Federal regional offices are telling the State: "Look, we have a ceiling requirement, you hire them, we will give you a grant to pay for the hiring, and then they will continue to work on this Federal job." I would like to know if it is true. If it is not, how did I get half-informed?

Mr. CUTLER. It is about half true, Mr. Chairman. Let me comment on it if I may.

It is true the Department of Labor, all Federal agencies, are subject to very tight constraints on Federal employment as a result not only of Mr. Leach's amendment in legislation but also in Mr. Carter's policy. OMB does not distribute those ceilings on anything below an agencywide basis. So, for example, we give the Department of Labor a ceiling and the Department of Labor's responsibility is to allocate that among its constituent parts.

Obviously, dealing with a constrained overall ceiling-the Department of Labor, as all agencies do, makes an analysis as to where the needs are greatest. In this particular case, the Department of Labor discovered that the need for secretarial services for the 52 State directors of the Veterans Employment Service totaled about 25 person-years-that is, half a person per director.

Because the State director's role or the Federal employee's role is a role that is inherently connected to the State service, where you essentially have a very small Federal presence, the Department's view was that the need to provide a full-time secretary for each of those directors simply did not rank highly enough in its needs to allocate one person for each director across the country.

So, the Department told the State VES directors they would rely or would have to rely on the State services, which are completely financed by Federal grants, to provide secretarial services. There was no increase-and this is the other half-there was no increase in the grant budget to provide additional personnel to the State. The 1978 budget will support about 30,000 State personnel, which is the same level supported for the past several years. The Department of Labor has assured us there are no plans to contract for support for these State VES directors, and although State agency employees will be supplied necessary clerical support, the State VES directors will not take any direct personnel actions with regard to them; these will remain the responsibility of the State agencies. These kind of shared arrangements are not unknown. Mr. HARRIS. I did not hear you. Did they increase the grant funds to the States?

Mr. CUTLER. No.

Mr. HARRIS. You feel as though the situation is OK, as far as your investigation is concerned?

Mr. CUTLER. Mr. Chairman, given what the Department has told us about the need for secretarial services being half a person per State director, given tight employment constraints, I feel this is a situation that is appropriate.

Mr. HARRIS. I want to thank you for your testimony. As you know, we are going to continue this hearing and investigation along with the Subcommittee on Investigations. We will be requiring your cooperation and some of our questions, if we may, we would like to submit to you in writing in order to tie the points down.

I understand your position of filling in for someone who is filling in for the Acting Administrator or Director.

Do you know or can you provide any information that would assure this subcommittee as to when someone is going to be put in charge of the Office of Federal Procurement Policy?

Mr. CUTLER. I do not have any specific knowledge. I can tell you there is a sense of urgency about filling the position.

Mr. HARRIS. I hope we have not increased in anyway that sense of urgency, but it seems to me with the important task ahead of us, to allow that position to go vacant much longer is a mistake. Í would certainly hope that we would continue to place emphasis on the area the subcommittee is focusing on, and we, in fact, get that position and other personnel requirements met.

It seems to me this is one function of growth that probably should not get contracted out, and we will need adequate personnel to carry out the function.

Mr. CUTLER. I think that is right, Mr. Chairman. I was hoping Mr. Leach would return. If I may, I would like to make just one statement, that in some respects it would spark what he said in his opening statement, but I would like to share with you some personal thoughts of my own on the problem you are generally addressing.

In the 21⁄2 years I have been doing this job, one of the most difficult tasks is not only that of budgeting Federal dollars, but also dealing with the personnel issue, deciding what appropriate ceilings are, trying to balance off all the factors involved.

Neither we, the Congress, nor the public can have it three ways. Mr. Leach this morning said if you squeeze a balloon in one place, it will bubble up in another. That is quite right. But if you squeeze a balloon in three places or every place, the balloon will break.

Within the bounds of our fundamentally inconsistent constraints, A-76 employment ceilings, the sunsetting of legislation and creating indeed new statutory responsibilities for the Federal agencies, we try-and I know the Congress tries to intelligently design sound policies that will work our way through that maze.

It is difficult and the pressures that come to bear on all of us are significant. But I assure you we consider this as urgent a problem as this committee does.

Mr. HARRIS. Let me say I appreciate your final statement and quite frankly agree with much of what you said and the implications of what you said.

Congress cannot get into the business of passing and authorizing programs and not hire anybody to do it. I am not sure that is sensible policy on the part of Congress.

These hearings are not intended to be critical of the administrative branch, but rather to help Congress obtain sufficient information to make proper policies with regard to personnel policies and contracting out policies.

Thank you again for your testimony.

Now, we call before us Director Alan K. Campbell, Office of Personnel Management.

Welcome, Director Campbell. Again my apologies for holding you up here. I know of the many responsibilities you have, and I certainly did not want to take you away from the pay bill, but I am

counting on you in an area which has grave implications with respect to grave problems.

STATEMENT OF HON. ALAN K. CAMPBELL, DIRECTOR, OFFICE OF PERSONNEL MANAGEMENT

Mr. CAMPBELL. Mr. Chairman and members of the subcommittee, I appreciate the opportunity to appear here today to respond to your interest in and questions on contracting out. I think I can best respond to the questions you have posed by describing OPM's overall role in relation to executive branch policies on contracting out, and presenting our sense of some of the key issues in this area. Under Public Law 93-400, the Administrator for Federal Procurement Policy is responsible for monitoring and revising the policy statements, regulations, procedures, and forms which implement the Government's general policy of reliance on the private sector for goods and services. The Office of Federal Procurement Policy is a part of the Office of Management and Budget, and OMB has primary responsibility for the program. The key executive branch statement of contracting policy is the recently revised OMB Circular A-76, "Policies for Acquiring Commercial or Industrial Products and Services Needed by the Government." I think in discussing and understanding OPM's view of the circular and its impact on Federal public management policy, close attention to the circular's title is important.

In a sense, A-76 is the Executive response to an extremely important question: "What factors shall determine how the Government acquires the products and services it needs in order to in turn furnish services to the public?" The answer presented in A-76 seems clear-where the services under consideration do not involve inherently governmental functions or national defense, and satisfactory commercial sources can supply services of no less quality than those available in-house, then the key factor in determining how the Government should acquire or provide services is cost. Perhaps an easier way of saying it is: "Getting the most for every dollar." We cannot fault that principle. Nor have we found any basic inconsistencies between the circular's provisions and our view that there is a legitimate need to measure the cost of the Government's work and set standards for its performance.

While OMB has the primary statutory authority to monitor and revise Federal contracting-out policy, throughout the revision of OMB Circular A-76 we provided advice to the Office of Federal Procurement Policy to assure that the circular did not infringe upon the Government personnel policies which we are charged with administering. Within the context of our personnel management responsibilities we have two concerns which relate to contracting out:

First, to insure that the Government's resources are managed in the most productive and least costly manner. Our particular focus is on the Government's human resources-its employees. However, nearly all aspects of personnel management from classification to training have a direct or indirect "bottom line" dollar impact. In this respect the circular's emphasis on economy parallels our own desire to provide quality service at the lowest cost.

Second, OPM has a responsibility to see that agencies take steps to end any contract administration practices which are inconsistent with the Government's personnel policies regarding employer-employee relationships. Essentially, agencies can contract for services, but they must appoint employees. They cannot establish employeremployee relationships outside the personnel laws.

I'd like to develop these two points a little further. Regarding cost and productivity, for example, you asked us to give you our understanding of the relationship between personnel ceilings and contracting out. OMB, of course, manages the personnel ceiling program. It is clear that there are strong feelings and arguments on both sides of the question of whether or not ceilings should be used. As you know, the Leach amendment to the Civil Service Reform Act imposes a statutory ceiling on overall Federal employment through September 30, 1981. Within the context of a discussion of contracting out, however, the question of ceilings becomes a moot point.

Where contracting out is a viable option under Circular A-76, the requirement for strict adherence to uniform cost comparision prevents a contracting out solely to avoid personnel ceilings. Economy is, as we believe it should be, the prime consideration. When indirect as well as direct costs are taken into account, under the circular's procedures, if contracting out is found to be more costly to the Government, an agency may not contract out-regardless of whether or not ceiling is available. Likewise, if the private sector can perform a service more inexpensively when all costs are accounted for, then the agency must contract for it-regardless of whether or not ceiling is available.

My personal belief is that the practice of giving primary consideration to cost where there are no overriding factors can work as much to the advantage of Federal employees as it is sometimes portrayed as working against them. Federal employees are as competent and hardworking as any employees anywhere in the private sector. One of our primary goals at OPM is to improve the capability of agencies and individual managers to harness the energies and efforts of Federal employees in the most productive ways. We see measuring, motivating, and managing for productivity as being of the highest priority. Through our involvement with OMB on the Management Improvement Council, and through the programs and consulting work of the new workforce effectiveness and development group I have established within OPM, we are trying to develop new techniques for managing the Government's human resources and to help agencies to implement them. In this respect, we at OPM view the head-to-head competition on the basis of cost required for contracting-out determinations to present a challenge, and thus an opportunity for Federal managers and employees to work together to boost the productivity of the public sector.

Along with our concern for productivity, we have a statutory responsibility to insure that agencies take steps to end any contract administration practices which are inconsistent with the Government's personnel policies regarding employer-employee relationships. Agencies can contract for goods and services, but the personnel laws govern the relationship between agencies and their employees. OPM is responsible for determining who is a Federal em

ployee for the purpose of title 5 of the United States Code. Application of 5 U.S.C. 2105, the statutory definition of a Federal employee, to the contracting situation hinges primarily on the issue of whether or not Government employees are supervising contractor employees in a manner that is tantamount to creating an employer-employee relationship.

If we receive a complaint that an agency-contractor relationship is improper, we review the written allegations and provide the agency and the person who complained an opportunity to comment on them. If the facts warrant, we may conduct on-site investigations including interviews with contractor personnel and Federal employees. Where we find improper contract administration, we direct the agency to take steps to eliminate it. Agency corrective actions might include, for example, changing the way the contract is performed or administered; redefining the job to be done and renegotiating the contract; converting to in-house performance if A-76 criteria for in-house operations are met; or even discontinuing the function contracted for. OPM's guidance on this matter is contained in Federal Personnel Manual Letters 300-8 and 300-12. The Office of Management and Budget has also included a specific prohibition on agency-contractor relationships tantamount to employer-employee in the new OMB Circular A-76.

You asked about our role in providing assistance to agencies to avoid contracting out governmental functions such as position classification, and for our views on the contracting out of management audits or reviews. Our basic concern with the employer-employee relationship question is really the crux of OPM's compliance role in contracting out. While we have an obvious interest in seeing that inherently governmental functions are properly managed, we have no direct role in determining whether or not agencies are properly following the A-76 prohibition on contracting out governmental functions. In fact, under the circular, any complaints regarding agency adherence to A-76 would be handled through the A-76 appeals procedure the circular directs agencies to establish. When discussing the nature of the agency-contractor interaction in relation to governmental functions, I think it is important to examine in detail what is actually happening and to distinguish between committing the Government to a course of action which is clearly governmental, and merely making recommendations which an agency head may or may not use in reaching a decision. While in most situations the former would be a governmental function, we believe the latter would not. Let us use classification as an example-5 U.S.C. 5107 authorize agencies to classify positions for the purposes of pay and other personnel transactions. A statement of duties has no meaning unless a supervisor certifies: One, that it reflects the duties the employee is officially assigned; two, the employee is performing them; and three the supervisor designates it the official position description of record for determining the employee's pay, qualifications, et cetera. If, for example, we were to detect in our onsite evaluations instances where agencies had delegated to contractor employees signatory authority to certify position classification actions in the name of the agency, we would immediately direct the agency to halt this practice. We would, if necessary, be prepared to suspend the agency's classification au