16

viding services needed by government agencies. This goal, I believe, is shared by
both political parties and recently endorsed by the NPE which, among other things,
advocated
—exposing agency operations to competition—with other agencies and private
companies and
—providing agencies with the flexibility to obtain services from the best possible
source.

To achieve the A-76 program’s goal, our work has shown that once agencies con-
sider the comparative costs of contracting-out versus using in-house personnel and
relevant noncost factors, the agencies then need to have the flexibility to have the
work performed in the most cost-effective manner.6 Because of the federal
downsizing in progress;, agencies may lack the necessary flexibility to perform ac-
tivities in the manner that is most beneficial to the government. The NPR also rec-
ognized this lack of flexibility and suggested eliminating personnel ceilings and al-
lowing federal managers to manage to their budgets—using ceilings on operation
costs to control spending. The NPR recognized that personnel ceilings could cause
agencies to contract out work that could be done more efficiently in-house.

As Congress and the executive branch continue to revisit issues associated with
contracting-out and Circular A-76, we should not lose sight of the underlying objec-
tives of seeking greater effectiveness and efficiency in government operations. ‘De.
spite the problems experienced in the implementation of Circular A-76, the basic
policy of relying on competition to guide procurement decisions in those markets
where competition exists makes sense and is generally accepted. We also need to
recognize the importance of the A-76 policy in encouraging agencies to systemati-
cally review the potential costs of their activities and to consider alternatives. Any
prospective revision of Circular A-76 and federal contracting policies should seek to
preserve the benefits of fair competition while addressing the concerns of all par-
ties—managers, federal employees, contractors, and taxpayers—about the impedi-
ments to its effective implementation.

This concludes my prepared statement, Mr. Chairman. I will be pleased to answer
any questions you or the Members of the Subcommittee may have.

Mr. Mica, We thank you, Mr. Stevens, and will now turn to John
Koskinen. John is the Deputy Director for Management of OMB.
Welcome.

Mr. KosKINEN. Thank you, Mr. Chairman, members of the sub-
committee. I appreciate having the chance to discuss with you this
morning Federal policies related to service contracting. My testi-
mony today will focus on the Office of Management and Budget’s
Circular A-76, Performance of Commercial Activities, the protec-
tions provided for Federal employees affected by agencies’ contract-
ing decisions, and recent efforts to improve contracting for support
services.

Let me begin by noting that every administration since 1955 has
endorsed the principles of competition and a general reliance on
the private sector for the provision of commercial activities. The
formal A-76 cost comparison process began in 1979, when the
Carter administration sought assurances that agencies make/buy
decisions were cost-effective and that cost-based decisions to per-
form in-house or by contract reflected a level playing field.

The Reagan and Bush administrations also supported the circu-
lar’s cost comparison process. Circular A-76 is a management
reinvention process, designed to use competition to encourage
change and improve the quality and cost of commercial support
services. The process consists of three basic elements: the develop-
ment of the performance work statement; the management study;
and the submission of formal bids in the conduct of the A-76 cost
comparison.

“Government Contractors: Contracting-Out Implications of Streamlining Agency Operations”
(GAO/T-GGD-95-4, Oct. 5, 1994).


37

at 1:30 p.m., in this room. And also, gentlemen, I have additional
questions which I would like to submit to you in written form. And
without objection, those will be entered into the record.

[The information referred to follows:]

QUESTIONS FOR AND ANSWERS FROM THE GENERAL ACCOUNTING OFFICE

INHERENTLY GOVERNMENTAL

1. Question: Previous hearings of the Post Office and Civil Service Committee in-
dicate that the Office of Management and Budget has developed a list of “inherentl;

vernmental” functions and that GAO has participated in the effort to define sucl

functions.

Is it fair to say that anything not on the inherently governmental list has a coun-
terpart in the private sector, and could therefore be subject to competitive cost com-

jarisons?

p Answer: OMB, in its Policy Letter 92-1 entitled, “Inherently Governmental Func-
tions,” (September 23, 1992) includes a list of 19 functions that are considered to
be inherently governmental in nature. According to OMB, this list is illustrative.
This implies that the list is not all-inclusive, and thus additional functions not on
the list could also involve inherently governmental functions. As the missions and
activities of the many federal agencies vary considerably, it is very likely that many
other activities could fall within this category.

The OMB policy letter also includes a list of 19 other functions that are not con-
sidered to be inherently governmental. Although, as OMB states they could ap-
proach this definition because of the way in which the contractor performs the con-
tract or the manner in which the government administers the contract. When con-
tracting for such services and actions, OMB cautions, agencies should be fully aware
of the terms of the contract, contractor performance, and contract administration to
ensure that appropriate agency control is preserved.

Accordingly, we do not believe that it is fair to assume that anything not on
OMB’s inherently governmental list has a counterpart in the private sector and
could therefore be subject to cost comparisons. Instead, we believe that the deter-
mination as to which activities are subject to cost comparisons should more appro-
priately be made by each individual agency, taking into account the agency’s con-
text, and applying the OMB criteria.

Can you estimate for this subcommittee what portion of the current workforce is
performing such “inherently governmental” functions?

Answer: We have no information that would permit us to estimate what_portion
of the current workforce is performing inherently governmental functions. One fac-
tor that makes such an estimate particularly difficult is the varied and diverse na-
ture of the duties and responsibilities of most federal employees. During a normal
workday, the typical employee may participate in the performance of many func-
tions. To specifically break out that portion of an employee's time that may be de-
voted solely to inherently governmental functions would require a study of the ac-
tivities of selected employees. Such a study probably could not then be generalized
to account for how other employees spend their time, but rather would only provide
statistical data relating to the employees being studied.

PERSONNEL IMPACT

1. Question: Your testimony indicates that federal employees have rights to ap-
peal if they believe that the methodology used in A-76 cost comparisons is unfair.

Do competing contractors have corresponding appeal rights?

Answer: The purpose of the A~76 appeal process is to provide all affected parties
with the ability to resolve questions relating to (1) determinations resulting from
1-76 cost comparisons and (2) justifications fbr converting contracts without a cost
comparison in accordance with the Circular’s provisions. As affected parties, all con-
tractors who have participated in the A-76 cost comparison process may appeal an
A-76 determination if (1) it is not a question of awarding to one contractor in pref-
erence to another or a question of a government management decision, (2) it can
be demonstrated that the result of an appeal could change the cost comparison deci-
sion, and (3) the appellant meets the filing deadlines specified in the Circular.

‘A managers of the contract appeals. process, has GAO conducted any particular
overviews of A-76 appeals? What portion are filed by employees or their organiza-
tions?

Answer: As managers of the contract appeals process, GAO has not conducted any
overviews of the A-76 appeals process. Some contract disputes arising from A-76


33

Mr. STEVENS. Mr. Chairman, one of the restrictions that OMB
has targeted as a burdensome one does, indeed, deal with this
question of how long the studies are. In Public Law 103-35, Section
8043, which is the Fiscal year 1995 DOD Authorization Act, it pro-
hibits the use of DOD funds to complete any A-76 cost comparison
that is more than 24 months old and involves a single function, or
more than 48 months old and involves multiple functions.

The overall effect of this, really, is to cancel ongoing studies, and,
it seems to me, to open some opportunities for foot-dragging: if we
could only make this thing take up another few months, maybe we
won't have to go through with it.

Mr. Mica. Well, just in the political process for the 27 months
that I’ve been here, its easy to see how these things evolve and how
the Congress gets wrapped up in passing prohibitions that don’t
make any sense and do not allow us to ‘do the job we set out to

lo.

Mr. STEVENS. Right.

Mr. Mica. Mr. Koskinen, you took the words right out of my
mouth and answered the next question, which was—but I don't
know if you answered it completely—it’s encouraging competition.
That seems to be the key to success in the private sector or where
these things have been successful: that you have true, real competi-
tion and a level playing field. Do you think we can craft something
legislatively that would also encourage competition, or do you think
that can only be done in a circular fashion, no pun intended?

Mr. KosKINEN. That’s right. Well, again, I think back to where
we started earlier in my testimony—I don’t think we have any dis-
agreement on what the goals ought to be or the standards ought
to be. In fact, I don’t think the circular is unclear about those goals
or standards. The real question is, can we get the process to work
effectively? I think your focus is right. Can we remove the impedi-
ments on managers, whatever they might be, to, in fact, function
effectively?

As I say, what’s driving the system, that has changed, certainly,
in the last 5 to 6 years, is that the managers themselves under-
stand that they’ve got to become more effective in their use of re-
sources because they have fewer resources that are available to
them. What we have to be careful about, as we start to drive them
to be more efficient, is that we don’t tell them specifically how each
and every one of them ought to do each and every thing they do.

That’s a natural tendency, not just of legislatures, it’s a natural
tendency of central management agencies, as well, to say, this is
the only way to do it. The Federal Government is a vast enterprise
with wide-ranging responsibilities and activities. What we have to
do is be able to provide the tools and the mechanisms for effective
management, then monitor it to ensure it’s done well; but basically,
not try to tell people how to do their jobs.

Mr. Mica. In this imaginary legislation that I’m crafting, we’re
up to Title 3, which is called employee protection. How would you
institute some protections for employees, and what rights and ben-
efits should be preserved for competition and continuance of em-
ployment?

Mr. STEVENS. Mr. Chairman, Congressman Conyers, then in ca-
pacity of Chairman of the Government Operations Committee, did


42

reviewed in the period 1990-1994, with estimated annual savings of $135.6 million.
This number was restricted by the legislative moratorium on DOD conversions of
work to the private sector in 1992 and. 1993. Since 1990, the civilian agencies, in-
cluding the Department of Veterans Affairs, the General Services Administration
and the Department of Transportation, have reported that they have submitted ap-
proximately 2,500 FTE to review under OMB Circular A~76.

METHODOLOGY

1, Question: “Your testimony indicates that agencies claim that the cost compari-
son studies required by OMB Circular A-76 are cumbersome, time consuming and
difficult to perform. Aren't these methods simply the same procedures that would
be used in any organizational assessment or review of operations?”

Answer:

The methods used in an OMB Circular A~-76 cost comparison are very similar to
the methods used by the private sector in their make or buy decisions. The difficulty
lies in (1) what is meant by a cost comparison; (2) the unique requirements of the
Federal procurement process; and (3) the necd to level the playing field between the
calculation of Federal and private sector costs.

The first step in the A-76 process is to define the workload. This is often a major
undertaking, as many departments and agencies do not have the management sup-
port systems to identify in-house workloads or their fully allocated costs. Second, a
management study is conducted that allows for the restructuring of the organiza-
tion. This is an important part of the A~76 process that may or may not be included
in a private sector make or buy decision. It is intended to protect current employees
from historical inefficiencies, creates incentives to restructure services, reduce costs,
and serves to protect the procurement process itself, by protecting the in-house bid.
Finally, the Circular requires that a cost comparison be conducted with bids from
the private sector. This requires that the Federal procurement system be used to
solicit bids from the private sector and to comply with prohibitions against “bid
shopping.”

‘Private sector make or buy decisions are similar in that they too require a work-
load definition, a sense of the fully allocated in-house and contract costs, and must
seek comparable estimates from outside providers. They are not, however, bound by
Federal procurement, regulations, the need to treat all potential offerors as equals
or even seek full and open competition. Private sector make or buy decisions do not
involve public versus private sector cost considerations, the need to provide an ad-
ministrative review process so that decisions can be made with full public disclo-
sure, nor are they under any obligation to offer their employees an opportunity to
compete for the work.

2. Question: “Has OMB compared the methodology used in private company’s de-
cisions to produce or Purchase ods and services to the methodologies used in A—
76 cost comparisons? What results have your obtained from such cost comparisons?”

Answer:

In the development of the 1979 and 1983 versions of the Circular, wide public and
private sector comment was solicited. Agency, union, and private sector comments
were received. As noted, the private sector’s make or buy decision process is not,

enerally, as rigorous or as open to public review as that required by the Circular.
Ae Circular is-designed to ensure that ail interested parties have an equal oppor:
tunity to participate in the process and to ensure that the vested interests and
rights of all parties are protected.

3. Question: “Your testimony indicates that the state of the art in the private sec-
tor is one factor complicating government agencies challenges in defining their most
efficient organizations. Why? If the Government is that far behind the private sector
in technology for example, shouldn't the contracting decision be automatic?”

Answer:

The reference to the private sector's “state-of-the-art” does not necessarily refer
to any technological advantage. The reference was made with regard to the level of
effort required to develop the Government’s in-house MEO. The development of the

0 is a process that can take time depending on the conditions that exist in-house
and the competitive environment that the in-house organization is about to enter.
Managers and employees review in-house service alternatives and the application
of private sector methods. Market studies, work flow analyses, position management
reviews, supply systems reviews, and performance standard reviews have been used
to improve in-house service quality and reduce cost.

Ultimately, the lessons learned from the MEO process are reflected in the Govern-
ment’s in-house cost estimates. In addition to permitting employees to compete for
the work and the protections offered to the procurement process itself, the MEO



10

ten in such arcane language specific to particular programs that
it’s difficult to identify that their effect is on contracting out stud-
ies. .

The second point I'd like to make is that Federal workers per-
ceive that the A-76 program really is a contracting out program,
rather than having a broader purpose of improving efficiency and
economy within government. Although there are some protections
in the circular, we’ve found the A-76 program, on balance over the
years, has had an adverse effect on employee morale and productiv-
ity.
The study process itself is disruptive in that employee anxiety,
understandably, begins as soon as an A-76 study is announced.
Some affected employees begin right away to look for other jobs.
There’s a reduction in individual and organizational productivity.
And it frequently results in the loss of some of the best employees.
The cost studies themselves are, in practice, mostly done by oper-
ational managers and operational workers rather than by trained
management engineers or management analysts.

They’re required by the circular to develop detailed work state-
ments and analyses. These are tasks that they are often not very
skilled in; they may never do again; and they're often given as
extra duties. The absence of good” workload data, and particularly
good cost accounting systems, makes the task they face all the
more difficult. The time that it takes to do A-76 studies has been
a major problem in the past, and contributed to the disruption.

When we checked DOD—the Defense Department has done most
of the contracting out so far—when we checked their data base in
1989, we found 940 active A-76 studies going on. Of those, about
44 percent, or 411, had been started in 1983 or earlier. So they had
been going on for 6 years at least. We haven’t done any recent
work on the question of what happens to displaced workers under
the A~76 program. However, in a 1985 report on the program’s im-
pact on the Defense Department employees, we found that the ma-
jority of Federal workers whose jobs had been contracted out did
obtain other Federal employment, most often at the very same in-
stallation that they had been at. Only 7 percent wound up working
for the contractor, in spite of the right of first refusal that’s in the
circular.

Of that small minority who did, more than half said that they
had received lower wages from the contractor, and most reported
that the contractor benefits, particularly retirement, were not as
good as their government benefits. So there’s a built-in reluctance
to take the contract route in those days. Now, the current govern-
mentwide downsizing effort, we think, will not even provide the
same opportunities that we’ve seen in the past.

Under OPM’s Interagency Placement Program, in the 9 months
before last September, from an inventory of over 2,000 registrants,
we found that agencies made just 204 job offers. And I’m sure not
all of those wound up being accepted.

The third point is that we have consistently found that evaluat-
ing the overall effectiveness of contracting out decisions and verify-
ing the estimated savings reported by agencies, and by OMB in the
aggregate, is extremely difficult to do after the fact. As a result, we
can’t convincingly prove, nor can we disprove, that the results of


48

DEFENSE

1, Title 10 Section 114(aX2)—Prohibits contracting out of R&D functions under
Circular A-76.

2. Title 10 Section 2461—Requires cost comparisons, congressional notifications,
Most Efficient Organization (MEO) certifications and annual reports to Congress to
contract out.

3. Title 10 section 2462—Permits contracting out if a cost comparison is fair and
includes certain costs.

4. Title 10 Section 2463—Requires a semi-annual report of all conversions to the
private sector involving more than 50 FTE.

5. Title 10 Section 2464—Limits contracting out of logistics support functions, un-
less waived by the Secretary.

6. Title 10 Section 2465—Prohibits conversion of firefighting and guard services
to contract performance.

7. Title 10 Section 2466 and 2469—Limits contracting out of Depot Maintenance
functions—the 60/40 in-house to contract rule.

8. Title 10 Section 2467—Requires DOD to consult with employees on the per-
formance work statement and MEO and include in the in-house bid certain retire-
ment costs.

9. Title 10 Section 2468 (Nichols Amendment, P.L. 100-800)—Removes from the
Secretary and assigns to the local installation commanders the authority to deter-
mine whether any function will be studied for possible conversion to contract per-
formance and how many FTE will be studied. Extended through September 30,
1995, by P.L. 103-337 Section 386(c), FY 1995 Authorization Act.

10. Title 10 Sections 4532/9532—Provides for the mandatory in-house use of DOD
factories and arsenals.

11, P.L. 103-335 Section 8020, DOD FY 1995 Appropriations Act—Requires MEO
certifications and reports to Congress regarding contracting out.

12. P.L, 103-335 Section 8043, DOD FY 1995 Appropriations Act—Prohibits the
use of DOD funds to complete any A-76 cost comparison that is more than 24
months old and involves a single function or is more than 48 months old if it in-
volves multiple functions. Designed to cancel studies and prevent conversions to
contract.

13. P.L. 103-835 Section 8057, DOD FY 1995 Appropriations Act—Prohibits the
use of A-76 to cost compare depot maintenance services. As a result, the DOD
Depot Maintenance Cost Comparison Handbook was developed.

14, P.L, 102-392 Section 207—Prohibits DOD from contracting for printing serv-
ices, except as permitted by the GPO.

EDUCATION

None. Education was previously restricted from contracting out library services,
but this legislative restriction has expired.

ENERGY
No legislative restrictions have been identified.
ENVIRONMENTAL PROTECTION
No legislative restrictions have been identified.
GENERAL SERVICES

1, Part 51-5.2, Federal Acquisition Regulations—Effective October 28, 1991, it be-
came mandatory for Federal agencies to order commodities on the CBOSH Procure-
ment List which are in the FSS supply system from GSA.

2. 40 USC 490(c) or P.L. 100-440 Section 507 (Edgar Amendment}—Prohibits
GSA from contracting for guard, clevator operators, messengers and custodians
(services).

HEALTH AND HUMAN SERVICES

No legislative restrictions have been identified.
HOUSING AND URBAN DEVELOPMENT

No legislative restrictions have been identified.


20

parisons conducted. But with the reinvention efforts of this admin-
istration and the renewed emphasis on budget savings, we believe
that that situation is changing. The renewed emphasis on budget
savings is forcing agencies to reconsider how work is being per-
formed and whether competition could reduce costs.

Finally, you asked about legislative impediments and whether
the administration would seek legislation to authorize cost com-
parison guidelines, such as those contained in Circular A~76.
Clearly, any legislation that limits the executive branch’s ability to
contract out, privatize or contract in for the performance of com-
mercial activities impedes our ability to hold managers accountable
for cost-effective management decisions. Historically, restrictions
have surfaced in a number of areas, including, as Mr. Stevens
noted, legislative FTE ceilings and floors; specific limitations as to
what commercial activities can or cannot be contracted out by func-
tion and location; agency-specific cost comparison procedures; and
specific prohibitions from even the study of contracting out options.
We have no recent list of current legislative obstacles to contracting
out, privatization or contracting in. We understand, however, that
the staff of the National Performance Review has begun to develop
such a list. If and when it is prepared, we would be happy to share
it with you. Frankly, we believe that any legislation with respect
to Circular A-76 or its requirements is unnecessary at this time
and, in fact, could even make the process more difficult.

The A-76 cost comparison process can be a win-win situation for
all concerned. By improving management and creating incentives
to change the way commercial activities are performed, by cutting
out the waste and confusion caused by antiquated workload and fi-
nancial systems, and by improving our contracting methods, the
agencies will achieve better performance at lower cost. The private
sector is already an important partner in the provision of services
needed by and for the Federal Government. The question here is
whether or not the private sector should provide additional levels
of support, and, if so, when? By improving the level of fairness in
competitions between in-house and contract resources, in-house
and contract employees can be assured that their efforts will be re-
warded appropriately. Taken together, this approach promises a re-
duction in unnecessary administrative support costs and will, we
believe, enable us to concentrate more on mission and mission de-
livery for every agency. We look forward to working with you and
your committee as we seek to make improvements in this entire
process.

Mr. Chairman, that concludes my prepared statement, and, like
Mr. Stevens, I will be pleased to answer any questions you or the
committee may have.

Mr. Mica. I thank you both for your testimony and your partici-
pation. After reading through your testimony and some of the back-
ground, it’s kind of amazing that anything gets contracted out,
with some of the barriers and constraints that have been set up,
and the patchwork and sort of quiltwork of prohibitions and obsta-
cles that have been set up to make—I guess—to protect certain in-
terests. And maybe some of it is to make an honest attempt at con-
tracting out.


38

decisions are brought to GAO by disappointed bidders. While we generally do not
review disputes over an agency's determination under A-76 to perform work in-
house rather than to contract out, we will consider protests alleging that there was
a faulty or misleading cost comparison which materially affected the agency's deci-
sion. Even in those cases, however, our review is intended only to protect the parties
that competed from the arbitrary rejection of their bids; our review does not extend
to protests by non-bidders such as federal employees or union locals that represent
federal employees.

2. Question: Your testimony reported that under the Office of Personnel Manage-
ment’s program for priority placement of federal employees affected by reductions
in force, only 204 of 2,729 registrants gained positions with other agencies.

Do you have any information about the number of people separated as a result
of cost comparisons during this period?

Answer: We have no information on the number of federal employees separated
as the result of cost comparisons. We are not aware of such information being devel-
oped and maintained by federal agencies. On the other hand, federal agencies may
have data on cost comparisons performed as the result of employee downsizing. The
Federal Workforce Restructuring Act of 1994 (P.L. 103-226) established ceilings on
the total number of full-time equivalent positions for federal agencies. Section 5(g)
of the act provides that there should be no increase in the procurement of service
contracts by reason of the federal downsizing effort, except in cases in which a cost
comparison demonstrates such contracts would be to the financial advantage of the
federal government. To the extent that certain functions are now being performed
by contractors that were previously performed by federal employees since separated
through downsizing, the required cost comparisons presumably showed that the gov-
ernment could benefit through contracting.

Can you inform the Committee about the overall extent of federal hiring during
that period?

Answer: In our statement, we indicated that, according to OPM, between the
interagency placement program's inception in December 1993 and September 16,
1994, from an inventory of 2,018 registrants, agencies made 204 job offers. We fur-
ther stated that OPM attributes the low number to the fact that agency downsizing
has substantially reduced the number of vacancies. An OPM official advised us that,
despite downsizing, executive branch agencies hired about 219,000 new employees
during fiscal year 1994. However, only 38,000 of these employees were in full-time
permanent positions (exclusive of on-call, seasonal, and student trainee employees).

IMPLEMENTATION

1. Question: In conducting A-76 studies, federal agencies are required to review
their organizations and develop a “most efficient organization” or MEO, which be-
comes the basis of the “in-house” bid, against which contractors are compared.

Do you have any record of federal agencies winning A-76 cost comparisons, then
failing to implement the MEO?

‘Answer: Circular A-76 does not require agencies to routinely evaluate the per-
formance of activities that remain in-house as a result of an A~76 cost comparison.
Therefore, it is very difficult to know with certainty whether agencies fully imple-
ment the “Most Efficient Organization” (MEO) that they use in their in-house bids.
In our recent work examining the contracting-out experience at the General Serv-
ices Administration (GSA), we reviewed a random sample of GSA’s in-house versus
contracting decisions. GSA has an internal evaluation process for activities that are
retained in-house, known as the Post-MEO Review. While files and documentation
on the actual implementation of MEOs were available for only a few cases, GSA’s
evaluations showed that actual costs remained within the acceptable 10 percent
range above or below the estimated costs for most of the activities we sampled.
Overall, the evaluated scores showed a range of actual costs from 13.5 percent below
to more than 25 percent above the estimated costs of the MEO. The sample activity
with a difference of more than 25 percent between actual costs and estimated costs
failed the agency’s evaluation and was converted to contract.

Although documentation was limited, our review indicated that there were delays
in meeting all requirements for implementing the MEO. There were also reports
that changes in in-house workload—additions to or deletions from the workload an-
ticipated in the A-76 cost comparison—were not always documented. In general, the
documentation provided anecdotal evidence that organizations found it difficult to
separate MEO activities from other activities and to view the MEO scope of work
as a “contractual” obligation.



CONTRACTING OUT: SUMMARY AND
OVERVIEW

WEDNESDAY, MARCH 29, 1995

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

The subcommittee met, pursuant to notice, at 10:15 a.m. in room
311, Cannon House Office Building, the Honorable John Mica
(chairman of the subcommittee) presiding.

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

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

cMillen, National Economic Growth, Natural Resources, and Reg-
ulatory Affairs.

Mr. Mica. Good morning. I call to order the meeting of the Sub-
committee on Civil Service. Thank you for your patience. We had
a Republican conference in conflict with our scheduled starting
time, and appreciate your patience this morning. I want to take
this opportunity to welcome you and our witnesses to our hearing.
This is an important hearing because we’re going to begin a review
of the subject of contracting out.

The hearings today and next week are for the purpose of deter-
mining what the Federal Government has done right and what
we've done wrong in the area of contracting out. It’s my hope that
we can extract from these hearings, and from our experience today,
the correct formula and proper course to utilize the benefits of con-
tracting out. It is critical today that we achieve more cost effective
and efficient services for our taxpayer dollars.

With proper guidelines and focus, I believe that within the next.
4 years it should and could be possible to contract out more than
50 percent of the services and activities of the Federal Government
as we know it today. In November 1987, President Reagan issued
Executive Order 12615, directing executive branch agencies to con-
duct cost comparison studies and inventory commercial functions
being performed by Federal employees.

At that time, OMB identified more than 900,000 positions that
could be compared to private sector performance. I believe that Ex-
ecutive order is still in effect, but has long been ignored. For the
past 10 years, corporate America has experienced substantial
downsizing and created more effective and efficient organizations
in the process.

qa)


31

such a discrepancy now in the numbers that OMB has had now
and in the past—I think from 250,000 to 900,000—is this defini-
tional question. As I understand the way it worked back 5 or 6
years ago, using definitions in A-76, which, admittedly, are not ab-
solutely precise, OMB asked the agencies, how many of your posi-
tions are susceptible to being commercial or being done by some-
thing other than Federal employees.

And basically, on a voluntary basis, they got back something in
the 250,000 range. That’s what emerges if you don’t press very
hard in this regard. The Commission on Privatization, using some
OMB figures that emerged from a more intensive dragnet, where
some OMB people went to the Office of Personnel Management and
looked at job titles and asked just on the basis of what anybody
could see, could this be a function that could be contracted out?
How many people are in that function? And they totaled up the an-
swer.

They came up with something in the 850,000-900,000 range,
went back to the agencies and confirmed that it was actually 2 or
3 times what they'd come up with voluntarily. And that was argu-
able, of course; it’s still arguable. And I would submit that as long
as the definitions are as imprecise as they are today as to what a
inherently governmental function is; what is and is not appropriate
for Federal employees to perform, I’m not sure we could come to
a agreement. And if we did, I’m not sure you would agree.

Mr. Mica. You’d be surprised how crafty I can be in coming up
with legislation?

Mr. KOSKINEN. I think that’s right. As Mr. Stevens stated, and
I was going to note as well, A-76 actually has a set of definitions
of what are functions that could be competed in the private sector.
As you stated, those are somewhat subject to discussion and dis-
pute. But again, I don’t think our problem here is that we don’t
know which are the positions that could be contracted out.

In fact, we have to bear it in mind that the $108 billion worth
of service-based contracting that now goes on is not a small amount
of money. If you look outside of the mandatory budget, a significant
part of the Federal budget is spent on contracting out. In fact, in
the past, one of the arguments has been, there’s too much contract-
ing out.

So again, I think our focus on this specific issue of contracting
in or out ought to be trying to find out, how can we establish a
level playing field, make it an effective device, and then let the
process decide whether we ought to proceed one way or the other.

Mr. Mica. Well, I'd like to do that possibly legislatively. I’m try-
ing to find the best mix of oversight and that would be one of your
responsibilities, or possibly OMB, or maybe in some combination.
Let me ask you about some other elements that you might rec-
ommend. It could be legislative. The administration has talked
about removing floors or ceilings. Would that be an element that
should be included?

What we’re going to have to do is go back and look at some of
these legislative constraints that have been imposed. What's your.
opinion on that?


7

Let me briefly describe each element before discussing the costs
and benefits of the process. The first step is one of the basic build-
ing blocks, implementing, actually, the Government Performance
and Results Act, passed recently. It requires agencies to define
their workload requirements in terms of measurable performance
standards. This approach allows government employees and the
private sector to competitively bid on the same scope of work.

This often has been a major undertaking. Describing the output
of a service requirement, rather than measuring inputs, is a signifi-
cant culture change with many agencies. And defining specific
functions at a sufficient level of detail for fair and open competition
often requires significant effort. And as Mr. Stevens noted, a num-
ber of times, people engaged in that activity are not professionals
in making those analyses.

Many departments and agencies do not have the accounting and
financial management support systems to readily provide for meas-
uring the current costs associated with commercial functions. Sec-
ond, the circular requires agencies to conduct a management study,
allowing for the restructuring of the organization, to identify the
government’s Most Efficient Organization, as it is called, or the
MEO.

This requirement protects current employees from historical inef-
ficiencies in the cost comparison itself; creates incentives to re-
structure services and reduce costs; and serves to protect the pro-
curement process itself by protecting the in-house bid. Managers
and employees review in-house service alternatives and the appli-
cation of private sector methods. Quality work circles, market stud-
ies, work flow analyses, position management reviews, communica-
tions and supply systems reviews, and the development of individ-
ual performance indicators have been used to improve service qual-
ity and reduce costs.

Historically, savings from reviewing the current before A-76 or-
ganization and implementing the government’s MEO have aver-
aged over 20 percent per study—a saving to the government that
is achieved whether or not the function is ultimately performed by
in-house or contract employees. At a minimum, as required under
the circular, another 10 percent savings must be experienced before
a function can be converted from in-house to contract performance.

Finally, the circular requires a cost comparison. The circular’s
handbook describes the specific cost elements of a cost comparison,
and includes such things as fringe benefits, material support, facili-
ties, insurance, contract administration and overhead. These speci-
fications are necessary in order to ensure that both the in-house
bid and the private sector bids compete on the level playing field
I mentioned earlier. The bottom line test ultimately is the cost to
the taxpayer.

Agencies that have pursued A~76 competitions to both contract
out and to contract in say it has been an effective mechanism for
achieving savings without reducing the provision of needed serv-
ices. And, as was stated earlier, the ultimate test is, what is the

ality of the services being provided? Because that is a critical
element in the operation of the Federal Government.

It has also been effective—Circular A-76—in ensuring that the
method of determining a financial advantage to the government is


23

not there, the changes that would have affected Federal perform-
ance can’t be projected into the future—that we simply cannot con-
‘irm it.

Mr. KoSKINEN. I would add that the full statement from Mr. Ste-
vens is very accurate and clear about this. That problem is not,
again, either a problem in the circular or a problem needing legis-
lation. It is a problem that, as you can imagine, it’s a dynamic sys-
tem. When you make the cost comparison, you're taking a snapshot
at a given point in time. When you come Back and measure later,
the ederal employees have changed in terms of what they’re
doing, and the contract often has changed.

So it is very tough to get a control group in which you can—in
1 year, 2 years, 3 years Tater—eome back and find an unchanged
situation. In fact, in almost every situation, the employees will be
doing different things, the work structure will be changed, the
agency activities will have changed.

So after the fact, to try to verify what the savings were doesn’t
mean that there weren’t any. It’s just very difficult to find the ade-
quate comparisons thereafter. To mandate that we ought to do bet-
ter 3 years after the fact won’t change the reality. We will not be
able to do that. So what we have to do is make sure that the sys-
tem, when it is applied, is applied accurately; that the information
is the best we can get; and that the comparisons are fair at that
time for the work that is being contracted out.

As I noted, one of the things we’re concerned about, whether it’s
in contracting out or otherwise, is that the service contracts ought
to be performance based. They ought not to be for time and
charges, they ought not to be overly general. We ought to try to im-
prove the procurement process, and we're working very hard on
that, to make sure that every contract, over time, will actually tell
a manager not what are the inputs of the contract, but will basi-
cally tell a manager, this is what I’m buying—this is the service
or the product I’m buying from the private sector.

Mr. Mica. I don’t want to monopolize the time, and we have sev-
eral other members I want to yield to. But I just noticed in one of
your reports here, “GAO’s cleaning costs are needlessly higher than
in the private sector,” and was conducted, I guess, in 1981, released
in 1981. It brought to mind a great visual and personal experience.

In 1981, I set up a U.S. Senate office in the Federal building in
Miami, FL. I went into that Federal office building and it was kept
like sort of a trash heap. I mean, you walked in, and the mainte-
nance was disgusting. Several years later, I walked into the build-
ing 1 day and the floors were sparkling and the elevator was clean.
I went up to the Senate office and asked someone what happened.

They said that they retained a private contractor to take over the
cleaning of the Federal building. But it’s interesting, because at
that time, they were paying more and getting less. And it’s like
somebody said in one of their statements—sometimes it’s hard to
describe what you want, but you know it when you see it. And
that’s what I’m trying to get to.

With that observation, I will yield to Mr. Mascara from Penn-
sylvania.

Mr. Mascara. Thank you, Mr. Chairman. I’m a newcomer to
Capitol Hill, so I come with no biases. I have virgin ears. But I am


19

reinvent Federal procurement, senior officials from the Office of
Management and Budget, 26 executive agencies and four industry
associations have signed a pledge to implement performance-based
contracting for designated contracts. Performance-based contract-
ing is a concept by which the government pays for the work it
needs to accomplish its mission and does not try to dictate how
contractors get the job done. We believe that performance-based
contracting will improve contracted services, increase competition,
cut waste and result in lower costs.

With respect to concerns regarding possible efforts by the agen-
cies to contract out to meet FDE reduction goals, I would cite Di-
rector Rivlin’s August 19, 1994, letter to agencies, outlining the re-
quirements of section 5(g) of the Federal Work Force Restructuring
Act of 1994, and GAO’s September 22, 1994, testimony before the
Subcommittee on Compensation and Employment benefits. GAO
stated that neither the agencies GAO surveyed nor the union rep-
resentatives GAO interviewed reported that contractors were bein,
hired to do the work of separated employees or employees being of-
fered buyouts under the Federal Work Force Restructuring Act.
Though difficult to monitor and often open to interpretation, we are
unaware of any instances where backfilling has occurred behind
the buyouts being offered without a cost comparison.

While we have not maintained an inventory of functions rou-
tinely performed by contract, we do have an inventory, which, un-
fortunately, is very dated, of commercial activities performed by
Federal employees. Since 1981, the government has competed ap-
proximately 112,000 FTEs, under the provision of A-76. Approxi-
mately 67,000 FTEs have been eliminated due to efficiencies
gained through the management and review process or conversion
to contract. We believe that there are an additional 250,000 or
more in-house FTEs that could be cost compared under the cir-
cular. I know the chairman has referenced an earlier study at OMB
of 900,000. But our present information is 250,000, and we'll try
and see if we can reconcile what the actual number is. But either
way, it is a significant number of positions that could be cost com-
pared under the circular.

We do not have current data on the number of the studies being
done, or data on how the studies have cost, in response to the
chairman’s question. Over the years, the costs to conduct A~76
studies have varied, depending on the agency’s workload, perform-
ance and financial systems, the scope of the study, its complexity,
and, frankly, the desire of agency managers to bring the study to
completion. Based upon agency information, however, and as re-
flected in the chairman’s opening statement, aggregate A-76 cost
comparisons have reduced service costs by approximately $1 billion
a year.

The number of existing commercial support service contracts and
their dollar value can be found through the Office of Federal Pro-
curement Policy’s Federal Procurement Data System. The Federal
Procurement Data System, however, measures contract support in
terms of contract dollar values, not FTEs. We estimate the total
now of service contracts to be, in fiscal year 1994, $108 billion.

In terms of recent trends, which the letter of invitation inquired
about, in the past 5 years, there have been relatively few cost com-


32

Mr. KOoSKINEN. We've generally opposed floors and ceilings. We
think that’s a micromanagement instruction to an agency that
doesn’t allow them to make good management judgments.

Mr. Mica. All right. And then, it is your recommendation that
these prohibitions—now everybody has had great intentions since
1955, but we've also put in a whole bunch of prohibitions: you can’t
even study or consider some of this; you can’t include some of these
‘olks?

Mr. KOsKINEN. Right.

Mr. Mica. We're going to pull those prohibitions out in my poten-
tial legislation. What do you think of that idea?

Mr. KoSKINEN. Well, again, I think the only way to get them out
is by legislation. Again, our judgment is that, in this day and age,
managers need to have the greatest flexibility that they can to de.
liver services under the budgetary constraints and the focus on
what do the customers get from the government. Arbitrary
micromanagement is not effective. So any way we could get rid of
that would be fine.

Mr. Mica. The next item that concerns me is the speed of the
process. Some of these things go on and on. They study them to
death or such and such is up for consideration. ] guarantee you,
some of those 250,000 positions that you've identified were identi-
fied under the 1981 Reagan exercise.

Mr. KOSKINEN. Right.

Mr. Mica. But nothing gets done. So would you include an ele-
ment to mandate some time constraints, or something to speed up
the process, establish some timetable?

Mr. KoskINEN. Again, on the same theory that we ought not to
be arbitrarily trying to have one-size-fits-all rules, I think it would
be unwise to say that there is no circumstance under which you
should take longer than, fill in the blank, 6 months, 12 months, 24
months, whatever it is. I think the real issue is that we ought to
make sure that the process can be done efficiently and in a reason-
able time.

It will vary, as I said, by complexity, by the number of employees
involved. I think what we also have to stress is the focus here is
what can we do for the existing positions to contract out? We have
to be willing to look at the existing contracts that are out and be
willing to have those contracted in.

We have a sort of stasis here, that, to some extent, no one on
supporting Federal employment wants to have more Federal jobs
contracted out, and no one supporting the private sector wants
more private sector jobs contracted in.

The best thing for the system would be what the concept of A-
76 is, and that is to have competition so that in fact the private
sector would have to be competitive with the abilities of the Fed-
eral sector. To the extent that Federal employees can be more effec-
tive, they ought to be able to perform the function.

Initially, the assumption was, you would contract out all sorts of
services, garbage collection and the rest of it. In many cities, they
have now discovered that the employees in the city government
are, in fact, capable of banding together, organizing themselves and
contracting back in and the service improves. So it works both
ways.


14

cent, received lower grades, and about 44 percent received the same or higher
grades.

In early 1985, we followed up by questionnaire with those employees who had
been involuntarily separated or had gene to work for contractors, Of those respond:
ents who were involuntarily separated, over half were reemployed with the federal
government. Over half also said that they had received unemployment compensation
and/or public assistance. Fifty-three percent who went to work for contractors said
they had received lower wages, and most reported that contractor benefits were not.
as good as their government benefits,

It is worth noting, however, that although our earlier reports indicated that a sig-
nificant number of displaced workers found employment in another government job,
the current downsizing environment may not provide the same opportunities, For
example, OPM operates an interagency placement program to assist separated em-
ployees. Under this program, agencies are required to give priority to separated em-
ployees when filling positions through competitive appointments. According to OPM,

etween the program’s inception in December 1993 and September 16, 1994, from
an inventory of 2,018 registrants, agencies made 204 job offers.

Among other things, OPM attributes the low number to the fact that agency
downsizing has substantially reduced the number of vacancies.

Effectiveness of A-76 Decisions

During the long history of our work in this area, we have consistently found that
evaluating the overall effectiveness of contracting-out decisions and verifying the es-
timated savings reported by agencies is extremely difficult after the fact. As a re-
sult, we cannot convincingly prove nor disprove that the results of federal agencies’
contracting-out decisions have been beneficial and cost-effective.

In previous reports, we expressed concerns about the implementation of A-76 and
the lack of complete and reliable data on the extent to which estimated savings have
been realized.? For example, our 1990 evaluation of DOD savings data showed that
neither DOD nor OMB had reliable data on which to assess the soundness of sav-
ings estimates or knew the extent to which expected savings were realized. At the
time of our reviews, DOD did not routinely collect and analyze cost information to
monitor actual operations after a cost study had been mage. In addition, DOD’s
database on costs contained inaccurate and incomplete information. If contracts
were subsequently modified, or in-house organizations were revised from the con-
figurations used in the comparison of government and contractor costs, this informa-
tion was not available for post-study analysis. Poor contract administration, includ-
ing poorly worded performance work statements, contributed to contract revisions
and cost escalations that quickly outdated comparisons with the precontract per-
formance of the functions.

In an attempt to address some of the broader performance questions, we began
Jooking at the overall contracting experience of the General Services Administration
(GSA) at the request of Senator James Inhofe. GSA began systematically reviewing
its real property services in 1982 using the guidelines in Circular A-76. In a report
released last year,3 we were able to report on the overall extent of contracting-out
by the agency and to identify the results of individual contracting decisions and the
reported savings. However, for the reasons that follow, we have, thus far, not been
able to provide a clear assessment of whether GSA has realized the expected sav-
ings and benefits from the activities contracted out or retained as a result of this

rocess.
P There is no common baseline available to evaluate subsequent performance of ei-
ther contract or in-house services. As a result, we have not been able to compare
the actual costs of these activities with what could have been the cost if other op-
tions had been chosen. However, even if such baseline data were available, we found
that post-decision comparisons would be extremely difficult, if not impossible in
some cases, because most activities do not remain static over time

While Circular A-76 contains a list of typical commercial activities and requires
agencies to compile an inventory of all government activities that are commercial
in nature and could be contracted out, these listings or inventories are not current
and may not be comprehensive. To our knowledge, no comprehensive inventory ex-
ists that identifies activities for which government agencies compete with private

2See, for example, “Achieving Cost Efficiencies in Commercial Activities" (GAO/T-GGD-90-
35, Apt. 25, 1990) and “OMB Circular A-76: DOD's Reported Savings Figures Are Incomplete
and Inaccurate” (GAO/GGD-90-58, Mar. 15, 1990).

3“Public-Private Mix: Extent of Contracting Out for Real Property Management Services in
GSA" (GAO/GGD-94-126BR, May 16, 1994).



6

contract with them on an as-needed basis, and that, to some ex-
tent, we have a national need to maintain a skilled private sector
that is able to contract with the Federal Government if we are
going to continue in this mode of radical downsizing of the Federal
work force.

So I’m anxious to see what we come up with in terms of ineffi-
ciencies and fallibility of the Federal contracting companies and
personnel. But I’m far more interested in some long-term planning
as to the respective roles of each. I don’t know if Mrs. Morella
shares my concern, but I think even more than trying to maintain
Federal employees who have devoted their careers to serving the
Federal Government, is the need to maintain those individuals in
a manner that is accessible to the Federal Government, even if
they are in the private sector.

And I would hope that that long-term view is taken by this com-
mittee. I have a suspicion that if we go too far too fast with the
downsize in the Federal work force, the pendulum is going to swing
back again. And there is going to be a public outcry for adequate
personnel to deliver the kinds of functions that the American peo-
ple have come to rely upon. For example, Processing Social Security
checks; making sure that there is integrity within the system;
rapid review of IRS returns; programmatic expertise in the areas
of education and health.

At the very least, the Federal Government is always going to be
filling gaps and trying to build capacity within the American econ-
omy, the American society. And those personnel need to be avail-
able to the Federal Government. And I hope that we can find a way
to develop a mutually constructive interdependent work force that
is going to meet the public’s demand not just for the short term,
but for the long term as well.

So I thank you, Mr. Chairman, for starting these hearings. I
really see them as being in the context of a much broader public
policy. And I hope we get at that—the structure of that public pol-
icy.

The prepared statement of the Honorable Jim Moran follows:]

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

Mr. Chairman:

I appreciate you for having this hearing today. My district, as you can imagine,
includes a large number of federal employees and a large number of contractors. I
am sensitive to the needs of both and to the role that both play in ensuring that
our government works effectively and efficiently.

‘As you know, I have been extremely critical of past efforts to set arbitrary federal
workforce reduction goals. The Congress has shown itself to be very effective in cut-
ting the federal workforce, but very poor in actually reducing federal programs. We
have created a situation where, in the future, we are going to have fewer and fewer
employees doing more and more work. The government will be forced to increasingly
rely on contractors to ensure that the work gets done.

s I said before, | am extremely supportive of federal contractors. They can be
more flexible than the federal workforce and can help reduce costs in some areas.
I do not, however, think that we should begin a wholesale conversion from federal
employees to federal contractors, particularly if we have no idea of the long term
impact this will have on the costs of government and the efficiency of goverament
programs. Contractors do perform a vital public service, as do federal employees, We
must ensure that a delicate, but critical balance remains between the need for a
strong federal workforce and the flexibility that contractors can offer. As we know,


29

in-house performance versus contract performance of 20 to 25 per-
cent.

I found that very significant. Then I also looked to, what if we
abolished the Department of Energy; who would perform these
functions, too? If you want to extend it beyond that, those nec-
essary programs. These are the kinds of things. Any brief comment
on that?

Mr. STEVENS. Yes. There are such savings, and those are exam-
ples of them. What we've cautioned against in that report and oth-
ers is extrapolating from those examples to the government as a
whole. And that’s where our work at the GSA was designed to
cover a broad range of contracts, not just ones where it can readily
be proven that Federal employees are cheaper, but the entire
range.

The anecdotal evidence that is generally used does not prove the
point. And I think even the aggregate body of our work does not
prove the point, because we have generally been asked to look at
cases in which the Federal employees have lost a competition. And
that generates political interest and pressures. We are rarely
brought in to look at a case in which the A-76 program caused a
manager to reexamine his operation to come up with a more effi-
cient internal organization to save 20 percent by streamlining the
organization internally, because it’s not controversial. There’s no
real objection to that.

Mr. KOSKINEN. One little footnote I would add to your example,
which is a very good one, is, even with the limitations of the Fed-
eral Work Force Restructuring Act, we authorized the Department
of Energy to contract in if they could establish that was the most
effective way to proceed. And we allowed them the additional FTEs
necessary for that. So we’re trying not to automatically or by rote
apply the downsizing issues.

We are trying to make sure that the FTE limits are applied in
response to what the most effective way to run an agency is.

Ms. More... And you know, the chairman and I actually both
agree on this particular issue, in terms of finding out what is best
in terms of what’s most efficient and what is fair. And we hope we
can call on you to assist in this regard. Thank you. Thank you, Mr.
Chairman.

Mr. Mica. I thank the gentlelady. Mr. Koskinen, in testimony be-
fore the Civil Service Committee, the predecessor of this sub-
committee, last October, you indicated that OMB Circular A-76
was under revision. It’s my understanding that the most recent re-
vision of the circular was in 1983. What's the status of the revi-
sion? Can we expect it anytime soon?

Mr. KosKINEN. Actually, we are engaged in a series of dialogs
and outreaches to the agencies who are most affected by A-76, col-
lecting their best judgments as to how we could improve the A-76
process. I can’t give you a definitive time, but I can give you a com-
mitment that we are, in fact, committed to providing an A-76 proc-
ess that is more streamlined.

T’ve looked at the handbooks and the guidance, and it’s a very
thick document. It seems to me that, while we need to make sure
that we collect the right costs and do this appropriately, we also


26

ment. So we need to encourage, ultimately, competition. And the
competition is not necessarily just between the private sector and
Federal employees, because your point is well taken—most Federal
employees are very skilled, very hardworking and dedicated.

What we need to do is open the process up so that we encourage
Federal employees, as the MEO process has, to become as efficient
as they can, become as effective as they can, and, to the extent that
they can, we ought to increase what they do rather than decrease
what they do.

Mr. Mascara. Mr. Chairman, just one brief statement and then
Tll keep quiet. What I’m understanding here is that there’s some
need for us to intensify privatization. It’s my opinion that we're not
ready to intensify privatization; that there are a lot of unanswered
questions. And what else concerns me is, one of the Presidential
candidates talked about HUD and Energy and Education, about
closing the lights, going home, locking the doors.

And that might be a microcosm of our rush, somehow, to deci-
mate this government and to dilute the talent of the employees
that we have in this government. I’m very concerned about what
T’ve heard thus far. Thank you very much, Mr. Chairman.

Mr. Mica. I thank the gentleman for his comments and ques-
tions, and now would like to yield to the gentlelady, Mrs. Morella.

Ms. MoreELLA. Thank you very much, Mr. Chairman. I'll try to
be brief. I’d like to be lengthy, but I’ve got to go testify before what
used to be the Interior Committee on behalf of some projects. I am
particularly interested in the GAO report, and I’ve gone through a
lot, of sections in it where some statements have been made that
I find very, very provocative.

One part says, “The administration . . . such downsizing of the
employees could in effect create rather than eliminate personnel
ceilings, with agencies finding themselves in a position of having
to contract out to meet the downsizing goal, regardless of what cost
comparison studies show.” I realize there was a statement that
came out later that said, oh, that should not be done.

Nevertheless, it is always a kind of factor. On another page here
it says, “The contractor’s performance was considered to be accept-
able in terms of quality. However, in terms of timeliness, the con-
tractor was not able to deliver the needed services as quickly as
agency personnel.” I’ve done some markers here. In another page,
it says, “and in some cases, cost analyses are not prepared prior
to entering into new contracts,” and that is with regard to the re-
port that said “many agencies do not routinely perform independ-
ent cost analyses of the market reasonableness of contractor bids
prior to the renewal, extension or recompetition of existing con-
tracts.’

Another section here, “Unless agencies are specifically authorized
to hire needed Federal employees in circumstances where meaning-
ful cost comparison indicates that in-house performance is desir-
able, agencies could be in a position of having to contract for serv-
ices, regardless of what a cost comparison study shows. OMB and
Congress will need to reconcile this potential conflict as they imple-
ment the NPR recommendations.”

“Applying a cost comparison requirement to advisory and assist-
ance service would be another step forward in a disciplined ap-


3

Every function that is not inherently governmental should be
considered for open competition. Since 1955, Presidents of both par-
ties have stressed the importance of relying upon the private sector
for commercial goods and services. However, numerous barriers
have been erected to efficient and effective management, including
enactment of laws by previous Congresses that actually prohibit
Federal agencies from even studying contracting opportunities.

These hearings will provide an opportunity to examine the record
of congressional interference with contracting, and help us to de-
velop measures to bring these laws into the 21st century. Third, we
must ensure the fair treatment of employees in a transition period
following any contracting of activities currently being performed by
government personnel. And as I said in my statement, they should
also be given the opportunity to participate in this competitive
process.

The evidence that will be presented by today’s witnesses is not
encouraging to taxpayers concerned about efficiency or effective

fovernment operations. We will hear of Federal agencies takin,

ong as 6 years to conduct cost comparisons. We'll hear that Fed-
eral agencies lack the management analysis and expertise nec-
essary to conduct proper cost comparisons.

We will also hear that Congress must bear a portion of the re-
sponsibility for this less-than-effective record. I’m also deeply con-
cerned about what we will not hear today. Because OMB Circular
A-76 mandates that Federal employees have “the right of first re-
fusal” to work for contractors if commercial firms win in competi-
tion, OPM has been assigned responsibility to facilitate opportuni-
ties for Federal employees to gain other Federal positions.

GAO has addressed some of these concerns. We invited the Office
of Personnel Management to report its efforts to protect Federal
employees, but other activities Fave precluded the Director, Mr.
King, from being with_us today. I look forward to OPM addressing
these concerns. The General Accounting Office is here today be-
cause it has long monitored contracting activities of government
agencies and can provide some of the historical and institutional
perspective necessary to understand these issues fully.

GAO has reported on these topics frequently, and I look forward
to maintaining this good working relationship. And again, we wel-
come Mr. Nye Stevens, to present GAO’s testimony today. We also
have with us, from the Office of Management and Budget, or its
predecessor agencies which have managed the executive branch’s
contracting policy since 1955, Mr. John Koskinen.

With the current emphasis on streamlining government oper-
ations, I look forward to the testimony from the Deputy Director,
who will describe the role that contracting plays in the administra-
tion’s plan to improve the efficiency and effectiveness of govern-
ment operations. That concludes my opening remarks, and I will
yield now to the ranking member, Mr. Moran.

[The prepared statement of the Honorable John Mica follows:]

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

Good morning, I want to thank our witnesses today as we begin a review of the
subject of contracting out. The hearings today and next week are for the purpose
of determining what the Federal Government has done right and what we have


2

Now it is time tor the Federal Government to catch up with its
private sector counterparts. Competition has proved to be the cata-
lyst for genuine improvements. We need that competitive spirit to
bring genuine reform to our Federal Government operations. State
and local governments routinely contract for a wide variety of pub-
lie services. In fact, in my State right now, in Florida, they’re look-
ing at contracting out the entire responsibility of the Department
of Commerce.

In Baltimore, there’s an interesting experiment with the schools.
Some of the five worst school operations in the city of Baltimore
have been contracted out to the private sector, utilizing the former
union employees. And, from what I understand, there’s a great
record of success and improvement in the operations of the schools.
On the positive side, it appears that over the short term, and from
what I can determine from the material presented to me, we've
saved about $1 billion at the Federal level by contracting some of
the government functions over the past 15 years.

It’s really hard to get a handle on these figures, and we'll get into
that with our witnesses. On the negative side, it appears that the
agencies have resisted contracting out, ignored cost comparison re-
views, and undermined real opportunities for change. Why should
more than 15 Federal agencies be in the business of developing and
marketing maps in competition with private firms that could pro-
vide the same function?

Why should many Federal law enforcement agencies, the Cus-
toms Service, Border Patrol, the Secret Service, and the Federal
Bureau of Investigation operate vehicle repair facilities when con-
tracting out for at least some of those services would allow them
to dedicate their employees to their primary responsibility—law en-
forcement—rather than providing commercially available support
services.

I believe it’s time that employee groups, unions and private busi-
nesses should be eligible to hold franchises for services, and that
taxpayers should gain the benefits of improved operations. Just as
we've seen with some of the employee groups in the private sector,
whether taking over an airline or a car rental business, maybe it’s
time for some of the employees to look at taking over the respon-
sibilities of conducting these responsibilities in the private sector as
private citizens.

If common sense does not move us quickly in the direction of in-
creased contracting for commercial services, certainly budget con-
straints will. As we move toward reality and necessity in contract-
ing for additional Federal functions and services, it is essential that
protections be established and maintained for Federal employees.
We must take, in my opinion, several precautions.

First, we must make certain that contracting out is cost-effective
for the taxpayers. The record to date seems to reflect much more
bureaucratic foot-dragging than actual cost comparison. And the
public interest is never served by these contrived delays. Second,
we must ensure that inherently governmental functions remain
within the government. But as both the Office of Management and
Budget and the General Accounting Office will testify, that list of
inherently governmental functions is not extensive.


15

contractors or identifies which agencies perform these activities in-house and which
perform them through contract.

Tt would be ideal for cost comparison purposes, Mr. Chairman, if an inventory ex-
isted of activities performed both under contract and by federal employees under
similar conditions, with good cost data on each. Such an inventory could be the basis
for establishing cost and performance benchmarks to evaluate the effectiveness of
contracting-out decisions and, perhaps, even streamlining the A-76 process. How-
ever, such an inventory could be compiled only if similar activities were performed
in both the public and private sectors. In addition, it could be costly and difficult
to maintain.

In isolated cases, we have been able to (1) obtain good cost data for similar activi-
ties performed by both government employees and private contractors under similar
conditions and (2) perform equitable post-decision cost comparisons. For example, in
1992 we reviewed the Postal Service's initiative to procure postage stamps from the
private sector and determined that the private sector was a lower cost source than
the Bureau of Engraving and Printing for seven of the eight pairs of postage stamps
we examined.‘ In this review, we were able to control for such factors as stamp size,
printing method, and quantity produced and compare government and private sector
costs. The cost comparison revealed that except for one case, private sector-produced
stamps ranged from 6.8 to 62.4 percent lower than the cost of government-produced
stamps.

Legislative Impediments

Observing the absence of definitive evidence to support projected cost savings and
management improvements and being frequently contacted by constituents upset by
the process, Congress generally has been concerned about the impact of contracting-
out on agency operations and skeptical of efforts to accelerate contracting out activi-
ties being done by federal employees. The A-76 program has never been adopted
legislatively. In fact, over the years, Congress has enacted many restrictions on A~
76 studies and on contracting-out jobs presently held by federal employees. While
we could not find a comprehensive list of these restrictions, the restrictions gen-
erally fall into one of three categories:

~Prohibitions on contracting-out specific activities. For example, GSA is prohib-
ited from contracting out for custodians, guards, elevator operators, and mes-
sengers unless the contract is to a sheltered workshop employing the severely
handicapped. Similarly, the Farmers Home Administration is prohibited from
contracting with private debt collection firms to collect delinquent payments.
The Department of Commerce is prohibited from contracting out any part of the
National Technical Information Service or from selling, leasing, or transferring
any part of the weather satellite system.

—Minimum staffing requirements. Minimum staffing requirements create a
level that effectively restricts contracting-out if contracting-out would cause the
agency to fall below that level. Minimum employment levels exist at the Depart-
ment of Aj Hture’s Stabilization and Conservation Service, and its Soil Con-
servation Service,

—Restrictive requirements. For example, DOD may not use its funds to com-
plete any A~76 cost study that is more than 24 months old and involves a single
activity or that is more than 48 months old if it involves multiple activities.

It_is worth noting that in addition to restrictions on contracting-out, there can be
similar restrictions on performing activities in-house. For example, we have found
that the personnel ceilings set by OMB frequently have the effect of encouraging
agencies to contract out regardless of the results of cost, policy, or high-risk studies.

fany of the examples of this.phenomenon are in the newer, more scientifically ori-
ented agencies such as the Environmental Protection Agency, National Aeronautics
and Space Administration, and the Department of Energy,® rather than in old-line
agencies whose organizational principles and base employment levels were estab-
lished before aggregate federal employment became a sensitive national issue.

Competition and Flexibility to Manage the Government's Work

As L have mentioned, the goal of the A~76 program is to achieve efficiencies by
encouraging competition between the federal workforce and private sector for pro-

<*Postage Stamp Production: Private Sector Can Be a Lower Cost Optional Source” (GAO/
GGD-93-18, Oct. 30, 1992).

5*Federal’ Contracting: Cost-Effective Contract Management Requires Sustained Commit-
ment” (CAO/T-RCED-93-2, Dec. 3, 1992); “Government Contractors: Are Service Contractors
Performing Inherently Governmental Funetions?” (GAO/GGD-29-11, Nov. 18, 1991); “Ene:
Management: Using DOE Employees Can Reduce Costs for Some’ Support Services" (GAO/
RCED-91-186, Aug. 16, 1991).


5

sonnel Management to report on its efforts to protect Federal employees, but other
activities precluded Mr. King from being here today. We look forward to OPM ad-
dressing these concerns,

The General Accounting Office is here today because it has long monitored con-
tracting activities of government agencies and can provide some of the historical and
institutional perspective necessary to understand these issues fully. GAO has re-

jorted on these topics frequently, and I look forward to maintaining this good work-
ing relationship. I welcome Mr. Nye Stovens to present GAO's testimony today.

e Office of Management and Budget—aor its predecessor agencies—have man-
aged the executive branch’s contracting policies since 1955. With the current empha-
sis on streamlining government operations, I look forward to testimony from Deputy
Director John Koskinen describing the role that contracting plays in the administra-
tion’s plans to improve the efficiency and effectiveness of government operations.

Mr. Moran. Thank you, Mr. Chairman. I’m glad we’re having
these hearings. They're terribly important. I have been somewhat
critical of the reinventing government effort because I felt that the
goals were arbitrary and were driven more by budget consider-
ations than good, thoughtful, programmatical considerations.

Clearly, we can reduce the size of the Federal work force, but I
think we ought to be doing it through a careful analysis of what
activities can be responsibly devolved down to States and localities,
and thereby save money and perhaps see programs run even more
effectively, as well as efficiently.

But we have seen that while it is relatively easy to downsize the
Federal work force, it is much more difficult to downsize Federal
responsibilities. And the reality is that very few Federal activities
have actually been eliminated. And so what we have is Federal
workers being responsible for more and more functions with fewer
and | fewer resources. That’s true both of managers as well as their
staff.

So it concerns me, the direction in which we are going, and I
think that the legislative branch is the primary culprit in this lack
of forward planning. But all of this is very intricately tied into the
role that contracting out plays at the Federal level with the execu-
tive branch, because to the extent that we downsize the Federal
work force and don’t concomitantly reduce the responsibilities that
the Federal Government has to carry out, then it increasingly is
going to fall upon Federal ¢ontractors.

d so I’m not on either side in terms of Federal contracting ver-
sus Federal employees and vice versa, because I think both have
an important role to play. There are a lot of Federal contract em-
ployees as well as Federal workers in my district. And I think that
is the case in many districts. What we need to do is to make clear
what are the appropriate roles for contract personnel vis-a-vis di-
rect Federal employees?

What do we give up in terms of latitude, flexibility and, more im-
portantly, control, when we contract out? And in what kind of expe-
rience and skills do we need to maintain? One of the reasons why
we have maintained the size of the Federal work force we have
now is because it was necessary to keep people with the kind of in-
stitutional knowledge, as well as skills and education, within the
Federal work force to be immediately available when their skills
were called for.

We aren't going to have that anymore. The people with a lot of
the institutional nowledge that we desperately need are going to
be in the private sector. I think it’s important that we be able to


21

It would drive me bonkers if I was in the private sector and had
to go through all these hoops and barriers. Mr. Koskinen, you just
testified and said—and correct me if I’m wrong—did you say you
don’t favor legislative action to replace the A~76 Circular?

Mr. KosKINEN. That is correct.

Mr. Mica. Well, I have to disagree with you. I think the Circular
A-76 has been a semi-failure. And I think it’s incumbent on myself,
chairing this committee, and upon this committee to develop some
legislation to replace the Circular A-76. By your own testimony,
you said that we have congressional and legislative restrictions—
prohibitions—that we've imposed.

Also we have the ceilings that we’ve imposed. And we have sort
of studied the process to death, by both of your testimonies. Then,
Mr. Stevens says, “GAO found that evaluating the overall effective-
ness of A-76 decisions and verifying the estimated savings reported
by agencies is extremely difficult. GAO cannot prove or disprove
that the results of Federal agencies’ A-76 decisions have been ben-
eficial and cost-effective.”

So what we're doing doesn’t really give us any basis for making
a determination?

Mr. KosKINEN. That’s correct.

Mr. Mica. And still you don’t favor legislative action?

Mr. KOSKINEN. Well, as I noted and as I stated last fall, we have
started a review with the agencies of a revision of A-76 to make
jt more efficient and more user-friendly, both for contracting in as
well as contracting out. To the extent that your focus on legislation
would be to remove the impediments that the Congress has im-
posed, obviously that would improve the operation of the circular
across the government.

Our concern is that the natural inclination of people, when they
are proposing legislation, would be in fact to mandate a new A-76
process. And the problem with that is that these processes need to
change over time because they are complicated, as we've noted. To
try to freeze a process into legislation would be very complicated
and difficult and would not necessarily deal with the problems
we're trying to deal with in the review, which is how to make this
process work more efficiently.

Mr. Mica. But could we not set some general guidelines by legis-
lation and then give the flexibility to proceed in a more orderly
fashion than we have now? And not only orderly—maybe the cur-
rent process is orderly—but to speed up the process. You're getting
into a situation where we’re going to have to find some way to do
things quicker and more efficiently and cost-effectively.

The host of choices out there is not too appetizing. You fire or
RIF people, you close down agencies of Federal Government. And
this is an interesting process. We’re only 22 months into it. But
in all the studies on downsizing you have given us, we have shifted
many people around and in corners and positions—except for the
civilian defense work force, which has taken the brunt of the
downsizing.

Now we're going to get into some serious new ways of doing
things. And you don’t think that we can legislate this?

Mr. KoskINEN. I think the standards for what the level playing
field ought to look like are clear. So the legislative guidance about


CONTRACTING OUT: SUMMARY AND OVERVIEW

HEARING

BEFORE THE

SUBCOMMITTEE ON
CIVIL SERVICE

OF THE

COMMITTEE ON GOVERNMENT
REFORM AND OVERSIGHT
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
FIRST SESSION

MARCH 29, 1995

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

ee

U.S. GOVERNMENT PRINTING OFFICE
93-293 CC WASHINGTON : 1995

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

ISBN 0-16-047694-1



44

ment’s bid MEO and the contractor’s winning offer, after adjustments for such items
as the 10 percent minimum differential. In addition, and what is again not shown
on the Cost Comparison Form are the MEO savings noted above.

After the completion of the cost comparison, unplanned scope changes, changes in
the Service Contract Act’s minimum wage and fringe benefit determinations, and
other considerations may change the actual cost of in-house or contract performance,
in comparison to the original cost comparison. Post implementation comparisens
have often sought to compare the cost comparison’s original estimates with current
costs, without the necessary adjustments and without consideration for MEO sav-
ings. While individual contract costs may increase, it is generally not clear that
these cost increases were inappropriate or that they would not be common to both
in-house or contract performance.

3. Question: “Page 2 of your testimony indicated that savings as a result of con-
tracting out are achieved, in part, by holding the winning organization to stated per-
formance standards. Can you descr,be any mechanism that OMB has in place to en-
sure that winning government organizations implement their reforms?”

“If work statements are often modified after contracts are awarded, doesn’t that
complicate the task of holding anyone to performance standards?”

nswer:

Agency heads are responsible for ensuring that the Government’s MEO is fully
implemented within six months of the cancellation of the solicitation. This implies
that agencies must meet the performance and quality standards of the Govern-
ment's MEO bid or be subject to immediate re-competition with the private sector.
OMB has no additional or recurring reporting requirement to certify agency compli-
ance with the performance standards of the solicitation.

Consideration has been given to a requirement to conduct Post-MEO Reviews. The
General Services Administration, for example, has conducted “second cycle” studies
to ensure that managers have fully implemented their MEO. It is our understanding
that the GSA Post-MEO studies confirmed that continued in-house performance was
appropriate. Implementation of the Government Performance Results Act and the

ief Financial Officers Act will also establish performance standards and mecha-
nisms to track performance.

4. Question: “Why will it be easier to develop work statements of intended results,
when you also testify—in the same paragraph—that one of the difficulties agencies
face in writing contracts is to specify what they want?”

Answer:

We believe that an important part of our effort to reinvent Federal procurement
is to move away from requirements oriented contracts, which define the work in
terms of how the work needs to be accomplished, to performance contracts which
define the desired end product. This approach relies less on process description and
more on the description of our service goals, less on historical workload records and
more on operational end products, less on the description as to how work needs to
be accomplished and more on the competitive imagination of our contractors to use
technology investments and other resources to maximum advantage.

5. Question: “Does OMB have an inventory of agencies that actually track con-
tracting costs after award?”

Answer:

OMB does not have an inventory of cost comparisons that tracks contracting costs
after award. In 1987, OMB attempted to develop and implement a centralized re-
porting system that tracked the development of A-76 performance work statements,
management plans, cost comparisons and post award information, but found it bur-
densome to the agencies, and generally unreliable.

6. Question: “Your concluding comments indicated a need to improve the level of
fairness in competitions between in-house and contract resources. What problems do
you see in this area?”

“Why are private contractors required to beat the Government bid by ten percent?
Doesn't this “tilt” the playing field?”

Answer:

By improving our solicitations and making them more performance oriented, the
in-house and contract resources will be better able to compete. Restrictive or process
oriented solicitations limit the offerors’ ability to be creative and to approach the

rovision of services in new and different ways. In some cases, solicitations have

en written to require offerors, both in-house and contract, to simply mirror the
Government’s current approach to the provision of services. The timeframes per-
mitted and the incentives to complete the solicitation, management plan and in-
house bid need to be compared to the timeframes provided to private sector offerors.
Overhead, fringe benefits, the cost of capital, contract administration costs, and the
cost adjustments for tax payments also need to be reconsidered.



8

Mr. Mica. I thank the gentlelady for her comments, and now
yield to the gentleman from Pennsylvania, Mr. Mascara.

Mr. Mascara. Thank you, Mr. Chairman, and thank you for the
opportunity to make a statement this morning. I must say, from
the onset, that I get a little nervous when people start talking
about massive contracting out of needed Federal services, largely
as a means of saving money. I think if you look more closely, it
translates into a back door effort to cut Federal jobs and to pri-
vatize government.

Several weeks ago, I had the honor of sitting in for Congress-
woman Carolyn Maloney at a hearing about privatizing Federal
Government functions. Earlier in the session, the full committee, if
I recall correctly, held a hearing on procurement reform. What I
took away from these hearings is a simple message: Beware, what
looks cheaper on the surface may end up costing more.

Moreover, the service you get, in the end may prove to be shoddy.
Now, this does not mean that I am totally against contracting for
goods and services. When I served as a county commissioner in
‘Washington County, PA, State law required the county to get com-
petitive bids for a great many purchases and other specified serv-
ices in a dollar amount that exceeded the State requirements.

By and large, the system worked well and the county generally
got its money worth. But the trick was, we had a strict system in

lace, and it was constantly and closely monitored. My impression,
rom reading over the testimony given at the contracting out hear-
ings last fall, and from what I have heard during the hearings I
mentioned, is this is far from the case as it relates to the Federal
Government.

All this is beginning to make me wonder if anybody, if any Fed-
eral agency can hand me a computer printout showing all the con-
tracting out and procurement that is Being done in that particular
agency.

Next, I’m beginning to think it would be a miracle if someone in
that agency could explain to me exactly why. It is obvious to me,
asa relative newcomer, that this whole issue of contracting out is
in serious need of a thorough examination and review.

I hope that the subcommittee will take the time to do this with-
out quickly rushing ahead with legislation that could end up push-
ing agencies into a contracting out frenzy that only ends up costing
the government more, not less. I look forward to today’s testimony,
and hope it will shed some light on this very important matter.
Thank you very much, Mr. Chairman.

Mr. Mica. I thank the gentleman, and now yield to the gen-
tleman from New York, Mr. Gilman.

Mr. GILMAN, Thank you, Mr. Chairman. And I want to thank you
for calling this hearing to discuss possible savings benefits that
government agencies could achieve by contracting out Federal work
to the private sector. And of course, if cost comparison research is
able to show that certain services can be provided by the private
sector at a lesser cost to the Federal Government, it’s only reason-
able that the purchasing agency should save taxpayer dollars.

That tool could be especially useful in agency efforts to comply
with Federal Work Force Reduction Act of 1994. However, it is es-
sential that we point out that we must make certain that the dedi-


7

contractors are not infallible. There have been examples of contractors abusing their
role and wasting taxpayer money.

In the end, it comes down to effective planning and effective oversight. We must
not rely on outdated Executive Orders or arbitrary privatization goals. We must en-
sure that the federal agencies themselves develop plans on what functions can best
be privatized. More importantly, we must ensure that federal agencies also maintain
the ability to properly and effectively review federal contracts.

I hope this is an issue that the Subcommittee will pursue judiciously and care-
fully. We have a responsibility to ensure that the programs and initiatives coming
out of this Subcommittee protect the federal taxpayer and improve the federal
workforce. This takes time.

Mr. Mica. I thank the gentleman from Virginia, and now yield
to the gentlelady from Maryland, Mrs. Morella.

Ms. More..a. Thank you. Thank you, Mr. Chairman. I certainly
want to add my thanks to you for holding this important meeting,
the first of two on this subject. You and I have discussed the fact
that I have long been interested in comparing the cost of using out-
side contractors versus Federal employees to perform services for
the agencies of the Federal Government.

And as you know, the General Accounting Office in 1994 issued
a report at the request of the Senate Committee on Governmental
Affairs, regarding the cost-effectiveness of using contractors over
Federal employees. GAO had reviewed nine studies, all of which
seemed to indicate that, “savings may be available in certain situa-
tions if services were performed by Federal employees, rather than
by contractors.”

In one of the nine studies, the quality and timeliness of the serv-
ices provided by the contractor was evaluated. And in terms of
quality, the work done by the contractor was acceptable and satis-
factory. However, Federal employees working in-house were able to
complete the required services faster than the contractor. The GAO
report also states, in all candor, that the studies had some limita-
tions.

However, with the downsizing of Federal agencies and the Fed-
eral work force, I believe there’s a need to make further compari-
sons between the public and private sectors in doing the govern-
ment’s work cost-effectively and efficiently; and we have that in
common. We are facing a cut in the Federal work force of 272,900
jobs. And as the GAO report points out, agencies may find them-
selves in a position where they must look to the private sector for
the services regardless of the cost.

Shouldn’t the cost, quality of service and the timely delivery of
those services guide the decision to choose an outside contractor?
I think we agree on that. Is it wise to force the use of outside con-
tractors when it clearly would be less expensive to perform the
service in-house? Should each agency be required to conduct a cost
comparison between work performed by an outside contractor and
by an in-house resource or resources? And I think you agree with
that, that that needs to be done.

So I really look forward to exploring some of these issues with
the expert witnesses on our panel today, and then following
through in our second panel. You know, the mantra of reinvent
government seems to be, smarter, cheaper and faster. And we may
‘ind that in-house will serve those three points. I thank you, Mr.
Chairman.


40

individual activity irrespective of its place within an organizational structure, to im-
prove the precision of their cost estimates.

3. Question: You reported that in 1989, more than 400 cost comparisons being
conducted by the Department of Defense had been in progress for more than six
years.

Why does it take so long to get a routine operational analysis completed?

Answer: Our previous work has identified three key factors that caused lengthy
cost studies (GAO/GGD-91-100), We found that time-consuming cost studies re-
sulted from the following:

——There was not a sufficiently high priority on ensuring that cost studies moved
quickly through the various points of review. A low priority was particularly
evident if those called upon to review studies were outside the A~76 office or
the studied function.
—There was a lack of necessary skills to prepare the work statement. Prepara-
tion of this document, which must precisely define the government’s require-
ments, was often a collateral duty of employees in the function being studied.
The frequent lack of staff with the necessary professional skills to lead cost
studies contributed to the length of the completion time. In some cases, the very
initiation of an A-76 study caused some good employees to seek and gain em-
ployment elsewhere.
ere was a lack of work load data that had in some cases extended study
times and contributed to poorly prepared work statements. When such data are
missing, the A~76 cost-study process is lengthened, and those doing the study
must do much more work to determine what the activity peing studied actually
accomplishes. In December 1990, the President’s Council on Management Im-
provement reported that it was not unusual for A~76 studies to require any-
where from 18 months to 2 or more years to collect historical and performance
data and to develop a competitive management study called the “most efficient
organization”—the government’s estimate of the lowest number and types of
employees required to do the functions described in the work statement.

You mentioned that appropriations riders have barred spending funds to complete
studies more than four years old. Have any other Congressional actions contributed
to these delays?

‘Answer: The A-76 program has sometimes been restricted by legislative action.
Such actions have not necessarily delayed the completion of cost studies, but have
affected their performance. For example, our past work has shown that certain leg:
islation has ‘affec ted the Department of Defense’s (DOD) A-76 program (GAO/GGD—
91-100). As we indicated in our testimony, the DOD Appropriations Act for 1991
(P.L. 101-511, Nov. 5, 1990) provided that funds appropriated under the act could
not be used for single function A-76 cost studies exceeding 2 years in duration and
multifunction studies in progress for over 4 years. A similar provision has been in-
cluded in the DOD appropriation acts for fiscal years 1992 through 1995.

In addition, a provision in the National Defense Authorization Act for fiscal years
1988 and 1989 (P.L. 100-180, Dec. 4, 1987) decentralized A-76 authority in the
military services. The provision gave individual military installation commanders
the authority and responsibility to determine, without approval from the services’
headquarters A-76 officials, which A-76 commercial activities at their installations
would be studied (the Nichols Amendment). This provision has been extended
through the end of the current fiscal year and will expire unless further extended.

The DOD authorization act for 1993 prohibited DOD from using the results of an
A-T6 cost comparison study to contract out a function that had previously been per-
formed in-house, with certain limited exceptions. A similar provision was included
in the DOD authorization act for 1994, but was limited to the first six months of
that fiscal year.

What could Congress do to facilitate the process?

Answer: As we indicated in our testimony, the A~76 program has never been
adopted legislatively. The A-76 program has been and continues to be controversial.
Generally, the objectives of the program, to seck efficiencies and cost savings, have
been accepted by federal managers. However, managers view the program as time-
consuming, difficult to implement, disruptive, and threatening to both managers
and employees.

We have been advised by OMB that it is in the process of revising its A-76 guid-
ance to federal agencies. We understand that this revision has been in process for
quite some time. We believe that OMB nceds to intensify its efforts to complete this
process. We believe that Congress may wish to emphasize to OMB the importance
of completing this project and perhaps have OMB commit to a reasonable timetable.
If OMB can deliver revised guidance that addresses the concerns raised, then we
do not believe legislation would be needed.



28

answer the basic question: how does the government best obtain
services and products? We should have a level playing field both
ways. We should be continually evaluating where we're going.

ne of the things that we need to bear in mind has to deal with
not particularly the FTEs, but with the budget situation. Life clear-
ly has changed significantly in the last 25 years of A—76 to the ex-
tent that there are now budgetary caps and limitations on what the
agencies can do. A lot of the dialog and consideration of what we
should be driving the agencies to do, or mandating in terms of al-
most micromanaging them, was in a context in which, if money
wasn’t any object, at least there were not the same financial con-
straints, on the agencies.

Now what we’re looking at is a situation where the agencies have
finite resources to deploy to achieve their missions. So there is in-
creasing pressure on them to become more cost-effective. Our focus
has to be, what can we do to encourage their cost-effectiveness; to
remove the impediments to their being able to do that. As we
noted, there are a range of legislatively imposed obstacles to man-
agers being able to decide how best to achieve the results of their
activities.

One of the restructuring goals of the streamlining plans that we
talked about last fall, and the entire Phase I and Dhase II of the
reinvention of government proposals of this administration, are to
get the agencies to change the way they do their work. Independ-
ent of contracting in or contracting out, agencies need to change
the way they actually are structured; just the way the private sec-
tor has changed the way it is structured.

So I think, as stated earlier in this hearing, what we have to do
is move away from very specific requirements—that either you will
do this or you will do that—and move into more general account-
ability standards of, here are your resources; what are the goals
you're going to pursue and your objectives; and how will you meas-
ure whether you've achieved those objectives? Then leave it to the
managers, with requirements that they be as effective as they can,
to achieve those goals.

The budgetary limitations are driving the managers, inevitably,
to have to become more efficient in the delivery of those services.
Our role in A~76, for instance, ought not to be to have a bias either
way. The debate always seems to change around A-76 in terms of
whether people are trying to encourage contracting out or in.

Ms. MoRELLA. It’s just that contracting out can seem to be the
easier road when confronted with so many ——

Mr. KosKINEN. Right. My point is that we ought not to have a
bias in favor of performing the activity in the private sector or in
the government. Our bias ought to be that you should place an ac-
tivity where it is most cost-effective and it provides the best service
and product for the government. We ought to have a fluid, contin-
ual analysis of that.

Ms. More.ta. It sounds like that’s the kind of thing we need to
do, to look more into the cost comparison analyses. And I’ve got to
go, but again, in the GAO report, there were 12 Department of En-
ergy contracts in 1990 that were looked at. And “in testimony be-
fore a Senate subcommittee, the Assistant Secretary of Manage-
ment and Administration at DOE cited estimated savings through


45

‘The 10 percent minimum differential does not, in our view, “tilt” the playing field
of the cost comparison, It is established to ensure that the other ‘non-speeified costs
to the Government, caused by the conversion of work to contract or in-house per-
formance, are recognized and to ensure that the Government will not convert to con-
tract or in-house performance for marginal estimated savings. Factors such as de-
creased productivity, and other disruption costs are accommodated by the differen-
tial.

While there have been complaints about the 10 percent differential when contract-
ing out, there have also been complaints about the differential added to the in-house
bid when considering a conversion to in-house performance. An activity performed
by contract shall not be converted to in-house performance, unless the cost differen-
tial is greater than 10 percent of total in-house personnel-related costs over the per-
formance period, plus 25 percent of the cost of new equipment and facilities that
must be acquired or leased to perform the activity in-house. The additional 25 per-
cent burden is to reflect the opportunity costs of money diverted to facilitate long
term in-house performance.

QUESTIONS FOR AND ANSWERS FROM Gary 1). ENGEBRETSON, PRESIDENT, CONTRACT
SERVICES ASSOCIATION OF AMERICA

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

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

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

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

found.

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

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

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

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

2) As I stated in my testimony, the current system of cost-comparisons is fun-
damentally flawed because the government accounting system is incapable of
producing accurate cost estimates of in-house performance. The system simpl:
does not allow for full accounting of all indirect costs—including capital and sal-
arics, The net result is that the government is making “buy/no buy” decisions
based on incomplete data, a problem which is clearly costing the taxpayers more
than is warranted.

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



27

proach to ensuring that the government gets the most for its
money.” That’s the concept of OMB's intent to reconsider the A-76
guidance as timely and harmonious. I know you are looking it over
in terms of trying to make it more effective.

“As part of its guidance,” this is about OMB, “as part of its guid-
ance to agencies in preparing cost comparisons for advisory and as-
sistance services, OMB should recognize that non-cost factors also
need to be considered, and specify any circumstances that might
exempt an agency from the cost comparison requirement.” I mean,
I could go on—“OMB should require agencies to adequately justify
and document decisions, not to conduct cost comparisons, and not
allow agencies to use these factors solely as a basis for avoiding a
comparison.”

What I am wondering is, are agencies required to conduct cost
comparisons to determine whether or not to contract for assistance
and advisory services if, in fact, you’re going to say an agency isn’t
exempt? What would be the circumstances that might exempt an
agency? And this is directed to both of you. 7

Mr. STEvENS. Yes. A number of the functions dealt with in that
study were ones that are now done by contract. And the A-76 pro-
gram, really, is a requirement that affects just ones that Federal
employees are now doing. Our recommendation was basically that
there should be a level playing field here. We should apply cost
analysis requirements to functions that are now being done outside
the government to determine if they can and should be done more
effectively within the government.

In many cases, this is not happening. The A-76 process is a
sticky one. As Mr. Koskinen said, it is very rare that once a func-
tion has been contracted out that a new cost study is done and it
is brought back into the government. There are a number of exam-
ples where it can be shown and where we've shown that functions
can be performed more effectively and less expensively by Federal
employees.

That’s not right now an equally advantaged option. And I believe
with the 272,000 FTE reduction in the Federal work force, if that
becomes the predominant way in which such analyses are made,
that will be true in the future, too. I don’t see a relief from that.

Ms. MoRELLA. Would you like to comment on that?

Mr. KoSKINEN. It is correct that once a contract is contracted out,
or a service is, over the course of time, then it’s not subject to the
A-76. So the over $100 billion in service contracting that’s con-
tracted out is not subject, automatically, to the A~76 reviews.

Ms. MoreELLA. So that means it’s not subject to the cost compari-
son analysis?

Mr. KOSKINEN. No. There may have been—and GAO notes that.
between 2 and 3 percent of those contracts originally were subject
to the cost comparison, so they were once. A number of contracts
have been put out before the A-76—those functions were con-
tracted out Before A-76 came into effect. Others are in areas, such
as research and development, that are not automatically required
to be covered by A—76.

What we're trying to do—and I think what our goal ought to be,
as I said earlier, in regard to where the National Performance Re-
view is going and this administration’s restructuring is going—is to


4

done wrong in the area of contracting out. It is my hope that we can extract from
these hearings and from our experience to date a correct formula and proper course
to utilize the benefits of contracting out. It is critical today that we achieve more
cost effective and efficient services for taxpayer dollars.

roper guidelines and focus, I believe that in the next four years it should
be possible to contract out more than fifty percent of the services and activities of
the federal government. In November, 1987, President Reagan issued Executive
Order 12615 directing executive branch agencies to conduct cost comparison studies
and inventory commercial functions being performed by Federal employees. At the
time, OMB identified more than 900,000 positions that could be compared to private
sector performance. I believe that executive order is still in effect, but has long been
ignored.

For the past ten years, corporate America has experienced substantial downsizing
and created more effective and efficient organizations in the process. Now it is time
for the Federal Government to catch up with its private sector counterparts. Com-
petition has proven to be the catalyst for genuine improvements. We need that com-
petitive spirit to bring genuine reform to government operations.

State and local governments routinely contract for a wide variety of public serv-
ices. On the positive side, we appear to have saved about a billion dollars at the
Federal level by contracting some government functions over the past fifteen years.
On the negative side, it appears that the agencies have resisted contracting out, ig-
nored cost comparison reviews, and undermined real opportunities for change.

Why should more than fifteen Federal agencies be in the business of developing
and marketing maps—in competition with private firms that could provide the same
function? Why should many Federal law enforcement agencies—the Customs Serv-
ice, the Border Patrol, the Secret Service, the Federal Bureau of Tavestigation” “op:
erate vehicle repair facilities when, by contracting for those services, they could
dedicate more employes to their primary law enforcement mission, rather than pro-
viding commercially-available support services?

I believe that it’s time that employee groups, unions, and private businesses
should be eligible to hold franchises for services and that taxpayers should gain the
benefits of improved operations,

Tf common sense does not move us quickly in the direction of greater contracting
for commercial services, certainly budget constraints will. As we move toward re-
ality and necessity in contracting for additional Federal functions and services, it
is essential that protections be established and maintained for Federal employees.

As we move by necessity toward more contracting out, we must take several pre-
cautions.

First, we must make certain that contracting out is cost effective for the tax-
payers. The record to date seems to reflect much more bureaucratic foot dragging
than actual cost comparison, and the public interest is never served by these con-
trived delays.

Second, we must ensure that inherently governmental functions remain within
the government. But as both the Office of Management and Budget and the General
Accounting Office will testify, that list of inherently governmental functions is not
extensive. Every function that is not “inherently governmental” should be consid-
ered for open competition.

Since 1955, Presidents of both parties have stressed the importance of relying
upon the private sector for commercial goods and services. However, numerous bar-
riers have been erected to efficient and effective management, including the enact-
ment of laws by previous Congresses that prohibit Federal agencies from even
studying contracting opportunities. These hearings will provide an opportunity to
examine the record of congressional interference with contracting, and help us de-
velop measures to bring these laws into the twenty first century.

Third, we must insure the fair treatment of employees in the transition period fol-
lowing any contracting of activities currently being performed by government. per-
sonnel.

The evidence that will be presented by today’s witnesses is not encouraging to
taxpayers concerned about efficiency or effective government operations. We will
hear of Fedcral agencies taking as long as six years to conduct cost comparisons.
We will hear that Federal agencies lack the management analyst expertise nec-
essary to conduct proper cost comparisons, We will also hear that Congress must
bear a portion of the responsibility for this less than effective record.

Tam also deeply concerned about what we will not hear today. Because OMB Cir-
cular A-76 mandates that Federal employees have “right of first refusal” to work
for contractors if commercial firms win competitions, OPM has been assigned re-
sponsibilities to facilitate opportunities for Federal employees to gain other Federal
positions. GAO has addressed some of these concerns. We invited the Office of Per-


18

fair, open to all parties and based on the level playing field. Sav-
ings are achieved through efficiencies in the management of the or-
anization, identified as part of the competition process; by holdin;
the winning organization to stated performance standards; throug]
competitive costing; and through the implementation of improved
contracting techniques. Circular A-76 cost comparison and appeals
procedures have ensured that all parties to the competitions have
equal access to the information and input to the decision process.

Once a decision to contract is reached, the circular requires agen-
cies to exert maximum effort to find available positions for ad-
versely affected employees within the agencies. Federal employees
are afforded the right of first refusal for jobs created in the success-
ful bidder's firm by the award of the contract. This requirement is
provided at 52.207-3 of the Federal Acquisition Regulations, In ad-
dition, and as a result of President Clinton’s Executive Order
12933, signed on October 20, 1994, last fall, Federal employees also
enjoy the right of first refusal for jobs created in successive con-
tracts for these services.

The A-76 Circular has been criticized, however, as overly bur-
densome, time consuming and complex. And Mr. Stevens described
several of the internal problems. It is true that the three-step proc-
ess takes time, and relies heavily on the procurement process to
complete. Depending on an agency’s workload and financial ac-
counting systems, the development of historic data necessary to
prepare a performance work statement may take considerable time
and effort. The development of the government’s in-house manage-
ment plan, and the most effective organization, the MEO, is a proc-
ess that is intended to improve program performance, allow em-
ployees the maximum opportunity to compete for the work, and to
protect the procurement process itself.

However, the MEO process can take time, depending on the con-
ditions that exist in-house and the state-of-the-art within the pri-
vate sector. As for the cost comparison, the handbook was devel-
oped over the years to try to ensure that the competitive cost to
the government of both the in-house bid and the private sector
were fully reflected. Simpler cost comparisons increase the risk
that the comparison will not be as accurate or as fair.

The fact that the cost comparison process relies on the procure-
ment process to generate competitive private sector bids also re-
sults in additional time requirements. Nevertheless, we have re-
cently met with representatives of the departments and agencies to
discuss ways that the cost comparison can be streamlined and im-
proved. We hope these discussions will allow us to make it easier
to use Circular A-76 and that increased use will generate addi-
tional operational efficiencies.

Numerous inspector general and GAO office reports, congres-
sional hearings and internal agency studies have documented con-
tract performance problems in service contract cost overruns. Many
of these problems stem directly or indirectly from the fact that
agencies often do not adequately define what they want. As a re-
sult, contractors waste time and money trying to anticipate our
performance requirements. Unfortunately, it has all too often been
a case of telling contractors and Federal employees, I'll know what
I want when I see it. As part of this administration’s effort to


35

which of its functions can be done more effectively by State and
local governments.

We have created in the budget a whole series of performance
partnerships by which we will, in fact, enter into arrangements
with States and localities in which they will, in fact, assume more
responsibility, subject to accountability for performance, for a range
of Federal functions. HUD is basically talking about restructuring
itself and going from 60 programs to ultimately 3, which are found-
ed on performance partnerships with State and local government.

So this is not an abstract exercise, as it might otherwise be, and
not a discussion about privatization. There is, in fact, a review
going on now in terms of efficiency, in terms of restructuring the
government, asking every agency to look very hard at what it can
do; what the private sector can do better; what no longer needs to
be done; and what the States and local governments can do.

Mr. Mica. We haven’t gotten into the area of State and local gov-
ernment, which you just mentioned, but it would be my guess-
timate that many functions could be transferred to the State for
them to perform functions with some financial assistance. The EPA
comes to mind, for example. There’s tremendous duplication that I
see from my State of Florida and what the national EPA does.
There are some things of regional and national and international
importance that must continue to be their function and responsibil-
ity.

SEPA isn’t a good example because they already contract out a
good deal of their work on some of those projects. But, we could
look for more efficient ways of providing services or oversight or en-
forcement of various EPA functions by contracting with State and
local governments; is that not true?

Mr. KOSKINEN. Yes, but that discussion, as I say, goes far beyond
the A-76 issue we’re talking about. It’s part and parcel of what's
going on right now across the government. In fact, EPA specifically
is taking a look at just that issue: what different relationships can
they have with State and local governments. They’re doing that not
as an A~76 issue.

Mr. Mica. Right.

Mr. KoSsKINEN. A-76 is really a means to get to that end. They’re
doing it on a basic fundamental analysis of what are they about.
This is a process that started when we did streamlining plans, and
when the NPR first issued its reports in the fall of 1993. So this
process has been going on and been driven for some time. It is now
Moving at a pace that really is somewhat awesome to behold.

We are actually reviewing with every agency—we have almost a
meeting every day—and every small commission, everyone, we're
asking them these questions: what can the private sector do better;
what can the States and localities do better; what programs should
no longer be managed at all?

Mr. Mica. Well, I think I'd have to disagree with the ranking
member. He’s not here to defend himself, but it’s a great time to
bring it up. He mentioned processing Social Security forms and IRS
returns, and also mentioned education. Well, I think those are all
primary targets for looking at contracting out, even within the
agency in which we have jurisdiction, OPM. They’re undergoing


36

some tremendous internal self-examinations on investigations and
training.

I guess the bulk of their remaining employees are in the retire-
ment area, and possibly some of those services could be contracted
out, too. There's a whole range of areas that we could look at—
again, giving employees an opportunity to compete, creating a real
spirit of competition.

Mr. KOSKINEN. That's right. But again, as I say, those are sub-
stantive issues that are going on. The A~76 function is to make it
possible for an agency, when it decides to look at privatization or
contracting out, to be able to make a sound business judgment. The
A-76 Circular is not the vehicle for driving the system either way.
I think it would be a mistake for us to try to convert the A-76 Cir-
cular by bootstrap into that dialog.

You might argue we should do that if we didn’t have all of this
momentum going. But in light of everything that’s gone on in the
last couple years, and certainly in Tight of everything that’s gone
on in the last several months, those forces for momentum and
change and movement in those directions are already unleashed.
As you say, OPM is taking a look at those functions not being driv-
en by A~76; it’s looking at those functions being driven by budg-
etary factors, by efficiency drives, by attempts to reorganize itself
to provide its services in the most effective ways possible.

Mr. Mica. And I think that also will drive anything we do at this
subcommittee or committee level or congressional level. I just note
in conclusion here, that in this morning’s Wall Street Journal,
there’s a little article by management consultant Peter Drucker.
And he noted, “A much larger proportion of adults now participate
in the U.S. labor force than did 30 or 40 years ago. Most especially,
the great majority of educated people do, indeed, work for an orga-
nization. But they are not employees of that organization; they are
contractors and have other roles.”

It is interesting how, even since the beginning of that circular in
1983 or the attempt in 1955 by other administrations to address
this problem, that life in the work place and work force has dra-
matically changed. And sometimes our circulars and laws and reg-
ulations don’t keep up with that.

Mr. KOSKINEN. No, I think that’s right. Again, I think if there
was going to be one impact of trying to make the circular more ef-
fective, it would be not so much necessarily just contracting out, it
may well be—and appropriately so—contracting in. If you look at
the State and local experiences, the initial movement out has been
balanced, not totally, by a movement back in, again, as a result of
the competition. Where employees can provide the service more ef-
fectively contracting in wil work for the city or the State or local
government.

So our bias ought not to be either way. Our bias ought to be to
try to continue to have the process respond and encourage employ-
ees wherever they work to respond effectively and cost-efficiently to
the needs we have for work that needs to be done.

Mr. Mica. Again, 1 thank both of you for testifying, and want to
try to come to a conclusion of the hearing this morning. We have
a continuation of this hearing; we may have a series of these before
we finish. And I believe our hearing is next Wednesday, April 5,


24

discerning more and more, as I attend these hearings and different
mark-up sessions, that nothing ever really changes. And I’m not
sure which of you gentlemen recollected that somehow, in the
1950’s in the Eisenhower administration, that the genesis for all of
this started, back in the 1950's.

Mr. KosKINEN. Right.

Mr. Mascara. And 40 years later, I think it was 1955, 40 years
later, we’re still here talking about whether A~76—we're not sure
that it works; it probably doesn’t work; should we take legislative
action to remedy some of these problems? So it’s my opinion—and
it’s only my opinion—that we are not prepared to deal with privat-
ization at this time, because no one really knows what’s best for
the people of this country.

And if you talk about privatization, I noted here, Mr. Stevens,
that you mentioned only 7 percent of the people went to the private
sector——

Mr. STEVENS. Went to the contractor who took over a Federal
function, sir.

Mr. Mascara. Did anybody ever ask the question, what a drain
this is on the valuable resources that we have with our Federal em-
ployees? I mean, if 7 percent went, the other 93 percent had to go
someplace. You did say that some took positions with other agen-
cies in the Federal Government. But even then, that’s a drain on
our most valuable resources, and that’s the experience of the people
who work for the Federal Government.

Mr. STEVENS. Well, we did do a questionnaire of those people,
Mr. Mascara, and generally found that the people directly affected
did not think that they had been positively affected. Only a few
were in better shape after the decision was made, whether or not
they were still working for the government or the contractor, than
they had been before. From the employees’ point of view—and the
perceived this accurately—as soon as an A-76 study is announced,
it’s likely to be an unpleasant experience.

Mr. Mascara. That’s difficult to measure, I understand. But
when we talk about privatization, we have to look at all aspects,
even the abstract kind of things like if 7 percent of the people went
to the new private organization, the other 93 percent that they
hired have loyalty to their boss and their company, not loyalty to
the American people, who pay for it.

I mean, let’s not kid each other—the money is still coming from
the Federal Treasury, paying the private sector to do what was
normally a Federal job.

Mr. STEVENS. Indeed it is, yes, sir.

Mr. Mascara. So I’m not working for the Federal Government
anymore, and I’m not working for the people of America. I’m work-
ing for John Smith, who owns this company, who now cleans this
building that Chairman Mica speaks about. And I think we need
to take a look at that. But more specific, do either of you gentle-
men—the question is for either of you—have a sense as to how
much contracting is currently going on, and what dollar figure that
might amount to, currently?

Mr. KoSKINEN. I think in service-based contracting, the best
number we have now for fiscal 1994 is $108 billion. So there is a
significant amount of service-based contracting going on, in terms




43

process ensures that the resulting cost comparison reflects the lowest possible cost
to the taxpayer.

4. Question “GAO reported that, a few years ago, the Department of Defense had
more than 400 cost comparisons that had taken more than six years to complete.
Is it common for cost comparisons by federal agencies to require that much time?”

Answer:

‘Agencies report that the average time to complete a relatively small cost compari-
son, e.g., less than 50 employees, is 12 to 18 months. Of this, a significant amount
of this time is related to the requirements of the procurement process, Many are
completed in much less time. Larger studies, due to increased workload and other
data collection requirements may take up to two years,

The GAO and Congress have historically considered a study to have begun at
DOD’s legislatively mandated congressional notification, not at the formation of a
study team or the issuance of a solicitation. In some cases, congressional notification
was not followed up with active study development for two or more years.

It is not clear why any study would take more than two years to complete. By
law, no DOD function can be converted to contract performance without a completed
cost comparison. Legislative requirements to cancel DOD studies over two years in
process and the moratorium on additional studies, may have also created unin-
tended consequences.

PERSONNEL,

1. Question: “GAO testified that agencies lack the management analysts to con-
duct A-76 studies in-house. What has OMB done to provide management analyst
positions for agencies in the course of budget reviews?”

“Could Congress help the process by directing greater effort toward the conduct
of cost comparisons?”

“If agencies lack such analysts, could the services be acquired through contracts?”

Answer:

It is an agency's responsibility to manage agency workforce requirements. Govern-
mentwide there are approximately 50,000 management analysts and technical sup-
port staff and approximately 7,000 program analysts, with the general skills nec-
essary to conduct A-76 studies. A-76 specific training has been available through
the Defense Department, OPM and through the private sector. Technical and full
A-76 cost comparison study skills are also available and have been acquired
through contracts with the private sector.

IMPLEMENTATION

1, Question: “What vehicle does OMB have to ensure that, when agencies win cost
comparisons, they actually make the organizational changes developed through the
cost comparison?” “Does your office have any record of organizations winning a com-
petition and then not implementing the MEO?”

Answer:

‘The Circular’s Supplemental Handbook provides at paragraph E. 5., page I-12,
that “Should the cost comparison result in a decision to perform the work in-house,
implementation of the in-house staffing plan must be initiated within one month
after cancellation of the solicitation and completed within six months.”

Agencies are responsible for implementing the Government's MEO when an A—
76 cost comparison is “retained” in-house. We are not aware of any instances where
agencies have not implemented the MEO.

2. Question: “Your testimony and GAO’s indicated that . . . it is very difficult to
determine the scope of savings that can be attributed to cost comparisons. If that
is so, how do critics of the A-76 program arrive at estimates that the costs of con-
tracts have increased after the contract is implemented?”

Answer:

A-76 cost comparisons provide a “point-in-time” snapshot_of the expected work-
loads and estimated costs associated with the performance of work by in-house and
contract resources. If the function is retained in-house, the “savings” reflected on the
A-76 Cost Comparison Form are really opportunity cost savings that demonstrate
that it is cheaper to implement the MEO than to convert to contract performance.
What is not shown on the A-76 Cost Comparison Form is the difference between
the original cost of in-house performance and the estimated cost of MEO perform-
ance. These savings have been estimated separately by OMB and the agencies. GAO
has generally not given consideration to MEO savings in its analyses. We believe
these saving to approximate 20 percent.

If the function is converted to contract performance, the “savings” reflected on the
A-76 Cost. Comparison Form are calculated as the difference between the Govern-


41

4. Question: Your testimony noted that the Postal Service had realized savings
in the printing of stamps by using contractors rather than the Bureau of Engraving
and Printing.

Same people have alleged that contracting might have some adverse effects on
non-cost factors that often are invoked in these discussions.

For example, do you have any evidence that contract printers have any difficulties
implementing appropriate security procedures for printing? Would they, for exam.
ple. be more vulnerable to fraud or counterfciting than the Bureau of Engraving and

rinting?

Answer: In our report, “Postage Stamp Production: Private Sector Can Be a Lower
Cost Optional Source,” (GAGIGED-93-18, Oct. 30, 1992), we found that the Postal
Inspection Service monitors contractors’ compliance with security requirements.
While the Postal Inspection Service has found some deficiencies in contractor secu-
rity systems, it found no serious security problems at contractor facilities, Some, if
nat most, of the contractors were firms—such as the American Bank Note Company
and the United States Bank Note Company—a major portion of whose business is
the printing of stamps, currency, and negotiable securities for other countries.

LEGISLATION RECOMMENDED?

Question: Would the General Accounting Office recommend adopting legislation to
require agencies to review their activities and identify those that are performed by
private firms for studies—perhaps using procedures similar to the A~76 Process?

Answer: As stated in our testimony, we do not believe that it is necessary for Con-
gress to legislate the A-76 process. We note that Congress did require, through pas-
sage of the Federa] Workforce Restructuring Act, that federal agencies conduct cost
comparisons before contracting out for downsized federal activities. Congress, how-
ever, left the manner in which the comparisons were to be made to OMB. OMB ad-
vised us that it is revising its A~76 guidance to address concerns that have been
raised. If OMB can deliver revised guidance, in a reasonable period, that addresses
past concerns, then we do not believe legislation would be necessary. This decision
is, of course, up to Congress. Congress may wish to monitor OMB’s progress in this
effort before reaching a decision on the need for legislative action.

QUESTIONS FOR AND ANSWERS FROM THE OFFICE OF MANAGEMENT AND BUDGET
INHERENTLY GOVERNMENTAL

1. Question: “. . . The Office of Management and Budget has developed a list of
“inherently governmental” functions . . . Is it fair to say that anything not on that
list has comparable positions in the private sector, ‘and could therefore be subject
to competitive cost comparisons?”

“Can you estimate for this Subcommittee what portion of the current workforce
is performing such ‘inherently governmental’ functions?”

nswer:

The Office of Federal Procurement Policy (OFPP) Policy Letter 92-1, dated Sep-
tember 23, 1992 (Federal Register 9/30/92, page 45096), provides agencies with guid-
ance on inherently governmental functions. ‘The policy letter also provides an flus.
trative list of functions that are considered, as a maiter of policy, to be inherently
governmental. On a functional or site-specific basis, the application of the criteria
provided by the policy letter could result in additional functions being designated
as inherently governmental.

At this time, we are unable to estimate the percentage of total non-military Fed-
eral employees performing inherently governmental functions. Agency inventories of
commercial activities are dated and have not required the listing of inherently a
ernmental positions. Developing a percentage is also complicated by the fact that
certain commercial activities may be exempt from contracting out, in the interest
of the Government, for reasons of national defense, direct patient care, no commer-
cial source, ete.

ADMINISTRATION POLICY

1, Question: “Please supply for the record a listing of agéncies that have con-
ducted cost comparisons under OMB Circular A-76 for the past five years. Please
identify the number of FTE affected by those studies and the savings projected as
a result of the cost comparison.”

Answer:

We do not have a current list of agencies that have conducted cost comparisons
over the last five years. The Department of Defense reports that 4,185 FTE were


11

Federal agencies’ contracting out decisions have been beneficial
and cost-effective in the aggregate. This has, of course, contributed
to the congressional skepticism about the program. But remember
that the way our requests come in, we have not looked at a rep-
resentative sample of studies. We’re rarely asked, for example, to
look at the 50 percent of A-76 studies in which the government
workers prevail in a cost competition.

There’s really not the same level of controversy there. We also
rarely get anything as clean, from an auditor’s perspective, to look
at, as in the postage stamp printing example that’s in my prepared
statement. In an attempt to address some of the broader perform-
ance questions, we have gone into the General Services Adminis-
tration, which is one of the four major contracting out agencies.

They had a work force of some 40,000 early in the Reagan ad-
ministration. I read in Mr. Johnson’s statement a few days ago
that they’re down to 16,000 today. So there’s been a great deal of
contracting out at that agency. However, despite our intensive look
at the records that they’re keeping on the results of this program,
we still have not been able to provide a clear assessment of wheth-
er GSA has indeed realized savings from the program and the ben-
efits that it expected.

The major problem is that the lack of a common baseline has
prevented us from comparing what the contract costs are currently
with what they would have been if the other option had been cho-
sen. But even if such baseline data were available, we found that
the post-decision comparisons would be extremely difficult because
Most activities just simply change over time. They don’t remain
static.

It’s also a fact that we have confirmed many times, in our broad-
er contracting work, that poor contract administration, including
poorly worded performance work statements which inexactly pre-
scribe what is expected of contractors, have contributed to contract
revisions and cost escalations that very quickly outdated compari-
sons with precontract performance of the functions.

In summary, Mr. Chairman, we have long held that the concept
of encouraging competition in the provision of Federal services is
a sensible management objective, and that with its strong endorse-
ment by the National Performance Review, it now has the un-
equivocal support of both political parties. NPR has unequivocally
advocated exposing agency operations to competition, both wit!
other Federal agencies and with the private companies.

But it has also advocated providing agencies with the flexibility
to obtain services from the best possible source, whatever their
analysis indicates that is. As long as agencies and managers are
held to close account on the numbers of people that they employ,
this flexibility, I believe, is likely to be more rhetorical than real.

The NPR also recognized this lack of flexibility and recommended
eliminating personnel ceilings and allowing Federal managers to
manage to their budgets, using ceilings on operational costs rather
than numbers of people to control spending. And we, too, believe
that is more sensible than arbitrary personnel ceilings that do limit
that flexibility. I'll conclude my statement there, Mr. Chairman,
and respond to any questions after Mr. Koskinen has spoken.

[The prepared statement of Mr. Stevens follows:]


13

sion of advisory and assistance services, extended to them by implication the cost
study requirement.

As Congress considers the proposals of the Contract With America and of the Na-
tional Performance Review (I i) to downsize the federal government, contracting
issues have assumed renewed prominence since the use of contractors may be a sub-
stitute for government employment. We believe that contractors can provide valu-
able services to the government. We have long held that the concept of encouraging
competition is a sensible management objective that can contribute to more efficient
and effective government operations and potentially result in significant savings.
However, despite its appeal on a conceptual level, the A-76 program has suffered.
from a number of implementation problems that raise questions on the amount of
savings actually achieved and that prevent governmentwide acceptance,

‘The A-76 program has been and continues to be controversial. In more than 100
reviews we and others have done, managers accepted its objectives of seeking effi-
ciencies and cost savings, but they also said that the program is time-consuming,
difficult to implement, disruptive, and threatening to both managers and employees.

Effects on Employees

The circular contains a number of provisions designed to protect the rights of fed-
eral employees affected by contracting-out decisions. First, unless a waiver is re-
ceived, any activity consisting of more than 10 full-time equivalent jobs (FTE), must
undergo a cost study, and the study’s results must indicate that contracting-out
would result in more than 10 percent savings over comparable in-house costs before
the activity can be converted. Federal employees may appeal these decisions to the
agency performing the cost study if they believe that the cost study was faulty.

indly, under A—76, once the decision to contract out is made, federal agencies
must exert maximum effort to find other jobs for adversely affected employees.
These efforts include giving them priority consideration for available positions with-
in the agency, establishing reemployment priority lists, paying reasonable costs for
training and relocation, and coordinating with the Office of Personnel Management
(OPM) to provide access to governmentwide placement programs. The winning con-
tractor must also give adversely affected employees the right of first refusal for posi-
tions for which they are qualified.

‘These policy provisions were strengthened by the Federal Workforce Restructur-
ing Act of 1994 (P.L. 103-226). This act prohibits agencies from increasing the pro-
curement of service contracts in order to achieve the personnel reductions mandated
by the act, unless an A-76 cost study shows that the contracts would be to the fi-
nancial advantage of the government.

Despite these protections, the A-76 program adversely affects workers’ morale
and productivity. Our work’ has shown that because employees affected by an A-
76 study are uncertain about their current employment, employee anxiety can begin
as soon as the study is announced. Some affected employees begin to look for new
jobs, reducing individual and organizational productivity and frequently resulting in
the loss of good employees.

‘The cost studies required by Circular A-76 are in practice mostly done by man-
agers and operational workers rather than trained management analysts. They are
required to develop detailed work statements and analyses—tasks they are often not
skilled in, may never do again, and frequently are assigned as extra duties. The ab-
sence of workload data and adequate cost accounting systems makes the task all
the more difficult. The time it takes to do A-76 studies has contributed to disruption
in the workplace. Cost studies completed by the Department of Defense (DOD) be-
tween 1978 and 1986 took an average of 2 years to complete. When we checked
DOD’s database in 1989, we found 940 cost studies in process. Of these, 411, or 44
percent, were started in 1983 or earlier and had been in process at least 6 years.

We have not done any recent work on the question of what happens to displaced
federal workers under the A-76 rogram. However, several reports that we did in
the 1980s may provide some insight. For example, in a 1985 report on the program’s
impact in DOD,} we found that the majority of federal workers whose jobs had been
contracted out obtained other federal employment, most often at the same installa-
tion. We found that of 2,535 DOD employees we sampled who worked in activities
that were contracted out in fiscal year 1983, 74 percent had found other government
jobs, most often at the same installation; 7 percent went to work for the contractor;
5 percent were involuntarily separated; and most of the remaining 14 percent re-
signed or retired. Of those who obtained other government positions, about 56 per-

“DOD Functions Contracted Out Under OMB Circular A-76: Contract Cost Increases and
the Effects on Federal Employees” (GAO/NSIAD-85-49, Apr. 15, 1985.


CONTENTS

Hearing held on March 29, 1995 .
Statement of:

Stevens, L. Nye, Director of Planning and Reporting, General Govern-
ment Division, General Accounting Office; and John Koskinen, Depaty
Director for Management, Office of Management and Budget

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

Mica, Hon, John L, a Representative in ‘Congress from the State of
Florida:

Prepared statement of ...

Questions for and answers from ‘ing

Questions for and answers from the Office of Managenent and Budg-
et

Questions for and answers from Gary D. Engebretson, president,
Contract Services Association of America

National Performance Review's list of legislative restrictions to com-
petition and contracting out in the Federal Government

Moran, Hon. James P., a Representative in Congress from the State
of Virginia, prepared statement of

Stevens, L. Nye, Director of Planni
ment Division, General ‘Accounting ‘Otiice, prepared: ‘diatement of.

Tobias, Robert M., president, National Treasury Employees Union, pro-
pared statement of ..

ay



34

submit a bill that would have legislated the contracting out pro-
gram, I think, in 1990. And the thrust of that bill, I think, really
was employee protection. So there are some precedents there. It
was also apparent that when you start writing these into legisla-
tion, you are not necessarily going to speed up the process.

Appeal rights for employees, a checklist for various ways in
which employee protections are built in or participate in the proc-
ess, can be a complicating rather than a simplifying factor.

Mr. KOSKINEN. I think there’s a point where we ought not to be
winging it here on our side of the table, since you probably have
a pretty good idea of where you would like to go with this. So it’s
hard to craft this legislation. I have general principles we can re-
spond to. When you get down to this level, again, there are a set
of employee protections in the way the circular has been imple-
mented.

We ought to be careful about those. I think your instinct is
right—we want to make sure, as the earlier statement was, that
we do not unnecessarily lose the abilit} that we've built into the
Federal work force. We've spent a lot of time training people; they
work here a long time; they’re dedicated. They are a great resource.
Most companies, most countries, most cities and States recognize
that their most valuable resource is a well-trained, highly efficient
work force.

We have a very well-trained work force, and we ought to be very
careful that we do not gratuitously lose the expertise that those
people can bring to bear on the system. Again, I think, when you
look at this structure, our thought is that what we need here, other
than removing obstacles, is not legislation that says, do this. There
is a circular that says, do this; there is a consensus that we ought
to do that.

I think what we ought to take a look at is what the agencies’ re-
sponse is now in this day and age—and the circular has not been
revised, as you know, for several years—to see what the process
can bring. Because I do not detect any difference in view, again,
which you would normally solve by legislation, saying, this is in
fact what the circular’s goal ought to be.

I think we all have the same goal for the circular. The real ques-
tion is, can we revise it and provide the agencies with an atmos-
phere in which they can actually exercise the responsibilities under
that circular.

Mr. Mica. Do you think you can go back now and look at some
of these functions and activities that could fall into the realm of
contracting out? I mean, I don’t want anyone excluded from this.
You can even include OMB and GAO. Certainly there are some
good accounting firms out there that could do a good job to supple-
ment what GAO is doing. But do you think that’s possible?

Mr. KoSKINEN. One of the things I should say—this is not the
subject of this hearing, but it is important and relates back to the
early points of Congressman Moran. We are in what we call Phase
Tr of reinventing government. As the President and the Vice Presi-
dent announced, the basic question every agency, every commission
is being asked is, what is its basic fundamental Federal role; what
is it doing that no longer needs to be done and can be terminated;
which of its functions can be done better in the private sector;


22

what those standards ought to be, it seems to me, are not nec-
essary. Our problem is not that we do not know what we're trying
to accomplish. The problem is, how can you implement a system
with detailed regulations to make sure that, in fact, you collect the
right information and you make the correct comparisons.

Therefore, I don’t think there’s any disagreement in terms of
what the goal is or, in fact, what the standards ought to be. The
problem, and as the GAO studies reflect, is, how can we get this
implemented most effectively? And that’s usually not a legislative
problem. Legislative problems, as you note appropriately, are, what
are the standards; what are our goals?

Well, our goals here are clearly to create a level playing field. It’s
been the same goal since this process started. And our goal is to,
in fact, increase the ability and the flexibility of managers to man-
age in the most cost-effective way. There are obstacles that have
been imposed by legislation that, if we removed those obstacles,
that would be an improvement.

Mr. Mica. But that’s going to require, again, legislation ——

Mr. KOSKINEN. Yes, as I said.

Mr. Mica. And even NPR recommended eliminating personnel
ceilings and giving Federal managers the ability to manage their
budgets. And some of this is going to require legislative authority.

Mr. KOSKINEN. Yes. As I said earlier, I think that’s exactly right.
With regard to the process of A-76, though, there I think our prob-
lem is not that we do not know what the standards ought to be or
what the goals ought to be. Our problem is that the GAO studies
and others say; if there are problems, how can we effectively create
the cost comparison process so that, in fact, we get the right infor-
mation in a timely way and so that the managers can use it?

Mr. Mica. Well, some of this is done by the agencies. Shouldn’t
some of this be done by people who are capable of doing it? I think
one or two of you testified that sometimes they don’t have even the
capability of determining whether they can perform the service, or
determine the cost, or do these analyses. Is that right, Mr. Ste-
vens?

Mr. STEVENS. Yes, sir, we did say that had been a common prob-
lem in the past. These are management people rather than man-
agement analysts.

Mr. Mica. And you provide us with some studies, a list of the
studies, and you've also testified, I believe, that the GAO studies
looked at primarily problem contracting. Was that your comment?
So you really haven’t done an evaluation of the overall impact of
the program?

Mr. STEVENS. We've attempted that at the General Services Ad-
ministration. That was the purpose of our work there, was to look
at their overall historical program; try to determine whether the
maybe 30,000 employees—or between 20,000 and 30,000 employ-
ees—whose work is not now being performed, except by contract,
and determine, has this been a good thing or a bad thing?

And we just really cannot prove that. The data from the cost
studies, at the beginning, they do prove it. The cost studies say
that indeed you will save money by contracting out. We go in 5
years later, the question we're asking, did we save money con-
tracting out? And things have changed so much—the baseline is


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, Indiana

JON D. FOX, Pennsylvania

RANDY TATE, Washington

DICK CHRYSLER, Michigan

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

WILLIAM J. MARTINI, New Jersey

JOE SCARBOROUGH, Florida

JOHN B. SHADEGG, Arizona

MICHAEL PATRICK FLANAGAN, Illinois

CHARLES F. BASS, New Hampshire

STEVEN C. LATOURETTE, Ohio

MARSHALL “MARK” SANFORD, South
Carolina

ROBERT L. EHRLICH, JR., Maryland

CARDISS COLLINS, Illinois

HENRY A. WAXMAN, California

TOM LANTOS, California

ROBERT E. WISE, JR., West Virginia

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

JOHN M. SPRATT, JR., South Carolina

LOUISE McINTOSH SLAUGHTER, New
York

PAUL E. KANJORSKI, Pennsylvania

GARY A. CONDIT, California

COLLIN C. PETERSON, Minnesota

KAREN L. THURMAN, Florida

CAROLYN B. MALONEY, New York

THOMAS M. BARRETT, Wisconsin

GENE TAYLOR, Mississippi

BARBARA-ROSE COLLINS, Michigan

ELEANOR HOLMES NORTON, District of
Columbia

JAMES P. MORAN, Virginia

GENE GREEN, Texas

CARRIE P. MEEK, Florida

FRANK MASCARA, Pennsylvania

CHAKA FATTAH, Pennsylvania

BERNARD SANDERS, Vermont
(Independent)

JAMES L. CLARKE, Sta/f Director
KEVIN SABO, General Counsel
JUDITH McCoy, Chief Clerk
Bup MYERS, Minority Staff Director

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

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

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

EX OFFICIO

WILLIAM F. CLINGER, JR., Pennsylvania

CARDISS COLLINS, Minois

GeoRGE NESTERCZUK, Staff Director
SUSAN MOSYCHUK, Professional Staff Member
NED LYNCH, Professional Staff Member
CAROLINE FIEL, Clerk

ap


46

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

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

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

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

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

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

2) Address the cost comparison issue (as suggested above) through the author-
ization of a credible, independent resource (such as a major business school) to
study the process and recommend 1) how a factoring or scoring formula might
be applied to government “bids” to make them more accurate and 2) how the
process itself can be streamlined and made far more simple. This is a natural,
and unavoidable, companion to the recommendation above (on limiting study
times) and an issue that goes to the very heart of the whole debate.

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

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

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

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

STATEMENT OF Ropert M. Tonias, Presipent, NATIONAL TREASURY EMPLOYEES
UNION

April 18, 1995

The Honorable John L. Mica
Chairman, Subcommittee on Civil Service
Committee on Government Reform & Oversight
U.S. House of Representatives
B-371C Rayburn House Office Building
Washington, D.C. 20002

DEAR CHAIRMAN Mica:


30

need to make sure we’re not going through paper exercises that
don’t actually move us in the directions we're trying to go.

Mr. Mica. But it is coming out. I notice, again, in testimony from
the administration, that the NPR has recognized a lack of flexibil-
ity and suggested eliminating personnel ceilings, allowing Federal
managers to manage their own budgets using ceilings and oper-
ations costs to control spending. The NPR recognized that person-
nel ceilings could cause agencies to contract out work that could be
done more efficiently in house.

They are looking at both sides of this. What is the status, do you
know, of the administration’s recommendation in this area, as far
as recommending any legislative changes or any other types of con-
Bressional action that may be required to eliminate some of these

arriers that have been set in place?

Mr. KOSKINEN. Well, the barriers—a number of them Mr. Ste-
vens mentioned—are clearly interfering with the ability of man-
agers to manage. So if anybody would like to eliminate those, that
would be fine. With regard to the 272,000 and the issue of manage-
ment by FTE limits, we think as a general matter, much like man-
dating results of any kind, rather than saying we should contract
in or out more or less, our standard should be to do the best we
can.

Similarly, with FTEs, we think that it is not an appropriate way
to manage costs by simply continually focusing on how many FTEs
are in the government. However, we are satisfied that we are well
on the way to meeting the Work Force Restructuring Act require-
ments—the 272,000 decline over a 5-year period—without any un-
necessary adjustments within the agencies in terms of how they de-
liver their mission.

We've reviewed their streamlining plans. That’s an ongoing proc-
ess. The agencies are reinventing the ways they propose to do their
work, the way they are operating. They're increasing the spans of
controls of supervisors. We think that the reality today, with the
budget debate that is going on, is that the driving force for what
an agency does is not its FTEs ceilings, it is its budget caps.

Mr. Mica. Well, it’s taken 40 years. Everyone says that since
1955, each administration has proposed and supported contracting
out. But I think we’ve seen 40 years of impediments being placed
in the way of actually making that happen. The only thing that’s
driving this exercise now is the question of downsizing, of the tre-
mendous strain of the deficit on the Federal budget. So we defi-
nitely have some motivation.

I’m convinced, even after this preliminary hearing and the infor-
mation that I’ve received, that we should take some legislative ac-
tion in this area and I would like to seek your counsel on some of
the elements that should be included. I’m wondering if we reverse
the process in some way and had OMB and GAO—right now there
is some identification of those positions or functions that can be
contracted out—I’m wondering if we could possibly have some sort
of joint or mandatory identification of those positions, and then
mandatory action required on those. What would you think of in-
cluding that in this type of prospective legislation?

Mr. STEVENS. I think one of the problems you'll run into, Mr.
Chairman, would be definitions. And I believe the reason there is


39

METHODOLOGY

1. Question: Your testimony indicated that agencies claim that the cost compari-
studies required by OMB Circular A~76 are cumbersome, time consuming, and
difficult to perlorm because they require management analyst expertise that many
federal employees don’t have.

But aren't these methods simply the same procedures that would be used in any
organizational assessment or review of operations?

nswer: To a large extent the management study required by A-76 to form the
basis of the in-house cost estimate involves the same methods or procedures that
would be used in any organizational assessment or review of operations.

Could you, for example, compare the A—76 cost comparisons to private sector com-
panies’ decisions to produce or buy goods or services?

Answer: The A-76 decisions to contract-out or retain activities in-house are simi-
lar to the “make or buy” decisions made by private sector companies. However, our
recent work examining GSA’s contracting-out experience indicates that private sec-
tor companies may not always base their decisions on A-76-like cost comparisons.
For example, real estate companies we examined commonly used performance-based
approaches to evaluate their activities. Specifically, the companies

—developed performance measures to evaluate the effectiveness of programs
and service delivery (i.e., established a baseline and looked at the subsequent
outcomes and results);

—benchmarked the companies’ performance against that of others, particularly
the “best in class” for the particular activity; and

—decided to retain an activity in-house only if its performance was consistent
with that of the benchmarked companies, or if it was part of the company’s
“core” business.

If agencies don’t have enough people to perform such management analyses, what
means do we have of developing effective organizational assessments?

Answer: If agencies don’t have enough people to perform needed management
analyses, they could contract out for such expertise.

If agencies don’t have enough management analysis expertise, what resources are
being used to conduct the National Performance Review?

Answer: We have not conducted an analysis of how the National Performance Re-
view work is being performed. It is our understanding that agency personnel have
been detailed to the National Performance Review.

Has the NPR diverted federal employees from routine analytical duties?

Answer: We have no information on whether federal employees were diverted
from routine analytical duties to be assigned to NPR.

2. Question: Your testimony indicated that federal agencies face absence of work-
load data and lack adequate cost accounting systems to perform proper cost com-

arisons.
P Have these deficiencies been addressed by the Chief Financial Officers Act, or
other legislation?

The Chief Financial Officers Act of 1990 (CFO Act) and the Government Manage-
ment Reform Act of 1994 (GMRA) which extended several major provisions of the
CFO Act, both contemplate the improvement of financial management systems in-
cluding systems used to determine, record, and report on the cost of programs. The
Federal! Accounting Standards Advisory Board (which recommends accounting
standards for the Federal Government to OMB, Treasury, and GAO) will shortly
issue its statement recommending concepts and standards for managerial cost ac-
counting for the federal government.

The managerial cost accounting concepts and standards contained in the draft
statement are aimed at providing reliable and timely information on the full cost
of federal programs, their activities, and outputs. The cost information can be used
by Congress and federal executives in making decisions about allocating federal re-
sources, authorizing and modifying programs, and evaluating program performance,
The cost information can also be used by program managers in making managerial
decisions to improve operating economy and efficiency.

What additional information would be needed to conduct adequate cost compari-
sons?

Answer: Agencies still need to collect. adequate workload data. While agencies
have sufficient cost data to conduct an adequate cost comparison, the quality of the
cost comparison would be improved if the agency accounting systems could provide
precise costs for such things as rent, supplies, and utilitics on the activity under
review. This would climinate the common need to prorate costs among 2 number
of activities. State and local governments are beginning to shift. toward activity-
based costing, an accounting technique that identifies all costs associated with an



25

of provision of services by the private sector to the Federal Govern-
ment.

Mr. Mascara. What kind of services? Is there any kind that
might fall in a similar category—cleaning or whatever?

Mr. KosKINEN. Yes. I haven’t got the fist, but service contracting
basically would include all the range of things we’ve been talkin
about. It includes, besides base maintenance, all kinds of standar«
blue collar work, and runs across the spectrum to research and de-
velopment work. A substantial amount of environmental clean-up
work is done under service contracts.

Mr. STEVENS, Our nuclear weapons program is, I believe, a con-
tract operation. The laboratories are included in that.

Mr. Mascara. Where do they get their skilled employees to deal
with that? If the Federal employees would not decide—

Mr. STEVENS. Well, they’re competing for scientists and techni-
cians. Some are former Federal emplo ees. There are university af-
filiations, usually, with the national labs.

Mr. Koskinen, A number of these services have been contracted
out for a substantial number of years, so that the contractors have
been in the private sector competing for young college graduates,
graduate students, people in the work force, laborers.

Mr. Mascara. You may have answered this question as a result
of Mr. Mica’s questioning. I may not have heard it. But if the A—
76 doesn’t work and the legislative approach, you feel, is not the
answer, then what do you think is the answer to accomplishing the
job that we want to accomplish?

Mr. KoskINEN. I don’t think we’ve established that it doesn’t
work. I think what Mr. Stevens’ testimony has been and what
we've talked about is, it’s very difficult to establish, after the fact,
what the savings are. If you look at what the studies demonstrated,
as the chairman noted in his opening comment, our estimate is
that we’re presently saving about $1 filtion a year from the con-
tracting out process.

A significant portion of that is the savings that have resulted
from the reconstruction of the Federal work force and keeping the
process in house. Part of the National Performance Review focus is
that what you need to develop over time, and what we are going
to try to focus on in A-76, is a process that is a fluid one rather
than a static one. All too often what happens is, you do a very good
cost comparison; you do an analysis of whether to primarily con-
tract out; and then that’s it.

There is very little future rebidding of the process. It does not
get bid back in, in terms of contracting back in. Or, if it’s decided
to stay in, very rarely do you, in fact, do another study to contract
it out. What we need to do, as has been noted in Mr. Stevens’ testi-
mony and other statements, is to encourage competition across the
board. We need to have franchise funds and operations within the
government so that we have government agencies that provide ver
effective services competing for the provision of those services witl
other government agencies.

We have that going now, and the National Finance Center is ev-
eryone’s favorite example. The Agriculture Department runs it. It’s
processing payroll for a vast number of Federal employees. My
check is written out of Columbus, OH, out of the Defense Depart-


9

cated Federal employees who are adversely affected by agency con-
tracting decisions are assisted in finding continued employment.

I understand the OPM representatives were unable to attend
today, and I think it’s extremely important that we examine the
Office of Personnel Management’s progress in future plans in that
regard. And we must also make certain that in contracting out,
we're going to do stringent oversight to make certain that any pro-
posal for contracting out will be cost effective and will reduce costs.

In the past we've had experience where there was contracting out
and subsequent cost comparisons showed that these actions did not
result in any savings to the Federal Government. I want to wel-
come our distinguished witnesses today—John Koskinen, Deputy
Director for Management for the Office of Management and Budg-
et, and Mr. Nye Stevens, Director of Planning and Reporting, from
General Accounting Office—to our subcommittee.

And I hope that their testimony will enable us to evaluate the
effect that contracting out work previously accomplished by Federal
agencies, what effect that would have on the Federal work force
and, in turn, the Federal budget deficit. Thank you, Mr. Chairman.

Mr. Mica. I thank the gentleman, and now I would like to swear
in our witnesses, Mr. Stevens and Mr. Koskinen, as is customary
with our panel.

[Witnesses sworn.]

Mr. Mica. Again, I welcome each of you and would like to call
on Mr. Stevens first. Mr. Stevens is the Director of Planning and
Reporting, the General Government Division of the GAO. Welcome
and we look forward to your testimony.

STATEMENT OF L, NYE STEVENS, DIRECTOR OF PLANNING
AND REPORTING, GENERAL GOVERNMENT DIVISION, GEN-
ERAL ACCOUNTING OFFICE; AND JOHN KOSKINEN, DEPUTY
DIRECTOR FOR MANAGEMENT, OFFICE OF MANAGEMENT
AND BUDGET

Mr. STEVENS. Thank you, Mr. Chairman and other members of
the subcommittee. As you mentioned in your own statement, Mr.
Chairman, we've done a great deal of work in this area over the
years, and I’ve listed a number of the reports we've issued since
1980 in the attachment to my statement. Now, I used those to pre-
pare the written statement itself, and with your permission, what
Id like to do is just submit that for the record and hit three or four
high points in 5 minutes or less.

ir. Mica. Without objection, and we look forward to your sum-
mary.

Mr. STEVENS, The first point that I'd like to mention in summary
is that the contracting out program has always been a controversial
one with the U.S. Congress. Many of the requests that we've gotten
over the years have been from Members of Congress whose con-
stituents have objected, either prospectively or at the fact, to the
prospect of their functions being contracted out.

There have been dozens of restrictions passed on A-76 studies
themselves, both in authorizing and in appropriations langua;
passed by Congress. Some of these are still in effect. We don’t real
¥ have a current inventory of those at the moment, because they

lo come and go. Some of them expire, and some of them are writ-


47

Thank you for your recent correspondence requesting NTEU’s submission for the
record of additional studies or reports on the federal government's contracting-out,
practices.

Tam pleased to bring the following to the Subcommittce’s attention:

1. Audit of the Cost-Effectiveness of Contracting for Headquarters Support Serv-
ices, Department of Energy Office of Inspector General, (DOE/IG-0297, August 30,
1991).

2. Audit Report on Consulting Services Contracts for Operational Test and Eval-
uation, Department of Defense Office of the Inspector General, (No.91-115, August
22, 1991).

3. Audit Report on Contracted Advisory and Assistance Service Contracts, Depart-
ment of Defense Office of the Inspector General, (No.91-041, February 1, 1991).

4. Audit Report on Selected Services Contracts at Wright-Patterson Air Force
Base, Department of Defense Office of the Inspector General,(No.92-128, August 17,
1992).

5, Changes Affecting the Pay and Benefits of Federal Employees—Federal Gov-
ernment Service Task Force, January 1993.

6. From Red Tape to Results: Creating A Government that Works Better And
Costs Less, Report of the National Performance Review, September 1993.

7, Renewing HUD: A Long-Term Agenda for Effective Performance—National As-
sociation of Public Administrators, July 1994.

8. Summary Report of Agencies’ Service Contracting Practices—Office of Manage-
ment and Budget (OMB), January 1994.

9. Testimony of Ambassador Henry F. Cooper, Director, Strategic Defense Initia-
tive Organization, DOD, before the Senate Committee on Governmental Affairs,
duly 24, 1992.

10. Testimony of Donna R. Fitzpatrick, Assistant Secretary for Management and
Administration, DOE, before the Subcommittee on Federal Services, Post Office and
Civil Service, Senate Committee on Governmental Affairs, September 6, 1989.

While it is important to recognize that many of the GAO studies cited in my re-
cent testimony are not a random sample of all contracts, it is equally important to
acknowledge these studies as definitive representations of specific contracting-out
abuses that demand the Congress’s critical attention.

As the Committee moves forward on this important issue, I too look forward to
working with you to resolve these concerns in the public interest.

Sincerely,
Ropert M. Topias
National President.

NATIONAL PERFORMANCE REVIEW'S List OF LEGISLATIVE RESTRICTIONS TO
COMPETITION AND CONTRACTING OUT IN THE FEDERAL GOVERNMENT

June 16, 1995.

Over the years Congress has enacted a number of legislative restrictions to con-
tracting out or placed other restrictions on managerial Nexibility. The following is
a list of legislative impediments. The climination of such restrictions could result
in additional managerial flexibility to improve performance and cost effectiveness.

AGRICULTURE,

None. Agriculture was previously restricted from contracting out in its Agricul-
tural Stabilization and Conservation Service (ASCS) and in the Soil Conservation
Service, but these legislative restrictions are no longer present.

COMMERCE

1, P.L, 102-555—‘Ncither the President nor any other official of the government
shall make any effort to lease, sell or transfer to the private sector or commercialize,
any portion of the weather satellite systems operated by the Department of Com-
merce or se successor agency.” .

2. 15 USC 3704(b)—“The functions of the NTIS are permanent Federal functions
to be carried out by the Secretary through the Service and its employces, and shall
not be transferred from the Service, by contract or otherwise, to the private sector
on a permanent or temporary basis, without the express approval of the Congress.”

“Regardless of any change in circumstances subsequent to the enactment of this
Act, even if such change makes it appear to be in the national interest to commer-
cialize weather satellites, neither the President nor any official shall take any action
prohibited by Section 601, unless this title has first been repealed.”


49

INTERIOR

1. 16 USC 668(d), Wildlife Refuge Administration Act—Prohibits the Fish and
Wildlife Service from contracting for the management, operation and maintenance
of wildlife refuges.

2. 43 USC 1707(204a)—Requires that Bureau of Land Management (BLM) lands
be managed directly by Federal employees.

3. 43 USC 1701 (e)—Prohibits BLM from replacing Federal employees with volun-
teers.

JUSTICE,
No legislative restrictions have been identified.
LABOR
No legislative restrictions have been identified.
NASA
No legislative restrictions have been identified.
OPM

42 USC 2165—The Nuclear Regulatory Agency must acquire personnel back-
ground investigations from OPM or the FBI. This limits the competition available
to NRC and imposes continuing service requirements on OPM.

‘TRANSPORTATION,
No legislative restrictions have been identified.
TREASURY
No legislative restrictions have been identified.
VETERANS AFFAIRS

Title 38 Section 8110(c), P.L. 103-446 suspended—Section 8110(c) limits the
DVA’s ability to contract out. Legislatively required cost comparison provisions serve
to raise the cost of contract performance, in conflict with the requirements of OMB
Circular A~76. In DVA, for example, a 15 percent differential is required vice the
10 percent differential required by the Circular. The Government’s cost of conduct-
ing the comparison (PWS, management study and cost. analysis) is also added to the
contractor's bid. P.L. 103-446 suspends Section 8110 (c) for five years.

RAILROAD RETIREMENT BOARD

1. 45 USC 2331(MbX3), 45 USC 362(m) and 45 USC 355—~Appeals of RRB deci-
sions can only be reviewed by board members. Taken in combination these provi-
sions prevent the RRB from contracting for alternative dispute resolution services.

2. 26 USC 6103(1X1)—Limits the distribution of tax information necessary to the
provision of services, thereby effectively requiring in-house performance.

SMALL BUSINESS ADMINISTRATION
No legislative restrictions have been identified.

Mr. Mica. We also have some comments and a written statement
from the ranking member and other members, and they will be en-
tered into the record, without objection.

Furthermore, during the course of today’s discussion, we’ve iden-
tified several questions that would have been asked of the Office
of Personnel Management if Mr. King or a representative had been
able to be here and respond. We'll hold the record open also for Mr.
King and OPM to respond for appropriate number of days. And
there being no other business before the subcommittee at this time,
this meeting is adjourned.

{Whereupon, at 11:30 a.m., the hearing was adjourned subject to
the call of the Chair.]

1e)


12

PREPARED STATEMENT OF L. Nye STEVENS, DIRECTOR, PLANNING AND REPORTING,
GENERAL GOVERNMENT DiIvISION, U.S. GENERAL ACCOUNTING OFFICE

GOVERNMENT CONTRACTORS—AN OVERVIEW OF THE FEDERAL CONTRACTING-OUT
PROGRAM

Summary of Statement

GAO has done a large body of work on federal contracting-out and has drawn on
this work to (1) provide a brief history of the contracting-out program, (2) discuss
the effect of contracting-out decisions on federal employees, (3) examine the effec-
tiveness of contracting-out decisions, and (4) describe Tegislative or any other im-
pediments to the program’s ability to promote the effective and efficient operation
of govern ment agencies.

fice of Management. and Budget Circular A-76 is the federal policy that governs
how contracting-out decisions are made in the government. The 40-year policy en-
courages government agencies to rely on the private sector for commercial goods and
services. Since 1967, the objective of the A-76 program has been to achieve effi-
ciencies by encouraging competition between the federal workforce and the private
sector for providing commercial services. More recent revisions to the circular and
other actions have more clearly detailed how cost studies were to be carried out,
specified activities that were “inherently governmental” and should only be per-
formed by federal employees, and extended the cost study requirement for advisory
and assistance services.

Circular A—76 offers a number of provisions designed to protect the rights of fed-
eral employees adversely affected by contracting-out decisions, such as requiring
that federal agencies exert maximum effort to find other jobs for these employees.
GAO notes that while its earlier reports found that a significant number of dis-
placed federal workers found employment in another government job, the current

lownsizing environment may not provide the same opportunities.

GAO found that evaluating the overall effectiveness of A-76 decisions and verify-
ing the estimated savings reported by agencies is extremely difficult. GAO cannot
prove or disprove that the results of federal agencies’ A-76 decisions have been ben-
eficial and cost-effective.

The A-76 program has never been adopted legislatively. In fact, Congress has en-
acted many restrictions on A-76 studies and on contracting out jobs presently held
by federal employecs. These restrictions generally fall into one of the following three
categories: prohibitions on contracting out specific activities, minimum staffing re-
quirements, and restrictive requirements regarding cost studies. Personnel ceilings
imposed during the budget process are sometimes an impediment to choosing the
option of federal performance when that is more cost-effective.

Mr. Chairman and Members of the Subcommittee:

‘Thank you for this opportunity to testify on the Subcommittee’s oversight of fed-
eral contracting-out policies and their implementation over the years. You asked us
to (1) give a brief history of the contracting-out program, (2) discuss what problems
have surfaced among federal employees affected by contracting-out decisions, (3) ex.
amine the basis for measuring the performance of the contracting-out program, and
(4) describe any legislative or other impediments to its success at promoting effec-
tive and efficient operations of government agencies.

We have done a large body of work on contracting-out. The attachment to m
statement lists some on ‘the most relevant products we have issued since 1981. I will
draw on this body of work to respond to your questions.

History of the Contracting-Out Program

The federal government contracts for a wide variety of goods and services over
the course of a year. Approximately $108 billion per year is spent for service con-
tracts. The practice of entering into service contracts that are the result of decisions
to convert work performed by federal employees to contract is commonly known as
contracting-out.

Office of Management and Budget (OMB) Circular A-76 is the policy that governs
how contracting-out decisions are made in the federal government. As a general pol-
icy, presidential administrations since 1955 have encouraged federal agencies to rely
on the private sector for commercial goods and services. Since 1967, the objective
of the A~76 program has been to achieve efficiencies by encouraging competition be-
tween the federal workforce and the private sector for providing commercial services
needed by government agencies. Subsequent revisions to the circular and other ac-
tions have more clear!; ‘Setailed how cost studies were to be carried out; specified
activities that were “inherently governmental” and should be performed only by fed-
eral employees; and through a rescission of Circular A~120, which covered the provi-