Human Capital: Preliminary Observations on Proposed DOD National 
Security Personnel System Regulations (15-MAR-05, GAO-05-432T).  
                                                                 
The Department of Defense's (DOD) new human resources management 
system--the National Security Personnel System (NSPS)--will have 
far-reaching implications for the management of the department	 
and for civil service reform across the federal government. The  
National Defense Authorization Act for Fiscal Year 2004 gave DOD 
significant authorities to redesign the rules, regulations, and  
processes that govern the way that more than 700,000 defense	 
civilian employees are hired, compensated, promoted, and	 
disciplined. In addition, NSPS could serve as a model for	 
governmentwide transformation in human capital management.	 
However, if not properly designed and effectively implemented, it
could severely impede progress toward a more performance- and	 
results-based system for the federal government as a whole. On	 
February 14, 2005, the Secretary of Defense and Acting Director  
of the Office of Personnel Management (OPM) released for public  
comment the proposed NSPS regulations. This testimony (1)	 
provides GAO's preliminary observations on selected provisions of
the proposed regulations, (2) discusses the challenges DOD faces 
in implementing the new system, and (3) suggests a governmentwide
framework to advance human capital reform.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-432T					        
    ACCNO:   A19396						        
  TITLE:     Human Capital: Preliminary Observations on Proposed DOD  
National Security Personnel System Regulations			 
     DATE:   03/15/2005 
  SUBJECT:   Compensation					 
	     Disciplinary actions				 
	     Employee promotions				 
	     Hiring policies					 
	     Human capital management				 
	     Personnel management				 
	     Civilian employees 				 
	     Federal employees					 
	     DOD National Security Personnel System		 

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GAO-05-432T

United States Government Accountability Office

GAO Testimony

Before the Subcommittee on Oversight of Government Management, the Federal
Workforce, and the District of Columbia, Committee on Homeland Security
and Governmental Affairs, U.S. Senate

For Release on Delivery Expected at 10:00 a.m. EST Tuesday, March 15, 2005

HUMAN CAPITAL

  Preliminary Observations on Proposed DOD National Security Personnel System
                                  Regulations

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

                                       A

GAO-05-432T

[IMG]

March 15, 2005

HUMAN CAPITAL

Preliminary Observations on Proposed DOD National Security Personnel System
Regulations

  What GAO Found

Given DOD's massive size and its geographically and culturally diverse
workforce, NSPS represents a huge undertaking for DOD. DOD's initial
process to design NSPS was problematic; however, after a strategic
reassessment, DOD adjusted its approach to reflect a more cautious,
deliberate process that involved more stakeholders, including OPM.

Many of the principles underlying the proposed NSPS regulations are
generally consistent with proven approaches to strategic human capital
management. For instance, the proposed regulations provide for (1)
elements of a flexible and contemporary human resources management
system-such as pay bands and pay for performance; (2) DOD to rightsize its
workforce when implementing reduction-in-force orders by giving greater
priority to employee performance in its retention decisions; and (3)
continuing collaboration with employee representatives. (It should be
noted that 10 federal labor unions have filed suit alleging that DOD
failed to abide by the statutory requirements to include employee
representatives in the development of DOD's new labor relations system
authorized as part of NSPS.)

GAO has three primary areas of concern: the proposed regulations do not
(1) define the details of the implementation of the system, including such
issues as adequate safeguards to help ensure fairness and guard against
abuse; (2) require, as GAO believes they should, the use of core
competencies to communicate to employees what is expected of them on the
job; and (3) identify a process for the continuing involvement of
employees in the planning, development, and implementation of NSPS.

Going forward, GAO believes that (1) the development of the position of
Deputy Secretary of Defense for Management, who would act as DOD's Chief
Management Officer, is essential to elevate, integrate, and
institutionalize responsibility for the success of DOD's overall business
transformation efforts, including its new human resources management
system; (2) DOD would benefit if it develops a comprehensive
communications strategy that provides for ongoing, meaningful two-way
communication that creates shared expectations among employees, employee
representatives, and stakeholders; and (3) DOD must ensure that it has the
institutional infrastructure in place to make effective use of its new
authorities before they are operationalized.

GAO strongly supports the concept of modernizing federal human capital
policies, including providing reasonable flexibility. There is general
recognition that the federal government needs a framework to guide human
capital reform. Such a framework would consist of a set of values,
principles, processes, and safeguards that would provide consistency
across the federal government but be adaptable to agencies' diverse
missions, cultures, and workforces.

                 United States Government Accountability Office

Chairman Voinovich and Members of the Subcommittee:

I appreciate the opportunity to be here today to provide our preliminary
observations on the Department of Defense's (DOD) proposed National
Security Personnel System (NSPS) regulations, which the Secretary of
Defense and the Acting Director of the Office of Personnel Management
(OPM) jointly released for public comment last month.1 The National
Defense Authorization Act for Fiscal Year 20042 gave DOD significant
authorities to redesign the rules, regulations, and processes that govern
the way that defense civilian employees are hired, compensated, promoted,
and disciplined. The proposed regulations, which according to DOD will
ultimately affect more than 700,000 defense civilian employees, are
especially critical because of their implications for governmentwide
reform. These implications have long been a concern to this Subcommittee.

NSPS represents a huge undertaking for DOD, given its massive size and
geographically and culturally diverse workforce. In addition, DOD's new
human resources management system will have far-reaching implications for
the management of the department and for civil service reform across the
federal government. NSPS could serve as a model for governmentwide
transformation in human capital management. However, if not properly
designed and effectively implemented, NSPS could impede progress toward a
more performance-and results-based system for the federal government as a
whole.

We raised several issues regarding DOD's civilian workforce in a recently
released report on the fiscal challenges the federal government faces in
the 21st  century, including whether DOD is pursuing the design and
implementation of NSPS in a manner that maximizes the chance of success.3
In recent testimony on DOD's business transformation efforts, we indicated
that DOD is challenged in its efforts to effect fundamental business
management reform, such as NSPS, and indicated that our ongoing work
continues to raise questions about DOD's chances of

1 National Security Personnel System, 70 Fed. Reg. 7552 (Feb. 14, 2005).

2 Pub. L. No. 108-136 S: 1101 (Nov. 24, 2003).

3 GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, GAO-05-325SP (Washington, D.C.: February 2005).

success.4 There is general recognition that the government needs a
framework to guide the kind of large-scale human capital reform occurring
at DOD and the Department of Homeland Security (DHS), a framework that
Congress and the administration can implement to enhance performance,
ensure accountability, and position the nation for the future.
Implementing large-scale change management initiatives is a complex
endeavor, and failure to address a wide variety of personnel and cultural
issues, in particular, has been at the heart of unsuccessful
organizational transformations. Strategic human capital management, which
we continue to designate as a high-risk area governmentwide,5 can help
agencies marshal, manage, and maintain the workforce they need to
accomplish their missions.

DOD's proposed regulations are intended to provide a broad outline of its
new human resources management system. They are not, nor were they
intended to be, a detailed presentation of how the new system will be
implemented. Although we continue to review these extensive regulations,
today I will (1) provide some preliminary observations on selected
provisions, (2) discuss the multiple challenges that DOD faces as it moves
toward implementation of its new human resources management system, and
then (3) suggest a governmentwide framework that can serve as a starting
point to advance human capital reform.

Summary	Let me begin by summarizing three positive features, three areas
of concern, and three comments regarding the way forward. The first
positive feature is that the proposed regulations provide for many
elements of a flexible and contemporary human resources management
system-such as pay bands and pay for performance. The second positive
feature is that the proposed regulations will allow DOD to rightsize its
workforce when implementing reduction-in-force (RIF) orders. For example,
DOD will be able to give greater priority to employee performance in RIF
decisions and take more factors into consideration when defining the areas
in which employees will compete for retention. The third positive feature
is that DOD has pledged to engage in a continuing collaboration with
employee

4 GAO, Department of Defense: Further Actions Are Needed to Effectively
Address Business Management Problems and Overcome Key Business
Transformation Challenges, GAO-05-140T (Washington, D.C.: Nov. 18, 2004).

5 GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.: January
2005).

representatives. (It should be noted that 10 federal labor unions have
filed suit alleging that DOD failed to abide by the statutory requirements
to include employee representatives in the development of DOD's new labor
relations system authorized as part of NSPS.)

However, in addition to the litigation referenced above, our initial work
indicates three primary areas of concern. First, DOD has considerable work
ahead to define the details of the implementation of its system, including
such issues as adequate safeguards to help ensure fairness and guard
against abuse. Second, in setting performance expectations, the proposed
regulations would allow the use of core competencies to communicate to
employees what is expected of them on the job, but the proposed
regulations do not require the use of these core competencies. Requiring
such use can help provide consistency and clarity in performance
management. Third, the proposed regulations do not identify a process for
the continuing involvement of employees in the planning, development, and
implementation of NSPS.

Regarding the way forward, development of the position of Deputy Secretary
of Defense for Management, who would act as DOD's Chief Management
Officer, will be essential to provide leadership that can elevate,
integrate, and institutionalize responsibility for the success of DOD's
overall business transformation effort, including its new human resources
management system. In fact, in my previous testimony on DOD's business
transformation efforts, we identified the lack of clear and sustained
leadership for overall business transformations as one of the underlying
causes that has impeded prior DOD reform efforts.6  Additionally, DOD
would benefit if it develops a comprehensive communications strategy that
provides for ongoing, meaningful two-way communication that creates shared
expectations among employees, employee representatives, managers,
customers, and stakeholders. Finally, DOD must ensure that it has the
institutional infrastructure in place to make effective use of its new
authorities. At a minimum, this infrastructure includes a human capital
planning process that integrates DOD'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

6  GAO-05-140T.

accountability mechanisms, to help ensure the fair, effective, and
credible implementation and application of a new system.

  Preliminary Observations on the Proposed DOD National Security Personnel
  System Regulations

DOD and OPM's proposed NSPS regulations would establish a new human
resources management system within DOD that governs basic pay, staffing,
classification, performance management, labor relations, adverse actions,
and employee appeals. We believe that many of the basic principles
underlying the proposed DOD regulations are generally consistent with
proven approaches to strategic human capital management. Today, I will
provide our preliminary observations on selected elements of the proposed
regulations in the areas of pay and performance management, staffing and
employment, workforce shaping, adverse actions and appeals, and
labormanagement relations.

    Pay and Performance Management

In January 2004, we released a report on pay for performance for selected
OPM personnel demonstration projects that shows the variety of approaches
taken in these projects to design and implement pay-forperformance
systems.7 Many of these personnel demonstration projects were conducted
within DOD. The experiences of these demonstration projects provide
insights into how some organizations in the federal government are
implementing pay for performance, and thus can guide DOD as it develops
and implements its own approach. These demonstration projects illustrate
that understanding how to link pay to performance is very much a work in
progress in the federal government and that additional work is needed to
ensure that performance management systems are tools to help agencies
manage on a day-to-day basis and achieve external results.

When DOD first proposed its new civilian personnel reform, we strongly
supported the need to expand pay for performance in the federal

8

government. Establishing a clear link between individual pay and
performance is essential for maximizing performance and ensuring the
accountability of the federal government to the American people. As I have

7 GAO, Human Capital: Implementing Pay for Performance at Selected
Personnel Demonstration Projects, GAO-04-83 (Washington, D.C.: Jan. 23,
2004).

8 GAO, Defense Transformation: Preliminary Observations on DOD's Proposed
Civilian Personnel Reforms, GAO-03-717T (Washington, D.C.: Apr. 29, 2003).

stated before, how pay for performance is done, when it is done, and the
basis on which it is done can make all the difference in whether such
efforts are successful.9 DOD's proposed regulations reflect a growing
understanding that the federal government needs to fundamentally rethink
its current approach to pay and better link pay to individual and
organizational performance. To this end, the DOD proposal takes another
valuable step toward a modern performance management system as well as a
market-based, results-oriented compensation system. My comments on
specific provisions of pay and performance management follow.

Aligning Individual Performance Under the proposed regulations, the DOD
performance management

to Organizational Goals	system would, among other things, align individual
performance expectations with the department's overall mission and
strategic goals, organizational program and policy objectives, annual
performance plans, and other measures of performance. However, the
proposed regulations do not detail how to achieve such an alignment, which
is a vital issue that will need to be addressed as DOD's efforts in
designing and implementing a new personnel system move forward. Our work
on public sector performance management efforts in the United States and
abroad has underscored the importance of aligning daily operations and
activities with organizational results.10 We have found that organizations
often struggle with clearly understanding how what they do on a day-to-day
basis contributes to overall organizational results, while high-performing
organizations demonstrate their understanding of how the products and
services they deliver contribute to results by aligning the performance
expectations of top leadership with the organization's goals and then
cascading those expectations to lower levels.

A performance management system is critical to successful organizational
transformation. As an organization undergoing transformation, DOD can use
its proposed performance management system as a vital tool for aligning
the organization with desired results and creating a "line of sight" to
show how team, unit, and individual performance can contribute to overall
organizational results. To help federal agencies transform their culture
to be more results oriented, customer focused, and collaborative in
nature, we have reported on how a performance management system that

9 GAO, Human Capital: Preliminary Observations on Proposed DHS Human
Capital Regulations, GAO-04-479T (Washington, D.C.: Feb. 25, 2004).

10  GAO-04-479T.

defines responsibility and ensures accountability for change can be key to
a successful merger and transformation.11

Establishing Pay Bands	Under the proposed regulations, DOD would create
pay bands for most of its civilian workforce that would replace the
15-grade General Schedule (GS) system now in place for most civil service
employees. Specifically, DOD (in coordination with OPM) would establish
broad occupational career groups by grouping occupations and positions
that are similar in type of work, mission, developmental or career paths,
and competencies. Within career groups, DOD would establish pay bands. The
proposed regulations do not provide details on the number of career groups
or the number of pay bands per career group. The regulations also do not
provide details on the criteria that DOD will use to promote individuals
from one band to another. These important issues will need to be addressed
as DOD moves forward. Pay banding and movement to broader occupational
career groups can both facilitate DOD's movement to a pay-forperformance
system and help DOD better define career groups, which in turn can improve
the hiring process. In our prior work, we have reported that the current
GS system, as defined in the Classification Act of 1949,12 is a key
barrier to comprehensive human capital reform and that the creation of
broader occupational job clusters and pay bands would aid other agencies
as they seek to modernize their personnel systems.13 The standards and
process of the current classification system are key problems in federal
hiring efforts because they are outdated and thus not applicable to
today's occupations and work.

Under the proposed regulations, DOD could not reduce employees' basic rate
of pay when converting to pay bands. In addition, the proposed regulations
would allow DOD to establish a "control point" within a band that limits
increases in the rate of basic pay and may require certain criteria

11 GAO, Results-Oriented Cultures: Implementation Steps to Assist Mergers
and Organizational Transformations, GAO-03-669 (Washington, D.C.: July 2,
2003).

12  5 U.S. Code S:S: 5101-5115.

13 GAO, Human Capital: Opportunities to Improve Executive Agencies' Hiring
Processes, GAO-03-450 (Washington, D.C.: May 30, 2003).

to be met for increases above the control point.14 The use of control
points to manage employees' progression through the bands can help to
ensure that their performance coincides with their salaries and that only
the highest performers move into the upper half of the pay band, thereby
controlling salary costs. The OPM personnel demonstration projects at
China Lake and the Naval Sea Systems Command Warfare Center's Dahlgren
Division have incorporated checkpoints or "speed bumps" in their pay
bands. For example, when an employee's salary at China Lake reaches the
midpoint of the pay band, the employee must receive a performance rating
that is equivalent to exceeding expectations before he or she can receive
additional salary increases.

Setting and Communicating Under the proposed regulations, DOD's
performance management system

Employee Performance would promote individual accountability by setting
performance

Expectations 	expectations and communicating them to employees, holding
employees responsible for accomplishing them, and making supervisors and
managers responsible for effectively managing the performance of employees
under their supervision. While supervisors are supposed to involve
employees, insofar as practicable, in setting performance expectations,
the final decisions regarding performance expectations are within the sole
and exclusive discretion of management.

Under the proposed regulations, performance expectations may take several
different forms. These include, among others, goals or objectives that set
general or specific performance targets at the individual, team, or
organizational level; a particular work assignment, including
characteristics such as quality, quantity, accuracy, or timeliness; core
competencies that an employee is expected to demonstrate on the job; or
the contributions that an employee is expected to make. As DOD's human
resources management system design efforts move forward, DOD will need to
define, in more detail than is currently provided, how performance
expectations will be set, including the degree to which DOD components,
managers, and supervisors will have flexibility in setting those
expectations.

14  Because movement through the pay band is based on performance,
employees could progress through the pay band more quickly than they could
receive similar increases under the GS system. One method of preventing
employees from eventually migrating to the top of the pay band, and thus
increasing salary costs, is to establish control points within each band.

The range of expectations that DOD would consider in setting individual
employee performance expectations are generally consistent with those used
by high-performing organizations. DOD appropriately recognizes that given
the vast diversity of work done in the department, managers and employees
need flexibility in crafting specific expectations. However, the
experiences of high-performing organizations suggest that DOD should
require the use of core competencies as a central feature of its
performance management effort.15 Based on our review of other agency
efforts and our own experience at GAO, we have found that core
competencies can help reinforce employee behaviors and actions that
support the department's mission, goals, and values, and can provide a
consistent message to employees about how they are expected to achieve
results. By including such competencies as change management, cultural
sensitivity, teamwork and collaboration, and information sharing, DOD
would create a shared responsibility for organizational success and help
ensure accountability for the transformation process.

Making Meaningful Distinctions High-performing organizations seek to
create pay, incentive, and reward

in Employee Performance	systems that clearly link employee knowledge,
skills, and contributions to organizational results. These organizations
make meaningful distinctions between acceptable and outstanding
performance of individuals and appropriately reward those who perform at
the highest level. DOD's proposed regulations state that supervisors and
managers would be held accountable for making meaningful distinctions
among employees based on performance and contribution, fostering and
rewarding excellent performance, and addressing poor performance.

Under the proposed regulations, DOD is expected to have at least three
rating levels for evaluating employee performance. We urge DOD to consider
using at least four summary rating levels to allow for greater
performance-rating and pay differentiation. This approach is in the spirit
of the new governmentwide performance-based pay system for the Senior
Executive Service (SES), which requires at least four rating levels to
provide a clear and direct link between SES performance and pay as well as
to make meaningful distinctions based on relative performance. Cascading
this approach to other levels of employees can help DOD recognize and

15 GAO, Results-Oriented Cultures: Creating a Clear Linkage between
Individual Performance and Organizational Success, GAO-03-488 (Washington,
D.C.: Mar. 14, 2003).

reward employee contributions and achieve the highest levels of individual
performance.16

Providing Adequate Safeguards Although DOD's proposed regulations provide
for some safeguards to

to Ensure Fairness and Guard ensure fairness and guard against abuse,
additional safeguards should be

Against Abuse	developed. For example, as required by the authorizing
legislation, the proposed regulations indicate that DOD's performance
management system must comply with merit system principles and avoid
prohibited personnel practices; provide a means for employee involvement
in the design and implementation of the system; and, overall, be fair,
credible, and transparent. However, the proposed regulations do not offer
details on how DOD would (1) promote consistency and provide general
oversight of the performance management system to help ensure it is
administered in a fair, credible, and transparent manner, and (2)
incorporate predecisional internal safeguards that are implemented to help
achieve consistency and equity, and ensure nondiscrimination and
nonpoliticization of the performance management process.

In April 2003, when commenting on DOD civilian personnel reforms, we
testified that Congress should consider establishing statutory standards
that an agency must have in place before it can implement a more
performance-based pay program, and we developed an initial list of
possible safeguards to help ensure that pay-for-performance systems in the
government are fair, effective, and credible.17 For example, we have noted
that agencies need to ensure reasonable transparency and provide
appropriate accountability mechanisms in connection with the results of
the performance management process.18 This can be done by publishing the
overall results of performance management and individual pay decisions
while protecting individual confidentiality and by reporting periodically
on internal assessments and employee survey results relating to the
performance management system. DOD needs to commit itself to publishing
the results of performance management decisions. By publishing the results
in a manner that protects individual confidentiality, DOD could provide
employees with the information they need to better understand their
performance and the performance management system.

16 GAO, Human Capital: Observations on Final DHS Human Capital
Regulations, GAO-05-391T (Washington, D.C.: Mar. 2, 2005).

17  GAO-03-717T.

18  GAO-04-479T.

Several of the demonstration projects have been publishing information
about performance appraisal and pay decisions, such as the average
performance rating, the average pay increase, and the average award for
the organization and for each individual unit, on internal Web sites for
use by employees. As DOD's human resources management system design
efforts move forward, DOD will need to define, in more detail than is
currently provided, how it plans to review such matters as the
establishment and implementation of the performance appraisal
systemand, subsequently, performance rating decisions, pay
determinations, and promotion actionsbefore these actions are
finalized, to ensure they are merit based.

Staffing and Employment	The authorizing legislation allows DOD to
implement additional hiring flexibilities that would allow it to (1)
determine that there is a severe shortage of candidates or a critical
hiring need and (2) use direct-hire procedures for these positions. Under
current law, OPM, rather than the agency, determines whether there is a
severe shortage of candidates or a critical hiring need. DOD's authorizing
legislation permits that DOD merely document the basis for the severe
shortage or critical hiring need and then notify OPM of these direct-hire
determinations. Direct-hire authority allows an agency to appoint people
to positions without adherence to certain competitive examination
requirements (such as applying veterans' preference or numerically rating
and ranking candidates based on their experience, training, and education)
when there is a severe shortage of qualified candidates or a critical
hiring need. In the section containing DOD's proposed hiring
flexibilities, the proposed regulations state that the department will
adhere to veterans' preference principles as well as comply with merit
principles and the Title 5 provision dealing with prohibited personnel
practices.

While we strongly endorse providing agencies with additional tools and
flexibilities to attract and retain needed talent, additional analysis may
be needed to ensure that any new hiring authorities are consistent with a
focus on the protection of employee rights, on merit principles-and on
results. Hiring flexibilities alone will not enable federal agencies to
bring on board the personnel that are needed to accomplish their missions.
Agencies must first conduct gap analyses of the critical skills and
competencies needed in their workforces now and in the future, or they may
not be able to effectively design strategies to hire, develop, and retain
the best possible workforces.

Workforce Shaping	The proposed regulations would allow DOD to reduce,
realign, and reorganize the department's workforce through revised RIF
procedures. For example, employees would be placed on a retention list in
the following order: tenure group (i.e., permanent or temporary
appointment), veterans' preference eligibility (disabled veterans will be
given additional priority), level of performance, and length of service;
under current regulations, length of service is considered ahead of
performance. I have previously testified, prior to the enactment of NSPS,
in support of revised RIF procedures that would require much greater
consideration of an employee's performance. 19  Although we support
greater consideration of an employee's performance in RIF procedures,
agencies must have modern, effective, and credible performance management
systems in place to properly implement such authorities.

An agency's approach to reductions should be oriented toward strategically
shaping the makeup of its workforce if it is to ensure the orderly
transfer of institutional knowledge and achieve mission results. DOD's
proposed regulations include some changes that would allow the department
to rightsize the workforce more carefully through greater precision in
defining competitive areas, and by reducing the disruption associated with
RIF orders as their impact ripples through an organization. For example,
under the current regulations, the minimum RIF competitive area is broadly
defined as an organization under separate administration in a local
commuting area. Under the proposed regulations, DOD would be able to
establish a minimum RIF competitive area on a more targeted basis, using
one or more of the following factors: geographical location, line of
business, product line, organizational unit, and funding line. The
proposed regulations also provide DOD with the flexibility to develop
additional competitive groupings on the basis of career group,
occupational series or specialty, and pay band. At present, DOD can use
competitive groups based on employees (1) in the excepted and competitive
service, (2) under different excepted service appointment authorities, (3)
with different work schedules,20 (4) pay schedule, or (5) trainee status.
These reforms could help DOD approach rightsizing more carefully; however,
as I have stated,

19  GAO-03-717T; GAO, Defense Transformation: DOD's Proposed Civilian
Personnel System and Governmentwide Human Capital Reform, GAO-03-741T
(Washington, D.C.: May 1, 2003); and Human Capital: Building on DOD's
Reform Effort to Foster Governmentwide Improvements, GAO-03-851T
(Washington, D.C.: June 4, 2003).

20  For example, employees who work full time, part time, seasonally, or
intermittently.

agencies first need to identify the critical skills and competencies
needed in their workforce if they are to effectively implement their new
human capital flexibilities.

    Adverse Actions and Appeals

As with DHS's final regulations,21 DOD's proposed regulations are intended
to streamline the rules and procedures for taking adverse actions, while
ensuring that employees receive due process and fair treatment. The
proposed regulations establish a single process for both performancebased
and conduct-based actions, and shorten the adverse action process by
removing the requirement for a performance improvement plan. In addition,
the proposed regulations streamline the appeals process at the Merit
Systems Protection Board (MSPB) by shortening the time for filing and
processing appeals.

Similar to DHS, DOD's proposed regulations also adopt a higher standard of
proof for adverse actions in DOD, requiring the department to meet a
"preponderance of the evidence" standard in place of the current
"substantial evidence" standard. For performance issues, while this higher
standard of evidence means that DOD would face a greater burden of proof
than most agencies to pursue these actions, DOD managers are not required
to provide employees with performance improvement periods, as is the case
for other federal employees. For conduct issues, DOD would face the same
burden of proof as most agencies.

DOD's proposed regulations generally preserve the employee's basic right
to appeal decisions to an independent body-the MSPB. However, in contrast
to DHS's final regulations, DOD's proposed regulations permit an internal
DOD review of the initial decisions issued by MSPB adjudicating officials.
Under this internal review, DOD can modify or reverse an initial decision
or remand the matter back to the adjudicating official for further
consideration. Unlike other criteria for review of initial decisions, DOD
can modify or reverse an initial MSPB adjudicating official's decision
where the department determines that the decision has a direct and
substantial adverse impact on the department's national security
mission.22  According

21  Department of Homeland Security Human Resources Management System, 70
Fed. Reg. 5272 (Feb. 1, 2005).

22  Any final DOD decision under this review process may be further
appealed to the full MSPB. Further, the Secretary of Defense or an
employee adversely affected by a final order or decision of the full MSPB
may seek judicial review.

to DOD, the department needs the authority to review initial MSPB
decisions and correct such decisions as appropriate, to ensure that the
MSPB interprets NSPS and the proposed regulations in a way that recognizes
the critical mission of the department and to ensure that MSPB gives
proper deference to such interpretation. However, the proposed regulations
do not offer additional details on the department's internal review
process, such as how the review will be conducted and who will conduct
them. An internal agency review process this important should be addressed
in the regulations rather than in an implementing directive to ensure
adequate transparency and employee confidence in the process.

Similar to DHS's final regulations, DOD's proposed regulations would
shorten the notification period before an adverse action can become
effective and provide an accelerated MSPB adjudication process. In
addition, MSPB would no longer be able to modify a penalty for an adverse
action that is imposed on an employee by DOD unless such penalty is so
disproportionate to the basis of the action as to be "wholly without
justification." In other words, MSPB has less latitude to modify
agency-imposed penalities than under current practice. The DOD proposed
regulations also stipulate that MSPB could no longer require that parties
enter into settlement discussions, although either party may propose doing
so. DOD, like DHS, expressed concerns that settlement should be a
completely voluntary decision made by parties on their own initiative.
However, settling cases has been an important tool in the past at MSPB,
and promotion of settlement at this stage should be encouraged.

Similar to DHS's final regulations, DOD's proposed regulations would
permit the Secretary of Defense to identify specific offenses for which
removal is mandatory. Employees alleged to have committed these offenses
may receive a written notice only after the Secretary of Defense's review
and approval. These employeess will have the same right to a review by an
MSPB adjudicating official as is provided to other employees against whom
appealable adverse actions are taken. DOD's proposed regulations only
indicate that its employees will be made aware of the mandatory removal
offenses. In contrast, the final DHS regulations explicitly provide for
publishing a list of the mandatory removal offenses in the Federal
Register. We believe that the process for determining and communicating
which types of offenses require mandatory removal should be explicit and
transparent and involve relevant congressional stakeholders, employees,
and employee representatives. Moreover, we suggest that DOD exercise
caution when identifying specific removable offenses and the specific
punishment. When developing these proposed

regulations, DOD should learn from the experience of the Internal Revenue
Service's (IRS) implementation of its mandatory removal provisions.23 
(IRS employees feared that they would be falsely accused by taxpayers and
investigated, and had little confidence that they would not be disciplined
for making an honest mistake.) We reported that IRS officials believed
this provision had a negative impact on employee morale and effectiveness
and had a "chilling" effect on IRS frontline enforcement employees, who
were afraid to take certain appropriate enforcement actions.24 Careful
drafting of each removable offense is critical to ensure that the
provision does not have unintended consequences.

DOD's proposed regulations also would encourage the use of alternative
dispute resolution and provide that this approach be subject to collective
bargaining to the extent permitted by the proposed labor relations
regulations. To resolve disputes in a more efficient, timely, and less
adversarial manner, federal agencies have been expanding their human
capital programs to include alternative dispute resolution approaches.
These approaches include mediation, dispute resolution boards, and
ombudsmen. Ombudsmen typically are used to provide an informal alternative
to addressing conflicts. We previously reported on common approaches used
in ombudsmen offices, including (1) broad responsibility and authority to
address almost any workplace issue, (2) their ability to bring systemic
issues to management's attention, and (3) the manner in which they work
with other agency offices in providing assistance to employees.25

Labor-Management The DOD proposed regulations recognize the right of
employees to

Relations	organize and bargain collectively.26 However, similar to DHS's
final regulations, the proposed regulations would reduce the scope of
bargaining by (1) removing the requirement to bargain on matters
traditionally referred to as "impact and implementation" (which include
the processes

23 Section 1203 of the IRS Restructuring and Reform Act of 1998 outlines
conditions for firing of IRS employees for any of 10 actions of
misconduct.

24 GAO, Tax Administration: IRS and TIGTA Should Evaluate Their Processes
of Employee Misconduct Under Section 1203, GAO-03-394 (Washington, D.C.:
Feb. 14, 2003).

25  GAO-01-479T.

26  Under current law, the rights of employees to bargain may be suspended
for reasons of national security. See Title 5 U.S. Code S:S: 7103(b) and
7112(b)(6).

used to deploy personnel, assign work, and use technology) and (2)
narrowing the scope of issues subject to collective bargaining. A National
Security Labor Relations Board would be created that would largely replace
the Federal Labor Relations Authority. The proposed board would have at
least three members selected by the Secretary of Defense, with one member
selected from a list developed in consultation with the Director of OPM.
The proposed board would be similar to the internal Homeland Security
Labor Relations Board established by the DHS final regulations, except
that the Secretary of Defense would not be required to consult with the
employee representatives in selecting its members. The proposed board
would be responsible for resolving matters related to negotiation
disputes, to include the scope of bargaining and the obligation to bargain
in good faith, resolving impasses, and questions regarding national
consultation rights.

Under the proposed regulations, the Secretary of Defense is authorized to
appoint and remove individuals who serve on the board. Similar to DHS's
final regulations establishing the Homeland Security Labor Relations
Board, DOD's proposed regulations provide for board member qualification
requirements, which emphasize integrity and impartiality. DOD's proposed
regulations, however, do not provide an avenue for any employee
representative input into the appointment of board members. DHS
regulations do so by requiring that for the appointment of two board
members, the Secretary of Homeland Security must consider candidates
submitted by labor organizations. Employee perception concerning the
independence of this board is critical to the resolution of issues raised
over labor relations policies and disputes.

Our previous work on individual agencies' human capital systems has not
directly addressed the scope of specific issues that should or should not
be subject to collective bargaining and negotiations. At a forum we
co-hosted in April 2004 exploring the concept of a governmentwide
framework for human capital reform, which I will discuss later,
participants generally agreed that the ability to organize, bargain
collectively, and participate in labor organizations is an important
principle to be retained in any framework for reform. It also was
suggested at the forum that unions must be both willing and able to
actively collaborate and coordinate with management if unions are to be
effective representatives of their members and real participants in any
human capital reform.

  DOD Faces Multiple Implementation Challenges

Once DOD issues its final regulations for its human resources management
system, the department will face multiple implementation challenges that
include ensuring sustained and committed leadership, establishing an
overall communications strategy, providing adequate resources for the
implementation of the new system, involving employees in designing the
system, and evaluating DOD's new human resources management system after
it has been implemented. For information on related human capital issues
that could potentially affect the implementation of NSPS, see the
"Highlights" pages from previous GAO products on DOD civilian personnel
issues in appendix I.

                  Ensuring Sustained and Committed Leadership

As DOD and other agencies across the federal government embark on
large-scale organizational change initiatives, such as DOD's new human
resources management system, another challenge is to elevate, integrate,
and institutionalize leadership responsibility for these key functional
management initiatives to ensure their success. A chief management officer
or similar position can effectively provide the continuing, focused
leadership essential to successfully completing these multiyear
transformations. For an endeavor as critical as DOD's new human resources
management system, such a leadership position would serve to

o 	elevate attention to overcome an organization's natural resistance to
change, marshal the resources needed to implement change, and build and
maintain the organizationwide commitment to new ways of doing business;

o 	integrate various management responsibilities into the new system so
they are no longer "stove-piped" and fit into other organizational
transformation efforts in a comprehensive, ongoing, and integrated manner;
and

o 	institutionalize accountability for the system so that the
implementation of this critical human capital initiative can be sustained.
27

In 2004, we testified that while the Secretary of Defense and other key
DOD leaders have demonstrated their commitment to the business
transformation efforts, in our view, the complexity and long-term nature
of these efforts requires the development of an executive position capable
of providing strong and sustained executive leadership-over a number of
years and various administrations.28 The day-to-day demands placed on the
Secretary, the Deputy Secretary, and others make it difficult for these
leaders to maintain the oversight, focus, and momentum needed to resolve
the weaknesses in DOD's overall business operations. While sound strategic
planning is the foundation upon which to build, sustained and focused
leadership is needed for reform to succeed. One way to ensure sustained
leadership over DOD's business transformation efforts would be to create a
full-time executive level position for a chief management official who
would serve as the Deputy Secretary of Defense for Management.29  This
position would provide the attention essential for addressing key
stewardship responsibilities, such as strategic planning, human capital
management, performance and financial management, acquisition and contract
management, and business systems modernization, while facilitating the
overall business transformation operations within DOD.

Establishing an Overall  Another significant challenge for DOD is to
ensure an effective and ongoing

Communications Strategy	two-way communications strategy, given its size,
geographically and culturally diverse audiences, and different command
structures across DOD organizations. We have reported that a
communications strategy that creates shared expectations about, and
reports related progress on, the implementation of the new system is a key
practice of a change

27 On September 9, 2002, GAO convened a roundtable of government leaders
and management experts to discuss the chief operating concept. For more
information, see GAO, 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), and The Chief
Operating Officer Concept and Its Potential Use as a Strategy to Improve
Management at the Department of Homeland Security, GAO-04-876R
(Washington, D.C.: June 28, 2004).

28  GAO-05-140T.

29  GAO-05-140T.

management initiative.30 DOD acknowledges that a comprehensive outreach
and communications strategy is essential for designing and implementing
its new human resources management system, but the proposed regulations do
not identify a process for the continuing involvement of employees in the
planning, development, and implementation of NSPS.

Because the NSPS design process and proposed regulations have received
considerable attention,31 we believe one of the most relevant
implementation steps is for DOD to enhance two-way communication between
employees, employee representatives, and management. Communication is not
only about "pushing the message out," but also using two-way communication
to build effective internal and external partnerships that are vital to
the success of any organization. By providing employees with opportunities
to communicate concerns and experiences about any change management
initiative, management allows employees to feel that their input is
acknowledged and important. As it makes plans for implementing NSPS, DOD
should facilitate a two-way honest exchange with, and allow for feedback
from, employees and other stakeholders. Once it receives this feedback,
management needs to consider and use this solicited employee feedback to
make any appropriate changes to its implementation. In addition,
management needs to close the loop by providing employees with information
on why key recommendations were not adopted.

    Providing Adequate Resources for Implementing the New System

Experience has shown that additional resources are necessary to ensure
sufficient planning, implementation, training, and evaluation for human
capital reform. According to DOD, the implementation of NSPS will result
in costs for, among other things, developing and delivering training,
modifying automated human resources information systems, and starting up
and sustaining the National Security Labor Relations Board. We have found
that, based on the data provided by selected OPM personnel demonstration
projects, the major cost drivers in implementing pay-for

30  GAO-03-669.

31  DOD's efforts to date to involve labor unions have not been without
controversy. Ten federal labor unions have filed suit alleging that DOD
failed to abide by the statutory requirements to include employee
representatives in the development of DOD's new labor relations system
authorized as part of NSPS. See American Federation of Government
Employees, AFL-CIO et al v. Rumsfeld et al, No. 1:05cv00367 (D.D.C. filed
Feb. 23, 2005).

performance systems are the direct costs associated with salaries and
training.

DOD estimates that the overall cost associated with implementing NSPS will
be approximately $158 million through fiscal year 2008. According to DOD,
it has not completed an implementation plan for NSPS, including an
information technology plan and a training plan; thus, the full extent of
the resources needed to implement NSPS may not be well understood at this
time. According to OPM, the increased costs of implementing alternative
personnel systems should be acknowledged and budgeted up front.32  Certain
costs, such as those for initial training on the new system, are one-time
in nature and should not be built into the base of DOD's budget. Other
costs, such as employees' salaries, are recurring and thus would be built
into the base of DOD's budget for future years. Therefore, funding for
NSPS will warrant close scrutiny by Congress as DOD's implementation plan
evolves.

    Involving Employees and Other Stakeholders in Implementing the System

The proposed regulations do not identify a process for the continuing
involvement of employees in the planning, development, and implementation
of NSPS. However, DOD's proposed regulations do provide for continuing
collaboration with employee representatives. According to DOD, almost
two-thirds of its 700,000 civilian employees are represented by 41
different labor unions, including over 1,500 separate bargaining units. In
contrast, according to OPM, just under one-third of DHS's 110,000 federal
employees are represented by 16 different labor unions, including 75
separate bargaining units. Similar to DHS's final regulations, DOD's
proposed regulations about the collaboration process, among other things,
would permit the Secretary of Defense to determine (1) the number of
employee representatives allowed to engage in the collaboration process,
and (2) the extent to which employee representatives are given an
opportunity to discuss their views with and submit written comments to DOD
officials. In addition, DOD's proposed regulations indicate that nothing
in the continuing collaboration process will affect the right of the
Secretary of Defense to determine the content of implementing guidance and
to make this guidance effective at any time. DOD's proposed regulations
also will give designated employee representatives an opportunity to be
briefed and to comment on the design

32 OPM, Demonstration Projects and Alternative Personnel Systems: HR
Flexibilities and Lessons Learned (Washington, D.C.: September 2001).

and results of the new system's implementation. DHS's final regulations,
however, provide for more extensive involvement of employee
representatives. For example, DHS's final regulations provide for the
involvement of employee representatives in identifying the scope,
objectives, and methodology to be used in evaluating the new DHS system.

The active involvement of employees and employee representatives will be
critical to the success of NSPS. We have reported that the involvement of
employees and employee representatives both directly and indirectly is
crucial to the success of new initiatives, including implementing a
pay-forperformance system. 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 of the changes that are being made.

    Evaluating DOD's New Human Resources Management System

Evaluating the impact of NSPS will be an ongoing challenge for DOD. This
is especially important because DOD's proposed regulations would give
managers more authority and responsibility for managing the new human
resources management system. High-performing organizations continually
review and revise their human capital management systems based on
datadriven lessons learned and changing needs in the work environment.
Collecting and analyzing data will be the fundamental building block for
measuring the effectiveness of these approaches in support of the mission
and goals of the department.

DOD's proposed regulations indicate that DOD will establish procedures for
evaluating the regulations and their implementation. We believe that DOD
should consider conducting evaluations that are broadly modeled on the
evaluation requirements of the OPM demonstration projects. 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 equal employment opportunity
groups, adherence to merit system principles, and the extent to which the
lessons from the project can be applied governmentwide. A set of balanced
measures addressing a range of results, customer, employee, and external
partner issues may also prove beneficial. An evaluation such as this would
facilitate congressional oversight; allow for any midcourse corrections;

assist DOD in benchmarking its progress with other efforts; and provide
for documenting best practices and sharing lessons learned with employees,
stakeholders, other federal agencies, and the public.

We have work under way to assess DOD's efforts to design its new human
resources management system, including further details on some of the
significant challenges, and we expect to issue a report on the results of
our work sometime this summer.

  Framework for Governmentwide Human Capital Reform

DOD recently joined a few other federal departments and agencies, such as
DHS, the National Aeronautics and Space Administration, and the Federal
Aviation Administration, in receiving authorities intended to help them
strategically manage their human resources management system to achieve
results. In this changing environment, the federal government is quickly
approaching the point where "standard governmentwide" human capital
policies and processes are neither standard nor governmentwide.

To help advance the discussion concerning how governmentwide human capital
reform should proceed, we and the National Commission on the Public
Service Implementation Initiative hosted a forum in April 2004 on whether
there should be a governmentwide framework for human capital reform and,
if so, what this framework should include.33 To start the discussion, we
suggested, in advance of the forum, a framework of principles, criteria,
and processes based on congressional and executive branch decision making
and prior work.

While there was widespread recognition among the forum participants that a
one-size-fits-all approach to human capital management is not appropriate
for the challenges and demands faced by government, there was equally
broad agreement that there should be a governmentwide framework to guide
human capital reform. Furthermore, a governmentwide framework should
balance the need for consistency across the federal government with the
desire for flexibility, so that individual agencies can tailor human
capital systems to best meet their needs. Striking this balance would not
be easy, but such a balance is

33GAO and the National Commission on the Public Service Implementation
Initiative, Highlights of a Forum: Human Capital: Principles, Criteria,
and Processes for Governmentwide Federal Human Capital Reform, GAO-05-69SP
(Washington, D.C.: Dec. 1, 2004).

necessary to maintain a governmentwide system that is responsive enough to
adapt to agencies' diverse missions, cultures, and workforces.

While there were divergent views among the forum participants, there was
general agreement on a set of principles, criteria, and processes that
would serve as a starting point for further discussion in developing a
governmentwide framework in advancing human capital reform, as shown in
figure 1.

                 Figure 1: Principles, Criteria, and Processes

Principles that the government should retain in a framework for reform
because of their inherent, enduring qualities:

o  merit principles that balance organizational mission, goals, and
performance objectives with individual rights and responsibilities;

o  ability to organize, bargain collectively, and participate through
labor organizations;

o  continued prohibition of certain personnel practices; and

o  guaranteed due process that is fair, fast, and final.

Criteria that agencies should have in place as they plan for and manage
their new human capital authorities:

o  demonstrated business case or readiness for use of targeted
authorities;

o  an integrated approach to results-oriented strategic planning and human
capital planning and management;

o  adequate resources for planning, implementation, training, and
evaluation; and

o  a modern, effective, credible, and integrated performance management
system that includes adequate safeguards to ensure equity and prevent
discrimination.

Processes that agencies should follow as they implement new human capital
authorities:

o  prescribing regulations in consultation or jointly with the Office of
Personnel Management;

o  establishing appeals processes in consultation with the Merit Systems
Protection Board;

o  involving employees and stakeholders in the design and implementation
of new human capital systems;

o  phasing in implementation of new human capital systems;

o  committing to transparency, reporting, and evaluation;

o  establishing a communications strategy; and

o  assuring adequate training.

Source: GAO.

  Concluding Observations

As we testified previously on the DOD and DHS civilian personnel reforms,
an agency should have to demonstrate that it has a modern, effective,
credible, and, as appropriate, validated performance management system in
place with adequate safeguards, including reasonable transparency and
appropriate accountability mechanisms, to ensure fairness and prevent
politicization of the system and abuse of employees before any related
flexibilities are operationalized. DOD's proposed NSPS regulations take a
valuable step toward a modern performance management system as well as a
more market-based, results-oriented compensation system. DOD's proposed
performance management system is intended to align individual performance
and pay with the department's critical mission requirements; hold
employees responsible for accomplishing performance expectations; and
provide meaningful distinctions in performance. However, the experiences
of high-performing organizations suggest that DOD should require core
competencies in its performance management system. The core competencies
can serve to reinforce employee behaviors and actions that support the DOD
mission, goals, and values and to set expectations for individuals' roles
in DOD's transformation, creating a shared responsibility for
organizational success and ensuring accountability for change.

DOD's overall effort to design and implement a strategic human resources
management systemalong with the similar effort of DHScan
be particularly instructive for future human capital management,
reorganization, and transformation efforts in other federal agencies.

Mr. Chairman and Members of the Subcommittee, this concludes my prepared
statement. I would be pleased to respond to any questions that you may
have at this time.

  Contacts and Acknowledgments

For further information, please contact Derek B. Stewart, Director,
Defense Capabilities and Management, at (202) 512-5559 or
[email protected]. For further information on governmentwide human capital
issues, please contact Eileen R. Larence, Director, Strategic Issues, at
(202) 512-6512 or [email protected]. Major contributors to this testimony
include Sandra F. Bell, Nancy L. Benco, Renee S. Brown, K. Scott Derrick,
William J. Doherty, Clifton G. Douglas, Jr., Barbara L. Joyce, Julia C.
Matta, Mark A. Pross, William J. Rigazio, John S. Townes, and Susan K.
Woodward.

Appendix I

"Highlights" from Selected GAO Human Capital Reports

Appendix I "Highlights" from Selected GAO Human Capital Reports

June 4, 2003

HUMAN CAPITAL

  Building on DOD's Reform Effort to Foster Governmentwide Improvements

Highlights of GAO-03-851T, testimony before the Committee on Governmental
Affairs, United States Senate

People are at the heart of an organization's ability to perform its
mission. Yet a key challenge for the Department of Defense (DOD), as for
many federal agencies, is to strategically manage its human capital. DOD's
proposed National Security Personnel System would provide for wide-ranging
changes in DOD's civilian personnel pay and performance management and
other human capital areas. Given the massive size of DOD, the proposal has
important precedent-setting implications for federal human capital
management.

This testimony provides GAO's observations on DOD human capital reform
proposals and the need for governmentwide reform.

www.gao.gov/cgi-bin/getrpt?GAO-03-851T.

To view the full testimony, click on the link above. For more information,
contact Derek Stewart at (202) 512-5559 or [email protected].

GAO strongly supports the need for government transformation and the
concept of modernizing federal human capital policies both within DOD and
for the federal government at large. 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 today's
rapidly changing and knowledge-based environment. The human capital
authorities being considered for DOD have far-reaching implications for
the way DOD is managed as well as significant precedent-setting
implications for the rest of the federal government. GAO is pleased that
as the Congress has reviewed DOD's legislative proposal it has added a
number of important safeguards, including many along the lines GAO has
been suggesting, that will help DOD maximize its chances of success in
addressing its human capital challenges and minimize the risk of failure.

More generally, GAO believes that agency-specific human capital reforms
should be enacted to the extent that the problems being addressed and the
solutions offered are specific to a particular agency (e.g., military
personnel reforms for DOD). Several of the proposed DOD reforms meet this
test. In GAO's view, the relevant sections of the House's version of the
National Defense Authorization Act for Fiscal Year 2004 and the proposal
that is being considered as part of this hearing contain a number of
important improvements over the initial DOD legislative proposal.

Moving forward, GAO believes it would be preferable to employ a
governmentwide approach to address human capital issues and the need for
certain flexibilities that have broad-based application and serious
potential implications for the civil service system, in general, and the
Office of Personnel Management, in particular. GAO believes that several
of the reforms that DOD is proposing fall into this category (e.g., broad
banding, pay for performance, re-employment and pension offset waivers).
In these situations, GAO believes it would be both prudent and preferable
for the Congress to provide such authorities governmentwide and ensure
that appropriate performance management systems and safeguards are in
place before the new authorities are implemented by the respective agency.
Importantly, employing this approach is not intended to delay action on
DOD's or any other individual agency's efforts, but rather to accelerate
needed human capital reform throughout the federal government in a manner
that ensures reasonable consistency on key principles within the overall
civilian workforce. This approach also would help to maintain a level
playing field among federal agencies in competing for talent and would
help avoid further fragmentation within the civil service.

Appendix I "Highlights" from Selected GAO Human Capital Reports

May 2003

HUMAN CAPITAL

DOD'S CIVILIAN PERSONNEL STRATEGIC MANAGEMENT AND THE

    Highlights of GAO-03-493T, a testimony
    before the Subcommittee on Oversight of PROPOSED NATIONAL SECURITY

Government Management, the Federal
Workforce and the District of Columbia, PERSONNEL SYSTEM

Senate Committee on Governmental Affairs

DOD's lack of attention to force shaping during its downsizing in the
early 1990sPeople are at the heart of an has resulted in a workforce that
is not balanced by age or experience and thatorganization's ability to
perform its puts at risk the orderly transfer of institutional knowledge.
Human capitalmission. Yet, a key challenge for challenges are severe in
certain areas. For example, DOD has downsized itsthe Department of Defense
(DOD), acquisition workforce by almost half. More than 50 percent of the
workforceas for many federal agencies, is to will be eligible to retire by
2005. In addition, DOD faces major successionstrategically manage its
human planning challenges at various levels within the department. Also,
since 1987, capital. With about 700,000 civilian the industrial workforce,
such as depot maintenance, has been reduced by aboutemployees on its
payroll, DOD is 56 percent, with many of the remaining employees nearing
retirement, callingthe second largest federal employer into question the
longer-term viability of the workforce. DOD is one of theof civilians in
the nation. Although agencies that has begun to address human capital
challenges through strategicdownsized 38 percent between human capital
planning. For example, in April 2002, DOD published afiscal years 1989 and
2002, this department wide strategic plan for civilians. Although a
positive step towardworkforce has taken on greater fostering a more
strategic approach toward human capital management, the planroles as a
result of DOD's is not fully aligned with the overall mission of the
department or resultsrestructuring and transformation. oriented. In
addition, it was not integrated with the military and contractorDOD's
proposed National Security personnel planning.Personnel System (NSPS)
would

provide for wide-ranging changes
in DOD's civilian personnel pay and We strongly support the concept of
modernizing federal human capital policies

performance management,  within DOD and the federal government at large.
Providing reasonable
collective bargaining, rightsizing, flexibility to management in this
critical area is appropriate provided adequate
and other human capital areas. The safeguards are in place to prevent
abuse. We believe that Congress should
NSPS would enable DOD to consider both governmentwide and selected agency,
including DOD, changes to
develop and  implement a address the pressing human capital issues
confronting the federal government.
consistent DOD-wide civilian In this regard, many of the basic principles
underlying DOD's civilian human
personnel system. Given the capital proposals have merit and deserve
serious consideration. At the same
massive size of DOD, the proposal time, many are not unique to DOD and
deserve broader consideration.

has important precedent-setting
implications for federal human Agency-specific human capital reforms
should be enacted to the extent that the

capital management and OPM. problems being addressed and the solutions
offered are specific to a particular

agency (e.g., military personnel reforms for DOD). Several of the proposed
DOD

This testimony provides GAO's reforms meet this test. At the same time, we
believe that Congress should

preliminary observations on consider incorporating additional safeguards
in connection with several of

aspects of DOD's proposal to make DOD's proposed reforms. In our view, it
would be preferable to employ a

changes to its civilian personnel government-wide approach to address
certain flexibilities that have broad-based

system and discusses the application and serious potential implications
for the civil service system, in

implications of such changes for general, and the Office of Personnel
Management (OPM), in particular. We

governmentwide human capital believe that several of the reforms that DOD
is proposing fall into this category

reform. Past reports have (e.g., broad-banding, pay for performance,
re-employment and pension offset

contained GAO's views  on what waivers). In these situations, it may be
prudent and preferable for the Congress

remains to be done to  bring about to provide such authorities on a
governmentwide basis and in a manner that

lasting solutions for DOD to assures that appropriate performance
management systems and safeguards are

strategically manage its human  in place before the new authorities are
implemented by the respective agency. capital. DOD has not always

concurred with our
recommendations. However, in all cases whether from a governmentwide
authority or agency

www.gao.gov/cgi-bin/getrpt?GAO-03-493T. specific legislation, in our view,
such additional authorities should be

To view the full testimony, including the scope implemented (or
operationalized) only when an agency has the institutional

and methodology, click on the link above. infrastructure in place to make
effective use of the new authorities. Based on

For more information, contact our experience, while the DOD leadership has
the intent and the ability to

Derek B.Stewart at (202) 512-5140 or implement the needed infrastructure,
it is not consistently in place within [email protected]. vast majority
of DOD at the present time.

Appendix I "Highlights" from Selected GAO Human Capital Reports

May 1, 2003

DEFENSE TRANSFORMATION

DOD's Proposed Civilian Personnel

  Highlights of GAO-03-741T, testimony System and Governmentwide Human House of
  Representatives Capital Reform

before the Committee on Armed Services,

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

major adjustments in the DOD

acquisition process, affect DOD's More generally, from a conceptual
standpoint, GAO strongly supports the need organization structure, and
change to expand broad banding and pay for performance-based systems in
the federal DOD's reporting requirements to government. However, moving
too quickly or prematurely at DOD or elsewhere, Congress, among other
things. 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
DOD's proposed National Security results-based system for the federal
government as a whole. Thus, while it is Personnel System (NSPS) would
imperative that we take steps to better link employee pay and other
personnel provide for wide-ranging changes decisions to performance across
the federal government, how it is done, when it in DOD's civilian
personnel pay and is done, and the basis on which it is done, can make all
the difference in whether performance management,  or not we are
successful. One key need is to modernize performance collective
bargaining, rightsizing, management systems in executive agencies so that
they are capable of and a variety of other human supporting more
performance-based pay and other personnel decisions. capital areas. The
NSPS would Unfortunately, based on GAO's past work, most existing federal
performance enable DOD  to develop and appraisal systems, including a vast
majority of DOD's systems, are not currently

implement a consistent DOD-wide

designed to support a meaningful performance-based pay system. civilian
personnel system.

The critical questions to consider are: should DOD and/or other agencies
beThis testimony provides GAO's

granted broad-based exemptions from existing law, and if so, on what
basis? Dopreliminary observations on

DOD and other agencies have the institutional infrastructure in place to
makeaspects of DOD's legislative proposal to make changes  to its
effective use of any new authorities? This institutional infrastructure
includes, civilian personnel system and at a minimum, a human capital
planning process that integrates the agency's discusses the implications
of such human capital policies, strategies, and programs with its program
goals and changes for governmentwide mission, and desired outcomes; the
capabilities to effectively develop and human capital reform. This
implement a new human capital system; and, importantly, a set of adequate
testimony summarizes many of the safeguards, including reasonable
transparency and appropriate accountability issues discussed in detail
before mechanisms to ensure the fair, effective, and credible
implementation of a new

the Subcommittee on Civil Service system.

and Agency Organization,
Committee on Government In GAO's view, as an alternative to DOD's proposed
approach, Congress should

Reform, House of Representatives consider providing governmentwide broad
banding and pay for performance

on April 29, 2003. 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, that can be certified to by a qualified
and

independent party, such as OPM, within prescribed timeframes. Congress

should also consider establishing a governmentwide fund whereby agencies,

www.gao.gov/cgi-bin/getrpt?GAO-03-741T. based on a sound business case,
could apply for funding to modernize their

performance management systems and ensure that those systems have adequate

To view the full testimony, click on the link safeguards to prevent abuse.
This approach would serve as a positive step to
above. For more information, contact Derek
Stewart at (202) 512-5559 or promote high-performing organizations
throughout the federal government

[email protected].

while avoiding further human capital policy fragmentation.

Appendix I "Highlights" from Selected GAO Human Capital Reports

April 2003

DOD CIVILIAN PERSONNEL

    Improved Strategic Planning Needed to Help Ensure Viability of DOD's
    Civilian Industrial Workforce

Highlights of GAO-03-472, a report to the Subcommittee on Readiness,
Committee on Armed Services, House of Representatives

Between 1987 and 2002, the Department of Defense (DOD) downsized the
civilian workforce in 27 key industrial facilities by about 56 percent.
Many of the remaining 72,000 workers are nearing retirement. In recent
years GAO has identified shortcomings in DOD's strategic planning and was
asked to determine (1) whether DOD has implemented our prior
recommendation to develop and implement a depot maintenance strategic
plan, (2) the extent to which the services have developed and implemented
comprehensive strategic workforce plans, and (3) what challenges adversely
affect DOD's workforce planning.

GAO recommends that the DOD complete revisions to core policy, promulgate
a schedule for completing core computations, and complete depot strategic
planning; develop a plan for arsenals and ammunition plants; develop
strategic workforce plans; and coordinate the implementation of
initiatives to address various workforce challenges. DOD concurred with 7
of our 9 recommendations; nonconcurring with two because it believes the
proposed National Security Personnel System, which was submitted to
Congress as a part of the DOD transformation legislation, will take care
of these problems. We believe it is premature to assume this system will
(1) be approved by Congress as proposed and (2) resolve these issues.

DOD has not implemented our October 2001 recommendation to develop and
implement a DOD depot strategic plan that would delineate workloads to be
accomplished in each of the services' depots. The DOD depot system has
been a key part of the department's plan to support military systems in
the past, but the increased use of the private sector to perform this work
has decreased the role of these activities. While title 10 of the U.S.
code requires DOD to retain core capability and also requires that at
least 50 percent of depot maintenance funds be spent for public-sector
performance, questions remain about the future role of DOD depots. Absent
a DOD depot strategic plan, the services have in varying degrees, laid out
a framework for strategic depot planning, but this planning is not
comprehensive. Questions also remain about the future of arsenals and
ammunition plants. GAO reviewed workforce planning efforts for 22
maintenance depots, 3 arsenals, and 2 ammunition plants, which employed
about 72,000 civilian workers in fiscal year 2002.

The services have not developed and implemented strategic workforce plans
to position the civilian workforce in DOD industrial activities to meet
future requirements. While workforce planning is done for each of the
industrial activities, generally it is short-term rather than strategic.
Further, workforce planning is lacking in other areas that OPM guidance
and high-performing organizations identify as key to successful workforce
planning. Service workforce planning efforts (1) usually do not assess the
competencies; (2) do not develop comprehensive retention plans; and (3)
sometimes do not develop performance measures and evaluate workforce
plans.

Several challenges adversely affect DOD's workforce planning for the
viability of its civilian depot workforce. First, given the aging depot
workforce and the retirement eligibility of over 40 percent of the
workforce over the next 5 to 7 years, the services may have difficulty
maintaining the depots' viability. Second, the services are having
difficulty implementing multiskilling-an industry and government best
practice for improving the flexibility and productivity of the
workforce-even though this technique could help depot planners do more
with fewer employees. Finally, increased training funding and innovation
in the training program will be essential for revitalizing the aging depot
workforce.

Staffing Levels, Age, and Retirement Eligibility of Civilian Personnel in
Industrial Facilities

                                    Service

FY 2002 civilian staffing levels Average age

Percent eligible to retire by 2007

Percent eligible to retire by 2009

                                                Navy 35,563        46 28 39 
                                                Army 14,234        49 41 52 
      www.gao.gov/cgi-bin/getrpt?GAO-03-472.    Marine Corps 1,323 48 45 60 
      To view the full report, including the    Air Force 21,152   47 35 44 
                       scope                                             
     and methodology, click on the link above.  Total 72,272       47 33 43 
                                                   Source: DOD           
    For more information, contact Derek Stewart    (data), GAO           
      at (202) 512-5559 or [email protected].     (presentation).         

Appendix I "Highlights" from Selected GAO Human Capital Reports

April 29, 2003

DEFENSE TRANSFORMATION

Preliminary Observations on DOD's

  Highlights of GAO-03-717T, testimony Proposed Civilian Personnel Reformsbefore
  the Subcommittee on Civil Service

and Agency Organization, Committee on Government Reform, House of
Representatives

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

major adjustments in the DOD

acquisition process, affect DOD's More generally, from a conceptual
standpoint, GAO strongly supports the need organization structure, and
change to expand broad banding and pay for performance-based systems in
the federal DOD's reporting requirements to government. However, moving
too quickly or prematurely at DOD or elsewhere, Congress, among other
things. 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
DOD's proposed National Security results- based system for the federal
government as a whole. Thus, while it is Personnel System (NSPS) would
imperative that we take steps to better link employee pay and other
personnel provide for wide-ranging changes decisions to performance across
the federal government, how it is done, when it in DOD's civilian
personnel pay and is done, and the basis on which it is done, can make all
the difference in whether performance management,  or not we are
successful. In our view, one key need is to modernize collective
bargaining, rightsizing, performance management systems in executive
agencies so that they are and a variety of other human capable of
supporting more performance-based pay and other personnel capital areas.
The NSPS would decisions. Unfortunately, based on GAO's past work, most
existing federal enable DOD  to develop and performance appraisal systems,
including a vast majority of DOD's systems, are

implement a consistent DOD-wide not currently designed to support a
meaningful performance-based pay system. civilian personnel system.

The critical questions to consider are: should DOD and/or other agencies
beThis testimony provides GAO's granted broad-based exemptions from
existing law, and if so, on what basis; andpreliminary observations on
whether they have the institutional infrastructure in place to make
effective useaspects of DOD's legislative proposal to make changes  to its
of the new authorities. This institutional infrastructure includes, at a
minimum, civilian personnel system and a human capital planning process
that integrates the agency's human capital poses critical questions that
need  policies, strategies, and programs with its program goals and
mission, and to be considered. 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 to 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

www.gao.gov/cgi-bin/getrpt?GAO-03-717T. systems have adequate safeguards
to prevent abuse. This approach would serve

as a positive step to promote high-performing organizations throughout the

To view the full report, including the scope federal government while
avoiding fragmentation within the executive branch inand methodology,
click on the link above.

For more information, contact Derek Stewart the critical human capital
area. at (202) 512-5559 or [email protected].

Appendix I "Highlights" from Selected GAO Human Capital Reports

March 2003

DOD PERSONNEL

    DOD Actions Needed to Strengthen Civilian Human Capital Strategic Planning
    and Integration with Military Personnel and Sourcing Decisions

Highlights of GAO-03-475, a report to the Ranking Minority Member,
Subcommittee on Readiness, House Committee on Armed Services

The Department of Defense's (DOD) civilian employees play key roles in
such areas as defense policy, intelligence, finance, acquisitions, and
weapon systems maintenance. Although downsized 38 percent between fiscal
years 1989 and 2002, this workforce has taken on greater roles as a result
of DOD's restructuring and transformation. Responding to congressional
concerns about the quality and quantity of, and the strategic planning for
the civilian workforce, GAO determined the following for DOD, the military
services, and selected defense agencies: (1) the extent of top-level
leadership involvement in civilian strategic planning; (2) whether
elements in civilian strategic plans are aligned to the overall mission,
focused on results, and based on current and future civilian workforce
data; and (3) whether civilian and military personnel strategic plans or
sourcing initiatives were integrated.

GAO recommends DOD improve the departmentwide plan to be mission aligned
and resultsoriented; provide guidance to align component- and
department-level human capital strategic plans; develop data on future
civilian workforce needs; and set mile-stones for integrating military and
civilian workforce plans, taking contractors into consideration. DOD
comments were too late to include in this report but are included in
GAO-03-690R.

www.gao.gov/cgi-bin/getrpt?GAO-03-475.

To view the full report, including the scope and methodology, click on the
link above. For more information, contact Derek B. Stewart at (202)
512-5559 or [email protected].

Generally, civilian personnel issues appear to be an emerging priority
among top leaders in DOD and the defense components. Although DOD began
downsizing its civilian workforce more than a decade ago, it did not take
action to strategically address challenges affecting the civilian
workforce until it issued its civilian human capital strategic plan in
April 2002. Top-level leaders in the Air Force, the Marine Corps, the
Defense Contract Management Agency, and the Defense Finance Accounting
Service have initiated planning efforts and are working in partnership
with their civilian human capital professionals to develop and implement
civilian strategic plans; such leadership, however, was increasing in the
Army and not as evident in the Navy. Also, DOD has not provided guidance
on how to integrate the components' plans with the department-level plan.
High-level leadership is critical to directing reforms and obtaining
resources for successful implementation.

The human capital strategic plans GAO reviewed for the most part lacked
key elements found in fully developed plans. Most of the civilian human
capital goals, objectives, and initiatives were not explicitly aligned
with the overarching missions of the organizations. Consequently, DOD and
the components cannot be sure that strategic goals are properly focused on
mission achievement. Also, none of the plans contained results-oriented
performance measures to assess the impact 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. Finally,
the plans did not contain data on the skills and competencies needed to
successfully accomplish future missions; therefore, DOD and the components
risk not being able to put the right people, in the right place, and at
the right time, which can result in diminished accomplishment of the
overall defense mission.

Moreover, the civilian strategic plans did not address how the civilian
workforce will be integrated with their military counterparts or sourcing
initiatives. DOD's three human capital strategic plans-- two military and
one civilian--were prepared separately and were 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. The components' civilian
plans acknowledge a need to integrate planning for civilian and military
personnel-taking into consideration contractors-but have not yet done so.
Without an integrated strategy, DOD may not effectively and efficiently
allocate its scarce resources for optimal readiness.

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