Pension, health care programs could be cut next

By Jason Miller
Executive Editor
Federal News Radio

Federal employees should prepare for a tough 2011.

Just two days after President Obama proposed a two-year pay freeze for civilian employees, the National Commission on Fiscal Responsibility and Reform issued its final set of recommendations Wednesday and is taking aim at host of federal employee programs from health care to pensions to the overall size of the workforce.

And while the panel is just making recommendations, committee members, who consist of several lawmakers on both sides of the aisle, promised to push through most of the suggestions over the next year.

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“I think this is a critically important moment and whether or not we get 14 votes–and I very much hope we do–I think this will provide a guide post for decisions that must be made,” said Sen. Kent Conrad (D-N.D.), chairman of the Budget Committee. “And the sooner they are made, the better for this country.”

The commission will vote on the final recommendations on Friday. Erskine Bowles, co-chairman of the panel, asked for final decisions by 11 a.m.

“The President looks forward to reviewing their work at that conclusion of their votes, which I think will be toward the end of the week, and evaluate their proposals and those votes as we move forward and put together a budget of our own for next year,” said Robert Gibbs, White House press secretary during his briefing with reporters Wednesday. “So let me not get too far out on the commission until they’ve had a chance to complete their work, as we’ve said before.”

Several recommendations will impact federal agencies and their employees in the short and long term.

In the short term, the commission suggested:

  • A three-year pay freeze. The freeze would impact feds and civilians in the Defense Department. The commission estimates the cost savings to be $20.4 billion by 2015.
  • Reduce federal workforce through attrition. For every three workers who leave, an agency can hire two new workers. The goal is to cut the federal workforce by 10 percent or 200,000 workers over the next five years to save $13.2 billion.
  • Reduce travel and vehicle budgets. The commission wants agencies to have travel budgets of 80 percent of their 2010 figure and reduce the number of vehicles by 20 percent by 2015.
  • Sell off excess federal property. The panel recommends the General Services Administration loosen agency restrictions for selling unused buildings and land.
  • Bring federal pensions in line with private sector.The recommendation includes moving from a high-three to a high-five calculation of retiree benefits. The commission wants to bring the pension program more in-line with private sector programs, defer cost of living adjustment (COLA) for retirees in the current system until they are 62 and adjust the ratio of employer/employee contributions so they are equal. The savings target over 10 years would be $70 billion.
  • Change the Federal Employee Health Benefits program. The commission recommends turning the FEHB into a defined contribution premium support program that offers federal employees a fixed subsidy that grows by no more than 1 percent over the GDP each year. For federal retirees, the subsidy could pay a portion of the Medicare premium.

Paul Posner, a professor at George Mason University and a former director of federal budget policy at the Government Accountability Office, said the proposed changes to the pension program stands out as one of the most significant potential changes.

“The federal, state and local pensions are very good deals for employees, and the problem is politically is they are out of step with the rest of the workforce and that creates a political vulnerability for federal employees,” he said. “I think what you see with some of these recommendations about relooking at retirement, most of the private workforce doesn’t have a pension at all or a defined contribution 401k kind of pension. We have these defined benefit plans where future taxpayers are on the hook to make good on it. As we stare at these deficits at the federal and state level, that whole bargain is going to have to be renegotiated.”

Posner said federal agencies have been insulated from many of the budgetary pressures that state and local governments are facing. He said even though the total dollars from cutting federal programs or the workforce is small compared to the larger picture, the changes offer both symbolic and actual short term savings.

“When the federal government asks for financial sacrifice of others in society it has to also contribute itself,” he said. “It sound symbolic, but it’s also important because it’s a way to share the sacrifice. In the 1990s, we took some cuts. In the Reagan period, we took some cuts. It’s all part of a careful staging for developing support of what you are trying to do.”

Alice Rivlin, a commission member and former director of the Office of Management and Budget in the Clinton administration, said this is an opportunity to right size the workforce and make sure the government has the right amount of people to do the job.

“This is a new ball game and we are facing a very serious problem and trying to do everything that can be reasonable done to avoid a debt catastrophe,” she said. “We will see how this plays out in Congress. I believe it’s an opportunity to look at the priorities of the federal government, spend money more wisely and deploy our workforce more wisely. And that will play out over time.”

Along with the specific reductions or cuts that will affect federal employees, the commission also is proposing to reduce discretionary spending.

The commission wants to cut discretionary spending and get rid of underperforming programs. The panel suggests freezing discretionary spending at 2011 levels in 2012, and bringing it down to 2008 levels in 2013 and beyond.

Total discretionary spending would drop to under $400 billion dollars in 2013 to 2015 and not reach 2011 levels of $410 billion until 2019.

The Government Accountability Office also will issue its first annual report of overlapping federal programs, agencies and initiatives. The commission recommends committees should consolidate or eliminate duplicative programs within their jurisdictions and rescind savings from reduced overhead and program elimination.

Robert Shea, a former OMB official and Capitol Hill staff member, said the attempts to tame discretionary spending is different in scope and approach than in the past.

“They are calling on OMB, Congress and agencies to go line-by-line to find areas to cut, but they also recommend the establishment of a commission whose job would be to find two percent cuts where one percent would go toward savings and one percent would be reinvested into high performing programs,” said Shea, now a principal with Grant Thornton’s global public sector group. “It is an innovative way to demonstrate that this is not about terminating programs, but finding savings from ineffective ones and putting some money in effective programs. This is different in magnitude, and different ways to trim spending.”

Shea said agencies would cut the easy stuff like travel and training initially to deal with the reduction in discretionary spending. But in the end, he said, agencies will have to make some tough decisions on which programs they will need to cut.

“I do think there is something different here than what we saw in the 1990s,” he said. “Clinton had to deal with a Republican Congress that forced more fiscal disciplines than in the past. I think we are seeing the same situation now with Obama and new Republican House and new members in the Senate. I think the election has motivated people to really take this seriously. The real issue will be when specific recommendations are proposed you will begin to see traditional constituencies rise up in protest for their sacred programs and why they should be exempted. That is one of reason why I like idea for commission to say the evidence says this program is not good use of funds, and we should invest a portion of that money into other programs that the evidence shows is having an impact.”

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