eryone recognized that it did not benefit the American public to underpay federal employees and in the process lose the ability to hire and retain the best people to do the work of government in its offices, hospitals, research labs, emergency relief efforts, crime fighting units, etc. The promise of FEPCA must be kept, for several compelling reasons.

First is the fact that federal pay lags non-federal pay by substantial sums. Inadequate federal pay has been a recurring problem that has plagued the federal workplace for well over a decade. The statutory goal of comparability was ignored for so many years that by 1990, the federal non-federal pay gap has grown to almost 30 percent. The cumulative loss to federal employees caused by the pay limitations imposed since 1978 has been well over $100 billion.

Second, federal employees have already shouldered a disproportionate share of the burden of deficit reduction in other ways as well: OMB and OPM's own data show compensation "changes" from 1981 to 1992 saved the government $163 billion. Those changes cost federal employees the same $163 billion.

Third, 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 nine years. These compromises were made in the economic context of $300 billion budget deficits and looming recession. Last year's failure to live up to the agreement regarding the ECI adjustment was a relapse to the political and ultimately inefficient pay-setting process which inspired the new law. But today, with lower deficits and strong economic recovery underway, as well as a planned decrease in federal employment of 252,000, there is no just rationale for refusing to allow FEPCA's prudent schedule to advance.

Finally, the Clinton administration has promised to revolutionize government by delayering management hierarchies and empowering front-line workers. The plan is that federal workers in a reinvented government will work "smarter," know more, have more responsibility, and be held more accountable. How can the government expect this to occur in the context of falling real incomes? How can the government expect the good will which is absolutely necessary to the success of this project, if it continues to evade FEPCA and allow the pay gap with the private sector to grow? It must also live up to its obligations when it is time to pay salaries.

The plain truth is that if FEPCA is not fully funded, federal employees will conclude that the Clinton administration is not much different from those that preceded it; they will see that they are not valued, that they remain costs that must be reduced.

THE ADMINISTRATION'S "METHODOLOGICAL" PROBLEMS

FEPCA established a process involving the Federal Salary Council (FSC) and Pay Agent for addressing and resolving problems with the operations of the law, such as the alleged flaws in methodology which the Clinton administration cited in last year's attempt to delay FEPCA's implementation. Despite several opportunities, the administration has presented neither criticisms nor suggestions for improvement in the methodology on which FEPCA calculations are based. We are quite willing to study ways to improve FEPCA's methodology through our participation in the FSC, if indeed there is substance to the claims which have been made.

While the methodological issues are being resolved, the pay increases ought to occur as scheduled under FEPCA. There will be ample opportunity to alter calculations of pay disparities during the nine-year phase-in period which end in 2002. Because at least 70 percent of the portion of the gap FEPCA is designed to close will remain after the 1995 increases are paid, there is no danger that the federal government will overpay anyone in the interim.

With all economic indicators heading in the right directions, and with the promise of genuine partnership in reinventing the way the federal government operates hanging in the balance, there is no justification for postponing, reducing, or eliminating the pay adjustments promised by FEPCA for 1995.

THE FEDERAL WAGE SYSTEM

The President's budget also addresses the gap between federal and private pay rates for craft and trade employees paid under the Federal Wage System (FWS). This gap has shrunk in recent years, mainly due to the stagnation in blue collar pay in the private sector. However, in some wage areas, the gap is quite large. At the end of 1993, the gap ranged from zero to over 22 percent. The overall weighted average pay gap was 7.046 percent. The President's proposal purports to treat prevailing rate employees the same as those paid under the General Schedule; the practical effects will be quite different. In some cases, the proposed method of com

puting pay increases will actually widen the gap between FWS and private sector pay.

The President proposes that if the GS employees receive a locality pay increase, but no general ECI-based increase (as was the case in fiscal year 1994), then prevailing rate employees would receive an increase equal to one-eighth or 12.5 percent of the existing pay gap for any given pay area. If the GS employees receive both ECI-based and locality-based increases, prevailing rate employees would receive first 12.5 percent of the existing gap in their pay area, and second, a general increase equal to GS ECI-based increase.

If the GS employees receive only an ECI-based increase, then prevailing rate employees would receive only that increase, across the board.

The intent is to close the pay gap over the same ten year period during which the GS pay gap is supposed to be closed under FEPCA. There are, however, important differences between the GS and prevailing rate systems that must be recognized. First, the pay gaps for prevailing rate employees are generally much smaller than those for the GS, and there are far fewer craft and trade workers. The cost of paying these employees at the prevailing rate in relatively low and does not warrant so gradual a phase-in. Ten years is too long to wait to close the pay gap under the FWS.

Indeed, in some areas, prevailing rates were being paid as of 1993. But by limiting FWS pay increases to some portion of the gap determined by the latest wage survey, new pay gaps were created where none had existed. For example, in the Los Angeles, California Wage Area, the survey showed that it would have taken an average increase of 9.5 percent to bring some employees up to the prevailing rate, while others were already at the prevailing rate. For the latter group, it would only have taken an increase of about 1.5 percent to maintain parity with the private sector. Yet because the Fiscal Year 1994 increase was limited to one-fifth of the pay gap, employees received only an average increase of 0.03 percent. In hourly terms, the increases ranged from $.03 to $.04.

In the Dallas, Texas Nonappropriated Fund Wage Area, the effect was even worse. The pay gap increased substantially at every grade as a result of this year's attempt to close 20 percent of the gap. Gaps were created in some grades where a three percent increase would have maintained the prevailing rate. There are other such examples where pay gaps were expanded or created as a result of the misguided efforts to close them. It is likely that these types of contradictory effects will be even more common if the President's proposals for 1995 are enacted. Surely the government can do better for its FWS employees.

The prevailing rate employees' pay gap should be closed immediately, and the excellent system Congress enacted in 1972 should be allowed to work again. If the gap must be closed in increments, the process should be accelerated and implemented so that we do not make matters worse under the guise of bringing improvements.

THE CSRS-FERS COMPETITION

AFGE opposes the President's proposal to require agencies to account for the relative differences in compensation costs between federal employees under the CSRS system and the FERS system. The effect of the proposal would be to engender competition among federal employees and between agencies that serves no useful purpose. Why should federal employees who chose to remain under the CSRS be penalized because the government sought and won the right to reduce the value of the pension benefit it provided to its employees hired after 1984?

In the best case scenario, accounting for the difference in costs between CSRS and FERS participants would simply put additional pressure on agency budgets without offering benefit in return. At worst, it creates the potential for the appearance, if not the reality of discrimination against a group of employees on the basis of their age. As a group, CSRS employees are, on average, older than FERS employees simply because they have all been working for the government for at least 10 years. There is nothing to be gained from this budget proposal, and AFGE believes it should be rejected.

FEDERAL EMPLOYMENT AND THE PROBLEM OF CONTRACTING OUT

The President has proposed the elimination of 118,300 federal jobs in fiscal year 1995. But he cannot propose the elimination of the work those jobs represent. Currently, agencies have but one option when workload is incommensurate with the FTE ceilings the budget process imposes. They contract out the work under the Service Contract Act. 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 (as distinct from manufactured goods), 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/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 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 10 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.

This concludes my statement. I would be happy to respond to any questions.
Ms. NORTON. Mr. Tobias.

Mr. TOBIAS. Thank you very much, Madam Chair. I really appreciate the opportunity to testify, and I, like my colleagues, wish to thank you for your continuing support for Federal employees and Federal employee issues. It's not a glamorous job. It is often extremely thankless with respect to your colleagues, and we appreciate very much the fact that you have been such a strong champion.

This morning, Madam Chair, I'd like to focus your attention on a very small piece of the $1.6 trillion budget that has been proposed by President Clinton. It's a $1.1 billion proposed expenditure for Federal employee pay increases in fiscal year 1995.

That $1.1 billion expenditure translates into a 1.6-percent pay increase for the existing Federal work force. Now that, as my colleagues have already mentioned, is a step in the right direction. Last year when we were testifying before you, the President had proposed nothing, and what we were able to salvage was the implementation of the comparability system, no small feat in last year's Congress.

Under the existing legislation, Federal employees are entitled to a 2.6-percent increase, based on an increase in the employment cost index, the ECI, and 10-percent closure in the comparability pay gap on a locality by locality basis. Now the cost of implementing the law as it exists today is $2.7 billion. So the President is $1.6 billion short.

This is the 17th time in 17 years that Federal employees have been asked to take a reduction in what the law required or the pay agent proposed to the President. Now it's not as though Federal

employees are getting rich and, therefore, the President has to put his foot down.

The most recent report by the President's pay agent shows the pay gap ranging from 23 to 39 percent. We believe, Madam Chair, that the $1.6 billion additional funds needed to fully fund FEPCA can be found in the $105 billion agencies annually spend on service contracts.

Now when I say service contracts, I'm not talking about the procurement of goods. I'm talking about the procurement of services. If the Federal Government decreased the expenditures on these service contracts by 1.5 percent, we could have the money necessary to fund a full Federal employee pay increase-a full Federal employee pay increase. 1.5 percent of $105 billion gives us the $1.6 billion we need in addition to the $1.1 billion the President has already provided.

We think reducing service expenditures by 1.5 percent is both doable and wise. In a recent report issued by OMB in January, it found that cost estimates are not performed by many agencies prior to the renewal or extension of existing contracts. OMB found that work inherently governmental was purchased on the outside, and OMB found that improvements are needed to ensure that the Government is getting its money's worth from service contractors.

Now the report did not comment on whether the work should be done at all, whether or not it's necessary to let that contract. Was it wise to spend the money? Now the OMB report mirrors the GAO report discussed in the Washington Post this morning.

The Energy Department pays 26 to 53 percent too much for service contracts. The Defense Department pays 37 to 51 percent too much for service contracts, and our own experience shows that FDIC pays between 44 and 77 percent more based on their own documents, and yet they continue to contract out this work.

Madam Chair, we can squeeze 1.5 percent from $105 billion, and squeezing those funds would send a powerful message to the Federal employee work force that every aspect of Government must reinvent itself to work better and cost less.

The Federal employee work force is being asked, and rightfully so, to reorganize, to rethink the way it does business, be more efficient and productive and work with 252,000 fewer employees. We, Madam Chair, are up to the challenge, but we believe that others, the private sector, should also be challenged to deliver the services at 1.5 percent less.

I strongly urge this committee to include-to suggest to the Members of Congress that we cut the 1.5 percent in agency service contracts and apply those savings to the Federal employee pay raise that is mandated by FEPCA.

Thank you very much, Madam Chair, for the opportunity to testify. I share in my colleague, John Sturdivant's, remarks that we are going to do all we can to continue to raise this issue to point out how a Federal employee pay increase can, in fact, be funded without any additional costs in the budget. Thank you, Madam Chair.

Ms. NORTON. Thank you, Mr. Tobias.

[The prepared statement of Mr. Tobias follows:]

PREPARED STATEMENT OF ROBERT M. TOBIAS, PRESIDENT, NATIONAL TREASURY

EMPLOYEES UNION

Madam Chairwoman, I am Robert Tobias, National President of the National Treasury Employees Union. On behalf of the more than 150,000 federal workers represented by NTEU, I appreciate your invitation to appear before your Committee today on the impact of the Administration's budget proposals on the federal workforce.

As you know, the President's budget includes $1.1 billion for federal civilian pay raises in fiscal year 1995. This is sufficient to fund a 1.6-percent across the board raise for all workers next January or some combination of locality pay and a nationwide increase. While this is a vast improvement over last year's budget submission which recommended a complete pay freeze, it is insufficient to keep faith with the Federal Employees Pay Comparability Act (FEPCA) which we have all struggled to get off the ground. In fact, the President's pay proposals have the effect of trimming federal pay adjustments outlined in FEPCA by as much as half over the next five

years.

With your help and your leadership Madam Chairwoman, the first installment of locality pay spelled out under FEPCA was implemented in 1993 and eligible federal workers across the Nation received that first increase in their checks just weeks ago. But as you also know Madam Chairwoman, the 2.2 percent Employment Cost Index (ECI), or across the board increase, also mandated by FEPCA was not paid. Proponents of reducing, delaying or eliminating federal pay raises stress that everyone must be willing to give a little if we are to have any hope of bringing our budget deficit under control. Madam Chairwoman, we are no strangers to the deficit reduction process; we have given generously in past years. It is significant that fiscal year 1994 represented the 17th time in 17 years that federal workers either received no raise or a raise that was well below that which was recommended by the President's Pay Agent. It's time to change this track record and make fiscal year 1995 the year we fully implement FEPCA.

Enacted in 1990, FEPCA was the first serious effort at fixing the federal compensation system in 20 years. The Bush Administration, Congress and federal employee representatives worked diligently to bring about this compromise legislation. It established a system to more closely tie federal salaries to local wage rates and make them more competitive with the private sector.

This past November, the President's Pay Agent issued its annual report to the President showing that based on Bureau of Labor Statistics surveys, the average pay disparity between federal and non-federal workers was 27 percent. In some regions of the country, the gap was as high as 39 percent. I think this Report starkly reinforces why FEPCA was enacted in the first place and why it must be fully implemented without further delay or adjustment.

In its 1992 transition series of reports to incoming President Clinton, the General Accounting Office (GAO), in its examination of the public service, presented the following analysis of FEPCA: “*** Achieving a consensus between the administration and Congress was a long, arduous process that would be difficult to reestablish if the current program were to become sidetracked. Full implementation of pay reform is a key building block of a more effective government and important to the government's ability to attract and retain a highly qualified and motivated workforce." NTEU could not agree more with GAO's analysis.

For fiscal year 95, FEPCA requires a 2.6 percent across the board raise plus a locality adjustment equal to 10 percent of each locality's pay gap. The additional amount necessary to fund these raises is $1.6 billion. Madam Chairwoman, we believe we have identified the resources necessary to fully fund FEPCA in 1995. We believe they can be found in the $105 billion agencies spend annually on service contracts. As we all know, the Administration has stated its intent to reduce federal employment levels by 252,000, or 12 percent, over five years. The fiscal year 95 budget calls for achieving 118,000 of this number, or 5.5 percent of the federal workforce by the end of 1995. If the federal government were to curb its appetite for contracting out by a mere 1.5 percent in fiscal year 1995, we would have the funds necessary to fully fund FEPCA. When we are asking the federal government to cut its personnel level by 12 percent, it does not seem at all harsh to explore the possibility of reducing contracting costs by 1.5 percent. In fact, it is an almost painless solution to the federal employees pay funding issue.

In January, the Office of Management and Budget (OMB) issued its "Summary Report of Agencies, Service Contracting Practices". OMB found that service contracts are the "fastest growing area of government procurement", accounting for "$105 billion of the government's $200 billion 1992 procurement program”. In addition, OMB discovered that cost analyses and independent government cost estimates