The Human Capital Crisis

wo years ago, Jeffrey Neal scared his boss. He told the director of the Defense Logistics Agency that 50 percent of the agency's workforce would be eligible to retire within five years. "The turnover numbers, on the surface, appeared to be very high," says Neal, DLA's human resources director.

A year later, Neal downgraded the threat level. Closer analysis showed that only about 22 percent of DLA employees would retire over the next five years. "A retirement rate of 4 percent a year is not a crisis," Neal says. In fact, in some parts of the agency, the retirement rate was going to be as low as 1 percent per year. "It's almost too low," Neal says.

"The human capital crisis for us wasn't a crisis," Neal says. "It was a concern."

In 2000, the phrase "human capital crisis" began appearing in reports about the federal workforce, in congressional testimony by experts on government management, in floor statements by lawmakers and in the vocabulary of agency human resources directors. Over the past three years, the "human capital crisis" has been used to explain almost every problem with the federal workforce. First, the theory holds, no one wants to work for the government, especially not the vaunted "best and brightest." Second, those people who do come to work for the government want to leave shortly thereafter, lured by the promise of higher private sector salaries and disgusted by the way federal agencies treat their employees. Third, a huge wave of those who have made careers in government is about to retire en masse.

Doomsayers of the human capital crisis warn that government soon will lack sufficient experienced staff to perform important missions such as protecting the country, preventing illness, curing disease and exploring the universe. They contend that as an employer, government is doing many things wrong and needs to learn from other employers.

But a review of federal workforce statistics, recent agency experiences and observations by federal human resource directors reveals that the human capital crisis has been overstated. In fact, the government often is awash in qualified candidates, no American industry can claim a lower turnover rate than the federal government, and the expected wave of retirements won't be as bad as people think. When it comes to human capital, it may be that other employers have something to learn from the federal government.

GOOD BORN OF "CRISIS"

David Walker, the comptroller general and head of the General Accounting Office, introduced the term "human capital" to the federal government in the late 1990s with a basic message that agencies need to pay more attention to their workforce needs. "Federal employees have often been viewed as costs to be cut rather than as assets to be valued," Walker has said frequently. "People are assets whose value can be enhanced through investment."

Under Walker, GAO has urged federal officials to analyze workforce demographics and skill sets, tie those assessments to agency goals, create cultures that emphasize results, develop managers' leadership skills and create human resources processes that will attract and retain top-notch workers.

Walker's messages have been valuable in getting government leaders to pay closer attention to their workforce needs. His crusade no doubt played a role in the Bush administration's decision to designate strategic handling of human capital as its top management priority. The notion of a human capital crisis also has prompted revision of civil service rules that have prevented effective workforce management, according to reformers.

Good things have been accomplished in the name of the human capital crisis, but it has created a false sense of insecurity among federal leaders. Decisions based on the fear of a problem that isn't going to materialize are likely to be bad decisions. Constant suggestions that the government can't attract or retain the best and brightest can't be good for morale. And, of course, the "crisis" has been used to promote a variety of agendas, from higher pay for workers to sales of human resources services and products.

But simply put, things just aren't as bad as the phrase "human capital crisis" implies.

RETIREMENT: NO WAVE AHEAD

The most common cry from those who warn of a human capital crisis is that half the federal workforce will be eligible to retire in this decade. Without context, that statistic leaves the impression that 50 percent of federal workers shortly will retire, leaving the government with massive vacancies and/or extremely inexperienced employees by 2010.

But retirement eligibility statistics are misleading. Only when eligibility for regular retirement is combined with eligibility for early retirement does the proportion of workers ready to leave reach 50 percent. But federal employees rarely opt for early retirement-that is, retirement before age 55. It's just too costly because early retirees' pensions are calculated at a reduced rate.

Even adjusting for a very low early retirement rate doesn't entirely fix the overestimate of coming departures because those eligible to retire don't always leave the workforce immediately. In fact, federal workers generally wait four to six years after becoming eligible before retiring. In 2001, GAO estimated that 37 percent of workers who became eligible to retire by 2006 would wait more than a decade to leave.

Actual retirement rates are expected to average between 2 percent and 4 percent a year for most agencies. GAO puts the current governmentwide retirement rate at 2 percent a year, only a fraction of a percent higher than rates over the past decade. "This is not a problem that is going to descend on us quite as fast as the doomsayers would argue," says David Chu, undersecretary of Defense for personnel and readiness.

The National Aeronautics and Space Administration, spooked by its retirement projections, is pushing for special personnel powers to attract and retain scientists, engineers and other highly skilled professionals. But NASA is projecting retirement rates of just 2 percent to 2.7 percent through 2008, virtually the same rates the space agency has experienced since five years of downsizing ended in 1998. The same holds true for the key occupational group at NASA, scientists and engineers. They will retire at a steady 2 percent rate through 2008, according to NASA's own projections.

Experienced human resources professionals say anticipated retirement rates at most agencies are manageable. Retirement rates are relatively predictable using workforce analysis. If an employer knows when retirements will rise, it can recruit accordingly. The Army has been fine-tuning its civilian workforce analysis system, the most sophisticated in government, for nearly a decade. The Army's projection of 6,624 retirements in 2002 was less than 1 percent off from the final tally of 6,667. A benefit of the human capital crisis scare is that it has encouraged more agencies to follow the Army's example of thorough workforce analysis.

Some human capital crisis purveyors have predicted that more people will retire over the next few years than left during the downsizing wave of the 1990s, when 428,000 jobs were eliminated over seven years, according to the Office of Personnel Management. But even if that were true, agencies now are replacing those who retire. Thus, as the decade closes, agencies will have ample numbers of employees with five to 10 years of experience who were hired as the millennium began. Factoring in those hires, agencies' workforces will not be as inexperienced as projected retirement losses alone suggest.

So there's no governmentwide retirement crisis, nor are most agencies in danger of unchecked losses or shortages of experienced staffers. Nevertheless, a few agencies and certain occupations do face higher retirement losses than the government average. At the National Institutes of Health, for example, officials predict that annual retirements will rise from 323 in 1998 to 850 in 2005. That retirement rate is less than 5 percent, but it will require NIH to more than double its recruitment efforts. The GAO estimated in 2001 that 30 percent of the government's program managers would retire from 1999 to 2006, and that retirements would shrink the ranks of engineers, contracting officers and computer specialists by 8 percent to 14 percent over the same period.

Some agencies have found that peer pressure can unexpectedly push up retirement rates. "When Bill starts talking about going fishing, Larry starts thinking about it too," says Engin Crosby, the Army's civilian workforce analyst.

At the Agriculture Department, officials say they have no overall human capital crisis, but retirement predictions for specific occupations such as scientists, economists and IT specialists raise concern. "You have to look at it by occupation because certain occupations leave differently than others," says Joseph Colantuoni, acting director of human resources at Agriculture. For example, Agriculture's scientists tend to stay more than four years past retirement age, while clerical workers tend to retire within a year or two. That turns out to be true at other agencies, such as NASA and the National Institutes of Health.

Managers must plan ahead when they have firm evidence of a coming surge in retirements. The most obvious solution is to recruit people to replace the retirees. Other options include incentives for some retirement-ready employees to stay and for others to leave earlier than they had planned in order to spread out retirements over a number of years.

RETENTION: MOST STAY

In March, the Office of Personnel Management issued the results of a survey of 100,000 federal employees. The survey found that a third were considering leaving the federal government, only half through retirement. That finding caused many observers to worry that government is facing not just a retirement wave, but also a wave of people quitting.

Employees may be considering leaving their jobs, but history suggests they won't go. Since December 2000, the first month for which the Labor Department began tracking quit rates for the federal government and other employers, federal employees have quit at a much lower monthly rate than private sector workers.

The federal quit rate is lower than that of the finance, transportation and public utilities, and manufacturing industries-lower, in fact than that of any industry, save state and local government.

Even during the boom economy of the late 1990s, people didn't quit government jobs in droves. No more than 5 percent of federal employees overall have quit in a given year since 1994. "We don't see signs of losing any of our people in critical occupations to other organizations," says Zane Schauer, human resources director for the National Oceanic and Atmospheric Administration.

One of the reasons civil servants are so loyal is that the government's benefits package is better than those of many employers. Federal employees get more annual leave than most workers, relatively good health benefits, flexibility in work schedules, and transit benefits.

The federal retirement systems provide employees incentives to stay in their jobs. The Civil Service Retirement System, which covers employees hired before 1984, includes an annual pension that can reach 80 percent of an employee's take-home pay. The longer an employee stays on the job, the larger his or her pension.

The Federal Employees Retirement System, which covers employees hired after 1983, also includes incentives for employees to stay on the job. Because it relies on personal savings (in the Thrift Savings Plan) and Social Security, to supplement a small pension, FERS is widely viewed as having unlocked the "golden handcuffs" of CSRS. But so far, employees covered by FERS have proved just as likely to remain in their jobs as their CSRS counterparts. In fact, more workers hired in 1984 under the new retirement system are still with government than workers hired in 1983 under the old system.

Defense Department analyses have found that employees covered by FERS tend to stay in government jobs longer than employees under the older system. One reason is that employees in CSRS can begin receiving full retirement benefits at age 55, but employees in FERS have to wait longer. The retirement age for the basic FERS pension rises from age 55 for those born before 1948 to 56 for those born between 1953 and 1964 and to age 57 for those born after 1969. Thrift Savings Plan funds cannot be withdrawn without penalty until recipients reach age 59 and a half. And reduced Social Security benefits don't become available to retirees until age 62; full benefits aren't available until ages 65 to 67, depending on year of birth. In addition, the FERS pension is calculated at a slightly higher rate if employees retire at or after age 62.

Another reason federal employees tend to stick around is that they like their jobs and want to serve their country. OPM's survey found that 91 percent of employees feel the work they do is important, 70 percent claim a sense of accomplishment from their jobs and 81 percent believe they produce high quality work.

Agencies are likely to see higher quit rates over the next few years, but that's because they will be hiring more people. It's true for all employers that if workers are going to quit, they will do so in the first couple of years on the job.

RECRUITMENT: PLENTY OF APPLICANTS

The federal government had a centralized hiring process until 1996, when OPM began allowing agencies to develop their own hiring programs. Agencies now have had seven years to tailor their recruiting processes to get the best talent from large pools of applicants. Some agencies have done so; some haven't. But by and large, when federal agencies try to recruit people, they succeed. Agencies that effectively publicize their job openings find themselves with more than enough applicants for most positions. There's no governmentwide measure of the quality of candidates, but human resources directors generally are pleased. "We get really excellent applicants and really excellent people who come to work for the agency," says Kirk Maconaughey, human resources director at the Environmental Protection Agency.

Many people want to work for the federal government. Last year, 1.7 million people applied for 60,000 jobs as airport passenger and baggage screeners at the Transportation Security Administration. Another 47,000 applied for 900 FBI special agent jobs. The Foreign Service had 35,000 applicants for 465 positions. An interagency online job fair drew 20,000 applicants for 270 information technology jobs at the Agriculture and State departments, the Railroad Retirement Board, OPM and other agencies. Officials at Avue, a hiring services firm based in Tacoma, Wash., report that on average, 154 people apply for every federal job opening in the company's system.

The number of federal job applicants has risen since agencies began posting openings online in the late 1990s. But even before then, federal jobs were coveted. From July 1990 through December 1992, when OPM administered central tests for many jobs, 182,305 qualified for 3,228 job openings. Similarly, from October 1992 to January 1993, OPM passed on to agencies the names of 6,400 qualified applicants for 200 jobs.

Applicants far outnumber some federal openings, such as those in the Foreign Service and wildland firefighting, because they don't exist in the private sector. In some cases, federal agencies employ the elite corps in a given field, such as meteorologists at the National Weather Service, environmental specialists at the EPA, law enforcement officers at the FBI and scientists at NASA or the National Institutes of Health.

Proponents of the human capital crisis often say agencies suffer because they cannot attract the best and brightest job candidates to work for the federal government. In recent years, for example, more graduates of Harvard University's John F. Kennedy School of Government went to work in the private sector than in the federal government. Only 41 percent of college students were considering careers with the federal government in 2002, according to a survey conducted by Penn, Schoen & Berland Associates, a polling firm based in Washington.

But the levels of interest in government jobs among college and graduate school students isn't all that important to government agencies because they don't hire the bulk of their new employees from the ranks of recent college graduates. Seventy percent of last year's new hires were 30 or older; just 30 percent were in their 20s. The average age of interns at the Defense Logistics Agency is 42.

Some observers criticize federal agencies for hiring experience over potential, age over youth. Others don't see that as such a bad thing. "Workers in their 30s and 40s tend to be more stable in their employment than those who are 22," says DLA's Neal. If an agency hires a 37-year-old who stays for a productive 20-year career, then the hiring effort has been more successful than if the agency had hired a 22-year-old who stayed for two years.

Of course, not every hiring factor is in an agency's control. Some jobs are simply tough to fill. The Veterans Affairs Department struggles to hire nurses for its hospitals and clinics. "Nursing is not only a federal problem," explains Ventris Gibson, the VA's human resources director. "There is a lack of students coming out of nursing programs." Other occupations with hiring problems have included computer specialists during the dot-com years. Engineers also are hard to hire because the number of engineering majors is dwindling nationwide.

In addition, some geographic areas have more competitive labor markets than others. For example, during a recruiting drive for accountants in 2001 and 2002, the Internal Revenue Service was able to hire its top candidates everywhere in the country except in California, where the labor market was tightest.

But even where hiring is comparatively easy and applicants aren't in short supply, some agencies struggle more than others to get good job candidates. For the most part, agencies with recruitment problems have poor recruiting techniques. Those that have conducted recruitment drives, spiced up job announcements and streamlined hiring processes usually have found success. Human resources directors who have failed cannot credibly blame a governmentwide human capital crisis.

'ARE THEY ENGAGED?'

Filling positions and keeping people in them is the easy part of human capital management. The hard part, particularly in large organizations where employees can easily hide, is getting high-level job performance. But that's a struggle every organization and every manager faces, government or not.

"Are the people who are staying turned on [and] productive, giving their all, or are they biding their time until the economy turns around and they have more choices?" asks Beverly Kaye, head of the Scranton, Pa.-based management consulting firm, Career Systems International. "Are they engaged?" There's no governmentwide answer to that question. Employees with effective managers and good working conditions would say yes; employees with bad managers and poor working conditions would say no.

Ken Boxer, a Potomac, Md.-based management consultant, says there are more similarities than differences among federal agencies and corporations. "The key elements to retaining employees-the retention drivers-are the same," says Boxer. "Do people have exciting work; are they challenged at work; do they have career growth, learning and development; are they working with great people; do they have fair pay and supportive management-a great boss?"

Federal and private sector employees give nearly identical answers to many such questions about their workplaces. In both sectors, surveys have found, almost 80 percent say co-workers cooperate to get the job done. About 80 percent of each group say the quality of the work done by their work groups is good. Nearly 70 percent are satisfied with their jobs, whether they work for companies or federal agencies.

Private industry employees rate their immediate supervisors slightly more highly than do federal employees. But both groups are unhappy with their level of involvement in work decisions, the amount of information they receive from management, the recognition they get, and their opportunities for promotion and for training.

The federal human capital crisis has spawned many ideas for reforming federal rules and regulations, processes and systems. But it's time to deflate the rhetoric about recruitment, retention and retirement, and begin addressing government's real human capital problems. As OPM's survey shows, government's problems are the same as those of other organizations: poor management, weak performance evaluation, inadequate employee development, too little employee involvement in decisions and insufficient information sharing. "People are people," says Senior Executives Association President Carol Bonosaro in response to the OPM survey results. "People in government aren't that different from people in private industry."

The government's personnel practices are getting employees to sign up and to stay put. Getting civil servants mentally and emotionally committed to their jobs, not just getting them to come and stay, may be government's real human capital crisis.

Tanya N. Ballard contributed to this report.