With the agreement between Congress and the administration to balance the federal budget and the widespread demands by the American people for a less costly government, agencies are being challenged as never before to ensure that their operations are as efficient as possible. Efforts by Congress and the administration are leading or have led to a broader focus on results, significant reductions in the size of the federal workforce, simplified administrative and management procedures, and additional mechanisms to improve efficiency. Within this context, interest has grown over the last several years in using contracting out as one of the central tools available to agencies to reduce costs in a balanced budget environment. have relied from the start on contracting out much of their work rather than performing it directly. Contractors also have almost completely replaced federal employees in some functions, such as cleaning services, travel management, and most recently personnel security investigations. As an indication of the degree to which the federal government uses the private sector, total civilian personnel costs for fiscal year 1997 were about $113 billion, as compared with about $110 billion that federal agencies spent on commercial service contracts. The issue of whether to contract out federal functions has always been challenging. In an effort to help agencies make better decisions in this regard, OMB issued Circular A-76 in 1966 and updated it several times, most recently in 1983. A-76 provides federal policy for the government’s performance of commercial activities. OMB issued a supplemental handbook to the circular in 1979 that included detailed procedures for competitively determining whether commercial activities should be performed in-house; by another federal agency, through an interservice support agreement; or by the private sector. OMB updated this handbook in 1983 and again in March 1996. This latest revision was intended to streamline the cost comparison process and reduce the A-76 administrative burden and thereby ease the use of A-76 within the executive branch. According to OMB, the purpose of A-76 is not to convert work to or from in-house, contract, or interservice support agreement performance. Thus, a senior OMB official stressed, OMB does not view its role as requiring agencies to undertake A-76 cost comparisons. Rather, OMB encourages agencies to understand and use A-76 as one of a series of tools federal managers can employ to make sound business decisions and to enhance federal performance through competition and choice. procedures for the most efficient and effective in-house performance of the commercial activity, referred to as the Most Efficient Organization or MEO; and (3) accepting formal bids and conducting a cost comparison between the private sector and the government’s Most Efficient Organization in order to make a decision on whether an activity will be performed by the government or the private sector. Agencies’ experiences with A-76 suggest that competition is a key to realizing savings, whether functions are eventually performed by private sector sources or remain in-house. We have found that savings achieved through the A-76 competitive process were largely personnel savings, the result of closely examining the work to be done and reengineering the activities in order to perform them with fewer personnel, whether in-house or by contractor. OMB has reported that savings from reviewing an agency’s operations and making changes to implement the Most Efficient Organization have averaged 20 percent from original costs. We have noted in past work that such reported savings must be viewed with caution because statements about savings have often been heavily premised on initial estimates that were not later updated to reflect actual amounts. However, there appears to be a clear consensus, which we share, that savings are possible when agencies undertake a disciplined approach, such as that called for under A-76, to review their operations and implement the changes to become more efficient themselves or contract with the private sector for services. In fact, in DOD’s case, about half of the competitions were won by federal employees. revision to the A-76 Supplemental Handbook would make A-76 a more attractive vehicle for agencies to use, no significant increase in efforts under A-76 among civilian agencies are readily evident. As shown in table 1, for fiscal year 1997, DOD was the only federal agency that reported to OMB that it had completed any A-76 studies of federal positions. For the future, DOD projected that it can save about $6 billion by 2003 and $2.5 billion each year thereafter by subjecting more of its business and support activities to competition using the A-76 process. Currently, DOD plans to subject over 220,000 positions to the A-76 process. DOD has not fully achieved estimated savings in the past, and we question DOD’s ability to achieve all estimated savings in the future. However, if DOD is able to complete its ambitious A-76 plans, significant savings are likely. then, A-76 efforts at Commerce and Interior have dwindled along with those at other federal agencies. The Department of Commerce has not done a complete update of its inventory of commercial activities since 1983 and recently completed what had been its only ongoing study. That study covered the operation and support of a National Oceanic and Atmospheric Administration (NOAA) ship. NOAA officials told us that the study was done because of pressure from Congress, OMB, and the Department’s Inspector General to explore alternatives to an agency-designed, -owned, and -operated fleet for acquiring marine data. However, the study did not result in any commercial offers in response to NOAA’s solicitation. In addition, the study took almost 19 months and required nearly 10 staff years to complete. It would have required even more resources if NOAA had received offers to perform the work. The Department of the Interior has a current inventory which it updates periodically, and has identified over 5,000 FTEs as devoted to commercial activities. These activities include such functions as administrative support services and automated data processing-related services. The Department reports that although it has not conducted many formal A-76 studies in recent years, it has undertaken a number of A-76 cost comparisons of its aircraft services, including examinations of aircraft maintenance and decisions on whether to lease or purchase aircraft. However, most of these studies did not involve any federal positions, and therefore are not reflected in OMB’s governmentwide data on FTEs studied. Officials at the Departments of Commerce and the Interior provided similar explanations for the limited effort under A-76. They said that they perceived that the priorities in management reform initiatives had changed and that greater emphasis was being given to implementation of more fundamental, mission-based initiatives arising from the National Partnership for Reinventing Government, formerly know as the National Performance Review (NPR) and the Government Performance and Results Act (the Results Act), among others. According to the officials, these shifting management priorities, along with the significant time and money needed to do the studies under A-76 and the need for sufficient staff with the necessary technical skills, have all contributed to reduce A-76 efforts. studies. This supplement was issued subsequent to the expiration of several legislative provisions that temporarily limited agencies’ A-76 efforts, particularly those of DOD. OMB’s revision of the supplement had the potential to re-focus attention on A-76. However, since issuing the revision, OMB has not consistently worked with agencies to ensure that the provisions of A-76 are being effectively implemented. For example, OMB made only limited efforts to gather and use the commercial activities inventories that agencies are to develop under A-76. In June 1996, OMB requested that agencies submit not later than September 13, 1996, a summary of their updated inventory of commercial activities as required by A-76. According to OMB, it did not receive inventories from all agencies, and of those that it did receive, many were based largely on previous inventory efforts. In June 1997, after not receiving responses from several agencies, OMB followed up with another request for the commercial inventory information. Several months later, in April 1998, we found that 6 of the 24 largest agencies still had not complied with OMB’s initial and follow-up requests to provide updated commercial activities inventories. OMB also has not systematically reviewed the inventories of commercial activities that it did receive to determine whether agencies are missing opportunities to generate savings. OMB generally has not attempted to determine whether agencies have inappropriately omitted some commercial activities. OMB also does not compare commercial activities among agencies to identify inconsistent application of A-76 guidance across the federal government. As a result, some agencies may not be identifying commercial activities that are similar to those included in other agencies’ commercial activities inventories, thereby missing opportunities to use the A-76 process to achieve cost savings. these paragraphs instruct agencies that their savings estimates should reflect the probable results generated by cost comparisons or conversions. OMB officials stated that they rely primarily on program examiners in the OMB Resource Management Offices (RMO) to review agencies’ A-76 efforts in conjunction with the budget review and approval process. In 1996, the OMB Deputy Director for Management asked the RMOs to examine competition initiatives, such as A-76, as part of their continuing program management and budget reviews. The Deputy Director highlighted agencies’ strategic plans and streamlining plans as being especially appropriate vehicles for examining agencies’ efforts to compete their support service requirements. However, since then, OMB has not provided its program examiners with more recent written requirements or guidance on the need to review agencies’ A-76 efforts. OMB officials said that, despite the lack of current guidance, some review has been done on an ad hoc basis in conjunction with budget reviews. According to these officials, examiners were given copies of agencies’ commercial activities inventories where they existed and were instructed to keep in mind all reinvention efforts, including A-76, as they reviewed agency budget requests. However, given the absence of inventory information for several of the largest federal agencies and the absence of ongoing studies in virtually all agencies other than DOD, the effect of examiners’ efforts, if any, is questionable. and functions, these inventories can be valuable not only for A-76 purposes, but also for identifying other reinvention opportunities. This plan for renewed OMB commitment, if effectively implemented, is an important and noteworthy development that could lay the groundwork for a reinvigorated A-76 program. Given OMB’s past experience with requesting and using inventories of commercial activities from agencies, it is clear that sustained OMB commitment and follow-through will be vital to the success of the effort. We plan to continue to monitor OMB’s and the agencies’ efforts in this area. Over the last couple of years, there has been interest in Congress in establishing a statutory basis for A-76 and for making other changes intended to expand the degree to which agencies compete their commercial activities. We have been pleased that Congress has turned to us for assistance as it has considered various legislative proposals.Irrespective of any decisions that Congress may make about the A-76 program, our work suggests that several elements are needed for a successful A-76 effort across federal agencies. Today, I will highlight four elements that I believe merit special attention. The sustained commitment of agency and administration leadership is a necessary element to ensure the success of any management improvement effort, including A-76. As the current level of activity suggests, consistent and forceful leadership from OMB may be needed to create incentives for agencies’ managers to subject themselves to the rigors of the A-76 process. By comparison with the rest of the federal government, DOD has maintained much larger levels of activity because it has incentives to generate savings through A-76 to fund its modernization efforts. goals the agency will pursue and the strategies the agency will use to achieve those goals. The first of these strategic plans were provided to Congress last fall. Each agency is then to develop annual performance plans that identify the agency’s annual goals and strategies and the resources that will be used to achieve those yearly goals. The first of these plans, to cover fiscal year 1999, were submitted to Congress this spring. An agency’s efforts on its annual performance plans provides the opportunity to consider A-76 within the broader context of what the agency is trying to achieve and how best to achieve it. At the request of congressional leaders and to assist Congress in using annual performance plans for making decisions, we issued a guide in February 1998 for Congress to use in assessing annual performance plans. In that guide, we noted that Congress could examine the plans from the standpoint of whether they show evidence that various approaches, such as establishing partnerships with other organizations and contracting, were considered in determining how best to deliver products and services. More directly, the annual performance plans can provide a ready-made, annual vehicle for Congress to use to inquire about agencies’ efforts to ensure that the most cost-effective strategies are in place to achieve agencies’ goals. As part of this inquiry, Congress can ask agencies about the tools the agencies are using to increase effectiveness, including the status of A-76 programs, and the specific choices the agencies have made about whether to keep a commercial activity in-house or contract it out. deficiencies affect the government’s ability to accurately measure the full cost and financial performance of programs and to efficiently manage its operations. For example, in January 1998, we reported that DOD has no reliable means of accumulating actual cost data to account for and manage resources. Moreover, in a February 1998 report, we noted that it will likely be many years before DOD is capable of providing accurate and reliable cost data. Efforts are under way to improve government cost data and supporting systems, but for some agencies it could be several years before significant improvements are made. Continuing efforts to implement the Chief Financial Officers Act are central to ensuring that agencies resolve their long-standing problems in generating vital information for decisionmakers. In that regard, the Federal Accounting Standards Advisory Board (FASAB) has developed a new set of accounting concepts and standards that underpin OMB’s guidance to agencies on the form and content of their agencywide financial statements. As part of that effort, FASAB developed managerial cost accounting standards. These managerial cost accounting concepts and standards require that federal agencies provide reliable and timely information on the full cost of federal programs and on their activities and outputs. Specifically identified in the standards is the need for information to help guide decisions involving economic choices, such as whether to do a project in-house or contract it out. Such information would allow agencies to develop appropriate overhead rates for specific operations. These cost accounting standards became effective for fiscal year 1998. Some agencies’ Chief Financial Officers have expressed concern about their agencies’ ability to comply with the cost accounting standards this year. privatization, the need for aggressive monitoring and oversight grows.Oversight was needed not only to evaluate compliance with the terms of the privatization agreement, but also to evaluate performance in delivering goods and services to help ensure that the government’s interests were fully protected. Officials from most state and local governments said that the monitoring of contractor performance was the weakest link in their privatization processes. Oversight and monitoring have been consistent weaknesses in federal efforts as well. In numerous past reports on governmentwide contract management, we have identified major problem areas, such as ineffective contract administration, insufficient oversight of contract auditing, and lack of high-level management attention to and accountability for contract management. For example, long-standing contractor oversight problems at several agencies, including DOD, the Department of Energy, and the National Aeronautics and Space Administration have, in our view, put these agencies at high risk for waste, fraud, abuse, and mismanagement.Although each of these agencies have taken actions to improve their contractor oversight and monitoring functions, these remain high-risk areas that we continue to monitor closely. In summary, Mr. Chairman, A-76 has shown itself to be an effective management tool in increasing the efficiency of the federal government and saving scarce funds. However, despite its proven track record, A-76 is seldom used in civilian agencies. OMB has not consistently sent strong messages to the agencies that A-76 is a priority management initiative. While OMB’s May 12, 1998, memorandum is an encouraging first step, thorough implementation and follow-through will be needed to get A-76 on track. In addition, agencies will need to continue their efforts to ensure both that they have the sound program cost data needed to make comparisons and that mechanisms are in place to monitor and oversee contracts. Finally, we believe that agencies’ development and Congress’ use of annual performance plans under the Results Act provide an opportunity to consider A-76 and other competition issues within the context of the most efficient means to achieve agency goals. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions you or other Members of the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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Summary: GAO discussed: (1) the purpose and usefulness of the Office of Management and Budget's (OMB) Circular A-76 in the current federal environment; (2) why A-76 is not being used extensively by civilian agencies; (3) the effectiveness of OMB's efforts to lead the implementation of A-76, which, in GAO's view, could be enhanced; and (4) observations regarding the necessary elements of a more active A-76 program. GAO noted that: (1) OMB Circular A-76 has shown itself to be an effective management tool in increasing the efficiency of the federal government and saving scarce funds; (2) despite its proven track record, A-76 is seldom used in civilian agencies; (3) OMB has not consistently sent strong messages to the agencies that A-76 is a priority management initiative; (4) while OMB's May 12, 1998, memorandum is an encouraging first step, thorough implementation and follow-through will be needed to get A-76 on track; (5) in addition, agencies will need to continue their efforts to ensure both that they have the sound program cost data needed to make comparisons and that mechanisms are in place to monitor and oversee contracts; and (6) agencies' development and Congress' use of annual performance plans under the Government Performance and Results Act provide an opportunity to consider A-76 and other competition issues within the context of the most efficient means to achieve agency goals.