Smashing the System

avid Chu waves his arms and pounds the table when he talks about the campaign that has consumed him for nearly two years. "This is not rocket science, and frankly, in terms of personnel management, it's not even controversial," he says. But it is, as he admits, politically controversial. Chu, the undersecretary of Defense for personnel and readiness, has fought hard, he's been persuasive, and he may become the man who killed the federal civil service system. That would be just fine with him.

Chu, a 59-year-old, Yale-trained economist, is the architect of the Defense Department's proposal to exempt itself from most of Title 5, the section of the federal code that is the bulwark of the civil service system. That system, created in an attempt to end the rampant patronage that corrupted government in the late 19th century, has governed the federal government's relationship with its employees for more than 100 years. It has been a work in progress right from the start, and Congress has tweaked it many times. Chu wants it gone, and last April, he sent Congress a wide-ranging proposal to free Defense of Title 5's constraints.

In May, the House approved language to do just that in its version of the Defense Department authorization bill. The Senate Governmental Affairs Committee followed shortly thereafter with a more restrictive bill. And while the Senate never passed the measure, conference committee members considering the Defense authorization legislation agreed to consider the Senate committee's bill as a possible substitute for the House language. In mid-October, members of the conference committee were still trying to hash out a compromise on the bill.

If the legislation does pass, it will apply only to Defense, but the significance of the move-which will affect more than 700,000 civilian employees-is not lost on anyone. Nor are many-outside of the federal employee unions-lamenting the loss. "The notion that managers should not have substantial control in this day and age over the recruitment and evaluation of people who work for them is archaic," says Elaine Kamarck, a lecturer at Harvard University's John F. Kennedy School of Government who previously advised President Clinton on civil service reform. "These reforms are long overdue."

Kamarck is not alone in that view. Civil service scholars, members of Congress, and a number of bipartisan blue-ribbon commissions-most recently the National Commission on the Public Service chaired by former Federal Reserve Chairman Paul Volcker-have called for the elimination of the civil service system. But there is less consensus, and more uncertainty, about what will replace it. "The question is transition to what?" asks Beth Asch, a civil service scholar with RAND, a nonpartisan think tank.

PATCHWORK APPROACH

With that question in mind, some view Defense-an agency with a long history of poor personnel management-as a dangerous choice to be the second Cabinet department to venture into the great unknown. The Homeland Security Department became the first when Congress authorized it to create its own personnel system last year. That system is still being developed. Defense officials haven't decided yet what their new system will look like either, and will face several key challenges in the process. Last March, the General Accounting Office reported that Defense had done little to develop a credible plan to evaluate employee performance-a critical element of any new personnel system-and had not aligned its human resources planning with broader mission objectives. "Without an integrated strategy, DoD may not effectively and efficiently allocate its scarce resources for optimal readiness," GAO reported (GAO-03-475).

For that, Chu has an answer. "If we agree there is a problem, it seems to me we ought to be proceeding forthrightly to its solution," he says. The argument that Defense should have a new system ready to go before Congress grants new flexibilities, Chu maintains, is "a rationalization for avoiding dealing with the problem, or trying to avoid acknowledging there is a problem." If the department needs to make corrections in mid-course, he adds, it can do that. Congress will provide oversight through the entire process.

But Congress has taken a patchwork approach to reform that worries some. Congress already has freed several agencies, such as the Federal Aviation Administration and GAO, from Title 5. But Defense is the 800-pound gorilla. It is the largest federal employer still bound by Title 5, and if it wins exemption, less than 20 percent of all civil servants will remain under the traditional system.

Kamarck argues that Congress has taken the right approach. She says each agency should develop its own system to meet its own needs. But other civil service scholars and GAO say Congress should seek more consistency as it reconsiders the civil service. "These small, incremental, agency-by-agency reforms have created a crazy quilt," says Donald Kettl, a political science professor at the Robert M. La Follette School of Public Affairs at the University of Wisconsin. But, Kettl adds, a Defense reform bill "would be an enormous breakthrough for reformers. If you can win here, you can win anywhere."

Federal employee unions, led by the American Federation of Government Employees and the National Treasury Employees Union, have opposed Chu's plan, and in the House, have found support among many Democrats. The unions argue that the kinds of reforms that Chu and the department are exploring would strip workers of protections against managerial abuse. They warn of a return to a spoils system. But most of all, they charge that the new rules-which would make it easier to fire employees-would help further what they say is a thinly veiled effort by the Bush administration to privatize more federal jobs.

"They want out of the people business," says Jim Davis, AFGE's national secretary-treasurer. "The bottom line is that they don't want employees. They don't want to have to manage them. They don't want to have to provide for their retirements and medical insurance." It's not because contractors are more efficient or cost-effective, Davis adds. Rather, the department wants to escape the hassles of human resources management, and perhaps even to reward politically connected contractors with new business.

Chu acknowledges that he often attends meetings in which he is the only civil servant in a room full of contractors. But that is easy to explain. "Managers who have a lot of things on their plate say, 'Well, I'd rather have a military guy . . . or a contractor who will say, 'For the right amount of money, I'll send whomever you want to Iraq.' " By contrast, Chu adds, the civil service, in the minds of many Defense executives, "is not an attractive managerial alternative. It's hard to work. . . . It's not responsive. You can't move people around."

Chu denies that privatization is the motive behind reform. In fact, he says, the department stands to keep losing civilian jobs if it fails to reform its personnel system, because managers will continue to opt for the flexibility of using contractors. Likewise, Defense Secretary Donald Rumsfeld has argued that the current system encourages Defense organizations to rely on uniformed personnel rather than civilians. He told members of Congress earlier this year that a study done under the Clinton administration showed that as many as 300,000 jobs then done by military personnel may have been better suited for civilians, either civil servants or contractors.

Still, Chu insists that the department neither wants to, nor should, rely fully on contractors. The department will always need civil servants to look out for the taxpayer's interests, he says. "I think it would be tragic, truly tragic for the country if we cannot have a strong civil service workforce."

HURRY-UP HIRING

The problem today, Chu argues, is that human resources management challenges have overwhelmed Defense managers. For example, he says, cumbersome hiring regulations prevent the department from effectively recruiting. Those regulations-aimed at ensuring fair treatment for all applicants-also take control out of the hands of agency managers. Under Title 5 rules, human resources officials vet job applications and whittle them down before front-line managers even have a chance to look at them. "The result of that is to put the department at a serious disadvantage in attracting talented young people," Chu says.

For the past decade, starting with the end of the Cold War, the hiring problem remained largely hidden because the Defense Department was downsizing. The size of its civilian workforce has dropped from 1.1 million in 1988 to about 700,000 today. The downsizing, largely accomplished through attrition, has left a department with almost no employees under the age of 30. By contrast, almost 40 percent are over 50, and about one-third of the total will be eligible for retirement in the next three years.

On average, hiring an employee takes the department three months, during which many workers bail out for jobs in the private sector, Chu says. Recent college graduates consider government employment less appealing than at any time in recent history. Highly skilled employees also have proved difficult to recruit. Job openings in some engineering and medical fields have gone unfilled for months and even years.

Under Defense's plan, the department would win new authority to expand the existing Outstanding Scholar program, which allows agencies to waive some federal hiring requirements to more quickly hire top college students. Defense managers also would be allowed to review a broader list of candidates for job openings, and to offer special salary rates to highly skilled workers.

Another problem with the current system, Chu says, is that managers have not been able to reward top performers, who have, in turn, left for the private sector. Managers' hands are tied because the civil service system is set up to reward employees more for seniority than for performance. As a result, a key component of a new personnel structure would be pay banding, a system that allows managers to increase salaries more rapidly than the General Schedule classification system does.

In his congressional testimony, Rumsfeld tied the need for civil service reform at Defense to the war on terrorism. Chu makes the same case. "The department needs to be in a different place if it is going to successfully meet the security challenges we have ahead," he says. But union representatives, point to the department's recent successes in Afghanistan and Iraq, and raise the question, "Why now?"

UNEQUAL WORK

The main argument behind the push for reform is that the nature of federal employment has fundamentally changed since 1949, when the General Schedule classification system was created. In 1950, 62 percent of federal workers were at GS-5 or below, with only 11 percent of workers in the ranks above GS-10. By 2000, that situation was reversed. Fifteen percent of federal workers were at GS-5 or below compared with 56 percent above GS-10.

In a personnel system dominated by relatively low-level jobs, "equal pay for equal work"-the premise on which the General Schedule was created-was a reasonable management theory, the recent Volcker commission found. Today, by contrast, the concept of "equal work" is much more difficult to apply to many of the tasks undertaken by government.

"The classification system doesn't work anymore because we're dealing with a highly skilled workforce," says Frank Cipolla, a consultant to the National Academy of Public Administration who previously oversaw civilian personnel at Defense and endorses the Pentagon's reform plan. "Because of new technologies, the occupations are changing rapidly." Indeed, Cipolla says, the federal workers of today are scientists and engineers, researchers and technicians who are asked to think creatively. The best and most creative workers, the argument goes, should not be confined to a single GS grade level, but allowed to advance more rapidly, to move into new jobs and to management positions.

If Defense wins the right to create a new personnel system, officials plan to base reforms on systems developed for three personnel demonstration projects. Since 1980-when its first such project started at the Navy's China Lake, Calif., research facility-Defense has experimented with some of the personnel authorities Chu says the department as a whole needs. In the late 1990s, Congress authorized two more Defense demonstration projects, one encompassing nine additional research facilities, the other involving acquisition personnel.

Of the three projects, only China Lake has undergone substantial review. For the most part, it has been judged to be a success.

In the late 1970s, the Navy laboratory, which conducts research and designs military weapons systems, was having trouble recruiting new employees. Less than a quarter of prospective hires accepted job offers, and the average grade point average of new employees was an unimpressive 2.7. Now, after implementing a pay-banding system, faster hiring procedures, and bonuses for top workers, the number of recent college graduates who accept offers is about 60 percent, and the average GPA has risen to 3.3, according to Nancy Crawford, a human resources manager at the base. China Lake has a lower turnover rate than Defense research facilities operating under standard civil service rules, particularly among employees with high performance ratings.

The experiments at Defense's nine other laboratories and among its acquisition workforce are too new to have undergone serious review. An initial Office of Personnel Management study last year found that the experiments are "doing decently but not great,"Chu admits. The same was true, however, during early evaluations at China Lake. After an adjustment period, employee support for the China Lake experiment has grown steadily, Chu points out.

The details of what exactly a new Defense personnel system will look like are fuzzy, but it will almost certainly build on the China Lake example. Under the system, managers would have greater authority to make hiring decisions quickly and on their own. Likewise, they would be able to promote the most productive workers, and deny raises to or fire unproductive ones. "What it would do is put in the hands of the mission managers the principal responsibility for making decisions that work best for them," Cipolla says. That, he argues, will make it easier to hold them accountable for results.

Two of the major innovations that Defense is almost certain to use are categorical ranking and pay banding. By using categorical ranking-in which prospective employees are grouped by their qualifications for the job-hiring managers will be able to review a greater number of applications. Currently, they are only allowed to consider three qualified employees for any given job opening.

By replacing the General Schedule classification system with a pay-banding approach, Defense will place new hires into broad pay ranges that will allow managers to offer a wider range of salaries to new employees, to promote workers more quickly, and to move employees into new jobs without opening positions to competition. Whereas the General Schedule pay system sought to ensure fair pay for all federal employees holding similar jobs, the pay-banding system will allow Defense to pay employees based on their perceived individual merit.

In addition, the agency is likely to win new authority to enable it to hire retirees back for short-term assignments without having to reduce their annuities; to set special pay rates for hard-to-fill positions; and to negotiate most personnel issues with the unions' national offices, instead of the myriad local union branches that the department must now deal with. When downsizing, the agency will be able to base layoff decisions partly on performance, rather than solely on seniority.

LEGISLATIVE PUSH

The Defense Department's push to win freedom from the civil service system dates back to the inception of the China Lake demonstration project. Then, in 1997, Defense officials floated a plan that would have removed the department's civilian workforce from the purview of Title 5 and placed the department's civil servants under Title 10, which governs uniformed military personnel. That plan foundered in the face of OPM and union opposition. In March 2002, Chu set up a committee of top agency managers to review the demonstration projects and come up with a new proposal. He began his public campaign for reform with a Federal Register notice last April listing some of the new authorities the department sought. Shortly thereafter, the department sent its proposal to Congress.

In testimony before Congress, Chu and Rumsfeld argued that their proposal merely followed the lead of the Homeland Security Department, which in its 2002 authorizing legislation received waivers from six chapters of Title 5 dealing with employee disciplinary appeal rights, hiring rules, performance evaluations, job classification, pay rates and systems, and labor relations. To the ire of critics, Defense proposed waiving six additional chapters of Title 5, including provisions that deal with employee training, pay allowances and retention preferences.

The House-passed legislation mirrors the Defense proposal. Most House Democrats and the unions opposed it, arguing that the proposal had been created without consulting the unions, and that it gave few specifics on what a new personnel system would look like. The Senate Governmental Affairs Committee shortly thereafter passed a compromise bill that removed some of the most controversial provisions of the Defense proposal and the House bill. Most importantly, it preserved the right of Defense civilians to appeal adverse disciplinary decisions to the Merit Systems Protection Board and the federal courts. The Senate bill also required that OPM approve the new Defense personnel system. The Senate bill, which passed on a bipartisan basis and has won some union support, seems more likely to emerge from the House-Senate conference as the final legislation.

Union officials have fought reform from the beginning. Both NTEU and AFGE testified against the proposals at congressional hearings earlier this year, and AFGE ran radio advertisements in September opposing them. But AFGE's Davis says that his union will have less trouble accepting the Senate bill.

The unions should not be counted out of the debate. They won a key victory earlier this year, when the House passed an amendment to an appropriations bill curtailing President Bush's plan to put federal jobs up for competition with private firms.

Even so, the tide may be flowing against the unions in the long run, says Kettl. "We are in an era where there is rising support for the idea that the private sector can do these [civil service] jobs as well as or better than the public sector," he says. "No one wants the federal service to grow any more." Kettl says the effort to loosen civil service protections fits into what he sees as a bipartisan trend toward the "quiet privatization" of government. "Both parties are frustrated trying to manage government."

NOBEL, PULITZER AND HEISMAN

But whether the Defense Department is prepared to effectively use new personnel flexibilities to make its operations more efficient is a hotly debated question. Simply creating an effective performance evaluation system will be no easy task. No federal agency has come up with anything like a model system.

"If anyone can solve the performance evaluation problem, he should be entitled to the Nobel, the Pulitzer and the Heisman in the same year," says Diane Disney, who previously oversaw civilian employees at Defense and is now dean of Commonwealth College at Pennsylvania State University. "That's essential here, and I don't believe there is anything that is being proposed that would do that."

The 1978 Civil Service Reform Act provided for bonuses and merit salary increases for high-performing civil servants. But as the Volcker commission noted in its January report, Congress rarely has provided sufficient appropriations to fund the bonuses. And managers tended to spread what bonus money there was among all of their employees to supplement annual raises.

The evaluation problem goes beyond Defense. A 2001 study by the Brookings Institution found that of 700,000 employees across government rated in 2001 using a pass/fail system, less than a tenth of 1 percent failed. Meanwhile, of 800,000 federal employees who were rated using a five-point grading system, 43 percent were rated as "outstanding," 28 percent as "exceeds fully successful," 18 percent as "fully successful," and less than 1 percent as either "minimally successful" or "unacceptable."

Union officials are quick to point out that increased managerial flexibility doesn't necessarily lead to better management. Numerous civil service scholars have argued that any civil service reform plan must provide incentives for managers to use their new flexibility, and limit the fallout when they make honest mistakes. The success or failure of Defense personnel reform depends not just on winning a new system, but on building it properly and using it to change the culture of the civil service.