Comments to the Volker Commission on Civil Service Reform

The Brookings Institution recently sponsored a Commission chaired by former Federal Reserve Chair Paul Volker. It looked at many aspects of career pay and benefits and asked for public comment. You do not have to ask me twice for such things. This essay contains the comments I provided to the Commission on the topics of management retention, the attracting of recent graduates, pay and benefits. I have slightly modified these remarks to delete material calling for the reform of the Presidential Management Intern Program, as such reforms have been announced by the Administration. I began my comments dealing with retention:

Management Tenure
Many leave the federal workforce because certain positions at the GS-14, GS-15 and Senior Executive Service (SES) levels because the incumbents continue to occupy these positions on an almost permanent basis, especially in the Defense agencies. While this is not always the case, the appearance can become reality and push younger professionals into the local government or private sectors.

Mid-level Professionals
Another aspect of career rigidity is the selection process for mid-level positions. Nothing is more frustrating than applying for a federal (or for that matter a private sector) position only to learn that the fix was already in and the results of the entire competition had been predetermined. In many cases, the individuals promoted into such positions are federal employees who deserve promotion non-competitively. Management should be able to advance such individuals without wasting the time and energy of applicants who must participate in a process that everyone knows is a sham.

Background Checks
An additional factor in pushing applicants away is the security process. Many individuals born after 1950 have experimented with illegal drugs. While the vast majority of these individuals have either entered recovery or simply stopped using without becoming addicted, most do not wish to face a clearance process that involves questioning on drug use in the distant past. There is also some question as to whether asking an individual if they have committed a crime as a condition of employment is a violation of the constitutional right against self-incrimination. While a federal job is not a right, due process rights such as self-incrimination should not be ignored. The Supreme Court has already upheld drug testing for certain sensitive positions. Offer potential and current employees the choice of taking a drug test rather than answering certain questions in detail on background questionnaires and interviews. Finally, the drug-testing program currently in force sends the wrong message, which is essentially one strike and you’re out. Offer employees who fail a drug test treatment, as in the private sector, rather than subjecting them to termination.

Executive Pay
The issue of pay compression identified by the Volker Commission is not a concern that I share. Higher-level positions offer rewards other than pay that are more along the lines of esteem and self-actualization. This is demonstrated by the tendency of high-grade workers to, in effect, decrease their hourly wage by putting in workweeks well in excess of 40 hours. While I agree that the problem of linkage to congressional pay is ill advised in the realm of judicial salaries, I urge the commission to consider with great care and respect the requirements of the 27th Amendment to the Constitution on congressional pay. Additionally, the problem of attracting political appointees is not low federal pay, but excessive private sector executive compensation. I ask that you not feed into the culture of executive greed.

Sick Leave
Other pay issues are of concern, however. The amount of sick leave that is accumulated by senior employees is staggering. Cap the accumulation of sick time at the higher end, and put a program of voluntary disability insurance in its place, with parental leave included as one of the benefits. This reform assures that those who truly need time off for medical reasons get it, while reducing the huge contingent liabilities now born by the federal government for sick time. Additionally, the best companies grant new employees a number of advance sick days upon hiring, sometimes up to a week’s entitlement. When the federal government introduced its sick leave policies originally it was ahead of its time, though it has not kept up with the times. These simple changes bring it up to date.

Annual Leave
Annual leave policies are also in need of reform. Many employees face the annual headache of trying to use their expiring annual leave. Many federal agencies are almost empty the last few weeks of the year, with junior employees forced to “baby sit their computers” for those weeks because they do not have the leave built up to take the time off. Many large firms simply close their doors between Christmas and New Years. This is a good step for the non-emergency and non-postal agencies of the federal government, with a matching reduction in the accumulation of annual leave at all levels. This allows the closure of these agencies, which saves energy costs. Even for junior employees, the annual leave entitlement is quite generous, at 13 days a year. In industry, the standard annual vacation time is 10 days. Employees with between 3 and 15 years receive 19.5 days a year, while senior employees receive 26 days. In industry, the vacation entitlement for these cohorts is usually 15 days for mid-level employees and at the most 20 days for the senior levels. A reduction of vacation to industry levels eases the public misperception that federal workers are over-paid. Reducing this misperception increases the likelihood that any general federal pay increase will pass.

Federal Holidays
Another action to change public perceptions is the reduction of the number of federal holidays, or at least their reorganization. Veterans Day was originally Armistice Day, honoring World War One Vets, who are now almost all deceased. Perhaps it is time to abandon this holiday and replace it with the Friday after Thanksgiving Day, which is a day off in much of industry and all of academia. Finally, Columbus Day has become quite politically incorrect, since it commemorates an action that led to the biological genocide of most Native Americans. In light of this, it needs to be abolished.

A Shorter Workday
Determining whether the pay of civil servants is adequate is difficult. Hourly estimates are misleading, because in much of the white-collar world the workday is no longer 8 hours. This is another area where the federal government started off as the most progressive employer and now is no longer. Many white-collar employees now work 7.5-hour days. Lowering the federal day to this level while holding annual salaries constant makes hourly wages higher. This action, as well as the introduction of an employee holiday the week after Christmas, also greatly impact federal contract employees, who are required to work the same 8 hour day, although most contractors, except those who are on-site at federal agencies, already close their doors for this week. As someone who is frequently employed as an on-site contractor, I strongly urge the Commission (and all of you) to consider them carefully.

Hon. Charles E. Grassley
135 Hart Senate Office Building
Washington, DC 20510

Dear Senator Grassley:

May God grant you, your family and your staff a blessed Christmas and the happiest of new years.

I write today on the most vital of topics, the future of Social Security. As you know, the President's Commission to Strengthen Social Security has concluded its work, recommending three models for reform. These models provide an excellent starting point for what promises to be a spirited year of debate, although some modifications are necessary before passage is either possible or advisable.

The Commission has taken great pains to assure that the poorest individuals are made better off under their proposals than under the current program. However, more attention to distributional equity is essential before these proposals have even a snowball's chance of survival on a sunny August day at Hawkeye Downs.

A good starting point for assuring the equity of whatever solution is accepted is to be honest about how the program credits money to retirees. There is a huge disconnect between how contributions are credited and how benefits are calculated. Currently, employer contributions are credited as a match to the employee contribution, while benefits are more in line with average income. This leads higher income individuals to believe that they are being robbed by the system. This perception is a driving force behind the push for Social Security reform.

There is a better way to calculate the employer match to bring contributions more in line with benefit projections. Instead of basing the employer contribution on the employee contribution, credit each full-time worker at the firm at the average contribution for such workers in the nation as a whole. Part-time workers would be credited at a separate rate. We believe the result will bring contributions more in line with expected benefits.

These revised assumptions lead directly to the Center's critique of the Commission's Reform Models. We recommend that employer and employee contributions be treated differently in both calculation and personal account creation. The following table summarizes our recommendations:




Average income can be calculated in different ways for the purposes of the employer contribution. Different averages can be credited for full-time and part-time workers. The average can be for the firm or for the economy at-large. If a firm average is used, contract and temporary workers should be included in the average for the client firm. If the national average is used, the amount paid into FICA by the firm should be taken into account so that the total cost to the firm of the employer contribution is the same percentage of payroll as the current obligation.

Another major area of concern is plan administration. Employees at for-profit corporations and their employers must have the option of investing the employer contribution in Employee Stock Ownership Plans. In this case, employees or their representatives must have a voice in how their shares are voted, including giving full voice to each employee faction (labor, professionals and management), so as to mitigate against the repetition of the Enron debacle. Additionally, employees should have the option of investing their private account contributions in the ESOP rather than the federally sponsored mutual funds.

Investing private account funds in ESOPs provides for a more direct avenue of investment in plant and equipment, rather than encouraging stock speculation and subsidizing mutual fund managers. It gives the employees of the firm and ownership incentive and long term protection against layoffs, provided that employees also have the appropriate voice in the leadership of the firm. The existence of both private accounts and the ESOP option also makes a discussion of raising or abolishing the income cap on contributions more acceptable, as such an increase will raise the average income which can be invested in the ESOP trust fund.

Addressing these concerns will make the creation of private accounts better for Iowans, since the average Iowa income reflects the lower cost of living found in the state. The changes to the President's Commission's plan which the ICFE has identified will allow younger Iowans to stay in the state, where many now leave for higher income jobs in other places. Without the changes we have proposed the flight of Iowa's youth will only get worse.

Before closing, please allow me to address an issue that was ignored by the Commission, the funding of Disability and Health Insurance. To remove these programs from the pressure of private accounts, these programs should be wholly funded by the employer contribution, with a corresponding decrease in gross, but not net, employee wages and salaries. The portion of Survivor's Insurance which is attributable to workers who die before retirement should be treated in the same way. These actions will forever remove these vital programs from this debate, which will allow the debate on expanding private accounts to occur in the future.

We thank you for your attention to these matters and thank you for your work on behalf of Iowa. Please contact me if you have any questions or if I can be of any assistance. I am available to testify on these matters if you so desire.

Sincerely,
Michael G. Bindner
Executive Director

Social Security ESOP Questions

What provisions of law must be changed and/or what would the impact be on ESOP financing of having OASI contributions flow to ESOPs?

What is preferable, providing survivors insurance for current workers as part of ESOP or to continue this program as social insurance?

What provisions of law would be required to allow ESOPs to serve the function of a credit union to provide home, car, education and line of credit loans (allowing members to borrow against their stock and future incomes without cashing out) and to have the ESOP to receive the home mortgage deduction and student loan deduction directly instead of transferring this to the employee? (note that this approach could bring the Credit Unions into an ESOP privatization coalition).

Can ESOPs hold “diversified shares and assets” or merely be part of a larger 401(k) plan that does so? What provisions of law must be changed, if any, to allow this and retain S Corporation benefits? Might some of these diversified shares be held as public monopoly Customer Stock Ownership Plans (CSOPs) and community development Community Investment Corporations in geographic areas where the firm does business? (this diversified approach might win over Wall Street, which might be a big loser otherwise if ESOPs became the primary focus for OASI privatization).

OASI benefits are currently redistributional. Using the employer contribution to provide flexibility, how could ESOPs duplicate progressivity in making ESOP contributions in lieu of OASI contributions? Might an alternative be to have employee contributions tied to income while the employer contribution is distributed equally – regardless of wage and salary level?
(this approach might win over such organizations as the Center for Budgetary and Policy Priorities, especially if they agreed to run the numbers)

What is better, to have a different ESOP for each “faction” in a firm (labor, management, engineering) or to provide for factional voting and representation for and on the ESOP board? What, if any, provisions of law must be changed in each case? If allowable under current law, how might this be accomplished?

How would a Union convert its pension fund into a series of ESOPs for its members in particular firms? (note that the previous approaches might be useful in bring labor into the coalition)

One possible option to transition from the current Social Security system to an ESOP based system is to allow employers and employees to cease contributing to FICA if past employees and retirees are or have previously been fully capitalized in the firm’s ESOP as if participating under the new provisions their entire tenure with the firm. At what point would it be in the interest of ESOPs to pursue this option and what federal financial incentives might hasten this (i.e., federal securities to capitalize the social security trust fund surplus – or some level over and above a fair distribution of this trust fund)?

Would raising or eliminating the income cap subject to OASI taxation actually help ESOPs by providing more funds for investment under the above scenario? Would such an increase speed the transition?

Regarding individual contributions to OASI, how would percentage contribution to a 401(k) or ESOP and percentage contribution to FICA be varied by income to both maintain progressivity and finance transition costs? Might ESOPs make these transitional contributions to OASI for employees and then have the employee reimburse the ESOP over time?