
now staffed with 12 FTE’s, which is 5 FTE’s fewer than they con-
sidered optimum for effectiveness and productivity. As a con-
sequence, they say that the office now has a skeleton workforce
that is unable to perform many auditing and monitoring functions.
The officials were concerned that the staff reductions could result
in misuse of Federal funds.

At other offices, FWS representatives noted that service to the
public has declined significantly, reports and correspondence re-
ceive less review and are often delayed, and vendors receive pay-
ments more slowly.

Another concern that has been raised is the backfilling of posi-
tions vacated through buy-outs with contractor personnel. While it
is still too early to tell the extent that this may be occurring, we
did find such backfilling had already taken place at NASA’s Lew!
Research Center. The center reported that 18 of the 199 employees
that received buy-outs in fiscal year 1994 returned to Lewis as em-
ployees of service contractors. All but one received the maximum
buy-out allowance of $25,000, and 5 of the 18 returned within 1
week of leaving the agency.

NASA officials told us that there exists no legal or contractual
authority for the center to interfere with the contractors’ decisions
to hire the former employees rather than other individuals with the
same skills. Nevertheless, to avoid an appearance of impropriety
the center director has recently stopped the practice of using con-
tractors to fill positions vacated by civil servants.

Another potential problem we noted is the contracting out of
work without adequate cost comparisons. Section 5(g) of the
Workforce Restructuring Act prohibits an increase in the procure-
ment of service contracts as a result of buy-outs unless a cost. com-
parison shows that such contracts are to the financial advantage of
the Government. The absence of cost comparisons makes it impos-
sible to determine whether such outsourcing is in fact beneficial.


69

ale at least for the increases, and the decreases appear to be tar-
geted largely at the NPR goals.

Mr. Mica. Do you know if the positions have been eliminated, or
are we retraining people at additional cost and the positions are
still continuing?

Mr. BOWLING. We don’t know that for sure. We have been told
that they are eliminating supervisory positions altogether in many
cases.

Mr. Mica. I think this would be a good area to look at. If you
can supply the subcommittee with any of your findings we would
appreciate it.

Mr. BowLING. We will do that.

Mr. Mica. Also in your testimony you mentioned that U.S. Fish
and Wildlife Service experienced a number of adverse effects in
downsizing. Is this just a sampling, or is there additional evidence
that this has occurred in other areas, or don’t we know? Is it pre-
Timinary?

Mr. Bow.inc. It is very preliminary. I wouldn’t be able to go
much beyond this. This is what some of the Groups have told us.
Now as I mentioned earlier, it is quite possible that when we get
out into the field offices and start talking to them, we will get a
different view or different perspective on what the effects would be
as opposed to talking to headquarters people. Often these things
are viewed somewhat differently. So there may be more of those as
we get into it, but this is about as much as we have done thus far.
fr. Mica. Did you have any response, Mr. Blum?

Mrs. Morella, did you have additional questions at this time?

Mrs. MorELLA. No, Mr. Chairman, I don’t. Thank you.

Mr. Mica. We have additional questions we would like to submit
to both of you. Our time doesn’t permit us to go into all of the ques-
tions now, but we would appreciate your response. Also as you pur-
sue some of these areas in your review of the agencies we would
appreciate your providing the subcommittee with that information.

At this time we will excuse the panel. Thank you both for your
cooperation.

Mrs. MorELLA. Mr. Chairman, could I just also add to what you
said, I am curious about whether or not with the downsizing we
are reaching that 15:1 ratio in terms of managerial to employee.
This was the concept of Reinventing Government.

Mr. BowLinc. Yes. Yes we have been told—again, this is anec-
dotal and verbal evidence, but we have been told by many of the
agencies we have talked with that they are in fact moving in that
direction. They are separating supervisors in larger percentages
than staff, and therefore the supervisory ratio is improving. How-
ever, we haven't gone in to verify that, and we are not sure what
the final numbers on that will show.

Mrs. MorELLA. Thank you.

Mr. Mica. Thank you.

Thank you, gentlemen.

Mr. BowLINc. Thank you very much.

Mr. Mica. If I may, I would like to call our third and last panel.
We appreciate your patience in waiting. And if you gentlemen
would let me introduce you, Dr. Peter Scott-Morgan, director of
Management consulting for the Arthur D. Little Corp.; and Mr.


BUYOUTS: BOON OR BOONDOGGLE?

WEDNESDAY, MAY 17, 1995

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

The subcommittee met, pursuant to notice, at 10:05 a.m., in room
311, Cannon House Office Building, Hon. John L. Mica (chairman
of the subcommittee) presiding.

Present: Representatives Mica, Morella, Bass, Moran, and Mas-
cara.

Staff present: George Nesterczuk, staff director; Daniel R. Moll,
senior policy director; Garry Ewing, counsel; Susan Mosychuk, Ned

ynch, and John Ciccone, professional staff members; Caroline
Fiel, clerk; Cedric Hendricks, minority professional staff; and Jean
Gosa, minority staff assistant.

Mr. Mica. Good morning, and welcome to the Subcommittee on
Civil Service. I wanted to call the meeting to order first of all and
begin by welcoming everyone to this hearing entitled “Buy-outs:
Boon or Boondoggle?”

I have an opening statement, and then will yield to some of the
other Members. We will try to proceed as quickly and orderly as

ssible so that we can complete our agenda. I know that people

ave busy schedules and there are some conflicts with other hear-
ings and floor activity at this time.

First of all, I entitled this hearing “boon or boondoggle” because,
quite frankly, I do not know whether this approach that we have
undertaken to personnel management and downsizing has been
beneficial or detrimental. Our hearing today will focus on the suc-
cesses and problems relating to Federal Government employee buy-
outs.

As we conduct this interim evaluation of a major factor in our
administration’s efforts to reduce the Federal workforce, we must
carefully measure both the costs and benefits of this program. So
far it is my understanding that more than 104,000 Federal employ.
ees have taken advantage of buy-out opportunities, including more
than 36,000 employees in non-Defense agencies and more than
68,000 workers from the Department of Defense.

In today’s testimony CBO will report that many of these buy-outs
cost, on average, exceed $24,000 each, meaning that the total cost
of the non-Defense Department buy-outs is somewhere in the
neighborhood of $1 billion. For non-Defense agencies, authority to
extend incentives for early retirement expired just_a short time
ago, March 31. In current legislation, the Budget Committees of

@M


72

ability to compete in the future. That is the true cost of not taking
account of the human face of change. So in that light, let me just
address the effectiveness of buy-out programs.

There is—and I think we have been hearing it a lot this morn-
ing—there is now strong evidence that the survivors of a
downsizing can actually suffer almost as much trauma as those
that are let go. If the downsizing is handled in a cold, an antiseptic
manner, those that remain in the company are left with the abid-
ing memory of their friends, their colleagues, being apparently un-
fairly, maybe almost cruelly, handled. Particularly in those organi-
zations that previously have offered a career for life or the percep-
tion of a career for life, that could feel like a severe betrayal and
a flagrant breach of the psychological contract of Jovalty in return
for job security. Many of the survivors then end up thinking: “If top
management can handle my friends like that, then I can never
trust management again; one day it is going to be my turn.”

Carefully handled buy-out programs can therefore be very advan-

eous. Although many companies, in all honesty, originally con-
sidered the buy-outs as a way of getting legal release from any pos-
sible discrimination suits, particularly on the grounds of age, in
practice the greatest benefits may have come from the higher mo-
rale of those remaining in the company afterwards. Early retire-
ment, temporarily enhanced severance payments, job counseling,
retraining courses, and outplacement, have all proved effective, al-
though most schemes are now far less generous in the private sec-
tor than they were a few years ago.

The greatest problem with the various buy-out programs has
been in creating programs that did not result in the most market-
able people—frequently the best people—jumping ship early, leav-
ing a band of mediocrity to then carry the organization through
change. I think that was very similar to the scenario that Con-
gressman Moran was postulating earlier. Even attempts to select
people who should be encouraged to take the buy-out package have
proved highly susceptible to camouflage, highly susceptible to sub-
version, so that too is a caution, even when recognized.

So what is the learning for the future? One of the most critical
lessons of the last few years is that management restructuring only
by focusing on the formal, official, tangible, numerical aspects of
the business is insufficient. Successful companies also put tremen-
dous effort into reflecting the human face of change in pragmatic
ways. There are four main areas. I'll quickly run through those.

‘irst, the vision of the future has to be one that people will want
to build. Mission statements, strategies, goals have to be recast in
a way that embed “emotional magnets,” if you like, to pull the or-
ganization onward, upward through change even when the com-
pany is not in crisis, which often isn’t sustainable anyway. Simply
communicating the old style, maybe insipid, uninspiring, strategies
of the past simply doesn’t work well enough any more. The cor-
porate goals and the people need to be aligned with each other. The
same is just as true in the Federal Government.

Second, managers must take account of the unwritten rules of
the game that are within every organization. When a group of peo-
ple resist change, what they do makes sense at least to them. Peo-
ple outside the group may not understand the rationale behind why


71

change. This has been most apparent in the recent spate of cor-
porate reengineerings, and if I can run through what now turn out
to be some of the misguided management approaches there, be-
cause I think there are strong lessons for the Federal Government.

The goal of business process re-engineering as far as it goes is
as valid today as it was at the beginning of the decade. Indeed, in
a survey that we conducted only a few weeks ago almost two-thirds
of the respondents said that re-engineering they believed was nec-
essary to experience growth again. The problem has been that the
goal of the re-engineering has often been too limited and the man-
agement approach taken to that re-engineering has been wrong.

Take the goals first. Too many companies have in practice cast
their goals for re-engineering in terms of reductions in the
workforce. However, there is no evidence that simply cutting back
on numbers of employees is sustainable. You also need to change
the way that the work is done. Short-term productivity improve-
ments can be temporarily realized by the surviving employees
working harder and longer, but over time the productivity improve-
ments prove impossible to maintain. A recent survey by the Uni-
versity of Michigan studied 150 companies that had downsized to
improve their performance. Three-quarters ended worse off.

There is a real caution here for the Federal Government because
many of the discussions that I have been hearing in the last 2¥2
hours this morning have all been about numbers, and I would pro-
pose that that is not actually the overriding goal for the restructur-
ing. The overriding goal is the appropriate number of people with
the appropriate skills profile doing work in the appropriate way
that will then make the restructuring sustainable. So I think there
is an important lesson to be fed into discussions such as the one
this morning.

But in the private sector, more damaging even than that fixation
on head count reduction has been the hard line, the sometimes al-
most brutal, approach to re-engineering that too many companies
have adopted, and that also has important implications for the Fed-
eral buy-out Program. Some of the most change fatigued organiza-
tions turn out to be those where a tough management believed that
they could force through major change in flagrant contravention
with what felt important to people, yet, once again there is no ac-
tual evidence that you can change hat is important to people even
under duress. On the contrary, when management have tried to
force through change that was in conflict with, if you like, the un-
written rules of an organization, the conflict has not tended to go
away, instead, it has just been forced underground. The harder
that management pushed, the more it got forced underground,
until the damage caused was so great that it was recognized for
what it was, often too late.

The real cost of the failed reengineerings that all too often have
resulted from an insensitive management is not just the financial
cost, although we have been hearing a lot about that this morning.
It is that that sort of callousness actually damages the resilience
of the workplace to change. Yet these days continuous change is
the only route to sustainable competitive advantage, and so that
anything that damages the resilience of the workplace to change
has actually poisoned the very lifeblood of the organization—its


74

measured through a variety of metrics corresponding to the satis-
faction of each of the major stakeholders of the organization. So
yes, of course, employees, but also external and internal “cus-
tomers,” the general public as overall “owners,” if you like, and so

on.

The goal should be to continuously increase the satisfaction of all
of the key stakeholders rather than one at the expense of another.
In the same way that such a balanced measure leads to sustained
profitable growth in the private sector, so they will similarly lead
to sustained achievement of organizational goals in the public sec-
tor.

Mr. Chairman, this concludes my prepared testimony. I would be
very pleased to answer any questions.

[The prepared statement of Dr. Scott-Morgan follows:]

PREPARED STATEMENT OF PETER Scort-Morcan, DIRECTOR OF MANAGEMENT
CONSULTING, ARTHUR D. LITTLE, INC.

Mr. Chairman, Members of the Subcommittee, thank you for the opportunity to
appear today to discuss the implementation of the Federal Workforce Restructuring
Act of 1994.

There are many relevant lessons for the Federal restructuring to be drawn from
the experiences of “reengineering” across corporate America. In general, although
most companies that have implemented downsizing and/or restructuring have
achieved significant short-term productivity improvements, many of the fundamen-
tal changes sought for sustained growth (such as genuine teamwork, innovation,
creativity, customer orientation) have not been sufficiently forthcoming. In addition,
many companies are now suffering from a form of “change fatigue” at the one time
when they need to be able to continue to change ever faster and become ever more
responsive. The approach taken to restructuring turns out to be critical in reducing
the risks from these problems.

An unacceptably high failure rate

My colleagues and I published a survey last year on “Managing Organizational
Change,” using a weighted national sample of 350 US executives across 14 major
industries to see how leading organizations were coping. | have subsequently held
individual discussions with over a hundred CEOs and top managers to flesh out the
findings of the survey. The pattern that emerged is as follows.

Practically every company these days is trying to implement major change. What
is more, nearly all of them expect to go through another major corporate change
within the next few years—we all anticipate wave upon wave of change into the
foresecable future. Yet in the survey, less than one sixth of the executives were real-
ly happy with the results that they had achieved. Almost 40% were really unhappy
with the results, claiming that everything was far too slow and results too patchy.
Almost 70% had experienced unanticipated problems and side effects, The most
striking common denominator of all the failures is a lack of realism and pragmatism
in dealing with the human aspects of the change. This has been most apparent in
the recent spate of corporate “reengineerings”.

Misguided management approaches

The goal of business process reengineering, as far as it goes, is as valid today as
it was at the beginning of the decade. Indeed, in a more recent survey we conducted,
almost two thirds of respondents said that reengineering was necessary to experi-
ence growth again. The problem has been that too often the goal of the
reengineering has been too limited, and the management approach taken to
reengineering has been wrong.

Too many companies have in practice cast their goals for reengineering in terms
of reductions in the workforce. Flowever, there is no evidence that simply cutting
back on numbers of employees is sustainable. Short-term productivity improvements
can be temporarily realized by the surviving employees working harder and longer.
But, over time, the productivity improvements prove impossible to maintain. A re-
cent survey by the University oF Michigan studied 150 companies that had
downsized to improve their performance. Three quarters ended up worse off.


31

Mr. Moran. I don’t disagree with that, and I know it is not
unique to Government.

Thank you, Mr. Chairman.

Mr. Kine. Thank you.

Mr. Mica. I thank the gentleman and yield to Mr. Mascara.

Mr. Mascara. I share your concerns about treating the employ-
ees fairly and the sensitivity that you've expressed, Mr. King.

My problem is, how do we attract on an ongoing basis? This Gov-
ernment is still going to need to recruit new employees, and if we
don’t treat them fairly how are we going to attract competent peo-
ple to work for the Federal Government if they see that we are
talking about downsizing, we are downsizing, we are contracting
out, we are privatizing? Have you given any thought to recruitment
in the future given the scenario that is developing here on Capitol

ALS

Mr. KING. Well, it just so happens that Mr. Klein’s area of exper-
tise and the program he manages is called employment, so—

Mr. Mascara. It’s called what, sir?

Mr. Kinc. Employment. So he does the work in that specific
area.

Mr. KLEIN. Yes, sir, that is a big concern. We want to assure we
continue to attract bright young people to Government and not.
present too negative a message to them so they don’t wish to come.
We have been trying to track that to see if our intake of quality
people is being maintained.

Now the total numbers obviously are down. As you know, we are
not recruiting the numbers of people we were 5 or 6 years ago
when we were bringing in about 120,000 people a year into perma-
nent jobs. The past year we hired about 35,000 people. So the num-
bers are way down. But we are tracking the quality of people com-
ing in from the colleges, and it is very good. We are still getting
the top rung kids. As I mentioned, over 50 percent are in the top
10 percent of their class. So I hope we can maintain that.

We have put a lot of effort into making sure that every college
has information about our employment. We have computers now on
the campuses and libraries, so they can find out where our jobs are
and how to apply and so forth. We have formed a partnership with
the College Placement Council to do that. So we are trying to main-
tain a positive image on the campus. But, as you state, we are con-
cerned, and I’m sure you are, that we can continue that.

Mr. Kina. I think our young people and others coming into Gov-
ernment still find it very exciting, very attractive, and very chal-
lenging, and there are still large numbers of people, very, very com-
petent Americans who want to be part of this Government, and we
are looking forward to receiving them.

Mr. Mascara. If I’m a young man or woman deciding to make
a career choice, and knowing what is going on currently in the
downsizing effort in the Federal Government, and I want to make
this career choice, I’m going say this might happen to me 20 years
down the line, that somehow I don’t feel sure about this choice that
I’m making now, and I might go someplace else other than comin;
to the Federal Government. You say you are considering that ani
your recruiting efforts are going well?


17

Mr. Kinc. I think if you look at both of these—and I'll pause for
a second.

Mr. Mica. Would there be any type of restrictions or do you see
any additional legislation that needs to be adopted? For example,
now they are coming at us with all these separate legislative au-
thorities for buy-outs. Is there some protective language to avoid
abuse or unnecessary use of the buy-outs that we should incor-
porate in that language, or do you have enough authority to see
that this is prevented?

Mr. Kina. Yes, as best we can. I think what we are back to is,
how do you create an incentive for someone to do something volun-
tarily, and that is really what we are looking at.

‘at the charts reflect was that Federal employees were not vol-
untarily leaving the Federal service, period. Even though they were
fully eligible and had their appropriate time in and everything else,
they weren't leaving.

at I'm talking about is—let me give you a quick example. I
had one unit that had always had a very Bieh turnover. We basi-
cally train people for other people in the government. We averaged
in that unit for a number of years almost 22 percent attrition. That
attrition rate dropped into the 3 percent range in 1¥2 years and
has stayed that way to date.

Tm just suggesting that what had been a very dynamic situation
in employment and in the employment profile ceased to exist in the
last few years, and what happened was, the action on buy-outs
stimulated leaving Government on a voluntary basis, and I stress
voluntary, Mr. Chairman, because, as you know, the cost implica-
tions of involuntary separations are very, very substantial in dol-
lars and cents.

The disruption from RIF within the operating units is spectacu-
lar. It is totally disproportionate to anything that you would see in
the private sector and in many cases even in other public sector
areas, because of the ability to bump back and retreat, so that
there are some enormous impacts in the organizations.

Mr. Mica. One last question, and I want to give everyone a
chance here. When you buy these folks out, have you gone back to
study to determine if the positions are being filled again, or are
they eliminated? Is there any statistical evidence that those posi-
tions will no longer exist, or are we just spending a lot of money
to train somebody, bring somebody new on, or fill the position?

Mr. KING. The first thing I think the thing that struck us, Len,
when we were looking at it was that the people who left us were

enerally—who were very senior and they were at the highest—
they were very substantially paid, and that if the job was—again,
we are talking about the job though, not the individual. The job
was looked at, basically redefined, and that was the reason why
they were able to take this particular buy-out.

Am I correct, Len?

Mr. KLEIN. Right.

Mr. Mica. Has the position been eliminated, or is it just a
reshuffling and you get somebody new in?

Mr. KLEIN. Actually an FTE was reduced for every buy-out. In
fact, another 50,000 FTE were reduced during that period of time,
so we are confident that they weren’t just restaffing positions.


23

some unigue duty? How do you decide who goes or who is offered
a buy-out?

Mr. KiNG. Let me yield to Mr. Klein.

Mr. KLEIN. Sir, we did not try to make those kinds of decisions
in each agency. We set up basic generic criteria on how this should
work and briefed them over and over and met with them, had indi-
vidual briefings with agencies. But each agency was responsible for
its own plan. They ‘Geveloped a strategic plan on how their
workforce should look in the future. That was approved by OMB
in terms of how many people and what the structure should look
like, but once that was done then OPM took over and we helped
them implement that.

So you are right, the decisions have to be made on point.

Mr. Kine. And you are right, by the way, you are right on target,
and please, if you ever find us or anyone else drifting into the area
of making the decisions outside of that, grab us; that is not the in-
tention, and it is not the way to go. It should be a decentralized
decisionmaking, but it should be within the structure of what is
fair and what is equitable to everyone involved.

Mr. KLEIN. We certainly spent a lot of time on that within OPM,
on how the structure ought to look, and each agency did the same
thing.

Mn Mascara. Well, I support the overall concept, Mr. King.
There are just some concerns that I know we have asked you to
address.

Mr. KING. You are right on target, and we share the concern.

Mr. Mascara. Thank you, Mr. King.

Thank you, Mr. Chairman.

Mr. Mica. Thank you, and I had a couple of quick points here.

First of all, do you have an agency-by-agency breakdown of how
the buy-outs occurred? I think Defense is forty-some-thousand?

Mr. KING. Yes, sir.

Mr. Mica. 47,000 more. Can you provide us with that?

Mr. Kine. Absolutely, Mr. Chairman.

[The information referred to follows:]

NON-DEFENSE BUYOUTS BY AGENCY
[BUYOUTS PAID AS OF MARCH 7. 1995)

‘Agency ‘Amount

Interior Dep't 4,607
Agriculture Dep't 4,302
Transportation Dep't 3,230
General Services Admin 2281
Veterans Atfairs Dep't 1618
MASA a a 47
‘Social Security Admin sein 1,164
HHS 1,163
‘Commerce Dep't 843
Energy Dep't ... 783
Justice Dep't .... 585
EPA o o seen 462
Education Dep't nnn _ 367
OPM ..... . . 282
Labor Dep't 28
HUD 260

Treasury Dept...
USA oe


19

We have checked with other agencies like the EEOC, the Merit
Systems Protection Board, the special counsel of MSPB, to see if
there have been complaints to them. We have no—we have zero
complaints that yield complaints or appeals coming out of these.
We think we have resolved those problems as we went through this
process by constant talking and briefings, and we had the agen
personnel people in our auditorium on three occasions all but fill
up the auditorium briefing all day long, trying to see that everyone
understands how to treat people, that we shouldn’t identify individ-
uals, that we ought to identify functions, that you ought not to let
a function have a buy-out if they are required for the future.

For example, Mr. King would not permit buy-outs in his retire-
ment operation because we needed all the people there to process
these retirements, obviously. But decisions like that——

x KiNG. Which made some people unhappy, I believe, Mr.
lein,

Mr. KLEIN. Yes, it certainly did.

Mr. Moran. Yes.

Is it Mr. Klein?

Mr. KLEIN. Yes, sir.

Mr. Moran. That’s just the answer I thought I was going to re-
ceive, and it is not the answer I wanted to hear. I understand that
you were making a special effort to keep everybody happy, to make
sure that the process was fulfilled so that everybody is treated fair-
ly and that any discomfiture is dealt with. That is not my concern,
and I don’t think it should be the overriding concern of this proc-
ess.

The overriding concern of this process is whether we have the
best people left in the Government to serve the American people
in the most efficient and effective manner possible, and that really
has very little to do with whether people are happy with the proc-
ess, because you can have people more than happy if they are leav-
ing the Government for a better job. They are taken care of, they
are getting more money, the process was followed, the supervisor
is happy because everybody is smiling and he can show that he
crossed every “t” and dotted every “i” and so on, but what has hap-
pened is that the people who are dependent upon that particular
Federal program and—I happen to think that there are some Fed-
eral programs that actually are important to this economy and this
society and ought to be retained and that the American people’s
quality of life is dependent upon them. Those are the People that.
are going to suffer, because they are losing the best people, they
are losing the most mobile people who have the most options on the
outside, and I have a sense that that is not the concern, the con-
cern is to meet the 272,900 and to do it in a way that everybody
is happy, and that whether it be employee unions or whether it be
the senior executive level—but that shouldn't be our principal con-
cern.

Our principal concern is, are the people who are dependent on
Federal programs going to be served in the best way possible, and,

‘in, m: Observation think is borne out that if this is your em-
phasis, then I think it is a misplaced emphasis and it really miti-
gates against keeping the very people who are the least expend-
able.


32

Mr. KLEIN. Yes, and I think some of the structural changes that
have been made in recent years—for example, the retirement sys-
tem that now allows people to leave and take their retirement with
them, rather than being the old golden handcuffs that, once you
were in the previous retirement system, you had to stay or you got
no benefits. Some of those things may help the new generation be
more mobile.

Mr. Mascara. Thank you.

Thank you, Mr. Chairman.

Mr. Mica. I thank the gentleman. Our colleague, the gentlelady
from Maryland, has just arrived and has expressed some keen in-
terest in the subject of buy-outs. We want to give her an oppor-
tunity.

We have gone through several rounds awaiting your arrival—just
teasing—but we have gone through several rounds, and we do want
to extend to you the courtesy of making any remarks or any ques-
tions before we dismiss the panel.

Mrs. MoRELLA. Thank you very much, Mr. Chairman.

I apologize for being late. It is because, as I mentioned to you
yesterday, I was chairing a security briefing on the FAA and safe-
ty, but this is a hearing obviously that I care very much about and
wish I could have been in two places, but I did have staff here. I
appreciate, Chairman Mica, your having this hearing because I
have been interested in how the buy-outs were working. I think
your title is somewhat provocative in terms of buy-outs: boon or

oondoggle.

Mr. iG. We have agreed that it is a boon.

Mrs. MorELLA. I’m sorry.

Mr. KInc. We have agreed it is a boon, I think.

I’m sorry, I didn’t mean to interrupt you. My apologies.

Mrs. Moret. OK. But I would like for my opening statement,
which addresses some of the concerns of the committee, to be in-
cluded in the record without mentioning it.

Mr. Mica. Without objection.

[The prepared statement of Hon. Constance Morella follows:]

PREPARED STATEMENT OF HON. CONSTANCE MoRELLA, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF MARYLAND

I would like to thank Chairman Mica for calling this hearing of the Subcommittee

n Civil Service to examine the effectiveness of Federal agencies’ implementations
of the buyout legislation. Although the Chairman’s title for this hearing is a little
on the sensational side [jokingly], I, too, wish to know if this has been a boon or
boondoggle.

A little over a year ago, Congress approved H.R. 3345, which allowed the head
of a non-Defense agency to authorize a payment of up to $25,000 to employees
agreeing to voluntarily resign or retire.

Our goal in approving this legislation, which the President signed into law on
March 30, 1994, was to give the heads of non-Defense agencies and their managers
‘a tool to assist them in meeting the streamlining goals that were recommended by
the National Performance Review.

Tn rinciple, this legislation paved the way for the strategic integration of man-
dated staff reductions and human resources lanming an integration that is vir-
tually impossible with a reduction in force (RIF), The legislation, again, in principle,
offered the agencies the flexibility of retaining a cadre of experienced workers, who
are crucial to organizational effectiveness, while lessening the potential reduction of
younger employees, who are crucial to the future effectiveness of agencies.

Now, we all know there are other options for reducing the number of employees
on a voluntary basis, including hiring freezes, early retirement options and attrition.


14

Mr. Mica. And, you know, I don’t know these figures to be accu-
rate.

Mr. KING. I think what people do, they see 52 percent were eligi-
ble. That does not mean they were going to leave.

Mr. Mica. Do you have a study of how many people, like what
number of years is that?

t Mr. KING. What we have is what the reality was that we were
facing.

Do we have these charts?

What we had was a reality, and what you can see even at this
distance—why don’t I share them? This is unfair to the chairman
to talk to something he can’t see.

Thank you so much.

(The charts referred to follow:]


3

the group is acting the way that it does, but people within the
group do.

We were hearing earlier about some of the unwritten rules of the
rating system, the temptation to put “outstanding” on a rating, the
unwritten rule “Give ‘outstanding’ to those who will complain the
most if you don’t give it to them.” I suspect that is not the only
unwritten rule that. potentially can, if you like, warp the restruc-
turing in the Federal Government. They need to be taken account
of

But the key lesson is that if the behavioral barriers to change are
caused by unwritten rules that are logical, then we need to under-
stand that logic so that then we have got a chance to do something
logical, to remove the barrier, for example, reforming the civil serv-
ice rules themselves. And I think the discussion held on that is an
important one given what we have been seeing in the private sec-
tor.

Third, successful restructurings need to involve people in a more

ragmatic way than just telling them that they are empowered.

‘he best approaches encourage people-driven results so that the or-
ganization pulls the change through rather than top management
Just aggressively pushing the change like aggressively pushing
string.
‘And, finally, the best restructurings have the goals of being
“learning organizations” where the ability to change and to learn
is encoded into the very fabric of the company so that the organiza-
tion becomes more and more responsive to fluctuations in the in-
dustry, signals from its clients and suppliers. That is being seen
has highly attractive because it allows the organization to jump out
of the tightening spiral of constantly fire fighting from one major
change initiative to another. I think, again, we were hearing some
of that major problem earlier this morning.

One of the goals of such restructurings is to provide systems that
help the people to get better and better at change so that the orga-
nization can then change faster and faster without burning out,
and, in other words, not just get performance improvement but get
accelerating performance improvement. That is the greatest de-
fense against an increasingly unknowable future.

Finally, let me just say a couple of words. You asked specifically,
Mr. Chairman, about how to measure success in the public sector
as opposed to private. The leading companies in the private sector
now no longer do measure successful change only in terms of profit.
At best, the profit measure lags behind what brings it about, so it
is of little use during the change process itself. There are important
implications for public sector performance measurement because
sustained high performance seems strongest correlated with the
balanced satisfaction of the needs of all of the stakeholders of a
business. In other words, focusing only on satisfying the owners of
the business by pursuing profit to the exclusion of all else is not
sustainable. At the very least, a company must also satisfy the
needs of its customers and, before long, its employees.

Balancing the satisfaction of all three major stakeholders is the
key to sustained success. For some companies, suppliers and the
community at large also have to be put into that balancing act, and
the implication for the public sector is that performance should be


58

Question 2a: The Office of Personnel Management has estimated that the typical
costs of separating one employee through a reduction in force is $36,000. What is
the $16,000 inclu: in that total for grade and pay retention?

Answer: Agencies that have to lay off workers must follow a complex set of Proce-
dures to determine who will actually leave government service. Those procedures
represent the government's effort to give favorable consideration in layoff decisions
to employees with career appointments, military service, long federal experience,
and food ‘job performance. As a result, employees in the positions that an agency
decides to abolish under a reduction in force (RIF) may not always be the employees
Who leave government. That occurs because federal procedures allow employees who
rank high according to the above criteria to replace others of lower rank and lower
grade.

Employees taking a job at a lower grade may keep the grade and pay of their
former position for two years. After that time, employees receive half of their annual
pay adjustments until the pay of the new job catches up to their pay. The extra sal-
ary the government pays under rules that allow employees to retain their grade and
pay is considered one of the costs of firing employees.

in our 1993 analysis Reducing the Size of the Federal Civilian Work Force, CBO
estimated that the average cost of grade and pay retention is $6,500—much less
than the $16,000 OPM suggested. CBO has little information about the assumptions
on which OPM based its estimate. Such estimates are, however, very sensitive to
assumptions about the number and grade of the employees affected and the number
of grades an employee drops in order to replace another employee.

'BO’s estimate assumes that an agency abolishes an average position and that
the employees in that position drops two grade to replace another employee. CBO
reduced its estimore to reflect the feet that many employees leave those lower-grad-
ed jobs and the grade and pay retention status associated with them.

me employees quit government altogether, and agencies promote others to jobs
more appropriate to their skills. Analysis by the General Accounting Office suggests
that most employees in grade and pay retention status leave that status before two
year’s time. If an agency closes and no jobs remain for employees to bump each
other out of, grade and pay retention rules do not apply.

Question 2b: Could RIF regulations be revised to reduce those costs, and would
you recommend any statutary changes to reduce costs?

Answer: CBO does not take positions on changes in statutes. As I stated in my
testimony, however, RIF regulations could be changed. On the one hand, those regu-
lations, as described above, are costly and disruptive. On the other hand, they offer
an agency the opportunity’ to ensure that layoffs mostly affect employees with less
experience and poor performance records, among other considerations. In general,
the complexity of the layoff procedures that the government chooses ought to reflect,
the priority it gives to protecting good performers and other groups of employees.

Question 3: Be you have a breal Gown of the costs and savings of a buyout?

Answer: The previously mentioned 1993 CBO study contains detailed estimates
of the costs and savings of different methods of separating federal employees. Those
estimates show that offering separation incentives can be expensive compared with
laying off employees (see Table 3). As we stated in our testimony, that occurs be-
cause agencies may need to offer more incentives than they have jobs to abolish
through a layoff. Agencies may, for example, offer incentives broadly to ensure eq-

uity.

CBO's estimates represent full-year impacts that assume the government abol-
ishes an average position. The estimates were generated using a DoD computer
model developed before the implementation of a buyout program in civilian agencies.
We have not updated those figures but believe that they still give a fair approxima-
tion of the relative cost-effectiveness of the two different approaches to separating
employees.

Oversight

Question 1. We note from your testimony that retirement rates were low just prior
to the enactment of buyout authority. Are you monitoring retirement rates, and
what trend do you expect for the near future in the absence of buyout authority?

Answer. The pattern that we observed is that retirements dropped in the two
years before enactment of buyout authority and then rose. That pattern suggests
that at least some employees simply delayed retirement in order to obtain a separa-
tion incentive payment.

We receive regular reports on retirements and other employee separations from
the Office of Personnel Management and will be examining those reports to see
what pattern emerges for the period afer March of this year, when buyout author-


6

less effective personnel have the ability to bump down into lower jobs where they
become overpaid and underworked.

But in the federal sector, voluntary separations can be an effective workforce
management tool. If done right, the manager can encourage more senior and more
‘expensive personnel to leave the civil service earlier than they had planned. The ef-
fective manager can then restructure the agency and streamline different functions.
The key to success is the ability of the manager, the communication between ma
agement and the employees, and the existence of a comprehensive and effective re-
structuring plan. The Department of Defense offers an excellent example of how
well this process can be carried out.

This hearing is important today because it gives us an opportunity to examine the
successes and failure of the Federal Workforce Restructuring Act and determine
what went right and what went wrong. It also gives us the opportunity, in light of
the possibility of greater workforce reductions, to examine other possible ways to en-
courage voluntary separation.

In examining the Federal Workforce Restructuring Act, we must first look at what
the bill tried to achieve and whether it met those goals.

« The legislation was designed to encourage voluntary separations. It did so.
The most recent buyout data from OPM shows that 24,863 non-DOD employees
separated with buyouts. When the Department of Defense is included, the num-
ber rises to 78,863.

The legislation was designed to encourage employees to retire before they
had originally planned. It did so. The average age of an employee retiring witl

buyout was 59.9 years—2 years earlier than the average retirement age of
62. The average age of those retiring early was 54.1. The average age of those
who resigned was 42.1.

The buyouts were designed to reduce higher grade employees. It did so. The
average grade of those retiring with a buyout was GS-11.6. The average grade
of those retiring early was GS-11.1. The average grade of those resigning was
GS-9.0. While these may be lower grades in the Washington DC area, they are
managers and supervisors in other areas.

ie buyouts were designed to improve the diversity within the federal gov-
ernment. They did so. Minorities received only 24% of the buyouts while non-
minorities received 75.8%.

* Finally, the buyouts were designed to lessen the cost of federal downsizin,
They did so. While the buyouts did cost up to $25,000 for each employee reti
ing, they are certainly cheaper than RIF's which cost $36,000 per employee.

‘There have been some examples of agencies improperly using the buyouts and not
having comprehensive workforce restructuring jlans. But those were the exception
rather than the rule. Most agencies properly followed the requirements of the Fed-
eral Workforce Restructuring Act and have used the buyouts to streamline their op-
erations.

There were examples of some employees not retiring until] they received the
buyout. In these cases we paid an employee to do something he or she had already
intended to do. But those were the exception rather than the rule. It is hard for
us to know the many decisions an employee makes in considering when and wheth-
er he will retire. While the possibility of a buyout may have kept some employees
on longer than normal, the recession probably had a much greater impact. Attrition
is always lower when alternative jobs are not available.

In addition to examining the effectiveness of the Federal Workforce Restructuring
Act, we should look to the future and examine ways to further encourage employees
to voluntarily separate. This should include a discussion of future buyout authority,
particularly for those agencies slated for elimination. One of the reasons the DO}

as been so successful is that it has a continuing buyout authority. It does not need
to separate a maximum number of workers in one fell swoop, but can effectively
apply the authority to functions as appropriate. It makes no sense to offer buyout
authority for one year to ease a downsizing effort that will take five years.

We should also examine other mechanisms to encourage voluntary separation, an
alternative to lump sum cash payments. The goal is to examine how you can encour-
a ¢ people to get out of the civil service. Maybe we can look at ways to put into
Cc @ permanent early retirement provision with an actuarial reduction or allow
people to leave at age 55 with fewer than 30 years of service, maybe 55/25. This
could be offered it to people for a limited period of time, made as part of the perma-
nent retirement system, or available to agencies as they are downsizing. Part of the

roblem with CSRS is that it has golden handcuffs where you can’t leave unless you
ave 30 years of service. For some people, you want them io leave.

Again, I welcome this discussion and this hearing. Thank you,



29

were wringing their hands saying, “But we are going to lose so-
and-so, and so-and-so stays,” and we went to the ratings sheets. I
would turn and say, “But you rated them outstanding.” So that the
accountability goes into managerial ranks too.

So the mechanistic thing we talk about is on a seniority basis
and it is mechanistic because you have built in the veterans pref-
erence, and the departure out of Government has a number of the
same elements that bring you into Government, and it is a fairness
that has been established within the context of our Federal service.

I think you will see some of that being addressed in the reform
legislation that does come forward, and we are waiting, as you are,
to see that legislation when it is brought forward. But I think at
this time one of the concerns that I think is quite genuine in the
Federal ranks is, are you joing to change the rules at a critical mo-
ment and how will they affect ‘me”. So that’s part of it.

But I think there is no question, your point is very well made,
but on the other hand there may be an interesting adjustment that
could be made on the ratings system.

Also in other things we get asked about, we have approved a
change in the rating system to a pass/fail. Well then you change
that particular element, and then it goes purely to seniority.

Mr. KLEIN. I might add too, sir, that there is a proposal in the
legislation that would help get at what your concern is, and that
is that managers would be able to reduce the salaries of poor per-
formers by 25 percent for a period of time to put some pressure on
them, and that should have some good effect, we think.

Mr. Moran. You know, I hate to tell you this, but my experience
in working with the Federal Government was that those people
who the manager knew were the most likely to challenge them if
they got anything but an outstanding rating were likely to get the
outstanding rating because it wasn’t worth the effort to try to ex-
plain why they didn’t. There is a different culture in the Federal
Government. Now that may have changed since——

Mr. KING. If it has, it was this morning while I was away from
the office.

Mr. Moran. Right. OK. And that is clearly part of the problem
that we are dealing with.

I think, personally, it is amazing that we have as high a quality
civil service as we do. It is a testament to the people who do go
into the workforce, and it is a testament to the quality of the man-
agement that we have. But your answer, Mr. King—and I'll say it
because you know I have the highest respect for you, but your an-
swer was something less than precise. I was Tooking for a yes or

no.

Mr. Kinc. I don’t think you will see in the reform legislation any-
thing that directly affects RIF’s as we know them today.

Mr. MoraN. OK. So we are not going to change the system. You
are saying that makes it virtually prohibitive to fire anybody?

Mr. KING. Well, I think there will be some materials in there
about, identifying nonproducers. That is a separate issue, but on
the —

Mr. KLEIN. There is a separate system for performance issues.

Mr. Moran. I understand that, but it is not fair for a supervisor
to fire somebody when ultimately it means that you are going to


65

I thank you both for your testimony. You gave it in a very suc-
cinct manner, and trying to go through all your pages, Mr. Bowl-
ing, while you were speaking, was not easy to do. But you had all
of the facts and figures there, and I appreciate the testimony of
both of you, Mr. Blum too.

You know, NIH is in my district, and I have chatted with some
of the people there. I have always thought a program they had for
high school students, who work at NIH and become motivated or
excited by medical science and ultimately choose to go into that
field, is an excellant cooperative work program, and I heard from
some of the people at NIH that those students who had been doing
that on that cooperative work program are now factored in as
FTE’s. Therefore, 1 think NIH has closed out that program on the
basis of this concept of the downsizing. Have you heard of anything
like that?

Mr. Bow Linc. I haven’t looked at that particular situation. It is
true that FTE’s are supposed to measure everyone who is on the
payroll including temporaries and term employees and so forth in
a reduction, and that in a reduction such as we have had here, a
downsizing, the temporaries are the ones that tend to go first and
so forth, but I guess it would depend on how that program is struc-
tured. If it is a paid position, then it would be counted.

Mrs. MorELLA. Even if minimum wage?

Mr. BowLINc. Yes, it would still probably count as part of an
FTE if it was compensated by the Government.

Mrs. MorELLA, What do you think about that?

Mr. Bow LINc. Well, we have a program in GAO, opportunities to
bring in students to do something similar, to work with us for a
few months and learn a little bit about us and so on, but it is al-
ways on a voluntary basis, and that seems to work very well. It
seems that if yeu are getting a benefit out of it, I think doing it
that way would get around any FTE issue that you might have.
Other than that, I guess cutting a minimum wage employee is not
probably the most cost-effective way to go about downsizing Gov-
ernment.

Mrs. MorELLa. Yes, I think you lose some opportunities where
you would be giving somebody just a very minimum amount. I was
just very surprised to see that as kind of—I won't say circumvent-
ing but addressing the FTE situation.

Let’s see. I guess I would like to ask you a little bit about the
contracting out that you mentioned, the NASA situation that you
mentioned in your testimony. Do you feel that we need to do some-
thing to tighten the law or to come up with a piece of legislation
that would have this cost comparison be required under all cir-
cumstances?

Mr. BowLINc. That is an interesting question, and I guess I
would say it would depend on whether this type of situation was
very widespread. I guess I would have to answer that our view is
with the controls in the current Workforce Restructuring Act, the
provision that offsets each buyout with a reduction of one FTE
Government-wide, the cost comparison for service contracts, and
the fact that personal service contracts could not be entered into
without returning a buy-out, I think those controls are probably
enough to control the extent of it Government-wide if they are ap-


67

those circumstances it may be appropriate to target particular
agencies that are going to be downsized dramatically or out of ex-
istence and provide buy-out authority on a selected basis where it
is needed.

We in GAO don’t believe that, at the moment at least, there is
any evidence that we need a Government-wide extension of the
buy-outs. But targeting it to the particular agencies that are likely
to be coming down dramatically I think would make a certain
amount of sense.

Mrs. MorELLA. Something we should bear in mind as a possibil-
ity if needed.

A final question: A number of agencies began offering buy-outs
before their streamlining plans were approved by OMB. What as-
sistance did OMB offer to these agencies to ensure that their buy-
out strategies would ultimately support their streamlining goals?

Mr. Blum.

Mr. Bum. I will have to defer to Mr. Bowling on that one. I
think he has been following the process much more closely than we

ave.

Mrs. MorELLa. OK. Do you want to handle that one?

Mr. BowLING. We know that the agencies did in fact submit their
downsizing planning, their streamlining plans to OMB. OMB was
initially dissatisfied with them. At the end of the summer they
were—the first ones they saw were not up to the standard that
OMB was looking for in terms of justifying what agencies were try-
ing to do and giving a logical explanation for it, and that they sent
them back for rework, and over the next few months that process
of back and forth and sort of working through what a streamlining
plan should look like and in achieving that standard through the
other agencies continued, and that, as we understand it now, those
streamlining plans are much better than they originally were. The
ones that we have looked at—and we have Tooked. at a number of
them—they run the whole spectrum of very good to probably less
good, but they are certainly much better than they were originally.

Mrs. MoRELLA. What criteria was established for them?

Mr. Bow Inc. I can’t give you the specific criteria now, but the
idea was that if you are going to make cuts, downsize, in a certain
area, it should be based on a programmatic rationale, there should
be a good reason for downsizing, there should be a reinvention ini-
tiative built into that. In other words, you are reinventing the busi-
ness process and thereby being able to reduce our workforce as op-
posed to simply just cutting a gross number without any real sense
of where it is going to come from or what impact that would have
on the agency. That is the type of criteria that was in place.

Mrs. MorRELLA. Can I assume that OMB helped, you know, when
they sent them back, they said this is the kind of assistance that
might help you to restructure, or rewrite?

Mr. BowLinc. Yes, it appears that they worked with the agency
in terms of giving them information and guidance at several points
to ensure that they at least knew what was expected, and, as I say,
the progress—there seems to have been considerable progress in
those plans.

Now the other issue is the one you had raised earlier about
RIGO Il, and given the possibility of considerably larger


68

downsizings, the last round of streamlining plans are rapidly be-

coming obsolete, and so I think that process of planning for the

downsizings, if in fact they are to take place, would need to concern
ou.

y Mrs. MorELLA. Thank you.

Thank you, Mr. Chairman. I thank both of you for testifying. I
thank you for your generosity of time.

Mr. Mica. I thank the gentlelady.

dust a couple of quick questions, gentlemen, before we conclude
this panel. First of all, does GAO monitor any of the normal attri-
tion rate with the Federal employees in non-Defense? Is there any
estimate of what this has been over the years?

Mr. BowLING. We largely get that sort of data from OPM, and
we understand that OPM is now showing an attrition and retire-
ment rate that dipped for the 2 years prior to the buy-out legisla-
tion, and increased as a result of the buy-outs.

Mr. Mica. And we directly attribute the dip in the attrition rate
to people waiting to take advantage of the buy-outs?

Mr. BowLInc. Well, I would not really have any evidence to sup-
port that, but that is one logical way to look at it. I mean certainly
that could be true.

Mr. Mica. It appears to me if you look at the attrition rate—say
for example, a 6 to 8 percent normal attrition rate, and then
have a sudden drop when you announce buy-outs—it seems that
people are waiting, then they take advantage of it. I’m wondering
if these folks would have gone anyways? Look at the numbers, it
looks as though it may have skewed the normal curve and we pick
some of those folks up when buy-outs are authorized. Again, when
52 percent of those taking buyouts are eligible for retirement, I
Wonder if we should set some limits in the parameters on eligi-

ility?

Mr. BowLING. Well, one thing you could do is to make sure that,
you do your buy-outs quickly rather than having a long period of
discussion followed by passage of a bill, so that if in fact there were
some sort of effect such as you suggest of people waiting around,
not retiring, to get that, you would minimize that.

It is also true that people are retiring somewhat earlier now
under the buy-out authority, a year on average younger than the
average had been 60 versus 61. If that is true, then that would
seem to suggest that the buy-outs are having an effect in getting
people to leave somewhat earlier than they might have otherwise.

Again, it is—that is one possible explanation. We haven’t done an
analysis that could show a clear cause and effect relationship.

Mr. Mica. In your testimony you examined how four agencies ac-
tually inereased in size despite using buy-outs as a restructuring
tool in downsizing. I asked Jim King to give us the agency-by-agen-
cy breakdown of utilization. Have you done any study of this be-
yond that or just these four agencies? Whether we are buying out
people and they are then increasing the size of the agency or re-
placing the position, is a concern.

Mr. BowLINGc. We have just looked at these four agencies thus
far. We will be looking into it more as part of our ongoing study.
In the four agencies we have looked at, there seems tobe a ration-


26

Mr. KING. I think one of the concerns, as you suggested in your
opening statement, and we have looked at the numbers, is that
when you talk buy-out in an agency you would be amazed what
happens to attrition. There seems to be a relationship between talk
of a buy-out and attrition; people don’t leave, they will wait. So if
you are going to do it, I think that you move very quickly. I think
that there should be a time line, a very careful time line, and it
should be done early in the fiscal year so you get optimum savings
or budget neutral, and that was one of the difficulties that you ex-
perienced. I think you raised that on the 11,000.

Mr. Mica. So those two points, early and a short timeframe,
would help.

Mr. KING. Yes, sir.

Mr. KLEIN. I would add too, ensure there would be a clause in
the bill that required an FTE reduction, as this legislation did.

Mr. Mica. OK.

Mr. KLEIN. And that there be some repayment to the retirement
fund so that we don’t wind up—

Mr. Mica. That was my next question, is: What impact does it
have on the retirement fund or are there obligations?

Mr. KING. That is where the agencies sometimes come in, and
they talk about all sorts of incentives that have enormous economic
implications but not to their budget. I think we are looking at this
from a corporate perspective and saying, let’s look at all the costs,
if you would, to the corporation, the Government of the United
States, and does it really make sense, and that is where some of
the proposals that have been put forward look modest, may not
look overly generous, but their impact is spectacular as far as the
overall budget is concerned.

Mr. Mica. Two more questions. One: Have you identified any in-
stances to date where employees have chosen to buy-out and then
to pay back to come back to take other positions?

Mr. KING. You have had a couple of comments on that.

Mr. KLEIN. OPM must waive the repayment of the buy-out. We
have had four requests since the buy-out legislation, and we have
approved one.

Mr. Mica. OK.

Mr. KLEIN. Only the Forest Service when they were having those
fire storms out west.

Mr. KING. That was the smoke jumpers last summer.

Mr. KLEIN. A few people came back for a short period of time.

Mr. Mica. I can see the headline now: OPM approves 25 percent
of requests to buy back in.

Mr. KLEIN. One approval, and those were temporary—those were
people who had experience in fire fighting, and they came back and
helped out during that period.

Mr. Mica. Final question, as you know, some of these agencies
are slated for almost total close down. Do you think we have an
obligation to offer buy-outs in those programs, or are we carrying
the program too far? I mean there are closedowns in the private
sector. at is the experience in State and local government? Are
they doing this when they have downsized?


78

is going to look like, and it is equally important that the vision of
the end organization be clearly communicated to everyone affected
by the program. Failure to take this first essential step leads to
many problems, not the least of which is asking people to set out
on 2 journey without an understanding of the final destination.

Another lesson involves humane treatment of people. This is re-
flected in part by the high number of companies that provided ca-
reer counseling services and financial planning services.

As for the buy-out tactics, the work in the private sector to the
extent that they are perceived as generous, that they provide
health care coverage for a reasonable period of time, and that the
individuals perceive that he or she has skills that are wanted in
the marketplace. In this sense, the public sector faces the chal-
lenges—these challenges plus one other one, the perception, unfair
though it may be, that Government workers do not work as hard
as their counterparts in the private sector. Any Government work-
er considering accepting a buy-out may well be asking: “Because of
the fact that I have worked for Government for a long time, will
I be entering the job market with one strike already against me?”
The answer to that question should be no, as long as long-service
Government workers receive advice and counseling on how to reen-
ter the private sector market.

As for measuring restructuring success, it is true that public en-
tities cannot apply the same bottom-line measurements. However,
just achieving desired bottom line results can be misleading. There

ave been many private firms that used restructuring to get the
numbers right, but in the process they destroyed the spirit of their
organizations. And, in the long run, no organization can be success-
ful if the spirit of the workforce and the values which they feel the
company stands for are destroyed. Ultimately, the primary deter-
minant of restructuring’s success has to be customer satisfaction,
and logically this would be as true of a Government agency as it
would Be of a private company.

We encourage any Government entity that is restructuring to
have a good handle on the bench strength it needs to fulfill its mis-
sion; and, if jobs are eliminated in the Government reform process,
it does not mean productivity and customer satisfaction must suf-
fer. In fact, in most of the private sector customer satisfaction im-
proved and so did productivity.

Tl close by sharing one final observation about restructuring. All
indications are that it will be part of the economic environment for
many years to come. Based on our experience with restructuring,
we believe it is imperative that the definition of restructuring move
beyond downsizing and become defined as a process that is used to
rebuild and renew rather than reduce. The future will not be won
by economies that are best at shrinking but by those that are best
at growing. Restructuring, when it is done well, is about growth.

at concludes my formal statement.

Thank you.

[The prepared statement of Mr. Ellis follows:]

PREPARED STATEMENT OF RoperT ELLIS, VICE PRESIDENT OF CORPORATE
MARKETING, THE WyatT Co.

Mr. Chairman, I am Robert J. Ellis, Vice President of Marketing at The Wyatt
Company. Wyatt operates as Watson Wyatt Worldwide, an international consulting


3

This hearing is more than a review of a completed program and
much more, I hope, than an academic exercise. Legislation is pend-
ing to consolidate or to eliminate several agencies and depart-
ments. Authority to offer buy-outs has been proposed in draft legis-
lation affecting several of those agencies. This subcommittee will
consider carefully the testimony presented today to identify the
conditions under which it could recommend to the House that it ex-
tend future buy-out authority to various agencies.

We want to support the executive branch and enhance its ability
to deliver more effective government at reduced cost. The American
taxpayer cannot forgive us if we fail to evaluate and revise this
program and let buy-outs turn into a $1 billion boondoggle of the
nineties.

Our first witness today is our good friend and able administrator,
Director Jim King of the Office of Personnel Management. We wel-
come him back. He heads one of the agencies with leading respon-
sibilities for coordinating all the agencies’ management. plans and
their implementation of various strategies.

The Office of Management and Budget was invited today, but a
schedule conflict does not permit them to be present. We are sub-
mitting questions, however, and they have agreed to respond.

Our second panel is composed of the General Accounting Office
and the Congressional Budget Office, two arms of the Congress
that have been monitoring workforce reductions and who will assist
our efforts to develop criteria to evaluate these strategies for re-
structuring our workforce.

Our third panel will be Dr. Peter Scott-Morgan of Arthur D. Lit-
tle and Mr. Robert Ellis of the Wyatt Co. These companies have re-
viewed the restructuring of corporations around the world and can
provide useful insights to keep us away from what I’ve termed

joondoggle boulevard.

May I say as we begin, I come to this hearing without a firm
opinion on whether or not we should continue these buy-outs.

ere is some evidence I have heard casually that does support
their continued enactment and adoption by the Congress, and there
are some negative responses that I have heard from folks who have
been involved with the program. So I don’t bring any preconceived
notions or position to this hearing, and I look forward to this being
a good session and a cooperative effort from the various agencies
to reach some conclusions on what this program has done and how
we can make it work for the benefit of the tough task we have of
restructuring our Federal workforce.

So with those comments, I appreciate your indulgence. I now
turn to the gentleman from Pennsylvania, Mr. Mascara, to see if
he has an opening statement or comments.

Mr. Mascara. I do, Mr. Chairman, but I'll have them entered
into the record.

Mr. Mica. Without objection, that is so ordered.

Did you have any informal comments?

Mr. Mascara. No. Other than I’m concerned about the direction

ere.

I know back in Pennsylvania we had a bill called the Mellow bill
in Pennsylvania, and as a trustee with California, University of
Pennsylvania, that we lost some of our best people to the Mellow


2

the House or Senate have proposed eliminating the Departments of
Education, Commerce, Housing and Urban Development, Energy,
and several other agencies, and we have heard a number of propos-
als from across the Hill and the administration on eliminating var-
ious departments and agencies. Currently a bill to consolidate the
Department of State and absorb three other agencies has gained
the approval of committees in the House and Senate, with a new
authority for buy-outs in both of the bills. Senator Bill Roth, chair-
man of the Senate Committee on Governmental Affairs, has long
supported buy-outs to facilitate staff reductions.

learly, buy-outs have proven popular among agencies admin-
istering them as a tool for staff reduction. Departing employees
also may benefit from buy-outs when they are eligible for retire-
ment. In fact, many of those who leave these agencies now leave
with a sizable award, and that is one of the questions we need to
examine.

What is not clear from the evidence to date is, is the national in-
terest well served because of these buy-outs? Should Congress ap-
prove additional buy-outs as a tool to reorganize and manage our
Federal Government? The General Accounting Office has been
monitoring efforts to reduce the size of organizations in both the
public and private sector. They have conducted extensive studies of
downsizing in private companies, State governments, and foreign
governments that provide a baseline for assessing workforce reduc-
tion in Federal agencies. As we evaluate the implementation of the
Workforce Reduction Act, we will focus on the dimensions of the
National Performance Review's criteria. We need a government
that works better and costs less. Many of us have heard that
phrase before, and we are trying to give it real meaning with this
104th session of Congress.

To assist us in gauging techniques and developing methods of
managing workforce reductions, we will hear from two private or-
ganizations that have studied workforce restructurings around the
world. Their surveys and analysis conclude that successful
workforce restructurings require advance planning, a strategic per-
spective and plans for the new organization. Let me cite a number
of points are raised as a result of their studies.

When the methods of working are not reformed but further
workforce is reduced, the organization will find itself with a small-
er workforce and often a bigger backlog. When senior experienced
professionals are replaced by untrained, young employees, the orga-
nization will face the same work loads and sometimes increased
training costs. Or when we pay an additional $24,000 or $25,000
to each employee who is already able to retire, as the General Ac-
counting Office will testify was the case for more than 52 percent
of the non-Defense employees collecting buy-outs, have we spent
that half a billion dollars in the public interest? That is kind of a
startling figure—that 52 percent of those folks were on the verge
of retirement anyway—so maybe we handed them a cash bonus on
the way out the door?

Where Congress has authorized increases in agencies’ staffs, spe-
cial care must be taken to be certain that buy-out authority, if used
at all, is used sparingly, so that Government does not bear the cost
of replacing the same people who benefited from the buy-out.


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5

Be yield at this time to the gentleman from New Hampshire, Mr.
ass.

Mr. Bass. Thank you, Mr. Chairman.

T would like to thank you for calling this hearing. I think it is
important. I think it is timely. At no time in the history of this
country have we faced the potential for greater changes in the na-
ture and the quality and the quantity, if you will, of the Federal
workforce.

I will only echo some of the observations made by the distin-
guished chairman of this committee, as one who has cosponsored
or will cosponsor legislation to eliminate three major cabinet de-
partments of government. One of the major concerns that we will
face not only with respect to meeting the consolidation, elimination,
and decentralization goals that will be envisioned in this legislation
will be the fate of the employees who currently work within the ex-
isting system as we move to make government more responsive
and more flexible and smaller.

This is a time for imagination, this is a time for new ideas, and
I think that the issue of buy-outs is certainly one of those ideas,
but we certainly want to try to balance the need to downsize gov-
ernment as we have never done before with the need to be sen-
sitive and concerned about the livelihoods and futures of the indi-
viduals who will be adversely affected by this process.

So I welcome this hearing, and I would like to welcome you here
again, Mr. King, and I look forward to your testimony.

Thank you very much, Mr. Chairman.

Mr. Mica. I thank the gentleman, and now want to welcome the
ranking member of our subcommittee. I'll give him a second to
catch his breath, though he is never at a loss for words, at least
in the 2 years I have known him.

Our distinguished ranking member from Virginia—if he has any
opening statements or remarks. Welcome.

Mr. Moran. Thank you, Mr. Chairman.

I do, but since there have already been three gpening statements,
I think rather than be duplicative, I’ll wait until we hear from the
witnesses and I’ll submit my opening statement for the record.

Mr. Mica. Thank you, and we will accept that without objection.

[The prepared statement of Hon. James P. Moran follows:]

PREPARED STATEMENT OF Hon. JAMES P. Moran, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF VIRGINIA

Mr. Chairman:

This is a very important hearing today. There is no question that the downsizing
currently underway in the federal government is being accelerated and that many
employees will further be affected as we close different federal agencies and depart-
ments. The 272,900 reduction goal, which the Administration is meeting and exceed-
ing could raise by 50,000 or even 100,000.

ere are different ways to cut your workforce. You can do it through attrition,
and not hire new employees to replace retiring employees, or you can lay employees
off. In the private sector, companies effectively use both and have the ability to pare
its workforce through selective lay-offs.

But in the federal government, the only viable option in reducing the workforce
is attrition. In the federal sector lay-offs or involuntary separations are performed
throvgh the Reductions-in-Force Pineedures which are expensive for the agency,
frustrating for the employees, and difficult to properly manage. When we RIF em-
ployees, we lose the less senior employees who ultimately do not have the same pro-
tections and create a situation where more senior, more expensive and sometimes



80

impossible to accurately measure the impact of the “writing on the wall” factor, but
just as it is true that organizations act faster to accept change when there is a stra-
‘tegic imperative to do so, it is equally true of people in a downsizing environment.

yond voluntary and involuntary severances, other compensation tactics are
used frequently to support restructuring. Perhaps among the most interesting find-
ings were the differences between the compensation tactics used and those that
turned out to be most effective. For example, 51% of the organizations froze pay or
reduced pay increases—but only 21% found this action to be “very effective.’ Only
24% pushed ownership levels down in the organization but 44% of those who did
found this tactic very effective. 42% re-evaluated jobs—but only 29% found it very
effective. Only 31% increased pay at risk, but 46% of those that did found it very
effective. In summary, when it came to using compensation tactics, restructuring or-
ganizations tended to take the easiest course of action—i.e., free or reduce pay—but

e easiest course proved consistently less effective. The tactics that were the most
difficult to execute and communicate—such as putting more pay at risk—were the
least used, but they proved the most effective when they were used.

Several work processes tactics were also used in support of restructuring. 68%
launched total quality management efforts, 58% eliminated low value work, 52% in-
creased outsourcing of work, and 45% increased automation. Generally, study par-
ticipants found these tactics to be effective in helping to achieve restructuring goals,

‘A variety of employee involvement tactics were also used by organizations. Re-
structuring project teams and task forces were the most used and the most effective.
Essentially employers were giving employees a say in the restructuring process; and
the employee involvement tactics were rated the most effective of all tactics in
achieving restructuring objectives.

What were the common barriers to restructuring success? 58% of study partici
pants cited employee resistance to change. 43% said a dysfunctional corporate cul-
ture. 37% blamed inadequate management skills. It is interesting to note that we
asked the same questions about barriers to corporate restructuring success in our
ongoing survey of worker attitudes, Wyatt WorkUSA. Rank and file employees
found manager resistance to change to be a major barrier to success. In fact, resist-
ance to change is fairly strong at all levels of an organization.

How successful has restructuring been in achieving stated goals? The results are
mixed at best. 90% said reducing cost was a goal—only 61% feel they achieved the
goal. 85% said increased profitability was a goal—only 46% met the goal. 64% said
restructuring would increase their competitive advantage—only 32% found this to
be true. 58% said they wanted to increase productivity—only 34% saw it happen.
58% said that improved customer satisfaction was a goal—only 27% saw improve-
ment.

Does this mean that most restructuring fails? Certainly restructuring that is com-

letely short-termed in focus has not proven successful, However, restructuring that
is recognized from the beginning as part of a longer-term change process—a change
process that includes actions such as developing new and more efficient work proc-
esses—is succeeding. Indeed, we are learning that restructuring is most successful
when it is part of a comprehensive change process.

at are the key ingredients in successful restructuring? The findings were fairly
consistent among participants . . .

* the restructuring was based on a clear imperative (72%)

* any downsizing was handled in a humane manner (65%)

« senior management was highly visible (61%)

* the objectives were clearly articulated (52%)

* there was effective employee communications (41%)

* employees were involved in the change (34%).

Executives in the study were also asked what changes they would make if they

were to do it all over again. They said they would . . .
‘* improve communications to employees
» increase the speed of the restructuring process
* increase manager and employee involvement
« improve the planning process
« increase senior management visibility
* ensure the changes made were fundamental and not cosmetic.

Mr. Chairman, you asked our opinion on whether the experience and tactics of
restructuring tactics used in the private sector can be applied to the public sector.
For the most part, we believe they can be applied.

Perhaps one of the most important lessons from the private sector’s experience is
the need to have a clear picture of what the “end organization” will look like before
the restructuring process begins. And, it is equally important the vision of the “end
organization” be clearly communicated to everyone effected by the program. Failure



83

But in a general vein, I wanted to ask if from what you have
heard and observed in the Federal process and what we are goin
through, do you have any recommendations? I think you are bot
experts in the private sector field. Are there any things that you
have heard or observed? Any bits of wisdoms that you want to
transmit to the subcommittee or the record here?

Mr. ELLIS. Last summer we had the opportunity to hold_a con-
ference that we sponsored along with another group for Govern-
ment agencies. There were several deputies from various govern-
ment agencies on restructuring, and we reported these results. One
of the interesting topics of discussion that came out were the
similarities between the private sector and the public sector on the
people issues. I think the thing that was most important from the
Government point of view was, at least from these deputies who at-
tended the seminar, was the need to precisely define the mission
of a given agency and work backwards from that mission. Most of
them had felt that they hadn’t done that because they first received
a number, a body count.

But I must also point out that although we have laid out a fairly
logical approach to restructuring—it often doesn’t happen that way
in private business. It would be nice if it did.

I think it improves the second time around—and we are seeing
now companies that are using restructuring as an ongoing rocess,
They have learned a lot the first time out, and they have learned
through mistakes like most of us learn the things that stick with
us. A lot of them made some mistakes in the eighties, and they
seem to be doing it better in terms of the humane aspects in the
nineties.

The thing that is still true, and I have to agree with Dr. Scott-
Morgan here, the findings are very clear in our study and others,
that the desired results are still not being achieved. They are not
being achieved because too many companies looked at the numbers
rather than defining what business is about and where it is going.

Mr. Mica. Dr. Scott-Morgan.

Dr. Scotr-Morcan. If I could expand on that, I guess having had
some contact with the Federal Government, the one area above all
others that really needs to be taken account of formally and explic-
itly is the logic behind why people resist the change, behind the en-
lightened self-interest of all the different groups that are part of
the restructuring. There has been a tendency in the private sector
to try to manage these sorts of major changes only by, if you like,
looking above the water level, the formal official aspects of how
things are supposed to work on paper. Yet in reality I think we
both experience this very much: Those aspects that you see above
the water level are just the tip of an iceberg, and, my goodness,
within the Federal Government, all of those things that feel like
the sensible ways to behave, the tradeoffs that people make of one
way to act rather than another, all of those “unwritten rules of the
game” are certainly as strong as in the private sector—if not even
more institutionalized than in the private sector. I think that as

art of the overall restructuring, the Federal Government needs to
old the mirror up, recognize when people resist change, what they
do does make sense, it is logical, that therefore if we are to try to
impart some logic into the proceedings we shouldn’t be doing an


21

as good as I was and my gang when I came in. They in fact are.
They are very high quality people coming into the workforce, and
their position in class is over 50 percent in the top 10 percent of
their class.

We are recruiting excellent people, but the buy-out was obviously
attractive to the older, more senior people. RIF’s would have hit
our junior people, and it was a balance for the future of where we
thought the—assuming the quality was evenly distributed across
our workforce—of where did we want to see that attrition happen.

Mr. Moran. The time for my questioning has expired.

Thank you, Mr. Chairman.

Mr. Mica. Thank you.

I think you raise some very good questions, Mr. Moran, particu-
larly the question of retaining quality in Government as far as our
employee base, and we will get into that probably in additional
questioning.

T’'ll yield now to the gentleman from Pennsylvania for questions.

Mr. Mascara. Thank you very much, Mr. Chairman.

I share some of your concerns, Congressman Moran, as it relates
to the quality drain on the employees of this Federal Government,
and I read in your testimony, Mr. King, that within 5 weeks of the
President signing the bill, that 11,000 employees left the Federal
Government and they hope by the end of this fiscal year that
105,000 employees will have left. Do you have in place some system
that will be able to measure the effect of these employees leaving
the Federal Government? Is there some way to measure?

I mean, first of all, I think OPM would not have been able to
measure anything if 11,000 employees left within 5 weeks of the
President signing the bill. Do you have in place some mechanism
that can measure the impact of the quality of the performance of
these employees that are leaving?

Mr. Kine. I think what we heard from Mr. Klein is that we have
done the ongoing surveys. When we are talking about the numbers
that left, the 11,000 in a short period of time, because it was mid-
way through the fiscal year, it was the end of March when the leg-
islation was passed and signed, and in order for buyouts to be
budget neutral the action had to take place in a rather compressed
time period, No. 1.

No. 2, though, the discussion in the Federal Times and among
Federal employees relative to this piece of legislation had been
going on for over a year. We had drafted the legislation where the
people had actually drafted it. We had been talking to the agencies
and their representatives and the IAG for months. The Federal
Times had been carrying this regularly, the Post had, other groups
that focus on Federal moves had covered it, and then of course its
progress, which was extraordinarily thoughtful as it moved through
the Congress itself, so this was very, very public to the community.

So when it did arrive, Mr. Mascara, when it was signed, there
was no surprise to any of the folks in the Federal Government,
least of all our senior people, who we said right from the beginning
as it went through the fiscal year would be really the only place
you could be budget neutral on a buy-out, because of their salaries.
It had to be budget neutral at the agency level, not at the national


BUYOUTS: BOON OR BOONDOGGLE?

HEARING

BEFORE THE

SUBCOMMITTEE ON
CIVIL SERVICE

OF THE

COMMITTEE ON GOVERNMENT
REFORM AND OVERSIGHT
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
FIRST SESSION

MAY 17, 1995

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

ts

U.S. GOVERNMENT PRINTING OFFICE
24-281 CC WASHINGTON : 1996

For sale by the U.S. Gover Printing Off
Superintendent of Documents, Congressional Sales Office, W.

3 ISBN 0-16-052820-8

DC 20402



84

academic exercise, we should be injecting a bit more realism and
a bit more pragmatism into the design, understanding what that
rationale is, and therefore as far as possible aligning what makes
sense for the individual with the goals of the restructuring over all
and with the vision of the future.

Mr. Mica. Well, I thank you for your comments.

One final question. It seems that some trends and personnel
practices or approaches to management sort of come and go. Do you
think that the buy-outs have peaked and this is something that
was part of a particular blip on the personnel, management, and
restructuring screen, or is this something that will continue?

Mr. ELLIs. I know that in our situation where we have looked at
the early retirement windows. They have pretty much peaked be-
cause you have probably got that generation out of the workforce
if you are going to get them out in a legal way.

e continue to see buy-outs, it still is an attractive approach,
though I have to agree that we are seeing a little bit harder-nosed
approach in terms of companies who have been through a buy-outs
and saying, “Let’s just cut.” I would say we are still going to see
buy-outs because it is a humane way, but basically I think it is
probably going to come to an end at some point. You see organiza-
tions who have been through it a few times. It stops after about
the third time.

Mr. Mica. Dr. Scott-Morgan.

Dr. ScoTr-MorcaNn. We have to ask ourselves why we are seeing
it peak. I mentioned in my testimony that indeed, now the sorts
of buy-outs that companies are offering do tend to be less generous
than they were in the past. But the reason is because the private
sector in general has already gone through the process of taking
those who were near retirement out of the system, so the fact that
we are seeing them peak and diminish in the private sector does
not mean that in the Federal Government, where so much does de-
pend on tenure, that therefore it is not a very attractive route for
the moment. Maybe in a few years time we will be looking within
the Federal Government and saying yes, now it is less of an issue
than it was.

But the fact that we are seeing it diminish in the private sector
I don’t think is because it was a human resources fad that people
were going through. I think it was because it was appropriate for
the situation that the private sector was in. I suspect that for the
same reason it is now appropriate for the Federal Government at
the stage it is, and maybe in a few years time we will see that di-
minish but for the same reasons.

Mr. Mica. I want to take this opportunity to thank both of you
gentlemen for providing your perspectives and for sharing with us
your experience in this area.

We have additional questions that we would like to submit to you
from the subcommittee and would appreciate your cooperation in
responding to them. It has been a little bit longer hearing than we
anticipated, so we also appreciate your indulgence and your pa-

lence.

Coming from the private sector, I like to have the private sector
offer their suggestions and comments and viewpoint and also make
that part of the record, and this probably will be one of the most


44

Department of Justice

Budget documents show that FTE increases were requested at the Department of
Justice to support staffing needs in response to congressional initiatives. Over 75
percent of the FTE increases from Fiscal Year 1994 through Fiscal Year 1996 are

levoted to programs in support of the Violent Crime Control and Law Enforcement

Act of 1994, the Bureau of Bisons, and the Immigration and Naturalization Service.
Included in the staff needs are the hiring of additional U.S. Marshal deputies and
Drug Enforcement Administration agents; 1,700 new immigration agents, officers,
and other staff to support the Border Control Strategy; and additional staff for two
new federal prisons and the expansion of five existing prisons to handle the antici-
pated increase in inmate population.

Although Justice is experiencing a significant increase in mission responsibilities
as a result of these congressional actions, agency officials told us that they elected
to use the buyout authority to target reductions in supervisory and administrative
positions. They explained that these reductions were possible as a result of Justice’s
reinvention and reengineering efforts. In addition, they noted that the use of
buyouts helped Justice improve its diversity profile. Buyouts were not used for the
direct mission support functions in divisions that are increasing, such as the Bureau
of Prisons. Most buyouts have focused on administrative support functions and on
supervisory levels.

Environmental Protection Agency

EPA has been criticized for its reliance on the contractor workforce to perform
many functions. To correct this situation, the agency has embarked on a project to
convert contractor FTEs to in-house FTEs, According to agency officials, about 900
contractor FTEs will be converted. This effort, the officials say, will strengthen re-
search programs, eliminate contractor access to confidential business information,
increase EPA control over Superfund cost recovery information, and enhance in-
house capabilities in regulatory and policy development processes.

‘According to agency officials, additional staff were also requested to respond to
increasing mission requirements, particularly in the environmental cleanup area.
Increased emphasis on congressionally mandated requirements for the Clean Air
Act and additional research on global climate change have necessitated additional
staff.

According to EPA officials, the agency used the buyout authority to target its su-

srvisors and managers as opposed to the specific occupations cited by NPR. Reduc-
ing their corps of personnel, budget, and acquisition experts, they said, did not make
sense given the workload and expertise needed to redesign administrative processes
and streamline the organization. They told vs the present personnel officer-to-staff
ratio is 1:100, while the goal recommended by OPM is 1:65. Further, according to
these officials, similar reductions in acquisition specialists would not make sense
when the agency is trying to improve its control over the contractor workforce.

In targeting the buyouts to supervisors and managers, however, EPA did not get
the response it wanted. While EPA’s plan was to use up to 80 percent of its total
buyouts for managers and supervisors in order to flatten the organization and in-
crease the supervisory span of control, actuality, only 20 percent of the buyouts
went to such individuals. EPA officials believe this occurred Because the maximum
amount of the buyout was insufficient to attract many applicants in the higher-level
management positions, unless they were already contemplating retirement. More-
over, they said that EPA has a relatively young workforce. Nevertheless, agency offi-
cials noted that EPA was still able to use the results of its buyout program to flat-
ten the agency in that it reassigned some of the remaining supervisors and man-
agers to nonsupervisory slots vacated by the buyouts in critical line functional
areas,

AGENCIES REPORT DIFFERENT IMPACTS FROM THE WORKFORCE REDUCTIONS

Because agencies are continuing to downsize, it is too early to say conclusivel
how they are compensating for reduced staff or how their productivity has been af
fected. In our contacts with agencies, some reported maintaining or improving serv-
ices by initiating reinvention efforts, while others said they were experiencing ad-
verse effects. Some examples of each situation are presented below. in considering
these reported successes and shortcomings, it is important to note that our informa-
tion is preliminary. Moreover, this information was obtained primarily from head-
quarters officials, and a different picture may emerge as we contact line employees,
union officials, and field staff as part of our longer-term effort.


8

In developing that legislation, we studied both the successes and
failures of previous—and I would like to emphasize, both the suc-
cesses and the failures of previous buy-out Tograms in the private
sector and in State and local government. The legislation permitted
agencies to offer buy-outs of up to $25,000 to employees who volun-
tarily separated through regular retirement, early retirement, or
resignation. These buy-outs were not an entitlement available to
all employees. The agencies had the authority to target them to
specific jobs and locations, not to individuals; to use them, in short,
to serve the Government’s specific workforce needs.

An employee who accepted a buy-out could not, with only rare
exceptions, return to Government service or accept a personal serv-
ices contract within 5 years without first repaying the entire incen-
tive, and, by the way, that is the entire incentive before all taxes
have been taken out of it, so there was a really negative impact.
And to ensure that buy-outs resulted in permanent personnel cuts,
the legislation required a reduction on a Government-wide basis of
one full-time equivalent position, or FTE, for each buy-out taken
for all non-Defense agencies. As the legislation neared passage,
time was clearly a factor since cost savings demanded its maximum
usage early in the fiscal year. :

Prior to the passage, OPM created a Workforce Restructuring Of-
fice that prepared the documents and guidelines that enabled agen-
cies to move quickly to implement the program. Because of these
efforts, the program began operations literally within hours after
President Clinton signed the bill on March 30, 1994, and within 5
weeks buyouts had been paid to more than 11,000 employees. Our
Workforce Restructuring Office, with a staff of about 10, continued
to work aggressively to see that the program was implemented
Government-wide in a manner that was fast, fair, and orderly.

OMB, the Office of Management and Budget—I always do that.
in reverse because they seem to be better known by their initials
than their name—estimates that by the end of this fiscal year
about 105,670 executive branch employees will have left Govern-
ment service with buy-outs. That figure includes 68,837 Depart-
ment of Defense employees and 36,835 non-Defense employees.

During fiscal years 1996/97 an estimated 6,200 non-Defense em-
ployees will take delayed buy-outs. These separations must take
place before March 31, 1997.

Defense is projected to offer some 42,000 buy-outs between now
and the end of fiscal year 1997, Mr. Chairman. Thus, by the end
of fiscal year 1997, we estimate about 154,000 executive branch
employees will have left the Government under these incentive pro-

grams.

Frankly, Mr. Chairman, we believe that OPM’s efforts made pos-
sible an orderly buy-out program, one that avoided the confusion
and additional expense that would have occurred if more than 40
participating agencies had attempted to develop programs of their
own.

Now let me address the questions that you raised in your letter
of May 3 inviting us to this hearing, Mr. Chairman. You asked for
a description of the process for approving agency buy-out imple-
mentation plans to ensure that they conformed with the law and
Title 5 requirements. The legislation authorized the head of each


7

Mr. Mica. Again we appreciate your indulgence in hearing these
opening comments from the Members but would like to welcome
our first panel. We have James King, who is the Director of the Of-
fice of Personnel Management, and Leonard Klein, Associate Direc-
tor.

Welcome to our panel.

As is customary, I need to swear you in, so if you wouldn’t mind,
stand and raise your right hand.

(Witnesses sworn.]

Mr. Mica. Thank you.

Let the record show that the witnesses answered in the affirma-
tive. Welcome, Mr. King. It is good to have you back. I have read
some of your comments, and you now have the floor. We would like
to hear your observations on this important issue.

STATEMENT OF JAMES B. KING, DIRECTOR, OFFICE OF PER-
SONNEL MANAGEMENT, ACCOMPANIED BY LEONARD KLEIN,
ASSOCIATE DIRECTOR FOR EMPLOYMENT

Mr. KING. Mr. Chairman, by the way, I was just wondering when
I took the oath, I often wonder what happens when you deal with
economists here and the conflicting numbers they bring to you. I
do hope—well, excuse me, Mr. Chairman, it was just a thought
flashed through my mind.

Mr. Mica. So far we haven’t had any economists.

Mr. KinG. Mr. Chairman and members of the subcommittee, I
want to thank you for giving OPM an opportunity to comment on
the Government-wide program of separation incentive payments or,
as they are better known, buy-outs, which we played a key role in
designing and implementing.

As you mentioned, Mr. Chairman, I’m accompanied this morning
by Leonard Klein, our Associate Director for Employment, who
worked closely with the buy-out program.

Mr. Chairman, during the 1980's, private industry really popu-
larized the use of buy-outs as a way of achieving downsizing in a
manner that was humane and conducive to employee morale and
productivity. I don’t believe anyone would argue that private em-
ployers offered buy-outs only for the benefit of their employees,
they offered them because they also were good business, and that
means there was a bottom line. The same has been true in Govern-
ment.

In the fall of 1993, the Clinton administration’s National Per-
formance Review recommended that the Federal civilian nonpostal
workforce be reduced by 252,000 full-time positions by 1999. Con-
gress increased that figure to 272,900. With large scale downsizing
ahead, the administration looked to buy-outs as a way to help to
achieve downsizing in a manner that was orderly and cost effective
and would minimize disruption in the workplace.

Throughout the fall and the winter of 1993 and 1994, OPM
worked with OMB, the Congress, and other interested groups to
develop the Federal Workforce Restructuring Act, wl ich was
passed by the Congress and signed by the President in late March
1994. As you know, the legislation expired on March 31 of this
year.


57

ing federal employment since some payments will go to employees who would have
left anyway. We do not know how often that occurred because the data are still
being collected. Over the long term, however, savings from reduced employment lev-
els should more than offset any short-term costs of separating workers.

FOLLOWUP QUESTIONS From Hon, JOHN L. Mica AND ANSWERS FROM MR. BLUM

The Costs of Buyouts

Question 1: Can you estimate the savings resulting from the buyout program?

Answer: According to our estimates, savings from the buyout programs at the De-
partment of Defense (DoD) and at civilian agencies could accumulate to $18.6 billion

for the 1993-1997 period (see Table 1). That estimate assumes, based on data from
DoD and testimony by the Office of Personnel Management (OPM), that 157,300
employees will leave the government with an incentive payment—114,300 from DoD
and 43,000 from civilian agencies (see Table 2).

The Congressional Budget Office (CBO) derived its estimate of savi in the fol-
lowing manner. First, it used the projected number of buyouts described above to
calculate the savings in pay and benefits the government achieves as a result of re-
ductions in employment under the buyout program. Those savings will accumulate
to $23.2 billion through 1997. That estimate assumes that without buyouts, agencies
would not have reduced employment levels. It also assumes that the reductions the
government makes in employment are permanent and that the jobs abolished are
at the same level as those vacated by employees who take buyouts. Based on data
from OPM, CBO assumed that the average 1994 salary of employees taking buyouts
is $40,000 for employees at DoD and $50,000 for employees at civilian agencies.

Next, CBO deducted from the savings in pay and benefits the costs that arise
under the buyout program. The cost of the incentive payments themselves, which
CBO estimates as averaging about $24,000 per employee, will total $3.8 billion
through 1997.

Most of the remaining cost covers the impact of the buyout program on pension
payments over the next five years. A buyout program changes pension payments by
Prompting some employees to retire earlier than they would have otherwise. Those
employees take a smaller pension but begin to collect it sooner. CBO’s estimate of
retirement costs is the difference, over a five-year period, between the pension Pay:
ments the government makes under a buyout program and the payments it would
have made without such a program. The estimate assumes that the initial pension
for employees who retire with @ ‘buyout averages about $ 17,000.

TABLE 1.—SAVINGS AND COSTS UNDER THE BUYOUT PROGRAM, 1993-1997
{in bilons of dollars)

Come

4993 19949951886 987 Fe
ar
Total

Savings in Pay and Benefits... stn 08 24 47) 68 «8h 232
Costs:
Incentives Paid 07 09 «11 06 05 38
Retirement Ol 02 02 02 O1 08
Net Savings nnn "14 33 60 7.9186

SOURCE: Congressional Budget Office using data provided by the Otice of Personnel Management and the Department of Oetense
* Less than $50 millon

TABLE 2—EMPLOYEE SEPARATIONS UNDER BUYOUT PROGRAMS, 1993-1997

in thousands}
19931994 199519961997 Total
Department of Defense 300 210 258 215 16.0 114.3

Civilian Agencies “ na 160 208 31 31 430

300 37.0 466 286 19.1 157.3
Budget Ottice using data provided by the Department of Defense and the Office of Personnel Management
cable.



40

data, non-Defense agencies expect to pay about 37,000 buyouts by the end of Fiscal
Year 1995. Defense agencies, which are covered under a separate buyout authority
enacted in January 1993, expect to pay about 69,000 buyouts by the end of Fiscal
Year 1995. The buyouts generally helped agencies eliminate staff thereby reducing
the need for involuntary reductions-in-force. Nearly 40 percent of the non-Defense
buyouts were paid to those employees in overhead positions such as personnel,
budget, procurement, and accounting. About 70 percent went to mid- to upper-level
employees,

1e strategy used to implement the buyout authority was based on the goals of
the National Performance Review (NPR). To ensure that agencies’ downsizing ef-
forts were consistent with NPR's goals, the President directed federal agencies to
submit streamlining plans to OMB. Each plan was to be asseased by OMB according
to a checklist of critical factors. OMB said that the quality of the plans played an
important role in OMB’s decisions to approve or disapprove agencies’ buyout re-
quests.

Four major agencies that offered buyouts—Education, Justice, Energy, and the
Environmental Protection Agency—were also authorized staff increases. Agency offi-
cials said that they used the buyout authority to reduce staff in areas where mission
priorities had changed.

Agencies reported experiencing different effects from the workforce reductions.
Some agencies said that they were dealing successfully with reduced staff by using
automation more extensively and/or redeploying staff. Other agencies said they ex-
perienced adverse effects such as reduced service to the public, backlogged work,
and lost expertise.

Mr. Chairman and Members of the Subcommittee:

We are pleased to be here today to present our observations on the way federal
agencies have used the buyout authority enacted under the Federal Workforce Re-
structuring Act of 1994 (P.L. 103-226). We have been monitoring federal downsi: ng
efforts since the Act’s inception; our statement today is the latest in a series of brief-
ings and testimonies designed to keep Congress fully informed of the progress being
made in reducing the size of the federal workforce.

At your request, our statement will provide information on:

—the results of the buyouts,

—the management strategy used to implement the buyout authority,

—the restructuring plans developed by those agencies that offered buyouts
while also being authorized staff increases,

—the effects on agencies of the workforce reductions, and

—restructuring initiatives at the Department of State.

We obtained information on the results of the buyouts and the management strat-
egy used to implement them by interviewing officials from the Office of Management
and Budget (OMB) and the Office of Personne] Management (OPM), and by review-
ing the statistics and documents they provided. Data on individual agencies were
obtained by interviewing agency budget and personnel officials and by examinin,
budget documents and streamlining plans. We also used the results of surveys o!
major non-Defense agencies we performed in August 1994 and February 1995. Ac-
cording to OPM data, the agencies in our surveys made more than 98 percent of
the nearly 15,100 buyouts reported by non-Defense agencies in Fiscal Year 1994.

Given that federal downsizing efforts are still in process, our observations today
should be considered preliminary. Although the governmentwide authority for non-
Defense agencies to offer buyouts expired on March 31, 1995, the full effects of these
reductions will not be apparent for some time. Moreover, plans to reduce the size
of the federal workforce still further are under consideration, making it premature
to draw any final conclusions.

We will be preparing a comprehensive report on federal downsizing for issuance
to the Subcommittee this fall. In the interim, we would like to highlight the suc-
cesses and potential problems arising from agencies’ use of the buyout authority so
that any buyout legislation that might be proposed in the future can be evaluated
in light of these experiences.

BACKGROUND ON THE BUYOUT PROGRAM

The Federal Workforce Restructuring Act of 1994 (P.L. 103-226) requires the fed-
eral Rovernment to reduce its workforce by 272,900 full-time equivalent (FTE) posi-
tions between 1993 and 1999. (NOTE: According to OMB guidance, an FTE or work
year generally includes 260 compensable days, or 2,080 hours. These hours include
straight-time hours only and exclude overtime and holiday hours.) To accomplish
this downsizing while minimizing reductions-in-force (RIFs), the Act allowed non-
Defense executive branch agencies, with OMB approval, to pay buyouts to employ-


81

to take this first, essential step leads to many problems—not the least of which is
asking people to set out on a journey without any understanding of the destination.

Another lesson involves the humane treatment of people. This is reflected in part
by providing career counseling services and financial planning services. For exam-
ple, there are often people who would take the opportunity offered by an early re-
tirement window but fear their own ability to manage their finances well enough
to have a secure retirement. Case in point was a client of mine who offered an early
out program—and the average eligible employee would receive a lump sum payment
from the retirement program of $280,000. The response to the early out was
underwhelming to say the least, so we asked the eligible employees to anonymously
phone in their concerns. The major concern was lack of financial and investment
education, The company responded by providing that service as part of the early
out—and participation skyrocketed.

As for buyout tactics, they work in the private sector to the extent that they are
perceived a3 generous; that they provide health care coverage for a reasonable pe-
riod of time; and that the individual perceives that he or she has skills that are
wanted in the marketplace. In this sense, the public sector faces these challenges
plus one other—the perception (unfair though it may be) that government workers
do not work as hard as their counterparts in the private sector. Any government
worker considering accepting a buyout may well be asking: “Because of the fact that
Tve worked in government for a long time, will I be entering the job market with
already one strike against me?”

‘The answer to that question should be “no”—as long as long service government
workers receive advise and counseling on how to re-enter the private sector market-
place.

As for measuring restructuring success, it is true that public entities cannot apply
typical bottom line measurements. However, just achieving the desired financial re-
sults can be misleading. There have been many private firms that used restructur-
ing to get the numbers right, but in the process they destroyed the spirit of their
organizations. And, in the long run, no organization can be successful if the spirit
of the workforce and the values which they feel the company stands for are de-
stroyed. Ultimately, the primary determinant of restructuring success has to be cus-
tomer satisfaction. Logically, this would be as true for a government agency as for
private business.

We would encourage any government entity that is restructuring to have a good
handle on the bench strength it needs to fulfill its mission. If jobs are eliminated
as part of the government reform process, it does not mean productivity and cus-
tomer satisfaction must suffer. Indeed, 77% of the businesses in our study found re-
structuring had a positive impact on productivity, and 67% found it had a positive
impact on customer satisfaction. These results occurred because in these organiza-
tions restructuring process wasn’t just about downsizing, it also included improve-
ment in work processes. Our recommendation, therefore, is that the reengineering
of work processes be an integral part of any government agency's restructuring.

T will close by sharing with you one final observation about restructuring—all in-
dications are that it will be part of the economic environment for many years to
come. Earlier this year Watson Wyatt completed a study of business and human re-
sources issues in Canada, France, Germany, Japan, the United Kingdom and the
USA. In all of these economies, senior executives made it clear that they plan to
continue to use restructuring as a key method for keeping their organizations com-
petitive. Based on our collective experience with restructuring, we believe that it is
imperative that the definition of restructuring move beyond downsizing—and be-
come defined as a process that is used to rebuild and renew rather than reduce. The
future will not be won by the economies that are the best at shrinking but, rather,
by those that are the best at growing. Restructuring—when done well—is about
growth.

Mr. Mica. I thank you for your comprehensive testimony in ad-
dressing some of the issues and questions that we asked.

I guess part of the problem that we have in the Federal Govern-
ment is developing the vision of where we want to be. Right now
I guess we are involved in sort of an identity crisis in trying to fig-
ure out what the role of the Federal Government is in some of the
traditional areas for which the Federal Government was estab-
lished. Is that our true role, or does it go beyond and include all
the sundry agencies and activities that we have assumed and we
sort that out backwards here?



28

eople affected is about $16,800, and their severance pay is about
37.300 on average. So that we come up with a total of $36,300, and,
again, as we have said before, Mr. Moran, these costs only reflect
the dollar costs. The disruption internally to an organization going
through a RIF is beyond anything on this sheet of paper or any of
the statistics I can give you or budget numbers as far as negative
goes, so that voluntary departure, whenever possible, is the way to

go.

Mr. KLEIN. GAO, by the way, did a separate calculation on this
several years ago, and we come up with the same kinds of conclu-
sions.

Mr. Moran. I understand that the system is set up so that it
would only reflect bad judgment on a supervisor's part to try to get
rid of anybody even if they were dumped on them from some other
supervisor who had more influence. I have never seen anybody
RIFed effectively in the Federal Government. But one of the ways
of dealing with that is to change the Civil Service Code. Have you
considered doing that, changing the bumping rights and the—all of
the things that mitigate against the possibility of anyone actually
being fired?

You see, what I’m getting at again is this quality issue. All of the
people who have mobility are those who would be most likely to
take buy-outs and least likely to stay in an agency that was going
to get downsized or if they felt that the Federal Government was
no longer an employer that would give you reason to be proud of
your profession, et cetera, then they are going to take up and leave

cause they know they can probably get paid higher outside the
Federal Government. But those people who have no other options,
who in fact are employed by the Federal Government because it
provides security and they know that they can—and that in fact is
their goal, they know that they can never effectively be fired with-
out it becoming a very punitive experience for the supervisor and
the agency that tries to fire them, those are the people that are
least likely to take buy-outs, and so you would wind up with a dis-
proportionate number of those people.

Now I understand from your response that you have been able
to keep everybody happy and follow the process and so on and you
have had very few EEOC complaints, et cetera, but, again, that
doesn’t get at the concern—I’m talking a little while so you can or-

anize your answer here—that doesn’t get at my concern at all. In
‘act, it may underscore the concern.

So now I’m ready to ask you, what is in the civil service reform
and the extent to which you enable managers to retain the highest
quality “employees and effectively remove the lowest quality em-
ployees?

Mr. KING. I think the RIF regulations by law, as you are suggest-
ing, are mechanistic and they fall in that way, but there is a mana-
genal input that almost no Federal manager wants to address. If

give you an “outstanding” rating, I also give you 20 years senior-
ity; if I give you “fully successful,” I give you 12 years seniority;
and if I give you “exceeds fully successful,” I give you 16 years se-
niority.

It is interesting to note—and, again, I will draw from my own
organization—when we looked at this, the number of people who


45

Some Agencies Said They Were Coping Successfully With Staff Reductions

Several agencies we contacted told us they were using a variety of strategies to
cope with the workforce reductions. These strategies included restructuring work,
using automation more extensively, and redeploying staff. For example, head-
quarters officials from the Department of the Interior told us that the agency has
reduced its personnel staff by about 860 positions, or about one-half. To maintain
personnel services, the human resource office has “reinvented” its mission so that
the personnelists now act as consultants to agency managers, while the managers
are being given the authority to develop position descriptions, advertise positions,
rate and rank employees, and make hiring selections. Personnel specialists in this
environment serve as advisors. We were also told that agency managers can draw
upon a new computer database of position descriptions to help in creating the posi-
tion descriptions they need.

With regard to other agencies, the Federal Aviation Administration said that it
was replacing certain written certification tests with computer-assisted examina-
tions, thus al lowing field staff to be redeployed to other, more essential line activi-
ties. Likewise, as a result of automation, the Bureau of the Census said it was im-
proving its procurement activities.

Some Agencies Have Reported Adverse Effects of Workforce Reductions

In reviewing the effects of the buyouts, we were told of several instances of how
downsizing had adversely affected agencies. Most of these appeared to result from
agencies trying to do the same or more work with fewer people.

For example, representatives of a regional office of the U.S, Fish and Wildlife
Service (FWS) described a number of adverse effects of downsizing at its various
program offices, In the Federal Aid Program office, officials noted that the office is
now staffed at 12 FTEs, which is 5 FTEs fewer than they considered optimum for
program effectiveness and productivity. As a consequence, they said that the office
now has a skeleton workforce that is unable to perform many auditing and monitor-
ing functions. The officials were concerned that the staff reductions could result in
misuse of federal funds. At other offices, FWS representatives noted that service to
the public has declined significantly, reports and correspondence receive less review
and are often delayed, and vendors recawve ments more slowly. Less quantifiable
impacts reported include loss of expertise, lower morale, and the cascading of work
onto other employees.

Another concern that has been raised is the backfilling of positions with contract
personnel of positions vacated through buyouts. While it is still too early to tell the
extent that this may be occurring, we found such backfilling had already taken
place at NASA’s Lewis Research Center. The Center reported that 18 of the 199 em-
ployees that received buyouts in Fiscal Year 1994 returned to Lewis as employees
of service contractors. All but one received the maximum allowable buyout of
$25,000, and 5 of the 18 returned within a week of leaving the agency. NASA offi-
cials told us that there exists no legal or contractual authority ‘tr the Center to
interfere with the contractors’ decisions to hire the former employees rather than
other individuals with the same skills. Nevertheless, to avoid an appearance of im-
propriety, the Center director has recently stopped the practice of using contractors
to fill positions vacated by civil servants.

While our review thus far suggests that the outsourcing of work previously done
by civil servants is not a pervasive problem, we are concerned that this practice
could become more widespread in the future, especially as agencies downsize in the
face of steady or increasing workloads. In such situations, any savings realized from
buyouts would be offset by contracting costs.

nother problem we noted is the contracting out of work without adequate cost
comparisons. Section 5(g) of the Workforce Restructuring Act prohibits an increase
in the procurement of service contracts as a result of buyouts, unless a cost compari-
son shows that such contracts are to the financial advantage of the government. The
absence of cost comparisons makes it impossible to determine whether such
outsourcing is beneficial. To date, we have found isolated instances of contracti
activities that occurred without the benefit of cost comparisons. In the case cite
above, for example, officials from NASA’s Lewis Research Center told us that cost
comparisons were not necessary because the former employees were hired under
task orders of an existing contract, and thus section 5(g) of the Workforce Restruc-
turing Act did not apply.

‘THE DEPARTMENT OF STATE'S USE OF BUYOUTS

State Department officials reported to us that 736 buyouts have been granted dur-
ing Fiscal Years 1994 and 1995. About 72 percent of these have gone to civil service


27

Mr. Kine. I think we have gone beyond them. We have had a lot
of success because, again, there are costs that sometimes don’t ap-
pear.

Let me use, for example, the cost of unemployment insurance,
which goes up. There are a number of issues that come in here, you
know, that aren’t really built into the equation. I think it should
be a multidimensional approach if you are talking about major
downsizing. I think the Department of Defense understands this
very clearly. I’m not sure that our other colleagues in Government
who have had little, if any, experience on the downsizing of budget-
ing fully appreciate that, No. 1, the threat or the loss of your job
is the equivalent to a death in the family and that the work that
one does isn’t just the simple kind of mechanistic thing that all too
often we read about. If we are really going to be addressing the
genuine concerns of our workers, there will be ongoing issues with
the workforce that is left.

So not only is it the humane thing to do, it is the prudent thing
to do from a business perspective, and that is to work with people
on outplacement as we are doing and to understand the cir-
cumstances they are in and to work with them from beginning to
end.

Our outplacement program in our agency—as I said, we have
downsized 25 percent as of this morning, and we have outplaced
over 90 percent of our people ourselves, and it is interesting to note
that 60 percent of them, consistent with Mr. Moran’s observation,
went into the private sector. Others went into other governmental
agencies at various levels, but 60 percent went into the private sec-
tor, and that was right across the board, and a number of these
because they were being RIFed, were our younger, less experienced
people whom we were able to work with.

We worked with them in a constructive fashion, and we made
the commitment to them, and, in turn, to us, that we were going
to be successful in this work. So that there are a number of things
that fit together. It isn’t a single item, it is a question, as you
know, Mr. Chairman, of using it and looking at it from a systems
point of view and putting it forward and dealing with folks, though,
as human beings, not just statistics.

Mr. Mica. Well, we appreciate your observations.

Mr. Moran.

Mr. Moran. Thank you, Mr. Chairman.

How many people have actually been RIFed since we started the
downsizing?

Mr. KING. About 15,000 would be the number across——

Mr. KLEIN. Both Defense and non-Defense.

Mr. Moran. It has been said that the average cost of a RIF is
$36,000.

Mr. KING. Correct.

Mr. Moran. How do you derive that?

Mr. Kinc. Let me just—there is a little breakout here. The per-
sonnel processing cost is about $4,100. Their annual leave is about
$4,000. The appeals cost, because usually you affect two other peo-
ple on a RIF, so invariably they generate an enormous number of
appeals. Unemployment is $1,700. By the way, the appeals cost is
around $2,400 average. The pay and grade retention for the other


64

In general, I would agree with the point that has been made by
Chairman Mica and yourself that planning is absolutely essential
to any sort of downsizing effort and that the first thing that should
be done is, before deciding to cut a specific number in a specific
agency, there should be some specific planning as to what the work
in that agency is going to look like, how it is going to be organized,
and how we can target those buy-outs or whatever method is ac-
cepted to get rid of the people that are performing jobs that we
don’t need to have performed any more. It would be a mistake, I
think, just to cut a blanket number without having a very clear
sense of what impact that would be on the productivity and the
customer service offered by that agency. So that clearly is true.

You are suggesting, I believe, that the RIF rules should be revis-
ited in some ways to prevent them having the very negative effect
they now have on agency operations, and I would say that we do
not have specific suggestions on that. We have taken the position
that RIF’s are not the preferred method of downsizing and should
be avoided. Presumably you could structure RIF’s so that they
would have less of an impact on agency operations such as limiting
the amount of bumping and retreating that could take place. But
when you do that you are also limiting the protections offered to
certain classes of employees, and that is really a policy issue that
we don’t have a position on right now.

Mr. Moran. How about your sister agency?

Mr. BLUM. Mr. Moran, the Con; fessional Budget Office does not
make policy recommendations to the Congress, so I am not in a po-
sition to make any specific recommendations. But taking another
look at the RIF rules seems to me eminently sensible given the
costs that are attributed to it, the disruption effects, and so forth.
That seems to be an obvious area to examine.

Mr. Moran. Well, thank you.

OK, Mr. Chairman. I think that is the conclusion of much of our
hearing really, that we need some civil service reform. We probably
should have gotten at civil service reform before we even started
the downsizing effort. It would have made a lot more sense. We
could have saved money and ultimately could have served the
American taxpayers better. But given the fact that we didn’t, we
don’t even have the legislation at this point.

Mr. Mica. We don’t have a proposal at this point, and I think
you are correct. We will be occupying a good part of the steamy
summer looking at that, hopefully.

Gentlemen, we do have a vote right now. If you wouldn’t mind,
we will take about a 20-minute recess, which will give Members
time to go over and come back. Mrs. Morella has some questions,
and then we will finish this panel and go on to the last.

We will recess the hearing for about 20 minutes.

Thank you.

[Recess.]

Mr. Mica. If we could call the witnesses back to order and recon-
vene our meeting.

Mr. Bowling and Mr. Blum, I would like to yield for the purpose
of questions at this time to Mrs. Morella.

Mrs. MorELLA. Thank you.


4

bill, which encouraged buy-outs. So I’m a new Member here, and
I’m just looking to see how all of this is going to affect the caliber
of people who work for the Federal Government. I do have a con-
cern, but I’m going to listen and then comment later.

Thank you.

[The prepared statement of Hon. Frank Mascara follows:]

PREPARED STATEMENT OF HON. FRANK MASCARA, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF PENNSYLVANIA

Good morning, Mr. Chairman. As always it is good to be here. I want to thank
ou for holding this hearing so we can carefully examine the results of the Federal
Workforce Restructuring Act.

I was not a Member of Congress nor a member of this subcommittee when this
legislation allowing government-wide buyouts was enacted. However, I must say the
evidence we will hear this morning clearly confirms these buyouts have been more
boon than boondoggle.

Before the Federal Workforce Restructuring Act expired this spring, almost 80,000
defense and non-defense Federal workers took advantage of the buyouts. The good
news is that most of these employees were in the middle management levels tar-
geted for reduction by Vice President Gore’s reinventing government efforts.

As a result, for the first time in many years, the government's attrition rate
climbed and agencies are ahead of schedule meeting the 272,900 drop in full-time
job slots required by last year’s crime bill.

Perhaps most significantly, the buyouts have allowed the government to reduce
its workforce in a very humane fashion. Instead of facing massive layoffs and pink
slips, employees were provided the financial security and incentive to retire or to
move along to private sector job opportunities.

The whole process was targeted and really very civilized. It was much preferable
to the mass confusion and low morale that are inherent in an uncontrollable reduc-
tion in force, or RIF as you call it down here.

If there were any snafus in the year-long buyout process, the most grievous seems
to be that agencies and departments were slow to develop the organization plans
required to move forward with their buyouts. Some departments also lost talented
employees who will be impossible to replace.

loreover, I know my Republican colleagues will point out that despite the re-
quirement that one full-time slot be cut for each buyout granted, employment at
several departments, Education, Energy, Justice and the Environmental tection
Agency, increased. However, the facts are this is the result of increased responsibil-
ities added by Congress last year and the conversion of outside contracts to in-house
workloads.

The point of today’s hearing is to determine whether buyouts should be reauthor-
ized and utilized in such situations as the proposed reshuffling of our Nation's for-
eign policy operations which includes plans to eliminate the Department of State.

must say | think such a discussion is putting the cart before the horse. Moreover
this whole exercise would be meaningless if my Republican colleagues succeed in
their plans to wholesale eliminate departments left and right.

If that scenario comes true, and we are left with a shell of a government, the
numbers of employees let go would make the costs of buyouts prohibitive, pink sli
would, by necessity, be the order of the day. Federal employees and citizens alike
would suffer.

Basically, 1 support the buyout concept and feel it has a role to play in govern-
ment personnel policies. Still, I remain convinced our Nation would be better served
in the long run by allowing departments and agencies to proceed with their
reinventing government reviews. This would obviously lead to further reductions in
the Federa] workforce.

Simply put, I am not a fan of the “meat ax” approach and feel it should be avoided
at all costs.

Thank you, Mr. Chairman.

Mr. Mica. I thank the gentleman.

We do value your experience, particularly in local and State gov-
ernment, and the expertise you bring to our panel. I’m a new chair-
man so I’m learning too, and, again, I don’t have any preconceived
notions.


18

As an example, about 40 percent of the buy-outs were in over-
head functions that we had determined—the administration had
determined were targets for downsizing like personnel manage-
ment, procurement, finance, those kinds of overhead functions. We
know for a fact, for example, in our personnel community that the
agencies are downsizing those staffs. For example, the Interior De-
partment has reduced half of its staff in personnel. They had buy-
outs there. They are not refilling jobs. They are under great inter-
nal pressure, budget pressure, to reduce those staffs and reduce
senior level jobs.

Mr. Mica. Thank you.

I’ve taken more than my time, and I’ll yield to our ranking mem-
ber, Mr. Moran.

Mr. Moran. Thank you, Mr. Chairman.

I have a sense that a number of managers felt under the gun to
reach the buy-out targets and in fact have been guided by that
pressure rather than the desire to be able to implement the agen-
cy’s mission most effectively, and so anyone who was willing to
leave, seized the opportunity rather than the agency in determin-
ing the relative need of that person within the organization. In fact
many of the people who have left because they knew they would
have opportunities in the private sector, which generally indicates
they were the more marketable and had the most to deliver to
whatever organization they were part of.

I’m wondering whether you have been able to conduct exit inter-
views with the individuals and with their supervisors to get a
sense of what is happening to the agency’s mission and exactly wh:
they left and whether in fact they were going to a higher paid jol
or whether they might be going into a contractual arrangement
with the Federal Government for more money.

Mr. Kina. Exit interviews are done by the agencies themselves.

Mr. Moran. Do you compile the results though?

Mr. KING. Of who leaves or where——

Mr. Moran. Well, is anybody then taking the exit interviews and
making some sense out of them, deducing why people are levering
and what kinds of trends——

Mr. Kine. I would ask Mr. Klein——

Mr. KLEIN. There were several things we tried to do in this. Of
course, one area for error is procedures, and we tried to take care
of that by having briefings and discussions and so forth for all the
agencies and the people running the buyout programs.

The other is the one you put your finger on, which is sort of a
judgment problem, someone allowing someone to leave or pressur-
ing someone to leave or treating someone perhaps unfairly during
that process, or a manager having a question how he might pro-
ceed.

What we did there was, we set up a hotline in OPM. In fact, we
received over 2,000 calls a week for a number of weeks from man-
agers, agencies, and employees who had questions: Why am I not
allowed to have a buy-out, or why I feel that perhaps this is unfair.
We tried to handle those questions for the employee, talked to their
managers, talked to their personnel people to resolve those issues
before they became a problem.


82

We are going to do the budget. In fact, we start on it in this
afternoon before the House and Senate, and then we do the appro-
priations, and sometimes the authorization gets sort of tucked in
between, and it all comes together in a disorganized fashion. In the
meantime, it is difficult for government, particularly the Federal
Government, to proceed in the orderly fashion and the standard
you have described that can sometimes be achieved in the private
sector. It sounds like even they have had problems with achieving
those goals.

I just wondered if you had any recommendations for the record
of any good private sector models or examples you have seen at any
other level of government, State or local buy-out programs that you
think are exemplary.

Mr. ELLIS. Well, the ones that I have seen that have worked the
best obviously have been perceived as fair by the employees. There
is a fairness issue.

Mr. Mica. Is there a company or someone or another level of
Government?

Mr. EL.is. Well, I think Ameritech was a company that has done
this very well; Amoco is another company, both of whom I have
worked with, who have done this very well. In both companies
there was a real sense of trying to be very fair to people. Dr. Scott-
Morgan dealt with that issue of the survivors; and I think it is a
very important point that you have to look at what happens after
and what we have lost.

One of the issues we see now emerging is that in a lot of organi-
zations where you are beginning to see a talent gap; and many
companies are now recruiting back some of these people and using
them as consultants. So defining the talent you need to keep is a
tough issue. But where I have seen it work best is in companies
who have been very thoughtful in their process.

Mr. Mica. Did you have any response, Dr. Scott-Morgan?

Dr. ScoTT-MorGaNn. Yes, I would utterly agree with that, but I
would like to add that I think from the discussions we were hear-
ing this morning the one area that I would like to see built in
stronger than it appears to be is a reflection, first of all, of what
the appropriate skills profile is that you want for the future, given
the difficulty, first of all, of coming up with a vision, as you say.
But even given that, what is the appropriate profile to fulfill it, and
then using that as part of the vision to work backwards and say,
therefore, who are the people that are most appropriate for it.

We were hearing the discussion earlier about the potential prob-
lem that the more senior people would take the buy-out option and
those might be the ones that were “best”—that you were losing val-
uable skills. There is also, of course, the counter that the sort of
people who have a willingness to think out of the box may actuall
not have the same skills as the past, and there is a clear tradeo
that needs to be managed there. I think you can only do that by
first of all knowing what are the appropriate skills that you are
looking for and then seeking them out quite explicitly as people ei-
ther are leaving or as you are offering the new buy-out for the fu-
ture.

Mr. Mica. You set this out so logically. Obviously you haven’t
dealt with the Federal Government or Congress.


55

as cuts in employment are permanent. Specifically, CBO estimates that the govern-
ment saves two to five times the near-term cost by the fifth year and 12 to 33 times
by the 30th year, provided that workers who leave are not replaced later on.

Separation incentives also offer certain advantages over other methods of reduc-

staff that may be worth the higher near-term costs.

fore discussing those advantages, however, let me tell you a little more about
the near-term costs. In our 1993 analysis, CBO observed that separation incentives
can be expensive in the short term because an organization may end up making
many more payments than it has jobs to abolish. Organizations may choose to offer
incentives broadly to ensure equity. The Postal Service, for example, offered incen-
tives to all employees who were eligible for early or regular retirement. Based on
that experience, the Federal Workforce Restructuring Act directed that total agency
staff positions be reduced by the number of people who were given voluntary separa-
tion payments,

Even in agencies that try to target incentives, some payments may go to employ-
ees who were planning to leave voluntarily but delayed plans to separate in order
to receive a cash payment. That phenomenon may help to explain both the drop in
the retirement rates for civilian agencies in 1992 and 1993, when separation incen-
tives were being considered, and the rise in retirements in 1994 after the Kongress

ranted those agencies authority to offer cash separation incentives (see Table 1).

similar pattern occurred at the Department of Defense and the U.S. Postal Serv-
jce just before and just after incentives were offered.

TABLE 1.—RECENT RETIREMENTS FROM FEDERAL CIVILIAN AGENCIES

(By calendar year)
Iverage An- Retirements. ver
ral Rete: fe,
‘Annual
Retie-
t992 19831994" ant,
Incentives* 1998

Number (Thousands) ........ snes 191 139 158 312-203
Rate (Percent)*** nan z = 22015 17 3422

sed on data for 1989 through 1991
Includes §,500 early retirements.

‘Number of retirements per 100 employees
‘SOURCE: Congressionat Budget Otice

Data for the 1992-1994 period suggest that the government did not retire many
more employees than it would have in the absence of an incentive program: many
employees who retired might have left federal service anyway but delayed their re-
tirement plans to qualify for a separation incentive. Of course, those data are pre-
liminary and do not reflect experience in 1995. In addition, they cover many early
retirements. The decision of some employees to delay their plans may have had
more to do with the long period over which the government considered offering in-
centives than with any limitation inherent in incentive programs.

The benefits of voluntary separation incentives may justify near-term costs in sev-
eral ways. Separation incentive programs, for example, help to avoid layoffs, espe-
cially if planned reductions are concentrated by occupation or area, as was the case
with base closings at the Department of Defense. Separation incentives can also
help with efforts to restructure a workforce. The National Performance Review has
called for streamlining government and reducing administrative overhead. Consist-
ent with those objectives, about 70 percent of the payments made in 1994 to General
Schedule employees in civilian agencies went to those in the highest five grades, 11
through 15. In addition, the largest occupational group affected was general admin-
istration and support, alone accounting for almost 25 percent of all separation incen-
tives paid. Finally, separation incentives are thought to bolster employee morale,
which can be shaken by employment cuts.

THE COSTS, SAVINGS, AND OTHER CONSEQUENCES OF LAYOFFS, HIRING FREEZES, AND
EARLY RETIREMENTS

We were asked to describe the costs and savings of the other methods the govern-
ment uses to cut employment. Those methods—laying off employees, imposing a
freeze on hiring, and increasing the number of employees who can retire early—do
not involve the near-term net costs that separation incentives do and in fact offer
first-year savings. Like separation incentives, those methods generate substantial


79

firm special ing in human resources and risk management. Thank you for inviting
me to testify before the committee.

Jn 1993—prior to my acceptance of my position as head of marketing for our
firm—I consulted on the employee relations aspects of change management. In that
role, I supervised our study of “Best Practices in Corporate Restructuring.” This
study was a follow BP to a 1991 study we conducted that examined corporate re-
structuring in the 1980's. Executives from 531 companies in the U.S. participated
in the 1993 study. 26% were CEOs; 51% senior human resource executives; and 23%
were executives from other areas of the participating organizations. We had rep
resentation from all industries, the largest being manufacturing (29%), banking/fi-
nance (11%), retail (8%), health care (8%) and high-tech (6%). 57% of the companies
employed 5,000 or more people; 41% employed 2,000 - 5,000 people. The study had
a sampling error of + 4%.

‘The purpose of the study was to define:

the forces driving the need for restructuring;

* the objectives of corporate restructuring in the 1980's and into the 1990's;

« the tactics used to achieve the objectives of restructuring;

* the barriers to achieving restructuring objectives;

* the result of restructuring efforts; an

« the key elements that are consistent in successful restructuring—the “best
practices”.

I will summarize first what we found to be the forces driving corporate restructur-
ing. Our 1991 study showed that corporate restructurings in the 1980's were driven
primarily by financial imperatives—u e need to reduce expenses, to increase profits
and to increase shareholder value. Our study showed that in the 1980's less than
50% of restructuring organizations—by their own assessment—achieved any of
these goals. By 1993 the reasons behind restructuring had changed somewhat: 75%
of organizations identified competitive pressure as a primary reason and 57% said
the economic recession was also a major driving force.

The objectives of restructuring also changed from the 1980's to the 1990’s. In the
1980’s the objectives of restructuring were overwhelmingly financial. By the 1990's
the financial objectives were still prevalent, but the new restructuring was looking
beyond financial to broader change objectives. Along with the financial objectives,
respondents also cited other key objectives—increase competitive advantage (64%),
increase productivity (58%), increase customer service (61%), improve decision-mak-
ing (57%) and reduce waste/inefficiency (53%).

e most common restructuring activities were reorganization and downsizing.
Very often these tactics were used together to achieve what many companies termed
their “right size.” As for downsizing tactics, many organizations Poceeded through
a series of steps to attain their desired employee population size. Ninety-one percent
used natural attrition of the workforce. Forty-four percent offered early retirement
windows and 43% offered a monetary severance package. Often these downsizing
tactics did not achieve the desired goals. Indeed, 72% of the organizations were also
required to use the tactic of involuntary severance.

{t is interesting to note that early retirement windows were most successful in
achieving downsizing goals when the programs offered supplemental income bene-
fits until early retirement age and some form of guaranteed heath care coverage
coupled with features designed to help individuals transition to their new situations.
For example organizations that offered financial planning, lifestyle workshops and
one-on-one counseling had an early acceptance rate of 20% or more, while those that
did not tended to have a 10% or less acceptance rate.

‘As noted earlier, voluntary severance programs were used by 43% of the organiza-
tions. The success of these programs—as is true with early retirement incentive—
depends in large part on the demographics of the workforce and the length of serv-
ice among employees. If an organization has a high percentage of older workers with
long service, the voluntary severance package (often one years pay for x number
of years of service) can and has proven attractive to many workers who feel they
have skills that make them employable elsewhere. However, voluntary severance
programs that do not offer paid or supplemental health care coverage for a period
of a least six months after severance are not as successful in achieving downsizing
objectives.

ere are two other issues that frequently drive acceptance of voluntary sever-
ance packages. The first is a working spouse. If the eligible employee’s spouse is em-
ployed, he or she is more likely to accept a voluntary severance or buyout. The sec-
ond factor is what we cal] the “writing on the wall” factor. The employee looks
around—the company is in serious financial trouble, or the skills needed to do the
work are changing rapidly, or technology seems to be taking over more and more
of the jobs—and concludes that he (or she) better take the offer while he can. It is



85

comprehensive records relating to the buy-out program. Again, I
thank both of you for your participation.

There being no further business before the subcommittee, this
subcommittee stands adjourned.

Thank you.

{Whereupon, at 1:25 p.m., the subcommittee was adjourned.]

°


62

purpose for which the grant was made. Under current law, the grantees refund
their interest earnings to the government. CBO estimates that under this provision
the Treasury would forgo collections of $500,000 per year.

Authority to Provide Services on a Reimbursable Basis. The bill contains several
sections that would allow the Department of State to accept reimbursements for
services and to credit the funds to the performing account. ‘ion 151 authorizes
the department to provide training services to corporate employees, their families,
and Congressional employees on a reimbursable basis. CBO estimates that collec-
tions would total less than $100,000 per year. Section 148 authorizes the State De-
partment to collect from insurance companies the reasonable costs of health care
services provided by the department beginning in 1997 and to use the collections
on health care services or other expenses. CBO estimates collections of $11.5 million
a year starting in 1997.

jirected Scorekeeping. Section 121 would direct a change in the scoring of budget
authority for lease-purchase agreements involving propert; foreign countries.
change would allow the State Department to incur obligations in excess of appro-
priated amounts. In most cases, acquiring property through a lease-purchase agree-
ment is more costly than buying the same property, but under section 121, such
agreements would require much less upfront budget authority than under current
law. Enacting the provision would thus encourage acquisition of property through
Jease-purchases, thereby increasing the government's long-term costs.

When measured using current scoring procedures, the use of additional lease-pur-
chase arrangements would add to the budget authority, obligations, and outlays as-
sociated with the State Department's acquisition of property in foreign countries
over the next several years. While CBO currently has no clear basis for estimating
those budgetary impacts, they could be substantial.

7. PAY-AS-YOU-GO CONSIDERATIONS:

The Balanced Budget and Emergency Deficit Control Act of 1985 sets up pay-as-

ou-go procedures for legislation alfecting direct spending or receipts through 1998.

the bill would have the following pay-as-you-go impact:

[By tiscal years, in milbors of dollars}

1995 1996 1997 1998

Change in Outlays ..... 0 6 8 3
Change in Receipts Not Applicable Not Applicable Not Applicable Not Applicable

8. ESTIMATED COST TO STATE AND LOCAL GOVERNMENTS: None.

9. ESTIMATE COMPARISON: None.

10. PREVIOUS CBO ESTIMATE: None

11. ESTIMATE PREPARED BY: Joseph C. Whitehill (202) 226-2840; Christopher
Duncan (202) 226-2840; and Wayne Boyington (202) 226-2820.

12. ESTIMATE APPROVED BY: Paul N. Van de Water, Assistant Director for
Budget Analysis.

Mr. Mica. I thank you, Mr. Blum, and Mr. Bowling.

I have a couple of questions. First of all, gentlemen, I think you
heard Mr. King give some testimony as to the cost savings and his
estimates. Do you have any reason to dispute any of the figures or
the basis on which he calculated the potential savings?

Mr. BowLinc. We haven’t done as thorough a job at looking at
this type of costing as CBO has, but I would say that in our looking
through those numbers, we did not see any information or assump-
tions that we would quarrel with.

Mr. Mica. Mr. Blum.

Mr. BLum. There may be some differences I think from the num-
bers Mr. King was citing this morning and the numbers that were
contained in our December 1993 report, but I think in the main
those differences are relatively minor in terms of the assumptions
that might have been made about the costs of the incentives pro-
grams or the costs of layoffs and so forth.



35

ferred by our central personnel referral system currently—over half
the people who are offered jobs turn them down, or don’t reply—
we now have a Government-wide job information system. Every job
is available in that electronic and telephone system.

What we are suggesting is, we allow people to apply for the job
they wish to be considered for rather than one we might refer them
to, and if they are well qualified for that job, they get the job. If
they meet that agency’s criteria for what they consider as com-
petent for that job, they get the job. So it is a different approach
to how we have a mandatory placement. It would be mandatory,
but we would put more of the control in the hands of the employees
rather than some central bureaucracy sending their name out to
jobs that we think they might be interested in.

Mrs. MorELLA. And this information is being disseminated to
employees and agencies so that there is kind of ‘aleveling——

Mr. KLEIN. Yes, ma’am, through our personnel community.

Mr. KiNG. By the way, we also want the folks to know how to
access that data, so that is part of the training. As you know, it
is not just throwing them a fish, it is teaching them how to.

Mrs. MoreE.LA. OK. I don’t want take up any more of your time
and the committee’s time, and I thank you very much for this cour-
tesy, Chairman Mica.

Mr. Mica. We thank the gentlelady. And, Mr. King and Mr.

Klein, we also thank you for your testimony and participation
today.
We have some additional questions, both from the majority and
the minority side, that will be submitted to you. Obviously, we
have raised a number of questions that need further response, and
will submit them to you.

Again, we thank you for your participation and your assistance,
and we have enjoyed working with you on this and some of the
other tough personnel problems that we face. We will excuse this
panel, and call the second panel, if I may.

Mr. Kine. Thank you, Mr. Chairman.

Mr. KLEIN. Thank you.

Mr. Mica. Mr. Tim Bowling of the General Accounting Office and
Mr. Jim Blum, Deputy Director of the Congressional Budget Office.

Gentlemen, if you will come and just stand for a second, I'll
swear you in.

[Witnesses sworn.]

Mr. Mica. Thank you.

Let the record reflect again that the witnesses answered in the
affirmative, and, again, we thank you for joining us today. Mr.
Bowling, from General Accounting Office, why don’t we start out
with you? Welcome, and the floor is yours for remarks.

STATEMENT OF TIM BOWLING, ASSOCIATE DIRECTOR, FED-
ERAL HUMAN RESOURCE MANAGEMENT ISSUES, GENERAL
GOVERNMENT DIVISION, GENERAL ACCOUNTING OFFICE;
AND JIM BLUM, DEPUTY DIRECTOR, CONGRESSIONAL
BUDGET OFFICE

Mr. BOWLING. Thank you very much, Mr. Chairman.
With your permission, I would like to read a shortened version
of my statement and submit the full text for the record.


1)

More damaging even than the fixation on head count reduction has been the
hardline, sometimes almost brutal approach to Teenginecrin that too many compa-
nies have adopted. This has important implications for the Federal buyout program.

Some of the most “change fatigued” organizations turn out to be those where
tough management believed they could force through a change in flagrant con-
travention with what felt important to people. However, once again, there is no evi-
dence that you can change what is important to people even under duress. On the
contrary, when management have tried to force through change in conflict with the
“unwritten rules” of an organization, the conflict has not tended to go away. Instead,
it has just been forced underground. And the harder management pushed, the more
the conflict was forced underground until the damage caused was so great that it
was recognized for what it was—often too late.

The real cost of the failed reengineerings that all too often result from an insensi-
tive management approach is not just the financial cost; it is that such callousness
damages the resilience of the workplace to change. Yet, these days continuous
change is the only route to sustainable competitive advantage. So anything that
damages the resilience of the workforce to ongoing change is poisoning the very life-
blood of the organization—its ability to compete in the fature, That is the true cost
of not taking account of the human face of change.

The effectiveness of “buyout” programs

There is now strong. evidence that the survivors of a downsizing can suffer almost
as much trauma as those that are let go. If the downsizing is handled in a cold and
antiseptic manner, those that remain in the company are left with the abiding mem-
ory of their friends and colleagues being apparently unfairly, even cruelly handled.
Particularly in organizations that previously offered a career for life, this can feel
like severe betrayal and a flagrant breach of the psychological contract of “loyalty
in return for job security.” Many survivors end up thinking: “If top management can
handle my friends like that, then I can never trust management again. One day it
will be my turn.”

Carefully handled buyout programs can therefore be very advantageous. Although
many companies originally considered buyouts as a way of getting legal release from
any possible discrimination suits (especially on grounds of age), in practice the
greatest benefits may have come from the higher morale of those remaining in the
company. Early retirement, temporarily enhanced severance payments, job counsel-
ing, retraining courses, and outplacement have all proved effective, although most.
schemes are now far less generous that a few years ago.

The greatest problem in the various buyout programs has been in creating pro-
grams that did not result in the most marketable (often the “best”) people jumping
ship early, leaving a band of mediocrity to carry the company through major change.
Even attempts to select the people who should be encouraged to take the buyout
package have proved highly susceptible to camouflage and subversion.

Learning for the future

One of the most critical lessons from the last few years is that managing
restructurings only by focussing on the formal, official, tangible, numerical, aspects
of the business is insufficient. Successful companies also put tremendous effort into
reflecting the human face of change in pragmatic ways. Four main areas have be-
come crucial.

Firstly, the vision of the future has to be one that people will want to build. Mis-
sion statements, strategies and goals have to be recast so as to embed “emotional
magnets” that will pull the organization onward and upward through change, even
when the company is not in crisis (which anyway is not sustainable). Simply com-
municating the old style, insipid, uninspiring strategies of the past is insufficient.
Corporate goals and people need to be aligned with each other.

Secondly, managers must take account of the “unwritten rules of the game” that
are within every organization. When s group of people resists change, what they do
makes sense—at least to them. People outside the |p may not understand why
the behavior is logical and rational, but the people in the group do. The key lesson
of this is that if the behavioral barriers to change are caused by unwritten rules
that are logical, then if managers uncover that logic it gives them a chance to do
something logical to remove the barriers. Intuition (based on experience of the past)
has proved inadequate during the rapid and major changes that occur when restruc-
turing.

Thirdly, successful restructurings involve eo) le in more pragmatic ways that just
telling employees that they are “empowered”. The best approaches encourage
ple-driven results, so that the organization pulls the change through, rather than



36

Mr. Mica. We look forward to that.

Mr. BOWLING. Thank you.

I’m pleased to be here today to present our observations on the
way Federal agencies have used the buy-out authority enacted
under the Federal Workforce Restructuring Act of 1994. At your re-
quest, my statement will provide information on the results of the
buy-outs, the management strategy used to implement the buy-out
authority, the restructuring plans developed by those agencies that
offered buy-outs while also being authorized staff increases, the ef-
fects on agencies of the workforce reductions, and restructuring ini-
tiatives at the Department of State.

Given that Federal downsizing efforts are still in process, our ob-
servations today should be considered preliminary. Although the
Government-wide authority for non-Defense agencies to offer buy-
outs expired on March 31, 1995, the full effects of some of these
reductions will not be apparent for some time. Moreover, plans to
reduce the size of the Federal workforce still further are under con-
sideration, making it premature to draw any final conclusions. We
will be preparing a comprehensive report on Federal downsizing for
issuance to this subcommittee in the fall.

According to the latest OMB data, non-Defense agencies expect
to pay roughly 36,800 buy-outs between March 1994 and the end
of fiscal year 1995. The Department of Defense expects to pay
68,800 buy-outs by the end of fiscal year 1995. An additional 6,200
deferred buy-outs are expected in fiscal years 1996 and 1997.

Most of the demographic information that has been reported thus
far on the buy-outs is for fiscal year 1994. As more comprehensive
data become available, we will include it as part of the longer-term
study that we are preparing for the subcommittee. Until then, the
latest. demographic information we were able to obtain from OPM
includes the following facts.

As of March 7, 1995, 43 non-Defense agencies reported paying
buy-outs in fiscal year 1994 and/or 1995. Of the fiscal year 1994
buy-outs paid by non-Defense agencies, roughly 38 percent went to
employees in overhead positions such as general administration,
personnel, budgeting, accounting, and supply; 69 percent went to
mid- to upper-level employees; that is, in grades GS-11 up through
the SES ranks. And, finally ,.in fiscal year 1994 males received 62.9
percent of the buy-outs while females received about 37 percent;
minorities received roughly 24 percent of the buy-outs compared to
about 76 percent for nonminorities.

Table 1 in our statement shows selected characteristics of three
categories of employees who received buy-outs in fiscal year 1994:
Those who were eligible for regular optional retirement, those who
retired early, and those who resigned. In particular, I would like
to draw your attention to the fact that the average age of those
taking buy-outs who were eligible for retirement is 60, which is
about 1 year less than usual. So it appears that some people are
in fact taking retirements earlier than they otherwise would have.

There is also our August 1994 survey of 34 non-Defense agencies
which showed that buy-outs nearly eliminated the need for RIF’s
at these agencies in fiscal year 1994. Of the 32 agencies respondin;
to this item on our questionnaire, only two reported that they ha
RIFed employees in 1994. Nine agencies reported that were it not


51

We have not examined agency st-buyout training; however, some agencies’
streamlining plans state that they olYer such training. For example, the Department
of Energy reports that it has training over 150 employees to serve as customer advo-
cates an change agents to improve processes and customer service across the agen-
cy. Likewise, the Internal Revenue Service's streamlining plan makes retraining a
prority during reinvention because its workers will need a much broader knowledge

ase in their future jobs, Employees currently performing processing will be re-
trained for enforcement activities.

fe agree with the views of the private sector witnesses (presented at the May
17 hearing) that future-oriented training is vital to the success of buyout programs.
Staff redeployed from headquarters to field locations, reassigned to new jobs within
their current location, or remaining where they are, will all likely need to enhance
their skills to assure efficient and effective agency performance in a downsized envi-
ronment.

3. We note from the Congressional Budget Office’s testimony that retirement rates
were unusually low immediately prior to the buyout authority. Are you monitoring
the retirement rate systematically, to see if the expiration of the buyout authority
on March 31 of this year results in a decline in the retirement rate? What trend
would you expect in the near future, in the absence of buyout authority?

OPM is responsible for monitoring retirement subsequent to the expiration of the
buyout authority, but data are not yet available. The retirement trend for the near
future is difficult to forecast. Generally, if employees are convinced that there will
be no future buyouts, over time the retirement trend can be expected to approach
the historical rate. Proposed change to the retirement system that could lower po-
tential retirees’ benefits might also influence employees’ decisions to retire sooner
rather than later. Offsetting this, perhaps, is the fact that many employees who
were nearing, or eligible for, retirement left’ during the buyout window, thus deplet-
ing the pool of potential retirees.

4, Have you identified any instances, to date, where employees who benefitted
from buyouts have repaid the money in order to accept new positions in federal
service? If so, how many? Does this appear likely to happen, given the penalty in-
volved?

The Workforce Restructuring Act requires that those returning to federal employ-
ment or as employees under a personal services contract within 5 years after the
date of separation repay the buyout to the government. According to an OPM rep-
resentative, while the exact number is not known, a small number of non-Defense
employees may have repaid their separation incentives and returned to Federal
service. We believe that such occurrences will continue to be rare in the future, be-
cause employees have to repay the full amount of the buyout, including any taxes
that may have been withheld, and federal jobs have become relatively scarce as a
result of downsizing.

5. Has GAO surveyed any post-employment activities of persons who have taken
the buyouts, and inquired how many have new jobs, are merely retired, or are work-
ing as consultants supporting the agencies that they left? Would that be a useful
survey?

We have not surveyed employees to determine their post-buyout activities. While
this information might be interesting, most post-employment activities have few, if
any, policy implications for Congress.

e exception to this involves those employees who took buyouts and then went
to work for federal contractors. Though not prohibited by the Federal Workforce Re-
giructuring Act of 1994 (P.O. 103-226), the workforce reductions mandated by the
Act would be negated to some extent if FTEs are merely being converted to private
sector contract positions. Instead of surveying employees who accepted buyouts, we
plan to contact individual agencies to determine whether such employees are now
performing similar work for federal contractors.

A related issue is the number of new contracts awarded by agencies. Section (5g)
of the Workforce Restructuring Act prohibits an increase in service contracts as a
result of implementation of the buyout provisions of the Act, unless a cost compari-
son shows such contracts to be to the financial advantage of the government. We
will examine agencies’ compliance with this provision as part of our current assign-
ment for the Subcommittee.

Future Buyout Authority
1. Legislation to consolidate the Department of State and several other
has been adopted by committees in both houses, with each bill containin,
authority. Would your agency support such an extension of buyout authorit
If the Congress decides to enact buyout legislation, are there any qualifying fac-
tors that your organization believes should be included in such legislation? For ex-



24

NON-DEFENSE BUYOUTS BY AGENCY—Continued
BUYOUTS PAID AS OF MARCH 7, 1995)

Agency Amount

208
791

Smithsonian eon
all other non-Defense

total non-Defense .nnmrmnmnininnnnintninninnnnntnntnne : . 24,863

Note: Data are for baycuts actually paid as of March 7, 1995. OPM estimates that by the end of Fiscal Year 1995, non-Delense buyouts
will fetal 36,800, in addition to 68,800 buyouts in the Department of Detense

Mr. Mica. Did you see any correlation between the agencies that
are slated for some type of reorganization and the number of buy-
outs, or was there no connection in those figures?

Mr. KLEIN. Yes, sir. Generally the agencies that knew they had
a budget problem or were facing some major concern in the future
were the major users of this plan.

Mr. Mica. Also, I don’t know if you have been able to prepare
an estimate of the total cost of buy-outs. I know the program is just
ending and we have some obligations too that will be picked up. Do
you have any figures you can provide us?

Mr. Kinc. We have some figures. I always, when I get to num-
bers, I yield to OMB, but our figures are probably a little more con-
servative than some that have Been used. Our figures show that it
is between 13 and 15 billion depending on——

Mr. KLEIN. Savings.

Mr. Kinc [continuing]. Savings, on a 5-year planning horizon.
The costs——

Mr. Mica. Did you say savings?

Mr. KING. Yes, sir.

Mr. Mica. And what is the actual cost of the buy-outs?

Mr. Kinc. The costs were all front-end loaded, and we have that
too.

Mr. KLEIN. Yes, sir, we have a breakout, and we can provide a
copy of this.

The separation costs—that is, the buy-outs paid and so forth,
were about 2 billion 400 million.

[The information referred to follows:]

COMPUTATION OF GOVERNMENTWIDE SAVINGS FROM BUYOUTS

‘Amount
INITIAL SEPARATION COSTS:
Number of buyouts paid 85000
‘Average buyout payment 24,000.00
TOTAL COST OF BUYOUT PAYMENTS 2,040,000,000.00
‘Average annual leave payment (per employee) 4,488.46
TOTAL ANNUAL LEAVE PAYMENTS... . 381,519,230.77
TOTAL INITIAL SEPARATION COSTS os  2421'519'230.77
‘ADDITIONAL COSTS OVER 5 YEARS.
‘Average annuity (optonal-estimated) ... . 21,000.00
‘Average annuity (eaty-estimated) - . _ . 12,000.00
Number of optional retirements _ 44965
Number of early retirements... . . 33575
‘Annual annuity costs (optional) 94, 265,000.00

‘Annual annuity costs (early)
5 YEAR COST OF ANNUITY PAYMENTS (optional)
5 YEAR COST OF ANNUITY PAYMENTS (early)
TOTAL ADDITIONAL COSTS (5 YEARS)



54

And those differences in timing are not likely to have a major effect
on the long-term financing of the retirement system.

Second, for the 5,500 employees who took early retirement in fis-
cal year 1994, that is—about 5,500 employees who took early re-
tirement, the agencies were required to deposit with the retirement
fund an amount equal to 9 percent of their final salary. That pay-
ment covers the long-run costs to government of early retirement
as estimated by the Office of Personnel Management. Finally, the
Federal Workforce Restructuring Act required agencies to make
four annual payments of $80 per employee covered under the two
principal retirement programs for civilian employees. Those pay-
ments were made to the Retirement Trust Fund to offset the in-
creased retirement costs in the short run, and it was this—these
payments that actually made the cost over a 5-year period that was
recorded on the pay-as-you-go scorecard essentially deficit neutral
over that longer period of time.

We will be happy to work with the subcommittee on any future
legislation that you may be considering along these lines. We can
help you to work out exactly what the budgetary consequences
would be in both the short term and the long term and avoid any
difficult scoring outcomes on the pay-as-you-go system.

Thank you, Mr. Chairman. That concludes my remarks.

[The prepared statement of Mr. Blum follows:]

PREPARED STATEMENT OF JIM BLUM, DEPUTY DIRECTOR, CONGRESSIONAL BUDGET
OFFICE

Mr. Chairman and Members of the Subcommittee, I am pleased to participate in
your review of the government's experience with the voluntary separation incentives
Authorized by the Federal Workforce Restructuring Act of 1994. Since the authority
of civilian agencies to offer incentives under that act expired in March, pressure
may mount to reinstate that authority as agencies face the prospect of further em-
ployment cuts.

Tn accord with the Chairman's letter of invitation, my testimony today will focus
‘on three concerns:

* Are separation incentives an effective way to reduce federal employment?

« What are the costs and savings of the other methods by which the govern-
ment may reduce staff?

. How will the separation incentives affect the financing of the retirement
system?

My’answers to these questions will be drawn largely from the 1993 Congressional
Budget Office (CBO) study Reducing the Size of the Federal Civilian Work Force.
The report examined the costs, savings, and other consequences of separation incen-
tives and the various other methods the government can use to separate employees
and reduce federal employment.

ARE SEPARATION INCENTIVES AN EFFECTIVE WAY TO REDUCE FEDERAL EMPLOYMENT?

Before enactment of the National Defense Authonzation Act of Fiscal Year 1993
and the Federal Workforce Restructuring Act of 1994, the government relied on lay-
offs, hiring freezes, and early retirements to reduce employment In granting au-
thority to use voluntary separation incentives, the Congress gave federal agencies
a tool for reducing the workforce that state and local governments and many private
firms have used. Under both acts, agencies have been able to pay a lump sum to
encourage eligible employees to retire or resign. The amount of separation pay is
the lesser of $25,000 per employee or the amount of severance pay for which the
employee would qualify under involuntary separation.

ur 1993 analysis suggested that separation incentives can be an effective way
to cut employment, but much depends on the objectives of the planned employment
reductions and the way the incentives are implemented. In the short run, using sep-
aration incentives can be more expensive than the other approaches to cutting staff.
In fact, costs can exceed savings in the first year. In the long run, however, reduc.
tions in pay and benefits will amount to many times the near-term costs as long


63

In looking at the larger picture, however, the permanent long-
run savings of reduced employment clearly are fr greater than
any of those near-term costs.

Mr. Mica. And, Mr. Bowling, I think in your testimony you basi-
cally concluded that the buy-outs are less costly than the RIF’s, fi-
nancially and nonfinancially. Is that correct?

Mr. BOWLING. That is correct. If you look at both the financial
and nonfinancial costs, the cost to the Government is clearly less
for doing a buy-out. The disruption caused through the RIF and the
various factors that Jim King cited this morning involved in havin;
people at a higher salary fill a job that is lower graded for a perio
of time because of the bumping retreating provisions of the regula-
tions, all of those costs get in the way of productivity and can fave
long-term consequences for the morale and the efficiency of the or-
ganization. So I think if you take all those costs together, it is
clearly better to go with an alternative other than a RIF.

Mr. Mica. With your agency, GAO, you had mentioned that you
are reviewing the instances where Government employees who par-
ticipate in buy-outs then work for a contractor. You found this is
limited, but you did cite one instance. Are you continuing to mon-
itor this?

Mr. BOWLING. Yes, we are.

Mr. Mica. And is there any reason to believe it extends beyond?
Did you quote NASA as one?

Mr. BowLinc. Yes, NASA was the one example where we had
found what appeared to be something that was not within the spir-
it of the law.

Mr. Mica. You had 18 out of?

Mr. BOWLING. 199.

Mr. Mica. 199.

Mr. BOWLING. Yes, so it is not a large number, and it is not ille-
gal. Other than it is not clear that that is what was envisioned
when the Workforce Restructuring Act was passed. I mean the con-
cept was let’s not replace the people who will take buy-outs with
contractors or other Federal employees, let’s reorganize so we don’t
need that position filled in any sense.

Mr. Mica. Well, I thank you. We do have a vote on.

Mr. Moran, did you want to take 5 minutes and question?

Mr. Moran. I wanted to see whether GAO and/or CBO wanted
to offer some recommendations with regard to legislative changes.
It is obvious that buy-outs are better than RIF’s, but it is also obvi-
ous that the Federal Government is unique vis-a-vis the private
sector in making RIF’s a punitive experience for a manager. It
would seem that the logical conclusion is to come up with some re-
form of the Civil Service Code so that we can retain the highest
quality Federal employees and reward them for their efforts, which
would probably include more functions than they are currently hav-
ing to perform given the downsizing. That is the obvious conclu-
sion, and it is certainly as obvious as it is that it is less money—
that $25,000 is less money than $36,000 for a RIF. So I would like
to know, what are your recommendations to rectify what is really
an untenable situation with regard to any downsizing effort in the
Federal Government? You may not have time to answer that.

Mr. BowLING. Well, I'll offer a couple just quickly.




43

TABLE 2.—Planned FTE Additions and the Number of Buyouts Offered at Agencies Experiencing Staff

{ncreases—Continued
ember
se poe a ate
though FY i956 $unng Ft 1994
EPA = sn ses nn 300 638

~ herding to OMB, the Fazal Year 1993 eracied base the FTE level estimated by the
uses, te ihe fearing point tor calculating FTE reductions under the Federal Worklorce Restruc
othe as

s
Source: OMB data and agency intewiews,

‘administration in is final budget. OMB
Ac.

Staffing levels have increased in these agencies due generally to shifts or in-
creases in agency missions as a result of new programs mandated by the adminis-
tration or Congress, At Energy and EPA, the increase is also the result of an effort
to convert work performed by contractors to work performed by federal employees.
The following summary, based on interviews with agency officials, our review of the
President's Fiscal Year’ 1996 budget, agency streamlining plans, and other agency
documents, describes the new mission priorities at the four agencies and the role
that buyouts played in meeting them. (We did not verify the information provided
by agencies.)
Department of Education

According to an agency official, the 100 additional FTEs expected between the Fis-

cal Year 1993 base and the Fiscal Year 1996 FTE estimate are to go to several new
programs. Most of these FTEs will be used to support the Direct Student Loan Pro-

am.
S"he Education official said that the agency hoped to use the buyout authority to
achieve a better staff skill mix and to reallocate resources within the agency. The
buyouts also helped the agency reduce its upper-level grades (GS-14 through SES)
by 10 percent. ‘the official explained that Education did not target its buyouts to
the overhead positions cited by NPR but noted that these positions will probably be
reduced in later years. In general, those individuals who took buyouts were either
replaced by lower-graded employees or not replaced at all. About 800 buyouts were
approved by the agency.

Department of Energy

According to agency officials, the increase in FTEs is due in large part to the pilot
project Energy has entered into under the Government Performance and Results Act
to identify contractor work that can be Gerformed more economically by in-house
employees. Under an agreement with OMB, Energy has studied its contractor
workforce and concluded that 1,600 contractor positions could be performed better
by civil servants. The additional FTEs are in the program areas of Environmental
lanagement and Environmental Safety and Health. Other FTE increases have been
responses to increased mission responsibilities in its energy efficiency programs. De-
fense-related programs, particularly the nuclear energy programs, are being de-em-
asized.
P According to Energy officials, the goals of the buyout program were to mitigate
the need for RIFs in those parts of the organization that were downsizing; increase
the supervisor-to-employee ratio; cut the ranks of overhead positions; reduce the
number of employees in grades 14 and above; and improve the skill balances in var-
ious skill programs.

Energy officials maintained that before the buyouts the supervisor-to-staff ratio
was about 1:4.5 and that this ratio increased to 1:7 following the buyouts. About
40 percent of the buyouts went to supervisors. While Energy has achieved reduc-
tions in occupations targeted by NPR, agency officials said that they must maintain
or even increase contro! in such areas as procurement and personnel, where new
demands to manage the streamlining effort have created more extensive work for
human resource managers.

‘According to agency officials, while final buyout figures are not yet available,
about 1,000 buyouts had been granted as of March 31, 1995. These employees have
already left the government. ih addition, 2,000 more deferred buyouta have been
granted, About 400 of these individuals are expected to leave the agency this fiscal
year, with the remainder separating in Fiscal Years 1996 and 1997.

Earlier this month, Energy announced a major downsizing initiative intended to
trim more than 3,700 jobs over the next 5 years, with half of the reductions taking
place in the next 2 years. Agency officials expect more than 60 percent of the cuts
to come from headquarters operations.


41

ees who agreed to resign, retire, or take voluntary early retirement by March 31,
1995, unless deferred by the head of the agency, but no later than March 31, 1997.
The Department of Defense, although subject to the act’s governmentwide FTE ceil-
ings, has the authority to offer buyouts through September 30, 1999, under separate
legislation enacted in January 1993.

RESULTS TO-DATE OF THE BUYOUTS.

Demographic Data on the Buyouts

‘According to the latest OMB data, non-Defense agencies expect to pay 36,835
buyouts between March 1994 and the end of Fiscal Year 1995. The Department of
Defense expects to pay 68,837 buyouts by the end of Fiscal Year 1995.

‘Most of the demographic information reported thus far on the buyouts is for Fiscal
Year 1994. As more comprehensive data become available, we will include it as part
of the longer-term study we will be preparing for the Subcommittee. Until then, the
latest demographic information we were able to obtain from OPM includes the fol-
Towing rep f March 7, 1: Defe d bu;

—As of March 7, 1995, 43 non-Defense agencies reported payin, wuts in
Fiscal Year 1994 and/or Fiscal Year 1995, poreee Paying Deve

—Of the Fiscal Year 1994 buyouts paid by non-Defense agencies, 38.3 percent
went to employees in overhead positions, such as general administration, per-
sonnel, budget, accounting, and supply: 69.4 percent went to mid- to upper-level
employees (grades GS-11 to GS-15, SES, and blue collar supervisors).

—In Fiscal Year 1994, males received 62.9 percent of the buyouts, while fe-
males received 37.1 percent. Minorities received 23.7 percent of the buyouts,
compared to 76.3 percent for non-minorities.

Table 1 shows selected characteristics of three categories of employees who re-
ceived buyouts in Fiscal Year 1994—those who were eligible for regular optional re-
tirement, those who retired early, and those who resigned.

TABLE 1.—Characteristics of Employees Who Received Buyouts in FY 1994

Eligible for
cance samt Rind ase
‘tement
Percentage of total buyouts . 525% 95% BIR
Average 288 oon 99 AD ALG
Average grade level (GS) usd 9.0
Average amount of buyout payment 28435 24,861 13,691

‘Source: OPM.

Agencies Reported That Buyouts Mitigated RIFs

The results of our August 1994 sarvey of 34 non-Defense agencies showed that
buyouts nearly eliminated the need for RIFs at these agencies in Fiscal Year 1994.
Of the 32 agencies responding to this item on our questionnaire, only 2 reported
that they had RIFed employees in Fiscal Year 1994. Nine agencies reported that,
were it not for the buyouts, RIF's would have been necessary in Fiscal Year 1994.
Eight of the nine estimated that they would have RIFed a total of nearly 2,800 em-
ployees in Fiscal Year 1994 without the buyout authority. (One agency did not esti-
mate the size of its potential RIF.) Moreover, according to 12 agencies, without the
buyouts, they. would probably have needed to RIF a total of over 8,000 workers in
Fiscal Year 1995.

Buyouts Are Generally Less Costly Than RIFs

RIFs can be costly. When agencies RIF employees, they are required to make sev-
erance payments that can be as much as 1 year’s salary at the level immediately
prior to separation. For example, a full year’s salary in severance pay could be re-
ceived by a 50-year old employee making $50,000 with around 18 years of service.
By contrast, buyout payments under the Workforce Restructuring Act for this or any
other employee could not exceed $25,000. Moreover, OPM data show that buyouts
can be more cost-effective than RIFs, especially when a higher-graded employee dis-
places a lower-graded employee—a common occurrence during a .

RIFs can be costly in nonfinancial ways as well. The involuntary nature of RIFs,
their widespread impact, and regulations that limit agencies’ control over who is ul-
timately separated, can disrupt agency operations and affect employee morale.
Buyouts, on the other hand, enable agencies to better manage their downsizing. For
example, the results of our February 1995 survey of 28 non-Defense agencies


66

plied appropriately, and that is one of the issues that we would like
to look at and will over the next several months. Our agency is in
fact complying with the law, and to the extent they are, my guess
is that that is probably sufficient, but we would need more data to
really whether there is a widespread problem or not.

Mrs. MorRELLA. I hope that you will share it with us.

Mr. BowLING. Yes, we will be happy to.

Mrs. MorELLA. At Interior you mentioned 860 positions in the
personnel area. Were they FTE reductions, or were they people
who were redeployed to other areas?

Mr. BowLING. Those were FTE reductions, as we understand it,
the responsibilities, if you will, for those people who were rede-
ployed to line managers who then became responsible for perform-
ing many of the tasks that the personnelists had previously per-
formed.

Mrs. Moret. And let me ask you, Mr. Blum, do you feel that
the buy-out time should be extended? Except for the DOD, there
are no more buy-outs in terms of signing up for them. Do you feel
that the program is such that it should be extended maybe in some
agencies? Do you have any comments on that?

Mr. Btu. I do not have a specific view on that. Our experience
has been that buyouts can be an effective tool in restructuring and
in downsizing if they are properly used and if safeguards are in
place along the lines that Mr. Bowling and Mr. King have talked
about.

The one observation I would make is that if the question of ex-
tending the buyout period comes up as it did in the Federal
Workforce Restructuring Act, and it is debated for some length of
time, I think that does contribute to slowing down the rate of re-
tirements and the rate of turnover in government. People think,
“Oh, well, there is a chance, and therefore I should hang on a bit
longer.” So I think that goes to Mr. King’s point: If you do it, it has
to be done quickly and it has to be for a short period of time. We
are also dealing with a situation in which agencies will be restruc-
turing or downsizing—it sounds like, given the kinds of assump-
tions that are being made in the budget resolutions, for example,
that this is going to go on for a period of time. You may, as a com-
mittee, have to deal with this issue almost on an agency-by-agency
basis as those agencies come up for their major reorganization or
downsizing.

Mrs. MoRELLA. So you see it as a possibility that we might have
to allow ourselves, legislatively or whatever implement we need, to
alter the limit in terms of the buy-outs? You see, I was referring
also—was it Mr. Koskinen who testified before this committee last
year, and he said that he thought we could arrive at the 272,000
with no difficulty by that deadline, and I just wondered, given the
current situation, whether that still seemed to be the fealing that
OMB had and even GAO had.

Mr. Bow Linc. Our view, in answer to that question, is that yes,
the 272,900 figure is attainable on schedule through the buy-outs
and attrition.

However, with Reinventing Government II on the horizon and
the budget resolutions now being discussed, it seems that further
downsizing in the Government may be contemplated, and under


1

In the fall of 1993, the Clinton Administration’s National Performance Review rec-
ommended that the Federal civilian non-postal workforce be reduced by 252,000
full-time positions by 1999.

Congress increased that figure to 272,900.

With large-scale downsizing ahead, the Administration looked to buyouts as a way
to help achieve downsizing in a manner that was orderly and cost-effective and
would minimize disruption in the workplace.

Throughout the winter of 1993-94, OPM worked with OMB, Congress, and other
interested Sens to develop the Federal Workforce Restructuring Act, which was
passed by Congress and signed by the President late in March, 1994. As you know,
the legislation expired on March 31 of this year.

In developing that legislation. we studied both the successes and failures of pre-
vious buyout programs in the private sector and in state and local government.

The legislation permitted agencies to offer buyouts of up to $25,000 to employees
who voluntarily separated through regular retirement, early retirement, or resigna-

ion.

These buyouts were not an entitlement available to all employees. The agencies
had the authority to target them to specific jobs and locations—to use them, in
short, to serve the Government's specific workforce needs.

An employee who accepted a buyout could not, with rare exceptions, return to gov-
ernment service, or accept a personal services contract, within five years without
first repaying the entire incentive.

And to ensure that buyouts resulted in permanent personnel cuts, the legislation
required a reduction, on a Government-wide basis, of one full-time equivalent posi-
tion (FTE) for each buyout taken for all non-defense agencies.

As the legislation neared passage, time was clearly a factor, since cost savings de-
manded its maximum usage early in the fiscal year. Prior to passage, OPM created
a Workforce Restructuring Office that prepared | the documents and guidelines that
enabled agencies to move quickly to implement the program.

Because of these efforts, the program began operations literally within hours after
President Clinton signed the bill on March 30, 1994. Within five weeks buyouts had
been paid to more than 11,000 employees.

Our Workforce Restructuring Office, with a staff of about ten, continued to work
aggressively to see that the program was implemented, Government-wide, in a man-
ner that was fast, fair, and orderly.

OMB estimates that by the end of this fiscal year, about 105,670 Executive
Branch employees will have lef. government service with buyouts. That figure in-
cludes 68,837 Department of Defense employees and 36,835 non-Defense employees.

During FY 1996-97, an estimated 6,200 non-Defense employees will take delayed
buyouts; these separations must take place before March 31, 1997.

fense is projected to offer some 42,000 buyouts between now and the end of Fis-
cal Year 1997.

Thus, by the end of FY 1997, we estimate that about 154,000 Executive Branch
employees will have left government under these incentive programs.

‘rankly, Mr. Chairman, I believe that OPM’s efforts made possible an orderly
buyout program, one that avoided the confusion and additional expense that would
have occurred if more than forty participating agencies had attempted to develo
programs on their own. It also avoided the disruption, hardships, and additional
costs that RIFs would have produced.

‘Now let me address the specific questions you raised in your letter of May 3. You
asked for a description of the process for approving agency buyout implementation
plans to ensure that they conformed with the law and Title 5 requirements.

The legislation authorized the head of each Executive Agency to establish buyout
programs and directed OMB to monitor the programs and ensure that they were
in compliance with the mandatory reductions spelled out in the law.

OPM was directed to administer the program. We met with officials of more than.
fifty agencies to discuss program strategies and regulatory requirements and to en-
sure that their plans conformed to the law, and with Title 5, and to provide them
with the legal authority to offer early retirement with buyouts.

You asked for a description of training programs provided to agencies or employ-
ees on the buyouts.

From the outset, we recognized that for each individual involved, whether or not
to accept a buyout was an extremely significant decision. We therefore worked in
many ways to provide information to Federal employees who faced this difficult de-
cision,

We brought agency personnel managers to OPM for briefings. We sponsored semi-
nars that were open to all employees and were widely attended. We wrote and dis-
tributed brochures and fact sheets. Our officials gave newspaper and radio inter-



53

First, are separation incentives an effective way to reduce Federal
employment? Second, what are the costs and savings of other meth-
ods by which government may reduce staff? And third, how will the
separation incentives affect the financing of the retirement system?

Unlike Mr. Bowling and Mr. King before me, I really come with-
out any new information. Essentially the answers to these ques-
tions would be based on a study that we did almost 2 years ago
titled “Reducing the Size of the Federal Civilian Work Force.” This
study examined the costs, savings, and other consequences of sepa-
ration incentives as well as the standard methods for reducing the
size of employment, whether it be layoffs, early retirement, or hir-
ing freezes. So our answers necessarily come from that study. And
since I have testified previously before this subcommittee, or its
predecessor, on the study, I won’t go through that again.

Turning quickly to the questions, are separation incentives an ef-
fective way to reduce Federal employment? Our study suggested
that they could be. Although costs could be higher in the first year
than with some of the other methods, over time the savings of re-
duced employment on a permanent basis more than outweighs any
possible near-term costs. Specifically, we estimated that the gov-
ernment saves anywhere from 2 to 5 times the near-term costs in
the 5th year and 12 to 33 times by the 30th year, all on the as-
sumption, however, that the workers who leave are not replaced
later on.

The benefits of voluntary separation incentives have been at-
tested to or described by Mr. King and Mr. Bowling. It is clear that
the primary reason to use them is to avoid layoffs, which were con-
sidered to be very costly and very disruptive. All the experience
seems to point in the direction that voluntary separation incentives
are an effective way of avoiding the disruptive costs of layoffs and
reducing the number of layoffs that are necessary when you are in
a downsizing environment.

What are the costs and savings of other methods by which the
government may reduce staff? The 1993 CBO study went into some

jetail on the issue, and essentially the bottom line was that the
long-term savings from reducing employment are really quite enor-
mous regardless of what the short-term costs may be. The short-
term costs may vary from one method of separation to another.

This finding suggested to us that the costs of various approaches
to cutting staff may not be of paramount concern to the Congress,
that important weight really should be given to the non-cost-relat-
ed consequences of the different strategies of reducing employment.

Last, we were asked to consider how the voluntary separation
agreements that have been made affect the financing of the Federal
retirement system? We have heard about the numbers of employees
who have taken or will take incentives, something in excess of
100,000, including those from the Department of Defense. A fuller
understanding of any long-term consequences of these separations,
as Mr. Bowling sug; ested, will have to await the final reports on
retirements under the incentive program. However, we do not an-
ticipate any major consequences on retirement financing, for three
reasons. First, using separation incentives will not change the total
number of employees who retire; it just changes when they retire.


59

ity expired for civilian agencies. We have no way of anticipating what that data will
show at this point.

TABLE 3.—FIVE-YEAR COSTS AND SAVINGS FOR SEPARATING FEDERAL EMPLOYEES BY DIFFERENT METHODS
[ln thousands of dollars per employee]

Incentive to

lap Rte
We naie teen

Savings 2026 202.6 202.6 202.6
Costs ... . a . sen 196 1200 915 430
Net Savings Z : : wove 163.0 826 1112 1596

‘SOURCE Congressional Budget Office, Reducing the Size o the Federal Critan Work Force (December 1993), pp. 19 and 24

Future Buyout Authority

Question 1a. Legislation to consolidate the Department of State and several other
agencies has been adopted by committees in both houses, with each bill containing
buyout authority. Would your organization support such buyout authority?

‘Answer. Our analysis suggests that buyouts can help avoid layoffs, especially in
cases where agencies or functions are consolidated, as is the case at the State De-
partment. They can also help target reductions in employment toward the top levels
of an organization. The government gains those benefits, however, at some cost. Our
cost estimate for legislation consolidating functions at the Department of State, for
example, shows that the retirement costs associated with the proposed buyout pro-
gram would accumulate to $18 million over five years (estimate attached).

Question 1b. If the Congress decides to enact buyout legislation, are there any
qualifying factors that your organization would like to see in this legislation? For
example, should the Congress retain a payback provision? How should we treat the
impact on the retirement systems of affected employees?

Answer. We have no specific recommendations for improving recent practice with
regard to buyouts. In general, however, we believe that quickly enacting buyout au-
thority helps limit the problem of employees delaying their plans to leave govern-
ment jn order to receive a separation incentive payment. We also believe that charg-
ing agencies for part of the cost of the buyout program helps ensure that buyouts
are used judiciously.

‘The payback provisions you asked about require an employee to return an incen-
tive payment to the government if that employee reenters federal service within five
years of leaving. OPM may waive repayment for a person who is uniquely qualified
for a position. Those provisions protect the government from making excessive pay-
ments and from lack of access to uniquely qualified individuals. As such, they ap-
pear to be sound policy.

With regard to your concern about the retirement system, we do not expect that
the buyout program will have much impact on retirement financing for a number
of reasons. First, such programs do not cause more retirements; they merely change
the timing of those retirements. Second, for employees who retired early under the
program, agencies were required to deposit with the retirement fund an amount
equal to 9 percent of final salary. That payment covers the long-run cost to govern-
ment of early retirement as estimated by the Office of Personnel Management. Fi-
nally, the buyout program required agencies to make four annual payments of $80
Per employee to the retirement trust fund to offset increased retirement costs in the
short run.

Quality of the Workforce

Question 1. Our discussion during the hearing raised numerous questions about
the quality of the workforce that would remain after restructuring. Please describe
any methods and measures used by your agency to evaluate workforce quality. Have
you assessed the impact of the Federal Workforce Restructuring Act in these terms?

‘Answer. CBO relies on other agencies to collect the workforce data used in its
analysis, and we know of no agency that routinely monitors the quality of the
workforce. We do not expect the buyout program to have too much impact on quality
overall, however, because most of the employees who leave would have done so
eventually anyway.

Nonetheless, by providing agency managers with an additional downsizing tool,
buyouts should help them to reach goals such as improving the quality of employees
and making reductions at top levels better than if no such tool was available.



13

A couple of things. Most significantly, I think I picked up your
comment that you do not recommend an agency-wide buy-out legis-
lative authority. Is that correct?

Mr. KiNG. We are hesitant for a government-wide authority, but
there may be situations in individual agencies that may be brought
to your attention, Mr. Chairman, that are so unique that they
should be dealt with. Once again, we do have a checklist that we
think makes a great deal of sense, and that is that it be budget
neutral, and the list that I suggested, and that it be for a limited
time.

Mr. Mica. I think you had also gone on to recommend that we
be agency specific so we tie the buy-outs into specific areas where
we are doing downsizing or there are some dramatic cuts as pro-
posed either by Congress or the administration. Is that correct?

Mr. KING. That is correct.

Mr. Mica. OK. That is an interesting point of view, and it is
probably the path we are on right now, Because we are getting re-
quests already from the Department of State for some waivers and
ability to conduct buy-outs. As we do that, you did say that you
wanted some standards——

Mr. Kina. Mr. Chairman——

Mr. Mica. OK.

Mr. KING. You mentioned the State Department. There is one
thing that I didn’t give in the list but I think is essential. The
amount of the buy-out should be cost effective, but then there is
a question of whether you move from being generous to being of a
questionable business practice, and I think in some of these sugges-
tions that come forward we may cross the line on that, and that
is why we are speaking of having a standard that would be reason-
able, that would be decent and adequate but, on the other hand,
would be still responsive to the concerns everyone faces.

Mr. Mica. You would probably like to retain that authority to set
some parameters, as OPM, as an oversight responsive agency.

Mr. Kinc. Well, I sometimes think, Mr. Chairman, when we
draft legislation it is like a labor negotiation that uses position and
bargaining. People come in with everything anyone has suggested
because they don’t want to say no in the preliminary stages. Rather
than laying what their interests are on the table, they get into po-
sition types of things.

We would like to stay within the confines of where the interests
lie for all of the parties so there can be true reconciliation and fair-
ness, and that is really what we would be looking for, and we have
guidelines that would help any organization that would be coming
forward or the committee itself as they are looking at this, because
we do have a model, I think, that reflects success and decency.

Mr. Mica. You have cited some instances where you, in fact, be-
lieve that this program to date has been a boon and some statistics
to back it up. I’m kind of concerned that we also look for protec-
tions where it may have been a boondoggle. One of the things that
concerns me is where you get this figure of close to 52 percent of
the folks were just on the verge of retiring. Were we handing them
cash on the way out?

Mr. Kina. I would submit——


CONTENTS

Hearing held on May 17, 1995 .
Statement of:
King, James B., Director, Office of Personnel Management, accompanied

by Leonard Kiein, Associate Director for Employment. . 7

Bowling, Tim, Associate Director, Federal Human Resource Management
Issues, General Government Division, General Accounting Office; and
Jim Blum, Deputy Director, Congressional Budget Office 35

Scott-1 Morgan, Peter, Director of ‘Management Consulting, Arthur D. Lit:
tle, Inc; and Robert Ellis, Vice President of Corporate Marketing,
the Wyatt Co .. 70

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

Bowling, Tim, Associate Director, Federal Human Resource Management
Issues, General Government Division, General Accounting Office, pre-
pared statement of 39

Blum, Jim, Deputy Director, Congressional Budget Office, prepared state-
ment of 54

Ellis, Robert, vice president of corporate marketing, the Wyatt Co., pre
pared statement of .. 8

King, James B., Director, Office of Personnel Management:

information concerning non -defense buyouts . 23
Prepared statement o! 10

Klein, Leonard, Associate for Employment, information concern-
ing savings from buyouts 24

Mascara, Hon. Frank, a Rep
Pennsylvania, prepared statement of 4

Mica, Hon, John Ly @ Representative ore
Florida:

estions for and answers from Mr. Bowling 46
Juestions for and answers from Mr. Blum .. 57

Moran, Hon. James P., a Representative in
of Virginia, prepared statement of . 5

Morella, Hon. Constance, a Representative in Congress from the State
of Maryland, 1 prepared statement of ... 32

Scott-Morgan, Peter, director of management consulting, Arthur D. tittle,

Inc., prepared statement of .. 14

ut)


34

would speak to it from that view, and Mr. Klein, who is with me
today, I would ask, would you respond?

Mr. KLEIN. I might offer, your point is well taken. If this round
of buy-outs or even if buy-outs are over completely, we have been
working with agencies, with OPM, to develop a plan on where we
go from here.

One of our difficulties is, in terms of Placing people who lose
their jobs, there just aren’t going to be enough Federal jobs for
them. We need to look more at how we can place people in the pri-
vate sector. At OPM we placed over 60 percent of our people in the
private sector, not in other Federal jobs. We have linked up with
other agencies, and we have prepared a report which we submitted
to Chairman Mica just a few weeks ago on additional things we
might do to help the transition of people who lose their jobs in the
Federal service. There are 8 or 10 specific recommendations in that
report that agencies agree with and things we could do. We might
want to look at some of those if there is a need for additional legis-
lation to help transition people into either other agencies or into
the private sector.

So I would recommend that to you, and we can provide you a
copy of that report.

Mr. Kine. Right. The Interagency Task Forcee——

Mr. KLEIN. That is correct.

Mr. KING [continuing]. Has been the unit we have been using,
which are the key personnel in every single agency in Government,
and so that we have anticipated, as we did on the buy-outs—we
have anticipated difficult times ahead and tried to deal directly
with the agency professionals, so they are ready, so that they are
giving advice to their senior managers within their organizations
to prepare for the reality.

One of the things, as you know so well, is that people, when they
are facing a very difficult human decision, go into denial, and one
of the things you can do in denial, and it is done most often, is that
you fail to plan, and by failing to plan you create crisis, and some-
times within organizations crisis is a way of perpetual manage-
ment. So it is the alternative, if you will, to planning.

What we are trying to do is avoid that from the beginning, and
to share with all the parties what is being done and what we know
to be best practices both in the private sector and in the public sec-
tor, and we are trying to keep ourselves advised and current on
that.

Mrs. MoRELLA. The difficulty is that sometimes a crisis occurs to
begin with and then one has got to try to adjust.

re you talking about the report that is called “Improving Tran-
sition Assistance for Federal Employees Affected by Downsizing”?

Mr. KLEIN. Yes, ma’am.

Mr. KING. Yes.

Mrs. Morea. OK. And you have concluded that it wasn’t fea-
sible to establish a mandatory interagency program of placement,
and the Department of Defense disagrees with you and——

Mr. Kin. That is the mandatory placement.

Mr. KLEIN. Yes, yes. Let me describe what we have proposed in-
stead of that, and which all the other agencies think ‘will work well.
We have had such a large turndown rate from people being re-


76
top management aggressively pushing the change—rather like aggressively pushing

string...

Finally, the best restructurings have as one of their goals to become “learning or-
ganizations” where the ability to change and learn is encoded into the very fabric
of the company so that the organization becomes more and more responsive to fluc-
tuations in the industry, and signals from its clients and suppliers. is is seen as
highly attractive because it allows organizations to jump out of the tightening spiral
of constantly fire fighting from one major change program to another.

One of the goals of such restructurings is to provide systems that help people get
better and better at change, so that the organization can change faster and faster
without burning out—in other word, not just get performance improvement, but get
accelerating performance improvement, And that is the greatest defense against an
increasingly unknowable future.

Measuring success

The leading companies in the private sector no longer measure successful change
only in terms of profit. At best, such a measure lags far behind what brings it about,
80 is of little use during the change process itself. There are important implications
for public sector performance measurement.

Sustained high performance seems strongest correlated with the balanced satis-
faction of the needs of all the stakeholders of a business. In other words, focusin
only on satisfying the owners of the business by pursuing profit to the exclusion o
all else is not sustainable. At the very least, a company must also satisfy the needs
of its customers and, before long, its employees. Balancing the satisfaction of all
three major stakeholders is the key to sustained success. For some companies, sup-
pliers and the community at large also have to figure in this balancing act.

The implication for the public sector is that performance should be measured
through a variety of metrics corresponding to the satisfaction of each of the major
stakeholders of the organization employees, external and internal “customers” of
services, the general public as overall “owners,” and so on. The goal should be con-
tinuously increasing satisfaction of all the key stakeholders rather than one at the
expense of the others. In the same way that such balanced measures lead to sus-
tained profitable growth in the private sector, so they will similarly lead to the sus-
tained achievement of organizational goals in the public sector.

Mr. Chairman, this concludes my prepared testimony. I would be pleased to an-
swer any questions you may have.

Mr. Mica. Thank you. I appreciate your comprehensive response
to our questions and your commentary, and I'll call now on Mr.
Robert Ellis.

Mr. ELLis. Thank you, Mr. Chairman, for inviting us to partici-
pate in the committee meeting today.

My statement is a brief overview of the written testimony that
I submitted.

In 1993, I supervised a study we called “Best Practices of Cor-
porate Restructuring.” The study was a follow-up to our 1991 study
that examined corporate restructuring in the 1980's. In our 1991
study, we found that the corporate restructuring in the eighties
was driven primarily by financial imperatives, the need to reduce
expenses to increase profits to increase shareholder value. Our
study also showed that in the 1980's, less than 50 percent of the
restructuring organizations, by their own assessment, achieved any
of these goals.

By 1993 the reasons behind restructuring had changed. Seventy-
five percent of the organizations identified competitive pressure as
a primary reason, and 57 percent said the economic recession was
the reason.

The objectives of restructuring also changed from the eighties to
the nineties. In the eighties the objectives were overwhelmingly fi-
nancial. By the 1990’s the financial objectives were still prevalent,
but the new restructuring was looking beyond financial to broader
issues, Along with financial objectives, respondents also cited some


22

level, it was at the agency level, so that there were people standing
by, as it were, who had been going through the thought process.

1 know in our agency we opened and closed the door for 2 weeks,
and then we reopened it near the end of the fiscal year when we
identified that we did have some additional moneys that might be
available if we would do it in that fiscal year, and that would be
a prudent way to use that money, in the downsizing effort.

So that we can get back to you, if you would like, to see what
the effects have been and share them with you, because we do col-
lect the data and we would be more than glad to share that with
the committee and directly to you, sir.

Mr. KLEIN. In fact, the legis lation requires OPM to report to Con-
gress annually on December 31, and we intend to do that this year,
try to pull some of that data together and take a look at it for you.

Mr. Mascara. Sure. I'd like an opportunity to see that.

Mr. Moran was making a point, are we just downsizing because
we want to downsize, or are we downsizing with the understanding
that we do not want to have a negative impact on the Government
itself, and we don’t want to end up with a shell for a Government
just to say we want to get the 270-some-thousand employees by the
year 2000. It has to make some sense, is what I’m saying.

Mr. Kine. Exactly.

Mr. Mascara, again on our own organization, we downsized our
supervisory and our managerial staff by 40 percent. Those folks
had retention rights and a number of other issues. I think when
they took a look at what was happening within the agency and
they had an opportunity, a number of them examined that. Others
felt that they were going to live with where they were and do an
excellent job, and they have.

What I’m saying is, we tried not to force individuals, what we did
was to look at the jobs and positions and say how do they fit into
the future, and that was the tone we tried to set across Govern-
ment.

As I’m suggesting, somewhere someone may not have been in the
spirit of that, but I would like to think just from what we have
seen that the vast majority were and it was cost beneficial, and it
was from the productivity point of view beneficial, and from the di-
versity aspects and keeping your seed corn, as it were, intact, it
was spectacular. The numbers on that are very, very impressive.

If I could, with RIF’s we lose 53—53.5 percent are female, and
43 percent are minorities. Under buy-outs we found almost 33 per-
cent female, and 24 percent minority, so that the numbers vary
substantially on who was affected in that particular arena too. So
we were able to retain the face of America, as it were, in the con-
text of Government and I think maintain the best and the bright-
est, and those of us who were in charge or responsible for succes-
sion planning, we had minimum effect on the overall things that
we are supposed to do, and that is serve our customer.

Mr. Mascara. I have another question as it relates to makin;
that final decision on who should be offered a buy-out. First of all,
I think it is your testimony, or somewhere I read, where OPM had
been given the responsibility of handling this rather than having
each particular agency do it themselves. My concern is what exper-
tise does OPM have to make a decision on agency A who may have


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, JR., New Hampshire

JOHN M. McHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

PETER BLUTE, Massachusetts

THOMAS M. DAVIS, Virginia

DAVID M. MCINTOSH, In

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, IMlinois

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, Penneylvani

GARY A. CONDIT, Californi

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
Juprnt McCoy, Chief Clerk

Bup MYERS, Minority Stoff 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, Mlinois

GroRGE NESTERCZUK, Staff Director
SUSAN MOSYCHUK, Professional Staff Member
NeD LYNCH, Professional Staff Member
JOHN CICCONE, Professional Staff Member
CAROLINE FIBL, Clerk
CEDRICK HENDRICKS, Minority Professional Staff

a


46

employees, with the remaining 28 percent going to Foreign Service employees. De-
partment officials told us that 212 of the 736 represent delayed buyouts, with sepa-
rations scheduled to occur through March of Fiscal Year 1997.

According to Department officials, the use of the buyout authority has been very
successful and will enable the Department to reduce the number of supervisors and
managers by about 130 by the end of Fiscal Year 1995, a reduction of about 5 per-
cent from the Fiscal Year 1993 total. In addition, we were told that buyouts have
been useful in reducing the number of personnelists at State by about 4 percent
over the same period.

Congress is considering legislation that would consolidate the State Department
with the United States Arms Control and Disarmament Agency, the United States
Information Agency, and the Agency for International Development. According to
the Secretary of State, the proposed consolidation would eliminate duplicate inter-
national operations among these agencies and reduce staffing levels by an addi-
tional 500 FTEs. A provision of the proposed legislation authorizes these agencies
to provide buyouts to employces eligible for retirement, with separation dates for
buyout takers generally running through January 30, 1997, or until the particular
agency is abolished.

‘Department officials told us they have not yet developed firm projections on pos-
sible reductions to State’s workforce or the number of buyouts that may be required
to implement any consolidation plan.

OBSERVATIONS

The buyout program authorized by the Workforce Restructuring Act has helped
agencies meet their workforce reduction goals while reducing the need for costly and
disruptive RIFs. While agency officials described both positive and negative impacts
from the buyouts, their full effect will not be apparent for some time. Since further
cuts in the federal workforce are anticipated, adequate strategic and workforce plan-
ning will be essential if agencies with fewer employees are to maintain—and even
increase—their productivity and performance levels.

This concludes my prepared statement. I would be pleased to answer any ques-
tions you or members of the Subcommittee may have.

FOLLOWUP QUESTIONS From Hon, Join L. MICA AND ANSWERS FROM MR. BOWLING
COST OF BUYOUTS V. RIFS

1. The Office of Personnel Management has been reported as estimating the typi-
cal costs of separating one employee through a reduction-in-force as $36,300.
Personnel Processing $4,100; Appeals $2,400; Unemployment $1,700; Annual
Leave Payment $4,000; Grade and Pay Retention (for others) $16,800; Sever-
ance Pay $7,300.

Are you aware of any legislative changes that might reduce those costs?

Would you recommend any regulatory changes that might reduce those costs?

The various costs listed above could be reduced through legislative or regulatory
changes (e.g., changing how unemployment compensation is computed, limiting the
amount of annual leave payment, revising grade and pay retention provisions).
However, these are all policy issues, and they would have to be weighed against the
impact such changes would have on employee morale, labor-management agree-
ments, and the like. Our work in this area has been limited, and we do not cur-
rently have the data to analyze these tradeoffs and make specific recommendations.

2. Would you please provide a comparable breakdown of the costs and benefits as-
sociated with buyouts? The Subcommittee would like to be able to compare the five-
year financial impact of both RIFs and buyouts.

While such an analysis will be essential in helping to formulate future downsizing
policy, a valid study would require a more comprehensive analysis than we could
provide here. Moreover, we would first want to meet with Subcommittee staff, Office
of Personnel Management (OPM) officials, and possibly others, in order to obtain
agreement on a set of assumptions and cosU/savings categories necessary to do a pre-
cise study.

While we cannot provide specific numbers at this time, Table 1 compares the rel-
ative cost elements of RIFs versus buyouts.



30

wind up bumping somebody who could very well be doing an excel-
lent job lower down the ladder. In that case you are going to wind
up paying the person you are trying to get rid of even more money
than what they deserve because they are going to be in an even
less challenging job ultimately and they are not going to be out of
the Federal Government, but somebody who may be performing
very well is the one who is actually going to be penalized by your
attempt to get rid of them.

Mr. KLEIN. You are right, and in fact that is why we believe that
the buy-out approach is far more effective. We limited the number
of RIF's to only 15,000 in 2 years, and there would have been far
more people RIFed had we not had the buy-out program.

Mr. KiNG. But I do think what we are talking about is affecting
the culture, and that was one of the things, that Reinvention was
designed to start to attack the culture to say we do not have ex-
panding resources, you can no longer layer managers in, and that
is one of the difficulties that we see throughout. Now we are going
to be making very tough choices, and if the tough choice is going
to be keeping and rewarding competence and identifying com-
petence and those who aren't fully competent or aren’t at the
standard that you have established to function in that unit, then
you are going to have to make hard choices, and I think that is
what we are talking about now in Government, harder choices in
a climate where there are not expanding resources.

Mr. Moran. I don’t want to belabor this, but what is the hard
choice?

Mr. KinG. The hard choice, in the past it was, Mr. Klein pro-
moted me, by the way, because I’m an excellent whatever I was
working with him. So in order to, quote, keep me for a whole num-
ber of reasons, I may have been promoted, and I am promoted and
he discovers that I’m not a very effective manager. In the happy
days we had a phrase called layering. He found another person
whom he promoted to a manager. They did the job I would be doing
if I were fully competent for the task I was in.

Mr. Moran. But you are saying the hard choice is not to promote
somebody.

Mr. KING. No. The hard choice is to come to Jim King and say,
“Jim, you are not cutting the mustard, you are getting a marginal

erformance. We are going to do the work plan with you, and

ere’s what is expected, and if it is not done, then, Jim, you are
going to have to fall back into this position. Here’s what we are
ooking for’—and then work the process so that I’m working in an
area where I am competent and we have people who have the abil-
ity needed for the job at hand, and that has been the unwillingness
there has been up and down.

And, by the way, this is not uniquely Government. That was one
of the things that I think IBM went through the pains of hell deal-
ing with, and so did Sears, and so did Xerox. Every one of the
places that reengineered and downsized were confronted with a
number of those issues. So we are not unique. Anyone that sug-
gests that somehow we have a higher level of incompetence or any-
thing else in our workforce doesn’t understand the labor force in
America or in the world, and we have the best labor force in the
world,


39

Today, we have found isolated instances of contracting activities
that occurred without the benefit of cost comparison. In the case
cited above, for example, officials from NASA’s Lewis Research
Center told us that cost comparisons were not necessary because
the former employees were hired under task orders of an existing
contract and thus section 5(g) of the Workforce Restructuring Act
did not in fact apply.

You also asked us about the need for buy-outs at the Department.
of State. State officials reported to us that 736 buy-outs have been
granted during fiscal years 1994 and 1995. Department officials
also told us that 212 of the 736 represent delayed buy-outs with
separations scheduled to occur through March of fiscal year 1997.

According to Department officials, the use of the buy-out author-
ity has been very successful and will enable the Department to re-
duce the number of supervisors and managers by about 130 by the
end of this fiscal year, a reduction of about 5 percent from the 1993
total.

Congress is considering legislation that would consolidate the
State Department with the U.S. Arms Control and Disarmament
Agency, the U.S. Information Agency, and the Agency for Inter-
national Development. According to the Secretary of State, the pro-
posed consolidation would eliminate duplicate international oper-
ation among these agencies and reduce the staffing levels by an ad-
ditional 500 FTE’s.

A provision of the proposed legislation would authorize these
agencies to provide buy-outs to employees eligible for retirement
with separation dates for buy-out takers generally running through
January 30, 1997, or until the particular agency is abolished. De-
partment officials told us they have not yet developed firm projec-
tions on possible reductions to State’s workforce or the number of
buy-outs that may be required to implement any consolidation
plan.

In summary, the buy-out program authorized by the Workforce
Restructuring Act has elped agencies meet their workforce reduc-
tion goals while reducing the need for costly and disruptive RIF’s.
While agency officials described both positive and negative impacts
from the buy-outs, their full effect will not be apparent for some
time. Since further cuts in the Federal workforce are anticipated as
a result of the second phase of the administration’s reinventin;
government initiative, among other things, adequate strategic an
workforce planning will be essential if agencies with fewer employ-
ees are to maintain and even increase their productivity and per-
formance levels.

This concludes my prepared statement. I would be pleased to an-
swer any questions you would like at any time.

[The prepared statement of Mr. Bowling follows:]

PREPARED STATEMENT OF TIM BOWLING, ASSOCIATE DIRECTOR, FEDERAL HUMAN RE-
SOURCE MANAGEMENT ISSUES, GENERAL GOVERNMENT DIVISION, GENERAL AC-
COUNTING OFFICE

OBSERVATIONS ON AGENCIES’ IMPLEMENTATION OF THE BUYOUT AUTHORITY

To help federal agencies in their downsizing efforts, a provision of the Federal
Workforce Restructuring Act of 1994 (P.L. 103-226) allowed non-Defense executive
branch agencies to pay buyouts of as much as $25,000 to employees if they met cer-
tain requirements. According to the latest Office of Management and Budget (OMB)


25
COMPUTATION OF GOVERNMENTWIDE SAVINGS FROM BUYOUTS—Continued

‘Amount
ANNUAL SAVINGS WHEN POSITIONS ARE NOT REFILLED:

Salary and benefits per employee . . = ee 54,460.00
‘SALARY AND BENEFITS SAVINGS (all employees) we — 4,629, 100,000.00
TOTAL SAVINGS OVER 5 YEARS:

‘ANNUAL SALARY AND BENEFITS 23,145,500,000.00

Less all 608t8 2. 0onon ee see 9,157,344,230.77
NET SAVINGS OVER 5 YEARS AFTER ALL COSTS ARE 13,988, 155,769.23

MODEL IS BASED ON THE FOLLOWING ASSUMPTIONS:
Total number of buyouts Paid... snonnnnsnn . a . 85000

Average buyout amount 24,000.00
‘Average salary of buyout taker 38,900.00

Annual employee benefits average 40% of sal
Total salary and benefit costs ... 54,460.00

Assumes maximum annual leave balance (in hOUIS) .c.un:nrnnnnonnon
Reduction pressures on most agencies will keep hiving down,
Since many managerial/supervisory jobs are being eliminated, similar positions will not
be recreated.
‘The number of positions eliminated over the next five years will equal at least the num-
ber of positions vacated by buyouts.

240

Mr. Mica. Now is that non-Defense? Is that just the non-Defense
figure?

Mr. KLEIN. This is for all buy-outs.

Mr. Mica. That includes the Defense?

Mr. KLEIN. Yes, sir.

Mr. Mica. The 2 billion figure?

Mr. KLEIN. Two billion four for the initial separation costs.

Mr. KiNG. We figured about a billion for non-Defense and then
about, a billion and four for—a billion five for Defense. Is that
right?

r. KLEIN. That is probably within the target, about right.

Additional costs over 5 years, for example, we cranked in the
costs of annuities, and when someone takes a buy-out you generally
have to pay them an annuity, so we can’t ignore that cost. That
was 6.7 billion. The annual savings for the positions that aren’t re-
filled because the law wisely says you lose an FTE for each buyout,
was 4.6 billion. So the 5-year savings between now and the end of
the century, 2000. The net savings is 13 billion, 988 million.

Mr. Kine. Calculated on that basis.

Mr. KLEIN. Calculated on that basis, and those positions will not
be filled because that target is for 5 years out, so there is no way
we can go back and refill those jobs.

Mr. KInc. That is why, Mr. Chairman, I use the 13 to 15 billion,
because it could—the 13 would be the extreme conservative, the 15
would be the high side, and I think we fully loaded it. But this is
an estimate, and we would yield to our colleagues at OMB to
produce the Government-wide numbers for you.

Mr. Mica. OK.

Are there any legislative or regulatory changes that you would
like to recommend to the subcommittee or to Congress to reduce
the costs of buy-outs? Anything that you have seen that stands out,
or anything if we look at adopting something, say, Government-
wide or incorporated in the various legislation to authorize the buy-
outs?


9

executive agency to establish buy-out programs and directed the
Office of Management and Budget to ensure that they complied
with the reductions spelled out in the law. OPM was directed to ad-
minister the program.

We met with officials of more than 50 agencies to discuss pro-
gram strategies and regulatory requirements and to ensure that
their plans conformed to the law and with Title 5 and then to pro-
vide them with the legal authority to offer early retirement with
buy-outs.

‘ou also asked for a description of training programs provided to
agencies and employees on buy-outs. From the outset we recog-
nized that for each individual involved, whether or not to accept a
buy-out was an extremely significant decision to them personally.
We therefore worked in many ways to provide information to Fed-
eral employees who faced this difficult decision. We brought agency
personnel managers to OPM for briefings, we sponsored seminars
open to all employees, and they were widely attended. We wrote
and distributed brochures and fact sheets. Our officials gave news-
paper and radio interviews and went on satellite TV to reach em-
ployees across this country. Agency officials and union representa-
tives were included in this process. We published a buy-out news-
letter that was widely circulated, We operated a telephone hotline,
and we literally received thousands of calls on that hotline.

Mr. Chairman, you also asked us about procedures and safe-

ds we used to monitor the program. We published strict regu-
lations to ensure that employees who returned to the Federal serv-
ice within 5 years after receiving an incentive payment must repay
the entire amount of the buy-out. These regulations address con-
gressional concerns that the buy-out program might become a re-
volving door for Federal employees. That has not been the case. We
have conducted spot checks via computer of OPM’s central person-
nel file, and to date we have found no cases of abuse.

OPM has also consolidated its reporting requirements to enable
agencies to report the use of buy-outs on the same format with
early retirement and other data. Through these quarterly reports
and occasional updates and close contact with the agencies we have
tracked the buy-out system continuously, Mr. Chairman.

I realize that some might ask, why pay people to leave the Gov-
ernment? There is a solid dollars and cents case for buy-outs. By
our projections, the typical buy-out is significantly less expensive
than the typical RIF that is, reduction in force. Moreover, as we
downsize we must seek to keep up the morale and productivity of
workers who continue on the job and are expected to do more work
than ever before.

RIF’s can be more expensive than buy-outs because RIF’s involve
increased administrative costs, severance pay, the real possibility
of appeals, litigation, and unemployment payments, and pay and
grade retention for other employees affected. Buy-outs have clearly

lefined short-term costs, but they lead to much larger long-term
savings from salary and benefits that will not be paid due to the
FTE reductions.

It might also be asked, Mr. Chairman, whether buy-outs don’t
simply pay people for what they would have done anyway. Our ex-
perience indicates otherwise. From 1983 to 1991, the Government-


61

Direct Spending and Receipts

In addition to authorizing appropriations, the bill contains several provisions af-
fecting direct spending and receipts.

Voluntary Separation Incentives. Section 1710 would allow the Secretary of State,
the Director of the United States Information Agency, the Administrator of the
Agency for International Development, and the Director of the United States Arms
Control and Disarmament Agency to offer separation incentive payments to employ-
ees before the end of fiscal year 1996. This provision would result in direct spending
costs because some employees who retire with the incentive would receive their an-
nuities earlier than under current law. CBO estimates that the costs of section 1710
would be 56 million in 1996, 59 million in 1997, and $3 million in 1998. In 1999
and 2000, however, CBO estimates direct spending savings of less than $1 million
because people who retire early would receive reduced annuities in those years.

Based on preliminary results from the voluntary separation incentive program
that expired March 31, 1995, these agencies made about 1,000 incentive payments
in 1994 and 1995. The results suggest that most of the employees took the incentive
and retired. Although many cligible employees took an incentive payment, and re-
tired in 1994 and 1995, CBO assumes that the employment cuts required in this
bill are great enough—about 9,000 full-time equivalents by 1997—that a comparable
number of separation payments will be needed. The estimate assumes that about
60 percent of the retirees would have retired without the incentive. The estimate
also assumes that the remaining 40 percent who accept the incentive would retire
one or two years earlier than they would have otherwise.

Other Provisions. Section 601 would repeal several permanent appropriations for
interparliamentary groups. The repeal would lower budget authority and outlays by
$150,000 per year. Section 413 would require the Director of the United States In-
formation Agency to carry out a pilot program of selling advertisements on the a
cy’s television and radio broadcasts and to spend the collections on operations. The
net budgetary effect of this pilot program would be negligible.

Spending Subject to Appropriations Action

The bill would authorize the appropriation of $23.3 billion for international affairs
and other programs over the next four years. The bill would reorganize various of-
fices and functions within the Department of State and transfer the authorities and
functions of the United States Information Agency, the Arms Control and Disar-
mament Agency, the International Development Cooperation Agency, and the Agen-
cy for International Development to the State Department.

The bill would provide ific authorizations for the payment to the foreign serv-
ice retirement and disability fund, the emergency migration and refugee account,
and the buying power maintenance account. These programs now have permanent,
indefinite authorizations, which would not be repealed by this bill. This estimate,
therefore, reflects no change in the projected spending for these accounts.

In addition, the bill contains various other indefinite authorizations. Section 137
would limit the authority provided in the following sections to the extent or in the
amounts provided in appropriations acts.

Fees for Machine Readable Visas. Section 163 would authorize the Secretary of
State to charge fees for machine readable visas in years 1996 through 1999. The
authority would be limited to $150 million per year, but collections are likely to be
much less than that threshold. The bill specifies that income from the fees be re-
corded as offsetting collections and be available for spending on consular activities.
Based on information from the Office of Management and Budget (OMB), CBO esti-
mates that the department will collect and spend $80 million each year from these

fees,

Immigrant Visa Fees. Section 161 would authorize the Secretary of State to
charge a fee for certain immigrant visas and to use the proceeds. CBO estimates
that the fees would generate $2.8 million per year based on information from OMB.

Buying Power Maintenance. Section 111(b) would authorize such sums as may be
necessary to cover the increased costs caused by the depreciation of the dollar. CBO
estimates that an additional $42.7 million in 1996 would be needed to restore the
value lost by the sharp drop in the dollar since the budget was prepared.

International Center Reserve Funds. Section 133 would authorize the special fund
for the Internationa] Center to earn interest. The interest, approximately $500,000
per year, may be appropriated for maintenance, security, and additional surveys
and ‘plans associated with developing areas within Washington, D.C. for chancery
and diplomatic purposes.

Funds for Environmental Scientific. Cultural and Related Areas. The bill would
authorize recipients of grants for environmental, scientific, and cultural activities to
deposit grant funds in interest-bearing accounts and to use the interest for the same



17

other objectives: Increased competitive advantage, increased pro-
ductivity, increased customer service, improved decisionmaking,
and reduced waste and inefficiency. The most common restructur-
ing activities were reorganization and downsizing.

As for the downsizing tactics, most organizations proceeded
through a series of steps to attain their desired results. Ninety-one
percent used natural attrition of the workforce, 44 percent offered
early retirement windows, 43 percent offered monetary severance
packages. Often these downsizing tactics did not work, and, indeed,
72 percent of the organizations were also required to use the tactic
of involuntary severance.

It is interesting to note that the early retirement windows were
most successful in achieving downsizing goals when the programs
offered supplemental income benefits until early retirement age
and some form of guaranteed health coverage, coupled with fea-
tures designed to help individuals transition to their new situa-
tions.

As noted earlier, voluntary severance Programs were used by 43
percent of the companies. The success of these programs, as was
true with the early retirement windows, depends in large part on
the demographics of the workforce and the length of service of the
employees. If an organization has a high percentage of older work-
ers with long service, the voluntary severance package can and has
proven attractive to many workers who feel they have the skills
that make them employable elsewhere. However, voluntary sever-
ance programs that do not offer paid or supplemental health care
coverage for a period of at least 6 months after severance, are not
as successful in achieving downsizing objectives in the private sec-
tor.

Beyond voluntary and involuntary severances, other compensa-
tion tactics are used frequently to support restructuring. Perhaps
among the most interesting findings of the study were the dif-
ferences between the compensation tactics used and those that
turned out to be most effective. For example, 51 percent of the or-
ganizations froze pay or reduced pay increases, but only 21 percent
found this action to be very effective; 24 percent pushed ownership
down—the levels—down to different levels in the organization, but
44 percent of the those who did found this tactic very effective.

In summary, when it came to using compensation tactics, re-
structuring organizations tended to take the easiest course of ac-
tion, but the easiest course of action usually proved consistently
the least effective.

What are the key ingredients of successful restructuring? The
findings were consistent among the participants: Restructuring was
based on a clear imperative; any downsizing was handled in a hu-
mane manner; senior management was highly visible; the objec-
tives were clearly articulated; there was effective employee commu-
nications; and employees were involved in the change process.

Mr. Chairman, we were asked our opinion on whether the experi-
ence and tactics of restructuring used in the private sector can be
applied to the public sector. For the most part we believe they can
be applied.

Perhaps one of the most important lessons from the private sec-
tor is the need to have a clear picture of what the end organization


47

TABLE 1.—A Comparison of the Cost Elements of RIFs and Buyouts

Cost Element Observation

Personnel processing... ...nen Because of the staff time needed to create retention registers, RIFS probably
hhave higher personnel costs.

Appeals Since the results of RIFs are imposed on rather than chosen by individual em-
ployees, a larger number of appeals are likely, hence greater costs.
Unemployment This cost applies only to RIF.

Annual leave payment onsen This cost would be the same for both RIFs and buyouts for & given employee:
however, since RIFS are more likely to affect lower-graded workers with less
tenure, overall annual leave payments would probably be less for a RIF. Com-
Piicating matters is thet an assumption would have to be made as to when
‘employees would have otherwise separated were it not for a RIF or buyout.

Grade and pay retention (for athers) This cost applies only to RIFs.
‘Severance pay . This cost applies only to RIFS and can be as much as a full year's salary.
‘Separation incentive payment This cast applies only to buyouts. However, because it is the lesser of an em-

ployee’s severance pay or $25,000, this cost wauld be the same of less than
‘the severance pay employees would receive in a RIF.
Payment to the retirement fund This cost applies only to buyouts
Lost productivity Because of the final outcome of RIFS is generally unpredictable, whereas
buyouts con provide agencies with greater control over separations, the cost
of lost productivity due to skill imbalances, employee uncertainty, etc., would
ike by higher with a RIF.

3. Your testimony concluded that buyouts are less costly than RIFs both finan-
cially and nonfinancially. RIFs are seen to be unmanageable and disruptive to agen-
cy operations. However, RIF results are only as good as the regulations allow them
to be. You testified that RIFs limit agencies’ control over who is ultimately sepa-
rated because of the regulations. Could reductions-in-force be managed differently
if the guidelines were tailored to enable agencies to target their RIFs more consist-
ently with management needs? That is, couldn’t agencies resolve this problem
through revised regulations?

The factors to be used in determining which employees are separated during a
RIF are set forth in law. Under 5 U.S.C. 3502, it is OPM's responsibility to prescribe
regulations governing RIFs which give due effect to the following four factors: (1)
tenure of employment, (2) military preference, (3) length of service, and (4) efficienc
or performance ratings. With the exception of certain specific requirements regard-
ing the retention rights of certain veterans, the statute provides OPM some discre-
tion in promulgating RIF regulations to determine how much weight should be ac-
corded to each factor. However, while OPM does have authority to revise its RIF
regulations to modify the relative importance of the stated factors, individual agen-
cies generally do not have independent authority under current law to promulgate
their own RIF regulations that could be tailored to meet the specific management
needs of each agency.

4. RIFs are typically described as extremely disruptive to agency operations. How
do buyouts affect agency operations? Are declines in retirement rates a necessary
evil accompanying buyout programs? When employees resist separation to receive
a cash payment, how does this hamper the program which aims to accelerate the
retirement rate?

Buyouts give agencies much more potential control over their resultant workforce
composition than do RIFs. As stated in our September 22, 1994, testimony, Federal
Employment: The Results to Date of the Fiscal Year 1994 Buyouts at Non-Defense
Agencies (GAO/T-GGD-94-214) buyouts should be accompanied by adequate strate-
gic and workforce planning to meet NPR’s reinvention goals. This is important as
a means of avoiding the disruption of agency operations. Under the NPR, agency

lans should include steps to reduce bureaucratic layers, flatten hierarchy, reduce
feadquarters staff, and pare down management control. Without adequate plan-
ning, buyouts may result in loss of institutional memory, reduced morale and pro-
ductivity, increased workloads, and difficulty meeting the agency’s mission.

OPM data on the use of buyouts indicates that little more than half the employees
who received buyouts were eligible for regular optional retirement. Reports and ru-
mors of impending buyouts may lead to delayed separations by retirement-eligible
employees.

ince a buyout program is authorized, employees could be provided a limited pe-
riod of time'in which to accept the buyout offer, in order to reduce the tendency
of retire-eligible employees to further defer their retirement decisions.


49

—Agency heads should have discretion to approve or turn down buyout re-
quests based on critical skill needs. While buyouts may be a humane method
of downsizing, agencies have a responsibility to ensure that the essential staff
members remain.

—Agencies should establish and maintain effective communications with em-
ployees regarding how the buyout program works.

—Agencies should assure that remaining staff obtain necessary retraining to
assure effective and efficient operations in a downsized environment.

It would be reasonable to use buyouts as an alternative to RIFs in future depart-
ment consolidations, assuming the above conditions are met.

Consistency With National Performance Review

1. The National Performance Review advocated a reduction in the supervisor-to-
staff ratio from 1:7 to 1:15 by the end of Fiscal year 1999. In the agencies you exam-
ined what type of supervisor-to-staff ratio changes has occurred?

To ensure that agencies’ downsizing efforts consisted of management reforms con-
sistent with the NPR’s reinvention goals, the President directed each federal agency
to submit a streamlining plan to OMB. These plans were to include the steps bein;
taken to reduce supervisor-to-staff ratios. Table 2 shows the ratio changes reporte
by agencies we examined.

TABLE 2—Supervisor-to-Staff Ratio Changes at Selected Agencies

Agenoy Py 1993" FY 1996
Agriculture 18 1:10
Commerce so nnn . _ sont 16.6 184
Justice . - — 158 168
Interior 16 19
MASA ..... 154 18
Archives ... 16.5 13.9
GSA 158 Wd

Internal Revenue Service .. 18

“Mast agencies calculated thei ratios using the 1983 enacted base as ther sting poit. According fo OMB, this isthe Tulime equiva:
lent (FTE) smpoyment level estimated by the previous administration i As final budge, an€ would have been downsizing iiliaves The
‘ceptions are the National Archives and GSA, which used actual 1993 employment levels. The Department of the Interior did not report whether
it used the enacted base or actual employment levels.

‘Source: Agency streamlining plans.

2. Is focusing on reducing the supervisor-to-staff ratio an effective and efficient
means to downsizing? Please include in your answer any specific experiences you
might be aware of in private sector.

ile we generally support increasing the supervisory span of control where ap-
propriate, it should be done with consideration of the continuing need for oversight
and accountability of employees.

Generally, reducing the supervisor-to-staff ratio in the process of downsizing en-
ables agencies to flatten their hierarchies and reduce their payrolls. As stated in our
answer to question 5, some agencies have increased their supervisory span of control
by reclassifying supervisors and managers to non-supervisory duties. Such actions
by themselves do not contribute to reduced FTE levels or better management.

During our review of downsizing stratcgics at 25 non-federal organizations, 1 com-
pany told us that its restructuring efforts focused on reducing supervisor-to-staff ra-
tios. (See “Workforce Reductions: Downsizing Strategies Used in Selected Organiza-
tions” (GAO/GGS.95-54, Mar. 13, 1995).) However, while the company’s efforts re-
sulted in about 100 persons being demoted or reassigned, only about 17 managers
were involuntarily separated.

3. In your testimony, you mention that each agency must provide OMB with a
streamlining plan that made sense programmatically, met FTE guidance, and was
based on sound analysis. Did you find that OMB established an effective, results
oriented review of the agency submissions?

We did not examine the effectiveness of OMB's review of agency streamlining
plans. However, OMB’s criteria for reviewing agency streamlining plans appear to

rovide a framework for an effective review. Criteria addressed how the plan af-
fected agency performance; the composition, skill-mix, and location of the workforce;
span of control; organizational layers; NPR-targeted positions; the number of senior
level employees; and streamlining actions. OMB officials said that while many of the
streamlining plans did not initially meet these criteria, the quality of the plans im-
proved following OMB's direction to revise them.



12

views and went on satellite TV to reach employees, agency officials, and union rep-
resentatives. We published a buyout newsletter that was widely circulated. We gave
one-on-one assistance via a telephone hot-line that received thousands of calls.

Finally, Mr. Chairman, you asked about procedures and safeguards we used to
monitor the program.

We published strict regulations to ensure that employees who returned to Federal
service within five years of receiving an incentive payment must repay the entire
amount of the buyout. These regulations addressed Congressional concerns that the
buyout program might become a revolving door for Federal employees. That has not
been the case. We have conducted spot checks via computer of OPM’s Central Per-
sonnel File and to date have found no cases of abuse.

OPM also consolidated its reporting requirements to enable agencies to report the
use of buyouts on the same format with early retirement and other data, ugh
these quarterly reports, occasional updates, and close contact with the agencies, we
tracked the buyout program continuously—always in close contact with OMB, I
might add.

r, Chairman, I realize that some might ask, “Why pay people to leave govern-
ment?”

‘There is a solid, dollars-and-cents case for the buyouts. By our projections, the
typical buyout is significantly less expensive than the typical RIF.

Moreover, as we downsize, we must seek to keep up the morale and productivity
of workers who continue on the job and are expected to do more work than ever

fore.

RIFs can be more expensive than buyouts because RIFs involve increased admin-
istrative costs, severance pay, the possibility of appeals, litigation and unemploy-
ment payments, and pay and grade retention for other employees affected.

Buyouts have clearly defined short-term costs, but they lead to much larger long-
term savings from salary and benefits that will not be paid due to required FTE
reductions

It might also be asked, Mr. Chairman, whether buyouts don’t simply pay people
to do what they would have done anyway.

Our experience indicates otherwise. From 1983 through 1991, government-wide
attrition rates averaged 7 9%. But in Fiscal Year 1992, that figure had declined to
5.2% and in FY 1993 it was as low as 2.9%.

We attribute this decline in attrition to the sluggish economy. People were not
leaving their jobs because they feared they couldn't find a new career in either the
public or private sector.

When the Department of Defense began using its buyout authority in 1993, the
attrition rate in government increased for the first time in five years.

White collar retirements almost doubled, from 1.4 to 2.7 per 100 employees.

Blue collar retirements did more than double, from 2 to 5.5 per 100 employees.

The buyouts were instrumental in jompsuarting departures from government.
Without them, agencies would have had to resort to expensive and disruptive layoffs
to achieve significant downsizing.

Mr. Chairman, your letter asked whether we thought the Federal Workforce Re-
structuring Act was an appropriate model to be used when agencies face substantial
personnel reductions.

‘Obviously, we feel that the buyout program has been an effective tool, has bene-
fited both individual employees and the overnment itself, and in the long run will
save the taxpayers significant amounts of money.

However, it was never anticipated that the buyouts would be permanent, They
were seen as an instrument the government could use for a specific period of time
to achieve specific workplace goals.

We are not advocating a new Government-wide buyout program. We are currently
looking at a variety of programs to assist in the humane downsizing of agencies.
If an agency-specific buyout program is included, we believe it should be modeled
on the 1994 Restructuring Act. It should be targeted, it should be used to avoid
RIFs, and it should include program controls, including the requirement for an FTE
reduction for each buyout. "there should be Government-wide standards to avoid the
confusion and inequity of different agencies offering different packages.

Should such a program be authorized, I believe OPM, on the basis of our recent

rience, can play a valuable role in its design and implementation.
fe will be glad to take your questions.

Mr. Mica. Thank you, Mr. King, for your comprehensive opening
remarks and response to our questions.