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Testimony:

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

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

Human Capital:

Preliminary Observations on Proposed DOD National Security Personnel 
System Regulations:

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

GAO-05-432T:

GAO Highlights:

Highlights of GAO-05-432T, a testimony to the Subcommittee on Oversight 
of Government Management, the Federal Workforce, and the District of 
Columbia, Committee on Homeland Security and Governmental Affairs, U.S. 
Senate:

Why GAO Did This Study:

The Department of Defense's (DOD) new human resources management 
system--the National Security Personnel System (NSPS)--will have far-
reaching implications for the management of the department and for 
civil service reform across the federal government. The National 
Defense Authorization Act for Fiscal Year 2004 gave DOD significant 
authorities to redesign the rules, regulations, and processes that 
govern the way that more than 700,000 defense civilian employees are 
hired, compensated, promoted, and disciplined. In addition, NSPS could 
serve as a model for governmentwide transformation in human capital 
management. However, if not properly designed and effectively 
implemented, it could severely impede progress toward a more 
performance-and results-based system for the federal government as a 
whole.

On February 14, 2005, the Secretary of Defense and Acting Director of 
the Office of Personnel Management (OPM) released for public comment 
the proposed NSPS regulations. This testimony (1) provides GAO's 
preliminary observations on selected provisions of the proposed 
regulations, (2) discusses the challenges DOD faces in implementing the 
new system, and (3) suggests a governmentwide framework to advance 
human capital reform.

What GAO Found:

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

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

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

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

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

www.gao.gov/cgi-bin/getrpt?GAO-05-432T.

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

[End of section]

Chairman Voinovich and Members of the Subcommittee:

I appreciate the opportunity to be here today to provide our 
preliminary observations on the Department of Defense's (DOD) proposed 
National Security Personnel System (NSPS) regulations, which the 
Secretary of Defense and the Acting Director of the Office of Personnel 
Management (OPM) jointly released for public comment last 
month.[Footnote 1] The National Defense Authorization Act for Fiscal 
Year 2004[Footnote 2] gave DOD significant authorities to redesign the 
rules, regulations, and processes that govern the way that defense 
civilian employees are hired, compensated, promoted, and disciplined. 
The proposed regulations, which according to DOD will ultimately affect 
more than 700,000 defense civilian employees, are especially critical 
because of their implications for governmentwide reform. These 
implications have long been a concern to this Subcommittee.

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

We raised several issues regarding DOD's civilian workforce in a 
recently released report on the fiscal challenges the federal 
government faces in the 21ST century, including whether DOD is pursuing 
the design and implementation of NSPS in a manner that maximizes the 
chance of success.[Footnote 3] In recent testimony on DOD's business 
transformation efforts, we indicated that DOD is challenged in its 
efforts to effect fundamental business management reform, such as NSPS, 
and indicated that our ongoing work continues to raise questions about 
DOD's chances of success.[Footnote 4] There is general recognition that 
the government needs a framework to guide the kind of large-scale human 
capital reform occurring at DOD and the Department of Homeland Security 
(DHS), a framework that Congress and the administration can implement 
to enhance performance, ensure accountability, and position the nation 
for the future. Implementing large-scale change management initiatives 
is a complex endeavor, and failure to address a wide variety of 
personnel and cultural issues, in particular, has been at the heart of 
unsuccessful organizational transformations. Strategic human capital 
management, which we continue to designate as a high-risk area 
governmentwide,[Footnote 5] can help agencies marshal, manage, and 
maintain the workforce they need to accomplish their missions.

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

Summary:

Let me begin by summarizing three positive features, three areas of 
concern, and three comments regarding the way forward. The first 
positive feature is that the proposed regulations provide for many 
elements of a flexible and contemporary human resources management 
system--such as pay bands and pay for performance. The second positive 
feature is that the proposed regulations will allow DOD to rightsize 
its workforce when implementing reduction-in-force (RIF) orders. For 
example, DOD will be able to give greater priority to employee 
performance in RIF decisions and take more factors into consideration 
when defining the areas in which employees will compete for retention. 
The third positive feature is that DOD has pledged to engage in a 
continuing collaboration with employee representatives. (It should be 
noted that 10 federal labor unions have filed suit alleging that DOD 
failed to abide by the statutory requirements to include employee 
representatives in the development of DOD's new labor relations system 
authorized as part of NSPS.)

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

Regarding the way forward, development of the position of Deputy 
Secretary of Defense for Management, who would act as DOD's Chief 
Management Officer, will be essential to provide leadership that can 
elevate, integrate, and institutionalize responsibility for the success 
of DOD's overall business transformation effort, including its new 
human resources management system. In fact, in my previous testimony on 
DOD's business transformation efforts, we identified the lack of clear 
and sustained leadership for overall business transformations as one of 
the underlying causes that has impeded prior DOD reform 
efforts.[Footnote 6] Additionally, DOD would benefit if it develops a 
comprehensive communications strategy that provides for ongoing, 
meaningful two-way communication that creates shared expectations among 
employees, employee representatives, managers, customers, and 
stakeholders. Finally, DOD must ensure that it has the institutional 
infrastructure in place to make effective use of its new authorities. 
At a minimum, this infrastructure includes a human capital planning 
process that integrates DOD's human capital policies, strategies, and 
programs with its program goals and mission, and desired outcomes; the 
capabilities to effectively develop and implement a new human capital 
system; and, importantly, a set of adequate safeguards, including 
reasonable transparency and appropriate accountability mechanisms, to 
help ensure the fair, effective, and credible implementation and 
application of a new system.

Preliminary Observations on the Proposed DOD National Security 
Personnel System Regulations:

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

Pay and Performance Management:

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

When DOD first proposed its new civilian personnel reform, we strongly 
supported the need to expand pay for performance in the federal 
government.[Footnote 8] Establishing a clear link between individual 
pay and performance is essential for maximizing performance and 
ensuring the accountability of the federal government to the American 
people. As I have stated before, how pay for performance is done, when 
it is done, and the basis on which it is done can make all the 
difference in whether such efforts are successful.[Footnote 9] DOD's 
proposed regulations reflect a growing understanding that the federal 
government needs to fundamentally rethink its current approach to pay 
and better link pay to individual and organizational performance. To 
this end, the DOD proposal takes another valuable step toward a modern 
performance management system as well as a market-based, results-
oriented compensation system. My comments on specific provisions of pay 
and performance management follow.

Aligning Individual Performance to Organizational Goals:

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

A performance management system is critical to successful 
organizational transformation. As an organization undergoing 
transformation, DOD can use its proposed performance management system 
as a vital tool for aligning the organization with desired results and 
creating a "line of sight" to show how team, unit, and individual 
performance can contribute to overall organizational results. To help 
federal agencies transform their culture to be more results oriented, 
customer focused, and collaborative in nature, we have reported on how 
a performance management system that defines responsibility and ensures 
accountability for change can be key to a successful merger and 
transformation.[Footnote 11]

Establishing Pay Bands:

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

Under the proposed regulations, DOD could not reduce employees' basic 
rate of pay when converting to pay bands. In addition, the proposed 
regulations would allow DOD to establish a "control point" within a 
band that limits increases in the rate of basic pay and may require 
certain criteria to be met for increases above the control 
point.[Footnote 14] The use of control points to manage employees' 
progression through the bands can help to ensure that their performance 
coincides with their salaries and that only the highest performers move 
into the upper half of the pay band, thereby controlling salary costs. 
The OPM personnel demonstration projects at China Lake and the Naval 
Sea Systems Command Warfare Center's Dahlgren Division have 
incorporated checkpoints or "speed bumps" in their pay bands. For 
example, when an employee's salary at China Lake reaches the midpoint 
of the pay band, the employee must receive a performance rating that is 
equivalent to exceeding expectations before he or she can receive 
additional salary increases.

Setting and Communicating Employee Performance Expectations:

Under the proposed regulations, DOD's performance management system 
would promote individual accountability by setting performance 
expectations and communicating them to employees, holding employees 
responsible for accomplishing them, and making supervisors and managers 
responsible for effectively managing the performance of employees under 
their supervision. While supervisors are supposed to involve employees, 
insofar as practicable, in setting performance expectations, the final 
decisions regarding performance expectations are within the sole and 
exclusive discretion of management.

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

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

Making Meaningful Distinctions in Employee Performance:

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

Under the proposed regulations, DOD is expected to have at least three 
rating levels for evaluating employee performance. We urge DOD to 
consider using at least four summary rating levels to allow for greater 
performance-rating and pay differentiation. This approach is in the 
spirit of the new governmentwide performance-based pay system for the 
Senior Executive Service (SES), which requires at least four rating 
levels to provide a clear and direct link between SES performance and 
pay as well as to make meaningful distinctions based on relative 
performance. Cascading this approach to other levels of employees can 
help DOD recognize and reward employee contributions and achieve the 
highest levels of individual performance.[Footnote 16]

Providing Adequate Safeguards to Ensure Fairness and Guard Against 
Abuse:

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

In April 2003, when commenting on DOD civilian personnel reforms, we 
testified that Congress should consider establishing statutory 
standards that an agency must have in place before it can implement a 
more performance-based pay program, and we developed an initial list of 
possible safeguards to help ensure that pay-for-performance systems in 
the government are fair, effective, and credible.[Footnote 17] For 
example, we have noted that agencies need to ensure reasonable 
transparency and provide appropriate accountability mechanisms in 
connection with the results of the performance management 
process.[Footnote 18] This can be done by publishing the overall 
results of performance management and individual pay decisions while 
protecting individual confidentiality and by reporting periodically on 
internal assessments and employee survey results relating to the 
performance management system. DOD needs to commit itself to publishing 
the results of performance management decisions. By publishing the 
results in a manner that protects individual confidentiality, DOD could 
provide employees with the information they need to better understand 
their performance and the performance management system. Several of the 
demonstration projects have been publishing information about 
performance appraisal and pay decisions, such as the average 
performance rating, the average pay increase, and the average award for 
the organization and for each individual unit, on internal Web sites 
for use by employees. As DOD's human resources management system design 
efforts move forward, DOD will need to define, in more detail than is 
currently provided, how it plans to review such matters as the 
establishment and implementation of the performance appraisal system--
and, subsequently, performance rating decisions, pay determinations, 
and promotion actions--before these actions are finalized, to ensure 
they are merit based.

Staffing and Employment:

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

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

Workforce Shaping:

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

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

Adverse Actions and Appeals:

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

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

DOD's proposed regulations generally preserve the employee's basic 
right to appeal decisions to an independent body--the MSPB. However, in 
contrast to DHS's final regulations, DOD's proposed regulations permit 
an internal DOD review of the initial decisions issued by MSPB 
adjudicating officials. Under this internal review, DOD can modify or 
reverse an initial decision or remand the matter back to the 
adjudicating official for further consideration. Unlike other criteria 
for review of initial decisions, DOD can modify or reverse an initial 
MSPB adjudicating official's decision where the department determines 
that the decision has a direct and substantial adverse impact on the 
department's national security mission.[Footnote 22] According to DOD, 
the department needs the authority to review initial MSPB decisions and 
correct such decisions as appropriate, to ensure that the MSPB 
interprets NSPS and the proposed regulations in a way that recognizes 
the critical mission of the department and to ensure that MSPB gives 
proper deference to such interpretation. However, the proposed 
regulations do not offer additional details on the department's 
internal review process, such as how the review will be conducted and 
who will conduct them. An internal agency review process this important 
should be addressed in the regulations rather than in an implementing 
directive to ensure adequate transparency and employee confidence in 
the process.

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

Similar to DHS's final regulations, DOD's proposed regulations would 
permit the Secretary of Defense to identify specific offenses for which 
removal is mandatory. Employees alleged to have committed these 
offenses may receive a written notice only after the Secretary of 
Defense's review and approval. These employeess will have the same 
right to a review by an MSPB adjudicating official as is provided to 
other employees against whom appealable adverse actions are taken. 
DOD's proposed regulations only indicate that its employees will be 
made aware of the mandatory removal offenses. In contrast, the final 
DHS regulations explicitly provide for publishing a list of the 
mandatory removal offenses in the Federal Register. We believe that the 
process for determining and communicating which types of offenses 
require mandatory removal should be explicit and transparent and 
involve relevant congressional stakeholders, employees, and employee 
representatives. Moreover, we suggest that DOD exercise caution when 
identifying specific removable offenses and the specific punishment. 
When developing these proposed regulations, DOD should learn from the 
experience of the Internal Revenue Service's (IRS) implementation of 
its mandatory removal provisions.[Footnote 23] (IRS employees feared 
that they would be falsely accused by taxpayers and investigated, and 
had little confidence that they would not be disciplined for making an 
honest mistake.) We reported that IRS officials believed this provision 
had a negative impact on employee morale and effectiveness and had a 
"chilling" effect on IRS frontline enforcement employees, who were 
afraid to take certain appropriate enforcement actions.[Footnote 24] 
Careful drafting of each removable offense is critical to ensure that 
the provision does not have unintended consequences.

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

Labor-Management Relations:

The DOD proposed regulations recognize the right of employees to 
organize and bargain collectively.[Footnote 26] However, similar to 
DHS's final regulations, the proposed regulations would reduce the 
scope of bargaining by (1) removing the requirement to bargain on 
matters traditionally referred to as "impact and implementation" (which 
include the processes used to deploy personnel, assign work, and use 
technology) and (2) narrowing the scope of issues subject to collective 
bargaining. A National Security Labor Relations Board would be created 
that would largely replace the Federal Labor Relations Authority. The 
proposed board would have at least three members selected by the 
Secretary of Defense, with one member selected from a list developed in 
consultation with the Director of OPM. The proposed board would be 
similar to the internal Homeland Security Labor Relations Board 
established by the DHS final regulations, except that the Secretary of 
Defense would not be required to consult with the employee 
representatives in selecting its members. The proposed board would be 
responsible for resolving matters related to negotiation disputes, to 
include the scope of bargaining and the obligation to bargain in good 
faith, resolving impasses, and questions regarding national 
consultation rights.

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

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

DOD Faces Multiple Implementation Challenges:

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

Ensuring Sustained and Committed Leadership:

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

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

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

* institutionalize accountability for the system so that the 
implementation of this critical human capital initiative can be 
sustained.[Footnote 27]

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

Establishing an Overall Communications Strategy:

Another significant challenge for DOD is to ensure an effective and 
ongoing two-way communications strategy, given its size, geographically 
and culturally diverse audiences, and different command structures 
across DOD organizations. We have reported that a communications 
strategy that creates shared expectations about, and reports related 
progress on, the implementation of the new system is a key practice of 
a change management initiative.[Footnote 30] DOD acknowledges that a 
comprehensive outreach and communications strategy is essential for 
designing and implementing its new human resources management system, 
but the proposed regulations do not identify a process for the 
continuing involvement of employees in the planning, development, and 
implementation of NSPS.

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

Providing Adequate Resources for Implementing the New System:

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

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

Involving Employees and Other Stakeholders in Implementing the System:

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

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

Evaluating DOD's New Human Resources Management System:

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

DOD's proposed regulations indicate that DOD will establish procedures 
for evaluating the regulations and their implementation. We believe 
that DOD should consider conducting evaluations that are broadly 
modeled on the evaluation requirements of the OPM demonstration 
projects. Under the demonstration project authority, agencies must 
evaluate and periodically report on results, implementation of the 
demonstration project, cost and benefits, impacts on veterans and other 
equal employment opportunity groups, adherence to merit system 
principles, and the extent to which the lessons from the project can be 
applied governmentwide. A set of balanced measures addressing a range 
of results, customer, employee, and external partner issues may also 
prove beneficial. An evaluation such as this would facilitate 
congressional oversight; allow for any midcourse corrections; assist 
DOD in benchmarking its progress with other efforts; and provide for 
documenting best practices and sharing lessons learned with employees, 
stakeholders, other federal agencies, and the public.

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

Framework for Governmentwide Human Capital Reform:

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

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

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

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

Figure 1: Principles, Criteria, and Processes:

Principles that the government should retain in a framework for reform 
because of their inherent, enduring qualities: 
* merit principles that balance organizational mission, goals, and 
performance objectives with individual rights and responsibilities; 
* ability to organize, bargain collectively, and participate through 
labor organizations; 
* continued prohibition of certain personnel practices; and; 
* guaranteed due process that is fair, fast, and final. 

Criteria that agencies should have in place as they plan for and manage 
their new human capital authorities: 
* demonstrated business case or readiness for use of targeted 
authorities; 
* an integrated approach to results-oriented strategic planning and 
human capital planning and management; 
* adequate resources for planning, implementation, training, and 
evaluation; and; 
* a modern, effective, credible, and integrated performance management 
system that includes adequate safeguards to ensure equity and prevent 
discrimination. 

Processes that agencies should follow as they implement new human 
capital authorities: 
* prescribing regulations in consultation or jointly with the Office of 
Personnel Management; 
* establishing appeals processes in consultation with the Merit Systems 
Protection Board; 
* involving employees and stakeholders in the design and implementation 
of new human capital systems; 
* phasing in implementation of new human capital systems; 
* committing to transparency, reporting, and evaluation; 
* establishing a communications strategy; and; 
* assuring adequate training..

Source: GAO.

[End of figure]

Concluding Observations:

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

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

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

Contacts and Acknowledgments:

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

[End of section]

Appendix I: "Highlights" from Selected GAO Human Capital Reports:

GAO Highlights:

Highlights of GAO-04-753, a report to the Ranking Minority Member, 
Subcommittee on Readiness, Committee on Armed Services, House of 
Representatives: 

Why GAO Did This Study:

During its downsizing in the early 1990s, the Department of Defense 
(DOD) did not focus on strategically reshaping its civilian workforce. 
GAO was asked to address DOD’s efforts to strategically plan for its 
future civilian workforce at the Office of the Secretary of Defense 
(OSD), the military services’ headquarters, and the Defense Logistics 
Agency (DLA). Specifically, GAO determined: (1) the extent to which 
civilian strategic workforce plans have been developed and implemented 
to address future civilian workforce requirements, and (2) the major 
challenges affecting the development and implementation of these plans.

What GAO Found:

OSD, the service headquarters, and DLA have recently taken steps to 
develop and implement civilian strategic workforce plans to address 
future civilian workforce needs, but these plans generally lack some 
key elements essential to successful workforce planning. As a result, 
OSD, the military services’ headquarters, and DLA—herein referred to as 
DOD and the components—do not have comprehensive strategic workforce 
plans to guide their human capital efforts. None of the plans included 
analyses of the gaps between critical skills and competencies (a set of 
behaviors that are critical to work accomplishment) currently needed by 
the workforce and those that will be needed in the future. Without 
including gap analyses, DOD and the components may not be able to 
effectively design strategies to hire, develop, and retain the best 
possible workforce. Furthermore, none of the plans contained results-
oriented performance measures that could provide the data necessary to 
assess the outcomes of civilian human capital initiatives. 

The major challenge that DOD and most of the components face in their 
efforts to develop and implement strategic workforce plans is their 
need for information on current competencies and those that will likely 
be needed in the future. This problem results from DOD’s and the 
components’ not having developed tools to collect and/or store, and 
manage data on workforce competencies. Without this information, it not 
clear whether they are designing and funding workforce strategies that 
will effectively shape their civilian workforces with the appropriate 
competencies needed to accomplish future DOD missions. Senior 
department and component officials all acknowledged this shortfall and 
told us that they are taking steps to address this challenge. Though 
these are steps in the right direction, the lack of information on 
current competencies and future needs is a continuing problem that 
several organizations, including GAO, have previously identified. 

Strategic Workforce Planning Process: 

[See PDF for image]

[End of figure]

What GAO Recommends:

GAO recommends that DOD and the components include certain key elements 
in their civilian strategic workforce plans to guide their human 
capital efforts. DOD concurred with one of our recommendations, and 
partially concurred with two others because it believes that the 
department has undertaken analyses of critical skills gaps and are 
using strategies and personnel flexibilities to fill identified skills 
gaps. We cannot verify DOD’s statement because DOD was unable to 
provide the gap analyses. In addition, we found that the strategies 
being used by the department have not been derived from analyses of 
gaps between the current and future critical skills and competencies 
needed by the workforce.

www.gao.gov/cgi-bin/getrpt?-GAO-04-753.

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

[End of GAO Highlights]

GAO Highlights:

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

Why GAO Did This Study:

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

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

What GAO Found:

GAO strongly supports the need for government transformation and the 
concept of modernizing federal human capital policies both within DOD 
and for the federal government at large. The federal personnel system 
is clearly broken in critical respects—designed for a time and 
workforce of an earlier era and not able to meet the needs and 
challenges of today’s rapidly changing and knowledge-based environment. 
The human capital authorities being considered for DOD have far-
reaching implications for the way DOD is managed as well as significant 
precedent-setting implications for the rest of the federal government. 
GAO is pleased that as the Congress has reviewed DOD’s legislative 
proposal it has added a number of important safeguards, including many 
along the lines GAO has been suggesting, that will help DOD maximize 
its chances of success in addressing its human capital challenges and 
minimize the risk of failure. 

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

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

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

[End of GAO Highlights]

Highlights of GAO-03-493T, a testimony before the Subcommittee on 
Oversight of Government Management, the Federal Workforce and the 
District of Columbia, Senate Committee on Governmental Affairs:

Why GAO did This Study:

People are at the heart of an organization's ability to perform its 
mission. Yet, a key challenge for the Department of Defense (DOD), as 
for many federal agencies, is to strategically manage its human 
capital. With about 700,000 civilian employees on its payroll, DOD is 
the second largest federal employer of civilians in the nation. 
Although downsized 38 percent between fiscal years 1989 and 2002, this 
workforce has taken on greater roles as a result of DOD's restructuring 
and transformation. 

DOD's proposed National Security Personnel System (NSPS) would provide 
for wide-ranging changes in DOD's civilian personnel pay and 
performance management, collective bargaining, rightsizing, and other 
human capital areas. The NSPS would enable DOD to develop and implement 
a consistent DOD-wide civilian personnel system. Given the massive size 
of DOD, the proposal has important precedent-setting implications for 
federal human capital management and OPM.

This testimony provides GAO's preliminary observations on aspects of 
DOD's proposal to make changes to its civilian personnel system and 
discusses the implications of such changes for governmentwide human 
capital reform. Past reports have contained GAO's views on what remains 
to be done to bring about lasting solutions for DOD to strategically 
manage its human capital. DOD has not always concurred with our 
recommendations.

What GAO Found:

DOD's lack of attention to force shaping during its downsizing in the 
early 1990s has resulted in a workforce that is not balanced by age or 
experience and that puts at risk the orderly transfer of institutional 
knowledge. Human capital challenges are severe in certain areas. For 
example, DOD has downsized its acquisition workforce by almost half. 
More than 50 percent of the workforce will be eligible to retire by 
2005. In addition, DOD faces major succession planning challenges at 
various levels within the department. Also, since 1987, the industrial 
workforce, such as depot maintenance, has been reduced by about 56 
percent, with many of the remaining employees nearing retirement, 
calling into question the longer-term viability of the workforce. DOD 
is one of the agencies that has begun to address human capital 
challenges through strategic human capital planning. For example, in 
April 2002, DOD published a department wide strategic plan for 
civilians. Although a positive step toward fostering a more strategic 
approach toward human capital management, the plan is not fully aligned 
with the overall mission of the department or results oriented. In 
addition, it was not integrated with the military and contractor 
personnel planning.

We strongly support the concept of modernizing federal human capital 
policies within DOD and the federal government at large. Providing 
reasonable flexibility to management in this critical area is 
appropriate provided adequate safeguards are in place to prevent abuse. 
We believe that Congress should consider both governmentwide and 
selected agency, including DOD, changes to address the pressing human 
capital issues confronting the federal government. In this regard, many 
of the basic principles underlying DOD's civilian human capital 
proposals have merit and deserve serious consideration. At the same 
time, many are not unique to DOD and deserve broader consideration.

Agency-specific human capital reforms should be enacted to the extent 
that the problems being addressed and the solutions offered are 
specific to a particular agency (e.g., military personnel reforms for 
DOD). Several of the proposed DOD reforms meet this test. At the same 
time, we believe that Congress should consider incorporating additional 
safeguards in connection with several of DOD's proposed reforms. In our 
view, it would be preferable to employ a government-wide approach to 
address certain flexibilities that have broad-based application and 
serious potential implications for the civil service system, in 
general, and the Office of Personnel Management (OPM), in particular. 
We believe that several of the reforms that DOD is proposing fall into 
this category (e.g., broad-banding, pay for performance, re-employment 
and pension offset waivers). In these situations, it may be prudent and 
preferable for the Congress to provide such authorities on a 
governmentwide basis and in a manner that assures that appropriate 
performance management systems and safeguards are in place before the 
new authorities are implemented by the respective agency.

However, in all cases whether from a governmentwide authority or agency 
specific legislation, in our view, such additional authorities should 
be implemented (or operationalized) only when an agency has the 
institutional infrastructure in place to make effective use of the new 
authorities. Based on our experience, while the DOD leadership has the 
intent and the ability to implement the needed infrastructure, it is 
not consistently in place within the vast majority of DOD at the 
present time.

www.gao.gov/cgi-bin/getrpt?GAO-03-493T. 

To view the full testimony, including the scope and methodology, click 
on the link above. For more information, contact Derek B.Stewart at 
(202) 512-5140 or Stewartd@gao.gov.

[End of GAO Highlights]

GAO Highlights:

Highlights of GAO-03-741T, testimony before the Committee on Armed 
Services, House of Representatives:

Why GAO Did This Study:

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

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

This testimony provides GAO’s preliminary observations on aspects of 
DOD’s legislative proposal to make changes to its civilian personnel 
system and discusses the implications of such changes for 
governmentwide human capital reform. This testimony summarizes many of 
the issues discussed in detail before the Subcommittee on Civil Service 
and Agency Organization, Committee on Government Reform, House of 
Representatives on April 29, 2003.

What GAO Found:

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

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

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

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

www.gao.gov/cgi-bin/getrpt?GAO-03-741T.

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

[End of GAO Highlights]

GAO Highlights:

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

Why GAO Did This Study:

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

What GAO Found:

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

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

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

What GAO Recommends:

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

www.gao.gov/cgi-bin/getrpt?GAO-03-472.

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

[End of GAO Highlights]

GAO Highlights:

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

Why GAO Did This Study:

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

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

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

What GAO Found:

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

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

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

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

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

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

[End of GAO Highlights]

GAO Highlights:

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

Why GAO Did This Study:

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

What GAO Found:

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

Also, DOD has not provided guidance on how to integrate the 
components’ plans with the department-level plan. High-level 
leadership is critical to directing reforms and obtaining resources 
for successful implementation.

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

Moreover, the civilian strategic plans did not address how the 
civilian workforce will be integrated with their military counterparts 
or sourcing initiatives. DOD’s three human capital strategic plans--
two military and one civilian--were prepared separately and were not 
integrated to form a seamless and comprehensive strategy and did not 
address how DOD plans to link its human capital initiatives with its 
sourcing plans, such as efforts to outsource non-core responsibilities.

The components’ civilian plans acknowledge a need to integrate 
planning for civilian and military personnel—taking into consideration 
contractors—but have not yet done so. Without an integrated strategy, 
DOD may not effectively and efficiently allocate its scarce resources 
for optimal readiness. 

What GAO Recommends:

GAO recommends DOD improve the departmentwide plan to be mission 
aligned and results-oriented; provide guidance to integrate component-
and department-level human capital strategic plans; develop data on 
future civilian workforce needs; and set milestones for integrating 
military and civilian workforce plans, taking contractors into 
consideration. DOD comments were too late to include in the final 
report.

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

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

[End of GAO Highlights]

[End of section]

(350605):

FOOTNOTES

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

[2] Pub. L. No. 108-136 § 1101 (Nov. 24, 2003).

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

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

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

[6] GAO-05-140T.

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

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

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

[10] GAO-04-479T.

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

[12] 5 U.S. Code §§ 5101-5115.

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

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

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

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

[17] GAO-03-717T.

[18] GAO-04-479T.

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

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

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

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

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

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

[25] GAO-01-479T.

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

[27] On September 9, 2002, GAO convened a roundtable of government 
leaders and management experts to discuss the chief operating concept. 
For more information, see GAO, Highlights of a GAO Roundtable: The 
Chief Operating Officer Concept: A Potential Strategy to Address 
Federal Governance Challenges, GAO-03-192SP (Washington, D.C.: Oct. 4, 
2002), and The Chief Operating Officer Concept and Its Potential Use as 
a Strategy to Improve Management at the Department of Homeland 
Security, GAO-04-876R (Washington, D.C.: June 28, 2004). 

[28] GAO-05-140T.

[29] GAO-05-140T.

[30] GAO-03-669.

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

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

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