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John A. Koskinen - May 23, 1996

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MAY 23, 1996

    I am pleased to be here this morning to describe the Administration's progress toward achieving the 272,900 FTE employment reduction required by the Federal Work Force Reduction Act (the "Act") by the end of Fiscal Year 1999. I will also discuss our plans for using voluntary separation incentives, or buyouts, to help those agencies that must downsize in order to meet severe resource limitations or program terminations.

    The authorities provided to the Department of Defense and separately to the non-Defense agencies in the Act have been successfully used to jump-start employment reductions -- with Executive Branch non-postal employment levels now below two million, and still falling. By the end of Fiscal Year 1995, we reported a total reduction of 185,000 FTEs from the 1993 base used in the Act. The President's budget shows that we expect to achieve a reduction of 214,400 FTEs by the end of this fiscal year. I might add that projections from agency reports to date indicate a greater reduction. The OPM "head count" numbers this year show a decline of approximately 230,000 to 240,000. While it is true that about two-thirds of the overall FTE reduction as of the end of Fiscal Year 1995 was from DOD components, significant reductions occurred on the non- DOD side as well. Agriculture is down about 11,000; HHS down nearly 7,000; HUD down more than 1,000; Interior by more than 6,000; Labor by 1,200; State by 1, 800; Transportation by 6,000; VA down 5,700. These numbers are comparisons of actual FTE levels in FY 1993 with FY 1995 actuals. I am attaching a chart to my testimony that shows each of the agencies FTE employment data since 1993.

    OPM data show that gains were also made toward reducing overhead positions, as recommended in the National Performance Review. Of the nearly 32,700 buyout takers
in the non-Defense agencies, over one-third came from positions targeted by the NPR, including personnel, accounting, budget, general administration, supply, etc. While the percentage is smaller in the Defense agencies, this is understandable since base closures and realignments were not NPR determined. In DOD, for example, more than 37% of buyouts went to blue collar workers -- nearly twice that in the non-Defense agencies.

    On the basis of our experience, therefore, it is clear that the 272,900 personnel reductions called for in the Federal Workforce Restructuring Act will be met, probably ahead of the schedule required by the Act. Beyond the streamlining plans agencies have been implementing, budgetary resources are not expected to be available to the agencies to meet the salary and other costs for a workforce that is any larger than that provided under the Act. With both the House and Senate budget resolutions calling for discretionary spending more than $40 billion below the President's plan by 2000, the gap is wide and, whatever the final budget outcome, more personnel cuts will be required. How we plan for and make those cuts will test our commitment as a responsible employer. Based on average Government-wide salary and benefits costs, agencies are faced with reducing employment levels by approximately 20,000 for every one billion-dollar cut in discretionary spending for salaries and benefits.

    Faced with the certainty that employment levels must continue to decrease, a top priority for agency managers is managing this downsizing as efficiently as possible. One possibility suggested has been simply to freeze hiring. An agency hiring freeze will capture whatever normal turnover occurs, but that may be from positions critical to the agency's mission requirements. Also, substantial turnover occurs in lower graded, nontechnical jobs, making reengineering only by attrition an impractical approach.

    Another alternative is to use reductions in force. Most people agree that reductions in force are the least desirable method for downsizing since they are expensive and disrupt the workforce and productivity. This past Sunday's article in the Washington Post Magazine illustrates the dislocations resulting from RIFs. To avoid -- or at least minimize -- RIFs, planning for downsizing should first include all available alternatives to involuntary separation.

    By targeting incentives for voluntary separation, as can be done with the buyout program, agencies have a greater ability to manage their attrition. Not all non-defense agencies will need buyout authority in the next few years. However, it is impossible to predict now which agencies will be confronted with budgetary cuts, sometimes unexpected, that will require further FTE reductions over a very short time period.

     Our proposal, the "Federal Employment Reduction Assistance Act of 1996", therefore provides that agencies would have buyout authority for a four year period. This will allow agencies to use this authority whenever necessary. However, we also provide that only downsizing agencies would be authorized to offer buyouts. We also provide that agency plans for using buyouts as part of their downsizing efforts are to be reviewed and approved by OMB before buyouts can be offered. And, to discourage employees from turning down a buyout now in the expectation that another buyout bill will inevitably come along, we not only establish a four-year buyout period, but also provide that the buyout payment declines over the four-year period by $5,000 each year, going from $25,000 in Fiscal Year 1997 to $10,000 in the year 2000.
    An inevitable alternative to a coordinated bill will be separate authorizations for buyouts on an agency by agency basis, such as the authority provided recently to the Smithsonian Institution. While that proposal is not troubling, the risk is that a series of such bills will have different attributes -- dollar value, eligibility requirements, refund requirements, relationships to agency downsizing plans, etc. To ensure equitable treatment and consistent administration, our proposal requires absolute reductions in personnel (from the prior year's actual level of FTE usage) on an agency-by-agency basis. It also strengthens the requirement for refund of the payment if reemployed within five years, and makes other improvements based on our experiences under the Federal Workforce Restructuring Act of 1994.

    In addition, our proposed legislation recognizes that involuntary separations outside of the Defense Department may be required as we work to balance the budget. If that occurs, employees in the non-Defense agencies would be able to volunteer for RIFs in lieu of colleagues about to be separated. Also, for those who are involuntarily separated, the agency would be authorized to pay the employer's share of the premium for health benefits coverage for up to 18 months after separation to cushion the impact of job loss and transition to new employment. DOD agencies already have these authorities. We believe that these provisions are necessary in non-Defense agencies as well.

    While other buyout and "soft landing" bills have been introduced, we believe that the Administration's proposal is the best response to our present situation. Our legislation makes all costs of the separation incentive explicit, rather than hidden in other programs, such as the retirement program. The Federal Workforce Restructuring Act offset the CBO-determined pay- as-you-go costs by an assessment on all agencies of $80 every year for four years for each of their employees. Our legislation provides that the offset, now estimated by CBO to be 15% of the salaries of employees who receive buyouts, will be made only by the agencies using buyouts.

    The Administration does not support as a general matter "soft landing" proposals that would increase the Government's long term costs, such as those that would change the retirement program's 2% reduction for early retirement. We also are concerned about proposals that produce apparent savings in the short term while they actually increase long term costs, such as those that would index deferred annuities to future wage increases.

    Mr. Chairman, I know that you have been concerned about several aspects of the administration of the buyout program under the Federal Workplace Restructuring Act of 1994, for example, the findings of the Department of Transportation's Inspector General regarding employees at the Federal Aviation Administration taking buyouts and then returning to work as contractors. The fact that the IG identified the problem, took firm and timely action, and the situation received wide media coverage is a positive indication of effective oversight. As Chairman of the President's Committee on Integrity and Efficiency and the Executive Committee on Integrity and Efficiency, the organizations of Inspectors General from throughout Government, I have discussed this matter with agency IGs. At our meetings earlier this month, I raised the question of the possible need for a cross agency review of the use of buyouts. None of the IGs present had received indications of problems in the operation of the buyout programs in their agencies. While I understand that GAO has identified other situations, in the Department of Defense and NASA, where some buyout takers took employment with a contractor, I have not, as yet, received any additional information from GAO on those situations. However, I understand that GAO found that use of buyouts allowed agencies to downsize without disproportionately affecting women and minorities and that most managers found the buyouts a useful tool in their downsizing efforts.

    You also asked specifically about OMB's approval of the Departments of Energy and Transportation deferred buyout program, recently highlighted by the media. We did this after review of the opinion of Energy's General Counsel. In the special circumstances applicable to these departments and few others, we agreed with their analysis. For an agency to reoffer unused deferred buyouts, there must have been an agency head determination, prior to March 31, 1995, that employees in targeted positions being offered buyouts at that time had to be retained, to the extent possible, in order to ensure the performance of the agency's mission. If that were the case, and not all buyouts were used, the agency may reoffer any of the unused deferred buyouts already allocated by OMB to the employees in the same targeted positions. Separation must occur by not later than March 31, 1997.

    In closing Mr. Chairman, let me say that I appreciate your interest and concern in ensuring that the government manages its continuing downsizing in an effective and economical manner. The President's Management Council, which I chair, is composed of the Chief Operating Officers of the agencies. They have focused for the past two years on the need for humane downsizing. As part of their consideration of these issues, they strongly support the renewed used of buyout authority by those agencies continuing to reduce in size.

    This concludes my statement. I will be pleased to answer any questions that you may have.

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