IMPACT OF THE PRESIDENT'S FISCAL YEAR 1995 BUDGET ON FEDERAL EMPLOYEES AND RETIREES

THURSDAY, MARCH 10, 1994

HOUSE OF REPRESENTATIVES,

COMMITTEE ON POST OFFICE AND CIVIL SERVICE, SUBCOMMITTEE ON COMPENSATION AND EMPLOYEE BENEFITS,

Washington, DC. The subcommittee met, pursuant to call, at 10:10 a.m., in room 311, Cannon House Office Building, Hon. Eleanor Holmes Norton (chairman of the subcommittee) presiding.

Members present: Representatives, Morella, Young, and Byrne. Ms. NORTON. The hearing is convened. I take pleasure in welcoming all of today's witnesses.

Today we hold the second of two hearings on the impact of the President's 1995 budget on Federal employees and retirees. This budget is the first under the new deficit reduction discipline. Last year was a very difficult budget and I would like to thank today's witnesses for their cooperation last year as we fashioned a way to save locality pay and benefits for Federal employees. I hope for the same collegial approach this year.

If last year's budget was difficult, this year's challenge is awesome. We have before us a $1.1 billion budget to do the work of the $2.7 billion that would be necessary to fund locality pay and the ECI raises that would benefit-that would normally be due Federal employees. Just as last year, however, this subcommittee must accept the discipline of the President's budget, and this year the Omnibus Budget Reconciliation Act of 1993 has created even steeper mountains to climb.

At the same time, this subcommittee is receptive to suggestions as to how to fully fund this year's pay raises. I hope that today's witnesses will be able to assist us and offer suggestions. At last week's hearing, representatives of Federal employees suggested cutting contracting by 1.5 percent in order to fully fund this year's raises. The lawyer in me has looked for the argument on the other side and has failed to find one.

The arrival of the Clinton administration has raised the morale of Federal employees, who will be a decisive factor in the success of this administration's ambitious and ground breaking plan to totally overhaul the Federal bureaucracy and the way the Federal Government conducts its business. Thus, it is important for this administration to understand why there is such enormous resistance to what for years has been a virtually annual call for one or (61)

78-224 O-94-3

another economic sacrifice from Federal employees. This habit, dramatically at odds with good labor-management practice, is a textbook case of how low morale and low productivity develop in a work place. Moreover, frequent pay sacrifices helped produce the pay gap that now requires large outlays for the Federal Government to close.

Private-sector companies use give-backs and other pay sacrifices occasionally but never on a frequent basis, because hard documentation shows them to be both counterproductive and emblematic of a failing business. The Clinton administration may not be fully aware, and therefore may not fully appreciate, that the pay sacrifices proposed today come on top of years of such pay denials that preceded this administration. There is a critical difference, however. The administrations of the 1980's disparaged Government and those who staffed it. This administration is making Government work, wants to reinvent it, and will be extraordinarily dependent upon career employees if the administration is to succeed. The Clinton administration deserves credit for adopting buyouts, one of the best tools of the private sector. Large private employers have discovered that it is better to become lean without becoming mean. Otherwise, the work force that remains is less likely to enthusiastically participate in making the business more efficient. A surly, roughed-up, downsized work force is not likely to be good at the business of reinventing Government.

Congress, particularly the Senate, deserves the blame for the gridlock on the buyout bill. However, the administration needs to be more energetic in moving the bill now that the House has passed a new one. Thanks to the skilled leadership of Chairman Bill Clay, a compromise bill was fashioned and passed by the House on Tuesday. Meanwhile, RIF notices were issued at OPM last week, some of which could have been avoided had buyouts been enacted when this committee, acting expeditiously, approved them last October. The most senior members of the administration need to work this bill energetically if layoffs that collapse rather then reinvent government are to be avoided. It is up to the administration, whose buyout bill this is, to see that Senator William Roth no longer blocks the gate to buyouts.

May I extend the most cordial welcome to all of today's witnesses and say that I look forward to their testimony.

May I ask my colleague, Ms. Byrne, if she has any opening statement?

Ms. BYRNE. Madame Chair, in the interest of time, I'd like to enter mine into the record; but do associate myself very strongly with your remarks and hope that we can work to uphold the contract and the compact that we have made with Federal employees about benefits. It seems that at every turn, we are doing things that we would not dream of doing with private contractors in terms of saying that they are entitled to one thing and then telling them that that's not forthcoming.

So I would associate again myself with the Chairwoman's remarks and enter my statement into the record, Madam Chairman. [The prepared statement of Hon. Leslie L. Byrne follows:]

PREPARED STATEMENT OF HON. LESLIE L. BYRNE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF VIRGINIA

Madam Chairwoman: I'd like to thank you for holding this second hearing about the 1995 budget and its effects on federal employees, retirees and their families.

I am pleased that we are hearing from the administration today about these proposals. As I said in my statement last week to the employee unions, this budget request is a welcome departure from last year's, which slashed benefits for the Federal work force and targeted federal employees for more severe reductions than for virtually any other group.

Fortunately, the administration and this subcommittee were able to find common ground and ask federal employees for a fair and equitable contribution towards deficit reduction.

I believe that the fiscal 1995 budget in general avoids the temptation to achieve deficit reduction primarily on the backs of the federal work force.

However, I am afraid that by looking so good in comparison, we will neglect the fact that this budget plan does in fact deny federal employees certain benefits which have been mandated by law by Congress, and which federal employees expect and deserve.

We should not ignore the fact that, one again, federal workers are being asked to forego either locality pay or comparability pay.

I understand the need to cut wasteful spending and meet the spending caps laid down in last year's budget. But I think we all need to ask ourselves how we expect the government to attract and retain talented people to meet the goals we set for agencies if we are not also willing to pay those people salaries comparable to what they could receive in the private sector.

We need to realize that this budget proposal is sending federal employees and prospective employees a message that being shortchanged in their paychecks is a fait accompli which is to be expected each year.

I am looking forward to hearing from the administration representatives about their justifications for spending levels put forth in the budget and how those levels relate to the administration's plan to Reinvent Government.

I am also interested in hearing about how the administration arrived at the 118,000-person reduction number. I have been asking the administration since last fall for documentation about their arrival at the 252,000 reduction and how it conforms to the reorganization and downsizing goals.

I have suspected that the number was merely pulled out of thin air, and I would like some reassurance that the 118,000 figure for fiscal 1995 is based upon credible information that this is the best way to reform the Government and cut wasteful spending.

While we might like to think of downsizing and choosing how many positions to eliminate as some abstract exercise in numbers, it is anything but abstract to the federal employees in my district and around the country who wonder whether they will have a job with the government next year. I hope this hearing can focus on how the administration has examined these changes and their effects on the people who make our government run.

Once again, I thank the Chairwoman for holding this hearing, and I look forward to hearing the witnesses' thoughts on this issue.

Ms. NORTON. Thank you, Ms. Byrne. I am very pleased to welcome our first witnesses, my own very good friend who happens to also be the Deputy Director of the Office of Management and Budget, Alice Rivlin, a Washingtonian; as well as Lorraine Green, who comes from the District government, and whom we are also very pleased to have here as Deputy Director of the Office of Personnel Management.

May we begin with Ms. Rivlin?

STATEMENT OF ALICE M. RIVLIN, DEPUTY DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET

Ms. RIVLIN. Yes, thank you very much, Madam Chairman. I am very pleased to be here again.

The President's 1995 budget is, as you note, a tough budget. It is the second budget that reflects the President's economic plan, which is a plan to get the deficit down and get the economy moving

again. We believe that plan is working. The economy is moving again. The deficit is coming down. This budget is designed to continue that work. It is extremely tough and the cap on discretionary spending for fiscal year 1995 is actually below what we expect fiscal year 1994 spending to be.

People talk about zero-sum games. This is a negative sum game. We are actually reducing discretionary spending below last year. And that's meant very, very difficult choices.

So that's the backdrop against which the provisions affecting Federal employees must be seen. We are holding the line on all kinds of spending. And we are holding the line on Federal employee pay increases, as well, although not as severely as we did in the budget we proposed last year.

We are also attempting to streamline Government, to reduce the number of Federal employees over a 5-year period. The reduction planned for next year will actually be more than the 100,000 that the President proposed last year. We believe that we can have a Government which employs fewer people and does a better job for the country. But it's a difficult thing to do that and downsizing is always hard. We hope to do it without a disproportionate effect on front-line workers, young employees, women, and minorities. That's why we appreciate so much the leadership of this committee in the effort to get buyouts. I'm hopeful that we can bring this overly long chapter to a close very quickly and get satisfactory buyout legislation.

Now, let me turn to the Federal employee pay raises, because I know this is a subject of great interest to this committee. Although all of the economic indicators-including GDP, interest rates, inflation, and unemployment-are moving in a positive direction, the discretionary spending caps leave little room for employee pay increases, or, indeed, for increases in anything.

Providing for the full ECI-based raises and locality pay would have forced further cuts in other programs. The objective, therefore, was to provide for pay increases below current law, but which were at the same time fair to Federal employees. The budget, as you know, proposes a Federal pay increase of 1.6 percent, effective January 1995. We wish the situation were different and that we could provide for a larger pay increase. But the cap on discretionary spending makes it reasonable to ask Federal employees to accept pay raises below current law, especially when the work force is declining and attrition is very low.

The 1.6-percent increase is intended to cover both the ECI-based raise and locality pay. As noted in the budget, we plan to work with the Congress, employee organizations, and other interested parties on how best to distribute the increase between the two. In keeping with the spirit of the National Partnership Council, we believe it's crucial to have employee organizations involved in making this decision.

The other major budget proposal affecting Federal employees is the proposal to charge agencies the full cost of retirement benefits. Currently, agencies pay the full retirement costs for active employees under two retirement systems: the military retirement system, which covers all military personnel; and the Federal employees retirement system [FERS], which covers most civilian personnel

hired since January 1984. These employees comprise nearly half the civilian work force.

Agencies do not pay the full retirement costs for employees covered by the civil service retirement system, which covers most civilian employees hired before January 1984. The CSRS benefits cost 25.1 percent of base pay. The employee and his or her employing agency, however, pay only 7 percent each for these benefits for a total contribution of 14 percent. The shortfall is eventually made up by a general fund payment into the retirement fund.

This proposal is simply a matter of good cost accounting. We believe that we should show the costs in the program when and where they accrue rather than as a Governmentwide cost at some point in the future. This practice was adopted in the 1980's for the military retirement system and the Federal employees retirement system.

This proposal is just one of many improvements that should eventually be made to cost accounting of Government programs. The private sector is moving toward recognizing not only the costs of retiree annuities but also retiree health benefits. The Financial Accounting Standards Board requires that financial statements of corporations recognize the liability of postretirement health benefits for its employees. This is an accounting improvement that is being considered for the Federal Government by the Federal Accounting Standards Advisory Board.

You have undoubtedly noticed that the budget contains a contingent cap adjustment of $6 billion in BA and outlays for implementing this proposal. This cap adjustment would be necessary to allow agency salaries and expense budgets to be increased to cover the full retirement cost. This would essentially hold agencies harmless for the accounting change. It would ensure that agencies do not have to reduce staff or cut program expenses in other ways to reflect the full costs of retirement benefits.

This proposal would not adversely affect employees. The cap adjustment would ensure that no staff reductions would be necessary to cover the full retirement cost. In addition, the proposal would not change retirement benefits.

The vast majority-$5.3 billion-of the contingent cap adjustment, would be necessary to cover the CSRS costs. The remaining $700 million of the cap adjustment would be the cost of charging agencies the full costs of retirement benefits for employees covered by the other retirement systems, including the Public Health Service Commissioned Corps, the Coast Guard, the CIA, and the Foreign Service retirement systems.

This proposal would not affect the deficit. Since the agency outlays for the retirement benefits would be transferred to another Government account, a retirement fund, total Government spending would be unchanged.

Finally, I would like to add that this proposal would not affect agency decisions regarding contracting out. Agencies are already required, under OMB circular A-76, to consider the full Government costs of employee benefits when comparing the costs of contracting out with the costs of having the Government perform the work itself. That requirement would remain unchanged.