Based on our  experience, while DOD’s leadership has the intent and the ability to  transform DOD, the needed institutional infrastructure is not in place  within a vast majority of DOD organizations. The following provides some observations on key provisions of the  proposed National Security Personnel System Act in relation to the House  version of the National Defense Authorization Act for Fiscal Year 2004. Specifically, the new personnel authorities could be  implemented for a maximum of 120,000 of DOD’s civilian employees in  fiscal year 2004, up to 240,000 employees in fiscal year 2005, and more  than 240,000 employees in a fiscal year after fiscal year 2005, if the  Secretary of Defense determines that, in accordance with the bill’s  requirement that the Secretary and the Director of OPM jointly develop  regulations for DOD’s new human resources management system, the  Department has in place a performance management system and pay  formula that meets criteria specified in the bill. We strongly support a  phased approach to implementing major management reforms, whether  with the human capital reforms at DOD or with change management  initiatives at other agencies or across the government. We are  pleased that both the House version of DOD’s fiscal year 2004  authorization bill and the proposed National Security Personnel System  Act contain statutory safeguards and standards along the lines that we  have been suggesting to help ensure that DOD’s pay for performance  efforts are fair to employees and improve both individual and  organizational performance. In our reviews of agencies’  performance management systems—as in our own experience with  designing and implementing performance-based pay reform for ourselves  at GAO—we have found that these safeguards are key to maximizing the  chances of success and minimizing the risk of failure and abuse. Congress has an important and continuing role to play in the  design and implementation of the federal government’s personnel policies  and procedures. Governmentwide Human Capital Reforms

As I mentioned at the outset of my statement today, the consideration of  human capital reforms for DOD naturally suggests opportunities for  governmentwide reform as well. Many of the provisions in the proposed  Federal Workforce Flexibility Act of 2003 and the governmentwide human  capital provisions of the House version of DOD’s fiscal year 2004  authorization bill fall into this category. Summary Observations

Since we designated strategic human capital management as a  governmentwide high-risk area in January 2001, the Congress, the  administration, and agencies have taken steps to address the federal  government’s human capital shortfalls. Significant progress has been—and is being—made in addressing the  federal government’s pressing human capital challenges. DOD and other agency-specific human capital reforms should be enacted  to the extent that the problems being addressed and the solutions offered  are specific to particular agencies. A governmentwide approach should be  used to address certain flexibilities that have broad-based application and  serious potential implications for the civil service system, in general, and  OPM, in particular. This approach will help to accelerate needed human  capital reform in DOD and throughout the rest of the federal government.
Why GAO Did This Study

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

What GAO Found

GAO strongly supports the need for government transformation and the concept of modernizing federal human capital policies both within DOD and for the federal government at large. The federal personnel system is clearly broken in critical respects--designed for a time and workforce of an earlier era and not able to meet the needs and challenges of today's rapidly changing and knowledge-based environment. The human capital authorities being considered for DOD have far-reaching implications for the way DOD is managed as well as significant precedent-setting implications for the rest of the federal government. GAO is pleased that as the Congress has reviewed DOD's legislative proposal it has added a number of important safeguards, including many along the lines GAO has been suggesting, that will help DOD maximize its chances of success in addressing its human capital challenges and minimize the risk of failure. More generally, GAO believes that agency-specific human capital reforms should be enacted to the extent that the problems being addressed and the solutions offered are specific to a particular agency (e.g., military personnel reforms for DOD). Several of the proposed DOD reforms meet this test. In GAO's view, the relevant sections of the House's version of the National Defense Authorization Act for Fiscal Year 2004 and the proposal that is being considered as part of this hearing contain a number of important improvements over the initial DOD legislative proposal. Moving forward, GAO believes it would be preferable to employ a governmentwide approach to address human capital issues and the need for certain flexibilities that have broad-based application and serious potential implications for the civil service system, in general, and the Office of Personnel Management, in particular. GAO believes that several of the reforms that DOD is proposing fall into this category (e.g., broad banding, pay for performance, re-employment and pension offset waivers). In these situations, GAO believes it would be both prudent and preferable for the Congress to provide such authorities governmentwide and ensure that appropriate performance management systems and safeguards are in place before the new authorities are implemented by the respective agency. Importantly, employing this approach is not intended to delay action on DOD's or any other individual agency's efforts, but rather to accelerate needed human capital reform throughout the federal government in a manner that ensures reasonable consistency on key principles within the overall civilian workforce. This approach also would help to maintain a level playing field among federal agencies in competing for talent and would help avoid further fragmentation within the civil service.