ment. Unfortunately, some of the contractors which form this shadow government are not performing effectively.

A recent Office of Management and Budget study of Federal contracting out found out there were instances of poor performance. Contractors were performing governmental work such as program management, incomplete cost and price analyses, and statements of the work to be done and weak oversight of contract performance. NFFE believes that the administration should mandate a fixed percentage reduction in each agency's level of contracting out that is sufficient to fully fund both pay increases. Such a reduction would allow Federal employees to receive the pay increase they deserve without forcing this committee and Congress to make painful cuts, as it had to do last year.

We look forward to working with this committee, with Congress and the administration in order to ensure that Federal employees receive fully funded pay increases.

Once again, thank you for the opportunity to appear before you today and for your efforts on behalf of Federal employees.

MS. NORTON. Thank you, Ms. Velazco.

[The prepared statement of Ms. Velazco follows:]

PREPARED STATEMENT OF SHEILA K. VELAZCO, PRESIDENT, NATIONAL FEDERATION OF FEDERAL EMPLOYEES

Good Morning, Madam Chair and members of the subcommittee, on behalf of the National Federation of Federal Employees, I am pleased to be here to offer testimony on the impact of the Administration's fiscal year 1995 budget proposal on federal employees. As you know, NFFE is the nation's oldest federal employee union representing nearly 150,000 workers in over 52 agencies across the nation.

Before I begin, I would like to express my thanks to you, Madam Chair, for all your tireless efforts during last year's budget battle. NFFE had hoped that during this year's budget process we would be facing a different scenario, but apparently that is not to be the case.

Last year, the Administration proposed that federal employees receive neither the national comparability increase nor the first installment of locality pay. Thankfully, through efforts of the members of this committee and others, we were able to salvage locality pay for 1994. Unfortunately, in order to offset the cost of funding locality pay it was necessary for Congress to cut or delay other federal employee benefits. This year, President Clinton's proposal for fiscal year 1995 recommends $1.1 billion for civilian employee pay raises. This would provide enough funds for a 1.6-percent across the board raise for all civilian employees. This proposal also has the effect of reducing pay adjustments over the next five years by approximately 50 per

cent.

The fiscal year 1995 budget, however, does not mention whether this money should be distributed as a national pay raise, a locality pay raise, or a combination of the two. The Administration has announced that it plans to consult with federal employee unions regarding the best method of distributing the funds.

In effect, the administration has tossed a bag of money to federal employee organizations and said, "here you go, you fight over it". This is not acceptable to NFFE. NFFE believes that federal employees should receive fully-funded locality pay raises and national comparability increases. Basic fairness dictates that this be done. Over the past 13 years federal employees have shouldered a disproportionate share of the cost of deficit reduction. In fact, through cuts in federal pay and benefits, federal employees have "contributed" $163 billion to deficit reduction since 1981.

These tremendous cuts directly led to the development of a pay gap between federal and private sectors. Each time federal employees were asked to "contribute", the gap widened, until eventually the public-private sector pay gap has ballooned to almost 30 percent.

Finally, after more than a decade of falling behind private sector salaries, the 1990 Federal Employees Pay Comparability Act promised that federal pay would be brought up to par. The law was enacted only after federal executives and political appointees received comparability raises of 35 percent. At that time, federal employ

ees were promised that they would no longer be forced to sacrifice their salaries in order to fund the government. The parties to the FEPCA agreement realized that cutting federal salaries was counterproductive. While such cuts may have provided immediate monetary savings, they could also cost the federal government the ability to hire and retain the "best and the brightest" for government service.

FEPCA represented not only a compromise on the goal of comparability, but also on the rate at which comparability would be achieved. Under FEPCA, federal pay would reach only 95 percent of comparability and it would do so very gradually, over a nine-year period. According to the law, any deviation from this gradual approach must be justified by the existence of either a national economic emergency, or other serious economic conditions which affects the general welfare. Currently, all major economic indicators point to sustained growth in the national economy. Obviously, the current economic climate does not justify setting aside the provisions of the FEPCA agreement.

NFFE is opposed to any further attempt to derail the intent and provisions of FEPCA. While NFFE supports the commitment that the Clinton Administration and the Congress have shown towards reducing the deficit, that support is predicated upon a deficit reduction plan that is based on fair, equitable sacrifice by all Americans. However, the cuts currently being proposed would roll back the gains made by passage of FEPCA and have federal employees shoulder a disproportionate share of deficit reduction.

NFFE believes that the solution to the dual concerns of federal pay comparability and deficit reduction lies in reducing the level of contracting-out. NFFE believes that at a time when the structure and size of the federal workforce is being reformed, a similar reform effort should be aimed at federal contracting out practices. Currently, the federal government spends $105 billion each year on contractingout, which has become the fastest growing area of federal procurement. As you very correctly stated, Madam Chair, federal contractors have formed a shadow government. Unfortunately, a majority of the contractors which form this shadow government are not performing effectively. A recent Office of Management and Budget study of federal contracting-out found instances of poor performance; contractors performing governmental work such as program management; incomplete cost and price analyses and statements of the work to be done; and weak oversight of contractor performance.

NFFE believes that the Administration should mandate a fixed percentage reduction in each agency's level of contracting-out that is sufficient to fully fund both pay increases. Such a reduction would allow federal employees to receive the pay increase they deserve without forcing this Committee and Congress to make painful cuts like it made last year.

NFFE looks forward to working with this committee, Congress and the administration in order to ensure that federal employees receive fully funded pay increases in 1995. Once again, thank you for the opportunity to appear before you today and for all your efforts on behalf of federal employees.

I will be glad to answer any questions you may have.

Ms. NORTON. Mr. Sturdivant.

Mr. STURDIVANT. Thank you, Madam Chair. On behalf of the American Federation of Government Employees, AFL-CIO, and the fellow employees that we represent, I thank you for the opportunity to come before your committee and to testify on the impact of the President's fiscal year 1995 budget proposals concerning Federal employees.

I also want to take this opportunity to thank you personally for your attention and your intensity on those issues affecting Federal employees, and we certainly thank you for the work that you have done and for the work that we know that you are going to do in the future.

I want to associate myself with your remarks also on some of the costs to Government about contracting out, and I'm going to talk a little bit about it in my statement.

I'm just going to summarize my testimony and I'd like permission to have my full statement entered into the record.

Ms. NORTON. So ordered, Mr. Sturdivant.

Mr. STURDIVANT. Thank you. I want to concentrate today my comments on the issues of Federal pay and jobs. In short, I want to urge you and your fellow Members of Congress to provide for the full nationwide adjustment as well as the full locality adjustment provided for under the 1990 Federal Employees Pay Comparability

Act.

In the words of Attila the Hun, if the two options that you are presented with are unacceptable, then find a third alternative. The options that we have been presented with are unacceptable, but in the spirit of trying to help to solve problems, we are proposing a third alternative.

I recommend to you a 3-percent across-the-board reduction in Government spending on contracting out, both as a means of financing the pay raise due Federal employees and as a way to split the burden of deficit reduction that recipients of Federal service contracts have heretofore been spared.

When you're spending $105 billion a year, we know rational thought tells us that you can squeeze. You don't have to-not even running people off, but you can squeeze 3 percent out of those costs by simply good, aggressive management practices, and that's what we're asking that the administration do.

As I said before, the President's proposals concerning Federal pay are really a mixed bag, but the administration has to be given credit; because we are not so we're not as far behind as we were last year this time, but we're still behind. So there's an effort to try to make a step, but we just need to make some more leaps. So they've tried.

On the one hand, the President has provided full funding for the pay increase that he suggests, and that aspect of his proposal deserves support, both as a sign that the era of deception and irresponsibility in Presidential budgets, hopefully, may be over, and as evidence that the President recognizes that agencies are so lean that unfunded or partially funded pay raises would require RIF's or other program cuts, which are unacceptable to large constituencies.

On the other hand, while the President has put his money on the table, he has come up short by approximately two-thirds. In other words, we need more money. The law dictates that in 1995 with economic conditions such as currently prevail, Federal employees are entitled to both an ECI based and a locality based pay adjust

ment.

The President says you can have one or the other, but in a gracious gesture offers that the choice is up to us. We choose not to choose between an ECI raise or a locality adjustment under FEPCA. Federal employees are due both. That is what the budget should provide, and we believe that we have come forth with alternatives on where to find the money.

The President has proposed the elimination of 118,300 Federal jobs in fiscal year 1995, but he cannot propose the elimination of the work that those jobs represent. Currently, agencies have but one option when the workload is incommensurate with the FTE ceilings the budget process imposes. They contract out the work.

The apparent reduction in federal employment is politically advantageous and, inefficient and costly as it may be, the work is still

accomplished. The President's proposal to eliminate 118,300 federal jobs in 1995 should be considered within this context.

AFGE proposes that the 118,300 jobs be eliminated from total federal employment, which in an honest accounting would include both direct employees of the government as well as those employees of the shadow government of private contractors.

In January, the Office of Management and Budget released a report showing that the government spends $105 billion annually on contracting out for services, and that such spending represents the fastest growing area of government procurement. The report described a virtual absence of rational standards or procedures relating to federal contracting out for services.

OMB also cited the fact that several agencies requested the flexibility or authority to decide whether money set aside for contracting could be used to hire employees of the agency to do the work. Examples were given to OMB which showed that millions of taxpayer dollars could be saved by allowing agencies to perform specific functions themselves, rather than having them performed by contract, but FTE ceilings have precluded this.

In short, the report shows that the government's preference for private contractors over federal agency staff has been irrational from a budget perspective. In an era where the government cannot afford to engage indulge in the ideological fancy that the private sector is always more efficient, the implications of the OMB study must be addressed.

The Department of Energy has ordered a ten percent reduction in 1994 service contracts. A three percent reduction throughout the government for 1995 would be more than adequate to fund the federal pay raises due under FEPCA, and to allow rational economic decisions about where federal job cuts should come from.

We believe that the shadow federal government should face the same economic/budget scrutiny as direct employees have faced. Give federal agency employees a real chance to compete for government work that has gone to contractors through a ruinous combination of ideology and politically inspired FTE ceilings, and AFGE is confident that the people we represent, along with the American taxpayer, will fare better than under the current system. Finally, we would hope that Members of Congress would be as vociferous about looking closely at these contracting costs as they have been in the extended debate in both houses over a balanced budget, to find out where is the money going.

I want to once again commend you on your leadership. I note that the Washington Post today is picking up on the story. I see the GAO had a report. So I want to just say, Madam Chair, that you are onto something. Do not let this one go.

The American people deserve to be told the truth about where the money is going, who is spending it, and how it is being spent. I can assure you that this union is working with our colleagues. We are going to raise this issue to a high visibility level, and we are going to take this right on into the 1994 elections.

Thank you.

Ms. NORTON. Thank you, Mr. Sturdivant.

[The prepared statement of Mr. Sturdivant follows:]

PREPARED STATEMENT OF JOHN N. STURDIVANT, PRESIDENT, AMERICAN FEDERATION OF GOVERNMENT EMPLOYEES

Madam Chairwoman and subcommittee members: My name is John Sturdivant and I am the National President of the American Federation of Government Employees, AFL-CIO. On behalf of the more than 700,000 federal and District of Columbia workers our union represents, I thank you for the opportunity to testify here today on the impact of the President's fiscal year 1995 budget proposals concerning federal employees.

I will concentrate my comments today on the issue of federal pay and jobs. In short, I urge you and your fellow Members of Congress to provide for the full nationwide adjustment as well as the full locality adjustment provided for under the 1990 Federal Employees Pay Comparability Act (FEPCA). Further, I recommend to you a three percent across-the-board reduction in government spending on contracting out both as a means of financing the pay raise due federal employees, and as a way to spread the burden of deficit reduction, from which the recipients of federal service contracts have heretofore been spared.

The President's proposals concerning federal pay are a mixed bag. On the one hand, he has provided full funding for the pay increase he suggests. The aspect of his proposal deserves support, both as a sign that the era of deception and irresponsibility in Presidential budgets may be over, and as evidence that the President recognizes that agencies are so lean that unfunded or partially-funded pay raises would require RIFS or other program cuts which are unacceptable to large constituencies. On the other hand, while the President has put his money on the table, he has come up short by approximately two-thirds. The law dictates that in 1995, with economic conditions such as currently prevail, federal employees are entitled to both an ECI-based and a locality-based pay adjustment. The President says you can have one or the other, but in a gracious gesture, offers that the choice is up to us. AFGE does not want to choose between an ECI raise or a locality adjustment; under FEPCA, federal employees are due both, and that is what the budget should provide.

WHAT FEPCA STIPULATES

Under FEPCA, General Schedule salary adjustments, effective in January 1995, are supposed to consist of two components: (1) a nationwide increase based on the Employment Cost Index (ECI), and (2) a locality adjustment that applies to areas where non-federal pay exceeds federal pay by 5 percent or more, based on BLS sur

veys.

The formula for the general increase provides that GS pay rates will be increased in January 1995 by the percentage change in the ECI during the 12 months ending September 30, 1993, minus one half of 1 percent. During that time, the ECI increased by 3.1 percent. Therefore, the January 1995 ECI-based adjustment should be 2.6 percent. The 1995 locality pay adjustment is supposed to be at least one-tenth of the amount needed to reduce 1994 local pay disparities to five percent.

Again according to the law, any deviation from these formulas by the President must be justified by the existence of either a national emergency, or serious economic condition which affects the general welfare. Specifically, the President must cite statistics such as the Index of Leading Economic Indicators (up for the fifth consecutive quarter, and most recently with eight of 11 indicators positive), the Gross Domestic Product (up 7.5 percent for the last quarter of 1993), the unemployment rate (down to 6.4 percent), the budget deficit (estimated to be down to $180 billion in fiscal year 1995), the Consumer Price Index (up 2.7 percent in 1993), the Employment Cost Index (up by 2.9 percent estimated in 1993), and the Implicit Price Deflator for Personal Consumption Expenditures (estimated by Data Resources Incorporated to be up by 2.7 percent in 1993).

As the President himself made clear in his recent State of the Union address, the economy is currently strong. Nothing in either government or private economic forecasts warrants an alternative pay plan for 1995. The legislative history of FEPCA is just as clear: Congress did not intend alternative pay plans to be offered in economic times such as these.

THE POLITICAL ASPECT OF FEDERAL PAY DECISIONS

After more than a decade of falling behind private sector salaries, the 1990 FEPCA promised that federal pay would be brought up to parity with non-federal salaries. The law was enacted only after federal executives and political appointees received comparability raises of 35 percent. The promise was that federal employees would no longer be forced to fund the government by sacrificing their salaries. Ev