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    "ocrText": "The original documents are located in Box 11, folder \"FY - 11/16/76, Defense, Small\nAgencies (1)\" of the White House Special Files Unit Files at the Gerald R. Ford Presidential\nLibrary.\nCopyright Notice\nThe copyright law of the United States (Title 17, United States Code) governs the making of\nphotocopies or other reproductions of copyrighted material. Gerald Ford donated to the United\nStates of America his copyrights in all of his unpublished writings in National Archives collections.\nWorks prepared by U.S. Government employees as part of their official duties are in the public\ndomain. The copyrights to materials written by other individuals or organizations are presumed to\nremain with them. If you think any of the information displayed in the PDF is subject to a valid\ncopyright claim, please contact the Gerald R. Ford Presidential Library.\nDigitized from Box 11 of the White House Special Files Unit Files at the Gerald R. Ford Presidential Library\nNATIONAL ARCHIVES AND RECORDS SERVICE\nWITHDRAWAL SHEET (PRESIDENTIAL LIBRARIES)\nFORM OF\nCORRESPONDENTS OR TITLE\nDOCUMENT\nDATE\nRESTRICTION\n1.\nbriefing paper, 11/16/76\nla. papers\nDOD, pp 1-18\n18 pages\n11/76\nA\nlb. papers\nDOD issues, pp 20-23\n4 pages\n11/66\nA\nFILE LOCATION\nSpecial Files, Budget Decision papers\nFY 1978, 11/16/76, DoD etc... (1) box 11\nPLC 4/19/84\nRESTRICTION CODES\n(A) Closed by Executive Order 12065 governing access to national security information.\n(B) Closed by statute or by the agency which originated the document.\n(C) Closed in accordance with restrictions contained in the donor's deed of gift.\nGENERAL SERVICES ADMINISTRATION\nGSA FORM 7122 (REV. 1-81)\na\nFY 1978\nDefense\nPresi.\ndential\nReview\nDOD 1976 Budget\nPresiduntial Review\nShould du peet\nupetairs in\nCase in 6\nwith rest of\nFord materials\nACC. 78-69\nSpecial Files\nSF-72\nFORD LIBRARY & HERAL\nDEPARTMENT\nEXECUTIVE OFFICE OF THE PRESIDENT\nOFFICE OF MANAGEMENT AND BUDGET\nDATE: 2/25/77\nTO: Frank Matthews\nFROM: Office of Management & Budget\nReturned per telephone conversation\nwith Nell Doering. Please put\nwith President Ford's papers.\nOMB FORM 38\nREV AUG 73\nPresident Ford's book\nOFFICE OF TIME PRESIDENT STATES UNITED\nEXECUTIVE OFFICE OF THE PRESIDENT\nOFFICE OF MANAGEMENT AND BUDGET\nWASHINGTON, D.C. 20503\nNOV 15 1976\nMEETING ON FY 1978 BUDGET\nTuesday, November 16, 1976\n2:00 p.m. (3 hours)\nThe Oval Office\nFROM: Paul H. O'Neill\nOhein\nI. PURPOSE\nTo make decisions regarding the fiscal year 1978\nbudget for the Department of Defense and related\nsmall agencies.\nII. BACKGROUND, PARTICIPANTS, AND PRESS PLAN\nA. Background: The Office of Management and Budget\nhas completed its review of the fiscal year 1978\nbudgets submitted for the Department of Defense\nand related small agencies. This meeting will\nraise the budget issues in these agencies that\nrequire Presidential review or determination.\nThe primary supporting material was sent to\nyou last Thursday. Additional materials con-\ncerning summary information and small agency\nbudget requests are included in the attachment.\nIn addition, a second complete set of materials\nis attached.\nB. Participants: James Lynn, Paul O'Neill,\nDonald Ogilvie, Dale McOmber,\nBrent Scowcroft\nFORD\nC. Press Plan:\nDavid Kennerly photo\nGENAL\nIII. TALKING POINTS\n1. Donald Ogilvie, what is the first issue\nthat we should discuss this morning?\nSmall Agencies\nA\nNATIONAL SECURITY COUNCIL\nComments\nOMB concurs with Agency request on staffing\nlevels, but recommends a more limited\nfunding increase for operating expenses.\nAgency has agreed to accept OMB recommendation.\nBudget\nFull-time\nauthority\nOutlays\npermanent\n(In thousands of dollars)\nemployment\n1976 actual\n3,052\n3,192\n68\n1977:\nEmployment ceiling\nXXX\nXXX\n70\nAgency request\n3,210\n3,300\n70\nOMB recommendation\n3,210\n3,300\n70\nChange\nXXX\nXXX\nXXX\n1978:\nGERAL\nR.\nAgency request\n3,388\n3,350\n70\nOMB recommendation\n3,235\n3,250\n70\nFORD\nChange\n-153\n-100\nXXX\nLIBRARY\n1979:\nAgency request\n3,388\n3,388\nXXX\nOMB recommendation\n3,235\n3,235\n70\nChange\n-153\n-153\nXXX\nAMERICAN BATTLE MOI\nTS COMMISSION\nComments\nThe OMB mark would make minor\nadjustments to the operations\nand maintenance program funding\nlevel and would allow construction\nof a WWI/Pershing memorial in\nWashington, D.C., and completion\nof a memorial commemorating the\nmissing in Vietnam. The agency\nhas agreed to accept the adjust-\nment.\nGERAL\nR.\nFORD\nLIBRARY\nBudget\nFull-time\nauthority Outlays\npermanent\n(In thousands of dollars)\nemployment\n1976 actual\n5,581\n5,405\n385\n1977:\nEmployment ceiling\nXXX\nXXX\n392\nAgency request\n5,844\n5,803\n392\nOMB recommendation\n5,844\n5,803\n392\nChange\n-0-\n-0-\n-0-\n1978:\nAgency request\n6,733\n6,603\n392\nOMB recommendation\n6,483\n6,200\n392\nChange\n-250\n-403\n-0-\n1979:\nAgency request\n6,033\n6,000\n392\nOMB recommendation\n6,033\n6,000\n392\nChange\n-0-\n-0-\n-0-\nU. S. Soldiers' and Airmen's Home\nComments\nOK\nAgency requested increases for\ninflation and to improve main-\ntenance and repair of facilities.\nAgency has agreed to accept re-\nduction in inflation estimate.\nGERAL\nR.\nFORD\nBudget\nFull-time\nauthority\nOutlays\nPermanent\n(In thousands of dollars)\nEmployment\n1976 actual\n15,502\n14,513\n934\n1977:\nEmployment ceiling\nXXX\nXXX\n1,080\nAgency request\n15,939\n15,875\n965\nOMB recommendation\n15,939\n15,875\n965\nChange\n0\n0\nXXX\n1978:\nAgency request\n16,260\n16,215\n965\nOMB recommendation\n16,196\n16,151\n965\nChange\n-64\n-64\nXXX\n1979:\nAgency request\n16,260\n16,215\n965\nOMB recommendation\n16,196\n16,151\n965\nChange\n-64\n-64\nXXX\nIncludes pay supplemental of $726.\nSelective Service System\nComments\nAgency requested increases in 1977 and 1978 for Reconciliation Services\nProgram and in 1977 for deferred Reserve training and for increased\nseverance pay costs. OMB mark approves only the increased severance pay\nand in addition would disestablish the Agency and transfer its functions\nand resources to the Federal Preparedness Agency, GSA. Agency agrees\nto part of mark but requests 1977 supplemental of $602K and strongly urges\nretention as independent Agency.\nGERAL\nBudget\nFull-time\nauthority\nOutlays\npermanent\n(In thousands of dollars)\nemployment\n1976 actual\n37,500\n34,494\n173\n1977:\nEmployment ceiling\nXXX\nXXX\n90\nAgency request\n9,074\n10,388\n90\nOMB recommendation\n8,124\n9,438\n90\nChange\n-950\n-950\n0\n1978:\nAgency request\n6,590\n6,820\n83\nOMB recommendation\n6,297\n6,527\n83\nChange\n-293\n-293\n0\n1979:\nAgency request\n6,200\n6,200\n80\nOMB recommendation\n6,200\n6,200\n80\nChange\n0\n0\n0\nIssue Paper\nSelective Service System\n1978 Budget\nBackground\nYour tentative decision last year on the 1977 budget for the Selective Service System provided\nfor an end to pre-registration and the Selective Service System as an independent agency. Residual\nplanning and reserve training functions would have been assigned to the Federal Preparedness Agency\nin GSA.\nIn response both to Director Pepitone's appeal and OMB's recommendation that the System's\nindependent status be retained until its pre-registration activities were phased down, you decided\nto defer your decision on the future organizational location of this agency until the 1978 budget\nreview.\nStatement of Issue\nShould the Selective Service System's planning and training functions be assigned to the Federal\nPreparedness Agency?\nPros.\n-- Many Americans believe the Selective Service System is an agency without a mission.\nBy taking the initiative now, we can demonstrate the seriousness of our purpose in\ncutting back unnecessary Federal Government activity.\nCons.\n-- Disestablishment of the Selective Service System as a visible and separate entity has the\npotential for being considered a sign of national weakness on the subject of preparedness.\nGERAL\nAlternatives\n#1.\nRetain the Selective Service System as an independent agency (Agency req.).\n#2.\nDisestablish the Selective Service System and assign its planning and training functions\nto the GSA Federal Preparedness Agency (OMB rec.).\nAnalysis\nBudget authority and outlays are roughly similar under both alternatives. Alternative #2\nreflects the OMB view that these resources would purchase greater \"preparedness\" if the System's\nplanning and training functions were transferred to GSA. The Agency argues the reverse.\nThe Selective Service System continues to indicate that their delivery performance in a\nfuture military mobilization would be well below that which was actually achieved just prior to\nWorld War II when they emerged from a similar operational posture. The table below illustrates\nsome of the critical differences between the System's past and projected response times.\nAction\nWorld War II\nCurrent Projection\nRegistration\nM+30\nM+60\nInitial Induction Orders\nN/A\nM+90\nInitial Inductions\nM+62\nM+110\n100,000 Inductions\nM+120\nM+150\nIn our view the System's projected delivery performance should actually exceed that experienced\nin 1940 when the Nation's communications, transportation, and data processing facilities were\nprimitive in comparison to today's capability.\nThe report of an informal interagency (DOD/SSS/OMB) study group on the budget concept for\nFY 1976 presented an analysis that further suggests that the System is understating the delivery\nperformance its current processing procedure could achieve. Within 60 days of the initial issue\nof induction orders to registrants, 655,000 registrants could be inducted according to this report.\nBy comparison, the Agency indicates that this figure would reach only 100,000.\nIn the current re-examination of foreign policy and military force requirement (NSSM 246), the\npossible need for an expanded draft capability is being considered. As part of this exercise, the\nSystem presented alternative funding levels and their associated delivery performance which were\nlogically inconsistent. That is, for certain alternatives, increased funding resulted in decreased\nperformance. While the System was quick to revise their estimates, this type of incident raises\nsome concern about the credibility of their projections.\nThe Selective Service System argues that their current operational posture does not mirror that\nexisting just prior to World War II when substantial portions of the Nation's mobilization manpower\nplanning and training efforts were being funded in other agencies and in budgets at the State and\nlocal level rather than at the Federal level.\nAs to the report of the informal study group on the budget concept for 1976, Director Pepitone\nindicates that he has never formally accepted the report's conclusion on induction delivery performance.\nAgency request: Alternative #1. Current procedures minimize the System's mobilization reaction\ntime within existing resource constraints. A faster response cannot be obtained with improved\nprocedures or with the proposed functional shift to FPA but only with increased funding.\nOMB recommendation: Alternative #2. Mobilization capability depends primarily on the procedures\nused to process young men for induction. To a large extent, they are independent of the cost of\noperating the Selective Service System. There is substantial evidence that mobilization performance\ncould be much better than now projected by the Selective Service System, with proper planning and\ntraining.\nAgency efforts to secure increased resources through its continued use of pessimistic performance\nprojections must be corrected. A functional transfer of the System's responsibilities to the FPA\noffers the best hope of realizing this goal. Even if NSSM 246 should result in an expanded standby\ndraft capability, FPA would still be the preferred organization to assume the additional responsibilities.\nR.\nI\nIntroduction\nGERALD R. FORD LIBRARY\nThis form marks the file location of item number\nla\nas listed on the pink form (GSA Form 7122, Withdrawal Sheet)\nat the front of the folder.\n19\nISSUES\nNo.\nTitle\nPage\n* 1\nDefense Budget Level\n20\nPay and Efficiencies\n24\n2\nQuadrennial Review of Military Compensation\n26\n3\nMilitary and Civilian Pay Increases\n30\n4\nAgency Budgeting for Federal Employee Retirement Programs\n33\n5\nCommissary Subsidy\n37\n6\nJunior Enlisted Travel Entitlements\n40\n7\nDOD Recruiting Costs\n43\n8\nAverage Grade Controls\n49\n9\nCivilian Employment Levels\n54\n10\nGuard and Reserve Manpower\n58\n11\nGuard and Reserve Pay Initiatives\n62\n12\nModernization of Defense Domestic Installation Structure\n65\n13\nContracting Out Depot Maintenance\n70\n14\nShipbuilding in Navy Yards\n74\nOperations and Maintenance\n15\nGrowth of Purchases: Operations and Maintenance\n77\nModernization\n82\nStrategic\n85\n* 16\nM-X\n89\n* 17\nB-1\n93\n* 18\nDefense Civil Preparedness Agency\n97\nGeneral Purpose\n19\nAir Force Tactical Aircraft\n100\n* 20\nAircraft Carrier Procurement\n109\n* 21\nNaval Force Options\n112\n22\nShipbuilding Funding Management\n119\n23\nThe XM-1 Tank\n123\nOther\n24\nAircraft Industry Capacity\n125\n25\nRDT&E\n130\n26\nSatellite Communications\n134\n* 27\nLevel of Other Procurement\n137\n28\nChemical Warfare\n141\n*\nAffected by NSSM 246.\nOverall Defense Level\nGERALD R. FORD LIBRARY\n16\nThis form marks the file location of item number\nas listed on the pink form (GSA Form 7122, Withdrawal Sheet)\nat the front of the folder.\nEfficiencies\nPay and\n24\nDepartment of Defense\n1978 Budget\nPay and Efficiencies\nThe Defense budget is extremely labor intensive. The cost of people represents a very high\nproportion of the total and is very difficult to control. Federal pay levels are generous and\nfuture pay increases reflect major increases in the Defense budget.\nThe issues raised in this area can be grouped in four categories:\n1. Broad policy issues concerning the basic structure of current compensation policy.\nIncluded in this area would be a review by an outside group of the work done to\ndate by the QRMC, and the use of the outside group to generate a broad base of\nnational support for reform of the Federal Wage System for blue collar workers.\n2. Efficiencies in the way we now do business. These include civilian and Reserve Forces\nmanning levels, the possibilities of further contracting out, base realignment studies,\nand the question of building ships in naval ship yards.\nGERALD\n3. Changes in current practices which will take money away from current and future personnel.\nThese will be most difficult to implement and will encounter severe opposition on the part\nFORD\nof the affected parties as well as congressional obstacles. Specific issues include a\nrenewed effort to reduce the commissary subsidy, reductions in Reserve compensation, and\nLIBRARY\na reduction in civilian average grade levels.\n4. Proposed new benefits not currently available to military personnel. Travel for junior\nenlisted personnel and new Reserve recruiting incentives are included in this area.\n25\nFurther complicating the current situation is the perception by military people that there has\nbeen an ongoing erosion of the benefits that they have been historically entitled to and the\nattitude of organized civilian employee leaders that the Administration is \"picking on\" Federal\ncivilians.\nThe changes proposed will be difficult to achieve and will require strong and personal Presidential\nleadership as well as the development of something approaching a national consensus that the changes\nare just and essential.\n26\nIssue Paper\nDepartment of Defense\n1978 Budget\nIssue # 2: The Quadrennial Review of Military Compensation\nBackground\nThe present military compensation structure is a complex mixture of direct pays, tax advantages,\npurchasing advantages and in-kind benefits. The system originated at a time when most military\npeople lived in a military environment where the employer provided food, shelter and most other\nnecessities. Over the years, the pay system was patched to meet specific problems, and today\nwe are still patching with no policy on what military pay should be and no rational way of adjusting\nmilitary pay.\nThis situation led the Congress in 1966 to direct a. comprehensive review of military compensation\nto be conducted beginning January 1, 1967 (and once each four years thereafter). The Congress also\ninstituted what was viewed at the time as a temporary link of the adjustment process wherein\nmilitary personnel pay raises are equated with those of Federal civilian employees 1/ Flaws\nin\nthis temporary mechanism resulted in military personnel receiving larger annual increases than\ncivilians for seven years. This imperfection has now been remedied. Many observers believe that\nwhile the flaws were in effect, direct military compensation shifted from a position which lagged\nFederal civilian pay to a point where it now appears to be ahead.\nThe Third Quadrennial Review of Military Compensation has been considering these issues since\nJanuary 1975. Unfortunately, it has not been able to reach a consensus on what policy changes are\nneeded in this area. Accordingly, the study group Chairman (Assistant Secretary for Manpower and\nReserve Affairs, David Taylor) has submitted to Secretary Rumsfeld for decision three key issues:\nShould military compensation levels be set and adjusted on the basis of pay for similar\nlevels of work in the private sector (a comparability principle) or should they be set\nand adjusted as needed to attract and retain the desired quality and quantity of personnel\n(a competitive principle)? Secretary Rumsfeld chose the comparability principle.\n1/ The \"Rivers amendment\"\n27\n-- Should compensation levels be based upon total compensation or upon the military equivalent\nof salary? Total compensation was tentatively approved.\n-- Should the current pay and allowances system be replaced by a salary system? The current\nsystem was retained.\nThese decisions, in turn, require a series of difficult decisions on unresolved questions,\nprimarily:\n-- What is military pay?\nWhat value should be placed on retirement? (The QRMC has not reached a consensus.)\nWhat value should be placed on medical care? (The QRMC has not reached a consensus.)\nDoes the extensive recreation system represent compensation? (The QRMC says no, but the\nGAO and many in the Congress say yes.)\n-- What should military pay be?\nCERALD\nWhat elements should be included in comparisons?\nWhere should military and civilian pay lines be linked?\nWhat is the \"military factor\" (which some say requires special compensation consideration\nfor the rigors of the military life) and should it be compensated for?\nWe understand that Assistant Secretary Taylor is in the process of obtaining Secretary Rumsfeld's\nposition on these issues and it thus may be premature to reach a final conclusion on the likely\noutcome. Nevertheless, we believe it is likely that the net effect will be almost no change in\na complex, controversial pay system that has been heavily criticized.\nThe present set of circumstances is not surprising. A series of actions have been taken (e.g.,\nthe change in the Rivers amendment and the pay raise reallocation measure) or proposed (e.g., the\n28\nretirement modernization act and elimination of the commissary subsidy) which are perceived by\nmilitary personnel as an \"erosion\" of their earned benefits. The uniformed military leadership\ninvolved in the QRMC are keenly sensitive to this situation, and, in fact, share this belief.\nThey feel deeply that this situation can lead not only to increasing pressure for unionization\nbut also to a loss of morale which would reduce the effectiveness of their Services. There has\nthus been a reluctance to come to conclusions or follow analytical paths whose inevitable con-\nclusion might worsen the situation as their members perceive it.\nOn the other hand, there are conflicting perceptions of military compensation. There are those\nnot only in the Administration but in the Congress who believe that military compensation in total\nis excessive. Others believe it is inefficient. The Defense Manpower Commission, in April, recom-\nmended conversion to a salary system. They also recommended a competitive system. Given the existence of\nthese fundamentally different views, it may be appropriate to use the forum of a distinguished outside\ngroup, whose objectivity and concern with the national interest would be unquestionable, to review the\ncomplex issue of military compensation and provide recommendations to the President. It is unlikely that\nanything less would be accepted by all concerned.\nStatement of Issue\nShould an outside group of distinguished Americans be established as a commission to review\nmilitary compensation and make recommendations to the President?\nPros.\n-- The QRMC has been in process for almost two years. For an in-house group to finally\nemerge with what may be seen as fundamentally the status quo may serve to only prolong\nthe debate on military compensation. The recommendations of a prestigious commission\nBERALD\nwould possibly avoid this.\n-- It has been impossible for those directly involved, either military or civilian, to be\nobjective about the issues. An outside group could be.\nThe issue involved is of such fundamental importance that we should not be satisfied with\na series of compromises. The military personnel appropriations are now at a level of\n$26 billion and annual pay increases add about a billion and a half each year. At the\nsame time the future success of the All-Volunteer force requires that service in the\nmilitary be as attractive to young people as opportunities in the private sector.\n29\nCons.\n-- After two years of study, there are obvious disadvantages to take the step of, what will\nbe seen as, asking for another study.\n-- The military leadership can be expected to strongly oppose such a step.\nAlternatives\n#1. Permit Secretary Rumsfeld to proceed on his current schedule which we now expect will result\nin essentially no real change in the current system (Agency req.\n#2. Establish a Presidential Commission which would review the findings of the QRMC to date\nand provide an independent recommendation to the President. (Such a panel could also be\nasked to review the Administration's proposal on blue collar pay and serve as a means of\nbuilding national support for the reform measures) (OMB rec.).\nAgency request: Alternative #1. The Department believes that the issue of military compensation has\nbeen debated too long already and that the most needed reforms have already been achieved.\nOMB recommendation: Alternative #2. The issues will not go away and only a comprehensive review by\nan outside body can provide a credible assessment of the military compensation system. The Commission\ncould use the research already done by the QRMC and thus could be expected to report in 3-6 months.\nYou could ask the Quadrennial Commission on Executive Pay under Pete Peterson to take on this\nadditional task or you could announce a new commission with appointments to be made later.\n30\nIssue Paper\nDepartment of Defense\n1978 Budget\nIssue # 3: Military and Civilian Pay Increases\nBackground\nThe Defense budget request assumes pay increases for FY 1978 and FY 1979 under current law. The\nassumptions used and the resulting costs are displayed below.\n($ in millions)\nDefense Budget Request Pay Raise Assumptions\n1978\n1979\nGeneral Schedule: 6.5% on Oct. 1, 1977 and\n6.25% on Oct. 1, 1978\n625\n1,266\nMilitary: 6.5% on Oct. 1, 1977 with a full 25%\nreallocation from basic pay to the Quarters\nAllowance and 6.25% on Oct. 1, 1978 with no\nreallocation\n1,370\n2,890\nWage Board: 8.8% in 1977, 7.9% in 1978 and\n7.0% in 1979\n553\n1,079\nTOTAL\n2,548\n5,235\nGeneral Schedule and Wage Board salaries are adjusted annually on the basis of \"comparability\" with\nsalaries paid in the private sector for similar levels of work. Changes in military pay are tied by\nstatute to changes in the General Schedule. Current law permits the President to propose an alternate\npay adjustment for General Schedule (and military) employees if he considers the \"comparability\"\nGERAL\nFORD\n31\nincrease inappropriate \"for reasons of national emergency or economic conditions affecting the\ngeneral welfare. This authority does not extend to the wage board system. The amount of the\nGeneral Schedule pay increases and the issue of an alternative plan will be covered later on a\ngovernment-wide basis.\nThis issue discussed herein concerns treatment of the Wage Board system and exercise of the\nauthority to reallocate up to 25% of the increase in military basic pay to the Quarters Allowance.\nThe Civil Service Commission plans to resubmit to the next Congress legislation to reform\nseveral features of the Federal Wage System that impede implementation of comparability. While\nthe Department of Defense strongly supports enactment of this proposal, they are reluctant to\nanticipate the savings in the budget because they estimate a low probability of congressional\nacceptance.\nFor the October 1976 military pay increase you authorized the reallocation of 25% of the basic\npay increase to the Quarters Allowance. This was done to better align the Quarters Allowance with\nthe costs of housing and to facilitate an eventual move to a Fair Market Rental system which you\napproved last year. The 1978 budget assumes a full reallocation in 1978 but none in FY 1979.\nStatement of Issue\nShould the budget assume smaller pay increases resulting from enactment of the Federal Wage\nSystem reforms and a full 25% reallocation from basic pay to the Quarters Allowance in 1979?\nPros.\n-- It may not be credible to submit wage board reform legislation without reflecting the\nsavings in the budget.\nGERAL,\nR.\nAttainment of the goal of a quarters allowance that reflects the cost of housing\nFORD\nrequires full reallocation in both years.\n32\nCons.\n-- If the wage board reform legislation is not enacted, Defense may have to absorbe the\nadditional costs.\n-- Military people who are nearing retirement object to the reallocation because it has the\neffect of reducing their retired pay.\nAlternatives\n#1. Assume wage board salary increases consistent with current law and assume no reallocation\nin FY 1979 (Agency req.).\n#2. Assume enactment of the wage board reform legislation and full reallocation in both years\n(OMB rec.).\nAgency Request\n($ in millions)\nDepartment of Defense\n(Difference from Alt. #1 (Agency Request)\n1978 Outlays\n1979 Outlays)\nAlt. #2 (OMB rec.)\n-337\n-971\n)\nAgency request: Alternative #1. While Defense strongly supports the wage board reform, they believe\nit has little chance of passage and they are reluctant to anticipate the savings in the budget. In\nreallocation, they prefer a slower approach to the same goal.\nOMB recommendation: Alternative #2. Failure to anticipate 1978 enactment of the proposed Federal\nWage System reforms in the budget estimates will severely dim prospects for enactment.\nGERAL\n3403\n33\nIssue Paper\nDepartment of Defense\n1978 Budget\nIssue #4: Agency Budgeting for Federal Employee Retirement Programs\nBackground\nSecretary Rumsfeld recommended that the current military retired pay appropriation be shifted\nto the income security function in the FY 1978 budget, excluding all funding for the military retire-\nment program from the DOD budget. In the Spring Planning Review, we proposed a similar shift of\nthose specific costs associated with past or current military retirees and their survivors. However,\nour recommendation would also budget the accrued retirement costs associated with the current active\nduty force in the Defense military function. In addition, we proposed that accrual estimates for all\nFederal employee retirement systems reflect \"dynamic\" assumptions that anticipate future salary\nincreases, CPI adjustments, and applicable interest rates. Mr. Rumsfeld supports the OMB position\nas a long-term goal but does not feel that the functional transfer should be delayed pending imple-\nmentation of full accrual budgeting.\nA draft report on the CSC evaluation of the present financing of the Civil Service Retirement\nSystem was submitted on October 15, 1976, without specific recommendations on financing and\nbudgeting for Federal employee retirement programs. Their evaluation has focused on the cash flow\nmanagement aspects of the trust fund rather than the personnel management impacts of accruing full\nretirement liabilities. One of the alternatives developed in that report reflects the OMB staff\nposition on this issue. The Civil Service Commission would recommend that this issue be deferred\nuntil after their report has been finalized and thoroughly reviewed.\nStatement of Issue\nShould agency budgets for military and civilian retirement programs reflect the full accrual cost\nof their current workforce?\n34\nPros.\n-- Provides timely and appropriate incentives for efficient manpower, personnel and compensa-\ntion decisions both within the Executive Branch and in the Congress\nby linking the cost of retirement benefits to the decisions from which such costs\naccrue, and\nby taking account of anticipated benefit increases due to wage and price inflation.\n-- More accurately reflects the cost of defense spending relative to non-defense spending in\nthe Federal budget.\n-- Reduces defense budget authority and outlays by $2 billion in 1979, although this is both\nlater and less than the $9 billion 1978 reduction resulting from the Defense proposal.\nCons.\n-- Projected 1979 total budget authority would increase by $13 billion although total outlays\nwould remain unchanged.\n-- Calculating accrual costs is both complex and difficult to check. Small changes in\neconomic assumptions or continuation patterns introduce billion-dollar changes in\naccrual levels.\n-- The management objectives sought by full accrual advocates can be achieved without\nreflecting such costs in our budgeting system. It may be sufficient simply to include\ndeferred costs as part of the justification for off-budget management and policy\ndecisions.\nAlternatives\n#1. Retain the current budget structure.\nGERALS\nFOR\n35\n#2. Shift the cost of the Military Retired Pay Appropriation to the income security function in\n1978 (Agency req.).\n#3.\nIn the 1979 budget combine the proposed functional shift of the Military Retired Pay Appro-\npriation with the introduction of full accrual budgeting for both military and civilian\nretirement programs (OMB rec.).\nAnalysis\n1976\n1977\n1978\n1979\n1980\n1981\n1982\nBudget Authority/Outlays\nBA\no\nBA\no\nBA\no\nBA\no\nBA\no\nBA\n0\nBA\no\n($ Billions)\nDept. of Defense\nAlt. #1\n8\n8\n9\n9\n10\n10\n11\n11\n12\n12\n13\n13\n14\n14\nAlt. #2 (Agency req.)\n8\n8\n9\n9\n1\n1\n1\n1\n1\n1\n1\n1\n1\n1\nAlt. #3 (OMB rec.)\n8\n8\n9\n9\n10\n10\n9\n9\n9\n9\n10\n10\n10\n10\nAll Agencies\nAlt. #1\n10\n16\n11\n18\n12\n20\n13\n22\n14\n24\n15\n26\n16\n28\nAlt. #2\n10\n16\n11\n18\n12\n20\n13\n22\n14\n24\n15\n26\n16\n28\nAlt. #3 (OMB rec.)\n10\n16\n11\n18\n12\n20\n26\n22\n28\n24\n30\n26\n32\n28\nSecretary Rumsfeld is seeking implementation of his proposal in the 1978 Budget. The OMB recom-\nmendation would be implemented in the 1979 Budget with the President announcing his intention to do\nso in the 1978 Budget Message. Additional time is required to seek agency agreement on costing\nmethodologies and procedures.\nAgency request:\nAlternative #2. The Secretary of Defense supports the OMB staff proposal as a\nlong-term goal. In his view, however, it is important that we not \"muddy the water\" and endanger\nhis immediate FY 1978 objective by pushing for short-term implementation of full accrual budgeting.\nThe Defense alternative will minimize the \"apparent\" size of the Defense budget and possibly secure\nadditional resources to purchase other defense materials and services. Mr. Rumsfeld indicates that\nthere is strong support for his proposal in Congress.\nGERAL\nR.FORD\nFORD\n36\nOMB recommendation: Alternative #3. The OMB alternative seeks to improve the legislative and\nmanagement processes, by relating future retirement payments to the policies and decisions that\ngive rise to the liability for them. The agency request completely frustrates this cost management\nobjective by removing DOD's incentive to limit annuity increases for current military retirees\nwithout substituting any incentive to manage the cost of their future retirees. It actually\nprovides Defense with a perverse incentive to initiate manpower, personnel, and compensation actions\nthat shift costs from military pay to retired pay appropriations in order to reduce the DOD cost\nof internal decisions. The Defense proposal would also result in serious undercosting of the\nDefense budget relative to other agency budgets which include a partial retirement accrual for\nall their employees.\nWith respect to Mr. Rumsfeld's expressed reluctance to \"muddy the water\" in Congress by pressing\nfor early implementation of the OMB recommendation (which he supports as a long-term goal), it\nshould be pointed out that a $9 billion-dollar reduction in the FY 1978 Defense budget, followed\none year later by an $8 billion increase as full accrual budgeting is implemented, will be much\nmore difficult to explain and justify than a single $2 billion reduction in 1979 that results from\nsimultaneous introduction of both actions. Furthermore, approval of his short-term proposal may\nsubstantially dim legislative prospects for his professed long-term objective. While there is\nsupport for the Secretary's proposal in some parts of the Congress, past inquiries on this question\nhave revealed strong opposition to the idea by the Chairman of the House Appropriations Committee.\nGERAL\nR.\nFORD\n37\nIssue Paper\nDepartment of Defense\n1978 Budget\nIssue # 5: Commissary Subsidy\nBackground\nThe Defense commissary system was initiated to meet the needs of military personnel stationed at\nremote locations and evolved into an economic benefit to offset formerly low military salaries.\nToday military salaries are competitive with civilian salaries, but the subsidy remains unchanged.\nIn the 1976 review, the President determined to phase out the subsidy over two years and in the\n1977 review the President proposed to reduce the subsidy over three years. In each instance the\nHouse restored the funds while the Senate was willing to accept the reductions proposed (although\nin the 1977 bill, the Senate proposed a six-year phase out in lieu of the Administration's three-\nyear proposal). In 1976 and in 1977, the conference committee restored most of the funds deleted.\nThe Congress did accept savings in the subsidy which resulted from management improvements rather\nthan the imposition of a surcharge. The subsidy, which totals $340 million, pays the salaries and\nexpenses of the 24,600 civilian and military personnel engaged in commissary operations.\nStatement of Issue\nShould the full costs of operating the military commissaries be passed on to the consumer by\neither ending the direct subsidy or adjusting future military pay increases to account for the\nvalue of commissary benefits?\nPros.\nRAL\nToday's military salaries and retiree programs and the ready availability of alternative\n(although somewhat more expensive) markets make the commissary system and, in particular,\nthe direct Government subsidy to the commissary system archaic.\nMilitary salaries are at least competitive, or more than competitive, with civilian\nsalaries.\n38\nThe military retirement system provides benefits far in excess of the average private\npension plan. Military retired pay, unlike most civilian sector retirement plans, is\nautomatically adjusted, based on the consumer price index, to insure that the retiree\nsuffers no loss in purchasing power through cost-of-living increases. These cost-of-\nliving increases have in the past been even greater than the increase in the CPI\nbecause of the 1% \"kicker.\"\n-- Discounting the amount of future military pay increases until the value of the subsidy\nis fully recovered, as proposed in Alternative #3, would follow the general principle\nof valuing total compensation--including fringe benefits--when setting military and\ncivilian salaries.\nCons.\n-- The commissary program is politically popular.\nPrivate sector service-oriented publications have publicized the proposal and urged\ntheir readers to protest to the Congress and the Executive Branch. A large volume\nof protest mail, particularly from retired personnel, can be expected.\nThis recommendation requires legislation to either end the direct subsidy or to allow\ndifferentiation between the civilian and military pay increases.\nThe reduction in compensation proposed in Alternative #3 will be clearly delineated\neach time that there is a pay increase, while the proposal is being implemented,\nthereby increasing the proposal's unpopularity.\nThe QRMC has included the commissary subsidy as part of the unquantified compensation\nnecessary to offset the \"military factor. If\nAlternatives\nGERAL\nContinue the subsidy on the basis that favorable congressional action is unlikely (Agency req.).\n39\n#2.\nTerminate the existing subsidy over a three-year period beginning on October 1, 1977, and\nsubmit legislation in January to implement this change (OMB rec.).\n#3.\nContinue the direct subsidy but limit the amount of future military pay increases over the\nnext two years until the value of the commissary to military personnel is fully discounted\nin military salaries.\nAnalysis\n1976\n1977\n1978\n1979\n1980\n1981\n1982\nBudget Authority/Outlays\nBA\n0\nBA\n0\nBA\n0\nBA\no\nBA\no\nBA\no\nBA\no\n($ Millions)\nAlt. #1 (Agency req.)\n310\n310\n320\n320\n340\n340\n340\n340\n340\n340\n340\n340\n340\n340\nAlt. #2\n(OMB rec.)\n310\n310\n320\n320\n225\n225\n110\n110\nAlt. #3\n310\n310\n320\n320\n90\n90\nAgency Request\n(Difference from Alt. #1 (Agency request)\n1978 Outlays\n1979 Outlays)\nAlt. #3\n-250\n-340\n)\n(\nAlt. #2 (OMB rec.)\n-115\n-230\n)\nAgency request: Alternative #1. Retain the subsidy on the basis that Congress will not allow the\nsubsidy to be ended.\nOMB Recommendation: Alternative #2. Reiterate the decision of the last two years to phase out the\ncommissary subsidy over a three-year period.\nFORD\n40\nIssue Paper\nDepartment of Defense\n1978 Budget\nIssue # 6: Junior Enlisted Travel Entitlements\nBackground\nJunior enlisted personnel stationed in CONUS or overseas, even if accompanied by their dependents,\nare not eligible for travel and transportation allowances for these dependents. They are also\nineligible for station allowances (cost of living, housing and temporary lodging) at rates other-\nwise allowable for those with dependents. Since 1975 DOD has attempted, unsuccessfully, to change\nthis policy to include funds in the budget for this purpose. In 1975 they were deleted by Congress;\nin 1976 they were deleted by the Secretary of Defense after discussion with the President; and in\n1977 they were deleted by the President.\nStatement of Issue\nShould existing entitlements for dependent travel and transportation allowances be extended to\njunior enlisted military personnel?\nPros.\n-- It would alleviate a definite financial burden imposed on the lowest-paid members of the\narmed forces.\n-- It would reduce family separations which should improve service morale and which may\nresult in improvements in the attrition and re-enlistment rates.\nCRAL\n-- It would permit junior enlisted personnel to be treated the same as higher ranking\nFORD\nmembers of the armed forces.\n41\nCons.\n-- It would result in significantly more dependents overseas, thus, aggravating current\ninadequate housing problems and contributing to additional government cost for hospitals,\npost exchanges and commissaries.\n-- The present policy applies primarily to enlisted personnel during their first enlistment\nas most have been promoted to E-4 by the time they re-enlist which makes them and their\ndependents eligible for travel entitlements. Providing these entitlements to first-termers\nmay remove an inducement for a junior enlisted member to re-enlist since he will enjoy\nfull benefits before he completes his first year.\n-- Although equity is the primary basis for extending the travel entitlements to junior\nenlisteds, the Congress indicated in its rejection of the 1975 proposal that equity alone\nshould not be the basis for extension of the entitlement. The entire military pay\nstructure is based on different allowances for individuals of different rank and officer/\nenlisted status.\nAlthough it would probably result in longer overseas tours for many junior enlisted service-\nGETTIE\nmembers, the cost of extending the entitlements would not nearly be offset by longer tour\nlengths. In FY 1976, when this issue was proposed, the Army estimated the maximum savings\nfrom this proposal including reduced travel, longer tours, leave and fewer hardship\nreassignments at $5 million.\nAlternatives\n#1. Extend travel and transportation allowances to junior enlisted personnel (Agency req.).\n#2. Retain the current policy of providing travel and transportation allowances only to senior\nenlisted personnel who are primarily careerists (OMB rec.).\nAnalysis\n1976\n1977\n1978\n1979\n1980\n1981\n1982\nBudget Authority/Outlays\nBA\n0\nBA\n0\nBA\no\nBA\no\nBA\no\nBA\n0\nBA\no\n($ Millions)\nAlt. #1 (Agency req.)\n189\n189\n189\n189\n189\n189\n189\n189\n189\n189\nAlt. #2 (OMB rec.)\n42\nAgency Request\nDifference from Alt. #1 (Agency request)\n1978 Outlays 1979 Outlays)\n(\nAlt. #2 (OMB rec.)\n)\n-189\n-189\n)\nAgency request: Alternative #1. The Department believes that extending the entitlement to junior\nenlisted personnel should be just the cost of doing business which is equitable and which would\nalleviate the financial burden on many service personnel and which may encourage re-enlistments.\nOMB recommendation: Alternative #2. The Department has no evidence that extension of this\nentitlement to junior enlisted personnel would have any significant positive impact on re-enlistment\nas most service members qualify for the entitlement when they are eligible to re-enlist.\n43\nIssue Paper\nDepartment of Defense\n1978 Budget\nIssue # 7: DOD recruiting Costs\nBackground\nSince the advent of the All-Volunteer Force (AVF) the cost of military recruiting has increased\ndramatically. Much of this increase results from the fact that, unlike the draft era, the military\nservices must now compete directly with the civilian labor market for young males. This has\nresulted in new and improved bonuses for enlistments and re-enlistments and sophisticated marketing\ntechniques, including a greatly expanded recruiter force, paid advertising and a great deal more\nmanagement of the total military recruiting effort throughout DOD. Prior to the AVF, the re-\ncruiter was, to a great extent, simply \"an order taker.\" He is now a carefully selected and highly\ntrained service member who faces a real challenge to continually obtain the quality and quantity\nof people demanded of him by his military service.\nThe military services have concluded that the recruiter and their other recruiting resources\nshould especially be directed at obtaining male high school diploma graduates, as opposed to\nnon-high school or high school equivalency certificate (GED) graduates. DOD believes that high\nschool graduates are much more likely to complete their enlistments and pose significantly fewer\ndiscipline problems. The services would prefer all of their male recruits to be high school\ngraduates, but supply and demand factors make this impossible. All services require that their\nfemale recruits be high school graduates.\nEach year, since the beginning of the AVF, the percentage of high school graduates entering the\narmed forces has increased.\nPercentage of Recruits Who are High School Graduates\nFY 1964\nFY 1974\nFY 1975\nFY 1976\n68\n66\n72\n75\n44\nThe Department's success in improving \"quality\" can be attributed in part to its vigorous\nrecruiting and advertising programs and its ability to pay enlistment bonuses up to $2,500 to\nhigh school graduates who agree to enter shortage skills. However, some of their success must\nalso be attributed to poor economic conditions and the lack of employment alternatives for young\nmen and women in the private labor market.\nWhile all the services completed FY 1976 with improvements over FY 1975, the Army was displeased\nwith its performance. Army had established a FY 1976 high school graduate enlistment objective of\n65%. During the first half of FY 1976, it was able to recruit 65%. However, in the latter half of\nthe fiscal year, a downward trend in quality developed, and Army ended the year with only a slight\nimprovement over FY 1975. If Army's first half FY 1976 performance had continued, DOD's overall\nrate in FY 1976 would have been 79% rather than 75%.\nArmy attributes the downward trend in the last half of FY 1976 to reduced recruiting resources.\nIn FY 1976 alone, the Congress reduced its recruiting budget by 13 percent and in the FY 1977\nPresident's Budget, funds for the enlistment bonus were significantly reduced - from $73 million\nin FY 1976 to $29 million in FY 1977.\nAs a result of the Army's problems in the second half of FY 1976, $79 million in additional re-\nsources have been proposed for reprogramming in FY 1977, including additional funds for enlistment\nbonuses. All of the other services, however, met or exceeded their FY 1976 high school graduate\nenlistment goals.\nTo halt what Army considers as a continuing downward trend in high school enlistments, it proposes\nto increase FY 1978 funding by $41 million from a proposed $276 million in FY 1977 to $317 million\nin FY 1978.\nHowever, the Air Force and Marines, as well as the Army Reserves, are also programming higher\nlevels of high school graduate enlistments. Both active and Reserve forces are requesting greater\nrecruiting resources in FY 1978, including the Air Force, which historically has enjoyed nearly\n100% high school graduate enlistments. Air Force complains that the increased recruiting resources\nprovided to the other services is adversely affecting their capability to attract quality recruits.\nGERAL\nFORD\n45\nAnd, if additional recruiting resources are provided to Air Force and Navy, Army's problems grow\nas today's youth prefer these two services over the Army.\nAlthough there are other sources for \"quality\" recruits, such as college drop-outs and prior\nservice personnel, DOD's recruiting efforts and resources are primarily concentrated on the Nation's\nhigh school seniors, as this group generally is much easier to contact.\nThe stated requirements of the military services for male high school graduates are compared\nwith the anticipated supply on the following table.\nMale High School Graduate Enlistments Required\nFY 1976\nFY 1977\nFY 1978\nActive Forces\n246,350\n262,996\n266,920\nReserve Forces\n42,846\n61,960\n68,575\nTOTAL\n289,206\n323,956\n335,495\nHigh School Graduate (HSG) Market*\nFY 1976\nFY 1977\nFY 1978\nAnticipated No. of Males\n1,543,000\n1,541,000\n1,547,000\nGERAL\nNo. Entering College\n717,000\n718,000\n726,000\nNever enter labor market\n60,000\n60,000\n60,000\nFORI\nAvailable: HSG Market\n766,000\n763,000\n761,000\n% Required by Active Forces\n30.2\n32.5\n33.1\n% Required by Reserve Forces\n5.6\n8.1\n9.0\nTotal % Required by DOD\n35.8\n40.5\n42.1\n*\nSource: Census Bureau and BLS data.\nStatement of Issue\nShould the military services quest for high school graduates be constrained and can more efficient\nuse be made of recruiting resources by lowering the amount of interservice competition?\n46\nPros.\n-- It would permit manpower resources currently utilized for recruiting to be applied to\nother military efforts.\n-- It would require that the military services aggressively examine measures to reduce first-term\nattrition (currently over 35%) other than by recruiting more high school graduates. This could\nmean further expansion in the enlistment of women and major changes to recruit training.\n-- DOD's FY 1977 and FY 1978 requirement for male high school graduate enlistments appears\nexcessive and probably unrealistic unless this group of Americans continue to experience\nhigh unemployment.\n-- The quest for quality recruits results in expensive competition between the services.\nThe military services, especially the Army, have not made maximum use of prior service\npersonnel who wish to return to military life. These people, to a great extent, have\nmade the adjustment to military living and 80% are high school graduates.\n-- We don't know what number of high school graduates are needed. We should review the\noverall need and identify places where others can be used.\nCons.\n-- If the military services recruit lower quality enlistees, DOD will incur significantly\nhigher training and manpower cost due to increased attrition. A FY 1975 Army study of\naccessions showed that 1,200 non-high school graduates had to be recruited to perform\nthe same useful service as 1,000 diploma holders. Army has estimated that the present\nlevel of quality results in cost avoidances of up to $133 million per year.\n-- Policy changes which would support lesser quality recruits could lead to serious questions\nabout the viability of the all-volunteer armed force.\nGERAL\n47\n--- Much of the personnel disturbances experienced by the services during the late 1960's\nand early 1970's have been blamed on lower quality first-termers. To endorse a return\nto lower quality recruits may signal a return of these problems.\nIf the services are required to enlist more prior-service personnel, then additional\nmanpower costs, especially with respect to retirement, will be incurred in the outyears,\nas prior-service personnel tend to remain on to retirement in much greater numbers than\nrecent high school graduate enlistees.\nAlternatives\n#1. Approve the Department of Defense request which provides for additional recruiting resources\nfor both active and reserve forces (Agency req.).\n#2.\nMaintain recruiting resources at the FY 1977 level and direct DOD to conduct a study of\nmilitary recruiting. This study would examine the implications as well as the feasibility\nof continuously accessing more and more high school males. It would also study methods\nof reducing attrition such as possible modifications to recruit training programs. And\nit would examine alternatives to male high school graduate enlistments such as recruiting\nGERAL\nmore women and prior service personnel.\nR.\nIn view of the major increases already planned in 1977, approve no more than one-half the\nincreased resources requested for 1978 and direct the Department to conduct the study\nproposed in Alternative #2. The distribution of the increase should assure that a competitive\nbalance exists among the services in the recruiting effort (OMB rec.).\nAnalysis\n1976\n1977\n1978\n1979-1982\nBudget Authority/Outlays\nBA\n0\nBA\n0\nBA\no\nBA\n0\n($ Millions)\nDOD recruiting Costs:\nAlt. #1 (Agency req.)\n486\n486\n595\n595\n720\n720\n720\n720\nAlt. #2\n486\n486\n595\n595\n595\n595\n595\n595\nAlt. #3 (OMB rec.)\n486\n486\n595\n595\n645\n645\n645\n645\n48\nAgency Request\n(Difference from Alt. #1 (Agency Request)\n1978 Outlays 1979 Outlays)\nAlt. #2\n-125\n-125\n)\nAlt. #3 (OMB rec.)\n-75\n-75\n)\nAgency Request: Alternative #1. The military services have made tremendous strides in achieving an\nacceptable level of quality recruits each year. They should be commended and encouraged to improve\npast performances. To do otherwise, could undermine the very idea of an all-volunteer force.\nOMB recommendation: Alternative #3. Present quality recruiting plans, when viewed individually,\nappear to be acceptable in most cases. However, when examined collectively, they make large\ndemands on the young male population. Further, while the services are enjoying improved quality\neach year, they still experience a high level of recruit attrition. A study of military recruiting,\nincluding a review of methods to reduce the present level of recruit attrition should be initiated.\nFurther alternatives to the present service recruitment plans should be explored, such as accessing\nmore prior service personnel and resources. This review should particularly assure that no one\nservice is permitted to maintain a significant competitive advantage over any other.\nGERAL\n49\nIssue Paper\nDepartment of Defense\n1978 Budget\nIssue #8 : Average Grade Controls\nBackground\nThe average grade of Federal civilian workers under the General Schedule has risen from 7.458 in 1964\nto 7.852 in 1974 and is currently reported at 7.997. Much of this increase is generally attributed to\ntechnological changes which have forced a change in the make-up of the Federal workforce, thus in-\ncreasing the proportion of high level technical, professional, and managerial employees. However, it\nhas long been recognized that not all of this average grade increase can be attributed to occupational\nor structural shifts and that some portion is attributable to unwarranted grade inflation. This\nprompted OMB to direct a Government-wide exercise in 1972-73 designed to arrest the trend of average\ngrade increases. Estimates vary widely as to the portion of average grade increase that is un-\nexplained by structural change. These estimates depend upon methodology, but the amount appears to\nbe significant. It should be emphasized that all \"unexplained\" increases are not necessarily un-\njustifiable increases.\nIncluded in the ongoing Presidential Management Initiatives is a year-long position and classi-\nfication management objective (announced by a Presidential directive of May 27, 1976) which requires\nFederal agencies to re-examine their internal position management systems and take appropriate\ncorrective action to restrain grade escalation. This initiative deliberately avoided setting grade\nreduction targets and instead requires individual agencies to implement the program under CSC guide-\nlines and monitoring. CSC has begun a vigorous attack on the problem. Among other steps, CSC recently\nhas identified statistically significant average grade changes occurring since May 1973 in twenty\noccupational series involving eight different agencies. These agencies are being given until next\nmonth to explain such changes. In cases which are not explained satisfactorily (by changes in series\nstandards, classification appeals, etc.) CSC will direct position audits and ultimate corrective action\nwhere warranted. The question has been raised whether corrective agency action and compliance would\nbe strengthened by projected budget reductions.\nStatement of Issue\nShould the anticipated results of this year's highly selective average grade reduction program be\nreflected in the 1978 budget by budgeting for a 1% reduction in the Government-wide average grade?\n50\nPros.\n-- Could provide a stronger incentive for agencies to develop effective position management\nand evaluation systems.\n-- Could reduce competitive hiring disadvantages that the Federal Government may be imposing\non the private sector.\n-- Could improve internal equity among Federal classified workers by ensuring that pay\ndistinctions reflect work distinctions.\nCons.\n-- Could open OMB to repeated union charges that we have directed downgradings to save money\nregardless of case merits.\n-- Could suggest that agencies which do a conscientious job of position management will be\nrewarded by having their budgets reduced.\n-- Could induce perverse management actions which increase total program costs while\nreducing average grade, such as hiring of lower graded temporary personnel to drive\ndown the average grade.\n-- Could create recruiting, retention, and morale problems (unless appropriate compensation\nadjustments are implemented).\nAlternatives\n#1. Retain the current plan without budgeting for anticipated average grade reduction (Agency req.).\n#2. Budget for a reduction of 1% in the General Schedule average grade (OMB rec.).\n51\nAnalysis\nRequest\n($ Millions)\n(Difference from Alt. #1\n1978 Outlays 1979 Outlays)\n(\nAlt. #2 (OMB rec.) - Total Government\n-18\n-95\n)\n(\n- DOD\n-7\n-38\n)\nOMB has recently completed a preliminary analysis on the causes of changes in average grade and\nthe cost implications of these changes. While this research has relied on several different data\nsources and 22 highly aggregated job families, the conclusions derived are likely to be supported\nby analysis of strictly comparable data bases and full review of all 422 classified occupational\nseries. Its major conclusions are outlined below:\n-- Average grade for General Schedule employees increased 7% between 1964 and 1976.\n-- A substantial portion of the average grade increase is due to non-structural changes.\n-- Grade inflation in the occupations reviewed is most prevalent in\nWashington, D. C.\nHigh wage areas (Detroit, San Francisco, etc.)\nHigh grades (GS 12-15)\nCertain occupational groups (Clerical, Engineering, and Medical)\nCertain agencies (Agriculture, SBA, NSF, GSA, FTC, etc.)\n-- The proportion of higher graded positions in most of the occupations reviewed is higher than\nin the same private sector occupations.\n52\n-- Overgrading is primarily the result of\nManagement distortion of position descriptions\nManagement influence on classifier judgment\nLack of classifier expertise\nThe design of any solution to the grade escalation problem must consider the incentive structure\nfacing each manager. The manager who allows positions to be classified higher than permitted by\nCSC standards may obtain a recruiting and retention advantage over other managers. With this\nadvantage he may have a better chance of mission accomplishment, for which he is rewarded. He will\nnot necessarily be penalized for overgrading his people, nor rewarded for strictly holding grades\nto classification limits.\nThe OMB recommendation would establish a continuing OMB/CSC task force to reconcile differences in\nand refine various preliminary research efforts, in order to identify those specific agencies,\noccupational groups, grade levels, and geographic locations where grade reduction targets should be im-\nposed on an agency or where an agency's classification authority should be revoked, modified, or\ncentralized. These selective efforts will be designed to achieve a 1% reduction in projected\naverage grade by the end of FY 1978. Full outlay savings of approximately $219 million are not\nachieved until FY 1981. Projected savings will be reflected in the pay raise contingency in the 1978\nbudget pending allocation of specific targets to selected agencies and appropriations.\nAgency request and CSC recommendation; Alternative #1. Continue and conclude the year-long,\nPresidentially-directed re-examination of internal agency classification systems and positions\nbefore projecting and budgeting for specific agency average grade reductions. Special CSC and\nagency actions under this initiative should be completed before further OMB action in this area.\n53\nOMB Recommendation: Alternative #2. CSC oversight of the agencies' classification responsibilities,\nand initiatives such as the PMIs, may not be sufficient to overcome the strong incentives facing some\nagencies and managers to overgrade portions of their work force. Effects of selective controls\nshould be anticipated in the budget to help ensure results. The program must be coordinated across\nFederal agency lines, since any unilateral constraint on the civilian grade structure within DOD\ncould disadvantage Defense activities in recruiting and retaining personnel.\nGERAL,\nR,\nFORD\n54\nIssue Paper\nDepartment of Defense\n1978 Budget\nIssue #9:\nCivilian Employment Levels\nBackground\nFor the past several years, Defense civilian employment has declined at a rate of 1% to 3% per\nyear. The decreases have been directed by the Administration or Congress and have been absorbed\nthrough increased productivity, including the closing of unneeded facilities. In the employment\nplan approved in last year's budget, Defense would have reduced employment by 25 thousand from\n967,000 at the end of September 1976 to 942,000 at September 1977. While Defense will begin\nFY 1977 at 957,000, there is great resistance by the military departments, particularly Army, to\naccomplishing the remaining planned reduction of 15,000.\nThe following table displays the total employment reflected in the Service budget submissions\nas compared with past history.\n(In Thousands)\nFY 1967\nFY 1971\nFY 1975\nFY 19TQ\nFY 1977\nFY 1978\nFY 1979\nTotal\n1,306\n1,094\n989\n957\n955\n970\n973\nThe FY 1977 request is an increase of 13 thousand over the current ceiling. Three thousand of\nthe increase is offset by a decrease of 3 thousand in planned indirect hire foreign national\nemployment and reflects the fact-of-life utilization of dependents in Germany to so some of the\njobs previously filled by local nationals. The primary justification advanced for the balance of\nthis increase is an alleged inability to accomplish the planned base closure actions contemplated\nin last year's budget. We expect that the Joint review will approve about half the requested\nincrease and FY 1977 will end at 950 thousand. For FY 1978 we expect the Joint review to produce\nGERALD\nR.\n55\na \"requirement\" of 960 thousand from which the Secretary will assume that productivity improvements\nof 1-1/2% can be achieved resulting in a civilian employment level of 945 thousand in 1978 and 1979.\nThis is only a slight decrease from the revised 1977 level.\nStatement of Issue\nShould further reductions be planned in Defense civilian employment?\nPros.\n-- The employment planned in the Defense request may be inconsistent with a balanced budget\nin 1979.\n-- The planned savings in FY 1977 should be accomplished because the existing base structure\nis extremely inefficient resulting in much larger than needed overhead costs.\n-- The Presidential Management Initiatives include a plan for achieving productivity\nimprovements of 2% annually and these should be reflected in the budget.\nCons.\n-- It may be unrealistic to expect productivity savings of 2% from the FY 1977 base in that\nworkload in Defense in-house industrial activities is increasing and the overall growth\nin Defense purchases should have some impact on civilian manpower requirements.\n-- Productivity savings as they occur should be used to meet added requirements. Defense\nemployment has been decreasing for several years while employment in other Government\nagencies has been increasing.\n--\nThere has been significant Congressional pressure against closing bases particularly\nduring a period of high unemployment, and no additional base closures or reductions\nare being proposed in this budget review.\n56\nAlternatives\n#1. Approve the expected result of the joint review which would provide an employment program\nof about 950 thousand in FY 1977 decreasing slightly to 945 thousand in FY 1978 (Agency req.).\n#2. Retain the current plan for FY 1977 and require a productivity increase of 1% in FY 1978\nand FY 1979 (OMB rec.).\n#3. Retain the current plan for FY 1977 and require a productivity increase of 2% in FY 1978\nand FY 1979.\nThe employment which would be provided by the alternatives is displayed on the following table:\nTotal Employment (in thousands)\nFY 1977\nFY 1978\nFY 1979\nAlternative #1\n950\n945\n945\nAlternative #2\n942\n933\n923\nAlternative #3\n942\n923\n905\nAnalysis\nThe Presidential Management Initiative on productivity improvement has resulted in a concerted\neffort to improve and extend productivity measurements. Throughout the Government a goal of 2%\nannual improvement has been set and several agencies have set targets well in e xcess of 2%. DOD\nhas established a productivity increase goal of at least 2% for each measured activity. They would\nclaim that any savings are reflected in meeting of additional requirements.\nAgency Request\n(Difference from Alt. #1 (Agency Request)\n1978 Outlays\n1979 Outlays)\n(\nAlt. #2 (OMB rec.)\n-90\n-220\n)\n(\nAlt. #3\n-175\n-530\n)\n57\nAgency request: Alternative #1. The Department believes that its request reflects the minimum\nemployment needed to accomplish the funded workload and that appropriate productivity savings have\nbeen reflected. In the absence of base closures and reductions or other program reductions, it\nis not reasonable to anticipate further employment reductions.\nOMB recommendation: Alternative #2. Given overall government productivity improvement goals of\n2%, it is not unreasonable to require Defense to achieve an overall average of 1%.\nGERAL\nR.\n58\nIssue Paper\nDepartment of Defense\n1978 Budget\nIssue #10: Guard and Reserve Manpower\nBackground\nReserve and Guard manpower projections indicate the beginning of a recovery from the downward\ntrends that began with the elimination of draft motivated enlistments. Reflected in authorized\nand requested strength levels is recognition of the current inability of Reserve forces to meet\na paid drill objective of approximately 940,000 against a stated full wartime structure allowance\nof about 1 million men.\n1976\n1977\n1978\n1979\nPaid Drill Strength (000)\nManning authorization\n/\n904\n878\n902\n906\nService request\n823\n862\n899\n906\n(Latest actual-Sept. 1976)\n(826)\nThe administration's 1977 budget initiatives for utilization of lower training categories\nconsistent with proficiency and mobilization needs, including legislative authority required to\npermit this latitude for National Guard units, were rejected by the Congress. Consequently, the\nmanpower programs continue to be based almost exclusively on utilization of the most intensive and\ncostly training category requiring 48 four-hour training periods and two weeks of active duty\ntraining annually.\n1/ 1976-77, Congressional Floor; 1978-1979, DOD paid drill authorization.\n59\nStatement of Issue\nShould Reserve manpower programs provide for more gradual recovery of manning levels than\nrequested by the Services and greater utilization of available training categories consistent\nwith unit/individual proficiency and mobilization needs?\nPros.\n-- Attainment of the requested strengths is highly questionable based on trends.\n-- Overoptimistic strength goals can result in quality deterioration, diversion from\nmission training and excessive utilization of recruiting and retention resources.\n-- Recognition of different deployment criteria and varying skill and proficiency levels,\nprovides an opportunity for more meaningful and efficient training.\nCons.\n-- Lack of full support for service efforts to meet Reserve manning authorizations and\nprovide maximum training opportunity casts doubts on the sincerity of stated reliance\non the Reserves in any future conflict.\n-- Utilization of less intensive training options is considered counterproductive to\nrecruiting and retention efforts due to reduced income opportunity.\nAlternatives\n#1. Approve the funding requested to reach and train programmed manning levels (Agency req.).\n#2. Provide for a more gradual recovery of manning levels and more efficient utilization of\navailable training options (OMB rec.).\nBERALD\n60\nAnalysis\nManning levels. Notwithstanding intensive recruiting and retention efforts, the Reserve Components\nare consistently overoptimistic in their strength programs. In addition, to the extent that a\nsudden surge in strength does occur in any one year, the likelihood of large losses and associated\nshort-term recruiting problems in the out-years is greatly increased. A more realistic projection of\ngain and loss estimates indicates that funding for a manning level approximately 21,000 less than\nrequested by the Reserve Components would be reasonable and save approximately $30 million in 1978.\nTraining Frequency. Last year's budget initiative to transfer significant numbers of Guard and\nReserve personnel to lower training categories consistent with mobilization deployment and skill\nlevel requirements was rejected by the Congress. In rejecting the initiative to shift 40,000 Naval\nReservists to a lower category, the Congress called for a Naval Reserve mission study, to be completed\nby February 1, 1977, to identify specific new missions for better utilization of authorized strength.\nAnalytical effort within OSD and Navy is being accelerated so that the Secretary can determine the\nappropriate strength level for the 1978 budget.\nWhile it is premature to address overall Naval Reserve paid strength levels, available program\ndata indicates the potential for significant personnel cost savings through better management of\ntraining frequency for all Reserve Components. After consideration of unit skill requirements, the\nneed for unit integrity and deployment criteria, a distribution of units and personnel by training\ncategory can be developed which is considered more appropriate and consistent with training require-\nments than the service request that places 98% of drilling reservists in the most intensive training\ncategory. We estimate that approximately 30% of all drilling unit personnel could potentially\nmaintain required proficiency at lower than currently programmed training frequencies, including\nover 40% of the Naval Reserve due to its heavy emphasis on augmentee personnel. Such a plan,\nwhich would require resubmission of legislation with respect to the National Guard, could result\nin ultimate reduced funding requirements of $125 million. Phasing of the redistribution over a\nfive-year period would allow evaluation and adjustment during implementation and enhance the chance\nof acceptance by the Congress. The strongest administration support will be required to obtain\nDefense as well as congressional approval to proceed in this direction.\n61\nAgency Request\n($ Millions)\n(Difference from Alt. #1 (Agency Request)\n1977 Outlays 1978 Outlays 1979 Outlays)\nAlt. #2 (OMB rec.)\n-17\n-55\n-75\n)\nAgency request: Alternative #1. The Reserve Component Chiefs feel that nothing short of all-out\nsupport for reaching authorized manning levels as quickly as possible will result in a viable\nReserve as a partner in the total force. Any initiative, such as reduced training, at a time\nof increasing reliance on Reserves is incomprehensible to them.\nOMB recommendation: Alternative #2. The current austere budget climate warrants every effort\nfor providing a viable Reserve force mobilization asset through a managed program to conserve\nresources. Defense should initiate the actions discussed, including resubmission of required\nlegislation.\n62\nIssue Paper\nDepartment of Defense\n1978 Budget\nIssue #11: Guard and Reserve Pay Initiatives\nBackground\nThe administration's 1977 budget initiatives included elimination of both dual compensation of\nFederal employees on active duty for training, and Administrative Duty Pay for reserve unit\ncommanders. Both initiatives were rejected by the Congress.\nThe 1978 request includes $20 million for an Army Guard and Reserve enlistment/re-enlistment\nbonus test which would also require legislative authority.\nStatement of Issue\nShould the 1978 legislative program include resubmission of the administration's 1977 Reserve pay\ninitiatives and/or authority for a Reserve force enlistment/re-enlistment bonus?\nPros.\n-- Initial limited support in Congress may increase in a second attempt.\n-- A bonus test may provide an answer to the problem of current Guard and Reserve manning\nshortfalls with a minimal commitment of resources at this time.\n-- Support for a bonus test concurrently with resubmission of the 1977 initiatives may defuse\nthe charge that the Administration \"is out to get the Reserves.\"\n63\nCons.\n-- Submission of any Reserve compensation initiatives may be viewed as prejudging the\nongoing Presidential directed Reserve Compensation System Study.\n-- Resubmission of the 1977 initiatives will be perceived as a disincentive to Reserve\nparticipation at a time when manning levels are low, regardless of merit.\n-- Support of a bonus test may result in a significant long-term funding commitment.\nAlternatives\n#1. Withhold further action on the 1977 pay initiatives pending consideration by the Reserve\nCompensation System Study but seek legislative authority required to conduct the\nenlistment/re-enlistment bonus test (Agency req.).\n#2. Include the 1977 pay initiatives and bonus authority in the 1978 legislative program.\n#3. Include only the initiative for elimination of dual compensation in the 1978 legislative\nprogram (OMB rec.).\nAnalysis\nDual Compensation for Military Training. Federal employees who are also reservists receive both\ntheir full civil service pay and military pay while on active duty for training. If the Federal\nGovernment followed the policy of many private employers by granting military leave and providing\ncivilian pay only to the extent necessary to avoid loss of take-home pay, it would save up to\n$45 million annually in civilian pay--split approximately $30 million within Defense and $15 million\nin other Federal agencies. The House Appropriation Committee agreed that the current policy\nrepresents a questionable practice but decided not to act pending action by either the Armed\nServices or Post Office and Civil Service Committees, neither of whom acted. Emphasis placed on\nthis proposal as a Federal civilian pay practice initiative would enhance the likelihood of\nfavorable consideration as well as minimize the argument that action should be deferred pending\ncompletion of the Reserve Compensation System Study.\n64\nAdministrative Duty Pay. The 1978 Defense request includes $2 million for payment to Reserve\nunit commanders for administrative duties performed outside of prescribed drill periods. In con-\nsidering the administration's 1977 budget initiatives, the Senate Armed Service Committee recommended\nrepeal of the authority, but receded in conference to the House Committee view that it was\ninappropriate to terminate this incentive. As a specific reserve pay entitlement, this issue could\nproperly be left to the Reserve Compensation System Study for resolution. An interim report is due\nDecember 1.\nEnlistment/Re-enlistment Bonus. The Defense request for an enlistment/re-enlistment bonus test\nto be conducted by the Army Guard and Reserve in FY 1978 is expected to cost up to $50 million,\nwith $20 million in FY 1978. Despite current manning difficulties, the implementation of a bonus\nprogram prior to determination that other recruiting/retention initiatives being implemented are\nnot successful, or that other more cost-effective alternatives are not available, appears questionable.\nAgency Request\n($ Millions)\n(Difference from Alt. #1 (Agency Request)\n1978 Outlays\n1979 Outlays)\nAlt. #3 (OMB rec.)\n-50\n-50\n)\nAlt. #2\n-32\n-32\n)\nAgency request: Alternative #1. The Department feels resubmission of the 1977 initiatives would\nstand no better chance of success than last year and may adversely impact on intensive efforts to\nimprove manning levels. They would prefer to have review by the Compensation Study. Conversely,\nthey feel the current strength situation warrants immediate action on a bonus test as part of the\noverall Reserve Component Readiness Improvement Package.\nOMB recommendation: Alternative #3. Seek elimination of dual compensation as a civilian Federal\nGovernment pay practice initiative. Defer action on Administrative Duty Pay pending review by the\nReserve Compensation System Study. Evaluate the full impact of additional non-compensation recruiting\nand retention actions being initiated before seeking a bonus authority.\nRACE\n65\nIssue Paper\nDepartment of Defense\n1978 Budget\nIssue #12: Modernization of Defense Domestic Installation Structure\nBackground\nOn June 30, 1975, the Department of Defense had 4,038 domestic installations located on 23 million\nacres at an initial acquisition cost of $37 billion. These installations have evolved over the years.\nMany were founded originally during the 19th century, but the majority were formed in response to\nforeign wars. The major expansions occurred during World Wars I and II. Subsequent to World War II,\nthe creation of the Air Force and new or revised missions for the other services has created more new\ninstallations. Our structure is still near its World War II level and is imposing a very heavy cost\nburden on Defense.\nThere has been steady pressure to close unnecessary installations, but we are still a long way from\nthe optimum domestic installation structure required to support our current forces. Although Defense\nhas accomplished 2,700 separate realignment actions in the last six years, most of these have been\ngenerated by short-range budget pressures and have not had a significant impact on the total installa-\ntion structure. Neither the Services, nor the Department have conducted studies to determine long-\nrange future installation requirements. The result has been the perpetuation of an inefficient,\noutdated basing structure.\nThe reasons for this continuing inability to modernize the installation structure are twofold:\n-- Congressional resistance to base closure. A major Defense installation is frequently the\nlargest employer within a constituency and the economic impact of closures can be severe\nduring the period of transition. The recent passage of Section 612 of the 1977 Military\nConstruction Authorization (despite the President's initial veto) indicates that Congressional\ninterference with plans to realign the base structure can be expected to continue and increase\nin the future.\n66\n-- The Services have strongly ambiguous feelings on the subject of base realignments. On the\none hand they are acutely aware of the budgetary drain imposed on them by maintaining\nobsolete facilities. However, they also believe that a network of military installations\naround the country serves to generate grass roots support for military programs in the\nCongress. They are concerned that an optimized base structure, which might result in\nconcentration of the military presence in one or two regions of the country, would erode\nCongressional, support of military programs to a severe extent. This concern is seldom\nexpressed openly, but usually emerges on the basis that various installations must be\nretained for \"surge\" purposes or for \"unforeseen contingencies.\"\nWe believe there should be a study to determine long-range future requirements in compliance with\nNSSM 246 and to prioritize construction programs. The Department has begun such a study but is already\nencountering strong resistance from the Services. With any cooperation, this study should be completed\nin a few months. However, a Presidential commitment is required to minimize resistance from the Congress,\nunions and impacted communities. Without such a commitment, an effective study may never be completed,\nand if one were completed, political opposition would probably kill any implementation plans. The\nPresidential commitment should be emphasized in the State of the Union message and in the formation of\na Blue Ribbon Panel to study our domestic basing. Such a panel could ameliorate political opposition\nand could provide independent credibility. Its membership should consist of distinguished Americans\n(such as the Vice President), defense experts (such as Ambassador Bunker and David Packard), congres-\nsional representatives (such as Senator Stennis and Senator Goldwater) and leading business and labor\nleaders who could provide assistance in the difficult area of economic adjustment.\nThe Panel would be expected to produce a document that would identify our Nation's essential required\ninstallations. Any installation not identified as essential would be closed. If the study were completed\nby August 1977, candidates for closure or realignment could be announced then and environmental impact\nstatements could be initiated. Because such a study is expected to reduce our basing structure, and to\nminimize criticism about sunk costs, some form of moratorium should be placed on FY 1978 domestic\nmilitary construction, except for: safety and approved mission changes (TRIDENT). Nonawarded\nconstruction, projects from prior years could be placed in budgetary reserve. Upon completion\nof the Panel study, prior year projects could be released for the essential installations and\nproposed legislation would be prepared to revise the authorization for utilization of other funds on\nessential installations. With the August 1977 completion date, adequate time would exist to prepare the\n67\nFY 1979 construction budget. This FY 1979 budget would be redirected to a planned program to modernize,\nwithin four years, the essential installations. By so doing, readiness would be enhanced, a more\nefficient and effective Defense would result, and morale of military forces should increase.\nStatement of Issue\nShould there be a major Presidential initiative to optimize by FY 1982 the domestic military\ninstallation structure?\nPros.\n-- Based upon such a Presidential initiative:\nDepartment of Defense military basing structure would be reconfigured to conform to\nmodern national security requirements, as revised by NSSM 246.\nDOD would enhance military readiness by establishing a modernized, efficient basing\nstructure.\nDeferral of FY 78 and prior year construction programs would minimize sunk costs and\nwould update programs to comply with NSSM 246.\nCons.\n-- Support for military programs might erode following withdrawal of military presence from\ncertain parts of the country.\n-- Strong opposition can be expected on two fronts:\nLocally - reflecting the adverse economic impacts on local communities with resulting\nunemployment and lost revenues from major base closures or realignments after FY 1978.\nCongress - massive resistance to impact of construction slowdowns and base\nrealignments in their communities.\n68\nAlternatives\n#1. Approve the FY 1978 military construction programs at the Department's requested level and\nprogram base realignments as currently planned (DOD req.).\n#2. Establish a Blue Ribbon Panel to identify optimum military basing requirements, place a\nmoratorium on FY 1978 domestic construction (except for family housing operations, safety\nand approved major weapon systems), freeze FY 1977 and prior year projects not under con-\ntract, and modernize resulting base structure during the FY 79 to FY 82 period.\n#3. Same as Alternative #2 except for a partial construction moratorium to allow for projects on\ninstallations that can be reasonably agreed as having firm functional requirements (OMB rec.).\nAnalysis\nBudget Authority/\n1976\n1977\n1978\n1979\n1980\n1981\n1982\nOutlays\nBA\no\nBA\no\nBA\no\nBA\no\nBA\n0\nBA\no\no\n($ Millions)\nAlt.\n#1\n(DOD\nreq)\n2,483\n2,019\n2,482\n1,945\n2,881\n2,100\n3,035\n2,575\n3,285\n2,775\n3,578\n2,995\n3,557\n3,250\nAlt. #2\n2,483 2,019\n2,482\n1,945\n881 1,900\n3,035\n1,575\n3,285\n2,175\n3,578\n2,695\n3,557\n3,100\nAlt.\n#3\n(OMB\nrec)\n2,483\n2,019\n2,482\n1,945\n2,381\n2,050\n3,035 2,325\n3,285\n2,625\n3,578\n2,920\n3,557\n3,210\nThe TOA reductions shown in the above table are $-2.0 billion and -$.5 billion for Alternatives Nos. 2\nand 3, respectively. These adjustments are based on our judgment as to the overall reductions consistent\nwith the rationale of Alternatives 2 and 3. They do not reflect detailed project review and final adjust-\nments for this issue could vary significantly!\nAgency Request\n(Differences from Alt. #1 (Agency request)\n1978 Outlays\n1979 Outlays)\n(\nAlt. #3 (OMB rec.)\n-50\n-250\n)\n(\nAlt. #2\n-200\n-1,000\n)\n69\nAgency Request: Alternative #1. The Department believes that the FY 1978 military construction\nprogram should be approved at the requested level and that no outyear deferral should occur until\ncompletion of its long-range basing study. To do otherwise would be unrealistic. They also\nmaintain that they place the great bulk of their construction projects at bases which are clearly\nto be retained indefinitely.\nAlternative #2. A one-year deferral of most of the military construction program. The findings\nof a select Blue Ribbon Committee would govern (subject to Presidential approval) our future\ninstallation structure and investment over the next four years. The \"hard-line\" moratorium would\nmake it clear that the Blue Ribbon Committee has a charter to consider the most comprehensive\npossible restructuring since no preconceptions would be built in on the basis of installations\nselected for modernization in 1978. Furthermore, deferral of the FY 1978 construction program\nwould minimize sunk costs until the firmness of the basing structure was established.\nOMB Recommendation: Alternative #3. Same as Alternative #2 except that only a partial moratorium\nwould be imposed. This means that certain projects will be approved for construction in 1978.\nApproval of these projects would be on the basis that they will definitely be viable under any plan\ndeveloped by the Blue Ribbon Commission.\nPERALD\nR.\nFORD\n70\nIssue Paper\nDepartment of Defense\n1978 Budget\nIssue #13: Contracting-Out Depot Maintenance\nBackground\nOMB Circular A-76 sets forth the Government's \"policies for acquiring commercial or industrial\nproducts and services for Government use.\" This circular states that the Government's general policy\nis to rely on the private enterprise system to supply its needs. Under some circumstances specified\nin A-76, however, it is in the national interest for the Government to provide directly the products\nand services it uses.\nDOD depot maintenance activities, such as Navy shipyards, Navy and Air Force aircraft facilities\nand Army vehicle facilities, represent a large segment of DOD civilian employees (172,000). There\nare major problems in increasing depot maintenance contracting out because:\n1. The Services want to protect their in-house capability in order to insure a ready and\ncontrolled source of the technical competence and capability necessary to meet military\ncontingencies. Therefore, before any work is even considered for contracting out, it\nmust be shown that doing so will not jeopardize their mobilization capability.\n2. Once work is identified as being considered for contracting out, DOD generally conducts a\ncost comparison study to determine if doing the work in-house would meet the cost criteria\nset forth in A-76. Since these cost studies are based on incremental cost comparisons,\nthe in-house option has a decided advantage; the expensive plant and equipment are a sunk\ncost to the Government, but a contractor would have to invest in and amortize similar\nequipment as a part of his cost.\n3. Inertia is a powerful force which makes it difficult to change on-going work from in-house\nto contract or the reverse.\n71\nUnder DOD depot maintenance policy, there is an implied goal for distributing workload between\nin-house and contract sources, i.e., no more than 70% of mission-essential workload should be\naccomplished in-house. However, the Services have not met this goal, since the latest actual data\navailable shows that in 1975 77% of mission-essential work was done in-house. For non-mission\nessential workload, the implied DOD policy is that no special in-house capacity should be planned.\nIn 1975, 40% of the non-mission essential work was done in-house. Since there are no clear criteria\nfor distinguishing mission essential from non-mission essential workload, there is some doubt about\nhow meaningful this policy is in any case.\nIt is also not clear that organic depot facilities can accommodate increased demand more rapidly\nthan private industry even for \"mission-essential\" work. For example, the 1965-68 Air Force workload\nsurge was initially carried by industry and not accommodated by the depots until 1970. The GAO\ncriticized the Army for procuring new UH-1 helicopters from Bell when several hundred were awaiting\nrepair at Army depots. GAO argued that Bell could have accomplished the repair and the procurement\ncould have been avoided. In 1969, when the Services were forced to develop a rapid defense against\nInfra-Red missiles in Southeast Asia, effective countermeasure devices were provided very rapidly,\nbut primarily by industry.\nIn addition, the possibilities of converting in-house maintenance facilities to contractor operation\n(Government owned-contractor operated) have not been fully explored. This approach could involve consider-\nable cost savings.\nStatement of Issue\nShould DOD be required to prepare a plan for meeting specific objectives for contracting out\ndepot maintenance workload and should there be a moratorium on depot facilities modernization and\nexpansion until this is accomplished?\nPros.\n-- Would provide some discipline to the current A-76 implementation policy guidelines in DOD.\n-- Puts the burden of proof on DOD and the Services for exceptions to the general policy set\nforth in A-76.\n-- OSD and OMB will be able to review those areas identified by the Services which would least\naffect their mission capability and determine whether these particular cases would, in\nfact, reduce the Services' mission capability.\n72\nThe Services would be required to develop and justify criteria for evaluating the\neffect of contracting out mission essential work on their mission capability.\nThe moratorium on depot maintenance facility improvements would reduce the continual\ngrowth of Service in-house capability which makes incremental comparisons between\nin-house and contract options weighted in favor of the in-house option.\nCould reduce DOD civilian personnel by approximately 15,000.\nCons.\n-- Implementation of the above plan would meet considerable resistance from the Military\nServices and OSD.\n-- There would need to be some exceptions to a moratorium on facilities construction to\npermit continuation of on-going efforts.\nAlternatives\n#1. Continue A-76 implementation in DOD under current system (Agency req.).\n#2. Request that DOD conduct a study to determine if more depot work could be contracted out\nand to establish more definitive criteria for retaining work in-house. In particular, the\nimpact of contracting out 30% of mission-essential and 70% of non-mission essential work\nby 1979, and 35% of mission-essential and 80% of non-mission-essential work by 1980\nshould be examined. The study should also include specification of criteria for defining\nmission-essential effort. It should also analyze possibilities of converting in-house\nmaintenance facilities to contractor-operated facilities.\n#3. In addition to alternative #2, direct DOD to submit a plan to meet the specific objectives\nstated in that alternative for contracting-out depot maintenance work, and impose a moratorium\non in-house facility expansion (allowing for some exceptions). (OMB rec.).\nGERAL\nR.\nFORD\n,3\nAnalysis\n1976\n1977\n1978\n1979\n1980\n1981\n1982\nBudget Authority/Outlays\nBA\n0\nBA 0\nBA\n0\nBA\n0\nBA\n0\nBA\n0\nBA\n0\n($ Millions)\nDepot Maintenance\n* Facility Modernization:\nAlt. #1 (Agency req.)\n75\n4\n94 35\n129\n59\n157\n94\n160\n124\n146\n140\n149\n129\nAlt. #2\n75\n4\n94 35\n129\n59\n157\n94\n160\n124\n146\n140\n149\n129\nAlt. #3 (OMB rec.)\n75\n4\n94 35\n54\n56\n82\n60\n85\n75\n71\n77\n74\n76\n*\nAgency request represents DOD funds for depot modernization, OMB recommendation would reduce this\nprogram by an estimated $75 million annually.\nAgency Request\n(Differences from Alt. #1 (Agency request)\n1978 Outlays\n1979 Outlays)\n(\nAlt. #3 (OMB rec.)\n-3\n-34\n)\n(\nAlt. #2\n--\n--\n)\nAgency Request: Alternative #1. DOD believes that their current policies are adequate for imple-\nmenting A-76 guidance. Defense is trying to increase the amount of depot maintenance work being\ncontracted out.\nOMB Recommendation: Alternative #3. This assumes that there is significant potential for\nincreased contracting-out and that requiring a study as in Alternative #2 would not be sufficient\nto accomplish desired actions.\nGERAL\nFORD\n74\nIssue Paper\nDepartment of Defense\n1978 Budget\nIssue #14: Shipbuilding in Navy Yards\nBackground\nAll ships have been built in private shipyards since the 1967 program. Lower costs for ships\nconstructed in private yards and pressure from private shipbuilders for more work led to the policy\nof assigning all new ship construction to private shipyards. Reversing this policy to put Navy\nshipyards back into the business of constructing new ships would be a major Administration initiative.\nStatement of Issue\nShould shipbuilding be reinstituted in naval yards?\nPros.\n-- New construction effort could help to fill in slack periods for ship repair, with a\nconsequent increase in work force productivity.\n-- The new construction work force would provide a surge capability for repair work in\ntime of war.\n-- Active experience with shipbuilding would enhance the expertise of Navy's engineering\nofficers.\n-- Naval yards would provide competition to private yards which could hold down private\nyard prices.\nBERALD\n-- It would provide an alternative to private yards in the face of their reluctance\nto accept Navy work.\n75\nCons.\n-- Naval shipyard work can be expected to cost 30-40% more than private yard work, in\naddition to start-up costs that would be associated with initiation of Navy yard\nconstruction.\n-- Administration policy stresses maximum reliance on the private sector. Public yard\nshipbuilding would be inconsistent with the President's initiative to encourage the con-\ntracting out of government functions.\n-- It is inconsistent with Administration efforts to restrain the level of government\nemployment. Public yard shipbuilding would require 2,400 additional civilian naval\nshipyard employees in 1978 and as many as 8,300 additional in 1982.\n-- New construction in naval yards would compete for manpower resources now devoted to\nrepair work, causing disruption and inefficiency.\n-- There are less costly ways of providing surge capability for naval yards and experience\nfor engineering officers.\n-- There is no evidence to demonstrate that naval yard competition holds down private\nyard prices.\n-- Will require another supplemental budget request ($.4 billion) in 1977.\nAlternatives\n#1.\nAssign construction of two nuclear submarines and one destroyer tender to naval yards\nin 1977 and one submarine and one tender to naval yards in 1979 (Agency request).\n#2.\nMaintain the Administration policy of assigning no new ship construction to naval yards\n(OMB rec.).\nSERALS\n++\n76\nAnalysis\n1976\n1977\n1978\n1979\n1980\n1981\n1982\nBudget Authority/Outlays\nBA\n0\nBA\n0\nBA\n0\nBA\n0\nBA\n0\nBA\n0\nBA\n0\n($ Millions)\nShipbuilding in Navy Yards\nAlt. #1 (Agency req.)\n--\n--\n450\n20\n16\n95\n176\n105\n177\n140\n183\n125\n114\n16\nAlt. #2 (OMB rec.)\nAgency Request\nifference from Alt. #1 (Agency request)\n1978 Outlays\n1979 Outlays)\nAlt. #2 (OMB rec.)\n-95\n-105\nAgency Request: Alternative #1. Defense believes that the benefits associated with public yard\nshipbuilding outweigh the costs involved.\nOMB Recommendation: Alternative #2. It is unclear that even the potential benefits which have\nbeen identified can be realized through public yard shipbuilding. The cost of public yard ship-\nbuilding is large and it is inconsistent with Administration policies to rely on private industry."
}