Federal Downsizing: The Costs and Savings of Buyouts Versus
Reductions-in-Force (Letter Report, 05/14/96, GAO/GGD-96-63).

Pursuant to a congressional request, GAO reviewed federal workforce
downsizing, focusing on the projected costs and savings from federal
workforce buyouts and reductions-in-force (RIF) over a 5-year period.

GAO found that: (1) employee buyouts could produce over $60,000 more in
net savings over 5 years than RIF for each vacated position because
buyouts can be used at higher grade levels that generate more savings in
salaries and benefits when downsized; (2) if federal agencies separate
retirement-eligible employees who do not displace lower-grade employees,
RIF could produce about $29,000 more in net savings over 5 years than
buyouts; (3) displacing employees in the same competitive areas but
lower-tenure groups or with less service within the same tenure groups
reduces RIF savings because those savings represent the salaries and
benefits of lower-grade employees; (4) savings from buyouts or RIF could
be reduced if the vacated positions are refilled or privatized; (5)
federal agencies may need more buyouts than RIF to achieve their
downsizing targets because normal attrition slows prior to buyouts; (6)
buyouts avoid or reduce the non-economic adverse effects of RIF, such as
reduced diversity, decreased productivity, and lower morale; and (7)
buyouts may help federal agencies improve diversity, since buyouts
typically affect older white males.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-96-63
     TITLE:  Federal Downsizing: The Costs and Savings of Buyouts Versus 
             Reductions-in-Force
      DATE:  05/14/96
   SUBJECT:  Employee buyouts
             Personnel management
             Federal downsizing
             Federal employees
             Reductions in force
             Federal employee retirement programs
             Labor costs
             Cost control
             Privatization
IDENTIFIER:  OPM Central Personnel Data File
             DOD Voluntary Separation Incentive Program
             
******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO report.  Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved.  Major          **
** divisions and subdivisions of the text, such as Chapters,    **
** Sections, and Appendixes, are identified by double and       **
** single lines.  The numbers on the right end of these lines   **
** indicate the position of each of the subsections in the      **
** document outline.  These numbers do NOT correspond with the  **
** page numbers of the printed product.                         **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
** A printed copy of this report may be obtained from the GAO   **
** Document Distribution Center.  For further details, please   **
** send an e-mail message to:                                   **
**                                                              **
**                                            **
**                                                              **
** with the message 'info' in the body.                         **
******************************************************************


Cover
================================================================ COVER


Report to the Chairman, Subcommittee on Civil Service, Committee on
Government Reform and Oversight, House of Representatives

May 1996

FEDERAL DOWNSIZING - THE COSTS AND
SAVINGS OF BUYOUTS VERSUS
REDUCTIONS-IN-FORCE

GAO/GGD-96-63

Federal Downsizing

(966676)


Abbreviations
=============================================================== ABBREV

  CBO - Congressional Budget Office
  CPDF - Central Personnel Data File
  CSRS - Civil Service Retirement System
  DOD - Department of Defense
  FERS - Federal Employees Retirement System
  FTE - full-time equivalent
  NPR - National Performance Review
  OMB - Office of Management and Budget
  OPM - Office of Personnel Management
  RIF - Reduction-In-Force

Letter
=============================================================== LETTER


B-265774

May 14, 1996

The Honorable John L.  Mica
Chairman, Subcommittee on Civil Service
Committee on Government Reform and Oversight
House of Representatives

Dear Mr.  Chairman: 

As part of our ongoing work examining how federal agencies have used
buyouts to downsize the federal workforce, you asked that we compare
the projected costs and savings of buyouts with an alternative
downsizing strategy, reductions-in-force (RIF), over a 5-year period. 
Because such an analysis is dependent on many factors that may vary
considerably among agencies, we used a variety of assumptions and
scenarios in our analysis to determine the average costs and savings
of each method.  We based our analysis on available workforce data
and on the results of earlier studies completed by us and by other
organizations.  This report describes and compares the circumstances
under which buyouts or RIFs offer greater potential savings, but it
does not calculate or compare the actual costs of either alternative
in past years. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Our analysis shows that agencies could realize net savings over a
5-year period through workforce reductions using either buyouts or
RIFs, because salaries and benefits saved from either strategy should
exceed costs.  However, savings from buyouts would generally exceed
those from RIFs over a 5-year period, because buyout recipients
typically have higher grades and salaries than employees separated by
RIFs.  Separation data from fiscal year 1993 through March 31, 1995,
show that buyout recipients had an average annual salary ranging from
$34,745 for resignees to almost $48,000 for retirees, while RIFed
employees averaged $29,495.  A primary reason for the salary
differences is that a person who would otherwise be separated under a
RIF can often displace a lower-graded employee with less retention
rights who is then separated.  This process, which is referred to as
"bumping and retreating,"\1 has occurred in most recent RIFs.  Our
analysis shows that, assuming that bumping and retreating will occur,
buyouts could generate over $60,000 (up to 50 percent) more in net
savings than RIFs for each vacated position over a 5-year period. 
RIFs, however, could generate greater savings than buyouts in those
instances where (1) bumping and retreating does not occur, and (2)
the employees separated are eligible for either regular or early
retirement.  By separating employees who are eligible for retirement,
the cost of severance pay is eliminated.  In such cases, we
calculated that RIFs would generate around $29,000 (up to 12 percent)
more in net savings than buyouts for each position vacated over the
same 5-year period.  However, if the separated employee (with the
same salary, age, and years of experience) is not eligible for
retirement and receives severance pay, buyout savings would exceed
the RIF savings over the 5-year period by about 10 percent. 

Estimated savings from buyouts are projected on the assumption that
the positions vacated by separated employees are eliminated. 
However, agencies could refill a bought-out position, as long as
another position in the agency is eliminated to meet downsizing
goals.  If the eliminated position is vacant or filled with a
lower-graded employee, the savings from the buyout would be reduced. 
Likewise, an agency could contract out the work previously performed
by the employee in the bought-out or RIFed position.  To the extent
such actions are taken, savings from buyouts and RIFs could be
reduced. 

Recent studies and our own analysis of agency-reported data suggest
that when employees anticipate buyout offers, normal attrition slows
considerably, because some employees delay their separations to
receive buyouts.  This phenomenon tends to increase the number, and
therefore the cost, of buyouts. 

RIFs, however, have historically been difficult and complex to
administer and are often viewed as decreasing employee productivity
and morale.  Agency officials told us that, in contrast, the use of
buyouts has been an effective tool in accomplishing their workforce
restructuring goals.  Furthermore, they said that buyouts helped them
maintain or improve diversity profiles compared with RIFs, because
RIFs are likely to result in the separation of proportionately
greater numbers of women and minority employees.  We did not attempt
to quantify these factors in our analysis. 

Savings from downsizing in an individual agency will largely depend
on (1) how effectively the agency had planned its workforce
restructuring, including the likelihood that bumping and retreating
would take place with RIFs, (2) employee demographics, including who
would likely be separated under a RIF versus who would likely take a
buyout; (3) how effectively the agency had targeted the use of RIFs
or buyouts, and (4) how the agency defined its competitive levels and
areas for RIFs. 

Decisions on which downsizing strategy to use--buyouts or
RIFs--depend on these savings as well as noneconomic factors,
including how effectively an agency can use buyouts or RIFs to
eliminate specific positions, and the potentially adverse effect the
strategy might have on agency operations and employee morale. 


--------------------
\1 "Bumping" means displacing an employee in the same competitive
area who is in a lower-tenure group (type of appointment category). 
Although the employee who displaces another employee through bumping
must be qualified for the position, it may be a position that he or
she has never held.  "Retreating" means displacing an employee in the
same competitive area who has less service within the same tenure
group.  The position into which the employee is retreating must be
the same or an identical position the employee held in the past on a
permanent basis. 


   BACKGROUND
------------------------------------------------------------ Letter :2

Both Congress and the administration have agreed that federal
employment levels should be cut as a means of reducing federal costs
and controlling deficits.  Through a series of executive orders and
legislation, goals have been established for reducing federal
staffing levels.  Two driving forces in the reductions have been the
Federal Workforce Restructuring Act of 1994 and the National
Performance Review (NPR).  The act, passed in March 1994, mandated
governmentwide reductions of 272,900 Full Time Equivalent (FTE)
positions through fiscal year 1999.\2 The NPR recommended that any
reductions be accomplished through agency efforts to streamline
operations, reduce "management control" and headquarters positions,
and improve government operations through reinvention and quality
management techniques. 

For many federal agencies, achieving reduced staffing levels cannot
be attained by relying solely on attrition.  Consequently, alternate
methods of workforce reductions must be explored.  One approach that
has been historically available to agencies is RIFs.  During RIFs,
staff reductions are achieved by eliminating positions and
involuntarily separating employees from federal service. 

The employee who is actually separated in a RIF may not hold the
position an agency actually abolishes.  Agencies that need to lay off
employees must follow a complex set of procedures to determine who
will be separated.  These procedures give favorable consideration in
layoff decisions to employees with (1) career appointments, (2)
military veteran status, (3) seniority, and (4) good job performance. 
The agencies rank employees according to these four factors and place
them on retention registers where they will compete with others in
similar positions.  Such competition is generally limited to
employees who fall within what the agency designates as the
competitive area (geographic, organizational, or both) and the
competitive level (those positions in a competitive area with similar
work and the same pay grade). 

During RIFs, higher ranked employees may take the positions of others
at lower grades or in different jobs through bumping and retreating. 
Although opportunities to bump and retreat may be limited if the
competitive areas and levels are very small, past experience has
shown that, on average, for every employee separated from federal
employment under a RIF, at least one bumping or retreating action has
taken place.  Employees taking lower-graded positions keep the grade
of their former positions for 2 years.  After that time, they are
entitled to indefinite pay retention but do not receive full annual
pay comparability increases until the rate of their new grade equals
or exceeds their current pay. 

Employees separated involuntarily may be eligible to receive
severance pay.  The amount received is based on the employee's pay,
years of creditable service, and age at the time of separation.\3 The
maximum amount that may be paid is limited to one year's salary. 

The buyouts, authorized by the Workforce Restructuring Act of 1994,
allowed agencies to make a Voluntary Separation Incentive Payment of
up to $25,000 to eligible employees in exchange for their voluntary
retirement or resignation from the federal government.  These
employees were entitled to a payment equal to the amount of severance
pay for which their age and length of service qualified them or
$25,000, whichever was less.  The act authorized buyouts at
non-Department of Defense (DOD) agencies from March 30, 1994, through
March 31, 1995.  DOD was authorized use of the buyout authority
through separate legislation.\4 Over 112,500 buyouts have been paid
to employees governmentwide since DOD was authorized use of the
authority in early 1993. 

Congress is considering new legislation that would again give non-DOD
agencies temporary authority to pay retirement and separation
incentives.  If an agency has a downsizing goal that requires
personnel reductions in excess of normal attrition, should the agency
conduct a RIF or, if legislatively authorized, offer buyouts?  This
decision involves not only the economics of each strategy but also
how effectively the agency can use buyouts and RIFs to eliminate
specific positions, and the potentially adverse effect the strategy
might have on agency operations and employee morale. 


--------------------
\2 According to OMB guidance, an FTE or work year generally includes
260 compensable days or 2,080 hours.  These hours include
straight-time hours only and exclude overtime and holiday hours. 

\3 To be eligible, the employee must not decline a reasonable job
offer within two grades of the current grade level in the same
commuting area, must have served at least 12 months, and must not be
eligible for an immediate annuity. 

\4 P.L.  102-484 authorized DOD buyouts through fiscal year 1997;
P.L.  103-337 extended this authority through fiscal year 1999. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3

Varying assumptions have been used in past economic studies of
buyouts and RIFs.  We analyzed these studies to obtain the factors
that should be included in an economic analysis of costs and savings
associated with buyouts and RIFs.  The studies we reviewed included
our 1985 study of RIFs,\5 a 1994 DOD study of buyouts and RIFs, a
1993 Congressional Budget Office study of buyouts and RIFs, and a
1995 Office of Personnel Management (OPM) analysis of buyout and RIF
costs. 

Although a detailed analysis of agency buyout and RIF costs was
beyond the scope of our current review, we contacted some agencies
that have experienced buyouts and RIFs in the past 2 fiscal years to
obtain cost data.  We found that little, if any, data had been
tracked or collected.  We asked general questions on how RIFs and
buyouts were administered to get a better understanding of the
factors to include in our economic analysis. 

We developed an economic analysis comparing buyouts and RIFs on the
basis of our review of past studies, contacts with agency officials,
and our analysis of OPM data from the Central Personnel Data File
(CPDF) on the average demographics of employees separated from the
federal government under buyouts and RIFs during the past 3 years. 
Those separated through buyouts tend to be older employees with
higher salaries and more years of service than those separated
through RIFs. 

We obtained updated information from the Department of Labor on
average number and amount of unemployment compensation payments. 
Whenever possible, we attempted to verify cost estimates from past
studies before inclusion in the cost analysis.  In cases where we
could not do this, we have included appropriate cost factors and
noted the potential weaknesses of the specific cost estimates (see
appendix III). 

We based our economic analysis on the assumption that positions
vacated through buyouts and RIFs were eliminated and not refilled
with other federal employees or with contractor employees.  Without
extensive analysis of agency buyouts and RIFs, we have no way of
determining the extent to which vacated positions were refilled or
the work performed in eliminated positions contracted out.  Thus, the
savings we have calculated from these downsizing strategies could be
overstated. 

Our work was performed in Washington, D.C.  and Denver, CO, between
July 1995 and January 1996, in accordance with generally accepted
government auditing standards. 

We provided the Director of OPM with a draft of this report for his
comments on March 13, 1996.  OPM's written comments are summarized
and evaluated at the of this letter and are presented in full in
appendix IV. 


--------------------
\5 Reduction in Force Can Sometimes Be More Costly to Agencies Than
Attrition and Furlough (GAO/PEMD-85-6, July 24, 1985). 


   BUYOUT SAVINGS GENERALLY EXCEED
   RIF SAVINGS
------------------------------------------------------------ Letter :4

The economics of workforce reduction strategies can vary widely among
agencies depending on (1) the positions eliminated, (2) the
demographics of the retirement eligible population, (3) how early in
the fiscal year separations are made, and (4) whether positions are
refilled, eliminated, or the work contracted out. 

On the basis of our work, we determined that agencies could realize
net savings from workforce reductions using either strategy, since
the savings over a 5-year period from salaries and benefits of
separated employees should exceed costs.  However, our analysis shows
that net savings accruing from the use of buyouts will generally
exceed net savings from RIFs over a 5-year period if bumping and
retreating take place .  Buyouts would generate over $60,000 (up to
50 percent) more in net savings than RIFs for each vacated position
over the 5 years.  This is primarily true because the buyout
population is different from the RIF population.  Employees separated
from the federal government through buyouts are typically at higher
grade levels than those separated through RIFs, thereby producing
greater savings in salaries and benefits.  Governmentwide data on
average salaries and other characteristics of separated employees
taken from the CPDF for fiscal year 1993 through the first half of
fiscal year 1995 are shown in table 1. 



                                Table 1
                
                  Average Characteristics of Separated
                               Employees

                               Regular      Early
                                        retiremen  Voluntary
                            retirement          t  resignati  Involunt
                                  with       with    on with       ary
Characteristic                  buyout     buyout     buyout      RIFs
--------------------------  ----------  ---------  ---------  --------
Salary                         $47,940    $44,259    $34,745   $29,495
Years of service                  29.0       27.5       12.8      10.6
Age                               61.5       53.7       42.8      41.8
----------------------------------------------------------------------
Source:  GAO calculations based on data from OPM's CPDF for fiscal
year 1993 through the first half of fiscal year 1995. 

However, if employees separated from the federal government through
RIFs are retirement eligible and do not displace lower-graded
employees, savings from RIFs could marginally exceed savings from
buyouts over a 5-year period.  For these cases, RIFs could generate
around $29,000 (up to 12 percent) more in net savings than buyouts
for each position vacated over the 5-year period. 

The major costs associated with RIFs are those of placement,
relocation, retraining, unemployment compensation, and, for those
employees not retirement eligible, severance pay.  The major cost of
buyouts is the amount of the separation incentive, up to $25,000. 
Savings from RIFs and buyouts are generated by removing the
obligation to pay the salaries and benefits of those separating. 

Tables 2 and 3 represent the results of a comparison of costs and
savings of buyouts and RIFs using weighted CPDF separation data for
fiscal year 1993 through the first half of fiscal year 1995. 
Individual examples of three basic separation scenarios are shown: 
(1) an employee who is eligible for regular retirement, (2) one who
is eligible for early retirement, and (3) one who resigns.  For each
scenario, the 5-year costs and savings of separations with buyouts
are compared with the 5-year costs and savings that would likely
accrue if the employee were separated through a RIF instead of a
buyout.  Net savings are shown for the year of separation and for the
cumulative 5 years after separation.  Because first-year costs and
savings are greatly dependent on the time of year the employee
separates, net savings are shown for an assumed separation date of
December 31, 1994, (table 2) and March 31, 1995, (table 3).  See
appendix I and II for a more detailed cost analysis. 



                                Table 2
                
                 Net Savings From Separation Scenarios
                  With a December 31, 1994, Separation
                                  Date

                                                                 Five-
                                                    First-        year
                                                      year
                                                       net  cumulative
                                                   savings         net
Separation scenario                              (FY 1995)     savings
----------------------------------------------  ----------  ----------
Regular retirement eligible (salary = $47,940)
----------------------------------------------------------------------
Retirement with buyout                             $10,546    $284,720
RIF -bump/retreat                                    9,986     201,859
RIF -no bump/retreat                               $32,484    $306,658

Early retirement eligible (salary = $44,259)
----------------------------------------------------------------------
Retirement with buyout                                  94    $253,217
RIF -bump/retreat                                    8,138     185,322
RIF -no bump/retreat                               $28,908    $282,031

Resignation (salary = $34,745)
----------------------------------------------------------------------
Resignation with buyout                              3,052    $203,509
RIF -bump/retreat                                  (1,374)     136,379
RIF -no bump/retreat                                $1,066    $196,715
----------------------------------------------------------------------
Source:  GAO calculations based on data from OPM's CPDF and GAO
assumptions. 

If separations occur later in the fiscal year, first-year costs
increase and total savings through fiscal year 1999 are reduced, as
shown in table 3. 



                                Table 3
                
                 Net Savings From Separation Scenarios
                                 With a
                    March 31, 1995, Separation Date

                                                                 Five-
                                                    First-        year
                                                      year
                                                       net  cumulative
                                                   savings         net
Separation scenario                              (FY 1995)     savings
----------------------------------------------  ----------  ----------
Regular retirement eligible (Salary = $47,940)
----------------------------------------------------------------------
Retirement with buyout                            ($4,975)    $269,199
RIF -bump/retreat                                    (878)     190,995
RIF -no bump/retreat                               $16,963    $291,137

Early retirement eligible (Salary = $44,259)
----------------------------------------------------------------------
Retirement with buyout                           ($14,234)    $238,889
RIF -bump/retreat                                  (1,892)     175,292
RIF -no bump/retreat                               $14,580    $267,703

Resignation (Salary = $34,745)
----------------------------------------------------------------------
Resignation with buyout                           ($8,196)    $192,261
RIF -bump/retreat                                  (9,248)     128,505
RIF -no bump/retreat                             ($10,182)    $185,467
----------------------------------------------------------------------
Source:  GAO calculations based on data from OPM's CPDF and GAO
assumptions. 

While RIF savings in tables 2 and 3 exceed buyout savings for the
retirement-eligible employee who does not bump or retreat, the
results would be different if the employee were not eligible for
retirement.  For these cases, the cost of severance pay, which could
equal up to one year's salary, would reduce the RIF savings below
those of the buyout scenario.  On the basis of the above demographics
of salary, age, and years of service, buyout savings could exceed RIF
savings in these cases by 10 percent over the 5-year period. 

While these comparisons are examples of what savings might accrue for
each separated employee under various scenarios, experience at
individual agencies will largely depend on (1) how effectively the
agency had planned its workforce restructuring, including the
likelihood that bumping and retreating would take place with RIFs;
(2) employee demographics, including who would likely be separated
under a RIF versus who would likely take a buyout; (3) how
effectively the agency had used RIFs or buyouts to eliminate specific
positions; and (4) how the agency defined its competitive levels and
areas for RIFs. 


   BUMPING AND RETREATING REDUCES
   RIF SAVINGS
------------------------------------------------------------ Letter :5

The right of federal employees to bump and retreat reduces the
savings achieved under a RIF, because the savings realized represent
the salary and benefits of the lower-graded employee who actually
leaves the federal payroll.  Data we gathered for a prior report\6

showed the average salaries of separated employees under RIFs equaled
about 70 percent of the salaries of the employees in the eliminated
positions.  Also, our prior study showed that, on average, for each
employee separated from the federal government through a RIF, at
least one other person had bumped or retreated to a position at least
two grade levels below the position eliminated. 

Our analysis shows that RIF savings can increase if the RIF
separations occur without bumping and retreating.  In fact, RIFs can
generate more savings than buyouts over a 5-year period for
retirement-eligible employees under such conditions.  Consequently,
the anticipated extent of bumping and retreating can be a factor an
agency considers in deciding whether to pursue RIFs or buyouts as a
downsizing strategy.  Agency officials, however, told us that
generally it is difficult to predict with any certainty the extent of
bumping and retreating under a RIF. 


--------------------
\6 GAO/PEMD-85-6 July 24, 1985. 


   SAVINGS COULD BE REDUCED IF
   VACATED POSITIONS WERE REFILLED
   OR WORK FROM ELIMINATED
   POSITIONS WERE CONTRACTED OUT
------------------------------------------------------------ Letter :6

Savings should result with the use of either buyouts or RIFs, as long
as vacated positions are eliminated and not refilled, and the work
previously performed by the separated employee is not subsequently
contracted out.  Under provisions of the Workforce Restructuring Act
and OMB guidance, agencies are to reduce one FTE for each buyout
granted.  However, agencies can refill a bought-out position,
electing instead to eliminate another position in the agency. 
Likewise, under certain conditions, agencies could contract out the
work of a position vacated through a buyout or eliminated through a
RIF.  In such instances, any savings from buyouts or RIFs could be
reduced by the cost of refilling the position or contracting out the
work. 


   MORE BUYOUTS THAN RIFS MAY BE
   NEEDED TO REACH AN AGENCY'S
   DOWNSIZING TARGET
------------------------------------------------------------ Letter :7

An agency may need a larger number of buyouts than RIFs to reach its
downsizing target.  More buyouts may be needed because normal
attrition slows considerably during the time period preceding a
buyout, since some employees delay their planned separations in order
to receive a buyout.  Indeed, as shown in table 4, annual
governmentwide separations dropped by over 20 percent from the end of
fiscal year 1991 through fiscal year 1992, as proposed legislation to
authorize buyouts was under consideration.  Separations then rose by
35 percent in fiscal year 1994, when both DOD and non-DOD agencies
had buyout authority.  Although some of the drop in separations may
have been due to economic conditions at the time, it is possible that
some employees delayed their separations so that they could receive a
buyout. 



                                     Table 4
                     
                     Historical Voluntary Separations, Fiscal
                     Year 1991 Through First Half Fiscal Year
                                       1995

                                                                         Percent
                                 Regula                                   change
                                      r   Early                             from
                                 retire  retire  Resignatio             previous
Fiscal year                        ment    ment          ns   Totals        year
-------------------------------  ------  ------  ----------  -------  ----------
1991                             33,064   3,454      74,221  110,739
1992                             22,076     851      65,259   88,186       -20.4
1993                             27,266   9,144      50,909   87,319        -1.0
1994                             37,682  17,861      62,684  118,227      + 35.4
1995 (first half)                23,626  12,562      30,145   66,333
--------------------------------------------------------------------------------
Note:  Separations are combined figures for Civil Service Retirement
System (CSRS) and Federal Employee Retirement System (FERS)
employees. 

Source:  GAO calculations based on data from OPM's CPDF. 

When analyzing the relative costs of buyouts and RIFs, the fact that
more buyouts than RIFs may be needed to meet downsizing goals should
be taken into account.  Recent studies and our own analysis of agency
reported data support this conclusion.  We concluded, on the basis of
data agencies reported to us, that 100 buyouts avoids about 68 RIFs. 
This relationship of "buyouts granted to RIFs avoided" has been
considered in our cost analysis of buyouts.  The effect of this
relationship on the cost analysis is to increase the costs of buyouts
relative to RIFs. 


   BUYOUTS AVOID NONECONOMIC
   EFFECTS OF RIFS ON WORKFORCE
------------------------------------------------------------ Letter :8

Agency officials noted that buyouts avoid or reduce some of the
negative noneconomic effects of RIFs, such as diminished workforce
diversity.  Since retention during a RIF is based largely on
seniority and military veteran status, women and minorities--who
generally rank lower in one or both of these factors, compared with
white males--tend to be separated disproportionately during a RIF. 
In addition, some agencies that recently conducted RIFs said they
experienced other adverse effects historically associated with RIFs,
including decreased productivity and lower employee morale.  They
also reported that the burden of administering RIFs was significant
and tended to disrupt normal agency operations.  The following are
examples of statements from agency officials: 

  -- "Since employees with the greatest seniority would normally be
     retained [under a RIF], we would need to release the group of
     employees in which the greatest training costs have been
     expended."

  -- "When people leave involuntarily, you get an unhappy workforce,
     and it takes a tremendous amount of administrative time to deal
     with that."

  -- "[We have] seen some cases of severe resentment on the part of
     employees who have successfully bumped and retreated to a
     lower-graded position.  They are resentful of having to work in
     a lower-graded position and often are not as productive as they
     should be."

However, agencies reported that buyouts can be an effective
restructuring tool and improve workforce diversity profiles.  As we
reported in our August 1994 congressional correspondence\7 on the use
of the buyout authority by the Department of Education, department
officials reported they used buyouts to adjust staffing levels when
changes in mission requirements occurred.  Officials at the National
Aeronautics and Space Administration reported that buyouts helped
them better manage their staffing levels during the current
downsizing period.  Agencies also reported that buyouts have enabled
them to either maintain or improve their diversity profiles, because
the separation of many buyout takers who are older white males opens
additional opportunities for women and minorities.  RIFs, with their
cascading effect of bumping and retreating, effectively prohibit such
workforce restructuring and improvements to diversity. 


--------------------
\7 Buyouts at the Department of Education (GAO/GGD-94-197R, Aug.  17,
1994). 


   CONCLUSIONS
------------------------------------------------------------ Letter :9

Buyouts are again being considered in pending congressional
legislation.  The results of our work show that buyouts granted under
the criteria of the Workforce Restructuring Act of 1994 will generate
more savings than RIFs if typical bumping and retreating take place. 
However, in those instances where bumping and retreating do not take
place, RIFs may generate more savings than buyouts for
retirement-eligible employees.  If the employee separated by a RIF is
not eligible for a retirement annuity, the projected buyout savings
would be 10 percent more than the net RIF savings for this same
employee.  Projected savings from both buyouts and RIFs could be
reduced if vacated positions were refilled and not eliminated or if
work previously performed by separated employees is later contracted
out.  Although the extent of bumping and retreating under a RIF may
be difficult to determine, it may have a significant effect on the
economics of the downsizing strategy used. 

While economics play an important part in an agency's decision on
which downsizing strategy to use, noneconomic effects were also
described to us by agency officials.  These effects included the
ability to use buyouts to restructure agency workforces, retain or
improve workforce diversity, and avoid lowering productivity and
morale. 


   AGENCY COMMENTS AND OUR
   EVALUATION
----------------------------------------------------------- Letter :10

OPM provided written comments on a draft of this report.  These
comments are summarized below and included in their entirety, along
with our specific responses, in appendix IV. 

OPM agreed with the conclusions of our report, saying the conclusions
supported OPM's belief that the government will be best served if
involuntary separations are minimized while downsizing.  OPM made a
few technical suggestions, and we have incorporated them into the
report where appropriate.  More important, OPM recommended that some
additional RIF costs be included and questioned the validity of how
buyout costs were computed.  We do not agree with these
recommendations and have not made changes to the report to reflect
these additional costs, explaining our reasons in appendix IV.  It is
important to note that the inclusion of these additional RIF costs
and the suggested revisions to buyout costs would increase the
savings differential between buyouts and RIFs but would not change
the conclusions we have reached.  Buyouts would still save more than
RIFs over 5 years when bumping and retreating occur, and RIFs would
still save more than buyouts over the same period if bumping and
retreating do not occur. 


--------------------------------------------------------- Letter :10.1

As arranged with your office, unless you announce the contents of
this report earlier, we plan no further distribution until 30 days
after its issue date.  At that time, we will send copies to the
Director of OPM and the Director of the Office of Management and
Budget.  We will make copies available to others on request. 

The major contributors to this report are listed in appendix V.  If
you have any questions about the report, please call me on (202)
512-8676 or Associate Director Timothy P.  Bowling on (202) 512-3511. 

Sincerely yours,

L.  Nye Stevens
Director, Federal Management
 and Workforce Issues


FIVE-YEAR BUYOUT-RIF SAVINGS/COST
COMPARISON (DECEMBER 31, 1994,
SEPARATION DATE)
=========================================================== Appendix I

                        Voluntary
                        optional        RIF no              Voluntary early                               Voluntary
                        retirement      bump      RIF bump  retirement (with  RIF no bump   RIF bump      resignation     RIF no bump   RIF bump
Savings/cost factors    (with buyout)   retreat   retreat   buyout)           retreat       retreat       (with buyout)   retreat       retreat
----------------------  --------------  --------  --------  ----------------  ------------  ------------  --------------  ------------  -------------
Grade/Step/Salary       GS12/6-         $47,940   $33,558   GS12/3-$44,259    $44,259       $30,981       GS11/1-         $34,745       $24,322
                        $47,940                                                                           $34,745

Years of service        29.0            29.0      10.6      27.5              27.5          10.6          12.8            12.8          10.6

Age                     61.5            61.5      41.8      53.7              53.7          41.8          42.8            42.8          41.8


FY 1995 SAVINGS/(COSTS)
-----------------------------------------------------------------------------------------------------------------------------------------------------
Buyout amount           ($36,016)       0         0         ($36,459)         0             0             ($20,626)       0             0

Severance pay           0               0         ($8,529)  0                 0             ($7,874)      0               ($13,342)     ($6,182)

Refund -Retirement      0               0         0         0                 0             0             ($8,326)        ($8,326)      ($6,085)
contribution

Agency payment to       0               0         0         ($6,433)          0             0             0               0             0
retirement fund

Unemployment            0               ($1,222)  ($1,222)  0                 ($1,222)      ($1,222)      0               0             ($1,222)

Outplacement            0               ($7,456)  ($7,456)  0                 ($7,456)      ($7,456)      0               ($7,456)      ($7,456)

Retraining              0               ($1,900)  ($1,900)  0                 ($1,900)      ($1,900)      0               ($1,900)      ($1,900)

Relocation              0               ($3,500)  ($3,500)  0                 ($3,500)      ($3,500)      0               ($3,500)      ($3,500)

Gross cost              ($36,016)       ($14,078  ($22,607  ($42,892)         ($14,078)     ($21,952)     ($28,952)       ($34,524)     ($26,345)
                                        )         )

Salary/benefit savings  $46,562         $46,562   $32,593   $42,986           $42,986       $30,090       $33,746         $33,746       $23,623

FY 1995 net savings     $10,546         $32,484   $9,986    $94               $28,908       $8,138        $4,794          ($778)        ($2,722)


FY 1996 SAVINGS/(COSTS)
-----------------------------------------------------------------------------------------------------------------------------------------------------
Salary/benefit savings  $64,565         $64,565   $45,196   $59,608           $59,608       $41,725       $46,795         $46,795       $32,757

Unemployment            0               0         0         0                 0             0             0               ($1,222)      0

FY 1996 net savings     $64,565         $64,565   $45,196   $59,608           $59,608       $41,725       $46,795         $45,573       $32,757

FY 1995-1996 net        $75,111         $97,049   $55,182   $59,702           $88,516       $49,863       $51,589         $44,795       $30,035
savings


FY 1997 SAVINGS/(COSTS)
-----------------------------------------------------------------------------------------------------------------------------------------------------
Salary/benefit savings  $67,148         $67,148   $47,004   $61,992           $61,992       $43,394       $48,667         $48,667       $34,067

FY 1995-1997 net        $142,259        $164,197  $102,186  $121,694          $150,508      $93,257       $100,256        $93,462       $64,102
savings


FY 1998 SAVINGS/(COSTS)
-----------------------------------------------------------------------------------------------------------------------------------------------------
Salary/benefit savings  $69,834         $69,834   $48,834   $64,472           $64,472       $45,130       $50,614         $50,614       $35,430

FY 1995-1998 net        $212,093        $234,031  $151,020  $186,166          $214,980      $138,387      $150,870        $144,076      $99,532
savings


FY 1999 SAVINGS/COSTS)
-----------------------------------------------------------------------------------------------------------------------------------------------------
Salary/benefit savings  $72,627         $72,627   $50,839   $67,051           $67,051       $46,935       $52,639         $52,639       $36,847

FY 1995-1999 net        $284,720        $306,658  $201,859  $253,217          $282,031      $185,322      $203,509        $196,715      $136,379
savings
-----------------------------------------------------------------------------------------------------------------------------------------------------
Note:  Lump-sum annual leave payments and annuity costs were not
included in the analysis (see appendix III). 

Source:  GAO calculations based on OPM's CPDF - FY 1993, 1994, and
first half of FY 1995, and GAO assumptions.  (See appendix III for
explanation of assumptions and computations made.)


FIVE-YEAR BUYOUT-RIF SAVINGS/COST
COMPARISON (MARCH 31, 1995,
SEPARATION DATE)
========================================================== Appendix II

                        Voluntary
                        optional        RIF no    RIF       Voluntary early                               Voluntary
                        retirement      bump      bump      retirement (with  RIF no bump   RIF bump      resignation     RIF no bump   RIF bump
Savings/cost factors    (with buyout)   retreat   retreat   buyout)           retreat       retreat       (with buyout)   retreat       retreat
----------------------  --------------  --------  --------  ----------------  ------------  ------------  --------------  ------------  -------------
Grade/Step/Salary       GS12/6 -        $47,940   $33,558   GS12/3 -$44,259   $44,259       $30,981       GS11/1-         $34,745       $24,322
                        $47,940                                                                           $34,745

Years of service        29.0            29.0      10.6      27.5              27.5          10.6          12.8            12.8          10.6

Age                     61.5            61.5      41.8      53.7              53.7          41.8          42.8            42.8          41.8


FY 1995 SAVINGS/(COSTS)
-----------------------------------------------------------------------------------------------------------------------------------------------------
Buyout amount           ($36,016)       0         0         ($36,459)         0             0             ($20,626)       0             0

Severance pay           0               0         ($8,529)  0                 0             ($7,874)      0               ($13,342)     ($6,182)

Refund -retirement      0               0         0         0                 0             0             ($8,326)        ($8,326)      ($6,085)
contributions

Agency payment to       0               0         0         ($6,433)          0             0             0               0             0
retirement fund

Unemployment            0               ($1,222)  ($1,222)  0                 ($1,222)      ($1,222)      0               0             ($1,222)

Outplacement            0               ($7,456)  ($7,456)  0                 ($7,456)      ($7,456)      0               ($7,456)      ($7,456)

Retraining              0               ($1,900)  ($1,900)  0                 ($1,900)      ($1,900)      0               ($1,900)      ($1,900)

Relocation              0               ($3,500)  ($3,500)  0                 ($3,500)      ($3,500)      0               ($3,500)      ($3,500)

Gross cost              ($36,016)       ($14,078  ($22,607  ($42,892)         ($14,078)     ($21,952)     ($28,952)       ($34,524)     ($26,345)
                                        )         )

Salary/benefit savings  $31,041         $31,041   $21,729   $28,658           $28,658       $20,060       $22,498         $22,498       $15,749

FY 1995 Net Savings     ($4,975)        $16,963   ($878)    ($14,234)         $14,580       ($1,892)      ($6,454)        ($12,026)     ($10,596)


FY 1996 SAVINGS/(COSTS)
-----------------------------------------------------------------------------------------------------------------------------------------------------
Salary/benefit savings  $64,565         $64,565   $45,196   $59,608           $59,608       $41,725       $46,795         $46,795       $32,757

Unemployment            0               0         0         0                 0             0             0               ($1,222)      0

FY 1996 net savings     $64,565         $64,565   $45,196   $59,608           $59,608       $41,725       $46,795         $45,573       $32,757

FY 1995-1996 net        $59,590         $81,528   $44,318   $45,374           $74,188       $39,833       $40,341         $33,547       $22,161
savings


FY 1997 SAVINGS/(COSTS)
-----------------------------------------------------------------------------------------------------------------------------------------------------
Salary/benefit savings  $67,148         $67,148   $47,004   $61,992           $61,992       $43,394       $48,667         $48,667       $34,067

FY 1995-1997 net        $126,738        $148,676  $91,322   $107,366          $136,180      $83,227       $89,008         $82,214       $56,228
savings


FY 1998 SAVINGS/(COSTS)
-----------------------------------------------------------------------------------------------------------------------------------------------------
Salary/benefit savings  $69,834         $69,834   $48,834   $64,472           $64,472       $45,130       $50,614         $50,614       $35,430

FY 1995-1998 net        $196,572        $218,510  $140,156  $171,838          $200,652      $128,357      $139,622        $132,828      $91,658
savings


FY 1999 SAVINGS/(COSTS)
-----------------------------------------------------------------------------------------------------------------------------------------------------
Salary/benefit savings  $72,627         $72,627   $50,839   $67,051           $67,051       $46,935       $52,639         $52,639       $36,847

FY 1995-1999 net        $269,199        $291,137  $190,995  $238,889          $267,703      $175,292      $192,261        $185,467      $128,505
savings
-----------------------------------------------------------------------------------------------------------------------------------------------------
Note:  Lump-sum annual leave payments and annuity costs were not
included in the analysis (see appendix III). 

Source:  GAO calculations based on OPM's CPDF - FY 1993, 1994, and
first half of FY 1995, and GAO assumptions.  (See appendix III for
explanation of assumptions and computations made.)


ASSUMPTIONS MADE IN ECONOMIC
ANALYSIS AND SOURCES OF DATA
========================================================= Appendix III


   BASIS FOR ECONOMIC ANALYSIS
------------------------------------------------------- Appendix III:1

When faced with staffing reductions that require the separation of
employees, an agency must consider which positions need to be
eliminated, how many employees in those positions will be separated,
and how they will be separated.  Historically, agencies have relied
on normal attrition (including regular retirements), hiring freezes,
furloughs, RIFs, and the use of early retirement authorities to
reduce staffing levels.  In 1993 and 1994, DOD and non-DOD agencies
were given the additional authority to pay financial incentives
(buyouts) to eligible employees who voluntarily separated from
government service.  Our economic analysis compares two of these
reduction strategies:  buyouts and RIFS.  Our assumption is that the
agency must reach a reduced staffing level and must decide whether it
will rely on the use of RIFs or buyouts to help it reach this goal. 

In either strategy, the potential savings to the government is in the
salary and benefits of the employees separated.  However, it may be
difficult to estimate potential savings because it is often difficult
to predict who will actually leave federal employment under either
strategy.  Separation with a buyout is a voluntary action.  Although
buyouts can be targeted to specific groups of employees or
occupational levels, agencies may not know exactly who will leave
under a buyout.  Conversely, while agencies can eliminate specific
positions in a RIF, the employee in that position can often displace
a lower-graded employee who is then forced to leave. 

Costs for each strategy vary.  The primary cost of the buyouts is the
financial incentive.  The primary costs of RIFs are severance pay for
those who are not eligible for retirement, unemployment,
outplacement, and relocation costs. 

Any governmentwide analysis of the costs and savings of buyouts and
RIFs must, of necessity, be based on average demographics.  Actual
demographics and separation experiences at individual agencies may
vary from this analysis; thus, actual costs and savings may also
vary.  We had neither the time nor resources to complete an in-depth
economic analysis at individual agencies that would capture these
experiences.  Consequently, our analysis is based on demographic data
from OPM showing average salaries, ages, and years of service for
separated employees.  It assumes that the position eliminated through
a buyout also would have been the position eliminated through a RIF. 

To show net savings in the first year and subsequent years, our
analysis extends out 5 years from the date of separation.  Because
first-year savings are dependent to a great extent on when the
separation occurs, we have computed net savings on the basis of two
different separation dates during the fiscal year.  The analysis
assumes a standard yearly inflation rate but does not take into
account such factors as life-cycle costing or discounting techniques. 

We compared the costs and savings of buyouts given to regular
retirement-eligible employees, early retirement-eligible employees,
and resignees with the estimated costs and savings that would result
if the positions these employees filled were subjected to elimination
under a RIF.  Costs and savings for each buyout and RIF scenario are
based on the weighted average CPDF data for buyout and RIF
separations from fiscal year 1993 through the first half of fiscal
year 1995. 


   ASSUMPTIONS, SOURCES OF DATA,
   AND CALCULATIONS USED IN
   ECONOMIC ANALYSIS
------------------------------------------------------- Appendix III:2

The following presents an explanation of some of the economic
assumptions we used in our analysis, along with the sources of the
data we included and the basis of our calculations: 

1.  Salaries, years of service, and ages shown for employees who
received buyouts and were separated by retirement and resignation are
weighted averages of actual figures for separated employees (CSRS and
FERS) taken from the CPDF data tape for fiscal year 1993 through the
first half of fiscal year 1995.  Fiscal year 1993 and 1994 separation
salaries were adjusted for inflation to fiscal year 1995 at 4 percent
per year.  Years of service and ages shown for employees separated by
RIFs are weighted averages for CSRS and FERS employees taken from the
CPDF tape for fiscal year 1993 through the first half of fiscal year
1995.  Average grades and steps were estimated by comparing salary
data from the CPDF tape with the 1995 national General Schedule pay
rates. 

2.  Salaries of employees who actually separated from the federal
government through RIFs were calculated as 70 percent of the salary
of employees in the eliminated position, on the basis of the results
of our 1985 study of RIF costs at eight agencies.  These salary
levels are comparable with the average salaries of employees RIFed,
which were calculated from the CPDF for fiscal year 1993 through the
first half of fiscal year 1995. 

3.  The buyout amounts for retirees and voluntary resignations were
computed using weighted CSRS and FERS data from the CPDF.  Amounts
were calculated as the lesser of the $25,000 maximum buyout amount or
the amount of severance pay that employees would have received if
separated by RIFs.  Based on these calculations, we arrived at the
following average buyout amounts: 

  -- Regular retirement - $24,501

  -- Early retirement - $24,802

  -- Resignation - $14,031

4.  Analysis of agency reported data from our 1994 agency
questionnaires shows that one buyout avoids about 0.68 RIFs. 
Therefore, it takes 1.47 buyouts to avoid one RIF.  This number
agrees with similar data obtained by the Congressional Budget Office
(CBO) and DOD in their cost studies.  To account for this conclusion,
the costs of the average cash incentive payments (listed in item 3)
were multiplied by 1.47.  This results in a number in the analysis
that exceeds the amount specified in the law. 

5.  Costs of retirement annuities and payments for annual leave
accrued have not been included in the analysis.  We did not conduct
an in-depth examination of buyouts to determine how buyouts affect
the number and timing of governmentwide separations.  However, we
believe, on the basis of available data, that it is possible many
employees who separated with buyouts would have separated close to
the time they did even without buyouts.  Recent CPDF data showed that
almost half of the buyout recipients were already eligible for
regular retirement, while another 39 percent were eligible for early
retirement.  CPDF data also showed that those regular retirees who
separated with a buyout had from 1 to 1.7 more years of service than
their counterparts who retired without buyouts.  It is possible that
some retirees delayed their separations in order to receive a buyout. 
Because we could not determine the effect that buyouts had on the
timing of separations, and the fact that payments for annuities and
annual leave likely would have been made for these separations
whether or not they were accompanied by buyouts, we did not include
these payments as costs in the analysis. 

6.  We included a cost of 15 percent of the final salary of employees
who retired early under CSRS and took the buyout as the increased
contribution by the agency to the retirement fund.  The Federal
Workforce Restructuring Act of 1994 specified that agencies were to
make additional contributions to the retirement fund to cover the
higher levels of annuity payments resulting from the expected
increase in early CSRS retirements.  Although the act set the amount
of the increased contribution at 9 percent of the salary of the CSRS
early retiree, a recent analysis by CBO has estimated that this
agency contribution would currently need to be 15 percent in order to
offset the higher annuities.  Therefore, we calculated the cost of
agency retirement contributions for early CSRS retirees taking
buyouts as 15 percent of their final salaries at separation and
included this as a buyout cost in the first year of the analysis. 

7.  Costs for accrued sick leave have not been included in the
analysis.  Accrued sick leave would slightly increase the amounts of
annuity payments but would not affect our analysis since we have not
included the costs of annuities in our calculations (see number 5
above). 

8.  To determine refunds of retirement contributions, we estimated
the amount of retirement contributions that would have been made by
the separated employees on the basis of their average salaries and
years of service at the time of separation.  Employees under CSRS
contribute 7 percent of pay each year towards future benefits, FERS
employees contribute 0.8 percent under the defined-benefit plan that
is part of the system.  We multiplied the estimated contribution
amounts by the percentage of employees who would be expected to
request refunds (on the basis of OPM data showing those who actually
separate and request a refund of their contributions).  The resulting
figures were divided by the number of buyouts and RIFs to obtain a
per buyout/RIF figure. 

9.  We calculated severance pay for the average employee separated
after bumping and retreating by using the weighted demographics
(years of service and age) from the CPDF of employees separated by a
RIF from fiscal year 1993 through the first half of fiscal year 1995. 
The salary of the separated employee was assumed to be 70 percent of
the salary of the employee in the position eliminated by the RIF. 

10.  Employees who displace lower-graded employees through bumping or
retreating are allowed to retain their grades for a 2-year period and
keep their salaries indefinitely, as long as they fill the
lower-graded positions.  This "cost" is not included in the analysis
as an additional cost of RIFs, because these "costs" already are
reflected in the reduced savings of the separated employee compared
with the salary of the employee in the eliminated position.  The
inclusion of this salary differential as a RIF cost would increase
the savings attributable to buyouts over the 5-year period when
compared with RIF savings where bumping and retreating occur. 

11.  If an employee is separated from the federal government by a RIF
without bumping or retreating, and is not eligible for an immediate
annuity, the cost of severance pay could reduce the amount of savings
achieved under the RIF.  For these cases, we calculated severance pay
on the basis of the same salary as the retirement eligible employee,
but with an age of 49 years and with 24 years of service at
separation.  Reducing the net savings of the "no bump/retreat
scenario" by the amount of severance pay, equal in this instance to
the employee's annual salary, would reduce net RIF savings below the
corresponding buyout savings.  The extent to which an agency could
avoid severance payments through effective job placements could
result in RIF savings in these cases remaining greater than buyout
savings. 

12.  Outplacement costs were derived from an OPM cost study of
outplacement activities and were assumed to be the same for all RIFed
employees. 

13.  Although our 1985 report\8 on RIF costs identified RIF
processing and appeals costs, we have not included these costs in the
current analysis.  Our recent contacts with agencies who have had
buyouts and RIFs, including OPM, showed that most, if not all, of the
increased workloads for processing buyouts and RIFs and the
additional workload for RIF appeals have been absorbed by existing
staff; no additional staff have been hired or contracted to perform
the work.  Some agency officials reported that they detailed
employees from one unit to another to handle the increased workloads. 
Cost estimates made in other studies for processing RIFs have ranged
from $100 per RIF to $2,900 per RIF.  The only other recent estimate
for appeals cost was $2,400 per RIF.  The inclusion of these
estimates as RIF costs would slightly decrease the 5-year savings of
RIFs but would not change the results of our analysis. 

14.  Unemployment compensation was computed from the Department of
Labor data on unemployment compensation payments for 1994.  It showed
the average person received total unemployment payments of about
$3,233 over an 18-week period.  However, the data also showed that
only about 60 percent of separated employees filed claims, and about
63 percent of them received first benefit payments.  Thus,
multiplying the number of employees separated from the federal
government through a RIF during fiscal year 1994 (5,470) by 60
percent, who filed claims, and then by 63 percent, who received
benefits, equals 2,068 first-time claims paid.  Multiplying this
number by the $3,233 and dividing by the total 5,470 employees
separated equals a per RIF cost of $1,222.  Since most states do not
pay unemployment compensation until severance pay expires, the
unemployment compensation payments were assumed to begin after
biweekly severance payments stopped for each RIF example. 

15.  Retraining and relocation costs were taken from a 1993 CBO study
on RIF costs and were assumed to be the same for all RIFed employees. 
CBO based its analysis on actual DOD cost experiences.  To the extent
these experiences may differ from non-DOD experiences, these costs
may not reflect actual average governmentwide costs. 

16.  On the basis of guidance from OMB in Circular A-76, we
calculated benefits to equal 29.5 percent of salary. 

17.  On the basis of the OPM study, we assumed a 4-percent per year
inflation factor for salaries and benefits. 



(See figure in printed edition.)Appendix IV

--------------------
\8 GAO/PEMD-85-6. 


COMMENTS FROM THE OFFICE OF
PERSONNEL MANAGEMENT
========================================================= Appendix III



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


The following are GAO's comments on the Office of Personnel
Management's letter dated April 1, 1996. 


   GAO COMMENTS
------------------------------------------------------- Appendix III:3

1.  GAO agrees that grade and pay retention is a cost of a RIF where
bumping and retreating occur.  However, we believe, as we state in
the report, that this cost is taken into account in our analysis
through the reduced savings realized by the separation of a
lower-graded individual.  Therefore, it would not be appropriate to
count this cost again by including it as an additional cost of a RIF. 
Although our 1985 study identified this factor as a RIF cost, that
study compared RIF costs with attrition costs, and not with buyout
separations.  We are assuming in our present study that the person
separating with a buyout would, in the absence of a buyout, have been
separated by a RIF, or would have displaced a lower-graded employee
under a RIF action.  As such, the bumping and retreating process
would result in reduced savings from what would have happened under a
buyout or under a RIF without bumping and retreating.  Further, the
inclusion of grade and pay retention again as a RIF cost would
increase the savings of buyouts relative to RIFs, but would not
change our study's basic conclusions. 

2.  The report has been revised to clarify that an employee who
exercises bump and retreat rights is entitled to keep his/her grade
for a 2-year period and is entitled to keep his/her salary
indefinitely while in the lower-graded position. 

3.  The Workforce Restructuring Act required increased agency
contributions to the retirement fund to cover retirement costs of
those CSRS employees retiring early with buyouts.  Since the act did
not require increased agency contributions to account for those
forced into retirement by RIFs, we did not include this as a cost of
a RIF. 

4.  We agree with OPM that the Workforce Restructuring Act required
increased agency contributions to the retirement fund for only those
early CSRS retirees separating with buyouts.  Accordingly, we have
revised the report to show that this agency contribution applies only
to these early retirees under CSRS.  In doing our analysis, we used
the 15 percent contribution figure CBO cited because this is the most
current estimate available. 

5.  We realize some costs are technically accrued by agencies as
opposed to the federal government (retirement fund).  However,
because the cost to taxpayers is not affected by this distinction,
and to simplify the analysis, we aggregated costs and did not
differentiate between agency or federal government costs. 

6.  We agree with OPM that diversity cannot be quantified as a cost
or savings of a RIF or buyout.  Although we have not included it as
an economic issue in the report, we discuss its implications on RIF
and buyout decisions because of the importance placed on it by agency
officials we contacted.  These officials often identified the adverse
effects of RIFs on the representation of women and minorities in
their agencies, and told us that buyouts allowed them to maintain or
improve their diversity profiles. 

7.  The economic assumption that one buyout avoids 0.68 RIFs is based
on evidence from two other major cost studies of buyouts and RIFs,
and on our own analysis of data reported by agencies.  Although the
act requires the reduction of one FTE for each buyout granted, the
FTE reduction does not have to be in the position occupied by the
buyout taker, and may in fact be in a vacant position.  Some buyouts
will be granted to employees who would have left in the absence of
the buyout; thus, the cost of these additional buyouts should be
included in the analysis.  Data from the CPDF indicate that almost
half of the buyout takers were already eligible for regular
retirement.  It is likely that some of these buyouts were granted to
employees who would have retired in the absence of a buyout program. 

8.  The report language has been changed to show that over 112,500
buyouts have been paid. 

9.  We have modified report language to show that sick leave balances
can slightly increase annuities (as opposed to severance pay). 

10.  We did not include the costs of appeals as a RIF cost in our
analysis because we could not identify additional costs associated
with appeals due to RIFs.  On the basis of our contacts with
officials of agencies that had undergone RIFS, we determined that the
personnel costs to process RIF appeals were always absorbed in
current budgets.  Although agency officials agreed that there may be
additional costs, they had no data available to support these costs. 
On the other hand, we identified added costs associated with other
factors such as outplacement of displaced employees, where agencies
often contracted with private organizations for outplacement
services.  Although appeals costs could be included in an economic
analysis of RIFs and buyouts if such cost data were available, their
inclusion would only slightly increase the economic advantage of
buyouts over RIFs. 


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix V

GENERAL GOVERNMENT DIVISION

Timothy P.  Bowling, Associate Director
Steven J.  Wozny, Assistant Director
Robert Goldenkoff, Senior Evaluator
Greg Wilmoth, Senior Social Science Analyst

OFFICE OF CHIEF ECONOMIST

James White, Acting Chief Economist
Timothy Carr, Economist

DENVER OFFICE

Thomas R.  Kingham, Evaluator-in-Charge


*** End of document. ***