STATEMENT BY

BOBBY L. HARNAGE, SR.
NATIONAL PRESIDENT
AMERICAN FEDERATION OF GOVERNMENT EMPLOYEES, AFL-CIO

BEFORE THE

HOUSE ARMED SERVICES COMMITTEE
SUBCOMMITTEE ON READINESS

REGARDING

PROBLEMS IN OUTSOURCING

March 15, 2001

My name is Bobby L. Harnage, Sr., and I am National President of the American Federation of Government Employees. On behalf of the American Federation of Government Employees, AFL-CIO, which represents more than 600,000 federal employees, including 200,000 in the Department of Defense (DoD), who serve the American people around the world and across the nation, I thank you for this opportunity to speak before the House Readiness Subcommittee about the acute and longstanding problems in service contracting. Of course, a lot of people bring you their problems. That's an occupational hazard for lawmakers. I'd like to lighten your load, however, by offering solutions to those problems which should command the support of all lawmakers, regardless of ideology or affiliation, who believe that the interests of warfighters and taxpayers should be paramount.

Problem #1: DoD is spending more and more on service contracting for less and less.

In fact, we don't even know how much DoD is spending on service contracting, let alone if those hundreds of billions of taxpayer dollars are being spent wisely. We do know that the cost to taxpayers of service contracting has increased drastically. Over the last eight years, Pentagon officials have systematically replaced federal employees with contractors, often regardless of whether or not it makes any sense. According to the Office of Personnel Management, the DoD civilian workforce fell from 966,000 to 682,000 in 2000. (Chart 1) Service contracting, on the other hand, increased from $39.9 billion in 1992 to $51.8 billion in 1999, according to the Inspector General (IG). (Chart 2)

It's clear that the emphasis in DoD's service contracting crusade has been giving the jobs of federal employees to contractors, not in making sure that work has been well done.

"...DoD managers and contracting personnel were not putting sufficient priority during the 1990's on (service contracting), which likewise was virtually ignored for the first few years of recent acquisition reform efforts. Consequently, we think the risk of waste in this area is higher than commonly realized…We reviewed 105 Army, Navy, and Air Force contracting actions, valued at $6.7 billion, for a wide range of professional, administrative, and management support services amounting to about 104 million labor hours, or 50,230 staff years. We were startled by the audit results, because we found problems with every one of the 105 actions. In nearly 10 years of managing the audit office of the IG, DoD, I do not ever recall finding problems on every item…"

- Robert J. Lieberman, Assistant Inspector General for Audits, Department of Defense; "Federal Acquisition: Why Are Billions of Dollars Being Wasted?" (testimony before the House Subcommittee on Government Management, Information, and Technology); March 16, 2000.

One of the principal architects of DoD's massive transfer of work from federal employees to the private sector was sheepish when asked during a Senate Readiness Subcommittee hearing last year about the IG's damning report:

"...I agree with (the IG about) needing significant improvements in service contracting…(T)his has become a major challenge for us…(W)e have to really significantly improve our service buying…(I)t's probably going to take us a few years…to shift towards really professional service buying."

- Jacques Gansler, Under Secretary for Acquisition & Technology, Department of Defense; "A Hearing on Acquisition Reform" (testimony before the Senate Subcommittee on Readiness); April 26, 2000.

The General Accounting Office (GAO) has weighed in as well, both with respect to service contracting undertaken pursuant to OMB Circular A-76 and service contracting generally.

"Efforts to improve the accuracy of data on savings from A-76 (public-private competition) studies at the time the studies are completed are warranted, as are efforts to assess savings over time. Both are key to establishing more reliable savings estimates and improving the credibility of the A-76 program amidst continuing questions in Congress and elsewhere."

- General Accounting Office, DoD Competitive Sourcing (NSIAD 01-20), December 2000.

In an earlier report on A-76, GAO had noted that entries in the Commercial Activities Management Information System (CAMIS), the system that is supposed to be used to monitor contracts undertaken pursuant to the circular,

"are not modified and are being used continuously without updating the data to reflect changes in or even termination of contracts. DoD officials have noted that they could not determine from the CAMIS data if savings were actually being realized from A-76 competitions. Our work continues to show important limitations in CAMIS data…During our review, we found that CAMIS did not always record completed competitions and sometimes incorrectly indicated that competitions were completed where they had not yet begun or were still underway. We also identified where savings data recorded for completed competitions were incorrect based on other data provided by the applicable service."

- General Accounting Office, DoD Competitive Sourcing: Results of Recent Competitions (NSIAD-99-44), March 2000.

According to a recent GAO report, DoD has chosen not to keep its commitment to the Congress to improve its system for reporting the costs of contract services.

"The Department of Defense (DoD) spends tens of billions annually on contract services—ranging from services for repairing and maintaining equipment; to services for medical care; to advisory and assistance services such as providing management and technical support, performing studies, and providing technical assistance. In fiscal year 1999, DoD reportedly spent $96.5 billion for contract services—more than it spent on supplies and equipment. Nevertheless there have been longstanding concerns regarding the accuracy and reliability of DoD's reporting on the costs related to contract services—particularly that expenditures were being improperly justified and classified and accounting systems used to track expenditures were inadequate...

"...DoD has not developed a proposal to revise and improve the accuracy of the reporting of contract service costs. DoD officials told us that various internal options were under consideration; however, these officials did not provide any details on these options. DoD officials stated that the momentum to develop a proposal to improve the reporting of contract services costs had subsided. Without improving this situation, DoD's report on the costs of contract services will still be inaccurate and likely understate what DoD is paying for certain types of services."

- General Accounting Office, CONTRACT MANAGEMENT: No DoD Proposal to Improve Contract Service Costs Reporting (01-295), February 2001.

In that last report, GAO even provided us with some rare comic relief in the "Agency Comments" section:

"DoD stated that the title of this report is technically incorrect and recommended that the title be changed to Update to DoD's Efforts on Reporting on Advisory and Assistance Service Costs. We believe that the title, No DoD Proposal to Improve Contract Service Costs Reporting, more accurately reflects DoD actions to address reporting problems."

To sum up, Pentagon officials don't even reliably know how much they're spending on service contracting, let alone whether those taxpayer dollars are being well spent. Moreover, they reportedly have no intention to honor their commitment to improve service contract administration. That is, they don't have a clue, and they're fiercely determined to remain clueless.

We often hear that the federal government should be run more like a business. If a business—a big defense contractor, let's say—ever contracted out billions and billions of dollars worth of work without even the most basic monitoring of costs, the chair and the board of directors would be lucky to escape with their lives from angry mobs of shareholders. At DoD, however, it's business as usual. The architects of this colossal failure have somehow managed to leave office with their reputations intact, some of them taking spins in that infamous revolving door and resuming their employment in the defense contractor community, where they'll lobby for even more indiscriminate service contracting. With respect to DoD service contracting, there's no success quite like failing abysmally.

DoD's failure to track the billions and billions of dollars in increased service contracting has of course resulted in giving taxpayers the business, so to speak. However, it's also shafted DoD's civilian employees, the working and middle-class Americans who helped the nation win the Cold War and become the world's preeminent power. They are nearly 300,000 fewer, many of them having been replaced by contractors over the last eight years. And, adding insult to injury, DoD can't even begin to make the case that this wholesale transfer of work to the private sector was actually done in the name of efficiency.

Solution #1: Require that the rest of DoD use the methodology developed by the Army to track the size and cost of its massive contractor workforce.

One part of DoD is striving to deal with this longstanding problem and deserves our praise and encouragement: the Army. We should also recognize the indispensable leadership of former Representative Tillie Fowler (R-FL) in making the Army's contractor inventory a reality through her work on Section 343 of the FY2000 defense authorization bill.

As the result of a recently issued rule, the Army has established an inventory to track the growth in the cost and size of the service's contractor workforce in a comprehensive, reliable, and contractor-friendly fashion.

"(The Army's new contractor inventory will) provide unprecedented departmental level visibility of the missions supported and functions performed by contractors" and will allow the Army to "assess whether, and to what extent, contractors may be performing (inherently governmental) functions, or commercial functions, which, when contracted out beyond a certain level of reliance, increase operational risks to overall Army mission capabilities and readiness…The capabilities provided by service contractors consume at least one third of the Department's obligation authority; and yet, due to lack of reliable data, senior Army planners lack the ability to assess the total manpower capabilities within a function and major Army organizations that may rely heavily on contract support. The data collected under this reporting requirement will remedy these defects..."

- Department of the Army; Final Rule on "Report on Use of Employees of Non-Federal Entities to Provide Services"; Federal Register; 32 CFR 668, December 26, 2000.

The GAO has already endorsed the approach taken by the Army:

"Data on the full range of agencies' activities, whether performed by federal personnel, or contract, could inform managers and other decision makers about how they are performing their mission and mission support activities, and how they have currently allocated their resources." (Emphasis added)

- General Accounting Office, Competitive Contracting (NSIAD-00-244), September 2000.

The former president of the Professional Services Council, a contractors' special interest group, told the Bureau of National Affairs' Federal Contracts Report, on March 21, 2000, that the rule "should not be harmful in light of the fact that (compliance) is not coupled with receiving payment."

Meticulous statistics are kept about federal employees, their numbers, their salaries, their work. Virtually nothing, however, is known about the federal government's four million-strong contractor workforce. The work of federal employees is transparent as a result of the budget process, the appropriations process, the Federal Activities Inventory Reform Act, and the Government Performance and Results Act. The Army's contractor inventory will finally ensure the beginning of that same transparency with respect to the service's contractor workforce.

There are probably some who fear the Army's establishment of a contractor inventory. Of course, they are the ones who have repeatedly told the American people over the last eight years that the federal workforce has become smaller, when they knew that agencies, DoD in particular, were simply replacing displaced federal employees with contractors and staying the same size or even growing. (In 1997, for example, prior to the research that went into the Army's contractor inventory, the service's contractor workforce was estimated to be 44,000 employees. After more rigorous analysis, according to a March 21, 2000, article in Federal Contracts Report, the service's contractor workforce was estimated in 1998 to be 269,000.) But the prospect of their understandable embarrassment shouldn't stand in the way of the Army's making contractors more accountable to the taxpayers.

Mr. Chairman, AFGE members appreciate the letter you and Mr. Ortiz have written in support of the Army's contractor inventory. You and the ranking member are to be commended for your vigilance and attention to detail. I would ask that the House Readiness Subcommittee through the defense authorization bill require that other parts of DoD use the Army's well-considered methodology in establishing their own inventories. We must not pass up this opportunity to ensure that Pentagon officials finally take seriously their profoundly important contract administration responsibilities.

Finally, Mr. Chairman, I bring to your attention the Truthfulness, Responsibility, and Accountability in Contracting (TRAC) Act (H.R. 721), legislation that would require all agencies, including DoD, to track the cost and size of their contractor workforces. We're very appreciative of the strong support we have received over the last two years from Republican and Democratic lawmakers for the TRAC Act, including many on the House Armed Services Committee.

Problem #2: Too much work is contracted out without public-private competition.

"While our work has shown that savings are being realized from individual A-76 studies, overall program costs to date are still exceeding savings. The President's fiscal year 2001 budget submission reports that during fiscal year 1998 and 1999, the overall costs of the A-76 program have exceeded the expected savings."

Reminiscent of hard-line Communists who say that their God has never failed them because Communism's never really been tried, the architects of acquisition reform say that the circular hasn't really failed because it's never been given a chance, despite the fact that, according to DoD's own report (Letter from Jacques Gansler in response to report requirement in Section 8109 in the FY2000 defense appropriations bill), nearly 300 A-76 reviews were completed between 1995 and 1999 alone.

Unfortunately, the embryonic Bush Administration doesn't seem to have learned anything from the failures of the previous Administration with respect to A-76. The Clinton Administration had attempted to compete slightly more than 200,000 civilian jobs under A-76. At the end, they had little to show for it except red ink, severe disruptions of the in-house workforce, and abysmal civilian employee morale. The Bush Administration wants to go "double-and-nothing." I say that, because the new director of the Office of Management and Budget has said that the Bush Administration will compete at least 400,000 civilian jobs. If past is prologue, the Bush Administration's A-76's initiative will be twice the failure that the Clinton Administration's effort was. However, that should at least go over very well at the Pentagon where the service contracting credo will no doubt continue to be: "if at first you don't succeed, fail, fail again."

I'm going to say two things that may surprise you, Mr. Chairman, because I can hardly be accused of pandering to my own constituency:

1. Every part of DoD should be striving to reach1 its Most Efficient Organization (MEO) every day of the week. It shouldn't take the threat of public-private competitions to spur managers to be more creative and more innovative, and above all, to work with rank-and-file federal employees and their union representatives through real labor-management partnerships to make their operations more effective, more efficient, and more reliable. But that's not just me. Rank-and-file members in AFGE's DoD Locals feel exactly the same way.

2. Despite A-76's record, fair and full public-private competitions for genuinely commercial activities performed by contractors as well as federal employees have the potential to save money for the taxpayers.

   However, for several reasons, we are far from achieving that potential:

   1. DoD has failed to hire and train the necessary staff to conduct A-76 competitions2 (Please see Problem #7);
   2. DoD has failed to establish a reliable and comprehensive system to track the costs and savings, short-term as well as long-term, that are associated with A-76 efforts (Please see Problem #1);
   3. DoD has failed to undertake the necessary research prior to undertaking A-76 efforts, instead relying on arbitrary civilian personnel quotas established at the outset3;
   4. DoD has used savings estimates that they either knew or should have known to be utterly false in order to generate undeserved support for an unjustified expansion of the A-76 program4;
   5. DoD has failed to use A-76 to hold contractors accountable to the taxpayers to the same degree as civilian employees (Please see Problem #4);
   6. DoD uses arbitrary personnel ceilings to reduce the civilian workforce and then hire contractors to replace civilian employees, even when it is contrary to law and costs more, to prevent us from competing for work; and
   7. It is not possible for federal employees to check DoD's increasingly arbitrary decisions with respect to A-76 because we, unlike contractors, lack standing to take our concerns to Federal Claims Court or GAO (Please see Problem #5).

Because public-private competition is merely an option for Pentagon officials—A-76, already riddled with waivers, loopholes, and exceptions, is a circular and does not have the force of law—there are no incentives for DoD to take it seriously.

Indeed, because federal employees win too many of the competitions5 for the contractors' liking, the competitions take too long, the competitions cost too much, and the predicted savings don't materialize, DoD has, in some instances, abandoned what should be a bedrock principle of public-private competition in favor of a nebulous and increasingly worrisome concept known as "strategic sourcing," while keeping the arbitrary civilian personnel quotas.

The House Readiness Subcommittee is to be commended for its efforts last year to force Pentagon officials to explain exactly what it means by strategic sourcing6 and to prevent the concept from being used to secretly pursue even more arbitrary downsizing and indiscriminate contracting out of DoD's civilian workforce. In last year's House defense authorization bill, the Readiness Subcommittee included a provision (Section 364) that would have prevented DoD from initiating any "manpower reductions (involving ten or more federal employees) at organizations or activities, or within functions, that are commercial, commercial exempt from competition, military essential, or inherently governmental until the Secretary of Defense fully complies with" a detailed reporting and analysis requirement and the Congress has had 45 days to review the submission.

Although Bush Administration officials are talking about competing at least 400,000 federal employee jobs, it won't be long until they discover that A-76 savings are usually illusory, based in legends rather than in ledgers, and hear the same old complaints from the private sector that contractors aren't winning often enough and they aren't taking our jobs fast enough. Thus, it likely won't be long until the Bush Administration follows the Clinton Administration's example of retaining arbitrary civilian personnel quotas but moving away from public-private competitions in favor of strategic sourcing, i.e., direct conversions to contractor performance as well as downsizing civilian employees and then replacing them with federal employees.

Solution #2: Require that work performed by civilian employees as well as new work be subjected to public-private competition before it is given to contractors.

Given the severe problems with A-76 and service contracting generally, you may be surprised Mr. Chairman, that I don't come before you and demand an end to all service contracting, forever and ever. I'm actually coming to you with a much different request: require DoD to give federal employees opportunities to compete in defense of their own jobs as well as for new work.

As you may know, Mr. Chairman, in DoD, almost all work is given to contractors without any public-private competition. (Please see Chart 3.)

"(C)ontracts resulting from a cost comparison performed in accordance with OMB Circular A-76 represent an extremely small portion of the total number of service contracts awarded by the Department during fiscal year 1999 (less than 1 percent). Further, these contracts represent a very small portion of the total dollars awarded by DoD to private sector contractors during fiscal year 1999."

- Jacques Gansler, Under Secretary for Acquisition & Technology, Department of Defense; Senate Report 106-53; December 26, 2000.

"From FY 1992 through FY 1999, DoD procurement of services increased from $39.9 billion to $51.8 billion annually. The largest subcategory of contracts for services was for professional, administrative, and management support services, valued at $10 billion. Spending in this subcategory increased by 54 percent between 1992 and 1999."

- Robert J. Lieberman, Assistant Inspector General, Department of Defense; "Federal Acquisition: Why Are Billions of Dollars Being Wasted?" (testimony before the House Subcommittee on Government Management, Information, and Technology); March 16, 2000.

That is, DoD has dramatically increased service contracting and reduced its civilian employee workforce—while almost never using public-private competition. In fact, there is often little competition among contractors for work. The IG reported that in excess of three-fifths of the contracts he and his staff surveyed suffered from "inadequate competition." Regardless of the level of private-private competition, 77% of the surveyed contracts had "inadequate cost estimates" that "clearly left the government vulnerable—and sometimes at the mercy of the contractor to define the cost."7

DoD managers need not be at the mercy of sole-source contractors, however. If GAO reports that savings are possible from individual A-76 competitions and if DoD insists that savings are generated through A-76 competitions generally whether the work stays in-house or is contracted out, then federal employees should be competing for more work, both their own as well as new work.

If DoD were being run in the interests of warfighters and taxpayers, Pentagon officials would be actively considering in-house performance of work. Would a firm in the private sector—a big defense contractor, let's say—automatically contract out almost all new work, as DoD does today? Of course not.

It's a homely metaphor but today, in the federal services marketplace, there are two shops, a civilian employee shop and a contractor shop. However, Pentagon officials have instructed managers never to use the civilian employee shop—no matter how much more effective we are, no matter how much more efficient we are, and no matter how much more reliable we are.

That's why the House Readiness Subcommittee should establish a requirement that DoD consider in-house performance before giving work to contractors. For those public-private competitions we win, warfighters and taxpayers will be well-served. As for those competitions we lose, we'll learn from our mistakes and strive to prevail the next time similar work is competed.

Institutionalizing the public-private competition process will also help to address some of the problems with A-76 I identified earlier. For example, if DoD understands that public-private competition is not an optional extra, they will have incentives to better administer their contracts and to develop the capacity to expeditiously and economically conduct public-private competitions.

Another example is in-house personnel ceilings. Over the years, the House Readiness Subcommittee has striven to prevent DoD from managing its civilian workforce by arbitrary end-strengths. Unfortunately, despite much effort, the Subcommittee has been singularly unsuccessful. Work that either should be performed by civilian employees because of its inherently governmental nature or could be more efficiently performed by civilian employees is contracted out in order to stay under onerous personnel ceilings. A public-private competition requirement, however, eliminates any incentive to discriminate against the civilian workforce because DoD would have to consider in-house performance. Pentagon officials would have to shift from downsizing the civilian workforce in favor of rightsizing the civilian workforce.

Finally, Mr. Chairman, please note that the TRAC Act would require agencies to subject work to public-private competition before giving it to contractors.

Problem #3: Work performed by civilian employees is being directly converted to performance by "Native American" contractors without any public-private competition.

A loophole included in a general provision in the defense appropriations bill allows for work performed by federal employees to be directly converted to contractor performance if the contractor happens to be "under 51 percent ownership by an Indian tribe." In the last two years, this loophole has been used twice by the Air Force to deprive 600 public works civilian employees of their jobs at MacDill Air Force Base, FL, and Kirtland AFB, NM. The National Imagery and Mapping Agency (NIMA) is now poised to use the direct conversion process against 600 civilian employees at installations in the St. Louis, MO, and Washington, DC, areas.

I am proud that AFGE is as diverse as the federal workforce. This union obviously bears no animus towards Native Americans. Moreover, we do not oppose the use of 8a set-aside contracts that benefit, among others, Native Americans. However, this direct conversion process is fundamentally different from 8a set-aside contracts. It must also be noted that the civilian employees who lose their jobs as a result of these direct conversions—who, incidentally, are in many cases members of minority groups themselves—are not being replaced by Native Americans. Moreover, it appears that individual members of the tribes that ostensibly own these "Native American" contractors are not benefiting financially from these contracts. Rather, this direct conversion process is federal service contracting in its essence: a corporate welfare boondoggle.

As DoD's own Guidance for Strategic and Competitive Sourcing Programs points out, the use of a direct conversion is not required to be substituted in favor of a real public-private competition; in fact, the guidance indicates that even when using a direct conversion, the process can be modified to allow federal employees to compete in defense of their jobs as an MEO. However, after beginning and then abandoning an A-76 competition, as in the cases of MacDill and Kirtland, NIMA management is on the brink of executing a massive direct conversion—without even allowing agency employees to compete in defense of their jobs as an MEO.

AFGE members in St. Louis have been told repeatedly that this direct conversion is not about achieving efficiencies; rather, it is, NIMA managers piously pontificate, all about "settling debts to the Indians."

Actually, the Native American direct conversion mechanism has, without rhyme or reason, deprived hundreds of civilian employees of their jobs or forced them to work for significantly less in terms of wages and benefits; even worse, if this loophole is not closed, hundreds more may soon meet similar fates. Of course, it must be noted that direct conversions, whether to Indian tribes or traditional defense contractors like Lockheed, are bitterly unfair to federal employees who are denied opportunities to compete in defense of their jobs and poorly serve taxpayers in that they are pork-barrel politics at their absolute worst.

Solution #3: Oppose the pending NIMA direct conversion and repeal the "Native American" direct conversion mechanism.

Mr. Chairman, I realize that authorizers must show deference to appropriators if they expect to receive deference in return, but the Native American direct conversion loophole is an unmitigated public policy disgrace and demands your immediate attention.

Problem #4: DoD has failed to look for savings from its massive and still ever-growing contractor workforce.

Mr. Chairman, AFGE has long believed that if savings were possible from competing the jobs of federal employees, then they were possible from competing the jobs of contractors as well. As you know, A-76 provides for insourcing as well as outsourcing. The same rules and the same rationale apply.

The Clinton Administration agreed with us—or so we believed. A senior OMB official even committed to ensure that agencies, including DoD, undertook more contracting in. In a February 2, 1999, letter to me, Acting Deputy Director for Management G. Edward DeSeve wrote,

"I also agree with you that we should ask federal managers to 'take pause' and consider the potential benefits of converting work from contract to in-house performance. As I indicated at our October meeting, OMB will encourage agencies to identify opportunities for the conversion of work from contract to in-house performance…"

No such guidance was ever offered. We were not deterred, however. Working with lawmakers on the House and Senate defense appropriations subcommittees, we secured the enactment of this report requirement:

"The Secretary of Defense shall submit a report to…identify those instances in which work performed by a contractor has been converted to performance by civilian or military employees of the Department of Defense…In addition, the report shall include recommendations for maximizing the possibility of effective public-private competition for work that has been contracted out."

U.S. Congress, FY 2000 Defense Appropriations Act, Section 8109.

The resulting report on DoD's contracting in activities—or, more precisely, the lack of contracting in activities—was hardly a surprise. DoD's compliance—or, more precisely, DoD's complete failure to comply—with the second requirement to develop a contracting in policy did cause me some surprise.

"Eight of the 286 (OMB Circular A-76 public-private competition) studies (completed during the previous five years) involved work which was being performed by the private sector." (Note: Federal employees won five out of the eight studies.) "In responding to the Section 8109 requirement to present recommendations for maximizing the possibility of effective public-private competition for work that has been contracted out, the Department reiterated existing policy guidance on the subject."

- General Accounting Office, DoD Competitive Sourcing (01-20), December 2000.

At a time when the Pentagon is supposedly championing public-private competition, less than 3% of all A-76 studies performed by DoD were directed at work performed by contractors. (Please see Chart 4.) In other words, public-private competition is being used to replace federal employees with contractors, instead of to make DoD as a whole more efficient. Moreover, after being directed to come up with a plan for increasing its contracting in, the Pentagon thumbed it's collective nose at the Congress.

Solution #4: Require DoD to subject work performed by contractors to the same degree of public-private competition as that experienced by federal employees, starting with those categories of work that have been competed under A-76 over the last several years.

With respect to contracting in, it's illustrative to look at local government, using survey data collected by the International City / County Management Association.

"Our data show significant incidence of reverse privatization or contracting back in previously privatized services…From 1992-1997, 88 percent of governments had contracted back in at least one service and 65 percent had contracted back in more than three services. On average across all places, 5 services were contracted back in from 1992 to 1997."

Mildred Warner and Amir Hefetz, Privatization and the Market Structuring Role of Local Government, Cornell University Department of City and Regional Planning Working Paper #197, December 2000."

Why so much contracting in? The authors explain:

"Contracting back in reflects problems with the contracting process itself, concerns over limited efficiency gains and maintenance of service quality…Analysis of cases of contracting back in shows that it is motivated by desire to maintain service quality and local control and to ensure cost savings in the face of changing markets.”

Let's revisit the scene at DoD: The A-76 process is a money loser. Contract administration is virtually nonexistent. Sole-source contractors have the department at their mercy. To engage in a bit of understatement, it's safe to write that conditions are ripe in DoD for the same sort of corrective contracting in that's occurring in local government.

What is the explanation as to why there is so much contracting in at the local level and so little at DoD, especially given the strong likelihood that there is much less private-private competition for DoD's work because of the much greater complexity of the work required and contract administration problems are so much more severe?8

Here's the most likely explanation:

"Ideology does not dominate local service delivery decisions; rather, pragmatic local government demonstrate the continued importance of public investment, innovation and direct involvement in service delivery."

In other words, local officials want to do what's right for their communities. Can the same good intentions be attributed to those who have run DoD in recent years? I'll leave that for others to answer definitively. However, it is clear that DoD officials have approached contracting out and contracting in with certain prejudices. That is, their disdain for civilian employees is so profound that they systematically replace them with contractors without public-private competition and stubbornly apply personnel ceilings so onerous that it is commonly recognized that DoD is contracting out work that could be performed more efficiently in-house. Moreover, senior acquisition officials too often either come from contractors and their various law firms and accounting agencies prior to government service or are speedily headed in that direction soon upon leaving government service.9 With such prejudices, is it any wonder that DoD fails to take advantage of contracting in opportunities?

Mr. Chairman, I'll note that the TRAC Act would neither prohibit contracting out nor require contracting in. Rather, the legislation would simply require agencies, including DoD, to subject equivalent numbers of federal employee and contractor jobs to public-private competition. That is, agencies would choose how many and which contractor jobs would be subjected to public-private competition.

Problem #5: Federal employees lack the standing sufficient to check arbitrary contracting decisions in Federal Claims Court and GAO.

Contractors have standing to challenge DoD's decisions on contracting out. They can go to Federal Claims Court or GAO. We don't have that option—no matter how arbitrary or unfair DoD's service contracting decision-makers might have been.

Here are a couple of recent examples: At Lackland Air Force Base, TX, we defied the odds and won an appeal of an adverse A-76 decision. Although they had no statutory authority or even discretionary authority under the circular to do so, senior civilian Air Force acquisition executives swooped in and overturned the appeal, and the work was contracted out. If that had happened to the contractor, that arbitrary decision could have been challenged in court. However, it happened to us. And we have no standing to challenge that arbitrary decision.

At Andrews AFB, MD, senior civilian Air Force acquisition executives insisted that they be given a waiver to A-76's public-private competition process because they intended to undertake a pilot project. Of course, there's no statutory authority or even discretionary authority under the circular to waive the cost comparison requirement for the work performed by the 50 AFGE members at Andrews merely because somebody wants to do a little experimenting and use hard-working civilian employees as their guinea pigs. If the contractor had been on the wrong end of that arbitrary decision, it could have been challenged in court. However, it happened to us. And we have no standing to challenge that arbitrary decision.

Solution #5: Allow civilian employees to check arbitrary DoD service contracting decisions through litigation.

There's obviously a compelling—and, I would contend, irrefutable—equity argument: we're not asking for anything contractors don't already have.

However, there's another argument for giving federal employees standing: making the service contracting process more reasonable and those who make service contracting decisions more accountable. Let's face the facts: in an always closely-contested process, if a service contracting decision maker is biased or scared of offending the Pentagon privateers, for whom will she decide? The party who can challenge her decision in court or at the GAO? Or the one who can do little more than turn the other cheek? The answer is obvious—as is the need for standing for federal employees to challenge agencies' arbitrary service contracting decisions.

Problem #6: Due to the massive increase in service contracting over the last several years, the next BRAC round will give Pentagon privateers a multitude of opportunities to contract out and privatize.

It will no doubt come as no surprise to you, Mr. Chairman, that AFGE opposes more infrastructure reductions. Important questions have been raised about the actual savings that have been achieved from BRAC. Some lawmakers, like Representative Jim Hansen (R-UT), have raised important questions about the actual extent to which infrastructure and force structure are out of balance.

In my own mind, I divide DoD's budgetary pie into four slices: military personnel, civilian personnel, contractors, and weapons. Military and civilian personnel have been downsized significantly over the last eight years. Contractors, on the other hand, have made astounding gains. They have not just escaped BRAC-like scrutiny; in fact, DoD is unable to say reliably how much is actually spent on service contracting or how large the service contractor workforce actually is. Weapons procurement, although burdened with the same waste and politics as infrastructure, has not been subjected to BRAC-like scrutiny.

Now, through BRAC, will military and civilian personnel be reduced even further in order to shovel more money into a bloated weapons procurement budget and waste even more money on service contracting? Clearly, that's the wrong path to take. The extent of infrastructure should of course be adjusted to take into account the geopolitics of the new century. However, infrastructure must not be examined in isolation. We must look for efficiencies in the weapons and the contractor budgets as well. Until all four parts of DoD's budget are subjected to the same scrutiny, AFGE will continue to strongly oppose further BRAC.

To BRAC or not to BRAC is a question that is on a lot of minds. However, there is another question that I don't think is receiving sufficient consideration: if there is a BRAC, what happens to the work done at bases that are closed and realigned? As I'm sure you know, Mr. Chairman, Senator John McCain is thinking about that. In his own BRAC bill (S. 397), Senator McCain would institutionalize the infamous process of privatization-in-place, allowing the commission discretion to perpetrate the practice if it were considered to be the "most cost-effective method."

People can disagree about whether to BRAC or not to BRAC. However, once the decision to BRAC has been made, the reductions in infrastructure should be faithfully implemented. As we saw with the last BRAC round, there are some who would deliberately defeat the purpose of the process. They don't really want to reduce infrastructure; rather, they simply want to hand off chunks of that infrastructure to contractors. This perversion of BRAC succeeds only in creating waste and excess capacity in the private sector and in preserving excess capacity in the public sector. This obviously serves the interests of contractors, but not warfighters and taxpayers.

Solution #6: If there is an additional round of BRAC, the discretion of the commission and DoD should be limited to ensure that the process is faithfully implemented.

If work that survives a base's closure or realignment is inherently governmental or core (in the context of depot maintenance), then it should continue to be performed by reliable and experienced federal employees—at another installation in the event of closure or at the same installation in the event of realignment. Surviving work that is not inherently governmental should not be converted to contractor performance without public-private competitions. Surviving depot maintenance work that is not core should be shifted to other depots that have excess capacity. Surviving work that is performed by contractors should, for purposes of consistency, not be converted to civilian employee performance without public-private competitions.

Problem #7: The acquisition workforce has been excessively downsized, preventing DoD from effectively administering its billions and billions of dollars in service contracts.

AFGE has strongly opposed the ruinous cuts in DoD's acquisition workforce that have been jointly imposed by the Pentagon and the Congress over the last several years. AFGE has warned lawmakers that DoD would lack sufficient in-house staff to keep contractors from perpetrating waste, fraud, and abuse. AFGE has also insisted that the Pentagon is replacing—at higher cost—federal employees in the acquisition workforce with contractors. And according to the 2000 IG report discussed earlier, AFGE's suspicions were completely correct.

The IG told the Senate Readiness Subcommittee last year that DoD has

"reduced its acquisition workforce from 460,516 people in September 1991 to 230,556 in September 1999, a reduction of 50 percent. Further cuts are likely and, in fact, one of defense acquisition goals (for FY01) is to achieve another 15 percent reduction in the DoD acquisition related workforce."

These staffing cuts have come at the same time the acquisition workload has increased significantly. According to the IG, from FY 1990 through FY 1999,

"the number of procurement actions increased (emphasis original) about 12 percent, from 13.2 million to 14.8 million. The greatest amount of work for acquisition personnel occurs on contracting actions over $100,000, and the annual number of those actions increased about 28 percent from FY 1990 to FY 1999, from 97,948 to 125,692."

Among the adverse consequences reported by multiple acquisition organizations:

insufficient staff to manage requirements efficiently, reduced scrutiny and timeliness in reviewing acquisition actions, increased backlog in closing out completed contracts, and lost opportunities to develop cost savings initiatives.

Ominously, the IG warned that the appalling litany of problems caused by the indiscriminate reductions of the acquisition workforce

"appears to be a conservative summary of the overall impact of the problem and, if further downsizing occurs, these staffing management problems and performance shortfalls can only get worse."

AFGE has warned that precipitous reductions in in-house acquisition personnel were forcing DoD to contract out acquisition work at higher costs. The IG reports that seven different acquisition organizations report "increased program costs resulting from contracting for technical support versus using in-house technical support." As an example, the IG reported that the

"lack of in-house engineering staff at an Army acquisition organization caused an increase in customer costs of $20,000 to $50,000 per each work year of support services for weapons programs because of the need to hire contractors to perform the work."

Considering that DoD essentially stopped hiring acquisition personnel several years ago and that the IG reports 42 percent of the remaining acquisition workforce being lost through attrition by FY 2005, it is imperative that the Congress take steps to actually increase the size of the acquisition workforce. As the IG sagely concluded,

"a reasonably sized, well-trained and highly motivated workforce is by far our best safeguard against inefficiency, waste, and fraud."

Solution #7: Oppose further cuts in the acquisition workforce and require DoD to provide the acquisition workforce with more training to administer service contracts.

The IG, in his Senate testimony last year, noted that none of the contracting personnel interviewed had received training related specifically to contracts for services, let alone for professional, administrative, and management support services. In fact, the vaunted Defense Systems Management College and the Defense Acquisition University didn't even offer courses on service contract administration.

Problem #8: A major cause of the "human capital crisis" is that DoD, like the rest of the federal government, is becoming less and less competitive with the private sector with respect to pay and benefits.

DoD's increasing inability to recruit and retain the best-qualified employees may make the in-house side less competitive vis-à-vis contractors in service contracting scenarios. The pay gap between federal employees and their counterparts in the private sector that perform comparable work is a complicated problem that is largely outside of the jurisdiction of the House Armed Services Committee. Consequently, I will limit my discussion to an issue that is of particular interest for at least two lawmakers on the committee, Representatives J.C. Watts (R-OK) and Saxby Chambliss (R-GA): pay for DoD blue-collar employees.

Representative Watts introduced legislation (H.R. 1393) in the 106th Congress that would have boosted pay for some DoD blue-collar employees in his district. Representative Chambliss has already introduced legislation this year to boost pay for blue-collar employees in his district (H.R. 258). Last year, he even secured a hearing before the House Civil Service Subcommittee for an earlier version of H.R. 258. Both lawmakers are to be commended for their interest in this area. However, their bills are almost surely too narrowly focused to stand any chance of enactment. If anything is to be done to address this problem, it will be necessary to craft legislation that boosts the pay of blue-collar employees generally.

What if I were to tell you that at DoD blue-collar employees are discriminated against? That a blue-collar employee in DoD may make less than his counterpart in, say, the Department of Veterans Affairs who is the same grade, who is the same step, who is doing the same work? Would you write me off as a paranoid? I hope not—because it's true. Blue-collar employees in the federal government almost uniformly make less than their counterparts in the private sector. But many blue-collar employees in DoD make even less than their counterparts in other federal agencies.

The "Monroney amendment" (See (d)(1) of 5 U.S.C. 5343) requires the government to look outside of the relevant wage survey area if there is an insufficient number of analogous private sector jobs to calculate blue-collar pay. Finding truly comparable matches in the private sector, whether in the relevant wage survey area or outside, almost invariably leads to at least a small boost in wages.

In 1985, the law was amended (See (d)(2)(B) of 5 U.S.C. 5343) through the defense authorization bill to exclude DoD from the Monroney amendment's requirement. As a result, DoD is paying its blue-collar employees less than other agencies are paying their blue-collar employees.

DoD blue-collar employees have long been dissatisfied with this manifestly inequitable arrangement. After all, it makes no sense to pay a WG 8 / Step 5 carpenter in DoD less than a WG 8 / Step 5 carpenter in DVA. In Georgia, for example, the wage rate for WG 10, the grade with the largest number of employees in the wage survey area, is $15.59 for non-DoD employees and $15.46 for DoD employees, a thirteen cent difference. A WG-8, Step-2 blue-collar DoD employee in Phoenix, AZ, makes $14.45 per hour, while her counterpart in another agency makes $14.57. In Sacramento, CA, a WG-10, Step-2 blue-collar DoD employee makes $17.40 per hour, while his counterpart in another agency makes $17.57. In Shreveport, LA, a WG-9, Step-2 blue-collar DoD employee makes $14.45 per hour, while her counterpart in another agency makes $14.51. Not much in the great scheme of things, but I can assure you that it adds up for individual employees who are trying to support their families on civil servants' paychecks.

Solution #8: Reinstate the Monroney amendment on DoD.

When DoD was exempted from the Monroney amendment in 1985, it was estimated that DoD would save $40 million annually. With the tremendous downsizing of the blue-collar workforce in the intervening years, the yearly cost of reinstatement of the Monroney amendment would be significantly smaller.

Problem #9: Contractor catch-phrases can cloud even the sharpest minds.

As you might imagine, Mr. Chairman, the recommendations I have offered in my testimony—track the costs and size of the contractor workforce, require public-private competition before giving work to contractors, improve contract administration, stop downsizing the acquisition workforce, subject contractors to public-private competition—are common-sense, good government proposals that AFGE has been offering for years.

The one argument—if one can really call it an "argument"—I can always count on hearing in response from contractors and their allies in the legislative and executive branches is that AFGE's ideas run contrary to the "acquisition reform effort" or threaten the "ongoing revolution in business affairs."

Of course, there's nothing the least bit "reforming" or "revolutionary" about selling off the federal government to the lowest bidders. That's just old-fashioned pork-barrel politics. Newspapers have certain code phrases to avoid winding up on the wrong end of libel suits. "Tired and overwrought" often means the guy was drunk in public. "Glancing familiarity with the truth" usually means she's a habitual liar. And "acquisition reform" is increasingly coming to mean "to blazes with the taxpayers, let's do whatever the contractors want." In fact, some senior acquisition executives, many of them either former contractors or future contractors, will now only refer to contractors as "our private sector partners"—as in "we don't need to subject our partners' work or bills to scrutiny because, as our partners, their interests and our interests are the same."

I will not comment on acquisition reform as it deals with goods and supplies. However, as Mr. Donald Mancuso, the outgoing IG noted in Defense Week, on January 8, 2001,

"(D)efense 'acquisition' reform programs have not resulted in major cost cuts, and often such changes are pushed through with insufficient regard to the taxpayer and the soldier."

Mancuso noted that some acquisition reform proposals "are really nothing more than, 'Integrity of the marketplace,' and 'Competition will somehow eventually result in the best product at the best price.'"

I think his comments are valid with respect to acquisition reform's emphasis on contracting out and privatization. After eight years of showering contractors with hundreds of billions in taxpayer dollars, acquisition reformers have managed to achieve virtually nothing for warfighters and taxpayers.

They can point to savings in civilian personnel, but they can't point to budgetary savings because, in the report language of the House Appropriations Committee (in the FY2000 defense appropriations bill), "high cost contractors (are) simply replacing government employees."

Despite an unprecedented emphasis on A-76, the initiative is still a money-loser. That is, after all of these years, acquisition reformers still can't come up with a reliable and expeditious way of competing work between federal employees and contractors. So what's their response? Abandon public-private competitions in favor of just giving work away to politically well-connected contractors: strategic sourcing, "Native American" sweetheart deals, and other assorted direct conversions of federal employees' work to contractor performance.

They're spending money so fast on service contractors that they can't even reliably estimate how much DoD is spending overall, let alone if those hundreds of billions of dollars are being well-spent.

Despite the relative absence of private-private competition and staggering amounts of service contractor waste, fraud, and abuse, "acquisition reformers" have never managed to get around to contracting work back in-house as their less-celebrated counterparts in local government have been doing for years.

Solution #9: Lawmakers should exercise a healthy skepticism towards "acquisition reform."

Quite simply, "acquisition reform" is one of the biggest public policy debacles of the 1990s. Not everyone is ready to say that the emperor isn't wearing any clothes. But, except for contractors, everyone knows he's showing far, far too much skin. I would suggest to the members of this subcommittee that when someone heatedly insists that "this proposal runs contrary to acquisition reform" or "that idea stands in the way of a revolution in business affairs," the appropriate response is, "So what?"

I would be pleased to answer any questions.

Chart 1
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Chart 4

1. Considering the growing appreciation of the "human capital crisis"—GAO's belated recognition that years and years of personnel ceilings, attrition, and inadequate compensation have left many agencies with critical shortages of federal employees—it can no longer be said that every part of DoD should strive to slim down to its MEO. Rather, every part of DoD should be staffed according to its budget and workload, while managers and union representatives work in partnership to achieve and sustain greater efficiencies.
2. According to a 1999 GAO report (NSIAD-99-44), "While none of the services has yet fully determined the staff resources necessary to implement its competition program, some service officials have expressed concern about their ability to provide sufficient existing in-house staff as the number of ongoing studies increases and the potential effect on other mission requirements of devoting available resources to meet competition needs. Some officials have already begun to express concern about the adequacy of their resources to initiate and complete ongoing competitions and to deal with other ongoing mission responsibilities…The large increase in the number of competitions expected to be ongoing in fiscal years 1999 and 2000 is likely to greatly increase resource requirements."
3. Would management at a firm in the private sector—a defense contractor, let's say—arbitrarily say that it would put up for grabs the jobs of 400,000 employees or one-third of its workforce or some such number or fraction pulled out of thin air? Of course not. That firm would look at specific functions in terms of achieving efficiencies, based on, among other factors, the record of in-house performance, the record of contractor performance, the extent to which the contractor market is genuinely competitive, and the extent to which it is necessary to maintain an in-house capacity in order to ensure at least a modicum of competition.

4. Moreover, as is well-known, DoD often "banks" savings from A-76 competitions that don't exist and will never exist. According to a 2000 GAO report (NSIAD-00-106), DoD officials a) have actually increased their overall "reform" effort savings goals and b) are continuing to take the money out of current budgets. Although GAO's "work continues to show that the savings estimates are likely overstated, at least in the short term, the Department has revised its savings goals for A-76, combined them with projected savings from strategic sourcing, and increased its overall savings goal for the two initiatives." (Emphasis added)

   "In addition to delayed savings, the reported costs of the A-76 program have been higher than estimated, and commands have been absorbing these additional expenses out of their current budgets as well. Various service officials expressed concern about the impact of such reductions given their perception that they are already operating under constrained resources in relation to their operating requirements."

5. According to a 2000 GAO report (01-20), federal employees win 60% of A-76 public-private competitions.

6. The Navy is most aggressively pursuing strategic sourcing, which, according to GAO, involves "consolidation, restructuring or reengineering activities, privatization, joint ventures with the private sector, and the termination of obsolete services...To date, only the Navy has identified numbers of positions to be reviewed under strategic sourcing, but other Defense components are expected to do so in the future."

   As in the case of A-76, savings estimates for strategic sourcing appear to be greatly overstated. GAO reports that although the Navy estimates that nearly half of its projected "reform" savings will come from strategic sourcing, "some departmental and service officials expressed concern that fewer savings could be forthcoming from strategic sourcing and said they lack a rigorous basis for projecting costs and savings…Office of the Secretary of Defense officials acknowledged uncertainties over the projected costs and savings from strategic sourcing, saying that it would likely take some years before the results of strategic sourcing initiatives can be measured. They also noted there is wide variation in the types of initiatives that make up strategic sourcing, and consequently, there can be wide variation in the resultant savings."

   What's the bottom line? Navy and DoD officials admit that any savings from strategic sourcing will be even less than any savings from A-76. According to GAO, while Navy claims that savings from strategic sourcing will be the same as those from A-76, "according to the budget submission data, strategic sourcing efforts are expected to result in manpower savings of less than 10 percent while A-76 studies are expected to generate manpower savings of 60 percent. In general, Office of the Secretary of Defense and Navy officials expect that savings per position reviewed under strategic sourcing will be less than under A-76 primarily because fewer positions will be eliminated than if a decision to contract or implement the most efficient organization were made. Office of the Secretary of Defense officials expect that a larger number of positions will need to be reviewed to generate the same level of savings expected in A-76 studies."

7. 7 Department of Defense Inspector General, Contracts for Professional, Administrative, and Management Support Services (Report No. D-2000-100) (March 10, 2000).
8. 8 For an appreciation of the relative absence of private-private competition for service contracts at lower levels of government, consider that, according to the State Auditor, two-thirds of California's service contracts are sole-sourced. Eliot Sclar, The Privatization of Public Service (1997)
9. Sometimes, it's not either/or—it's both. Stan Soloway, for example, moved from chief flack for the Contractor Services Association of America to Deputy Under Secretary for Acquisition and Technology during the latter years of the Clinton Administration and then most recently to head up another contractor special interest group, the Professional Services Council. If he ever becomes confused as to where he's working, Soloway at least has the consolation of knowing that his agenda never changes, regardless of where he's employed.

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