Accounting games

Should the latest proposed accounting change for federal pay and benefits worry federal employees?

Federal employees with a few decades of service under their belts are familiar with the many accounting tricks involving pay and benefits that presidents and lawmakers have used to reduce government spending.

In the 1980s, President Reagan moved the effective date for federal pay raises from the start of the fiscal year, in October, to January, where it remains today, to delay the annual increase in spending. Reagan and lawmakers also changed the number of hours per year on which workers' hourly rates are based from 2,080 to 2,087--a change that reduces workers' paychecks (see Why Your Paychecks Don't Always Add Up, Sept. 9, 1999).

In 1997, President Clinton and lawmakers temporarily increased deductions from federal employees' paychecks for contributions to their retirement funds. The boost in deductions, which was rescinded in 2000, cost many employees more than $100 in take-home pay in 1999.

To reduce expenditures in one fiscal year, lawmakers frequently try to move the end-of-September payday for some federal workers and military personnel to the beginning of October, when the next fiscal year begins.

All of these accounting games give many federal workers the jitters when they hear politicians talking about civil service pay and benefits. Readers of Pay and Benefits Watch have written many e-mails questioning whether Treasury Secretary Paul O'Neill is "pulling an Enron," as many have described it, by suspending investments in the Thrift Savings Plan's G Fund during the current debt limit crisis. (See Treasury to suspend G Fund investments for assurances that your money in the G Fund is safe.)

Another concern for federal workers is the Bush administration's plan to change the way the government accounts for Civil Service Retirement System benefits and Federal Employees Health Benefits Program benefits.

The Bush administration is proposing to fund the full cost of the government's share of those benefits directly out of agencies' salary and expense accounts. Currently, those benefits are partially funded through a central account managed by the Office of Personnel Management.

The change would move $9 billion in fiscal 2003 out of the central OPM account into agency accounts. The central fund is considered a "mandatory" account and is not subject to annual spending debates on Capitol Hill, but agency accounts are considered "discretionary" and are subject to congressional approval.

The change, Office of Management and Budget Director Mitch Daniels told the House Treasury-Postal Appropriations Subcommittee on March 20, would make managers aware of the full cost of employment decisions. "At long last, the true cost of these programs will be visible, and managers will have full incentive to control the costs of additional personnel," Daniels said.

But National Treasury Employees Union President Colleen Kelley says a concern among federal employees about the proposed change is that future spending caps or funding cuts would force agencies to cut training or layoff employees to pay for the retirement and health benefits. "These possibilities are not far-fetched," Kelley told the Senate Governmental Affairs Subcommittee on International Security, Proliferation and Federal Services on March 18. "Every year agencies are hamstrung by restrictive funding levels and forced to shuffle resources between competing priorities and from one account to another."

So would this accounting change help managers make more informed personnel decisions, as Daniels suggested, or would it lead to cuts in operating budgets, as Kelley said?

If the military's experience with a similar change is any indication, the answer may be neither, according to a recent report by the Los Angeles-based nonprofit RAND Corp.

In 1984, Congress told the Defense Department to switch to the so-called "accrual method" to account for military retirement, the same method being proposed for civil service retirement and health benefits. Reformers used the same argument that Daniels is now making: Personnel managers would make better decisions by considering the full cost of service members.

But the RAND report says the accrual method hasn't done that.

"The current method fails to provide appropriate incentives to manage the number of individuals retiring from service, to handle changes in force size or to provide incentives to each service to manage its personnel effectively," says the 2001 report.

The report suggests several reasons that the method hasn't improved personnel management. One is that personnel managers don't understand how the accrual method works, so they don't apply it to their plans. Another reason is that the estimates of retirement costs the Defense Department comes up with each year don't reflect reality. They don't take into account several ever-changing factors, including the effects of pay raises and benefit changes on the services' ability to keep personnel, or the differences in retention and retirement rates among the services.

A third reason that the accrual method hasn't affected personnel decisions is that military services haven't had to make trade-offs in the budget process based on retirement costs. They haven't had to cut other programs when retirement costs increased, nor have they been able to spend more money on other programs when retirement costs decreased. When retirement costs have fallen, the Office of the Secretary of Defense has snatched up the savings for priority programs. "Not only are services uncertain whether accrual savings will be fungible, but if they are, OSD will control them," the RAND report says. "This largely eliminates incentives at the service level for efficient management of retirement obligations."

That experience suggests that the accrual method may not affect training and personnel levels, as Kelley told the Senate in March.

But the 1984 change had another effect on military pensions-one that could worry federal employees. The change allowed more direct, transparent comparisons between military retirement benefits and that of the private sector. Congress decided military retirement benefits were too generous, and in 1986, reduced them.

Long-Term Care Checkup

On April 10, the Senate Select Committee on Aging will hold a hearing to examine the new federal long-term care insurance program. The Office of Personnel Management kicked off an early enrollment period for the program last week.

The hearing will be held at 9:30 a.m. in Room 628 of the Dirksen Senate Office Building.