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2003.

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Testimony:

Before the Subcommittee on Civil Service and Agency Organization, 
Committee on Government Reform, House of Representatives:

United States General Accounting Office:

GAO:

For Release on Delivery Expected at 10:00 a.m. EDT:

Tuesday, April 29, 2003:

Defense Transformation:

Preliminary Observations on DOD's Proposed Civilian Personnel Reforms:

Statement of David M. Walker, 
Comptroller General of the United States:

GAO-03-717T:

GAO Highlights:

Highlights of GAO-03-717T, testimony before the Subcommittee on Civil 
Service and Agency Organization, Committee on Government Reform, House 
of Representatives

Why GAO Did This Study:

DOD is in the midst of a major transformation effort including a number 
of initiatives to transform its forces and improve its business 
operations.  DOD’s legislative initiative would provide for major 
changes in the civilian and military human capital management, make 
major adjustments in the DOD acquisition process, affect DOD’s 
organization structure, and change DOD’s reporting requirements to 
Congress, among other things.

DOD’s proposed National Security Personnel System (NSPS) would provide 
for wide-ranging changes in DOD’s civilian personnel pay and 
performance management, collective bargaining, rightsizing, and a 
variety of other human capital areas.  The NSPS would enable DOD to 
develop and implement a consistent DOD-wide civilian personnel system.  

This testimony provides GAO’s preliminary observations on aspects of 
DOD’s legislative proposal to make changes to its civilian personnel 
system and poses critical questions that need to be considered.  


What GAO Found:

Many of the basic principles underlying DOD’s civilian human capital 
proposals have merit and deserve serious consideration.  The federal 
personnel system is clearly broken in critical respects—designed for a 
time and workforce of an earlier era and not able to meet the needs and 
challenges of our current rapidly changing and knowledge-based 
environment.  DOD’s proposal recognizes that, as GAO has stated and the 
experiences of leading public sector organizations here and abroad have 
found strategic human capital management must be the centerpiece of any 
serious government transformation effort.  

More generally, from a conceptual standpoint, GAO strongly supports the 
need to expand broad banding and pay for performance-based systems in 
the federal government.  However, moving too quickly or prematurely at 
DOD or elsewhere, can significantly raise the risk of doing it wrong.  
This could also serve to severely set back the legitimate need to move 
to a more performance and results- based system for the federal 
government as a whole.  Thus, while it is imperative that we take steps 
to better link employee pay and other personnel decisions to 
performance across the federal government, how it is done, when it is 
done, and the basis on which it is done, can make all the difference in 
whether or not we are successful.  In our view, one key need is to
modernize performance management systems in executive agencies so that 
they are capable of supporting more performance-based pay and other 
personnel decisions.  Unfortunately, based on GAO’s past work, most 
existing federal performance appraisal systems, including a vast 
majority of DOD’s systems, are not currently designed to support a 
meaningful performance-based pay system.

The critical questions to consider are: should DOD and/or other 
agencies be granted broad-based exemptions from existing law, and if 
so, on what basis; and whether they have the institutional 
infrastructure in place to make effective use of the new authorities.  
This institutional infrastructure includes, at a minimum, a human 
capital planning process that integrates the agency’s human capital 
policies, strategies, and programs with its program goals and mission, 
and desired outcomes; the capabilities to effectively develop and 
implement a new human capital system; and, importantly, a set of 
adequate safeguards, including reasonable transparency and appropriate 
accountability mechanisms to ensure the fair, effective, and credible 
implementation of a new system.  

In our view, Congress should consider providing governmentwide broad 
banding and pay for performance authorities that DOD and other federal 
agencies can use provided they can demonstrate that they have a 
performance management system in place that meets certain statutory 
standards, which can be certified by a qualified and independent party, 
such as OPM, within prescribed timeframes.  Congress should also 
consider establishing a governmentwide fund whereby agencies, based on 
a sound business case, could apply for funding to modernize their 
performance management systems and ensure that those systems have 
adequate safeguards to prevent abuse.  This approach would serve as a 
positive step to promote high-performing organizations throughout the 
federal government while avoiding fragmentation within the executive 
branch in the critical human capital area.

www.gao.gov/cgi-bin/getrpt?GAO-03-717T.

To view the full report, including the scope
and methodology, click on the link above.
For more information, contact Derek Stewart at (202) 512-5559 or 
stewartd@gao.gov. 

[End of section]

Chairwoman Davis, Mr. Davis, and Members of the Subcommittee:

It is a pleasure to appear before you today to provide our preliminary 
observations on the Department of Defense's (DOD) proposed National 
Security Personnel System (NSPS) included as part of the Defense 
Transformation for the 21st Century Act of 2003. As you know, DOD is in 
the midst of a major transformation and it has undertaken a number of 
related initiatives to transform its forces and fundamentally improve 
its business operations. As part of DOD's transformation process, the 
Secretary of Defense and senior civilian and military leaders have 
committed to adopt a capabilities-based approach to acquisition 
planning and to improve the linkage between overall strategy and 
individual investments. At the same time, DOD has embarked on a series 
of efforts to achieve strategic savings and improve its business 
processes, including financial management, support infrastructure 
reforms to include base closures, information technology modernization, 
logistics reengineering, and strategic human capital management. In 
that regard, I am pleased to serve as an observer to the Defense 
Business Practice Implementation Board. Notwithstanding these ongoing 
efforts, GAO has reported a range of DOD challenges for many years. In 
addition, DOD also is covered by several of GAO's governmentwide high-
risk areas, including the area of strategic human capital management.

The proposed Defense Transformation for the 21st Century Act of 2003 
represents a substantive legislative proposal that has both significant 
precedent-setting implications for the government and far-reaching 
implications on the way DOD is managed. Specifically, the critical 
questions are whether DOD and/or other agencies should be granted 
broad-based exemptions from existing law, and if so, on what basis; and 
do agencies have the institutional infrastructure in place to make 
effective use of the new authorities they are seeking. DOD's 
legislative initiative would, among other things, provide for major 
changes in civilian and military human capital management, make 
important adjustments to the DOD acquisition process, affect DOD's 
organization structure, and change DOD's reporting requirements to 
Congress.

As a starting point, and as agreed with the Subcommittee, today I will 
provide our preliminary observations on DOD's legislative proposal to 
make changes to its civilian personnel system. The proposed NSPS would 
provide for wide-ranging changes in DOD's civilian personnel pay and 
performance management, collective bargaining, rightsizing, and a 
variety of other human capital areas. The NSPS would enable DOD to 
develop and implement a consistent, DOD-wide civilian personnel system 
bringing together the many disparate systems that exist today. The 
proposal, while providing a section-by-section analysis, does not 
provide an adequate justification given the significance of the 
proposed changes. In addition, it is my understanding that a document 
containing a fully developed justification for the proposed changes is 
not available. At the same time, it our understanding that DOD's 
current thinking is that NSPS will be based on the work done by DOD's 
Human Resources Best Practices Task Force. The Task Force reviewed 
federal personnel demonstration projects and selected alternative 
personnel systems to identify practices that it considered promising 
for a DOD civilian human resources strategy. These practices were 
outlined in a April 2, 2003, Federal Register notice asking for comment 
on DOD's plan to integrate all of its current science and technology 
reinvention laboratory demonstration projects under a single human 
capital framework consistent with the best practices DOD 
identified.[Footnote 1]

Many of the basic principles underlying DOD's civilian human capital 
proposals have merit and deserve serious consideration. The federal 
personnel system is clearly broken in critical respects--designed for a 
time and workforce of an earlier era and not able to meet the needs and 
challenges of our current rapidly changing and knowledge-based 
environment. DOD's proposal recognizes that, as GAO has stated and the 
experiences of leading public sector organizations here and abroad have 
found, strategic human capital management must be the centerpiece of 
any serious government transformation effort.

Human capital reforms at DOD obviously have important implications for 
national security. However, given the massive size of DOD and the 
nature and scope of the changes that are being considered, DOD's 
proposal also has important precedent-setting implications for federal 
human capital management generally and should also be considered in 
that context. The critical questions raised are should DOD and/or other 
agencies be granted broad-based exemptions from existing law, and if 
so, on what basis; and whether they have the institutional 
infrastructure in place to make effective use of the new authorities. 
This institutional infrastructure includes, at a minimum, a human 
capital planning process that integrates the agency's human capital 
policies, strategies, and programs with its program goals and mission, 
and desired outcomes; the capabilities to effectively develop and 
implement a new human capital system; and importantly a set of adequate 
safeguards, including reasonable transparency and appropriate 
accountability mechanisms, to ensure the fair, effective, and credible 
implementation and application of a new system.

Consistent with this view, we have long held that the first step toward 
meeting the government's human capital challenges is for agency leaders 
to identify and make use of all the appropriate administrative 
authorities available to them to manage their people for results, 
undertaken as part of and consistent with proven change management 
practices. Much of the authority agency leaders need to manage human 
capital strategically is already available under current laws and 
regulations. This includes the ability to develop modern, effective, 
and credible performance management systems that would support more 
performance-based pay decisions. The second step is for policymakers to 
pursue incremental legislative reforms to give agencies additional 
tools and flexibilities to hire, manage, and retain the human capital 
they need, particularly in critical occupations. The third step is for 
all interested parties to work together to identify, based in part on 
the experiences of the incremental reforms and demonstration projects, 
the kinds of comprehensive legislative reforms in the human capital 
area that should be enacted over time, taking into account the extent 
to which existing approaches make sense in the current and future 
operating environment. [Footnote 2]

Observations on Selected Provisions of the Proposed NSPS:

With almost 700,000 civilian employees on its payroll, DOD is the 
second largest federal employer of civilians in the nation, after the 
Postal Service. Defense civilian personnel, among other things, develop 
policy, provide intelligence, manage finances, and acquire and maintain 
weapon systems. Given the current global war on terrorism, the role of 
DOD's civilian workforce is expanding, such as participation in combat 
support functions that free military personnel to focus on warfighting 
duties for which they are uniquely qualified. Civilian personnel are 
also key to maintaining DOD's institutional knowledge because of 
frequent rotations of military personnel. However, since the end of the 
Cold War, the civilian workforce has undergone substantial change, due 
primarily to downsizing, base realignments and closures, competitive 
sourcing initiatives, and DOD's changing missions. For example, between 
fiscal years 1989 and 2002, DOD reduced its civilian workforce by about 
38 percent, with an additional reduction of about 55,000 personnel 
proposed through fiscal year 2007. Some DOD officials have expressed 
concern about a possible shortfall of critical skills because 
downsizing has resulted in a significant imbalance in the shape, 
skills, and experience of its civilian workforce while more than 50 
percent of the civilian workforce will become eligible to retire in the 
next 5 years. As a result, the orderly transfer of DOD's institutional 
knowledge is at risk.

These factors, coupled with the Secretary of Defense's significant 
transformation initiatives, make it imperative for DOD to strategically 
manage its civilian workforce based on a total force perspective which 
includes civilian personnel as well as active duty and reserve military 
personnel and contractor personnel. This strategic management approach 
will enable DOD to accomplish its mission by putting the right people 
in the right place at the right time and at a reasonable cost.

NSPS is intended to be a major component of DOD's efforts to more 
strategically manage its workforce and respond to current and emerging 
challenges. This morning I will highlight several of the key provisions 
of NSPS that in our view are most in need of close scrutiny as Congress 
considers the DOD proposal.

Providing the Wide-Ranging Authority to Design a New Civilian Personnel 
System:

The DOD proposal would allow the Secretary of Defense to jointly 
prescribe regulations with the Director of the Office of Personnel 
Management (OPM) to establish a flexible and contemporary human 
resources management system for DOD--NSPS. The joint issuance of 
regulations is similar to that set forth in the Homeland Security Act 
of 2002[Footnote 3] between the Secretary of Homeland Security and the 
Director of OPM for the development of the Department of Homeland 
Security (DHS) human resources management system. However, unlike the 
legislation creating DHS, the Defense Transformation for the 21st 
Century Act would allow the Secretary of Defense to waive the 
requirement for joint issuance of regulations if, in his or her 
judgment, it is "essential to the national security"--which is not 
defined in the act. While the act specifies a number of key provisions 
of Title 5 that shall not be altered or waived, including those 
concerning veterans' preference, merit protections, and safeguards 
against discrimination and prohibited personnel practices, the act 
nonetheless would, in substance, provide the Secretary of Defense with 
significant independent authority to develop a separate and largely 
autonomous human capital system for DOD.

The DOD proposal also has significant potential implications for 
governmentwide human capital policies and procedures and for OPM as the 
President's agent and advisor for human capital matters and overseer of 
federal human capital management activities.[Footnote 4] In essence, 
the act would allow for the development of a personnel system for the 
second largest segment of the federal workforce that is not necessarily 
within the control or even direct influence of OPM. To strike a better 
balance between reasonable management flexibility and the need for a 
reasonable degree of consistency and adequate safeguards to prevent 
abuse throughout the government, Congress should consider making these 
provisions of the Defense Transformation for the 21st Century Act 
consistent with the Homeland Security Act of 2002, or at a minimum, 
providing some statutory guidance on what would constitute a situation 
"essential to the national security" that would warrant the Secretary 
of Defense to act independently of the Director of OPM.

Implementing Pay Reform and Performance Management:

DOD states that it needs a human capital management system that 
provides new and increased flexibility in the way it assesses and 
compensates its employees, and toward that end, we understand that in 
implementing NSPS DOD plans to strengthen its performance appraisal 
systems and implement pay banding approaches as core components of any 
new DOD human capital system. We have a long and successful experience 
in using pay banding with our analyst staff as a result of the GAO 
Personnel Act of 1980. Certain DOD components have had a number of 
years of experience with pay banding through OPM's personnel 
demonstration projects, authorized by the Civil Service Reform Act of 
1978, to test and introduce beneficial change in governmentwide human 
resources management systems. For example, in 1980, the Navy personnel 
demonstration project, commonly referred to as the China Lake 
demonstration project, implemented a number of reforms including pay 
banding and a pay for performance system. More recently, the Civilian 
Acquisition Workforce personnel demonstration project (AcqDemo) was 
implemented in 1999 and created a pay banding system that covers part 
of its civilian acquisition, technology, and logistics 
workforce.[Footnote 5] The expected results of AcqDemo's pay banding 
system include increased flexibility to assign employees as well as 
increased pay potential and satisfaction with advancement for 
employees. According to agency officials, an evaluation to OPM on 
AcqDemo's progress is scheduled to be available this June. Lastly, 
DOD's science and technology reinvention laboratory demonstration 
projects all implemented some form of pay banding and pay for 
performance. OPM reports that these reinvention laboratory 
demonstration projects have been able to offer more competitive 
starting salaries. Additionally some labs' turnover experience was 
significantly lower among highly-rated employees and higher among 
employees with lower ratings.[Footnote 6] DOD's demonstration projects 
clearly provide helpful insights and valuable lessons learned in 
connection with broad banding and pay for performance efforts. At the 
same time these projects and related DOD efforts involve less than 10 
percent of DOD's civilian workforce and expanding these concepts to the 
entire department will require significant effort and likely need to be 
implemented in phases over several years.

As you know, there is growing agreement on the need to better link 
individual pay to performance. Establishing such linkages is essential 
if we expect to maximize the performance and assure the accountability 
of the federal government for the benefit of the American people. As a 
result, from a conceptual standpoint, we strongly support the need to 
expand broad banding approaches and pay for performance-based systems 
in the federal government. However, moving too quickly or prematurely 
at DOD or elsewhere can significantly raise the risk of doing it wrong. 
This could also serve to severely set back the legitimate need to move 
to a more performance and results-based system for the federal 
government as a whole. Thus, while it is imperative that we take steps 
to better link employee pay to performance across the federal 
government, how it is done, when it is done, and the basis on which it 
is done can make all the difference in whether or not such efforts are 
successful. In our view, one key need is to modernize performance 
management systems in executive agencies so that they are capable of 
adequately supporting more performance-based pay and other personnel 
decisions. Unfortunately, based on GAO's past work, most existing 
federal performance appraisal systems, including a vast majority of 
DOD's systems, are not designed to support a meaningful performance-
based pay system.

The bottom line is that in order to receive any additional performance-
based pay flexibility for broad based employee groups, agencies should 
have to demonstrate that they have modern, effective, credible, and, as 
appropriate, validated performance management systems in place with 
adequate safeguards, including reasonable transparency and appropriate 
accountability mechanisms, to ensure fairness and prevent 
politicalization and abuse.

At your request Madam Chairwoman, and that of Senator Voinovich, we 
identified key practices leading public sector organizations both here 
in the United States and abroad have used in their performance 
management systems to link organizational goals to individual 
performance and create a "line of sight" between an individual's 
activities and organizational results.[Footnote 7] These practices can 
help agencies develop and implement performance management systems with 
the attributes necessary to effectively support pay for performance.

More specifically, Congress should consider establishing statutory 
standards that an agency must have in place before it can implement 
broad banding or a more performanced-based pay program. As the request 
of Congressman Danny Davis, we developed an initial list of possible 
safeguards to help ensure that any additional flexibility Congress may 
grant for expanding pay for performance management systems in the 
government are fair, effective, and credible. We provided an initial 
list to Congressman Davis late last week. This initial list of 
safeguards was developed based on our extensive body of work looking at 
the performance management practices used by leading public sector 
organizations both in the United States and in other countries as well 
as our own experiences at GAO in implementing a modern performance 
management system for our own staff. We believe that the following 
could provide a starting point for developing a set of statutory 
safeguards in connection with any additional efforts to expand pay for 
performance systems.

* Assure that the agency's performance management systems (1) link to 
the agency's strategic plan, related goals, and desired outcomes, and 
(2) result in meaningful distinctions in individual employee 
performance. This should include consideration of critical competencies 
and achievement of concrete results.

* Involve employees, their representatives, and other stakeholders in 
the design of the system, including having employees directly involved 
in validating any related competencies, as appropriate.

* Assure that certain predecisional internal safeguards exist to help 
achieve the consistency, equity, nondiscrimination, and 
nonpoliticization of the performance management process (e.g., 
independent reasonableness reviews by Human Capital Offices and/or 
Offices of Opportunity and Inclusiveness or their equivalent in 
connection with the establishment and implementation of a performance 
appraisal system, as well as reviews of performance rating decisions, 
pay determinations, and promotion actions before they are finalized to 
ensure that they are merit-based; internal grievance processes to 
address employee complaints; and pay panels whose membership is 
predominately made up of career officials who would consider the 
results of the performance appraisal process and other information in 
connection with final pay decisions).

* Assure reasonable transparency and appropriate accountability 
mechanisms in connection with the results of the performance management 
process (e.g., publish overall results of performance management and 
pay decisions while protecting individual confidentiality, and report 
periodically on internal assessments and employee survey results).

The above items should help serve as a starting point for Congress to 
consider in crafting possible statutory safeguards for executive 
agencies' performance management systems. OPM would then issue guidance 
implementing the legislatively defined safeguards. The effort to 
develop such safeguards could be part of a broad-based expanded pay for 
performance authority under which whole agencies and/or employee groups 
could adopt broad-banding and move to more pay for performance oriented 
systems if certain conditions are met. Specifically, the agency would 
have to demonstrate, and OPM would have to certify, that a modern, 
effective, credible, and, as appropriate, validated performance 
management system with adequate safeguards, including reasonable 
transparency and appropriate accountability mechanisms, is in place to 
support more performance-based pay and related personnel decisions 
before the agency could implement a new system. In this regard OPM 
should consider adopting class exemption approaches and OPM should be 
required to act on any individual certifications within prescribed time 
frames (e.g., 30-60 days). This approach would allow for a broader-
based yet more conceptually consistent approach in this critical area. 
It would also facilitate a phased-implementation approach throughout 
government. The list is not intended to cover all the attributes of a 
modern, results-oriented performance management system. Rather, the 
items on the list cover possible safeguards for performance management 
systems to help ensure those systems are fair, effective, and credible.

Congress should also consider establishing a governmentwide fund 
whereby agencies, based on a sound business case, could apply for funds 
to modernize their performance management systems and ensure those 
systems have adequate safeguards to prevent abuse. This approach would 
serve as a positive step to promote high-performing organizations 
throughout the federal government while avoiding fragmentation within 
the executive branch in the critical human capital area.

Establishing Senior Executive Service Pay and Performance Management:

The Senior Executive Service (SES) needs to lead the way in the federal 
government's effort to better link pay to performance. We have reported 
that there are significant opportunities to strengthen efforts to hold 
senior executives accountable for results.[Footnote 8] In particular, 
more progress is needed in explicitly linking senior executive 
expectations for performance to results-oriented organizational goals 
and desired outcomes, fostering the necessary collaboration both within 
and across organizational boundaries to achieve results, and 
demonstrating a commitment to lead and facilitate change. These 
expectations for senior executives will be critical to keep agencies 
focused on transforming their cultures to be more results-oriented, 
less hierarchical, more integrated, and externally focused and thereby 
be better positioned to respond to emerging internal and external 
challenges, improve their performance, and assure their accountability.

Given the state of agencies' performance management systems, Congress 
should consider starting federal results-oriented pay reform with the 
SES. In that regard and similar to the Homeland Security Act, the 
proposed NSPS would increase the current total allowable annual 
compensation limit for senior executives up to the Vice President's 
total annual compensation. However, the Homeland Security Act provides 
that OPM, with the concurrence of the Office of Management and Budget, 
certify that agencies have performance appraisal systems that, as 
designed and applied, make meaningful distinctions based on relative 
performance. NSPS does not include such a certification provision. 
Congress should consider requiring OPM to certify that the DOD SES 
performance management system makes meaningful distinctions in 
performance and employs the other practices used by leading 
organizations to develop effective performance management systems that 
I mentioned earlier, before DOD could increase the annual compensation 
limit for senior executives.[Footnote 9]

Employees and Employee Organizations Involvement in Creating NSPS:

The proposed Defense Transformation for the 21st Century Act includes 
provisions intended to ensure collaboration with employee 
representatives in the planning, development, and implementation of a 
human resources management system. For example, employee 
representatives are to be given the opportunity to review and make 
recommendations on the proposed NSPS. The Secretary of Defense and the 
Director of OPM are to provide employee representatives with a written 
description of the proposed system, give these representatives at least 
30 calendar days to review and make recommendations on the proposal, 
and fully and fairly consider each recommendation. DOD may immediately 
implement the parts of the proposed system that did not receive 
recommendations or those recommendations they chose to accept from the 
employee representatives. While these provisions are designed to help 
assure that employees and their authorized representatives play a 
meaningful role on the design and implementation of any new human 
capital system, DOD does not have a good track record in reaching out 
to key stakeholders. In fact, it is my understanding that neither DOD 
employees nor their authorized representatives played a meaningful role 
in connection with the design of the legislative proposal that is the 
subject of this hearing.

For the recommendations from the employee representatives that the 
Secretary and the Director do not accept, the Secretary and the 
Director are to notify Congress and meet and confer with employee 
representatives in an attempt to reach agreement on how to proceed with 
these recommendations. If an agreement has not been reached after 30 
days, and the Secretary determines that further consultation with 
employee representatives will not produce agreement, the Secretary may 
implement any or all parts of the proposal, including any modifications 
made in response to the recommendations. The Secretary is to notify 
Congress of the implementation of any part of the proposal, any changes 
made to the proposal as a result of recommendations from the employee 
representatives, and the reasons why implementation is appropriate.

Although the procedures called for in the DOD proposal are similar to 
those enacted in the Homeland Security Act, the latter states 
explicitly the intent of Congress on the importance for employees to be 
allowed to participate in a meaningful way in the creation of any human 
resources management system affecting them. To underscore the 
importance that Congress places on employee involvement in the 
development and implementation of NSPS, Congress should consider 
including similar language as that found in the Homeland Security Act.

More generally, and aside from the specific statutory provisions on 
consultation, the active involvement of employees will be critical to 
the success of NSPS. We have reported that the involvement of employees 
both directly and indirectly is crucial to the success of new 
initiatives, including implementing a pay for performance 
system.[Footnote 10] High-performing organizations have found that 
actively involving employees and stakeholders, such as unions or other 
employee associations when developing results-oriented performance 
management systems helps improve employees' confidence and belief in 
the fairness of the system and increases their understanding and 
ownership of organizational goals and objectives. This involvement must 
be early, active, and continuing if employees are to gain a sense of 
understanding and ownership for the changes that are being made.

Attracting Key Talent:

The legislation has a number of provisions designed to give DOD 
flexibility to help obtain key critical talent. Specifically, it allows 
DOD greater flexibility to (1) augment the use of temporary appointment 
authorities, (2) hire experts and consultants and pay them special 
rates, (3) define benefits for overseas employees, and (4) enter into 
personal services contracts for experts and consultants for national 
security missions, including for service outside of the United States. 
Specifically, the Secretary would have the authority to establish a 
program to attract highly qualified experts in needed occupations with 
the flexibility to establish the rate of pay, eligibility for 
additional payments, and terms of the appointment. These authorities 
give DOD considerable flexibility to obtain and compensate individuals 
and exempt them from several provisions of current law. While we have 
strongly endorsed providing agencies with additional tools and 
flexibilities to attract and retain needed talent, the broad exemption 
from some existing ethics and other personnel authorities without 
prescribed limits on their use raises some concern. Accordingly, 
Congress should consider placing numerical or percentage limitations on 
the use of these provisions or otherwise specifically outline basic 
safeguards to ensure such provisions are used appropriately.

Rightsizing and Organizational Alignment:

The proposed Defense Transformation for the 21st Century Act would 
provide the Secretary with a number of broad authorities related to 
rightsizing and organizational alignment. These include authorizing the 
Secretary to restructure or reduce the workforce by establishing 
programs using voluntary early retirement eligibility and separation 
payments, or both. In addition, the Secretary would be allowed to 
appoint U.S. citizens who are at least 55 years of age to the excepted 
service for a period of 2 years, with a possible 2-year extension, 
subject only to certain provisions preventing displacement of current 
employees. The proposal also provides that annuitants who receive an 
annuity from the Civil Service Retirement and Disability Fund and 
become employed in a position within the Department of Defense shall 
continue to receive their unreduced annuity. This and selected other 
NSPS provisions will clearly have incremental budget implications for 
which we have not seen any related cost estimate. Furthermore, this and 
other selected NSPS provisions would create an unlevel playing field 
for experienced talent within the civilian workforce.

Authorities such as voluntary early retirements have proven to be 
effective tools in strategically managing the shape of the workforce. I 
have exercised the authority that Congress granted me to offer 
voluntary early retirements in GAO in both fiscal years 2002 and 2003 
as one element of our strategy to shape the GAO workforce. However, 
given DOD's past efforts in using existing rightsizing tools, there is 
reason to be concerned that DOD may struggle to effectively manage 
additional authorities that may be provided. While DOD has used 
existing authorities in the past to mitigate the adverse effects of 
force reductions, the approach to reductions was not oriented toward 
strategically shaping the makeup of the workforce. We have previously 
reported that the net effect of lack of attention to workforce shaping 
is a civilian workforce that is not balanced by age or experience, 
which risks the orderly transfer of institutional knowledge.[Footnote 
11] DOD thus may be challenged in using new authorities in a cohesive, 
integrated way that supports achieving mission results, absent a 
comprehensive and integrated human capital strategy and workforce plan.

In the past, OPM has managed its authority to reemploy an annuitant 
with no reduction in annuity on a case-by-case basis. The NSPS 
proposal, which broadly grants such treatment, raises basic questions 
about the intent and design of the federal benefits or total 
compensation of federal employees and obviates the importance of 
establishing an effective DOD partnership with OPM in prescribing the 
use of this authority. As noted previously, providing such authority 
only to DOD would provide DOD a competitive advantage in the market 
place that would place other agencies at a disadvantage. It would also 
involve incremental costs that have yet to be estimated. Flexible 
approaches to shaping the workforce, such as 2-year excepted service 
appointments, may be helpful in avoiding long-term commitments for 
short-term requirements, addressing transition gaps, and smoothing 
outsourcing strategies. At the same time, these authorities represent 
tools that are not effective on their own, rather they are elements 
that need to be developed into an effective strategy and aligned with 
program goals and missions.

The legislation could also allow DOD to revise Reduction-in-Force (RIF) 
rules to place greater emphasis on an employee's performance. DOD has 
indicated that it will be considering for application DOD-wide, 
personnel practices that were identified in the April 2, 2003, Federal 
Register notice. This notice describes revised RIF procedures that 
change the order in which employees would be retained under a RIF 
order. Specifically, employees could be placed on a retention list in 
the following order: type of employment (i.e., permanent, temporary), 
level of performance, and veterans' preference eligibility (disabled 
veterans will be given additional priority), which we note would reduce 
the order in which veterans' preference is currently provided. While we 
conceptually support revised RIF procedures that involve much greater 
consideration of an employee's performance, as I pointed out above, 
agencies must have modern, effective and credible performance 
management systems in place to properly implement such authorities.

Establishing Employee Appeals Procedures:

The proposed NSPS would allow the Secretary, after consultation with 
the Merit Systems Protection Board (MSPB), to prescribe regulations 
providing fair treatment in any appeals brought by DOD employees 
relating to their employment. The proposal states that the appeals 
procedures shall ensure due process protections and expeditious 
handling, to the maximum extent possible. In this regard, the proposal 
provides that presently applicable appeals procedures should only be 
modified insofar as such modifications are designed to further the 
fair, efficient, and expeditious resolution of matters involving DOD 
employees. This provision is substantially the same as a similar 
provision in the Homeland Security Act of 2002 allowing DHS to 
prescribe regulations for employee appeals related to their employment. 
As required of the Secretary of DHS, the Secretary of Defense would be 
required to consult with MSPB prior to issuing regulations. However, 
neither the Homeland Security Act nor the proposed legislation 
expressly requires that employee appeals be heard and decided by the 
MSPB. There is also no express provision for judicial review of 
decisions regarding employee appeals decisions.

Given the transparency of the federal system dispute resolution and its 
attendant case law, the rights and obligations of the various parties 
involved is well developed. It is critical that any due process changes 
that are implemented after consultation with MSPB result in dispute 
resolution processes that are not only fair and efficient but, as 
importantly, minimize any possible perception of unfairness.

Building the Institutional Infrastructure Needed to Support NSPS:

The critical need for an institutional infrastructure to develop and 
support change has been a consistent theme raised throughout the 
observations I have been providing on some of the specific aspects of 
the proposed NSPS. This institutional infrastructure includes, at a 
minimum, a human capital planning process that integrates the 
department's human capital policies, strategies, and programs with 
DOD's mission, goals, and desired outcomes; the capabilities to 
effectively develop and implement a new human capital system; and a set 
of adequate safeguards, including reasonable transparency and 
appropriate accountability mechanisms to ensure the fair and merit-
based implementation and application of a new system. Quite simply, in 
the absence of the right institutional infrastructure, granting 
additional human capital authorities will provide little advantage and 
could actually end up doing damage if the new flexibilities are not 
implemented properly. Our work looking at DOD's strategic human capital 
planning efforts and our work looking across the federal government at 
the use of human capital flexibilities and related
human capital efforts underscores the critical steps that DOD needs to 
take to properly develop and effectively implement any new personnel 
authorities.

Strategic Human Capital Planning at DOD:

Our work here and abroad has consistently demonstrated that leading 
organizations align their human capital approaches, policies, 
strategies, and programs with their mission and programmatic goals. 
Human capital plans that are aligned with mission and program goals 
integrate the achievement of human capital objectives with the agency's 
strategic and program goals. Careful and thoughtful human capital 
planning efforts are critical to making intelligent competitive 
sourcing decisions. The Commercial Activities Panel, which I was 
privileged to chair, called for federal sourcing policy to be 
"consistent with human capital practices designed to attract, motivate, 
retain, and reward a high performing workforce" and highlighted a 
number of human capital approaches to help achieve that 
objective.[Footnote 12]

In April 2002, DOD published a strategic plan for civilian 
personnel.[Footnote 13] However, as we reported in March 2003,[Footnote 
14] top-level leadership at the department and the component levels has 
not until recently been extensively involved in strategic planning for 
civilian personnel; however, civilian personnel issues appear to be a 
higher priority for top-level leaders today than in the past. Although 
DOD began downsizing its civilian workforce more than a decade ago, 
top-level leadership has not, until recently, developed and directed 
reforms to improve planning for civilian personnel. With the exception 
of the Army and the Air Force, neither the department nor the 
components in our March review had developed strategic plans to address 
challenges affecting the civilian workforce until 2001 or 2002, which 
is indicative of civilian personnel issues being an emerging priority.

In addition, we reported that top-level leaders in the Air Force, the 
Marine Corps, the Defense Contract Management Agency, and the Defense 
Finance and Accounting Service have been or are working in partnership 
with their civilian human capital professionals to develop and 
implement civilian strategic plans; such partnership is increasing in 
the Army and not as evident in the Navy. Moreover, DOD's issuance of 
its departmentwide civilian human capital plan begins to lay a 
foundation for strategically addressing civilian human capital issues; 
however, DOD has not provided guidance on aligning the component-level 
plans with the department-level plan to obtain a coordinated focus to 
carry out the Secretary of Defense's transformation initiatives in an 
effective manner. High-level leadership attention is critical to 
developing and directing reforms because, without the overarching 
perspective of such leaders as Chief Operating Officers and the Chief 
Human Capital Officers, reforms may not be sufficiently focused on 
mission accomplishment, and without their support, reforms may not 
receive the resources needed for successful implementation. We have 
previously reported that the concept of a Chief Operating Officer (COO) 
could offer the leadership to help elevate attention on key management 
issues and transformational change, integrate these various efforts, 
and institutionalize accountability for addressing management issues 
and leading transformational change both within and between 
administrations.[Footnote 15] In our view, DOD is a prime candidate to 
adopt this COO concept. In addition, if Congress provides DOD with many 
of the flexibilities it is seeking under the NSPS, the basis for adding 
a COO position at DOD would be even stronger.

Despite the progress that has been made recently, the DOD human capital 
strategic plans we reviewed, for the most part, were not fully aligned 
with the overall mission of the department or respective components, 
results oriented, or based on data about the future civilian workforce. 
For example, the goals and objectives contained in strategic plans for 
civilian personnel were not explicitly aligned with the overarching 
missions of the respective organizations. Consequently, it is difficult 
to determine whether DOD's and the components' strategic goals are 
properly focused on mission achievement. In addition, none of the plans 
contained results-oriented performance measures that could provide 
meaningful data critical to measuring the results of their civilian 
human capital initiatives (i.e., programs, policies, and processes). 
Thus, DOD and the components cannot gauge the extent to which their 
human capital initiatives contribute to achieving their organizations' 
mission. Also, for the most part, the civilian human capital plans in 
our review did not contain detailed information on the skills and 
competencies needed to successfully accomplish future missions. Without 
information about what is needed in the future workforce, it is unclear 
if DOD and its components are designing and funding initiatives that 
are efficient and effective in accomplishing the mission, and 
ultimately contributing to force readiness.

Lastly, the DOD civilian strategic plans we reviewed did not address 
how the civilian workforce will be integrated with their military 
counterparts or with sourcing initiatives. At the department level, the 
strategic plan for civilian personnel was prepared separately from 
corresponding plans for military personnel and not integrated to form a 
seamless and comprehensive strategy and did not address how DOD plans 
to link its human capital initiatives with its sourcing plans, such as 
efforts to outsource non-core responsibilities. For the most part, at 
the component level, the plans set goals to integrate planning for the 
total workforce, to include civilian, military, and contractor 
personnel. The Air Force and the Army, in particular, have begun to 
integrate their strategic planning efforts for civilian and military 
personnel, also taking contractor responsibilities into consideration. 
Without integrated planning, goals for shaping and deploying civilian, 
military, and contractor personnel may not be consistent with and 
support each other. Consequently, DOD and its components may not have 
the workforce with the skills and competencies needed to accomplish 
tasks critical to assuring readiness and achieving mission success.

In our March report we recommended, among other things, that DOD 
improve future revisions and updates to the departmentwide strategic 
human capital plan by more explicitly aligning its elements with DOD's 
overarching mission, including performance measures, and focusing on 
future workforce needs. DOD only partially concurred with our 
recommendation, and, as explanation, stated that the recommendation did 
not recognize the involvement in and impact of DOD's Quadrennial 
Defense Review on the development of the departmentwide plan. We also 
recommended that DOD develop a departmentwide human capital strategic 
plan that integrates both military and civilian workforces and takes 
into account contractor roles and sourcing initiatives. DOD did not 
concur with this recommendation stating that it has both a military and 
civilian plan, and the use of contractors is just another tool to 
accomplish the mission, not a separate workforce with separate needs to 
manage. The intent of our recommendation is not to say that DOD has a 
direct responsibility to manage contractor employees, but rather to 
recognize that strategic planning for the civilian workforce should be 
undertaken in the context of the total force--civilian, military, and 
contractors--since the three workforces need to perform their 
responsibilities in a seamless manner to accomplish DOD's mission. In 
commenting on our recommendations, the Under Secretary of Defense for 
Personnel and Readiness stated that DOD is in the early stages of its 
strategic planning efforts. We recognize this and believe that our 
recommendations represent opportunities that exist to strengthen its 
developing planning efforts.

The Capabilities Needed to Effectively Develop and Implement Human 
Capital Flexibilities:

Our work has identified a set of key practices that appear to be 
central to the effective use of human capital authorities. These 
practices, which are shown in figure 1, center on effective planning 
and targeted investments, involvement and training, and accountability 
and cultural change.[Footnote 16]

Figure 1: Key Practices for Effective Use of Human Capital 
Flexibilities:

[See PDF for image]

[End of figure]

Congress should consider the extent to which an agency is capable of 
employing these practices before additional human capital flexibilities 
are implemented. In the context of NSPS, Congress should consider 
whether and to what extent DOD is using those practices.

Adequate Safeguards, Reasonable Transparency, and Appropriate 
Accountability:

I have discussed throughout my statement today the importance of moving 
to a new human capital system which provides reasonable management 
flexibility along with adequate safeguards, reasonable transparency, 
and appropriate accountability mechanisms to prevent abuse of 
employees. In addition to the suggestions made above, Congress should 
consider requiring DOD to fully track and periodically report on its 
performance. This requirement would be fully consistent with those 
contained in our calendar year 2000 human capital legislation, which 
required us to comprehensively assess our use of the authorities 
granted to us under the act.[Footnote 17] More generally, Congress 
should consider requiring DOD to undertake evaluations that are broadly 
modeled on the evaluation requirements of OPM's personnel demonstration 
program. Under the demonstration project authority, agencies must 
evaluate and periodically report on results, implementation of the 
demonstration project, cost and benefits, impacts on veterans and other 
EEO groups, adherence to merit principles, and extent to which the 
lessons from the project can be applied elsewhere, including 
governmentwide. This evaluation and reporting requirement would 
facilitate congressional oversight of NSPS, allow for any mid-course 
corrections in its implementation, and serve as a tool for documenting 
best practices and sharing lessons learned with employees, 
stakeholders, other federal agencies, and the public. DOD has stated 
that it would continue its evaluation of the science and technology 
reinvention laboratory demonstration projects when they are integrated 
under a single human capital framework.

Concluding Observations:

In summary, DOD's civilian human capital proposals raise several 
critical questions. Should DOD and/or other federal agencies be granted 
broad-based exemptions from existing law, and if so, on what basis? 
Does DOD have the institutional infrastructure in place to make 
effective use of the new authorities? This institutional infrastructure 
includes, at a minimum, a human capital planning process that 
integrates the agency's human capital policies, strategies, and 
programs with its program goals and mission, and desired outcomes; the 
capabilities to effectively develop and implement a new human capital 
system; and a set of adequate safeguards, including reasonable 
transparency and appropriate accountability mechanisms to ensure the 
fair, effective, and credible implementation and application of a new 
system.

Many of the basic principles underlying DOD's civilian human capital 
proposals have merit and deserve the serious consideration they are 
receiving here today and will no doubt be received by others in the 
coming weeks and months. However, the same critical questions should be 
posed to the DOD proposal. Should DOD and/or other federal agencies be 
granted broad-based exemptions from existing law, and if so, on what 
basis? In addition, Congress and DOD should carefully assess the degree 
to which DOD has the institutional infrastructure in place to make 
effective use the new authorities it is seeking. Our work has shown 
that while progress has been and is being made, additional efforts are 
needed by DOD to integrate its human capital planning process with the 
department's program goals and mission. The practices that have been 
shown to be critical to the effective use of flexibilities provide a 
validated roadmap for DOD and Congress to consider. Finally, as I have 
pointed out in several key areas, Congress should consider, if the 
authorities are granted, establishing additional safeguards to ensure 
the fair, merit-based, transparent, and accountable implementation and 
application of NSPS.

In our view, Congress should consider providing governmentwide broad 
banding and pay for performance authorities that DOD and other federal 
agencies can use provided they can demonstrate that they have a 
performance management system in place that meets certain statutory 
standards, which can be certified to by a qualified and independent 
party, such as OPM. Congress should also consider establishing a 
governmentwide fund whereby agencies, based on a sound business case, 
could apply for funds to modernize their performance management systems 
and ensure that those systems have adequate safeguards to prevent 
abuse. This would serve as a positive step to promote high-performing 
organizations throughout the federal government while avoiding further 
fragmentation within the executive branch in the critical human capital 
area.

This morning, I have offered some preliminary observations on some 
aspects of the proposal. However, these preliminary observations have 
not included some serious concerns I have with other sections of the 
proposed legislation that go beyond the civilian personnel proposal. My 
observations have included suggestions for how Congress can help DOD 
effectively address its human capital challenges and ensure that NSPS 
is designed and implemented in an effective, efficient, and fair manner 
that meets the current and future needs of DOD, its employees, and the 
American people. Human capital reforms at DOD obviously have important 
implications for national security and precedent-setting implications 
for governmentwide human capital management. Given the massive size of 
DOD and the magnitude of the nature and scope of the changes that are 
being considered, such reform at DOD also has important precedent-
setting implications for federal human capital management generally and 
should be considered in that context.

We look forward to continuing to support Congress and work with DOD in 
addressing the vital transformation challenges it faces. Madam 
Chairwoman and Mr. Davis, this concludes my prepared statement. I would 
be pleased to respond to any questions that you may have.

Contacts and Acknowledgments:

For further information on human capital issues at DOD, please contact 
Derek Stewart, Director, Defense Capabilities and Management on (202) 
512-5559 or at stewartd@gao.gov. For further information on 
governmentwide human capital issues, please contact J. Christopher 
Mihm, Director, Strategic Issues, on (202) 512-6806 or at 
mihmj@gao.gov. Individuals making key contributions to this testimony 
included William Doherty, Clifton G. Douglas, Jr., Christine Fossett, 
Bruce Goddard, Judith Kordahl, Janice Lichty, Bob Lilly, Lisa Shames, 
Ellen Rubin, Edward H. Stephenson, Jr., Tiffany Tanner, Marti Tracy, 
and Michael Volpe.

FOOTNOTES

[1] 68 Fed. Reg. 16,119-16,142 (2003).

[2] U.S. General Accounting Office, Human Capital: Building on the 
Current Momentum to Address High-Risk Issues, GAO-03-637T (Washington, 
D.C.: April 8, 2003).

[3] Pub. L. No. 107-296, Nov. 25, 2002.

[4] We discuss OPM's human capital leadership role in our report: Major 
Management Challenges and Program Risks: Office of Personnel 
Management, GAO-03-115 (Washington, D.C.: January 2003).

[5] U.S. General Accounting Office, Acquisition Workforce: Status of 
Agency Efforts to Address Future Needs, GAO-03-55 (Washington, D.C.: 
Dec. 18, 2002).

[6] U.S. Office of Personnel Management, 2002 Summative Evaluation: DOD 
S&T Reinvention Laboratory Demonstration Program (Washington, D.C.: 
August 2002).

[7] U.S. General Accounting Office, Results-Oriented Cultures: Creating 
a Clear Linkage between Individual Performance and Organizational 
Success, GAO-03-488 (Washington, D.C.: Mar. 14, 2003).

[8] U.S. General Accounting Office, Results-Oriented Cultures: Using 
Balanced Expectations to Manage Senior Executive Performance, 
GAO-02-966 (Washington, D.C.: Sept. 27, 2002).

[9] GAO-03-488.

[10] U.S. General Accounting Office, Insights for U.S. Agencies from 
Other Countries' Performance Management Initiatives, GAO-02-862 
(Washington, D.C.: Aug. 2, 2002) and Human Capital: Practices That 
Empowered and Involved Employees, GAO-01-1070 (Washington, D.C.: Sept. 
14, 2001).

[11] U.S. General Accounting Office, Strategic Approach Should Guide 
DOD Civilian Workforce Management, GAO/T-GGD/NSIAD-00-120 (Washington, 
D.C.: Mar. 9, 2000).

[12] Commercial Activities Panel, Improving the Sourcing Decisions of 
the Government (Washington, D.C.: April 2002).

[13] Civilian Human Resources Strategic Plan 2002-2008. At this time, 
DOD also published two strategic plans for military personnel (one 
addressing military personnel priorities and one addressing quality of 
life issues for service members and their families). In a December 2002 
report (Military Personnel: Oversight Process Needed to Help Maintain 
Momentum of DOD's Strategic Human Capital Planning, GAO-03-237), we 
addressed aspects of the two plans concerning benefits for active duty 
military personnel, noting that the plans were incomplete and that DOD 
needed a process to oversee the plans' implementation. 

[14] U.S. General Accounting Office, DOD Personnel: DOD Actions Needed 
to Strengthen Civilian Human Capital Strategic Planning and Integration 
with Military Personnel and Sourcing Decisions, GAO-03-475 (Washington, 
D C.: Mar. 28, 2003) and DOD Personnel: DOD Comments on GAO's Report on 
DOD's Civilian Human Capital Strategic Planning, GAO-03-690R 
(Washington, D.C.: Apr. 18, 2003).

[15] U.S. General Accounting Office, Highlights of a GAO Roundtable: 
The Chief Operating Officer Concept: A Potential Strategy To Address 
Federal Governance Challenges, GAO-03-192SP (Washington, D.C.: Oct. 4, 
2002).

[16] U.S. General Accounting Office, Human Capital: Effective Use of 
Flexibilities Can Assist Agencies in Managing Their Workforces, 
GAO-03-2 (Washington, D.C.: Dec. 6, 2002). 

[17] Our October 2000 legislation gave us tools to realign our 
workforce in light of mission needs and overall budgetary constraints; 
correct skills imbalances; and reduce high-grade, managerial, or 
supervisory positions without reducing the overall number of GAO 
employees. This legislation allowed us to create a technical and 
scientific career track at a compensation level consistent to the SES. 
It also allowed us to give greater consideration to performance and 
employee skills and knowledge in any RIF actions.

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