COST OF POTENTIAL LAYOFFS UNDER 

THE ADMINISTRATION'S FEDERAL 

EMPLOYMENT REDUCTION PROGRAM 

A Staff Working Paper 

July 1981 

Congressional Budget Office 

Office of Intergovernmental Relations 
PREFACE 

This working paper, prepared at the request of the House 

Co1Illlli.ttee on Post Office and Civil Service, examines the costs 

of employee layoffs caused by the Administration's program to 

reduce federal civilian employment in nondefense agencies. As 

noted in the paper, the estimates are based on current information 

and are subject to considerable change because of uncertainty about 

the number of employees who may be laid off and about their ages, 

salaries, and length of government service. 

The study was prepared by Earl A. Armbrust, David DelQuadro, 

and Mark Musell of the General Government Management staff of 

CBO's Office of Intergovernmental Relations, under the supervision 

of Stanley L. Greigg. The authors gratefully acknowledge the 

assistance given by the staff of the Federal Government Service 

Task Force. Johanna Zacharias edited the paper, and Norma Leake 

typed the various manuscripts. In keeping with CBO' s mandate to 

provide objective analysis, this paper offers no recommendations. 

July 1981 

11 

Alice M. Rivlin 

Director 
CONTENTS 

PREFACE ................................................................. SUMMARY ................................................................................................ 

SECTION I. 

SECTION II. 

SECTION III. 

APPENDIX. 

INTRODUCTION .......................................................... 

THE ADMINISTRATION'S EMPLOYMENT 

REDUCTION PROGRAM ................................................ 

CONTRACTING OUT--A MAJOR PROSPECT 

FOR REDUCING FEDERAL EMPLOYMENT 

SUMMARY DATA ON FEDERAL CIVILIAN 

.................... 

WORKFORCE ................................................................ 

iii 

11 

iv 

1 

8 

20 

25 
SUMMARY 

In preparing its employment reduction program for fiscal years 

1981 and 1982, the Administration assumed that most job cuts could 

be achieved primarily through attrition--that is, by not filling 

existing and upcoming vacant positions-rather than by laying off 

large numbers of employees. Relative to the January Budget, the 

program is expected to cut 79,000 workyears throughout the two 

fiscal years and to generate associated federal savings of some 

$2.0 billion. Recent reports suggest, however, that the program 

may cause as many as 15,550 permanent full-time workers to be laid 

off by December 31, 1981. 

If the projected layoffs should occur, the two-year savings 

estimated by the Administration would decline by as much as $0 • .'34 

billion because of costs for various entitlement benefits to laid 

off federal workers-namely severance pay, unemployment compensation, refunds for retirement contributions and unused leave, and 

pensions for involuntary retirees. Some layoffs have occurred 

already, and more are anticipated. Almost one-third of the costs 

are distributed over the accounts of employing agencies and will 

thus most likely be absorbed within existing budget limitations, 

although cutbacks in other activities might also result. The 

remaining portion, mainly unemployment compensation and refunds 

of retirement contributions, is funded in two central government 

accounts. (The estimated budgetary impact of federal layoffs is 

subject to great uncertainty because of data limitations concerning 

the numbers, and timing, and the characteristics of workers who 

might be affected.) The cost of entitlement benefits for laid-off 

federal workers, basically a one-time expense, might be viewed 

as a necessary price for cutting back nondefense employment and 

achieving associated savings in domestic programs. (This paper 

focuses solely on the potential costs of layoffs and does not 

examine other budgetary effects of employment reductions or 

program cuts.) 

Overall, the Administration's planned employment control 

efforts will alter the composition of the federal civilian workforce more than its total size. The size of the federal civilian 

workforce remains about the same, but contrary to past trends, the 

portion employed by the Department of Defense will increase while 

the nondefense portion shrinks accordingly. 

iv 
The Congressional Budget Office's analysis of government-wide 

data shows that the combined 79,000 workyear reductions for fiscal 

years 1981 and 1982 equate numerically to elimination of jobs that 

would have been added to a straightline projection of employment 

as of December 31, 1980. Within the government-wide totals, 

however, employment in particular programs will be cut below the 

December 1980 level. 

In future years, federal employment reductions may also 

result from agencies' deciding that it is more economical to have 

various federal functions, comparable to certain commercial and 

industrial types of activities in the private sector, performed by 

government contractors. Employment cutbacks accompanying a shift 

to more contracting out could rival the fiscal year 1981-1982 

reductions that largely reflect lower program levels and redefined 

federal responsibilities. Any savings that could result from more 

contracting out would diminish initially, however, if the personnel reductions were achieved by laying off staff rather than by 

attrition. 

v 
SECTION I. INTRODUCTION 

Early this year, President Reagan announced a hiring freeze on 

federal civilian employment and later set employment ceilings for 

agencies in the Executive Branch. Personnel ceilings, essentially 

matters of administrative decision, emerge in the budgetary 

process. Relative to the employment levels estimated in the 

January 1981 Budget, the Administration expects its program to cut 

nondefense agency employment by 17,000 workyears 0.4 percent) in 

fiscal year 1981 and 62,000 workyears (5.1 percent) in fiscal year 

1982. 1/ The Administration estimates assume that agencies will be 

able to achieve their employment reductions primarily by attrition 

(that is, not filling existing and upcoming vacant positions) 

rather than by large numbers of layoffs, and that these cutbacks 

will generate federal outlay savings of some $2.0 billion over 

the two fiscal years. 2/ Costs for federal layoffs were not 

considered. 

1/ Workyears, for purposes of this paper, disregard overtime, and 

thus the term may be used interchangeably with full-time 

equivalent employment, which measures the size of the workforce 

in terms of the number of scheduled work hours (2,080 hours 

representing one work year). Estimates for nondefense agencies 

include civil functions of the Department of Defense, mainly 

carried out by the Army Corps of Engineers. Appendix A provides workyear estimates related to the Administration's 

employment controls. 

2/ Office of Management and Budget, Fiscal Year 1982 Budget 

Revisions: Additional Details on Budget Savings, April 

1981, p. 390. The Administration estimates may slightly 

overstate savings from employment cutbacks. eBO calculations, 

also disregarding layoff costs, show a two-year savings of 

$1.9 billion rather than $2.0 billion. The difference reflects 

a lower assumed average annual compensation cost per workyear 

and adjustment for the lag in fund disbursement. 
Recent reports suggest, however, that employee layoffs may 

be much more numerous than was initially anticipated. The reported 

layoffs reflect decisions to cut back particular programs rather 

than across-the-board percent reductions in agency totals. Thus in 

many instances assumptions about agency-wide attrition rates are 

not relevant. If the projected layoffs materialize, the estimated 

savings might be eroded by as much as $0.3 billion because of offsetting outlays for layoff benefits to which federal employees are 

legally entitled. Because of such entitlements, layoffs cost a good 

deal more than shrinking the workforce by attrition. 

This study analyzes costs associated with laying off federal 

employees in the Executive Branch. (Because of data limitations, 

the paper does not address the budgetary impact of employment 

ceilings on voluntary retirements, overtime, service contracts, 

and administrative/legal activities; nor does it assess the 

budgetary effects of program changes.) The remainder of this 

section describes how federal employment controls operate and 

gives an overview of past and current efforts to control the size 

of the federal workforce. The next section describes the Administration's employment reduction plan, the costs of federal 

layoffs, and possible budgetary effects. The third section 

identifies contracting out as a major source of federal employment 

reductions in future years. 

HOW EMPLOYMENT CONTROLS OPERATE 

Throughout the last two decades, federal civilian employment 

has been controlled on an agency-by-agency basis through personnel 

2 
ceilings established by the Office of Management and Budget (OMB). 

The ceilings are customarily developed in the preparation of budget 

estimates, and they reflect decisions about program levels and 

resource allocations. Agencies may request adjustments in their 

ceilings throughout the year, or revisions may be initiated by 

OMB. For the most part, agencies have wide discretion in setting 

internal ceilings, within the overall allocations, for various 

programs and component organizational units. 

Traditionally, employment ceilings have specified the number 

of employees who can be on an agency' s payroll as of a particular 

date, usually the end of a fiscal year. There are usually two 

ceilings for each agency: one for its total workforce and another 

specifically for its full-time permanent staff--mainly career 

employees appointed for regular work on a 40-hour week. When endof-year ceilings apply to total employment, agencies can conform to 

them by freezing vacancies or by reducing part-time, temporary, or 

intermittent employment near the date of compliance. When controls 

are limited to full-time permanent staff, on the other hand, the 

number of part-time and other nonpermanent employees may increase. 

The General Accounting Office (GAO) has repeatedly criticized the 

use of end-of-year ceilings as ineffective and as an inferior 

substitute for effective management. 3/ 

3/ General Accounting Office, Personnel Ceilings-A Barrier to 

~E~f~f:,:e::.,c;:.::.t.::::i.:.v.::e:....:,M!:.a::.:n::.pt:;::o.:w.::e:.:r:....:M;a~n:.:.:::a§g;:e~m:.::e:.:n;::.t (J un e 2, 1 9 77 ), and Fed e r al 

Workforce Planning: Time For Renewed Emphasis (December 30, 

1980) • 

3 
The OMS hopes to improve federal personnel management through 

a revised system that translates part-time and intermittent 

employment into the equivalent of full-time workyears. The new 

system bases agency personnel ceilings on scheduled work hours, 

using a measure called "full-time equivalent" (FTE) employment. 

This approach, in effect. averages employment levels throughout 

the year and provides a common denominator for monitoring and 

comparing employment under full-time permanent and other work 

schedules. Measuring FTE employment leaves less room for end-ofyear manipulations and serves as a more useful means of evaluating 

the workforce in the course of programmatic and budgetary decisionmaking. 

The new system for controlling employment is expected to 

become fully operational throughout the Executive Branch for fiscal 

year 1982, but it applies to eight maj or agencies in fiscal year 

1981. These eight include the departments of Agriculture; Education; Health and Human Services; Housing and Urban Development; 

and Treasury; the Environmental Protection Agency; the General 

Services Administration; and the Veterans Administration. 

Agency personnel ceilings based on FTE employment introduce 

time as a new factor in controlling the size of the workforce. As 

cutbacks are delayed, more positions may be affected. For example, 

reducing an agency I s workforce by one FTE unit would require the 

loss of one job if effected at the beginning of the year, but it 

4 
would cost four jobs if the cut were not taken until the beginning 

of the last quarter. In addition, reductions in part-time or 

intermittent jobs will only reflect their respective contribution 

to the agency's total workyears. For example, considering parttime employees who work a 20-hour week, the agency would need to 

cut two positions for 12 months to reduce its rolls by the equivalent of one workyear. 

Information on federal workyears is subject to several 

limitations, including lack of detailed historical data, possible 

inconsistencies among various governmental reports, and technical 

changes in the definition of full-time permanent work. In addition, most agencies are now in the process of developing systems 

for monitoring FTE employment, and thus, reporting problems are to 

be expected during the first few years. 

Employment Ceilings and Contracting Out 

Under policies of the current and past Administrations, 

agencies are not supposed to contract for services solely to 

circumvent personnel ceilings. Agency decisions to perform work--

similar to commercial and industrial types of activities in the 

private sector-either in-house by federal employees or outside 

under contract must be based on an objective determination of the 

most cost-effective method. Changes to perform more work in-house 

or more under contract may be accompanied by administrative adjustments in agency personnel ceilings either in connection with 

OMB's budget review process or at other times throughout the year. 

5 
There is no present basis for estimating the extent to which 

current personnel ceilings might cause an increase in contracting 

out. (Reporting lags and lack of data on reasons for purchasing 

services now impede drawing any firm conclusions.) The GAO contends that, in practice, many agencies have used contracting-out as 

a means to by-pass personnel ceilings, though not necessarily 

because contracting was determined to be more economical. GAO has 

found that many services supporting federal programs could be 

performed by government contractors and, conversely, that some 

agencies currently contract out for work that should be done 

in-house, because it involves basic management decisions. 4/ GAO 

is examining the volume of services the government purchases under 

contract as well as agencies' compliance with present reporting 

requirements. The last section of this paper describes in greater 

detail the future prospects of contracting out as a means of 

reducing federal employment. 

PAST AND PRESENT EFFORTS TO REDUCE FEDERAL EMPLOYMENT--AN OVERVIEW 

The present Administration's employment control plans would 

change the composition of the federal civilian workforce more than 

its total size. Contrary to a widespread misconception, total 

federal civilian employment has remained relatively stable over the 

past decade. Throughout this period, reductions in civilian 

employment in Department of Defense (DOD) programs have offset 

increases of about 230,000 workyears in nondefense agencies. 

4/ General Accounting Office, Civil Servants and Contract Employees: Who Should Do What for the Federal Government? 

(June 19, 1981). 

6 
Consistent with its general priorities, the present Administration has slated DOD for a sizable manpower increase and the 

nondefense agencies for concommitant decreases. Thus. the size 

of the federal civilian workforce will remain roughly constant, 

but a greater portion will be employed by DOD--thus reversing 

past trends. Relative to fiscal year 1980, the civilian workforce 

for nondefense agencies will decline by 3.4 percent through 

September 30, 1982, but the civilian workforce for DOD will 

increase by 1.5 percent. Because of these changes the proportion 

of the total civilian workforce employed by DOD will increase 

slightly during the two-year period (see Table 1). 

TABLE 1. PROJECTED FEDERAL CIVILIAN WORKFORCE: IN FISCAL YEARS 

1980-1982, FULL-TIME EQUIVALENT EMPLOYMENT IN THOUSANDS 

Administration Budget 1980-1982 Change 

1980 1981 1982 In In 

Actual Estimate Estimate Numbers Percents 

Department of Defense 

(military 

functions) 924 929 938 14 1.5 

Nondefense 

Agencies 1,204 1,191 1,163 -41 -3.4 

Total 2,128 2,120 2,101 -27 -1.3 

-- DOD as percent 

of total 43.4 43.8 44.6 NA NA 

SOURCE: Derived by the Congressional Budget Office from budget 

materials prepared by the Office of Management Budget; see 

Appendix A. Details may not add to totals because of 

rounding. 

NOTE: Minus figure denotes a decrease. 

7 
SECTION II. THE ADMINISTRATION'S EMPLOYMENT REDUCTION PROGRAM 

More than four-fifths of the Administration's proposed workforce reductions in nondefense agencies are targeted for full-time 

permanent employees (see Table 2). More important, the aggregate 

reductions are numerically equivalent to stopping growth in the 

workforce for nondefense agencies. Analysis of government-wide 

employment data shows that the combined reduction of 79,000 

workyears for fiscal years 1981 and 1982 equates to elimination of 

workyears that otherwise would have been added over a straight line 

projection of the December 31, 1980 level for the remainder of 

this and the next fiscal year. Within the government-wide totals, 

however, the employment reductions in particular agency programs 

include personnel cutbacks below the December 1980 level. 

POSSIBLE LAYOFFS 

Contrary to initial expectations, the cutbacks are leading 

to noticeable numbers of layoffs. Many layoff notices have already 

been issued, and more are expected in the months ahead. The total 

numbers of layoffs are very difficult to estimate. The number and 

particular people affected will depend, in large part, on agency 

decisions concerning how to comply with their employment ceilings 

and on Congressional decisions concerning the allocation of 

resources among programs and subsidiary agency organizations. 

According to data collected by the Federal Government Service Task 

Force, employee layoffs could be much more numerous than the 

8 
TABLE 2. PROJECTED REDUCTION IN WORKYEARS FOR FEDERAL NONDEFENSE 

AGENCIES: FISCAL YEARS 1981 AND 1982, IN THOUSANDS 

1981 Projec- Combined 

tion from 1981 1982 Reductions 

December al January Revised January Revised for 1981 

1980 Level Budget Estimates Budget Estimate and 1982 

Full-Time 

Permanent 972 bl 1,015 999 1,024 975 65 

Other 167 bl 194 193 201 188 14 

Total 1,139 1,209 1,192 1,225 1,163 79 

SOURCE: Deri ved by the Congressional Budget Office from Administration 

budget materials. See Appendix A. 

~ The Congressional Budget Office estimates 1,139,400 workyears for 

civilians employed by nondefense agencies in fiscal year 1981, if 

employment remained at the December 31, 1980 level for the remaining 9 

months of the fiscal year. This estimate includes 285,200 workyears 

for the first quarter and 854,100 workyears projected for the last 

three quarters, based on a straight line projection from the December 

31, 1980 level. The calculations assume that the average employee 

who is not under a full-time permanent work schedule accounts for 

0.7049 of a workyear (based on data for fiscal year 1979). 

bl Estimates include 31,000 workyears for DOD civil functions (27,000 

under full-time permanent work schedules and 4,000 under other work 

schedules). 

9 
Administration originally anticipated. 11 The survey, which bases 

its findings on information from agency responses to survey 

questions and on follow-up interviews with Task Force staff, found 

that as many as 15,550 full-time permanent employees may be laid 

off by December 31, 1981. 

On an annual basis, the projected layoffs represent nearly a 

quarter of the proposed cutback in full-time permanent workyears 

for fiscal years 1981 and 1982. The survey data do not specify how 

many of the layoffs are associated with employment reductions for 

each fiscal year, but most will occur during the remaining three 

months of fiscal year 1981. (A substantial number of additional 

layoffs are expected during the balance of fiscal year 1982 and 

beyond.) The Task Force projects that a little under half of the 

layoffs will occur in the Department of Health and Human Services 

(HHS) and almost a quarter in the departments of Commerce, Interior, and Transportation (see Table 3). A large majority of the 

HHS layoffs will result from closing most of the 37 hospitals and 

clinics now run by the Public Health Service. 6/ 

5/ The Federal Government Service Task Force, which began 

operation in January 1981 under the chairmanship of Representative Michael D. Barnes (D.-Md.), serves as a bipartisan 

Congressional clearing house for information on issues affecting federal civilian employees (nondefense) and anuitants. 

Task Force membership, subj ect to periodic change, currently 

consists of Senator Paul Sarbanes (D.-Md.), Senator John W. 

Warner (R.-Va.), and 32 members of the House of Representatives. 

6/ It should be kept in mind that this staff working paper focuses 

on the compensation costs of laying off federal employees and 

does not address larger issues concerning the budgetary costs 

and benefits of program changes. 

10 
TABLE 3. LAYOFFS PROJECTED BY THE GOVERNMENT SERVICE TASK FORCE, 

BY AGENCY: DECEMBER 31, 1980 

Number of 

Agency Layoffs 

Department of Health and Human Services 7,000 

Department of Interior 1,350 

Department of Transportation 1,200 

Department of Commerce 1,100 

Community Services Administration 950 

Department of Energy 750 

Department of Housing and Urban Development 550 

Department of Justice 450 

Department of the Treasury 450 

Department of Labor 350 

Others Combined al 1,400 

Total 15,550 

SOURCE: Derived from Government Service Task Force Survey data 

released by Congressman Michael D. Barnes, May 28, 1981, 

and updated through July 1, 1981. 

NOTE: The total projected layoffs, rounded to the nearest 

50 excludes 350 layoffs of temporary employees recorded 

for the Department of Education. Thus, the remaining 

layoffs are believed to consist almost entirely of 

employees working full-time permanent schedules. 

al Includes agencies with fewer than 350 layoffs. 

11 
By the end of December, the actual number of layoffs could 

be below or above the current Task Force estimates. In some cases, 

the number might decline, because the Administration could revise 

personnel ceilings for individual agencies, or because more reductions might be achieved through attrition. In other cases, the 

number of layoffs could increase because of problems not reported 

by some agencies responding to the Task Force survey. 

POSSIBLE OUTLAYS FOR GOVERNMENT-WIDE LAYOFFS 

This section describes the entitlement benefits and related 

outlays for federal workers who are laid off and offers an estimate 

of the potential budgetary impact. The conclusions are based 

on the number of layoffs reported to the Federal Government Service 

Task Force (discussed above). 

Entitlement Layoff Benefits 

When employment reductions cause layoffs, savings can be 

significantly reduced or eliminated in the short run by substantial one-time costs associated with entitlements for severance 

pay, federal unemployment compensation, lump-sum payments for 

employee retirement contributions and unused leave, and pensions 

for involuntary retirement. A brief description of these entitlements follows. 7/ 

7/ The benefits available to laid-off federal workers and related 

eligibility provisions are described in more detail in Fed 

Facts 22, prepared by the Office of Personnel Management and in 

the Federal Employees Almanac 1981, 28th annual edition, 

Joseph Young, editor. 

12 
Severance Pay. Generally. federal workers who are laid off 

after being employed for at least one year may receive severance 

pay. The number of years employed determines the severance period 

covered: one week's pay at the employee's final salary for each of 

the first 10 years of service, and two week's final pay for each 

year of the next 21 years of service. If, for example, a federal 

employee with 10 years of service and final salary of $22,000 were 

laid off, the 10 weeks' severance pay would come to about $4,230. 

In addition, severance payments are increased by 10 percent for 

each year the employee is over age 40. The maximum payment may not 

exceed one full year's salary, however. The payments are disbursed 

by the employing agency every two weeks as though the person were 

still on the active payroll. 8/ 

Unemployment Compensation. Unemployment insurance benefits 

are available to federal employees who are laid off, but they vary 

according to the geographic location of the work site. The unemployment program is administered by state agencies based on their 

own standards for determining eligibility, the size of payments, 

and length of time benefits may be received. Below certain dollar 

maximum levels, payments usually vary according to earnings; 

maximum weekly benefits currently range from $84 to $184. State 

8/ Except for unemployment compensation, severance pay and other 

cash benefits received by laid-off workers are subject to 

federal and other income taxes (the retirement contributions 

having been taxed at the time they were withheld from employee 

pay). Unemployment compensation is taxable only when taxable 

income from all sources exceeds $25,000 (married filing a joint 

return) • 

13 
agencies are reimbursed for federal unemployment compensation costs 

out of funds appropriated to the U.S. Department of Labor. 

Payments for Unused Vacation. Federal employees who are laid 

off receive payment in lieu of earned "annual leave" (vacation) 

time that has not been used. For example, a federal employee with 

an annual salary of $22,000 and three weeks of unused earned leave 

would receive a lump-sum payment of some $1,270. Such payments 

are normally disbursed by the employing federal agency and are 

drawn from its operating budget. 

Refunds for Employee Retirement Contributions. Most federal 

civilian employees are required to contribute 7 percent of their 

gross salaries to the Civil Service Retirement (CSR) system. Any 

employee leaving government service, including one who is laid off, 

may receive a refund of his accumulated contributions to the CSR 

system. Employees with five or more years of federal service may 

leave their contribution with the federal government and thus 

retain their right to a CSR pension upon reaching age 62. Contribut ion refunds are administered by the Office of Personnel Management (OPM), and the cost impact on CSR trust fund outlays can 

be substantial. For example, an employee with a salary of $22,000 

and 10 years' service, could receive a refund, without interest, of 

some $11,700 for retirement contributions made while employed. 9/ 

9/ CSR refunds can include interest, depending on length and 

period of federal service. Interest may be paid if the laidoff employee had at least one but less than five years of 

service or, for contributions made prior to 1957, if the 

employee had five or more years of service. 

14 
Involuntary Retirement. Federal employees who are forced 

to leave the government for reasons other than misconduct or delinquency may receive an immediate pension, though they forfeit other 

layoff benefits, provided they meet certain requirements. The 

present eligibility requirements are a total of 20 years of 

service, whether consecutive or interrupted, at age 50 and over, or 

simply 25 years of service, whether consecutive or broken, at any 

age. At present, involuntary retirements may be granted if a 

person I s job is abolished or transferred to a location outside 

the current commuting area. 10/ 

As under voluntary retirement, the size of an involuntary 

retirement pension is based on salary and length of service, but 

it is reduced by 2 percent for each year the retiring employee is 

under age 55. For example, an employee involuntarily retired at 

age 50 with 20 years of service would receive a pension equal to 

32.6 percent of his average salary for the three years at his 

highest earnings. As with voluntary retirement, the pensions would 

be further reduced if the ex-employee elected survivor coverage for 

a spouse or other dependent. The retirement benefits are administered by OPM and the costs are paid from the CSR trust fund. 

10/ The Office of Personnel Management may grant benefits similar 

to those for involuntary retirement to employees who elect to 

retire when their agency is undergoing a reorganization, 

transfer of functions, or reduction in employment. OPM has 

recently tightened the requirements for such voluntary early 

retirement. This authority does not apply to laid-off employees and the associated costs are not addressed in this 

paper. 

15 
Budgetary Impacts 

If the actual number of layoffs should come close to the 15,550 

suggested by the Task Force survey, outlays for related entitlements in the first 12 months could reach $0.34 billion. More than 

half of this amount would cover lump-sum refunds of employee 

contributions to the eSR trust fund (see Table 4). 

The outlay estimates in this paper are limited to layoff 

entitlements. Employment reductions, however, also generate 

other federal expenses that cannot be readily estimated. Such 

expens es, albeit in unknown amounts, include increased workload 

in personnel administration and appeal processes, relocation, 

training replacements for persons who elected to retire voluntarily, and job placement and counseling programs run by the 

employing agencies, the Department of Labor, and OPM. 11/ When 

employment reductions occur, they may also be accompanied by 

increased numbers of voluntary retirements because of encouragement 

by supervisors, solidarity with employees who might otherwise be 

laid off, reexamination of personnel circumstances, or early 

eligibility granted by OPM (see note on page 15). As previously 

noted, the impact of current employment reductions on voluntary 

retirement cannot be determined. 

11/ The staff of the Federal Government Service Task Force further 

note that some layoffs may increase federal costs for Social 

Security, Medicaid, and other federal entitlements as well as 

increase costs of various public programs run by state and 

local governments. 

16 
TABLE 4. OUTLAYS FOR LAYOFF BENEFITS PROJECTED BY FEDERAL 

GOVERNMENT SERVICE TASK FORCE: FIRST TWELVE MONTHS, IN 

MILLIONS OF DOLLARS 

Benefit Source of Funding 

Severance Pay ~I Employing Agency 

Unemployment Compensation bl State Agencies 

Reimbursed by U.S. 

Department of Labor 

Refunds for Unused 

Annual Leave cl Employing Agency 

Refunds for Retirement Civil Service 

Contributions ~I Retirement Trust Fund 

Pensions for Involuntary Civil Service 

Retirement el Retirement Trust Fund 

Total Cost 

SOURCE: Congressional Budget Office. 

Percent 

of Total 

Layoff 

Costs Costs 

85 25 

20 6 

20 6 

200 59 

15 4 

340 100 

NOTE: Estimates, rounded to the nearest $5 million, reflect 

fiscal year 1981 prices. 

al Estimate assumes 14,000 of the laid-off employees would receive 

average payments of $6,160. 

bl Estimate assumes some 12,900 of the laid-off employees would 

receive benefits averaging $102 per week for an average of 15.9 

weeks. 

c/ Estimate assumes 15,550 laid-off employees would receive 

average refunds of $1,400. 

dl Estimate assumes 14,000 of the laid-off employees would receive 

average refunds of $14,190. 

el Estimate assumes 1,550 of the laid-off employees would receive 

involuntary retirement pensions averaging $8,400 each. 

17 
Any estimate of the budgetary impact of layoff entitlements 

that will result from the Administration's budget reduction program 

is subject to great uncertainty. No single information source 

exists to determine the number of employees affected or when the 

layoffs will occur. Equally important, information is not readily 

available on the salaries, ages, and years of service of employees 

who may be laid off. Without solid information on either the 

numbers or characteristics of affected workers, layoff cost 

estimates are highly subjective. The estimates in this study are 

based on a set of "average" characteristics constructed to reflect 

the employees of major agencies and weighted to reflect the relative number of projected layoffs for each agency. The governmentwide composite assumes the laid-off employee is age 37, worked Some 

11 years for the federal government, has three weeks of unused 

leave, and an annual salary of about $24,000. These assumptions 

may be conservative; some ana.1ysts believe most laid-off employees 

have higher salaries and more years of federal service. 

The cost of entitlements for laid-off federal workers might 

be viewed as a necessary price for cutting back federal employment 

government-wide and achieving the associated long-run savings. In 

many agencies, workforce reductions are apparently being achieved 

using layoffs as a last resort and as an exception to general 

practice. Nonetheless, the $0.34 billion in benefit expenses 

for layoffs noticeably reduces the Administration's initial 

18 
government-wide savings estimates of $0.4 billion in fiscal year 

1981 and $1.6 billion in 1982. Even with layoffs, however, most of 

the savings would continue to be realized in subsequent years, 

because most of the entitlements are essentially one-time costs. 

Budget Control 

Almost a third of the total cost of entitlements for laid-off 

federal workers may be distributed among the accounts of individual 

employing agencies. Thus, costs of refunds for unused leave 

and severance pay may well be covered by appropriated funds. 

Such cost absorption would, of course, reduce resources that 

otherwise would have been available for other agency activities. 

In some instances, for smaller agencies in particular, requests for 

supplemental funds might later be transmitted to the Congress. 

Costs for unemployment compensation, pensions for involuntary 

retirement, and refunds of employees I retirement contributionsrepresenting the remaining portion of estimated entitlements-are 

funded in two central accounts: the CSR Trust Fund, administered 

by OPM; and the Federal Unemployment Benefits and Allowances 

account, administered by the Department of Labor. 

19 
SECTION III. CONTRACTING OUT--A MAJOR PROSPECT FOR REDUCING 

FEDERAL EMPLOYMENT 

In 1983 and subsequent fiscal years, large reductions in 

federal employment may also result from agencies' deciding that it 

is more economical to have certain activities performed by private 

contractors than by workers hired directly onto the federal roles. 

This rationale for cutting back federal civilian employment 

would contrast with current reduction efforts, which largely 

reflect reduced program levels and federal responsibilities. 

Contracting out to reduce costs is a common practice in 

private industry. Similarly, the Administration believes that 

in many cases, certain federal activities of a commercial and 

industrial nature might be performed at less cost by private 

contractors because of more efficient operations, lower overhead, 

and lower pay and outlays for fringe benefits. Reviews by GAO and 

OMB indicate that the potential for cost savings through contracting out federal work could be more actively pursued by many 

agencies. Future reductions in the size of the federal workforce 

caused by increased use of private contractors could rival the 

employment reductions currently planned for fiscal year 1982. 

Initial savings from shifts to contracting out, however, would 

diminish if the associated federal personnel reductions were 

achieved by laying off employees rather than relying mainly on 

attrition. 

20 
Some observers, including organizations representing public 

employees, express skepticism about claims that contracting out 

federal work brings about legitimate economies. In their view, 

some private contractors might initially offer low bids to obtain 

government work and then try to increase prices at the time of 

contract renewal. In other situations, contractors might provide 

their employees with inferior pay, retirement, and other fringe 

benefits. It should be pointed out that the Administration's 

three-year plan to reduce federal compensation (pay and fringe 

benefits combined) below levels for comparable work in the private 

sector could lower compensation differentials that may exist 

between contract and federal employees and likewise the potential 

savings available to the government from shifts to contract work. 

Under current law, agency mode-of-perf ormance decisions 

(in-house versus contracting out) are subject to policies and 

procedures set forth in the revised OMB Circular A-76. In 

order to emphasize relative cost as a major criterion for future 

contracting-out decisions, bids from potential contractors must be 

compared against the estimated cost of in-house performance. 

Agencies will be required to compare in-house and contractor costs 

according to detailed and comprehensive guidelines, which include 

federal cost factors such as: fringe benefits and paid time off, 

specified at 44 percent of wages and salaries; a 10 percent capital 

investment cost; and depreciation. The guidelines also require 

contractor costs to be reduced by estimated federal income taxes. 

21 
The revised OMB regulation will be fully implemented after 

an initial three-year review cycle, scheduled to end in March 

1982. Full implementation could noticeably shift more work to 

government contractors and would thus reduce future federal 

employment levels. The aggregate effect cannot be projected because 

of the comprehensive nature of the new guidelines and the large 

volume of individual federal activities that are subject to review 

for contracting out. Even so, considerable potential exists 

for reducing the cost of particular government operations through 

expanded use of government contracts. OMB believes full imp lementation of Circular A-76 could generate average annual savings of 

as much as $0.6 billion, assuming contract costs would average 20 

percent less than in-house costs. 12/ 

The prospect of achieving savings from further contracting out 

is illustrated by activities OMB has identified in four agencies: 

the departments of Defense and Health and Human Services, the 

General Services Administration, and the Veterans Administration. 

The identified areas--affecting an estimated 95,800 federal 

workers--include custodial and maintenance services, food preparation, commissary and supply operations, and other commercial and 

industrial sorts of activities (See Table 5). If, hypothetically, 

12/ Office of Management and Budget staff, memorandum to Edwin 

Harper, Deputy Director of the Office of Management and 

Budget, February 27, 1981, used by GAO, Civil Servants and 

Contract Employees, p. 16. 

22 
cost comparisons resulted in half of the work performed by these 

employees shifting to service contracts, then annual full-year 

outlay savings in fiscal year 1983 prices could exceed $90 million 

and might reach $185 million • .!ll OMB has asked these four 

agencies to give special attention to review of the specified 

activities and to complete cost studies by March 1982. 

TABLE 5. EMPLOYMENT IN AREAS IDENTIFIED BY THE OFFICE OF MANAGEMENT 

AND BUDGET FOR EXAMINATION OF CONTRACTING OUT ECONOMIES 

Building 

Maintenance 

Department and Custodial Food Supply and 

or Agency Services Preparation Commissary Other al Total 

Defense 15,000 33,000 4,000 52,000 

Health and 

Human Services 900 7,100 8,000 

General Services 

Administration 9,000 4,000 13,000 

Veterans 

Administration 11,900 10,900 22,800 

Total 36,800 10,900 33,000 15,100 95,800 

SOURCE: Letters from Edwin L. Harper, Deputy Director, Office of 

Management and Budget, April 8, 1981. 

al Includes delivery, guard, data processing, and audio-visual 

services • 

.!ll The hypothetical savings estimates aSSume current compensation 

for the 47,900 affected positions would average $19,300 in 

fiscal year 1983, and that 10 to 20 percent of this cost might 

be saved through contracting out. 

23 
Areas not specifically identified by OMB may also offer 

potential savings from contracting out. Decisions to change 

the mode of performance in these areas could affect budgetary 

requests for fiscal year 1983 and could lead to further reductions 

in federal civilian employment. 

24 
APPENDIX. SUMMARY DATA ON FEDERAL CIVILIAN WORKFORCE 

The following table compares federal civilian employment by 

fiscal year, by budget plan, and by type of agency (defense 

and nondefense). The estimates measure the workforce on the basis 

of FTE employment (workyears), including employees under full-time 

permanent work schedules. 

25 
TABLE A-I. SUMMARY DATA ON FEDERAL CIVILIAN WORKFORCE: IN 

THOUSANDS OF FTE WORKYEARS, FISCAL YEARS 1980-1982 

1981 Estimate 1982 Estimate 

1980 January Revised January Revised 

Actual Budget Budget Budget Budget 

(Full-time Permanent Employment) !!./ 

Defense b/ 880 865 870 865 879 

Nondefense !:../ 1,002 1,015 999 1,024 975 

Total 1,882 1,880 1,868 1,889 1,854 

--

(Total Employment) d/ 

Defense b/ 924 924 929 e/ -916 938 e/ 

Nondefense c/ 1,204 1,209 1,192 1,225 1,163 

Total 2,128 2,133 2,120 2,141 2,101 

SOURCE: Derived by the Congressional Budget Office from data 

supplied by the Office of Management and Budget. 

NOTES: For comparative purposes, the estimates do not reflect 

the impact of technical changes caused by conversion to 

the FTE system of monitoring federal employment. OMB 

indicates a decrease of about 25,000 will occur for the 

DOD, military functions. Details may not add to totals 

because of rounding. 

a/ Derived from Fiscal Year 1982 Budget Revisions, March 1981, 

Table 26, p. 133. 

b/ 

c/ 

d/ 

e/ 

Estimates limited to Department of Defense military functions; 

employment for civil functions are included under nondefense. 

Represents the difference between employment for DOD military 

functions and total employment in the Executive Branch, 

excluding the U.S. Postal Service. 

Includes employment not covered by full-time permanent work 

schedules. Data derived from Special Analysis, Budget of the 

U.S. Government, Fiscal Year 1982, January 15, 1981 p. 278; 

Fiscal Year 1982 Budget Revisions, Additional Details on Budget 

Savings, April 1981, p. 391; and supplemental data provided by 

OMB staff. 

Derived from Listing of Employment of Executive Branch, Office 

of Management and Budget, March 26, 1981, p. 1. 

26