IRS Personnel Flexibilities: An Opportunity to Test New Approaches
(Testimony, 03/12/98, GAO/T-GGD-98-78).

GAO discussed the possible implications of proposed legislation that
would give new personnel flexibility to the Internal Revenue Service
(IRS).

GAO noted that: (1) it examined two bills that would give IRS new
flexibilities in managing its workforce: H.R. 2676 and S. 1174; (2) the
bills are similar in that both would give IRS additional flexibilities
relating to performance management, staffing, and the development of
demonstration projects; (3) until the Commissioner of IRS develops an
implementation plan, acting in accordance with both the new legislation
and those provisions of Title 5 to which IRS would remain subject, and
has some experience in implementing the new flexibilities, there is no
way to predict just how helpful the new flexibilities may be in
improving IRS' actual performance; (4) GAO believes that H.R. 2676
appropriately gives IRS the opportunity to factor in other measures,
such as customer service results and employee behavior; (5) the
proposals for new personnel flexibility at IRS are a part of a broader
set of proposals to restructure the agency and improve its performance;
(6) GAO has recognized that to manage effectively for results, agencies
need the flexibility to manage according to their needs and mission; (7)
GAO also found that, over the years, Title 5 has evolved to give federal
agencies more flexibility than they once had--and often more then they
realize-- to tailor their personnel approaches to their missions and
needs; (8) the merit principles and certain other national goals such as
veterans' preference remain generally applicable to employees of all
agencies; (9) both H.R. 2676 and S. 1174, while giving new personnel
flexibilities to IRS beyond those already available to it under Title 5,
would specifically require that the agency continue to conform to the
merit principles and other national goals; (10) the proposals in H.R.
2676 and S. 1174 have been developed to provide IRS exceptions from
various Title 5 personnel requirements that IRS believes impede its
ability to accomplish its mission; (11) the bills' provisions
encouraging IRS to align its employees' performance with IRS mission and
goals are consistent with other public- and private-sector
organizational trends that have been given congressional endorsement
through the passage of the Government Performance and Results Act; and
(12) these proposals do not make clear the Office of Personnel
Management's role of ensuring IRS' continued compliance with the merit
principles.

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

 REPORTNUM:  T-GGD-98-78
     TITLE:  IRS Personnel Flexibilities: An Opportunity to Test New 
             Approaches
      DATE:  03/12/98
   SUBJECT:  Agency missions
             Personnel management
             Personnel evaluation
             Federal personnel legislation
             Human resources utilization
             Proposed legislation
             Federal agency reorganization
             Civil service

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


Before the Senate Committee on
Governmental Affairs

For Release on Delivery
Expected at
10:30 a.m., EST
Thursday
Mar.  12, 1998

IRS PERSONNEL FLEXIBILITIES - AN
OPPORTUNITY TO TEST NEW APPROACHES

Statement of Michael Brostek
Associate Director, Federal Management and Workforce Issues
General Government Division

GAO/T-GGD-98-78

GAO/GGD-98-78T


(410304)


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

  DOD - Department of Defense
  FAA - Federal Aviation Administration
  FBI - Federal Bureau of Investigation
  GPRA - Government Performance and Results Act
  IRS - Internal Revenue Service
  OPM - Office of Personnel Management
  PBO - performance-based organization
  SES - Senior Executive Service

IRS PERSONNEL FLEXIBILITIES:  AN
OPPORTUNITY TO TEST NEW APPROACHES
====================================================== Chapter Summary

GAO was asked to comment on the possible implications of proposed
legislation that would give new personnel flexibility to the Internal
Revenue Service (IRS).  Specifically, H.R.  2676 and S.  1174 would
give IRS additional flexibilities relating to performance management,
staffing, and the development of demonstration projects.  The Senate
bill also includes classification and pay provisions ("broad
banding") and "critical pay authority" to help recruit and retain
employees in highly skilled, high level, technical and professional
positions.  The legislative proposals--which would make some
flexibilities permanently available and others available for
testing--were intended to help IRS improve its service to taxpayers
and overcome longstanding performance problems. 

GAO had three comments regarding the proposed legislation: 

  -- Because the legislative proposals provide only a broad outline
     for managing IRS employees, it was difficult for GAO to predict
     the extent to which the new provisions would help IRS improve
     its performance and overcome past problems.  For example, the
     IRS Commissioner would have one year to develop a new
     performance management plan, acting in accordance with both the
     new legislation and those provisions of Title 5 U.S.C.  to which
     IRS would remain subject.  Until the plan is developed and IRS
     has some experience in implementing the new flexibilities, it
     would be difficult to predict how helpful the new flexibilities
     might be in improving IRS' actual performance or whether such
     flexibilities might prove worthy of emulation elsewhere in the
     federal government.  GAO noted that the provisions giving IRS
     permanent flexibilities regarding performance management,
     staffing, and pay could alternatively be added to the proposed
     demonstration authority already included in the legislation. 
     Doing so would give IRS the opportunity to shape personnel
     approaches outside those currently available and gather
     evaluative data on how well they work--which would also provide
     information that other agencies could use to assess whether
     similar changes might improve their personnel systems as well. 

  -- GAO stated that the legislative proposals, focusing as they do
     on customer service and on aligning employees' performance with
     IRS' mission, goals, and objectives, are in keeping with broad
     trends that GAO has identified in its previous work on public-
     and private-sector management.  GAO noted that legislation
     requiring that IRS or any other agency establish a performance
     management system that focuses employees' efforts on their
     agency's mission and goals will not, in and of itself, guarantee
     a shift in organizational culture or in traditional ways of
     doing business.  Consistent with its reviews of agencies'
     efforts to implement the Government Performance and Results Act,
     GAO stated that the degree of commitment by IRS' leadership
     would determine whether a new focus on agency mission could be
     sustained for the long-term. 

  -- Federal agencies, including IRS, need the flexibility to tailor
     their personnel approaches to best meet the demands of their
     missions.  GAO also noted that granting personnel flexibilities
     to federal agencies raises important issues as to the extent to
     which, or the mechanisms whereby, Congress or OPM will oversee
     these agencies to ensure their continued adherence to applicable
     civil service laws. 


IRS PERSONNEL FLEXIBILITIES:  AN
OPPORTUNITY TO TEST NEW APPROACHES
==================================================== Chapter Statement

Mr.  Chairman and Members of the Committee: 

I am pleased to be here today to discuss some of the possible
implications of legislative proposals that would give new personnel
flexibility to the Internal Revenue Service (IRS).  With federal
agencies now called upon to improve customer service and deliver
better results to the American people while limiting costs, the need
for a well-managed, well-qualified, and highly motivated workforce
has never been greater.  Therefore, it is not surprising that recent
discussions have centered on the amount of flexibility federal
agencies should have in hiring and managing their employees.  With
regard to the personnel flexibility proposals for IRS, I would like
to make three points on the basis of our prior body of work in the
human resource management area: 

  -- First, because the proposals generally provide a broad outline
     for managing IRS employees, but not the details, it is difficult
     to predict to what extent the new provisions will help IRS
     improve its performance and overcome past problems. 

  -- Second, the proposals, focusing as they do on customer service
     and on aligning employees' performance with the agency's
     mission, goals, and objectives, are in keeping with broad trends
     in the public and private sector that we have identified in our
     previous work.  At IRS or any federal agency, the degree of
     commitment by top management will determine whether this new
     focus can be sustained. 

  -- Third, federal agencies such as IRS need the flexibility to
     tailor their personnel approaches to best meet the demands of
     their missions.  Along with this need for flexibility, there is
     a need to maintain oversight and accountability mechanisms that
     will ensure that agencies adhere to the statutorily required
     merit principles, such as maintaining high standards of
     integrity, conduct, and concern for the public interest and
     other national goals, such as veterans' preference. 

The personnel flexibility proposals of the kind contained in H.R. 
2676 and S.  1174 are intended to help IRS improve its service to
taxpayers and overcome problems that have plagued its performance for
some time.  These flexibility provisions, some of which the bills
make permanently available and others available for testing, would
allow IRS to manage its employees differently than it does today.  As
experience is gained in implementing these proposals, some may show
considerable benefit and be worthy of emulation elsewhere; others may
be less successful.  In order to take advantage of the lessons that
implementation will yield, Congress may find it appropriate to have
IRS test all of its new approaches for a limited period of time. 
This would give IRS the opportunity to include effective planning and
evaluative mechanisms in the test and would allow Congress to
consider the effects of IRS' personnel changes before deciding
whether they should be made permanent. 


   THE NEW PERSONNEL FLEXIBILITIES
   COULD BE EVALUATED BEFORE BEING
   MADE PERMANENT
-------------------------------------------------- Chapter Statement:1

We have examined two bills that would give IRS new flexibilities in
managing its workforce:  H.R.  2676, which passed the House of
Representatives in November 1997, and S.  1174, which has been
referred to the Senate Committee on Finance.  The bills are similar
in that both would give IRS additional flexibilities relating to
performance management, staffing, and the development of
demonstration projects.  The Senate bill also includes classification
and pay flexibilities ("broad-banding") and a provision for "critical
pay authority" to help recruit and retain employees in highly
skilled, high level technical and professional positions.  The new
flexibilities in performance management, staffing, and pay would be
granted permanently, while those initiatives IRS might develop under
the bills' demonstration authorities would be subject to testing
before being made permanent. 

The legislative proposals in H.R.  2676 outline a performance
management approach for IRS that would include all IRS employees,
with the exception of the IRS Oversight Board, the IRS Commissioner,
and the IRS Chief Counsel.  The new performance management system
would appear to cover Senior Executive Service (SES) members and
non-SES employees alike, require that goals and objectives
established through IRS organizational performance planning be linked
to individual or group performance and used to make performance
distinctions among employees or groups of employees, require
performance appraisals to have at least two performance rating levels
at fully successful or above, allow awards of up to 50 percent of
salary for a small number of employees who report directly to the IRS
Commissioner, and allow for employee awards based on documented
financial savings.  It would also require periodic performance
evaluations to determine whether employees are meeting all applicable
retention standards, and would use the results of employees'
performance evaluations as a basis for adjustments in pay and other
appropriate personnel actions. 

These provisions constitute the broad outlines of a performance
management approach aimed at underscoring the importance of
accountability for performance and allowing IRS managers more room to
reward good performers.  The provisions are intended to afford IRS
the opportunity to address some of its long-standing challenges,
which include attracting and retaining the talent necessary to
modernize its management practices and bring its technology and
administrative systems up-to-date.  The provisions may also help IRS
focus its employees on the agency's fundamental responsibility for
collecting the proper amount of taxes while, at the same time,
providing courteous service to those who must pay the taxes. 

The details of the new performance management approach are left to
the Commissioner, who is charged with developing a plan for the new
system within 1 year.  Leaving the details to the Commissioner is of
course entirely consistent with the bills' approach of granting IRS
somewhat greater flexibility to tailor its personnel management to
the agency's particular needs.  Until the Commissioner develops that
plan, acting in accordance with both the new legislation and those
provisions of Title 5 to which IRS would remain subject, and has some
experience in implementing the new flexibilities, there is no way to
predict just how helpful the new flexibilities may be in improving
IRS' actual performance. 

To the extent that the performance management, staffing, and pay
flexibility provisions, as implemented, contribute to improved IRS
performance, they not only will be worth retaining in IRS, but also
may be worthy of emulation elsewhere in the federal government.  If
certain provisions do not improve performance, or perhaps
unexpectedly detract from performance or have other undesirable
consequences, it may be useful to have a means of identifying these
problems and pulling the plug if necessary. 

Under these circumstances, one useful alternative to permanently
authorizing the performance management, staffing, and pay flexibility
provisions might be found in the legislation itself.  H.R.  2676
would allow the Commissioner to carry out demonstration projects
without the screening and approval currently required under the
Office of Personnel Management's (OPM) demonstration project
authority.  The time-limited projects as currently authorized in the
bill could be conducted for such purposes as improving personnel
management, providing increased individual accountability, and
eliminating obstacles to dealing with poor performers.  An
alternative might be to add the performance management, staffing, and
pay flexibility provisions to authorized activities included in the
proposed demonstration authority. 

Including all of the authorized flexibilities under the demonstration
authority would give IRS a chance to see just how well its new
approaches work when put into action.  IRS would have the opportunity
to shape personnel approaches outside those currently available and
to develop an evaluative mechanism to gather data on how well they
work.  Congress would have the opportunity to consider the effects of
the new approaches before deciding if they should be made permanent. 
This option would also provide information that other agencies could
use to assess whether similar changes might improve their personnel
systems. 


   THE FOCUS ON IRS' MISSION AND
   GOALS WILL REQUIRE TOP
   MANAGEMENT'S LONG-TERM
   COMMITMENT
-------------------------------------------------- Chapter Statement:2

In our contacts with human resource management experts from public-
and private-sector organizations both here and abroad, we have found
that successful organizations recognize the importance of
organizational mission, vision, and culture as a means of focusing
their workforce on the job at hand.\1 At IRS, that job includes more
than simply collecting taxes.  For example, as Congress is now
emphasizing to IRS, it includes fair treatment of the taxpayers as
well.  According to the House Ways and Means Committee report on H.R. 
2676, the new proposals for personnel management at IRS would be
aimed at establishing a balanced system of measures that would ensure
that taxpayer satisfaction--i.e., customer service--is paramount
throughout all IRS functions.  For example, while giving IRS greater
flexibility in distributing cash awards to employees, H.R.  2676
specifies that awards will not be based solely on tax enforcement
results.  This is consistent with our belief that IRS employees'
performance should be assessed using a balanced set of indicators. 
Therefore, we believe H.R.  2676 appropriately gives IRS the
opportunity to factor in other measures, such as customer service
results and employee behavior. 

The Committee report also said that the proposed legislation would
refocus the IRS personnel system on the agency's overall mission and
on how each employee's performance relates to that mission.  Across
government, some of the agencies now implementing the Government
Performance and Results Act (known as GPRA or the Results Act) are
engaged in similar efforts, aligning the performance expectations of
each level of their organizations, and ultimately of each employee,
with the agencies' missions and strategic goals.  The Results Act
itself was based on principles and best practices established by
successful private-sector organizations and by governments at the
state and local level and abroad.  The challenge for federal agencies
such as IRS is to make these principles work for the federal
government as well. 

Some federal agencies that have tried to align employee performance
with agency missions and goals have noted the conceptual challenges
involved in becoming more results-oriented.\2 For example, when we
reviewed the experiences of five regulatory agencies affected by the
President's March 1995 directive to measure agency and employee
performance in terms of results, we found that some of the agencies
were further along than others.  Officials at the five agencies cited
some barriers, mostly involving the need to clarify their missions
and establish results-oriented goals and measures, that made creating
results-oriented performance standards for employees more difficult. 
For example, at IRS, one of the five agencies we reviewed, officials
said it was difficult to measure the impact that IRS taxpayer
education and outreach efforts would have on the agency's goal of
increasing voluntary tax compliance rates. 

To a significant extent, meeting the challenge of more effectively
aligning employees' performance with organizational missions and
goals will be an effort that succeeds or fails through its
implementation.  Nothing in current personnel law or regulation
prohibits agencies from establishing goals or objectives for
employees that are based on organizational goals, communicating these
goals and objectives to the employees, and using these goals or
objectives to make performance distinctions for purposes of
adjustments in pay and other personnel actions.  Still, while many
agencies implementing the Results Act have tried to do these things,
others have not.  Some that have tried have found that the challenges
involved are not so much a matter of restrictive personnel rules as
of instilling in their managers and other employees a new
understanding of their agencies' missions and goals and of what, for
each employee, constitutes successful performance. 

The H.R.  2676 requirement that IRS establish a performance
management system that focuses employees' efforts on their agency's
mission and goals could be useful in further directing IRS' attention
to this issue.  But at IRS or any other agency, requiring this focus
by legislation will not, in and of itself, guarantee a shift in
organizational culture or in traditional ways of doing business. 
These things will hinge primarily on the long-term commitment of IRS'
leadership to making the agency's new direction clear, to changing
IRS' organizational culture to support it, and to holding all
employees accountable for fulfilling IRS' commitment to the
taxpayers. 

Both H.R.  2676 and S.  1174 also require that before any
flexibilities are exercised, management and the employee unions need
to enter into a written agreement.  This provision underscores the
need for a shared commitment to improving performance at every level
of the agency.  It also underscores the importance of maintaining
good working relationships between management and all employees. 


--------------------
\1 Transforming the Civil Service:  Building the Workforce of the
Future, Results of a GAO-Sponsored Symposium (GAO/GGD-96-35, Dec. 
20, 1995). 

\2 Managing for Results:  Regulatory Agencies Identified Significant
Barriers to Focusing on Results (GAO/GGD-97-83, June 24, 1997). 


   FLEXIBILITY AND ACCOUNTABILITY
-------------------------------------------------- Chapter Statement:3

The proposals for new personnel flexibility at IRS are part of a
broader set of proposals to restructure the agency and improve its
performance.  In facing new pressures to perform, IRS is not alone. 
In recent years, changes in social, economic, and technological
conditions put new pressures on both public and private sector
organizations, which had to deal with calls for better performance
and growing demands for more responsive customer service, even as
resources were becoming harder to come by.  Many of these
organizations have looked hard at their human resource management
approaches, found them outmoded or too confining, and turned to new
ways of operating.\3

The new human resource management model that many of these
organizations have chosen is more decentralized, more directly
focused on mission accomplishment, and set up more to establish
guiding principles than to prescribe detailed rules and procedures.\4
Under this model, an organization adopts its human resource
management practices because they support the organization's needs
and mission, rather than because they conform with practices that
have been adopted elsewhere. 

Recently, many federal agencies seem to be calling for similar
flexibilities.  Some have criticized Title 5 as too restrictive and
have sought to be excepted from some or all of its provisions.  For
example, in the past 3 years, the Federal Aviation Administration
(FAA) gained the right to establish its own personnel system, the
Federal Bureau of Investigation (FBI) gained demonstration authority
directly from Congress to change the system under which it pays some
of its scientific and technical workers, and the Department of
Defense (DOD) has begun developing a proposal for a separate civilian
personnel system tailored specifically to its needs.  In addition,
the administration's initiative to create performance-based
organizations (PBO) includes personnel features that lie outside the
structure of Title 5.  The proposals for IRS we are discussing today
are part of this general trend. 

In our previous work, we have recognized that to manage effectively
for results, agencies need the flexibility to manage according to
their needs and missions.  Under the Results Act, managers are
expected to be given greater flexibility to manage, but also to be
held more accountable for results. 

We have also found that, over the years, Title 5 has evolved to give
federal agencies more flexibility than they once had--and often, more
than they realize--to tailor their personnel approaches to their
missions and needs.  But we also know that the federal government has
traditionally wanted certain principles to hold true for all its
employees.  The merit principles and certain other national goals,
such as veterans' preference, remain generally applicable to
employees of all agencies.  In fact, both H.R.  2676 and S.  1174,
while giving new personnel flexibilities to IRS beyond those already
available to it under Title 5, would specifically require that the
agency continue to conform to the merit principles and other national
goals. 

The question is, what sort of oversight is appropriate as agencies
such as IRS gain additional personnel flexibilities outside the
traditional purview of Title 5?  The current civil service system is
already highly decentralized, and current oversight is by no means
uniform.  What is commonly thought of as the "civil service"--the
federal civilian workforce subject to all the provisions of Title 5
and overseen by OPM--comprises just more than half of all federal
civil servants.\5 Technically, this segment is known as the
"competitive service," which operates under the federal merit system. 
Other federal civilian employees are employed in agencies or other
federal entities--such as government corporations (like the Tennessee
Valley Authority) and quasi-governmental organizations (like the U.S. 
Postal Service)--that operate outside Title 5 or are statutorily
excepted from parts of it.  These workers, while all members of the
civil service, are in the "excepted service" and are covered by a
variety of alternative merit systems.  One of Congress' reasons for
establishing alternative merit systems for some federal organizations
was to give them a measure of freedom from the rules governing the
competitive service under Title 5. 

Concerns over the constraints imposed by Title 5 have led to
proposals such as those already accepted or pending regarding FAA,
FBI, DOD, and IRS--proposals that could lead to an even more
decentralized civil service.  To the extent that agencies such as
these gain flexibilities outside of Title 5, Congress will need to
know whether, in planning and implementing their new approaches,
these agencies continue to adhere to the merit principles and other
national goals.  However, the proposals for IRS do not make OPM's
role in this regard entirely clear.  Congress has options of
clarifying OPM's role or taking a more direct hand itself in
overseeing IRS' new personnel practices. 

In closing, the proposals in H.R.  2676 and S.  1174 have been
developed to provide IRS exceptions from various Title 5 personnel
requirements that IRS believes impede its ability to accomplish its
mission.  In order to take full advantage of the lessons that
implementation will yield, Congress may find it appropriate to
incorporate all of the flexibilities into the demonstration authority
provisions of the bills.  With appropriate evaluative mechanisms
included, this would allow for an informed judgment as to whether
these flexibilities should be made permanently available to IRS as
well as whether they possibly should be extended to other agencies. 
In addition, the bills' provisions encouraging IRS to align its
employees' performance with IRS' mission and goals are consistent
with other public- and private-sector organizational trends that have
been given congressional endorsement through the passage of the
Results Act.  However, success in achieving this alignment will
require a culture change in IRS driven by a long-term managerial
commitment.  Finally, the granting of personnel flexibilities to
federal agencies raises important issues as to the extent to which,
or the mechanisms whereby, Congress or OPM will oversee these
agencies to ensure their continued compliance with the merit
principles and other national goals that undergird all federal
employment. 


--------------------
\3 Civil Service Reform:  Changing Times Demand New Approaches
(GAO/T-GGD-96-31, Oct.  12, 1995). 

\4 GAO/T-GGD-96-31, October 12, 1995. 

\5 See The Excepted Service:  A Research Profile (GAO/GGD-97-72, May
1997). 


------------------------------------------------ Chapter Statement:3.1

This concludes my prepared statement, Mr.  Chairman.  I would be
pleased to answer any questions you or other Members of the Committee
may have. 

*** End of document. ***