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[Senate Hearing 107-151]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 107-151
 
          EXPANDING FLEXIBLE PERSONNEL SYSTEMS GOVERNMENTWIDE
=======================================================================

                                HEARING

                               before the

                  OVERSIGHT OF GOVERNMENT MANAGEMENT,
              RESTRUCTURING, AND THE DISTRICT OF COLUMBIA
                              SUBCOMMITTEE

                                 of the

                              COMMITTEE ON
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 17, 2001
                               __________

      Printed for the use of the Committee on Governmental Affairs

                    U.S. GOVERNMENT PRINTING OFFICE
75-472                       WASHINGTON : 2002
____________________________________________________________________________
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                   COMMITTEE ON GOVERNMENTAL AFFAIRS

               JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan                 FRED THOMPSON, Tennessee
DANIEL K. AKAKA, Hawaii              TED STEVENS, Alaska
RICHARD J. DURBIN, Illinois          SUSAN M. COLLINS, Maine
ROBERT G. TORRICELLI, New Jersey     GEORGE V. VOINOVICH, Ohio
MAX CLELAND, Georgia                 PETE V. DOMENICI, New Mexico
THOMAS R. CARPER, Delaware           THAD COCHRAN, Mississippi
JEAN CARNAHAN, Missouri              ROBERT F. BENNETT, Utah
MARK DAYTON, Minnesota               JIM BUNNING, Kentucky
           Joyce A. Rechtschaffen, Staff Director and Counsel
         Hannah S. Sistare, Minority Staff Director and Counsel
                     Darla D. Cassell, Chief Clerk

                                 ------                                

OVERSIGHT OF GOVERNMENT MANAGEMENT, RESTRUCTURING, AND THE DISTRICT OF 
                         COLUMBIA SUBCOMMITTEE

                 RICHARD J. DURBIN, Illinois, Chairman
DANIEL K. AKAKA, Hawaii              GEORGE V. VOINOVICH, Ohio
ROBERT G. TORRICELLI, New Jersey     TED STEVENS, Alaska
THOMAS R. CARPER, Delaware           SUSAN M. COLLINS, Maine
JEAN CARNAHAN, Missouri              PETE V. DOMENICI, New Mexico
MARK DAYTON, Minnesota               THAD COCHRAN, Mississippi
       Marianne Clifford Upton, Staff Director and Chief Counsel
               Andrew Richardson, Minority Staff Director
                     Julie L. Vincent, Chief Clerk

                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Durbin...............................................     1
    Senator Voinovich............................................     2

                               WITNESSES
                         Tuesday, July 17, 2001

Hon. David M. Walker, Comptroller General, U.S. General 
  Accounting Office..............................................     5
Hon. Sean O'Keefe, Deputy Director, Office of Management and 
  Budget.........................................................     7
Charles O. Rossotti, Commissioner, Internal Revenue Service......     9
Charles S. Abell, Assistant Secretary of Defense for Force 
  Management Policy, Department of Defense.......................    11
Bobby L. Harnage, Sr., National President, American Federation of 
  Government Employees, AFL-CIO (AFGE)...........................    28
Susan L. Shaw, Deputy Director of Legislation, National Treasury 
  Employees Union................................................    30
Myra Howze Shiplett, Director, Center for Human Resources 
  Management, National Academy of Public Administration..........    32

                     Alphabetical List of Witnesses

Abell, Charles S.:
    Testimony....................................................     1
    Prepared statement...........................................    91
Harnage, Bobby L., Sr.:
    Testimony....................................................    28
    Prepared statement...........................................   110
O'Keefe, Hon. Sean:
    Testimony....................................................     7
    Prepared statement...........................................    83
Rossotti, Charles O.:
    Testimony....................................................     9
    Prepared statement...........................................    86
Shaw, Susan L.:
    Testimony....................................................    30
    Prepared statement of Ms. Colleen M. Kelley submitted by Ms. 
      Shaw.......................................................   128
Shiplett, Myra Howze:
    Testimony....................................................    32
    Prepared statement...........................................   137
Walker, Hon. David M.:
    Testimony....................................................     5
    Prepared statement...........................................    41

          EXPANDING FLEXIBLE PERSONNEL SYSTEMS GOVERNMENTWIDE

                              ----------                              

                         TUESDAY, JULY 17, 2001

                                       U.S. Senate,
       Oversight of Government Management, Restructuring,  
                     and the District of Columbia Subcommittee,    
                        of the Committee on Governmental Affairs,  
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:35 p.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Richard 
Durbin, Chairman of the Subcommittee, presiding.
    Present: Senators Durbin and Voinovich.

              OPENING STATEMENT OF SENATOR DURBIN

    Senator Durbin. Welcome everyone. I apologize for my 
tardiness. The Appropriations Committee is marking up the 
agriculture bill, which has some consequence to the State of 
Illinois, and I wanted to be there and cast my vote. So I 
apologize, but I rushed right over as quickly as I could. Thank 
you all for being here as the Senate Subcommittee on Oversight 
holds a hearing entitled, ``Expanding Flexible Personnel 
Systems Governmentwide.'' I have indicated to Senator Voinovich 
on several occasions that his dedication to this question of 
human capital challenge facing Federal Government is one that 
leads this Subcommittee and will continue to, though there has 
been a change in some of the titles around here, but I am 
pleased to have this opportunity, at his request, to delve into 
another aspect of the issue.
    Our focus today will be on some of the various personnel 
flexibilities and special authorities granted by Congress to 
specific government agencies to facilitate personnel retention, 
recruitment, pay and promotion. Senator Voinovich launched a 
series of Subcommittee hearings in the 106th Congress to probe 
the issue of the Federal Government's human capital challenges. 
This hearing builds on that foundation.
    In showcasing three agencies today, the General Accounting 
Office, the Internal Revenue Service, and the Department of 
Defense, we will examine their experiences in implementing the 
flexibilities extended to them through congressional 
enactments. Last year, GAO was accorded an array of 
flexibilities that were added under the GAO Personnel 
Flexibility Act of 2000. These include authorizing senior level 
positions for scientific, technical or professional staff; 
voluntary early retirement offers to individual employees; 
separation payments for realignment purposes; and reduction-in-
force flexibilities for downsizing, realignment, or correction 
of skills and balances. These recent authorities build on 
authority extended to GAO over 20 years ago to develop its own 
personnel system. GAO's system includes broad-banding of its 
pay grades, pay-for-performance, and flexible hiring and 
promotion practices.
    With respect to the Internal Revenue Service, under the 
Restructuring and Reform Act of 1998, Congress included human 
capital flexibility provisions covering a wide range of 
personnel-related functions. These included eliminating the use 
of enforcement statistics and employee evaluations; authority 
to terminate employees for committing certain acts or omissions 
in performance of official duties; providing critical pay to 
attract senior managers; streamlining hiring, travel and 
relocation procedures; and implementing a broad-banded pay 
system.
    The Defense Department has also been a beneficiary of 
congressional authorization to engage in a variety of 
demonstration projects to test improvements in managing its 
civilian workforce. For example, in 1980, Congress authorized 
China Lake and other U.S. Navy facilities, such as science 
laboratories, to participate in the first personnel 
demonstration project under Title VI of the Civil Service 
Reform Act of 1978. The lab sought to improve recruitment and 
retention of high-quality workers by increasing their control 
over classification, pay and other personnel matters.
    The project was expanded several times and now covers 
approximately 10,000 employees. It was extended indefinitely in 
1994, and in 1995, the Navy was given authority to expand the 
project throughout the Naval Air Systems Command. In addition 
to eliciting the insights of key leaders of these three 
agencies today, we seek to learn more about the plans of the 
administration to address workforce planning concerns. We are 
anxious to hear the perspectives on personnel flexibility of 
representatives of employee labor organizations and interested 
public administration associations.
    I want to particularly explore several questions about the 
utility of these tools, how useful has these authorities been; 
what are the strengths and drawbacks; has there been particular 
impediments to using existing authority; how has the agencies 
engaged with employees and employee organizations in 
implementing these authorities. Is it working? Can it be 
improved?
    A key outcome of our inquiry will be identifying the 
lessons other agencies and Congress ought to apply and the 
cautions they should be heeding in considering whether to 
extend any of these authorities more broadly. I want to now 
yield to the Ranking Minority Member of the Subcommittee, my 
good friend and a leader on Capitol Hill on this important 
issue--Senator Voinovich, your opening statement.

             OPENING STATEMENT OF SENATOR VOINOVICH

    Senator Voinovich. Thank you, Mr. Chairman. I am pleased 
that the Subcommittee is holding this hearing on ``Expanding 
Flexible Personnel Systems Governmentwide,'' and I would like 
to welcome our two panels of witnesses.
    Mr. Chairman, today's hearing is the ninth that our 
Subcommittee has held on the Federal Government's human capital 
crisis since July 1999. I would like to thank you publicly for 
your partnership in the examination of this issue during my 
time as Chairman of the Subcommittee and for your commitment to 
continue examining these problems and seeking solutions during 
your chairmanship.
    I think we both agree that one of the real crises that we 
face in the Federal Government today is the human capital 
crisis. I consider this a key hearing on the Subcommittee's 
human capital agenda. When examining the Federal Government's 
human capital problems, some are quick to say that entirely new 
civil service architecture is needed to address this system's 
many problems. I am sympathetic to that argument. However, we 
all know how difficult that overhaul would be. That is why it 
is critical to explore two other options when considering civil 
service reform.
    The first option is that we simply try to use the 
authorities available under current law more effectively. I 
have discussed that approach with both Mr. Walker and Mr. 
O'Keefe, and we all agree that a great deal can be done through 
better management and the use of current laws and regulations. 
I am pleased to note that Kay James was confirmed by the Senate 
last Wednesday to be the Director of the Office of Personnel 
Management. Earlier this year, I discussed with her that OPM 
should do all it can to relax certain rules and regulations 
that make some aspects of the Civil Service System overly 
bureaucratic. For example, there are certain elements of the 
hiring system that should be changed. Lieutenant General Robert 
Flowers, Chief of the Army Corps of Engineers, recently 
indicated to me that since the Corp's special hiring authority 
was rescinded, it takes him 4 months to hire an engineer. This 
is unacceptable in a competitive field.
    Second, we should identify the special personnel 
flexibilities provided to some agencies, such as the Internal 
Revenue and General Accounting and the Department of Defense, 
examine how effectively they have been employed, and determine 
if those flexibilities should be extended governmentwide. The 
purpose of today's hearing is to explore the second approach. 
The primary advantage of that approach is that if it is agreed 
that a certain flexibility is proved to be worthwhile, 
extending it to the entire Executive Branch is certainly better 
than designing a whole new system and can help address the 
human capital crisis until more comprehensive reforms can be 
agreed upon and implemented.
    The General Accounting Agency, under the leadership of 
Comptroller General David Walker, has tried to make itself an 
example of excellence in government. Its personnel system is a 
great candidate for examination today. The Internal Revenue 
Service has a relatively newer alternative system, which was 
authorized in Congress of 1998. The Restructuring and Reform 
Act directed IRS to establish a performance management system 
and provided human capital flexibility provisions that covered 
a wide range of personnel-related functions. Commissioner 
Rossotti, I look forward to hearing from you about how you 
think that system is working.
    I am especially pleased also that we have Charlie Abell, 
Assistant Secretary of Defense for Force Management Policy, 
because the DOD has over 3 million active duty military, 
reserve, and civilian personnel combined. Managing this 
enormous workforce is a tremendous challenge. Secretary Abell, 
I am eager to learn from you what the Bush Administration is 
doing or what you intend to do to address the human capital 
crisis that we have at the Defense Department.
    I would also like to mention the fact that my staff and I 
worked closely with Mr. Abell last year to insert language in 
the fiscal year 2001 Department of Defense Authorization Act to 
reshape its workforce by offering voluntary separation 
incentive payments to 1,000 senior employees in this fiscal 
year. That provision also authorized another 8,000 slots for 
the next 2 fiscal years. I am really pleased, Secretary Abell, 
that the money to fund that is in the President's 2002 budget, 
and hopefully the money will be there in 2003.
    I think we are all familiar also with former Defense 
Secretary James Schlesinger's testimony before this 
Subcommittee several months ago, where he indicated that, for 
all intents and purposes, the Department of Defense, in terms 
of personnel and the human capital crisis, is in intensive 
care. You might be interested that I recently had a human 
capital roundtable in Dayton, Ohio at Sinclair Community 
College. Dr. Russo, Executive Director of Aeronautical Systems 
Center at Wright Patterson was there, Colonel Larry Strauser, 
Vice Commander, Air Force Research Laboratory, Wright 
Patterson, and local college students were in attendance.
    I wanted to find out from those students: Are you 
interested in going to work for the Federal Government? If you 
are, why? If you are not, why not? It was interesting, first of 
all, that many really did not know about the opportunities 
available to them in the Dayton area, in the Defense 
Department. Several of them mentioned that they felt that the 
pay was not competitive with the private sector. The colonel, 
after one student explained that he was an electrical engineer, 
said to him, ``We have got a job for you now, right now, in a 
work-study program.'' I saw a big smile on the youngster's 
face. Then I asked the colonel, ``How long is it going to take 
for you to have your hiring of this young man approved?'' He 
looked at me with a straight face and he said, ``Five months.'' 
Well, at that point, you could have heard a pin drop in the 
room.
    I am also pleased today that we have with us Presidents 
Harnage and Kelly from the American Federation of Government 
Employees and the National Treasury Employees Union. I have 
said on numerous occasions we cannot expect to change the Civil 
Service System unless we closely involve those who will be 
affected most directly. I look forward to your analysis of 
these new personnel systems from the unions' point of view.
    Last, but certainly not least, I look forward to hearing 
the perspectives of Ms. Shiplett on behalf of the Human 
Resources Center at the National Academy of Public 
Administration. NAPA has studied these issues closely for many 
years and they have a great deal to offer to this discussion. 
Again, I thank the witnesses for coming today and I look 
forward to your testimony. Thank you, Mr. Chairman.
    Senator Durbin. Thank you, Senator Voinovich. I want to 
welcome the first panel: David Walker, Comptroller General of 
the U.S. General Accounting Office. Mr. Walker is the Nation's 
chief accountability officer and the head of GAO, a Legislative 
Branch agency that assists Congress in insuring the 
accountability of the Federal Government. Sean O'Keefe, who is 
the Deputy Director of the Office of Management and Budget. In 
addition to overseeing the preparation of the budget, 
supervision of the administration of Executive Branch agencies, 
OMB is at the centerpiece of Federal agency management 
oversight. Charles Rossotti is the Commissioner of the Internal 
Revenue Service. Almost since the time of his appointment to 
that post in November 1997, Mr. Rossotti has had the 
challenging task of overseeing the restructuring of the IRS. 
Charles Abell joins us from the Department of Defense. A 
retired Army lieutenant colonel, he is the Assistant Secretary 
of Defense for Force Management Policy. In that capacity, he is 
responsible for the policies, plans and programs for military 
and civilian personnel management, including recruitment, 
education, career development, equal opportunity compensation, 
recognition, discipline and a separation of all DOD personnel.
    Thank you for coming. We look forward to your testimony. As 
is customary in the Subcommittee, we swear in all witnesses. So 
would you please rise and raise your right hand? Do you swear 
the testimony you are about to give the Subcommittee is the 
whole truth, and nothing but the truth?
    Mr. Walker. I do.
    Mr. O'Keefe. I do.
    Mr. Rossotti. I do.
    Mr. Abell. I do.
    Senator Durbin. Let the record note that the witnesses 
answered in the affirmative, and so they will be allowed to 
continue. I would ask that you limit your oral statements to no 
longer than 5 minutes, and remind you that your entire 
statement will be entered into and made part of the record.
    Mr. Walker, please proceed.

  TESTIMONY OF DAVID M. WALKER,\1\ COMPTROLLER GENERAL, U.S. 
                   GENERAL ACCOUNTING OFFICE

    Mr. Walker. Thank you, Mr. Chairman. It is a pleasure to be 
here and I will summarize my extensive statement that has been 
provided for the record. Mr. Chairman, I have tried to make 
human capital a top priority for GAO ever since I was the 
Comptroller General of the United States. First, externally, 
with regard to evaluation work that we are doing, as well as to 
try to provide tools and methodologies to help agencies help 
themselves see the way forward in this critically important 
area.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Walker appears in the Appendix on 
page 41.
---------------------------------------------------------------------------
    Second, we have also tried to make human capital, or our 
people, a top priority within GAO, with the objective to try to 
lead by example. The way that we do things is not the only way. 
It is not necessarily the best way, but it is a way. We are not 
perfect and we never will be. On the other hand, we believe as 
the leading accountability organization in the United States 
and possibly the world, we have a responsibility to lead by 
example in all critical management areas, and we are trying to 
do that.
    As you know, Mr. Chairman, GAO recently designated the lack 
of strategic human capital in management as a governmentwide 
high-risk area. Unfortunately, all too frequently, the Federal 
Government has viewed its employees as a cost to be cut, rather 
than an asset to be valued. We believe very strongly that this 
must change in the future, because of the fact that we are now 
in a knowledge-based economy. People are the source of all 
knowledge. We must be able to attract some of our Mation's best 
and brightest to run what is arguably the largest, the most 
complex, the most diverse and the most important entity on the 
face of the earth, namely the U.S. Government.
    We cannot afford to do otherwise. We believe that there is 
a three-phased approach that is ultimately going to have to be 
followed in the area of human capital. First, agencies should 
do everything they can within the context of current law to 
attract, retain and motivate a skilled and knowledgeable 
workforce. Second, they should seek, based on a business case 
analysis, selected additional flexibilities targeted additional 
changes. In addition, the Congress should consider providing 
additional flexibilities and to a broader range of Federal 
agencies, along with appropriate safeguards to prevent abuse. 
Third, there is going to be a need for broader, more 
comprehensive civil service reform over time.
    However, we must learn from what has worked and what has 
not worked with regard to the best flexibilities and we must 
reach out to try to involve all key stakeholders to build a 
consensus before comprehensive civil service reform will be 
possible. In my opinion, that is at least 2 years away. Many 
have shared responsibilities for addressing the human capital 
challenge, including all agency heads, OMB, OPM and a variety 
of other players.
    As you properly pointed out, Mr. Chairman, GAO has certain 
additional flexibilities that have been granted to us in past 
years. For example, in 1980, the GAO Personnel Act was passed. 
It was passed primarily with two concepts in mind, independence 
and innovation. It was passed in order to provide GAO 
reasonable independence from OPM and other entities, since we 
have the responsibility to review, evaluate and audit certain 
entities; therefore, we wanted to make sure that there would 
not be a potential conflict of interest with regard to our 
activities relating thereto.
    Second, it was also passed with the idea to try to use GAO 
as a potential experiment for certain new and innovative 
approaches. The three major areas dealt with hiring practices, 
classification, and compensation practices. In the hiring area, 
we have streamlined hiring authorities, but it is important to 
note that we still maintain veterans preference to the extent 
applicable under current law, under Title V, and in addition to 
that we also conform with merit principles in all of our 
practices. We use broad-banding as a classification system for 
most mission personnel. In addition to that, we have a pay-for-
performance system for compensating our mission related 
employees, the desire being, that to the maximum extent 
possible, we make decisions on who we hire, who we promote, who 
we reward and who we discipline based upon skills, knowledge 
and performance.
    The 2000 act that was passed last fall, with the help of 
both of you Senators and others, provided us with four 
different authorities. First, the authority to create a new 
senior-level position going up to the SES level of compensation 
for certain specialists and technical professionals. We have 
implemented that authority and we have put about four new 
people into that category and we have reclassified about four 
others. We have the authority to use voluntary early retirement 
authority, as well as buyout authorities, to realign GAO, 
rather than to downsize GAO. We have issued the regulations on 
voluntary early retirement and we sent out an offer yesterday, 
as a matter of fact, for a voluntary early retirement authority 
for our employees to consider during the next 45-day period.
    We have not proposed buyouts, nor do we plan to. We do not 
believe they meet the cost-benefit requirement, at least as 
they are currently structured. And, we have not promulgated 
revised reduction in force regulations, even though we have the 
authority to do that, because these are not issues that are 
presently before us.
    Two more quick things, Mr. Chairman--first, I have outlined 
in my statement a number of actions that GAO has taken, within 
the context of current law, within that 80 percent that can be 
done within the context of current law that we hope will be 
informative to this Subcommittee as well as other agencies. 
Second, I have also outlined in my statement a number of 
legislative actions that we believe Congress should consider 
that would provide agencies reasonable flexibility to attract, 
retain, and motivate a qualified workforce, while providing 
adequate protections to prevent abuse.
    Last, let me say, Mr. Chairman, that I believe this is a 
critically important area. It is one that is going to require 
the concerted efforts of a variety of parties, including the 
Congress, to see our way forward. We are more than happy to do 
what we can to help agencies help themselves, as well as to try 
to provide additional tools and methodologies and examples of 
how one can move forward in this area. Thank you, Mr. Chairman.
    Senator Durbin. Thank you very much. Mr. O'Keefe.

 TESTIMONY OF HON. SEAN O'KEEFE,\1\ DEPUTY DIRECTOR, OFFICE OF 
                     MANAGEMENT AND BUDGET

    Mr. O'Keefe. Thank you, Mr. Chairman and Senator Voinovich. 
It is a pleasure to be here this afternoon. If you have no 
objection, Mr. Chairman, I will submit the statement for the 
record and summarize if briefly.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. O'Keefe appears in the Appendix 
on page 83.
---------------------------------------------------------------------------
    Mr. Durbin. Without objection.
    Mr. O'Keefe. First and foremost, the strategic management 
of human capital is one of the President's five top management 
priorities. It is a management agenda he has formulated during 
the course of the last 6 months, quantified in the blueprint to 
accompany the President's budget that was submitted on February 
28 and expanded dramatically in the budget submission that was 
made in April. We have discussed it and testified about it 
rather widely, this being one of the primary functions, all of 
which are interrelated, that of the integration of budget and 
performance criteria, the strategic management of human 
capital, competitive sourcing objectives, e-Government 
initiatives and a range of other factors that are related in 
that regard. As a result, what we are looking at is all these 
factors working off each other as a piece, an interrelated 
effort as part of the President's management agenda.
    Workforce planning becomes one of the primary aspects of 
what is required in achieving this approach. So, even the 
requesting of the departments and agencies--and they have gone 
through the rather laborious task of preparing all the efforts 
necessary to achieve, certainly, the first two objectives, 
which is to look at the implications on the workforce 
requirements as integrated within the budget criteria, based on 
some set of performance criteria, to determine exactly and 
justify exactly what the basis of requirements may be for this 
particular human resource.
    As part of the 2003 objectives, what we were also looking 
to is, for fiscal year 2003 to be submitted this January, a 
handful of very interrelated factors with this five point 
management agenda that the President has prepared. First and 
foremost is--as David Walker just testified to--is to 
capitalize on the proposition, that we need to exploit the 
current flexibilities as they exist today. I will submit to you 
as an opening proposition, most of the senior leadership of 
most of the departments in the Federal Government are not even 
aware of the extent to which those flexibilities exist.
    The President's Management Council was just constituted 
recently, and as a result, the new deputy cabinet officers, 
have been designated largely as chief operating officers across 
the Federal agencies and departments. Having convened just a 
week ago, the first order of business was to walk through from 
OPM what the current flexibilities are and discuss those 
extensively. We have just begun that task. Although there is an 
awful lot that has been accomplished and an awful lot discussed 
throughout the institutional framework, the leadership of those 
particular departments and agencies have just become more and 
more familiar with what the extent of the flexibilities are.
    Second, the pilot and test authorities exist not only 
within the three agencies and departments represented here this 
afternoon, but also across a range of other Federal agencies. 
The assessment and evaluation necessary to determine the 
success or relative utility of each of those particular 
approaches has yet to be taken on in earnest. As a consequence, 
that is the effort here over the course of the next couple of 
months, to look to prepare all the necessary analysis that 
would support offering to you, as part of a larger fiscal year 
2003 legislative initiative to accompany the fiscal year 2003 
budget, a proposal to extend those authorities where 
appropriate and to make them available.
    Certainly, equally important is the clarification of a 
number of different approaches of management criteria as well 
as objectives that have been usefully put together by the 
General Accounting Office and summarized in David Walker's 
testimony today, as a matter-of-fact, that is very widely 
available, making sure each of the departments and agencies are 
aware of the extent to which some of those authorities could be 
utilized, and then building those into the performance criteria 
that we anticipate will become part of the review for fiscal 
year 2003, as well as to determine what the performance 
criteria is and which resources would then become available as 
part of the integrated effort there.
    Last, as each of these performance measures are introduced, 
to start with a fundamental proposition of what is the outcome 
or objective, a very familiar theme, certainly, within this 
Committee, sponsorship of the Government Performance Results 
Act, having determined what those performance criteria would be 
for selected programs, it then gives us groundwork and basis 
for further determination of precisely the extent to which we 
need to expand the human capital requirements for training, for 
education retention programs and a range of other flexibilities 
across the board in this area. So, for all of those, as part of 
the fiscal year 2003, our attempt is to corral-up all those 
points prior to seeking a wider range of reform initiatives, 
which we anticipate would be after the fiscal year 2003 
preparation has been completed, so we can give you a more 
comprehensive picture therein. But we are about, from a 
management and administration objective, precisely the same 
objectives that you enunciated so eloquently in your opening 
statements. Thank you, Mr. Chairman.
    Senator Durbin. Thank you. Mr. Rossotti.

  TESTIMONY OF CHARLES O. ROSSOTTI,\1\ COMMISSIONER, INTERNAL 
                        REVENUE SERVICE

    Mr. Rossotti. Thank you, Mr. Chairman and Senator 
Voinovich. Just about 3 years ago, the Congress passed the 
Restructuring and Reform Act, which was a really massive 
mandate for change in the IRS. One of the keys in delivering on 
those mandates is to develop and retain a highly skilled and 
motivated workforce, and a workforce that is organized and 
managed in line with our mission and our strategic goals as 
laid out in the act. To this end, we have benefited a great 
deal from the personnel flexibilities that were incorporated 
into that act.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Rossotti appears in the Appendix 
on page 86.
---------------------------------------------------------------------------
    As I will just briefly summarize in my opening statement, 
and describe in more detail in my written statement, they have 
enabled us to employ a number of management techniques that 
have made a critical difference in recruitment and in 
reorganizing the workforce and in performance management. It is 
important to note, as the other witnesses have mentioned, that 
these flexibilities complemented existing authorities that were 
underway, and it was really the combination of the existing 
authorities plus the new flexibilities that we think has made 
such a difference in our ability to move forward on the 
mandates of RRA.
    To mention a couple of areas, the IRS modernization program 
requires a very high level of senior level leadership that is 
far beyond the capacity of any one or two individuals. Much of 
that talent was and is available within the IRS, but for 
certain positions, especially those requiring expertise in 
business systems modernization, leading organizational change, 
emulating best practices in the private sector, and 
communicating more effectively with taxpayers, we looked 
outside the government to recruit selectively. RRA gave us 
streamlined critical pay authority to hire up to 40 such 
individuals. To date, we have used this to hire 32 people, many 
with very distinguished careers. They are now filling such 
positions as chief information officer, director of business 
systems modernization, taxpayer advocate and commissioner of 
the large and mid-size business division and commissioner of 
the small-business, self-employed business division.
    We have also effectively used the combination of existing 
authorities and RRA flexibilities to recruit, at the entry-
level, talented, front-line professionals. For over 5 years, 
budget constraints really kept the IRS out of the recruiting 
market while we suffered attrition in our critical occupations. 
Fortunately, due to congressional funding in fiscal 2001, we 
were able to get back into the market and to launch a 
significant recruiting initiative aimed at filling hundreds of 
entry-level key professional positions, such as criminal 
special agent, revenue agent, revenue officer, and some new 
positions in our new structure, tax specialist and tax 
resolution representative. Many of these positions are going to 
be filled with people with accounting degrees or other kinds of 
accounting and business skills, and there is quite an active 
market out there for those kinds of people.
    We developed a focused marketing and recruiting strategy, 
aimed at both outside employees as well as soliciting current 
employees and providing support to current employees for 
advancement. One of the special authorities RRA gave us is 
called category rating ability for new recruits, which we used 
to expedite the rating process and hiring process, particularly 
for revenue agents, which is one of the most difficult 
occupations to recruit for, yet one of the most important. I am 
pleased to say that while it is not fully complete, most of the 
recruiting for this year has been done and has been successful. 
Overall, we have recruited over 2,000 new people into the IRS 
in these targeted positions, including about 400 that came in 
through the category rating process.
    The RRA also mandated a major shift in our reorganization. 
Our whole structure has moved from a geographic structure to 
one that is based on a customer focus, built around four major 
taxpayer segments. This required a comprehensive workforce 
transition strategy because it was a massive change, not only 
in Washington and headquarters, but across the entire country. 
This change went from top to bottom across the IRS. I am 
pleased to say that as of last October--26 months after the 
Restructuring Act was passed by Congress--the old 50-year-old 
structure was gone and was replaced with a new, customer-
focused structure. As part of this, nearly all of our mid- to 
upper-level management positions were abolished, and new 
selections were made to fill these newly defined positions. In 
this process numerous layers were eliminated, the structure was 
flattened and about 25 percent of our total number of mid- to 
top-level positions were eliminated. All this was done in 26 
months without any involuntary separations, making active use 
of existing authorities, together with early out and buyout 
authorities that were provided in RRA.
    Last, let me mention the other key element that was called 
for in RRA and is a major part of our strategy, which is making 
sure that all of our managers and employees are focused on 
achieving our organizational priorities and goals. This was 
mandated in some special ways because of the special mission of 
the IRS in terms of tax compliance. We implemented those 
mandates through what we call our balanced measure system, 
which identifies a set of performance measures for every 
organizational unit that balances and quantifies customer 
satisfaction, business results and employee satisfaction. We 
then use this performance management system, which measures 
unit objectives down to individual performance through our new 
executive and managerial performance appraisal system.
    This appraisal system includes a core set of competencies 
for management responsibilities that are tied to our balanced 
measure system, with more specific commitments built around our 
plan for the upcoming year. Complementing this was pay-banding 
authority that was available to us in RRA, which we have used, 
so far, for all of our mid- to top-level managers. This allows 
us to link individual performance assessments to the 
advancement of senior managers in their pay process. They 
progress from step to step within the band only if the rating 
under the performance management system meets or exceeds 
certain standards.
    In conclusion, many of the human resource initiatives that 
I described are still being implemented and it is too early to 
make any definitive assessment of their results. Nevertheless, 
I have to say that the results so far have been very promising. 
We have used them effectively to do the things that we set out 
to do. Again, I stress that I think they were effective because 
they did complement our full use of the existing authorities 
that existed in the law. We used both of them to achieve our 
goals and I think together they have been extremely powerful in 
letting us get to the point that we are. Thank you.
    Senator Durbin. Thank you very much. Mr. Abell.

   TESTIMONY OF CHARLES S. ABELL,\1\ ASSISTANT SECRETARY OF 
   DEFENSE FOR FORCE MANAGEMENT POLICY, DEPARTMENT OF DEFENSE

    Mr. Abell. Mr. Chairman and Senator Voinovich, Congress has 
been very generous to the Department of Defense in granting, 
through the use of demonstration project authorities, certain 
civilian personnel systems flexibilities. I have provided the 
Subcommittee with written testimony that provides an overview 
of these legislative provisions, examines how the Department 
has used them and discusses their effects on the workforce.
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    \1\ The prepared statement of Mr. Abell appears in the Appendix on 
page 91.
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    This legislation has encouraged the Department to conduct 
civilian personnel demonstration projects in our science and 
technology reinvention laboratories and for our civilian 
acquisition workforce throughout the Department. We are now 
conducting eight such projects under two separate legislative 
provisions. In addition, two pilot programs are authorized for 
science and technology labs and two test and evaluation centers 
in each of the military departments. Congress has also granted 
the Department flexibilities in hiring and compensating 
scientists and engineers in the Defense Advanced Research 
Projects Agency, DARPA, the military departments, the National 
Imagery and Mapping Agency and the National Security Agency.
    The hiring and pay innovations of these demonstration 
programs and pilot programs are outlined in my written 
statement. While we do not have any formal evaluation of the 
results of these yet, I believe the flexibilities of the 
demonstration projects and pilot programs have had a positive 
effect on civilian human resource management within the 
Department. Although we have evaluations of the demonstration 
projects scheduled in fiscal year 2002 and again in fiscal year 
2003, the preliminary indications are that broad-banding and 
the other flexibilities we have employed have helped us manage 
our human capital. We have been able to recruit and retain 
scientists and engineers through the use of categorical hiring, 
scholastic achievement appointments, modified term 
appointments, pay for performance and expanded probationary 
periods.
    We have also used a voluntary emeritus program to permit us 
to retain the skills and experience of retired civil servants 
who want to volunteer to remain on the job and help us 
transition the next generation of leaders. In closing, I would 
like to thank this Subcommittee and the Congress for the 
support given to the Department to facilitate our downsizing 
and transition. We have been able to avoid over 147,000 layoffs 
since 1993 by using the voluntary separation incentive payment 
program. In addition, using the voluntary early retirement 
authority, we have avoided over 67,000 involuntary separations 
and demotions. This has gone far to support the moral of the 
workforce and the efficiency of the Department. I look forward 
to continuing this partnership as we continue our efforts to 
reshape the workforce in the Department. Thank you, Mr. 
Chairman.
    Senator Durbin. Thank you, Mr. Abell. Last year, I joined 
with Senator Voinovich and Senator Akaka in offering an 
amendment to the defense authorization bill relative to 
offering student loan repayments as an incentive to attract 
qualified employees to Federal service. The amendment was 
adopted by the Senate, part of the final conference package 
signed into law October 30, 2002. OPM published final 
regulations and issued them on January 11. The new 
administration wanted to review them and they became effective 
on April 12, 2001. Currently, OPM is amending these regulations 
and some of these amendments I think are positive. I like the 
way they are headed.
    I have been advised that OPM is awaiting approval from OMB 
at this moment before they publish the final regulations. 
Meanwhile, agencies have begun to start making plans to 
implement the student loan repayment program--Commerce, State, 
Veterans Affairs and others, GSA, for example. Part of my 
concern last year in putting this language in the DOD 
authorization bill was the fact that this was not a new idea. 
This was an idea that was enacted into law in 1990 and OPM 
never issued rules and the agencies never utilized the 
authority in the ensuing period of time.
    My amendment suggested imposing a specific, but what I 
thought was a reasonable deadline for rule-making with final 
rules to be issued by June 30 of this year. I would like to ask 
Mr. O'Keefe: Are you familiar with this situation and can you 
tell me when this will be approved and available for all 
agencies to use, this student loan repayment?
    Mr. O'Keefe. No sir, I am not familiar with it, but I will 
be by the end of the day and I will be back in touch with you.
    Senator Durbin. Fair enough.
    Mr. Abell, one of the things I found interesting was this 
dual compensation issue, which must have been a disincentive 
for military retirees to work at the Department of Defense, and 
last year Congress repealed it. If I understand it correctly, 
retired military officers coming back into civilian service had 
to forego 50 percent of their military retirement pay. Has the 
appeal of working for the Department of Defense changed, 
particularly with those who have experience and have served our 
country?
    Mr. Abell. Yes, sir. There was a fairly complex algorithm, 
but essentially 50 percent was the forfeiture, and the repeal 
has allowed not only us, but all Federal agencies, to receive 
the benefit of the experience, the leadership and the technical 
knowledge of former military, both enlisted and officers, who 
would like to continue to serve in a civilian capacity 
following their military assignment, but thought that the 
monetary penalty was just too great. We have examples all the 
time throughout, where it not only assisted the Department of 
Defense in hiring experienced leaders and technical people, but 
also in areas such as pilot shortage and so forth, where we 
were able to put a retired aviator into a staff deposition and 
put the military aviator back out into the cockpit.
    Senator Durbin. Mr. Rossotti, when we decided a few years 
back to pass the RRA, the IRS Restructuring and Reform Act, we 
had Section 1203 in there, which has been characterized as the 
ten deadly sins, which, as I understand it, are ten acts which 
proven against an employee of the Department of Treasury and 
the IRS, would require mandatory termination. I have read 
through these ten deadly sins and from my religious 
perspective, I would say to Senator Voinovich, eight or nine 
are mortal sins and one is a pretty serious venal sin.
    I would not argue about any of this in relation to eight or 
nine of these. There is one that is pretty open-ended, 
harassing a taxpayer. These are taxpayers that I assume are 
being audited or investigated for example. There are a lot of 
complaints from people who are working at your agency about 
Section 1203, whether it is fair. I think, as I said, some of 
these things are beyond debate, but when it comes to this whole 
question of harassment, there is a news article that made the 
Chicago papers last year, but it said of the first 830 
complaints of taxpayer harassment filed under that new law, not 
one of them was found to be worthy and meritorious. I think the 
information given later by the representative of NTEU suggests 
that the percentage of those who are actually found to have 
violated one of these is very small and yet she raises the 
point, and I think a valid one, that it has a very chilling 
effect on the personnel in the Department and in terms of their 
morale. Could you comment on that?
    Mr. Rossotti. Yes, Mr. Chairman, there were over 70 
specific provisions in the Restructuring Act, many of them 
pretty complex to implement. We now have had 3 years of 
experience with them. I can tell you, having lived through 
this, that there have been none that have been as difficult to 
work with as Section 1203. The reason is not that the offenses 
listed for the most part of Section 1203 are not serious 
offenses, as you noted, and had always been considered serious 
offenses. I will come back to a couple of exceptions, but, for 
the most part, everyone, including most of our employees, 
acknowledges that. Nor has it been the problem that many people 
have been terminated unfairly. There was that great fear 
initially, but we have taken tremendous care to administer this 
law, and it does provide the commissioner the ability to 
personally mitigate any termination, which we have taken very 
seriously.
    I think at this point we have enough experience to be able 
to cling to employees, which we have been able to do. We have 
not been just terminating people willy-nilly that we should not 
be. The way it is viewed by our workforce is that under Section 
1203, if somebody accuses me of, let's say, harassment of a 
taxpayer, first, I am put onto death row and sentenced to the 
death penalty and then a year later I might get a reprieve. In 
fact, I probably will get a reprieve, but the process of going 
through that is very difficult for people and very burdensome 
and cumbersome.
    I will also say, any provision of the tax law is a balance 
and unfortunately, even though it is designed to protect 
taxpayers, there will be some fringe element of taxpayers who 
will attempt to abuse that provision and take advantage of it. 
We have that situation too. We have practitioners out there who 
make it a practice of simply filing Section 1203 complaints 
routinely. They have it on a form letter and they file it any 
time one of their clients is audited or subject to a collection 
action or something like that.
    So, this has been very difficult. Within the last week, we 
have submitted to our tax writing committees some proposed 
modifications to RRA, including Section 1203. We had a 
discussion of this at a hearing earlier this year, the joint 
hearing where all the six committees come together. Subsequent 
to that, we have submitted specific legislative suggestions or 
proposals on a number of provisions that we think would help us 
to administer Section 1203, administer the whole Restructuring 
Act, completely in accord with the intent of Congress, but 
eliminating some burdensome things, including some elements of 
Section 1203. Specifically, what we have proposed with respect 
to Section 1203, is that we would keep these offenses on the 
books, because exactly as you said, Mr. Chairman, we consider 
them to be serious offenses, and if someone really and truly is 
found guilty of some of the things that are in there, they 
should be terminated or at least subject to a penalty.
    The key change that we propose is to keep the offenses on 
the books, but to eliminate the mandatory penalty provision, 
and simply allow the IRS the ability to terminate someone, but 
also the flexibility to impose other penalties. We have laid 
out how we would expect to do this. This is a key change that 
we have proposed. We have also proposed eliminating one other 
thing which has been somewhat unfair. Included in the deadly 
sins is failure to file a timely tax return. It turns out that 
includes someone who files a refund return. Well, under the tax 
law, there is no penalty to a taxpayer who fails to file a 
return in which they are due a refund, other than they do not 
get the refund.
    So, we have had lower grade employees, typically seasonal 
employees, many of them in the service center, that may not 
file a return on time even though they are due a refund, and 
under this provision they would be subject to mandatory 
termination. We have used our authority to mitigate a lot of 
those offenses, but that is a rather cumbersome process, to go 
through the whole thing and mitigate it. We have laid these 
proposals on the table now. We have sent the letters to the 
tax-writing committees that would consider them. And my view is 
that there are some others, which I will not cover here, which 
I think would help us on other provisions of RRA----
    Senator Durbin. As I am out of time on this round, I would 
just like to ask one question in closing. I had the unhappy 
experience 20 years ago of having a small business that I owned 
back in Springfield, Illinois audited. We did not turn out to 
have any additional tax liability, he says for the record. I 
will tell you that the people that came out from the IRS were, 
I thought, reasonable. They had a tough job, though. They 
basically said our business had not paid its taxes, and we 
believed we had and established that fact. That is kind of a 
contentious relationship to start with though. Most business 
people are not going to welcome you into their offices and 
invite you in for coffee to audit them. And to have this 
looming over their heads, how difficult is it to fill the ranks 
of those who are involved in these investigations and audits?
    Mr. Rossotti. Well, as I said, we have not been filling 
many until this year because there was not money, but we have 
been successful in attracting some very qualified people with 
the help of the flexibilities. I think the real problem is the 
work environment, the motivation. We have very qualified 
employees who are doing a very difficult job. They spend all 
day, every day, out there talking to taxpayers. They do an 
excellent job. They do a professional job. If there is a 
taxpayer who has a beef, there are now many different channels 
that they can follow through RRA to get their side of the story 
heard. We feel with the proposed modifications of the RRA that 
we have made, we would still be able to protect taxpayer 
rights. We would still be able to remove an employee, that rare 
employee I must say, who really does violate these rules, but 
we would not have this cumbersome process, as it is viewed by 
the employees, as first you put me on death row and then you 
give me a reprieve a year later.
    Senator Durbin. Thank you. Senator Voinovich.
    Senator Voinovich. Thank you, Mr. Chairman. Mr. Walker, as 
part of the Legislative Branch, GAO arguably has had a greater 
degree of flexibility in personnel system more than the 
Executive Branch agencies; however, I understand that many of 
the apparent restrictions that exist within the Executive 
Branch are the result of rules and regulations imposed by the 
Office of Personnel Management and the simple failure of 
individual human resource bureaus to use the authorities that 
they have. What actions do you believe need to be taken in 
order to remedy that situation? Or, do you agree with that?
    Mr. Walker. First, I think one of first things that needs 
to be to done is that we need to summarize all the different 
flexibilities that are available. It is my understanding that 
OPM has started to do that. They have actually put together a 
publication with the intended purpose of summarizing all the 
existing flexibilities. I have a copy of it. There seems to be 
a significant gap between what OPM believes agencies can do 
within the context of current law and the understanding of the 
agencies with regard to what they believe they have the 
authority to do.
    In addition, many of these flexibilities have strings 
attached to them. They have strings attached such that you must 
go to OPM for certain types of approvals. I think clearly one 
of the first things we need to do is to take a hard look at 
what flexibilities are available. To what extent can you 
provide what I am going to refer to as class exemptions? In 
other words, we are going to delegate authority for you to be 
able to do things, as long as you meet conditions A, B, C, and 
D, and that we might have a mechanism to periodically review 
and find out whether you are complying with them, but to 
minimize the number of occasions that people have to come back 
for an individual exemption or individual approval.
    I can tell you that having attended at least one of the 
President's Management Council meetings within the last month, 
there is a tremendous amount of frustration on behalf of 
department and agency executives, and this is one of their top 
priorities, and I expect that it will be one of Kay James' top 
priorities, now that she has been confirmed.
    Senator Voinovich. Would you like to comment on that, Mr. 
O'Keefe?
    Mr. O'Keefe. No, I could not concur more. Thank you, Mr. 
Walker, because that is an affirmation of precisely the focus 
we have been after, trying to pull together first an 
understanding of what everybody believes to be the existing 
authorities and corral those up. So this is the first 
comprehensive effort that I have seen that OPM has conducted, 
and the document Mr. Walker was referring to was just put 
together here in recent weeks. So, as a consequence, that is 
the first step in the equation. Next is to determine where the 
difference is between interpretations, and that, then, as, 
Senator, we have discussed a few times, forms the basis of some 
reform initiatives, I think, that will be informed, as opposed 
to simply calling for variations of what may be existing 
authorities today.
    Senator Voinovich. Mr. Rossotti, you dealt with the Office 
of Personnel Management and you said that the additional 
authorities and flexibilities you were given were on top of 
what was already there. What has your experience been in terms 
of utilizing those flexibilities?
    Mr. Rossotti. We have worked very closely with OPM, because 
of the fact that we do have these new flexibilities and some of 
the existing ones, and I guess it could be fairly said that we 
pressed the envelope against probably all of them, given the 
massive change that we have been going through in the IRS. I 
think that actually we have also had very good support from our 
Treasury Department. We have an excellent Human Resource 
Officer, Mr. Sanders, who knows the ropes on this stuff very, 
very well, together with Treasury, and they have worked with 
OPM to make it clear to us what we could do--how we could deal 
with the existing authorities and what the new authorities 
provided.
    So, by working that process very aggressively with some 
knowledgeable people, I think we have gotten the benefit of it. 
I will say that for a person like myself who comes from outside 
the Federal Government and is certainly not a Federal personnel 
expert, it is a bewildering set of rules. For any manager that 
comes in, unless you have someone to advise you--when I came 
into the tax agency, I was not a tax lawyer and people thought 
that might be a problem because I did not know anything about 
taxes. Little did I know that my real problem was that I did 
not know anything about Federal personnel systems. The tax part 
of it was relatively not as hard, and this is not an 
exaggeration really, because you have some very good tax 
lawyers and very good resources to figure out what happens, at 
least in the IRS, on taxes.
    I think that the comments that Mr. O'Keefe and Mr. Walker 
made about just clarifying what you can do and making it 
simpler to understand what you could do would go a long way, 
especially if you could find some way to translate it into 
something that a non-expert, somebody that is a top manager, 
but not an expert, can do, because figuring this stuff out is a 
big part of the challenge.
    Senator Voinovich. It would probably be a good idea, Mr. 
O'Keefe, if you set up a little group of the customers that 
deal with OPM, and the ones that have been around for awhile, 
have them come back and recommend to you how to improve OPM's 
role as a service provider to Federal agencies. I think, Mr. 
Walker, you referred to flexibility with strings and how the 
strings can be eliminated to create a quality management 
project where the folks who are really using OPM's services can 
come back with recommendations on how to streamline the current 
system.
    Mr. O'Keefe. That is precisely what we are after, Senator. 
Again, a week ago, with the President's Management Council, 
which was the succeeding meeting to the one that Mr. Walker 
referred to a few moments ago, OPM went through an exhaustive 
presentation of the material that the Comptroller General just 
referred to. But also they have a follow-up requirement to meet 
every one of the individual departmental inquiries that have 
been made, to work through the workforce planning documents 
that we have asked for, that were due to be submitted about 3 
weeks ago, to then decide exactly how those flexibilities have 
been incorporated in meeting those objectives.
    So we are trying to pick up on precisely the kind of a 
theme that you are talking about administratively, to work 
through each of those steps and then determine what objectives 
we have to go after across the board, as opposed to simply 
trying to call for reform initiatives now. So, yes, we are 
trying to pull those kinds of groups together at the present 
time.
    Senator Voinovich. I think one of the alternatives that 
could be looked at also would be the issue of giving the 
agencies more authority to do the personnel hirings Mr. Walker 
suggested. Too often, agencies have been granted such 
flexibilities only to have OPM take them back. I know you are 
doing an assessment now of the departments and the skills and 
experience of their employees. Is an extra effort being made to 
identify whether or not the departments have a human capital 
piece to that process?
    I know the agency heads are getting familiar with this, but 
whether or not that process bears fruit depends upon what kind 
of human capital people you have inside of your shops, and Mr. 
Rossotti you have a pretty good one, I understand.
    Mr. Rossotti. Yes, I think so.
    Mr. O'Keefe. Well, you have to wonder how good he is if it 
is more complicated than the tax code, the way he has explained 
it to him.
    Mr. Rossotti. It helped cut through it, though. [Laughter.]
    Mr. O'Keefe. I know your expert from a previous 
incarnation. We will talk later.
    Mr. Walker. I think a key point here is you not only have 
to have very capable human capital professionals, which I think 
hopefully all of us do, but you must have committed leadership 
from the very top. Basically, what we are talking about here is 
cultural transformation. It is nothing less than that. It is 
really tough work, and the fact of the matter is that one of 
the agencies that has to engage in a cultural transformation, 
is OPM. They do a lot of things that are helpful, but I would 
say in general they need to become more of a consulting 
organization rather than a compliance organization, and they 
need to focus more on tools rather than on rules, and they need 
to focus more on enabling, rather than inhibiting agencies. 
They have a lot of good people and I think they can do it, but 
they need to undergo a huge cultural transformation.
    Senator Voinovich. Mr. Rossotti, you have been doing a lot 
of recruiting for your agency, and as I talk to people around 
the country, they say many agencies recruit at the wrong time. 
Some do not even recruit at all. Obviously, you have done a 
fairly good job in that area, but you have had to go out and 
try to find some high-quality mid-level people. Mr. Abell, you 
may be doing the same thing with the Defense Department's 
workforce reshaping provisions. How successful have you been 
with that and what impediments have you had in terms of 
bringing people into mid-level positions from the private 
sector? How receptive are they to coming to work for the 
Federal Government, and what hurdles do you find?
    Mr. Rossotti. Actually, Senator, we really have not brought 
very many in at the mid-level, interestingly. We brought some 
in at the top level, and then we have people coming in at the 
entry-level. At the mid-level, except in very small numbers, we 
have really not hired many people. For one thing, we have had 
somewhat of a surplus, as we flattened the management layers. 
So at this point, we have not brought in too many people at the 
mid-level.
    Senator Voinovich. How about the senior managers, then?
    Mr. Rossotti. The senior managers, we have the so-called 
Critical 40, or Critical 32, and I have to thank this 
Subcommittee, because this Subcommittee was one of the ones who 
helped us when we went through RRA to get this. It was a little 
controversial at the time, but it has been absolutely critical. 
As I mentioned, we brought in 32 people. Many of these are 
people that have a whole career behind them in the private 
sector, or a large portion of a career with very distinguished 
records, and have come in to help us with this massive 
transformation.
    We have people, for example, the Chief Information Officer 
and Director of Modernization, who are critical, running some 
of these new operating divisions, which are really the 
forefront of instituting the change, as well as other 
positions, for example, the technology management and 
communications and marketing, which were not strong points at 
the IRS. So those are people that we have been able to recruit 
one at a time, to fill very specific positions, and they are 
not going to be here for 10 or 20 years, in most cases. A few 
might be. They come in on 4-year term appointments. It can be 
renewed once. But they have, in our case, made a tremendous 
difference in the time that they are in the agency.
    We do not view them as replacing the Senior Executive 
Service. Most of the talent that we have is from the 
traditional Senior Executive Service, but what we have done is 
complemented our internal Senior Executive Service with people 
that have a lifetime of experience in something that is a 
related field, and I really have to say that is one of the 
gratifying things for me and I think that is one of the 
critical items that has helped us to get to the point that we 
are in now.
    Senator Voinovich. I just want follow-up. You bring them in 
at fairly high salaries; don't you?
    Mr. Rossotti. This is called the critical pay authority. It 
gave us the ability to go up to the Vice President's salary for 
total compensation, which is, I think, $183,000 right now, and 
frankly not all of them have been brought in at that maximum. 
Some of them have been brought in at somewhat less. But, most 
of the people we recruited were people who were earning 
substantially in excess of that in the private sector and they 
really were coming into the government for public service.
    Senator Voinovich. Has there been any resentment among the 
Senior Executive Service to the fact that these folks have come 
in, they are earning the big bucks, while they remain at the 
same level? And we also have to consider the severe pay 
compression now with the Senior Executive Service earning 
essentially the same salary.
    Mr. Rossotti. I think that when we first proposed this 
idea, it was certainly controversial internally, as well as 
externally. I think that now that we have this experience where 
almost all these people are working side-by-side with Senior 
Executive Service people, they know that they are getting a 
developmental opportunity, working with most of these folks. 
They also know that they are not--they do not have some of the 
other things that the Senior Executive Service might--they have 
no longevity or seniority or anything like that. They are just 
there for the time that they are there.
    So while it has, obviously, in the early stages especially, 
raised some of those issues, I would say at this point those 
are kind of behind us and we really have got these people 
working as part of a team. I do not know whether this would be 
something that would work forever, but in the period that we 
are in at the IRS, where we have been going through this 
massive change, where we have got modernization, we know this 
works. The Restructuring Act says you have got to emulate best 
practices in the private sector, in technology, in customer 
service, even in terms of things like auditing, all these 
things. If you can bring in a few people that have that 
personal experience, having lived that, and have them work 
directly side-by-side with people that have done it the IRS 
way, both of them being good people, you really get, in my 
opinion, if it works right, an equation with the so-called 
cliche of two-plus-two equals five. I think, in many cases, we 
have been able to do that.
    Senator Voinovich. Thank you.
    Senator Durbin. Thank you, Senator. Thanks to your 
leadership, we have identified this human capital challenge as 
one of our major priorities in the Subcommittee. The GAO has 
identified as a high risk across the Federal Government. I do 
not know that we are the first to acknowledge it. We are trying 
to focus our attention and resources in dealing with it. Back 
in 1990, former President Bush signed into law the Federal 
Employees Pay Comparability Act, designed to close gradually 
the gap between the private sector and Federal white collar 
employee compensation.
    In the years that led up to that and ever since, the 
measured gap between Federal and non-Federal pay has been 
measured at about 30 percent average, nationwide. I would like 
to have comments from you in reference to--first Mr. Walker and 
the others, as well--how big a factor is this disparity between 
pay in the private and public sector, in terms of recruitment 
and retention? Second, and this is probably going to be 
something I will regret asking, how big a problem is Congress 
in dealing with this? Because if we do not appropriate the 
funds for pay and do not give adequate increases on an annual 
basis, it is no wonder that Federal employees cannot keep up. I 
might also add the President's budget starts the process, so 
each President since the former President Bush would have some 
culpability in this situation. Mr. Walker.
    Mr. Walker. Well, several things. First, pay is an issue. 
There is no question about it. But I think we have to keep in 
mind that most of the people who come to work for the Federal 
Government come to work for reasons other than to maximize 
their net worth. They come for reasons because of the nature of 
the work, the challenge, the opportunity to make a difference, 
and the ability to try to achieve a better balance between work 
and family. Nonetheless, we have to have reasonable 
compensation for these people. I think at the SES level, 
compression has gotten to the point that something has to be 
done about it. A significant majority of all the SES members 
now making the same amount of money.
    Senator Durbin. Senior Executive Service?
    Mr. Walker. Senior Executive Service, exactly. There is a 
significant incremental layer of duties and responsibilities 
that you have, and related obligations and pressures that come 
with that when you are at the SES level. To the extent that you 
get a situation where there is very little economic 
differential, then that serves as a disincentive for people to 
want to move up to that level or to stay at that level as 
compared to some of their private-sector options. I do think we 
have to be careful, however, with regard to the use of 
averages. Averages can be deceiving. I believe that over time 
we have to start compensating our people based upon skills, 
knowledge and performance. We do not do that to a great extent 
today.
    Today, most of the Federal pay system is based more on the 
passage of time and the rate of inflation, rather than skills, 
knowledge and performance. As a result, I think that if you did 
a critical analysis of this, you would find that there are some 
Federal workers that are significantly underpaid and are very 
deserving of additional compensation. There are some levels and 
some occupations where, quite frankly, you might find that they 
are overpaid as compared to their private sector counterparts. 
I think we have to be careful when you talk about averages, 
because averages can be very deceiving.
    Senator Durbin. What about the culpability of 
administrations and Congress in this?
    Mr. Walker. I think the Congress is part of the problem 
from the standpoint that----
    Senator Durbin. We will acknowledge that for the record. 
[Laughter.]
    Mr. Walker. Obviously, there is more than one member of 
Congress, so we can spread it around. But the fact of the 
matter is I think there are problems with regard to certain 
linkages that exist, rightly or wrongly, in compensation. The 
ripple effect that pay compression has, as well as whether, in 
certain circumstances, Congress has provided reasonable 
flexibilities with adequate protections are important issues. 
Other important issues include whether Congress has, in certain 
circumstances where a business case has been made, provided 
resources, for example, to allow agencies to inventory the 
skills and knowledge of their workers, to go to a new modern 
performance appraisal system, to be able to have reasonable 
training and professional development for their workers.
    We have some things, quite frankly, that I have just come 
across, Mr. Chairman, where we are penny wise and pound 
foolish, where we are saying you cannot spend money for some 
minor kinds of things that not only do not make any sense, but 
quite frankly pour salt in the wounds, and I have given several 
examples in my testimony.
    Senator Durbin. Mr. O'Keefe, let me ask you this, there is 
another issue that comes up regularly, and that is the whole 
question of contracting out. OMB, the agency that you work 
with, issues directives to Federal agencies about percentages 
of work they want contracted out. I once asked some of my 
colleagues when I served in the House, on this issue of 
privatization and contracting out, what is the goal here? What 
are we trying to achieve? Is it higher quality of service, 
lower cost to the taxpayers, or just turn out the lights in 
some Federal agencies and give them the money--the taxpayer 
dollars to private sectors to perform the work?
    I think you would concede--at least I would think we all 
could concede--that this process of contracting out is not 
exactly a morale builder for those who are still in. They have 
to wonder what the value of their work is if there is this 
constant drumbeat to send it off the farm and let somebody else 
try and do it. Could you comment on the OMB directives?
    Mr. O'Keefe. Sure. The approach, again, as I mentioned in 
the opening statement, is part of the five-element plan of the 
President's management agenda, strategic management of human 
capital being one, competitive sourcing being one of the 
others, and that is where I think the distinction is. There has 
been a drumbeat for outsourcing, privatization, a general focus 
as if that was the answer, the solution to the problem, when 
instead the empirical evidence would suggest that the active 
competitive sourcing, in and of itself, regardless of who wins, 
which sector, has been the element that has yielded the 
greatest efficiencies, in terms of cost savings, as well as 
performance.
    Senator Durbin. Is there real competition?
    Mr. O'Keefe. Yes, sir.
    Senator Durbin. Do the public agencies really have an 
opportunity to compete with the private-sector alternative?
    Mr. O'Keefe. Based on all the evidence I have seen, the 
answer to that is positively yes, and as a matter of fact, 
testimonial to the resilience of public institutions and public 
servants who are liberated from process rules, to go about the 
business of competing in a way they think is most efficient to 
deliver the outcome, the objective, the performance standard 
that is expected. In almost 60 percent of the occasions, the 
public entity is successful and the private offer that is made 
does not work. A lot of the experiences throughout the Defense 
Department further demonstrate that it is at least on the order 
of a 20 to 30 percent savings each time you go through that 
particular effort all by itself.
    So, if anything, the focus we have concentrated and the 
inflection in the Bush Administration now is very much towards 
competitive sourcing, with little regard for the question of 
exactly how the sector results may come from that. The other 
element that is involved here--I am a little bit reticent to 
advocate specific objectives. We will go from this point 
forward, beyond that, I think, demonstrated track record of the 
last few years that has emerged from this general policy focus, 
Dave Walker is currently chairing and heading up a commission 
that Congress has required for looking at competitive 
practices, to look at a range of different issues, of which I 
and Bobby Harnage and others are all members of, to try to come 
up with what is the most appropriate means to accomplish this 
particular task. But, again, I am very much wed to the 
propositions and objectives that are incorporated in the 
President's objectives now, of looking at competitive sourcing 
alternatives to achieve that task without particular bias 
towards what the outcome might be, as long as there is a 
performance improvement or a cost savings--hopefully both--
attendant to it.
    Senator Durbin. Let me ask you about another item that is 
often pointed to in terms of compensation and benefits for 
Federal employees, and that is the Federal Employees Health 
Benefits Program, basically our health insurance plan, which I 
hasten to add is the same program that members of Congress are 
covered by. Some people think we have something else, but we 
are under the same program, and I think it is one of the better 
ones in the country. And yet some have said, in comparing it to 
what is being done in the private sector, it is not that 
generous.
    I am told that 250,000 Federal employees currently do not 
enroll for health insurance, though they have an option to do 
so, because it appears, at least for many of them, they cannot 
afford to pay the employee share on this. I do not know if any 
people can comment, but I am looking at Mr. Walker. What are 
your thoughts? I know GAO has looked at this in the past, along 
with the Congressional Research Service.
    Mr. Walker. Obviously, everything in the world is relative. 
It depends on who you are comparing the program to. If you are 
comparing it to a major employer which has a unionized work 
force, which does not have a whole lot of competition, then in 
that circumstance you could say that maybe this program is not 
as competitive as comparing it to a small-business or to an 
employer that faces a tremendous amount of competition. I think 
we have to recognize that health benefits are very important 
benefits, but they are one element of total compensation. You 
need to look at salary. You need to look at pensions. You need 
to look at health. You need to look at vacation. You need to 
look at disability. You need to look at all these various 
areas, and I think it is important that we start doing that 
more in the Federal Government, because there is a tendency to 
look at each piece by itself, rather than looking at the 
overall package.
    I will say that, quite frankly, the concept that the 
Federal Government has, which is to offer more choice and to 
offer employees more options as to the level of the coverage 
and the provider of that coverage, quite frankly, I think, is 
probably something that is going to be a trend that you will 
see the private sector adopting with increasing frequency in 
the future.
    Senator Durbin. We can only hope so. Open enrollment once a 
year is an amazing option that people in the private sector 
never get a chance, many of them never get a chance to see. Let 
me ask you about the incentives that we use to retain and 
recruit. The statistics come back and say they are hardly ever 
used. We are talking about one-tenth of one percent of 
employees who would perhaps get efforts in the Executive Branch 
to recruit, retain, and relocate--incentives. Mr. Rossotti, how 
often do you use them in your agency?
    Mr. Rossotti. We have begun to use them more extensively as 
part of this new recruiting process for our professional 
occupations. This was something that we had the authority to 
do, especially where we were doing the so-called category 
rating. I am getting a little deeper into these personnel 
details than maybe I know, but we were able to, at least with 
revenue agents, which is a very competitive occupation, use 
this new technique, and we did set up a sort of internal set of 
standards that if we had the highest-rated person, we would be 
able to provide certain incentives, such as relocation and some 
starting bonuses. We were also able, for people that were 
already employed in the workforce, to match their current 
salary by bringing them in at a higher step. We did use these. 
I do not have the statistics in my head, but I can get them for 
you, for the record, as to how many we used.
    This is just recently, within the last few months, that we 
have done this, and I think it certainly was helpful. I will 
say, with regard to the matter of pay, the problem with having 
these kind of incentives, of course, is equity. We are bringing 
in new people, and I think it has been helpful to us, in terms 
of getting people into the professional occupations, but of 
course you have the majority of the workforce that is already 
there, and you run into a little bit of an equity problem when 
you start to bring in the new people with these special 
authorities.
    So I think it is obviously not my place to comment on the 
overall pay raise, but I would say within the kind of business 
that the IRS is in, where we have a significant number of 
people in professional occupations--I am thinking about people 
that are basically accountants, auditors, people that are 
dealing with taxpayer representatives--they do not stay just 
for the pay. It is important that they have some kind of 
reasonable progression to look forward to, not just to get them 
in at the front-end, which we are doing, but to have them stay 
in and be motivated and realize that that is successful. It 
takes a couple of years after they get in for them to really be 
productive, at least a couple years, and then they are at their 
peak period, and we really want to make sure we hang onto them, 
not just keep them for the first 2 years.
    Senator Durbin. Your comments remind me of the parable of 
the prodigal Federal employee, but that is something else we 
have read about. I literally have 1 minute to go vote, and so 
if I could ask the panel to just stand at ease until Senator 
Voinovich returns, to see if he has a follow-up question, if he 
does not, we will bring up the second panel, and I will be 
right back.
    The Subcommittee stands in recess.
    [Recess.]
    Senator Voinovich [presiding]. I suspect that you exhausted 
the Federal Employees Pay Comparability Act. But I suspect it 
probably has not been implemented because of the cost and 
perhaps because the Clinton Administration felt that the Bureau 
of Labor Statistics may not have been the best place to 
determine the basis of comparability. We have not really looked 
at the Federal Government's classification system since 1978. I 
would like your response to the point that I think both of our 
union witnesses are going to make, and that is if we did 
something about that, many of the problems we are faced with, 
in terms of retaining people and bringing them on board, would 
disappear. I would like your views on it. How do you go about 
determining an objective way of determining pay comparability?
    Mr. O'Keefe. Mr. Chairman, if I could offer, I am of a mind 
that pay compression and comparability certainly are 
contributors to the challenges we are facing, in terms of 
overall personnel recruitment and retention for the right skill 
mix and for the skill mix you need at the present time and the 
present capabilities to do so. Having said that, I think by 
comparison to some of the other factors that are extant today, 
that is but one of many different impediments or issues within 
this personnel system that exists, because the larger problem, 
I think, is captured quite nicely by the Comptroller General's 
reference to the culture transformation that is necessary.
    Right now, the focus of the system is towards a very career 
oriented objective. All the incentives, all the motivations, 
the idea is to come in at entry-level and stay until you 
retire, and all the motivations are built on that proposition. 
So the issues of comparability and compression and so forth are 
a growth from that, as opposed to what has become 
generationally represented by many of the folks sitting behind 
you, is a set of interests that is quite different from the 
kind of motivation that was designed and built around the 
personnel system that exists today within the Federal career 
force, and that is opportunities to move around to lots of 
circumstances, mobility, lateral entry, a range of incentives 
to enjoy different experiences, to try different alternatives, 
those are sorely lacking within the system.
    The movement between and among departments for entry-level, 
junior-to-mid-grade kinds of opportunities is one you really 
must aggressively push if you want to have those opportunities 
availed to you, and that has little to do with pay compression, 
little to do with comparability. It has to do with the erection 
of a series of impediments that make this particular process so 
hard to do, unless you consciously set about it.
    Senator Voinovich. If you are running General Motors or any 
other major corporation, you have people working for you at a 
salaried level. And you know very well, that you have to pay a 
competitive wage if you intend to retain good people. Isn't 
there kind of a floor that you must have in terms of pay? From 
my experience, and it goes way back when I overhauled the 
classification system when I was mayor of Cleveland--you have 
to pay your staff a competitive wage. In Cleveland, we found 
that people from the entry levels to mid levels were fairly 
competitive, but the salaries of our senior staff were not 
competitive. And then, on the other hand, after we completed 
our study, we found that some people were overpaid. In fact, 
many people remained in their salaries and positions for 3 
years because they were being overpaid.
    The point is that there were people who were way underpaid, 
and we had the self-discipline to go through the exercise. 
Don't you think it is about time we got to that in the Federal 
Government, and if we do get to it, who would do it?
    Mr. Walker. One of the things I mentioned, Senator, when 
you were voting is that I think, over time, we have to move to 
a system that is focused more on skills, knowledge and 
performance, and that ties back into classification to a 
certain extent, because I think what you have right now is you 
have a circumstance where you have some people who are 
significantly underpaid, you have some people that are 
reasonably paid, given some things the government has to offer 
that the private sector does not, and you have some people that 
are overpaid, as you found out in your red-lining positions.
    I think, at least based on my experience, I was a global 
partner with Arthur Andersen. I headed our human capital 
services practices worldwide. Typically, when you are looking 
at these issues, you want to do it with the people that are on 
the front line, actually engaging in the competition on a day-
in and day-out basis. In other words, you need to have OMB and 
OPM play some coordinating role and try to ensure a reasonable 
degree of consistency so everybody is not doing their own 
thing.
    On the other hand, the people that have to be at the 
forefront are the people who are in the war for talent, the 
people who are on the front line, trying to attract, retain and 
motivate a quality workforce. So I think part of it has to be 
is we need to have their involvement more in this process, with 
OMB and OPM maybe providing a facilitation and a coordination 
role, rather than saying it has all got to come down from above 
and one size fits all, I think, which has been one of our 
problems in the past. We have tended to look at things that 
way, and the world is just not that way.
    Senator Voinovich. But I am still getting at what does the 
new Secretary of Transportation do, for example, in terms of 
looking at the people that are there, and how does he 
determine----
    Mr. Walker. I will tell you some things that we have done 
and they can think of it as a guideline. First, we did our 
strategic plan. We looked at what we are trying to accomplish, 
how we measure success. We realigned the organization based 
upon that strategic plan, eliminated a layer of hierarchy. We 
did not fire the people. We just eliminated a layer of 
hierarchy, reduced the number of silos, had more people focused 
cross-organizationally and externally. We then ended up looking 
at our performance measurement and reward systems, to be able 
to link those to that strategic plan.
    We inventoried the skills and knowledge of the people 
within the organization. We compared that against what we think 
we need. That told us where we were long, where we were short, 
and where we had gaps. We analyzed where we were having 
increasing difficulty in attracting people and retaining 
people. We try to understand the reasons for that through 
polling existing employees, prior employees, and potential 
recruits. We took all that information and figured out what we 
thought we needed to do in order to try to address those 
problems.
    Senator Voinovich. In other words, you created a new 
classification system for the General Accounting Office.
    Mr. Walker. We already have a new classification system. 
But I think these are things you can do and you should do 
whether you have a new classification system or not, although I 
will tell you that I think over time you may find that the 
concept of broad-banding and pay-for-performance, which we 
have, is something that may well have broader application 
throughout government. But you have to make sure that you have 
the support systems to make them work. You have to have a good 
performance appraisal system. You have to know what skills and 
knowledge you are looking for. You have to have a good 
recruiting and college relations program. You have to have a 
good training and development program. As Mr. O'Keefe said 
before, these things are linked. They have to be linked with 
each other.
    Senator Voinovich. But the fact is you re-did your 
classification system. You had the flexibility. But a lot of 
these other agencies do not have such flexibility. How much 
flexibility do you have, Mr. Abell, in your operation, for 
instance, to change it around? Aren't you locked in with 
certain classifications? I know you are locked into 
classifications, because I have a nurse in the Hart Building, 
who just got her master's degree in nursing and she is a GS-11. 
She wants to get a job that is a GS-13. She cannot get a job 
that is a GS-13 because she has never been a GS-12.
    Mr. Abell. We have not been blessed with that level of 
flexibility yet.
    Senator Voinovich. Don't you think we need to look at the 
classification system?
    Mr. Abell. I think the points you make are valid, Senator, 
and I agree with Mr. O'Keefe, as well, that we have some 
flexibilities we have not used. This is not among them, as it 
turns out, but there are many factors that have to be included, 
and I will tell you that many of the things that we have 
discussed here today, the Department has explored and continues 
to explore. I am struck by the parallels between the challenges 
of managing the military force and the challenges in managing 
the civilian force, and the impact and the ability to move 
between the two, and the impact of the generational effect, as 
Mr. O'Keefe has laid out, the impact of pay gaps, if there are 
any, and how that affects, and my view is the pay gap is not as 
important as the behavior that results from that pay gap.
    So we have to watch all those things, and again back to the 
fact that people serve in government, both the military and 
civilian side, for reasons other than compensatory.
    Mr. Walker. Sir, I think you are going to need to look at 
the classification system, yes. [Laughter.]
    Senator Voinovich. OK. Charlie, I am sorry you did not get 
many of the questions today, but I would be interested in any 
further information that you have. I would like to sit down 
with you to talk about the flexibilities that other parts of 
the Defense Department have had, for example, the China Lake 
demonstration project and how that is working out.
    Senator Durbin is not back yet. Do you want to give me a 
couple minutes? Have you had a chance yet to really look at 
those flexibilities, to compare them and see whether or not 
they are working--be candid with me if you have not.
    Mr. Abell. No, I will, Senator. From the time between our 
discussions in April and today, I have tried to spin up rather 
quickly on the flexibilities that were provided by the Congress 
and what we have done to implement them, and I will tell you 
that I am fairly proud, and I got an `` 'Atta boy'' from my 
friends on Armed Services for moving forward on several 
provisions of legislative authority that were given to us in 
2000 and 2001 defense bills, because when I got to the 
Department and said, ``Where are we on this,'' we where 
essentially nowhere.
    So my experience is learning about them and trying to get 
them implemented in a way that makes sense, and as some of the 
other witnesses pointed out, when you implement these 
flexibilities you also have to do a fair amount of training at 
the manager levels, supervisors. They have to learn how to deal 
with these flexibilities. It requires sort of new skill sets 
for them. They have to exercise judgment. They have to exercise 
a certain amount of courage in some cases, in pay banding and 
pay performance and so forth. So we are, on those 
flexibilities, at the neophyte level. On the China Lake, the 
permanent authorities, I think those are ingrained in those 
laboratories and reinvention labs and S&T centers that function 
under those authorities. It has become a way of life and I 
think they are better for it.
    Senator Voinovich. They are working?
    Mr. Abell. Yes, sir.
    Senator Voinovich. Remember I talked to you about the daisy 
chain process. I would be interested to see if that has been 
changed, because that is one of the things that our people are 
still complaining about.
    Mr. Abell. Yes, sir. We are working on it.
    Senator Voinovich. Good. I have a lot of other questions, 
but our second panel has been very patient. I really appreciate 
the fact that you have been here today and again I want to 
publicly acknowledge the fact that Senator Durbin has been 
wonderful in terms of going forward with this agenda. He is on 
board and supportive, and I want to say I am grateful to him 
and I look forward to continuing to work with you on this big 
challenge we have. Thank you. We will stand in recess until 
Senator Durbin gets here.
    [Recess.]
    Senator Durbin [presiding]. I would like to introduce our 
second panel of witnesses: Bobby Harnage is the President of 
the American Federation of Government Employees, of the AFL-
CIO, 600,000 Federal and D.C. Government employees, the largest 
union for government employees, some 1,100 locals here in the 
United States and Chicago and overseas. Thanks for being here; 
Susan Shaw is the Deputy Director for Legislation with the 
National Treasury Employees Union, and she will be delivering 
the testimony of Colleen Kelly, NTEU's President, whom I 
understand had a last-minute scheduling conflict. NTEU 
represents more than 155,000 Federal employees across the 
government, including those who work for the Internal Revenue 
Service. Myra Howze Shiplett joins us from the National Academy 
of Public Administration. Director of the Center for Human 
Resources Management, she has 30 years of experience in public 
service, including managing the State Department's Civil 
Service Personnel Program. Thank you for coming. It is 
customary now to swear you in. If you would please rise and 
raise your right hand. Do you swear the testimony you are about 
to give to the Subcommittee is the truth, the whole truth, and 
nothing but the truth?
    Mr. Harnage. I do.
    Ms. Shaw. I do.
    Ms. Shiplett. I do.
    Senator Durbin. Thank you. Let the record reflect that they 
answered in the affirmative, and I will ask you to limit your 
oral statements to 5 minutes. We will put your entire written 
statement in the record. I have read several of them and am 
prepared to ask a few questions, and Mr. Harnage why don't you 
proceed first?

  TESTIMONY OF BOBBY L. HARNAGE, SR.,\1\ NATIONAL PRESIDENT, 
  AMERICAN FEDERATION OF GOVERNMENT EMPLOYEES, AFL-CIO (AFGE)

    Mr. Harnage. Thank you, Mr. Chairman, and I want to thank 
you for the opportunity to testify today on the issue of 
flexibility in the Federal personnel system. The government is 
in the midst of a serious personnel crisis that is self-
inflicted and as a result of more than a decade of downsizing, 
contracting out and failure to match either private or public 
sector standards for pay and benefits. In addition, political 
leaders have criticized and demeaned Federal employees, 
cynically feeding public misperceptions of government and the 
people who work for it.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Harnage appears in the Appendix 
on page 110.
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    Congress and the last three administrations have failed to 
invest in improvements in the government's infrastructure, 
training of its workforce, or invest in more modern tools and 
equipment. This refusal to make the necessary capital 
investment has been penny wise and pound foolish, with 
predictable results. This crisis is not only self-inflicted, it 
was planned. A good example of this planned crisis is while 
some agencies are now attempting to hire and train the next 
generation of Federal employees, their efforts are thwarted by 
the administration's orders to put an additional 425,000 jobs 
on the chopping block as they begin to comply with OMB's 
directive to convert or compete 10 percent of the FAIR Act list 
each year.
    Another example is the arbitrary number of management 
positions targeted by the administration to be eliminated. We 
continue to downsize rather than to rightsize the government. 
Management by competition or quotas is a disservice to the 
taxpayers. It drives costs up, not down. There is no proverbial 
silver bullet answer to the personnel crisis, but certainly it 
is not rational to publicly malign Federal employees or 
rational to undermine their morale, standard of living, or 
valuation by refusing to pay competitive salaries. It is not 
rational to withdraw or withhold training or deprive them of 
resources and equipment necessary to high-quality performance.
    None of these personnel practices is consistent with the 
human capital approach to personnel management. I have been 
asked whether expanding the use of flexibilities in Federal 
personnel systems will be a useful way to address the human 
capital crisis. In short, management flexibilities alone will 
not solve this problem. In fact, exercise of some of the 
flexibilities which have been proposed are more likely to 
worsen the problem. AFGE's opposition to unilateral increases 
in management's authority on flexibility is not a defense of 
inflexibility or a challenge to the rights and responsibilities 
of management. In principle, we believe that any expansion of 
Federal management authority or flexibility must be 
counterbalanced with an expansion of the rights of Federal 
employees to bargain collectively over the terms of change.
    Pay and benefits and a process for determining their level 
are written into Federal statute. Because of the statutory 
framework, Federal employees can inform their elected 
representatives on their views on the adequacy and fairness of 
these statutory items. We can lobby Congress for advantageous 
changes. We can lobby Congress to defend against harmful 
changes. If statutory protections are eliminated in order to 
make Federal compensation flexibility so change can be 
implemented unilaterally by management, the absence of 
collective bargaining rights would deprive Federal employees of 
any democratic process through which to make our voice heard.
    An expansion in collective bargaining rights would be a 
necessary component of any expansion in management rights. One 
example is DOD's effort to replace the current pay-setting 
process with a management-design process called Contribution-
based Compensation and Appraisal System, CCAS, which is a 
version of pay-banding. DOD excluded any meaningful role for 
the union and grants enormous discretion to management. 
Managers are able to make unilateral decisions regarding the 
pay of individual employees. Pay matters that under Title V are 
covered by government-wide laws and regulations which ensure at 
least some measure of consistency and fairness are, in DOD's 
CCAS system, controlled by local managers who are able to 
operate with extremely broad authority.
    The system was designed for and by management. Pay 
decisions are made by a management panel, and bargaining unit 
employees have no right to challenge them. AFGE suggests four 
broad policy changes which could help resolve the Federal 
Government's human capital crisis in a way that would help 
taxpayers and Federal employees. First, provide Federal 
employees with compensation that is comparable and competitive 
with that paid by large public and private-sector employers. 
Congress and the administration should fully implement the 
Federal Employees Pay Comparability Act of 1990 and also 
increase the government's contribution to the Federal 
Employee's Health Benefit Program from an average of 72 percent 
of premium to 80 percent.
    Second, the administration should eliminate arbitrary FTE 
ceilings and hire according to agency mission needs. The fact 
that Federal employee agencies are prohibited from hiring above 
these ceilings is a critical component of the human capital 
crisis. In view of many reports of the government losing out on 
desirable job candidates who are instead hired by employers 
able to make on-the-spot offers, many people are focusing on 
the question of how to speed up the hiring process. AFGE 
supports any attempt to speed up the hiring process, as long as 
merit principles and veteran preferences and internal 
candidates' rights are preserved.
    Third, the government should end the practice of 
contracting out all new Federal work and privatizing work 
presently being performed by dedicated public employees.
    Mr. Chairman, I have submitted my statement, my full 
statement, and I appreciate your consideration of that, and 
that concludes my oral testimony. I would be glad to answer any 
questions.
    Senator Durbin. Thanks, Mr. Harnage, and I have read your 
statement. I appreciate that much.
    Susan Shaw, if you would proceed.

TESTIMONY OF SUSAN L. SHAW,\1\ DEPUTY DIRECTOR OF LEGISLATION, 
               NATIONAL TREASURY EMPLOYEES UNION

    Ms. Shaw. Thank you, Mr. Chairman. My name is Susan Shaw. I 
am the Deputy Director of Legislation for NTEU. President 
Kelley very much regrets that she is unable to be here today. 
NTEU believes that for too long, too little attention and too 
few resources have been spent on the Federal Government and its 
employees, which is why we face the crisis we do today. 
According to the Bureau of Labor Statistics, in some parts of 
the country, the gap between private and public sector pay is 
as high as 30 percent.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Colleen M. Kelley, National 
President, National Treasury Employees Union, submitted by Ms. Shaw 
appears in the Appendix on page 128.
---------------------------------------------------------------------------
    The Federal Employees Pay Comparability Act has never been 
fully implemented, even in this time of record budget 
surpluses. For most prospective employees, the most critical 
element in deciding whether or not to accept a job is salary. 
The administration's response has been to propose only a 3.6 
percent pay raise next year. Although the House and Senate 
Budget Committees adopted bipartisan language as part of the 
fiscal year 2002 budget resolution, making clear that Federal 
employees should receive identical pay raises to their military 
counterparts next year, at least 4.6 percent, the 
administration continues to press for only a 3.6 percent raise. 
This is not reflective of an administration that takes the 
human capital crisis seriously.
    NTEU believes that a decision to fully implement FEPCA 
would do more to address recruitment and retention in the 
Federal Government than all of the other incentive programs the 
government has, combined. Acquiring and retaining employees 
with the best skills is a particular challenge for the Federal 
Government. Agencies are so often hamstrung by inadequate 
funding levels and forced to shuffle resources between 
competing priorities, that they are never able to adequately 
fund the range of programs they need to become an employer of 
choice. This is a situation agencies face for fiscal year 2002.
    Discretionary funding levels in the budget resolution are 
not adequate to meet current needs, never mind the challenges 
of 2002. Federal agencies currently have a wealth of 
flexibilities available to them. There are programs for 
retention allowances, bonuses, performance awards, student loan 
repayment incentives, even bilingual awards. However, according 
to OPM, less than one-quarter of one percent of the Federal 
workforce received any form of recruitment, retention or 
relocation incentive in fiscal year 1998. Why? Because agencies 
are not being given the resources to fund the very programs 
that might help them solve their human capital crisis.
    Adequate and stable agency funding, coupled with 
appropriate pay, benefits and incentives, are the keys to 
ensuring that the Federal Government is able to attract, hire 
and keep the best employees. There is a Federal pay law on the 
books, but it is not funded. There are flexibilities and 
demonstration project authority and a virtual laundry list of 
programs available to Federal agencies, but they, too, are not 
funded. The problem is not a lack of options, it is a lack of 
resources.
    Mr. Chairman, I also want to take this opportunity to thank 
you for your leadership in introducing S. 1152. More dollars 
are doled out to contractors each year than are spent on the 
Federal workforce, yet there is little or no oversight of these 
contracts once they are awarded. No one knows if any real cost 
savings have been achieved or services have been improved. What 
we do know, however, is that contracting out quotas, such as 
the 5 percent and 10 percent quotas for 2002 and 2003 that OMB 
recently issued send an unmistakable message to Federal 
employees that they are not valued.
    We cannot continue to arbitrarily award contracts to 
private companies while simultaneously letting our Federal 
employees walk out the door. S. 1152 will bring a measure of 
accountability to this process. With regard to personnel 
flexibilities in the IRS Restructuring and Reform Act, one of 
the major disincentives, as this Subcommittee heard today, is 
Section 1203. The mandatory firing provision has had a chilling 
effect on collections and morale. No other employee in the 
Executive, Judicial or Legislative branch, not to mention any 
other taxpayer, must be fired for filing a tax return 1 day 
late.
    We are working closely with the IRS to try to make these 
penalties less than mandatory termination and look forward to 
working with the Subcommittee on this matter. As you also know, 
the IRS is preparing to implement a pay band for its senior 
managers, allowing greater flexibility when setting salaries. 
However, it, too, will require additional resources to work. 
Pay-for-performance has also been suggested as a step towards 
improving the Federal workplace. NTEU is not opposed to pay-
for-performance or pay-banding. However, we believe that they 
must be accomplished in the context of collective bargaining.
    Current performance evaluations are widely viewed by our 
members as subjective, susceptible to favoritism, and in some 
cases discriminatory. By collectively bargaining the design and 
implementation of a new system, we believe employees will have 
faith in the process. Here again, though, additional resources 
are going to be required to make such a system work. Finally, I 
want to note that Mr. Walker commented that the FEHB program is 
perhaps not as competitive if you compare it to programs 
offered by major unionized employers. That is precisely what we 
believe the Federal Government is, and I think that we need to 
do a better job with the FEHB program as well.
    Senator Durbin. Thank you, Ms. Shaw. Ms. Shiplett.

TESTIMONY OF MYRA HOWZE SHIPLETT,\1\ DIRECTOR, CENTER FOR HUMAN 
RESOURCES MANAGEMENT, NATIONAL ACADEMY OF PUBLIC ADMINISTRATION

    Ms. Shiplett. Thank you. Thank you, Mr. Chairman and 
Senator Voinovich. The National Academy of Public 
Administration appreciates the opportunity to share its views 
with you, and we certainly applaud the efforts of the 
Subcommittee to look at additional flexibilities. There are, as 
you know, approximately 100 Federal agencies that carry out a 
wide variety of missions and responsibilities, and yet despite 
this diversity, they are all required to live under the same 
personnel system that was developed on 19th-century principles, 
and essentially has the notion that one size fits all.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Shiplett appears in the Appendix 
on page 137.
---------------------------------------------------------------------------
    In this area of dramatic change, this very standardized 
approach is detrimental to the government's ability to recruit 
and retain an effective workforce. Work is changing rapidly. 
Organizations need to be able to change rapidly, also, and that 
requires additional system flexibility. There are three 
concepts which have been tested for a number of years in 
several different agencies that we suggest for the 
Subcommittee's consideration. The first of those is broad-
banding. This technique was approved in 1980 for use in the 
Navy's China Lake and San Diego weapons laboratories. It 
involves grouping Federal pay grades into several pay bands and 
permitting greater flexibility in setting pay and making 
promotion decisions and reassignments within the broader pay 
ban.
    The Office of Personnel Management has monitored this 
demonstration project very closely for the last 20 years, and 
reports consistently that the laboratories are able to recruit 
and retain quality employees at higher rates than a traditional 
system allows.
    Since cost is always an issue in these matters, it is 
useful to note that the overall salary costs for the China Lake 
demonstration project have increased only 3 percent over what 
would be in the traditional system, over this 20-year period. 
We suggest that broad-banding be made available to those 
agencies who see a value in its use, not that it be mandated 
for government-wide applications. The second flexibility we 
would suggest for your consideration is performance-based 
reduction-in-force procedures.
    Earlier this year, the academy was asked to review the 
reduction-in-force system at China Lake. We were particularly 
interested in their approach to structuring the RIF competitive 
levels, since the paramount criterion in determining retention 
credit in their system was performance, rather than tenure. The 
installations conducted two reductions in force simultaneously, 
one for their employees in the demonstration system and one 
where the employees were in the traditional system. The RIFs 
conducted were conducted at the same time, by the same 
management team, in the same facilities, using the same 
management controls, and both of the systems used a five-level 
performance rating system.
    In the traditional system, of those terminated, 65 percent 
had been rated either outstanding or highly successful for 
their performance. In the demonstration system, only 14 percent 
of those rated outstanding or highly satisfactory were, in 
fact, terminated. If our goal is to recruit and to retain 
highly-qualified employees in the Federal service, broad-
banding and performance-based reduction-in-force systems lend 
themselves strongly, we believe, to your consideration.
    The third flexibility we would suggest is that of quality 
categories to replace the rule of three. The academy and the 
Merit Systems Protection Board have recommended that the rule 
of three be eliminated. In 1990, Congress authorized a 
demonstration project for the Department of Agriculture's 
Forest Service and the Agricultural Research Service. Rather 
than requiring job applicants to be listed by absolute score 
and selections made from the top three, which is a process that 
we have seen in our research is time-consuming, litigious, and 
creating a false sense of precision, these agencies were 
permitted to place candidates in one of several quality 
categories--for example, highly-qualified, qualified, or 
unqualified.
    Selecting officials could then make their selections from 
the top group or from the second group, if there were not 
sufficient numbers in the top-rated group. Veterans placed in 
one of the categories are put at the top of that category and 
are the first selected. This project was so successful in the 
Department of Agriculture that in 1995, Congress approved this 
approach for the entire Department. The National Academy of 
Public Administration believes that these three flexibilities 
have been extensively tested and have proven to be successful. 
They should be made available as alternatives under the overall 
structure of Title V for all Federal agencies. Enacting these 
flexibilities would in no way alter fundamental merit 
principles.
    Thank you, Mr. Chairman and Senator Voinovich. We 
appreciate the opportunity.
    Senator Durbin. Thank you for your testimony. Mr. Harnage 
and Ms. Shaw, if a labor organization is going to succeed, it 
has to represent the wishes of its members, and when we talk 
about issues of retention, when your members suggest to you 
what they would like to see in their work arrangement with the 
Federal Government, what is their highest priority? Mr. 
Harnage.
    Mr. Harnage. Right now, I think their highest priority--it 
is hard to distinguish between compensation and the job 
security, but I think right now the job security--they see this 
issue of driving privatization regardless of cost, jeopardizing 
them even having a job, regardless of what the pay is. So I 
would say that is their highest priority.
    Senator Durbin. Ms. Shaw.
    Ms. Shaw. I would agree with Mr. Harnage and just add for 
the employees we represent at IRS, Section 1203 and fixing that 
section of the law is right up at the top, too.
    Senator Durbin. So you heard the testimony earlier from Mr. 
Walker and others--Mr. O'Keefe, I think it was--relative to 
outsourcing, contracting out, and privatizing. The suggestion 
was that it was truly a competition between the public agency 
and the private sector. The competition led to more 
productivity. In 60 percent of the cases, I believe he 
testified--still stayed with the government and did not end up 
being outsourced. Could you tell me your experience and the 
experience of your employees on this outsourcing approach and 
what their reaction has been?
    Mr. Harnage. Well, first we need to understand that the 
competition is for Federal jobs and the competition that he is 
talking about is only 2 percent of all the privatization that 
takes place in the Federal Government. There is an indication 
that there is a projected 20-percent savings with the 
competition, and that is one of the reasons this union has not 
faulted competition. We embrace competition, fair competition, 
but the problem is the competition is one-sided.
    New work for Federal Government is--Federal employees are 
not allowed to compete for that, even though it could be done 
in-house more economically, more efficiently, more effectively, 
no consideration. It is automatically privatized.
    Senator Durbin. Excuse me. Can you give me an example of 
that? Can you think of one where so-called new work was not--
the Federal agency did not have the chance to compete for it?
    Mr. Harnage. I cannot think of an example right now. It is 
not a matter of not having a chance. They are not allowed. It 
is just not done. The same way with once it is privatized, 
there are only very rare occasions where it is looked at 
bringing it back in-house, even though it is more economical, 
more effective. The only examples that are available of 
bringing it back in-house is where the contractor defaulted and 
there was not anybody to replace them, rather than competing it 
to make sure there was that savings.
    The part that bothers me the most about what seems to be 
driving what we are doing is--my position is--it is referred to 
as the most efficient organization, the MEO, and that is our 
everyday job. We ought to be at the MEO right now, but we are 
allowing----
    Senator Durbin. Could you say what MEO is, for the record?
    Mr. Harnage. Most efficient organization.
    Senator Durbin. Thank you.
    Mr. Harnage. We are allowing that inefficiency to continue 
until we put everybody's jobs in jeopardy by saying we are 
going to compete it. We ought to be holding these people 
accountable for having the MEO every day, not just for 
competition purposes. But that figure that was given to you 
today has gone from 10 percent to 60 percent. We have gotten 
better at it. That figure of 20 percent is going to go down, 
simply because we are getting more efficient, more effective 
every day. So that 20 percent is not going to hold true 
forever, and that has to be taken into consideration.
    But the biggest problem that we have is that most of these 
are projections and nobody is looking behind to see if they 
were actually realized, and that is the reason we strongly 
support the act, and Mr. Chairman, I appreciate not only you 
are a co-sponsor of it, but also your support for it.
    Senator Durbin. May I ask Ms. Shaw, if I can, on this 
Section 1203, when I read the 10 deadly sins that results in 
termination for employees from their union, who work for the 
IRS, as I said to Senator Voinovich, some of these are 
outrageous. No one would want to defend them if you could prove 
that a person had done them. The two that struck me as 
arbitrary--one you have already mentioned, and that was failure 
to file an income tax return in a timely fashion. I believe 
there is some additional language there, as well. The second 
was so open-ended, this harassment question. I would imagine, 
as Mr. Rossotti testified, it almost becomes an automatic 
motion filed by the attorney for someone being audited.
    When you look at it, are those the two that stand out as 
being particularly onerous from the employees' point of view?
    Ms. Shaw. Yes. In general, I would say yes. The problem 
with the harassment statute, as you have already pointed out, 
is that it is so broad. There have been 1,300 charges filed to 
date; seven of them have been found to have merit. But the year 
it takes to get from, as I think the commissioner said, OK, now 
you are on death row, and eventually you had been reprieved, 
you can imagine not a lot gets done. Certainly you are not 
going to want to take on any case that you are going to have to 
put yourself in a position of having even more problems of this 
nature.
    Of the 10 deadly sins, there are others that--they are not 
black and white. There are gray areas in there, and that is why 
one of the provisions we have worked with the IRS on--and I 
believe the commissioner referred to the language they 
submitted to the Finance and Ways and Means Committee--would 
allow the IRS more discretion, in general. It would not have to 
be mandatory termination. They would have an opportunity to 
look into the situation first, which seems reasonable to us.
    Senator Durbin. Ms. Shiplett, one of the observations from 
Ms. Shaw about the banding approach, which I think creates more 
flexibility for compensation, is the funding question. If the 
funds are not there to finance this banding approach, then it 
really does not offer too much. What has been your observation 
in terms of the actual funding of that type of program?
    Ms. Shiplett. She is absolutely correct. It is important to 
have sufficient funding, so that reasonable decisions can be 
made.
    Senator Durbin. And, in the instance that you cited in your 
testimony, I take it that the funding was there?
    Ms. Shiplett. Right.
    Senator Durbin. Fine. Senator Voinovich.
    Senator Voinovich. You heard the comments of the other 
witnesses, in terms of the Federal Employees Pay Comparability 
Act. From looking at your testimony, you believe that pay 
comparability is fundamental to any kind of a new system in 
terms of attracting and keeping people. The issue here is that 
this law, which was enacted in 1990 has not been implemented, 
and as they mentioned, it is probably because of the fact that 
previous administrations determined that they did not have the 
money to implement it. And then there was some question about 
whether or not the Bureau of Labor Statistics was the correct 
place to determine how severe the pay gap was with the private 
sector.
    If we were going to go forward with this law and create 
this kind of an underpinning for the whole Federal pay system, 
what would be your advice in terms of how you would go about 
getting data that people could agree to, assuming Congress 
would come up with the money that is necessary to implement it?
    Mr. Harnage. Senator, the problem is not that we cannot 
agree. The problem is that we make no effort to agree. NTEU and 
AFGE in 1997 asked the past administration to sit down and 
let's talk about fixing FEPCA. If you have a problem with it, 
let's look for the fix. But we did not see a problem with it, 
except the implementation side of it. But we have not had those 
meetings yet. Each year, we talked about the next year's pay 
increase.
    Senator Voinovich. Who are you meeting with?
    Mr. Harnage. We were meeting with OPM, OMB, and a 
representative of the White House in these discussions, trying 
to--we cannot agree on the gap. We say it is 30. You say it is 
less. Let's sit down and figure out what it is. You think it is 
12? Fine, you win. Pay me. So I think nobody wanted to talk 
about it, simply because they did not want that last result. 
Once they reached an agreement, then they have no defense but 
to pay it. Where we have these enormous surpluses, there is 
little justification for there to be any gaps in the Federal 
pay.
    I recognize, as I believe Comptroller Walker said, that 
there are people that are overpaid and there are a lot of 
people underpaid, but that is fewer than it was simply because 
we have continued not to close that gap, and that is part of 
what locality pay was for, was to help reduce that to where 
nobody was overpaid and nobody was underpaid, but the locality 
pay has been extremely limited, and there was a question asked 
earlier about was Congress responsible--yes, to some degree, 
but I do not totally blame it all on them, either, because the 
administration set the mark by submitting their numbers, and 
thank you very much, every year you have exceeded that.
    So we managed that the gap not get any bigger in the last 4 
years, but we have not done anything about closing it.
    Senator Voinovich. What were your suggestions on how to 
resolve this difference?
    Mr. Harnage. We never got that far. We offered to sit down 
and do that, but we never had those meetings. The meetings that 
we had each year was simply to talk about what the next year's 
pay would be, not about FEPCA.
    Senator Voinovich. We have heard some testimony that people 
do not come to work for the Federal Government because they 
want to get rich, but because they want to contribute. I always 
felt people come to work for the Federal Government because it 
is a way to support their family and make a contribution to 
society. But there is a certain base salary that needs to be 
paid to individuals so that they can support themselves, and 
when you pay them less than that, I think you basically tell 
them that you do not think very much of the job you are asking 
them to do.
    I would really appreciate it if you would send me a one-
pager on the negotiations that you have had, and see if we can 
start talking once again about how to deal with this problem. I 
want to clear up one thing, Mr. Harnage, in your testimony. You 
said, ``AFGE believes that the idea is based upon a zero sum 
model of Federal pay, taking away from one person or group in 
order to fund an increase for another is bound to exacerbate 
the human capital crisis, not improve it. In this category, 
AFGE would place ideas such as contingent pay, payment of one-
time bonuses, incentive pay, and merit pay.''
    I interpret that to mean that you are not opposed to these 
things, but that they should be available only after you pay a 
sufficient base. Maybe you want to clarify that for me.
    Mr. Harnage. That is correct. There need to be two things. 
One is that it ought to be additional money. In the past, some 
of the reasons the agencies did not implement or use the 
flexibilities that they had was because they had to use current 
money. In other words, if I give four employees a retention 
bonus, I have got to do away with one of them, because it is 
coming out of salary money. So there was a disincentive to use 
those flexibilities, because it was an additional money. It 
needs to be a pool of money that is additional money than what 
it takes to close the gap.
    The second ingredient is the employees themselves are to 
have a voice in that process. They should not be left out, and 
that was our problem with DOD. We met in 1998 with DOD for 
about 6 months on five working groups, trying to work out a lot 
of the personnel flexibilities that we are talking about today. 
But where that ran into a roadblock was once DOD realized that 
we were talking about we will give you flexibilities, but there 
have got to be checks and balances down at the work site, that 
the employees have an opportunity or their representatives have 
an opportunity for input into that. That is when they threw up 
their hands and said, ``We don't want any part of that.'' So 
now they are piecemealing all those things we discussed in 
those 6 months a little bit at a time each year, which is a lot 
less productive than what it would have been if we went ahead 
and reached an agreement.
    Senator Voinovich. I would like to change the subject to a 
degree to the issue of privatizing. I just wonder, has NAPA had 
a chance to look at that issue? I know Paul Light has some 
written work about the government's shadow workforce. You have 
not looked at that?
    Ms. Shiplett. No.
    Senator Voinovich. The impression that I get is that, when 
new work comes along, rather than give the union an opportunity 
to compete for it, agencies just farm it out automatically, 
without any consideration?
    Ms. Shaw. It is my understanding that, yes, under the 
current rules, there is an opportunity to do just that. Under 
the administration's new directive, they have issued a 5 
percent directive for 2002, that agencies contract out 5 
percent of their workforce, 10 percent in 2003. Aside from the 
obvious concerns we have about that, the agencies do not 
necessarily have the people in place to handle these 
competitions. So if they are going to be forced to meet an 
arbitrary number of jobs to contract out, we are concerned that 
they are going to be forced into a situation of not even doing 
a competition, simply because they will not have the manpower 
to do it.
    Senator Voinovich. They are talking about farming out 5 
percent of the current workforce; correct?
    Ms. Shaw. Yes.
    Senator Voinovich. That 5 percent would compete with the 
private sector, and then the agency would decide whether they 
are going to outsource the work or not?
    Ms. Shaw. The way it is stated is that they will be 
competed, 5 percent of the jobs will be competed. But for some 
agencies that do not have contracting staff, as many of them do 
not, as evidenced by the lack of oversight over current 
contracts, what is going to happen to those agencies when they 
bump up against the October 1 deadline that they have got to 
have these jobs contracted out? Are they simply going to 
contract them out?
    Senator Voinovich. One of the things that I would be 
interested in--and it may be in the Light study on the shadow 
workforce--is whether you have any statistics on the amount of 
privatization that has already occurred. It has been my 
impression from doing some reading that it has been enormous, 
and that by downsizing the actual number of Federal employees 
it looks as if the Federal Government is smaller. But if you 
look at the number of outside contractors that have been hired, 
in effect, the actual size has not changed very much, except 
that people are no longer working for the Federal Government. 
They are working for the private sector.
    I am not even sure that they really understand. But it has 
been enormous, I think, and the issue is that, if you farm out 
that work, do you have the people inside the departments to 
make sure that you are not getting ripped off?
    Ms. Shaw. That is exactly our concern, and I would be happy 
to send you some material.
    Mr. Harnage. Senator, it is enormous, and that is one of 
the items in the TRAC Act. Nobody really knows how much it is, 
but we know it is somewhere about four times of what the 
civilian workforce is. Nobody knows exactly what it costs, and 
although we talk about these savings that are supposed to take 
place, nobody can really prove they took place because nobody 
is looking back to ensure that this did, in fact, happen. That 
is one of our main problems, but also these quotas are driving 
a lot of it.
    Make sure you get what is being said by NTEU. The 
instructions by OMB are to convert or compete 5 percent, and 
she is saying that the agencies do not have the time, the 
money, the expertise. So come October 1, they are going to 
simply convert them--that is without competition--in order to 
get the job done. The other thing is these manpower ceilings, 
the FTEs, controls, although everybody says they do not manage 
by FTEs, in private, they will admit they do, in a lot of cases 
the agencies do not have the manpower to do the job any more 
and they have no option but to privatize it, regardless of 
cost, and that is not to the benefit of the taxpayers.
    So one of the things we are saying is part of the human 
capital crisis is brought about by these quotas that are 
arbitrarily plucked out of the air and implemented for the sole 
purpose of driving the privatization, not saving the taxpayer 
money.
    Senator Durbin. Senator Voinovich, I might just follow-up 
from information that was printed in the Washington Post on 
June 8, in an article written by Ellen Nakashima. She said that 
the Bush Administration has ordered more than 40,000 Federal 
workers to compete for their jobs with the private sector, a 
first step toward the President's goal of making about 425,000 
government jobs eligible for private contracting. The current 
civilian Federal workforce is approximately 1.8 million. So 
that would suggest about 25 percent, if my calculations are 
correct, not quite 25 percent would be outsourced, of the 
current Federal workforce.
    The best estimate that they can provide in this article 
related to your question comes from the Brookings study by Mr. 
Light in 1999, where he estimated 5.6 million contract 
employees working for the Federal Government in various 
capacities, which is a little more than three times the size of 
the civilian workforce of the Federal Government. It strikes me 
as difficult to attract people to the Federal workforce when 
you are telling them that over the next few years, one out of 
four jobs will disappear into the private sector. That does not 
give you one of the elements that you raised, Mr. Harnage, the 
job security issue, any attention at all.
    I think what I am going to do, and I do not know if Senator 
Voinovich wants to join me, is to ask the GAO to give us a 
study on this shadow workforce. I would like to know if we can 
get a more updated number on the total involved in it, and I 
would like to have a profile of several things: What are they 
paid? What kind of benefits do they receive? Then, if there is 
any way to measure their performance, my impression was that 
some of my colleagues, at least in the House, were just 
hidebound to privatize and outsource, regardless of cost, 
regardless of performance. Their idea was to reduce the size of 
the Federal workforce, the civilian Federal workforce, at any 
cost.
    When I suggested amendments, arguing that we had to save 
money in the process, they rejected them. They said that is not 
the point; we are not here to save money; we are here to turn 
out some lights in some Federal buildings. I hope that is not 
what is still driving the outsourcing fervor, and we are going 
to ask the GAO to help us prepare some information for that.
    I do not have any further questions. Senator Voinovich, do 
you?
    Senator Voinovich. No, but I would be more than happy to 
join you on that request. I would like to find out more about 
the size of the shadow workforce. I would like to know in what 
capacity they serve and what kind of a job they are doing, 
because obviously the budgets are not going down.
    Senator Durbin. No, they are not.
    Senator Voinovich. I think that, from my experience, it 
hurts the esprit de corps of the workforce for this kind of 
thing to happen, and I have been personally involved in 
reversing that process. At the State level, if something new 
came along, the unions were able to compete for it. Then there 
were some areas, quite frankly, that we found we were not doing 
as well as we should. I went to the unions and said, ``Look, 
here is the deal, security people and some others, you could be 
doing better,'' then we genuinely put it out for competition, 
and there was a real, honest-to-goodness, objective evaluation. 
Sometimes the unions won and sometimes they lost. But it was 
not arbitrary or automatic. And so I think that a GAO report 
would be a great way of getting a real sense of this at the 
Federal level.
    Senator Durbin. I would like to invite the three panelists, 
if they would like, to suggest to us questions that the GAO 
might look into in reference to this workforce. If, in the next 
few days, you can contact the staff of the Subcommittee and 
give us some ideas that you think are legitimate inquiries that 
we can include in this request to the GAO, that would be 
helpful. I thank you for your testimony.
    Senator Voinovich. Could I just ask one last question?
    Senator Durbin. Of course.
    Senator Voinovich. Ms. Shiplett, you are really strong 
about your three recommendation, and Mr. Harnage, you heard 
NAPA's recommendations. What is your reaction?
    Mr. Harnage. My reaction is to be very cautious about it. I 
would be glad to get with them and talk about what their 
experiences are and compare it with ours, and see if we can 
come up with a consensus.
    Senator Voinovich. We are interested in looking at some of 
these innovations, in terms of short-term and long-term 
legislation and so forth. You seem to be really sold on this, 
and I would like to know a bit more. I think you said that 
broad-banding ought not to be federalized, but that agencies 
should be given the opportunity to ask for that flexibility; is 
that what you are saying?
    Ms. Shiplett. Right, but we would say that for all three of 
the flexibilities. It is our belief that Federal agencies' 
missions and strategic objectives and needs are sufficiently 
different that we ought not to be mandating any of these in 
saying every Federal agency must use them, but saying instead 
that Federal agencies ought to have them as an option if they 
believe their particular set of circumstances requires it.
    If I could add just one more thing, and I believe it echoes 
some of the comments that were made, not only in this panel, 
but in the earlier panel; whatever changes are made, one of the 
things that is really essentially is to make an investment in 
seeing that the managers and the supervisors have the skills to 
exercise these authorities appropriately, and that employees 
are knowledgeable enough that they understand what the changes 
are, and have the opportunity to learn about them well before 
they are actually applied.
    Senator Voinovich. Thank you. Mr. Chairman, I have no other 
questions.
    Senator Durbin. Let me just ask you this for the record, 
Ms. Shiplett. I was just speaking to Ms. Upton on my staff. You 
are congressionally chartered?
    Ms. Shiplett. Yes, sir.
    Senator Durbin. But you are not congressionally funded?
    Ms. Shiplett. That is also correct. We are funded through 
the contracts that we have with Federal agencies or our various 
consortiums.
    Senator Durbin. I am going to invite all of the panel that 
are interested to give us some ideas about this investigation 
by the GAO, and I thank you all for your testimony. We may have 
some other follow-up questions, but I appreciate your patience 
and thank you for being here today.
    With that, this hearing stands adjourned.
    [Whereupon, at 5 p.m., the Subcommittee was adjourned.]
                            A P P E N D I X

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