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Realistically, you have to decide how you're going to get that done. And by the way, the 36 items on our oversight list, that's not a one-year agenda; it's a many-year agenda. And what has to get done to get us on a prudent and more fiscally sustainable path will take many years to do. But I think round one could be as follows: budget controls, additional transparency, comprehensive solution to Social Security where you're not preprogrammed to have to come back, round one of health care reform, and round one of tax reform.

Now, you can do that with or without a commission; the question is how are you going to pull together a credible, comprehensive and balanced package that the president and the Congress can deal with, all right?

Now, one way to do it is through a commission. The good news is if you had something like that, they don't have to reinvent the wheel; there's plenty of work already out there. You could have a capable, credible commission that could make recommendations within six months, easy, because you're not reinventing the wheel, all right?

I would like to see some things done during the balance of this administration. I think the president would too. I think there is an increasing number in Congress who are open to that. But at a minimum, we have to make sure that if it doesn't get done during the balance of the administration - which I hope it does - but if it doesn't get done, it's incredibly important to make sure that this be a major issue for the next presidential election in order to increase the likelihood that it will get done sooner rather than later.

MR. CLARK: Okay, I'm going to turn to questions from the audience:

Q: I wonder if you would comment, given the fiscal disaster that we point out at the federal level, the nexus you see between that problem and the looming problems at the state and local level, and how they all come together, and what the federal government might do to stop, for example, its preemption on what state and locals can do to solve their problems.

MR. WALKER: Well, first, I and others have been talking primarily about the federal fiscal challenge. At the same point in tine, bad news flows downhill. So if the federal government is going to have a problem, state and local are going to have a problem as a result of federal. But in addition to that, state and locals have their own challenges. They have challenges associated - states for example: Medicaid, pension and retiree health costs for their employees, and infrastructure, homeland security - a number of issues that they have challenges with as well.

One of the things that we're doing at GAO right now is we're trying to gather data on state and local fiscal challenges so we can try to pull together a national picture. The other this is that we're trying to partner for progress with the state treasurers, with the state comptrollers, with the state auditors, with the local auditors and others to try to help come together to recognize this is not just a federal issue. Clearly there are areas where you're going to want to provide an opportunity for the states to do what the founding fathers intended: to be able to experiment more. And there's discussions on that, especially in the area of health care as being one example.

You know, but you need to have a policy framework; you need to have a set of principles and a framework to which you can try to provide reasonable but not absolute assurance that when you're giving additional flexibility, it's toward trying to achieve certain desired outcomes so that you can assess it, evaluate it and share the result.

So those would be a few of the thoughts that I would have on that. But I think it's a very pertinent question.

MR. CLARK: Let me ask about the human resources policy - human capital policy. You put that on the high-risk list some years back. There have been laws to reform elements of the civil service, the National Security Personnel System, and the one at Homeland Security. Both of those have been tied up in court to some extent, and I wonder whether you're disappointed in that and whether you think that there has been enough progress toward the kind of human capital reform that you were thinking about when you put it on the high-risk list.

MR. WALKER: Well, look, there are several dimensions to the human capital challenge. I mean, I continue to believe that a majority of what needs to be done in the human capital area doesn't take legislation, and that there are a number of things that can and should be done that don't take legislation. And I think a vast majority of agencies aren't in a position to effectively implement a pay-for-performance system, even if they had the authority.

I mean, if you don't have a modern, effective, credible, and preferably validated but not legally required performance management system that provides meaningful and constructive feedback to employees, that helps everybody try to maximize their potential but also serves to provide meaningful differentiations in performance, to be able to identify the truly top performers, people who are doing a good job and contributing day in and day out, and people who aren't, you know, doing what they need to do - if you don't have that in place, then pay-for-performance is a joke.

The other thing is, if you don't do market-based pay studies in order to determine what you ought to really be paying people, based upon their roles and responsibilities, their location - and let me tell you, the GS system is not market based. It is not. And I can tell you that - I mean, I would bet that there's maybe not one person in this room - and I could be wrong - that could explain how the GS system works. I'm talking about how do they come up with the pay ranges? How do they come up with the annual adjustments? How do they come up with the local adjustments by market? The irony is, since all the lemmings are in the same system, nobody asks questions, but the system is flawed.

And so, I think people need to be doing their work that doesn't require legislation, and I do think that ultimately we need to go to a system that is market-based, skills, knowledge, and performance oriented, and I think that's going to take legislative authorization, but I think it should be conditional. I think it should be conditional that agencies have to be able to demonstrate to an independent third party before they go live that they have done what is necessary in order to maximize the chance of success in order to make sure that employees are protected from abuse. And I think that should be the affirmative requirement by an independent player - OPM and/or its designee, for example - and ultimately that's where I'd like to see us get.

But the key is, it's not just what you do, but how you do it that matters. As I said before, figuring out what needs to be done is 10 percent of the challenge. Ninety-percent of the challenge is implementation, all right? And it's really important to try to get the implementation right or you're going to fight a two-front war because a lot of people aren't going to like moving to a new system, no matter what it is because some people are benefited by new systems and some people aren't.

If you have a system that's market-based, skills, knowledge, and performance oriented, that's going to cut for some people and not be as good for others. It doesn't mean they're not good people; they are, but, you know, that's a big change.

MR. CLARK: So you've been at the forefront of implementing this kind of change at GAO. I want to ask you how it's going because we hear that - there's some talk of possible union election there at GAO.

MR. WALKER: I mean, look, we only have one issue where there is real controversy over, in my view, and I'm pretty close to our employees and what they think. And let me first say, look, I support collective bargaining. I support the right of people to organize, if that's what they want to do. They need to make a full and informed decision.

When you get right down to it, there's only one issue we have, and let me tell you what it is. And I wouldn't wish it on any other department or agency, and you need to understand why we have it and what you need to do to avoid it because you want to avoid it.

In 1989, our agency went to broadbanding, but when it went to broadbanding, it didn't do an adequate study of the number of different roles and responsibilities and therefore how many bands you should have. We didn't create enough bands. We created three; in hindsight we should have create four. Secondly, when we did that in 1989, the assumption was that the GS system reflected market, and so the bands were all based on the GS system. Well, the GS system may or may not have reflected market in 1989; it doesn't reflect market today, at least for us.

We went out, we studied and found out that we had the middle band, which was like a third of our workforce - we had apples, oranges and pears. We had all good people. We had people who were individual contributors and never in a leadership role. We had people that were part-time leaders and we had people that were fulltime leaders. And under the banded system, everybody had a chance to make the same amount of money, and everybody was entitled to make the pay cap. It wasn't a matter if you're going to make the pay cap; it's only a matter of when.

There was negative correlation to performance for people at the pay cap, and that system did not provide for equal pay for work of equal value over time. We created two pay ranges within this Band 2 - so-called Band 2A and Band 2B. We did a market-based study, and there were three results of the market-based study. For most of our people, we competitively compensate them. For some of our people, we ought to pay them more: attorneys, Ph.D. economists, IT specialists, people that we're focusing on developing professional standards, as an example.

And so we increased their pay ranges and their ability to make more money. And for about 10 percent - 10 to 15 percent of our employees, they're paid over market. They're paid over market. The people who are paid over market are having a tough time dealing with that, all right? And that's what this is all about, okay? We're basically having to unscramble an egg that was baked in 1989. But the way we went about that was nobody's pay was cut - nobody's pay was cut, and we provide some opportunity for people to make more money up to what they could have made under the new system. If they get placed into the higher pay range, competitively, they can make 10,000 bucks more than they ever could have made under the old system, but unless and until that happens, their future pay ranges are constrained.

And some people say, well, gee, I want to get an across-the-board increase guaranteed; I said, you're paid above market. I mean, I'm not going to go the taxpayers and tell the taxpayers I'm going to give automatic across-the-board increases for people who are paid above market, especially in a time when we've got a budget freeze.

So here are the key lessons: When you go for broadbanding and pay for performance, you absolutely have to do three things in order to avoid this, because I wouldn't want to wish it on anybody. But we did the right thing and we're sticking with it. Number one, you have to study how many different roles and responsibilities you have for each occupation, and therefore how many bands you should have. Number two, you have to do a market-based study of what people ought to get paid and not just assume the GS system is market. And number three - coming back to what I said before - you've got to have a modern, effective, credible and preferably validated performance management system that results in meaningful distinctions in performance. And if you don't do all those three things, you're going to have challenges.

Now, for the most part, everybody loves broadbanding. Why? You get a guaranteed promotion without competition, all right? I mean, who's against broadbanding? I mean, employees love broadbanding, if you do it right. Secondly, pay for performance - clearly a net plus. Clearly more people like it than don't, all right? The real challenge we have is this so-called Band 2 restructuring, which is directly attributable to what happened in 1989. And, you know, we'll get through it. But that's unique to us; that's not something that I think is a broad-based issue, nor should it be.

MR. CLARK: Please let me ask you one last question that I think would be of interest to the audience. You alluded to the budget freeze. So we've got this continuing resolution that's going to apparently last all year. What are the essential effects going to be on agencies that are subject to that?

MR. WALKER: It depends on how much of the agency's costs are discretionary and how much of the costs relate to human capital. For agencies like GAO, they're heavily human capital oriented; they don't have a lot of other non-human capital costs, and whose other non-human capital costs are really not discretionary. They're light, heat, power, you know, operating the computer system, things like that. It's a real squeeze, especially when you need and want to give pay increases to your people because they're doing a good job and because they deserve it.

And so a lot of agencies who are in our situation are going to do everything that they can to cut back on wants versus needs, defer things, freeze sort of line items like travel and a few other things at last year's level, but if you're going to give pay increases, and if 80 percent of your budget is for pay, all right, then something's got to give. And for us, you know, tentatively, through consultation with our Employee Advisory Council and others, if we don't get adequately funded, then we're inclined to do unpaid furloughs of up to five days because that's the most equitable way to distribute the pain, and it's also a temporary measure.

The other alternative is to reduce pay raises, which, believe me, employees won't like, plus that has a multiyear effect. You know, pay raises affect your high three; pay raises affect what you get compounded in future years, but my view is I like to avoid both, and we're going to do, and we are doing, everything we can to try to avoid both. I mean, one of the things that I've proposed to Congress is give every agency the amount necessary to fund the across-the-board increase, to give every agency that. You may not give them anything else, but give them that. If we get that, we don't have to have any unpaid furloughs, we can give reasonable pay adjustments, we can deal with the rest.

But ultimately we need to get to a system that merit-based. Our current appropriations system is not merit-based. GAO's employees generated $105 return for every dollar invested last year - all time record for us, number one in the world. Second place isn't even 10 to 1. And we are not being treated fairly, and I'm going to keep on fighting until we are.

MR. CLARK: Thank you very much. Please join me in thanking David Walker for being with us.

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