PRESIDENT S PRIVATE SECTOR SURVEY ON COST CONTROL-TASK FORCE REPORT ON THE DEPARTMENT OF STATE/AID/USIA

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85B01152R001201540002-5
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 154
• Document Creation Date: December 21, 2016
• Document Release Date: May 5, 2008
• Sequence Number: 2
• Publication Date: May 26, 1983
• Content Type: REPORT

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PRESRDENT'S
PRRVATE SECTOR SURVEY
ON COST CONTROL
THE
ID
TASK FORCE REPORT ON
PARTMENT OF STATE/MMD/USIA
SUBMITTED TO THE SUBCOMMITTEE FOR
CONSIIDERATIION AT ITS MEETING ON MAY 26, 1983
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DEPARTMENT OF STATE/AID/USIA
SUBMITTED TO THE SUBCOMMITTEE FOR CONSIDERATION
AT ITS MEETING ON MAY 26, 1983
CO-CHAIRS:
J. Rawles Fulgham
George L. Shinn
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THE PRESIDENT'S PRIVATE SECTOR SURVEY ON COST CONTROL
May 6, 1983
Mr. J. Peter Grace
Chairman, Executive Committee
President's Private Sector Survey
on Cost Control in the Federal Government
The following Report represents the results of the
State/AID/USIA Task Force of the President's Private Sector
Survey on Cost Control in the Federal Government. The
report culminates the combined efforts of 28 private sector
volunteers who contributed 30 person months of their exper-
tise on a pro bono basis to the PPSS initiative. In addi-
tion, these team members represented 14 private sector com-
panies who reviewed State/AID/USIA activities during the
period from June 22, 1982 through November 12, 1982.
The, Report contains proposed major recommendations
which, when fully implemented, could result in three-year
total cost savings and revenue generation of $719.3 million.
This consists of first year annual cost savings and revenue
generation of $170.1 million. In addition, another $55.9
million in cash acceleration over three years could be
realized. It should be noted, however, that some of the
recommendations may require a number of years for the full
savings to be realized. While all facets of State/AID/USIA
could not be surveyed in the time allotted, areas selected
for review were considered to offer significant potential
for cost savings and/or other benefits.
Clearly, other opportunities for improvement exist,
but due to limited time and personnel resources available,
they could not be pursued. Several, however, because they
offer significant potential savings opportunities, are
suggested for further review. We believe you and the other
members of the Executive Committee will find our recommen-
dations to be constructive and fully documented. We urge
their adoption by the Executive Committee.
1850 K Street, N.W. ? Suite 1150 ? Washington, D.C. 20006
[phone]
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Mr. J. Peter Grace
May 6, 1983
Page 2
The importance of the accompanying recommendations is
underscored by their potential to better utilize the finite
resources available to the Federal Government, particularly
as they relate to State/AID/USIA. It was the intention of
this Task Force to suggest approaches and practices that
will enable the Executive Branch to carry out its mission
of guiding more effectively the State/AID/USIA programs and
policies which are important to our country.
Should you, the other members of the Executive Commit-
tee, or the Survey Management Office have any questions,
please do not hesitate to contact us, the Project Manager,
or the individual members of the Task Force..
George L. Shinn
Chairman of the Board (Retired)
The First Boston Corporation
J . 1 .r u1gham
Vice Chairman (Retired)
InterFirst Corp.
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0 REPORT OF THE TASK FORCE ON
DEPARTMENT OF STATE/AID/USIA
0
SUBMITTED TO THE SUBCOMMITTEE FOR CONSIDERATION
AT ITS MEETING ON MAY 26, 1983
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On June 30, 1982, President Reagan signed Executive
Order 12369 formally establishing the President's 'Private
Sector Survey on Cost Control (PPSSCC) in the Executive
Branch of the Federal Government. An Executive Committee
under the chairmanship of J. Peter Grace was established,
consisting of 161 high-level private sector executives--
mostly chairmen and chief executive officers--from many of
the nation's leading corporations.
Briefly stated, the President directed the PPSSCC to:
o Identify opportunities for increased efficiency
and reduced costs achievable by executive action
or legislation.
o Determine areas where managerial accountability
can be enhanced and administrative controls
improved.
o Suggest short- and long-term managerial operating
improvements.
o Specify areas where further study can be justified
by potential savings.
o Provide information and data relating to govern-
mental expenditures, indebtedness, and personnel
management. _
The Executive Order also provided that "the Committee
is to be funded, staffed and equipped . . . by the private
sector without cost to the Federal Government." To imple-
ment this objective, the Foundation for the President's
Private Sector Survey on Cost Control was established. It
formed a Management office which organized thirty-six "task
forces," each co-chaired by two or more members of the
Executive Committee, to do the "preliminary reports." These
are listed below:
Agriculture
Air Force
Army
Automated Data Processing/Office Automation
Boards/Commissions-Banking
Boards/Commissions-Business Related
Commerce
Defense-Office of Secretary
Education
Energy (including Federal Energy Regulatory
Commission and Nuclear Regulatory
Commission)
Environmental Protection Agency/Small
Business Administration/Federal
Emergency Management Agency
Federal Construction Management
Federal Feeding
Federal Management Process
Financial Asset Management
Health & Human Services-Department Management/
Human Development Services/ACTION
Health & Human Services-Public Health
Service/Health Care Financing Admin..
Health & Human Services-Social Security Admin.
Hospital Management/Veterans Admin.
(Hospitals)
Housing & Urban Development
Interior
Justice
Labor
Land, Facilities, and Personal
Property Management
Low Income Standards and Benefits
Navy
Personnel Management
Privatization
Procurement/Contracts/Inventory
Management
Real Property Management
Research and Development (National
Science Foundation/National
Aeronautics & Space Admin.)
State/USIA
Transportation
Treasury
User Charges
Veterans Administration
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Twenty-two of these task forces were assigned to study
specific departments and agencies, and the remaining fourteen
studied functions cutting across government such as personnel,
data processing and procurement. Apart from the co-chairpersons,
none of the task force members were members of the Executive
Committee, nor did the task forces have any authority to make
recommendations to departments and agencies or to the President.
Each of the 36 task forces prepared a draft report. This
is one such task force report. Each, with a few exceptions,
also prepared an appendix providing more detailed information
supporting the tentative recommendations contained in the task
force report. Those appendices are on file at the Department
of Commerce's Central Reference and Records Inspection Facility.
It should be noted that tentative recommendations relating to
any one federal agency may be included not only in the
appropriate agency task force report but also in the reports
of the functional cross-cutting task forces.
All of the task force draft reports will be considered
and acted upon in meetings open to the public by a Subcommittee
of the Executive Committee of PPSSCC, along with other statements
and recommendations. Accordingly, all tentative recommendations
contained in this task force report are subject to possible
changes resulting from the Subcommittee's deliberations. In
addition, in identifying the implementation authority for each
recommendation, the Task Force drew upon all available data at
its disposal. Because of the complexities of the appropriations
process, as well as historical precedents, further data could
result in a change in the PPSS-identified authority.
It is important to note that cost savings, revenue
generation, and cash acceleration opportunities in this draft
report may duplicate similar dollar opportunities reported in
other task force reports. Thus, there may be instances of
double counting of dollar opportunities between task force re-
ports. These duplications will be netted-out in the Final Summary
Report to the President. Additionally, dollar estimates in this
draft report are based on reasonable and defensible assumptions,
including standard three-year projections based on first, second,
and third year partial or full implementation will occur.
Accordingly, estimated savings or revenue opportunities are
understandably of a "planning" quality and not of a "budget"
quality. Therefore, the reader should guard against drawing
conclusions or making dollar projections based on the disclosures
contained only in this draft report.
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Following action upon all of the task force reports, the
Executive Committee will adopt a Final Summary Report to
the President, summarizing the scope of its individual task
force recommendations and offering general conclusions and
advice. This Summary Report is tentatively scheduled for
release on or about June 30, 1983.
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]?age
Number
EXECUTIVE SUMMARY
THE REPORT RECOMMENDATIONS --
A PERSPECTIVE
i
I.
INTRODUCTION
1
II.
ISSUE AND RECOMMENDATION SUMMARIES
A.
DEPARTMENT OF STATE
5
B.
AGENCY FOR INTERNATIONAL DEVELOPMENT
54
C.
UNITED STATES INFORMATION AGENCY
90
III. SUMMARY OF RECOMMENDATIONS AND SAVINGS
99
IV. COST CONTROL OPPORTUNITIES FOR
105
FURTHER STUDY
V.
TASK FORCE MEMBERSHIP
122
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9
0
Table
TABLE OF EXHIBITS
Title
Page
Number
-II-1
Foreign Service Personnel Out of Grade
12
11-2
Typical Classifications of Overcomple-
ment Personnel
13
11-3
Elimination of Position Grade/
Personnel Grade Overages
18
11-4
Salary Costs of Other Overcomplement
Employees
20
11-5
Summary of Overcomplement Savings
21
11-6
Consolidation of 1981 Shipments
82
11-7
AID Shipments Abroad
83
11-8
Savings Resulting from Use of Foreign
Shipping
89
IV-1
Administrative Support
108
IV-2
International Organizations'
Contributions Assessed
114
?
Figure
Title
Page
Number
1 Interest Rate Comparisons
2 Retirement System Cost as Percent
of Payroll
S
0
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EXECUTIVE SUMMARY
AND
PERSPECTIVE
0
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EXECUTIVE SUMMARY
The State/AID/USIA Task Force surveyed the interna-
tional affairs agencies -- the Department of State (State),
Agency for International Development (AID) and U.S.-
Information Agency (USIA) -- to identify opportunities for
increased efficiency and reduced costs, to determine areas
to enhance managerial accountability, to suggest managerial
operating improvements and to pinpoint specific areas for
further study.
The study was conducted by 28 private sector volun-
teers from investment and commercial banks; consulting and
public accounting firms; privately held businesses; a non-
profit, private-voluntary organization and several univer-
sities. Experts in the areas of personnel, retirement
plans, building management and project administration were
consulted from other private sector organizations.
While the Task Force findings resulted primarily from
analytical studies and interviews conducted in Washington,
visits to selected embassies and overseas posts provided
substantive and supportive details for the.broad, funda-
mental issues we identified, particularly in the areas of
the Foreign Service Personnel System, Foreign Buildings
Operation, AID Project Planning and Organization for
International Affairs Activities.
We had complete access to all personnel at these
agencies and were extended full cooperation and courtesy.
We interviewed over one hundred government officers ranging
from Department Secretary, Agency Director and ambassador
to junior foreign service officer and staff members. A
number of former government officers including a Department
Secretary, retired ambassadors and ex-agency heads also
provided additional information, data and perspectives.
The International Affairs Budget Perspective
The President's FY 1983 budget "to protect and advance
the interests of the United States and its people in inter-
national affairs"!/ amounts to $18.1 billion, representing
Presidential Budget - FY 1983.
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2.3 percent of the total $801.9 billion Federal budget.
The department and agencies assigned to this Task Force
comprise 46 percent of the international affairs budget,
totaling $8.2 billion or 1 percent of the Federal budget.
Employment at these agencies for FY 1983 is estimated at
nearly 38,000 personnel both in the United States and
abroad. The other international affairs activities (com-
prising 54 percent of the budget) such as military sales,
P.L. 480 and Export-Import Bank have been studied by Task
Forces assigned to the Department of Defense, Department of
Agriculture and Boards/Commissions-Banking Investment,
respectively.
While the combined spending of the departments/
agencies reviewed by this Task Force, have increased by 166
percent over the past 20 years, combined personnel head-
count has decreased by more than 10,000 or 23 percent,
particularly at AID (64 percent) and USIA (32 percent).
The most significant budget increase has occurred at the
Department of State, where expenditures have multiplied by
a factor of seven since 1962, while at AID and USIA the
budgeted expenditures have merely increased by 1.8 and 2.4
times their respective 1962 levels.
Task Force Focus
Our Task Force reviewed all budgeted expenditure cate-
gories for each of the agencies to identify the most rele-
vant cost saving opportunities. We determined that at least
60 percent of such expenditures was funded to support major
international affairs policy initiatives and decisions; for
example, Contributions to International Organizations and
Economic Support funds amount to $83.6 million for FY 1983
and are tied to our United Nations position and the "Camp
David Accord," respectively. Our focus, therefore, became
those areas of operating expenditures in need of a criti-
cal objective review and opportunities for cost-saving
within the administration of funding for international
policy initiatives and decisions.
Opportunities for Cost Savings and Revenue Enhancements
It is our judgment that, if implemented in a vigorous
and constructive manner, the Task Force's 38 recommenda-
tions, including Issues recommended for further study, could
reduce costs and generate increased revenues while improving
the effectiveness of the international activities effort by
at least $170.1 million in the first year of implementation,
with-an overall savings of $719.3 million over three years.
In addition, another $55.9 million in cash acceleration over
three years can be realized. Larger paybacks could result
in future years as benefits are gained from the development
of more efficient systems, as recommended.
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Total dollar savings/revenue enhancement opportunities
are as follows by year:
($ millions).
First Year
Second Year
Third Year
Total
Cost Savings
$110.1
$119.7
$129.5
$359.3
Cash accelerations
21.3
18.5
16.1
55.9
Revenue enhancements
60.0
120.0
180.0
360.0
Total
91.4
258.2
325.6
775
Direct three-year cost savings and cash accelerations
of $258.6 million are achievable at State through the
realignment of personnel, elimination of overcomplement
personnel, revisions of certain provisions of the
retirement system, positioning for foreign currency needs,
and collection of interest on refugee loans (see STATE 1
through STATE 5).
Three-year cost savings and revenue enhancements at
AID are estimated to be $516.6 million through elimination
of burdensome project paperwork, an increase in the
interest rate on AID loans, extension of the overseas
assignment period and relief from the Cargo Preference
policy (see STATE'6 through STATE 9). Savings by agency
are summarized as follows:
($ millions)
FY 1983
Budget authority
First year
savings
Percentage
to budget
State
$2,673
$ 84.1
3.1%
AID
4,895
107.3
2.2
USIA
Other
653
118
*
--
191.4
2_3%
* Specific savings not estimated.
The Task Force has also identified opportunities for
further study in the following areas affecting inter-
national affairs:
o the organizational structure;
0 the use of foreign currencies held by the United States;
o contributions to international organizations; and
0 overseas workmen's compensation insurance.
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A recap of recommendations by implementation authority
follows:
Implementation by agency authority
State
AID
USIA
Implementation
by
presidential
authority
Implementation
by
congressional authority
3-year
Number of savings in
recommendations $ millions
19
$168.0
8
385.8
2
--
8
$ 6.0
11
$215.4
48 *
775.2
* Includes instances where further study is recommended and
implementation is required at more than one agency and/or
authority level.
Findings and Conclusions
The 14 issue areas resulting from our Task Force ef-
forts include findings and conclusions that relate specif-
ically to opportunities for improving the management of
international affairs, for application of private sector
business techniques and for elimination of excess costs in
identified programs.
1. The Management of International Affairs
The international affairs activities of the U.S.
Government have not only expanded but also changed in
direction since our role as an international superpower was
established through World War II. The pre-war roles includ-
ed treaty negotiation, official representation and consular
representation. Today, a host of new activities requires a
far greater range of skills than provided by forma]. train-
ing in international affairs and host country languages.
The new activities include economic analysis; development
and financial loan assistance; multilateral negotiation;
monitoring of special situations like narcotics traffic,
terrorist activities and U.S. capital investment overseas;
and international trade negotiations (export of U.S. surplus
commodities, military arms and other industrial products and
import of needed natural and strategic resources). At the
same time, the role of the Secretary of State has become
oriented toward that of chief negotiator and shuttle diplo-
mat, leaving less time available for the expanded management
requirements.
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The Foreign Service Officer Corps initially staffed
these activities by assumption of the new duties under the
theory that a Foreign Service Officer can/should respond to
any overseas job requirement. Beginning in the early 50s,
it was realized that these activities had diverted State's
Foreign Service Officers from a traditional diplomatic role
and also required more specialized skills. Spin-off of some
activities like public information, development assistance
and (recently) international trade to either new agencies
or other departments was initiated. Today, as a result,
while Foreign Service Officers from State/AID/USIA comprise
the majority (70 percent) of U.S. personnel at overseas
posts, representatives from 22 other departments and agen-
cies are found in many posts. However, State has continued
to maintain its role as host in each embassy and provides
administrative support to other agencies present overseas.
In addition, the Secretary of State has maintained a dotted-
line responsibility for the information agency and develop-
ment assistance functions.
We observed in our visits to embassies and in our
Washington interviews, particularly at State, the effects
of these shifts in international affairs requirements.
Efforts had been expended primarily to respond to those
requirements. The presence of business-like managerial
skills and controls was not uniformly evident, and their
development is just being introduced to Foreign Service
Officer training.
Our focus highlighted the broad, fundamental areas
which, when corrected, can result in a better managed
international affairs function and in cost savings to the
government process. Opportunities for better management
were seen within the Foreign Service Personnel System,
where we found that the distribution of personnel is
heavily skewed toward the higher levels in sharp contrast
to other professions as shown below.
COMPARISON OF STATE PERSONNEL DISTRIBURIO:N_
TO OTHER ORGANIZATIONS
(Senior 1
I I
I I
IMid-level)
I I
(Junior I
I I
State
Accounting
Banking
I
Military
I
20%
12%
8%
I
6%
I
I
I
I
66%
I
16%
I
40%
I
65%
I
I
1
I
I
I
14%
I
72%
I
52%
)
29%
I
I
I
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We also found that 56 percent of State's Foreign Service
Officers who are not specialists are mismatched in rank to
job position due to the rank-in-man staffing approach (see
below).
Personnel
Not in Jobs
Equal to
Rank
56%
Personnel
In Jobs Equal
To Rank
44%
As a result, "overcomplement" personnel are maintained
within the Department.
In addition to personnel concerns in the management of
international affairs, Foreign Buildings Operations lacks
the informational tools to manage the vast (at least $5
billion) real estate holdings abroad; instead it is orien-
ted toward building design and construction. Also, the
three agencies -- State/AID/USIA -- maintain separate
regional bureaus and administrative facilities in
Washington, while sharing most administrative support
overseas; the need for the establishment and continuance of
many bureaus, functions and diplomatic posts was not always
apparent. The problem is compounded by the fact that most
Senior Foreign Service Officers covet the role of negoti-
ator or ambassador and avoid typical management and admini-
strative functions. This is particularly troublesome
because the shift of international affairs functions to
other departments and agen- cies, as noted previously, has
elevated the need for management and administrative skills
at most embassies.
2. Application of Business Techniques
We have found and concluded that the application of
specific business techniques could significantly enhance
cost-effectiveness. Specifically, adjusting charges to
match costs has not taken place, as evidenced by the fact
that interest rates on AID loans have not paralleled
Federal borrowing costs (see Figure 1).
[Figure 1 on following page]
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Figure 1
INTEREST RATE COMPARISONS
2 "/- AID Loan Rate
1 1 t 1
1975 1980
(Average)
Further, foreign exchange fluctuation risks could be
minimized by purchasing currencies in advance. Addition-
ally, we found that evaluation processes had not been fully
applied to programs at USIA and in State's Bureaus for
Refugee Programs and International organizations.
3. Elimination of Excess Costs
We found that U.S. taxpayers are bearing the burden of
excessive costs for the Foreign Service Retirement System
and AID's Project Planning, Cargo Preference Policy and
Rotational Policy. For example, excessive retirement sys-
tems costs, primarily from a lower retirement age, result
in higher percentage of payroll costs as shown in Figure 2.
[Figure 2 on following page]
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Percentage
of
Payroll 20
290
Foreign Civil Private
Service Serv. Sector
System System
Recommendations and Implementation
We recommend that corrective action, improvement and
further consideration be made in 38 specific ways in our
Report. Implementation of these recommendations can result
in immediately quantifiable budgetary savings of $191.4
million in the first year and $325.6 million in the third
year. We believe that larger paybacks in future years will
result from the application of management and business
techniques, but more importantly enhance the quality of our
international affairs functions.
A tabular summary of savings by issue follows:
No.
Issue
Number of
recommendations
First year
savings
($ millions)
1
Personnel
6
$ 25.8
2
Retirement
2
29.7
3
Foreign buildings
5
4
Foreign exchange
3
5.7
5
Refugee programs
3
22.9
6
Project planning
5
9.9
7
Interest on loans
3
60.0
8
Rotation policy
1
1.6
9
Cargo Preference
1
35.8
10
Evaluation process
2
IV
Further study areas
7
$-191-.4
Figure 2
RETIREMENT SYSTEM COST AS
PERCENT OF PAYROLL
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More than 70 percent of our recommendations can be
implemented by Agency authority, with a cost savings of
$553.8 million over three years. We, therefore, urge the
respective agency heads to initiate suggested actions as
quickly as possible. Recommendations which require Presi-
dential action do not represent a substantial portion of
our cost saving, because those recommendations contain,
areas where further study and justification, as well as
policy decisions, are required. We believe, however, that
the potential savings from those areas could exceed those
already quantified and encourage full and expeditious
consideration. Lastly, we believe our recommendations
requiring congressional action contain realistic and
feasible solutions to situations costing the U.S. taxpayer
$215.4 million more than required.
Finally, we recognize that implementation steps may
reveal refinements and additional findings that should
strengthen these executive agencies in the most efficient
way.
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THE REPORT RECOMMENDATIONS -- A PERSPECTIVE
As the product of an unprecedented and wide-ranging
survey performed in a political atmosphere by private sec-
tor executives and specialists, the recommendations in this
Task Force Report must be placed in perspective. Our
volunteer staff had the formidable task of bringing their
expertise to bear on the complex Federal operations in the
short span of a few months while holding down other full-
or part-time employment.
Despite these challenges -- most of which were antici-
pated at the outset -- valuable analysis and issue develop-
ment were achieved. The recommendations contained in this
Report will result, if implemented, in real and significant
savings and other benefits to American taxpayers whose hard
work and personal sacrifices financially support these
Federal programs and operations.
We believe that the majority of our recommendations
are fully substantiated. However, it would be misleading
to allege that each and every recommendation is rooted in
uniformly high level of research, analysis and substanti-
ation. Various time limitations, business resources, and
other constraints did not permit achievement of the desired
uniformity objective.
We have evaluated, therefore, the "supportability" of-
the recommendations on their management merits and have
grouped them into the following three categories.
o
Category I
--
0
Category II
--
o
Category III --
Fully substantiated and defensible.
Recommendations in this category are,
in the opinion of the Task Force,
convincing and deserving of prompt
implementation.
Substantially documented and sup-
portable. Recommendations in this
category may not be fully rational-
ized or documented in the Report, but
all indications point to the desira-
bility and defensibility of proceeding
with their implementation.
Potentially justifiable and sup-
portable. Recommendations in this
category, while meritorious,-are not
regarded as fully supported in the
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Report, due to time, personnel
resources, and other constraints, but
are deemed worthy of further analysis
to determine the full extent of their
merit for implementation.
These category descriptions do not take into account
political, social or economic conditions which may alter
the supportability of these recommendations for implementa-
tion. Accordingly, it is possible, by grouping the recom-
mendations along the above categories, to assess more
effectively the cost savings that can be expected. This
analysis permits summary estimates of: (1) firm, (2) prob-
able, and (3) potential savings.
The Report Recommendations -- An Assessment
Based on the above perspective and categorization, an
assessment of the reported recommendations is contained in
the following matrix:
3-year savings by
category with. savings/
revenue/cash accelera-
tion indicated
State 1:
Foreign Service Personnel
System
o Use models to correct skewed
distribution (STATE 1-1) $42.4(S)
o Review ranking of positions,
realign personnel (STATE 1-2) 19.9(S)
o Eliminate overcomplement
employees (STATE 1-3) 24.0(S)
o Redesign the performance
evaluation system and train
supervisory personnel
(STATE 1-4)
o Amend the FSA 1980 to expand
definition of management official
(STATE 1-5)
o Improve recruiting and training
(STATE 1-6)
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3-year savings by
category with savings/
revenue/cash accelera-
tion indicated
STATE 2:
Disability System and Foreign
Service Retirement
0 Increase retirement age
(STATE 2-1)
o Change the benefit formula
(STATE 2-2)
STATE 3:
Office of Foreign Buildings
o Develop a real property
management system (STATE 3-1)
o Properly allocate operating
and maintenance expenditures
(STATE 3-2)
o Expand cost accumulation
report (STATE 3-3)
o Consolidate fiscal authority
(STATE 3-4)
o Provide guidelines for
identification of excess
capacity (STATE 3-5)
STATE 4:
Purchase of Foreign Currencies
o Develop an accounting system
to gather foreign currency neeas
(STATE 4-1)
0 Establish foreign currency
futures/forward desk
(STATE 4-2)
$ 56.7 (S)
33.9(S)
17.1(5)
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3-year savings by
category with savings/
revenue/cash accelera-
tion-indicated
o Hire staff and define
functions of trading desk
(STATE 4-3)
STATE 5:
Refugee Programs
0
Rectify the collection
problem; require sponsor
$ 55.9(CA)
guarantee (STATE 5-1)
$ 11.7(S)
o
Improve monitoring program
(STATE 5-2)
0.0(S)
o
Develop tracking and integrated
data base (STATE 5-3)
(3.0)(S)
STATE 6:
Project Planning, Approval, and
Monitoring Process
o Increase the dollar value of
block grants (STATE 6-1) 7.1(S)
0 Request Congress to return
deobligation/reobligation
authority to AID (STATE 6-2) 6.3(S)
o Find additional ways to
increase decentralization of
authority (STATE 6-3)
0 Limit the time spent responding
to Congress (STATE 6-4) 6.3(S)
o Move to a two-year budget
submission cycle (STATE 6-5) 6.0(S)
7.1 (S)
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3-year savings by
category with savings/
revenue/cash accelera-
tion indicated
STATE 7:
Interest Rates on AID Loans
o Establish a base lending rate
(STATE 7-1) 360.0(R)
o Establish a uniform set of
criteria for the determination
of loan terms (STATE 7-2)
STATE 8:
Foreign Service Rotation Policy
o Enforce four-year tours
(STATE 8-1) $ 5.3(S)
Cargo Preference
0 Seek relief from cargo
preference for AID-sponsored
shipments (STATE 9-1)
STATE 10:
Evaluative Procedures
o Establish analytical resource
capability (STATE 10-1)
0 Defer expenditure for planned
expansions (STATE 10-2)
Total cost savings (S)
Total revenue generation (R)
Total cash acceleration (CA)
118.5(5)
$355.2
$4.1
$360.0
--
$ 55.9
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It
0
I. INTRODUCTION
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I. INTRODUCTION
This Task Force has identified cost-saving oppor-
tunities within three major agencies responsible for the
conduct of international affairs and implementation of
foreign policy. These agencies -- the State Department
(State), the United States Information Agency (USIA) and
the Agency for International Development (AID) -- account
for $8.2 billion!/ of the $801.9 billion estimated FY
1983 Federal budget, and employ, both overseas and in the
United States, 38,000 personnel of the 2,054,000 government-
wide civilian headcount. The expenditure of the budgeted
resources falls within two categories:
o Operating expenses - $2.9 billion or 35 percent
of total budget ($8.2 billion), and
o Bilateral and multilateral assistance programs --
$5.3 billion or 65 percent of total budget.
The Task Force had also been assigned to review the
Peace Corps but found that its limited funding requirement
of $98.5 million, coupled with evidence of an effective
agency-developed cost reduction program, did not justify
allocation of our limited study group resources.
Federal government expenditures for other non-military
international affairs programs such as arms sales, P.L. 480
(grain sales) and international lending were assigned to
other Task Force teams.
The three. government units -- State, USIA and AID --
have a common international focus as well as coordinated
international roles and similar personnel structures. The
Secretary of State was the first cabinet post established
by our country's founders and, under the Constitution, the
Secretary is third in line of succession to the President;
hence, State has been traditionally accorded the senior
status amongst all executive departments.
Both USIA and AID were created after World War II.
USIA was established in 1953 as a result of the separa-
tion of the International Information Administration, the
Mutual Security Agency and the Technical Cooperation Agency
from the State Department. Under Reorganization Plan No. 2
of 1977, USIA was consolidated with the Bureau of Educa-
tional and Cultural Affairs of the State Department to form
the International Communications Agency (ICA). The name
USIA was reinstated in August 1982.
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AID was formed in 1961 by merging two foreign aid
organizations -- the International Cooperation Administra-
tion and the Development Loan Fund (which were successors
to five other post-war agencies). AID has operated as an
independent agency under the foreign policy guidance of the
Secretary of State although, since 1979, it has reported
through the International Development Cooperation Agency
(formed by the Carter Administration).
Tradition as well as a Presidential definition. of the
Secretary of State's role have established State's leading
position. "The Secretary of State has responsibility not
only for the Department of State and the Foreign Service
but also...for the overall policy direction, coordination
and supervision of the United States Government activities
overseas." 1/ The "overall coordination" mandate has
caused State to establish an administrative support capabi-
lity seen in the following ways: In the personnel area,
U.S. employees serving overseas?/ are members of the
Foreign Service Corps, headed by a Director General who is
also the Director of Personnel for State. In the :Facili-
ties area, office and residential space is provided to U.S.
personnel through State's Foreign Building Office. Com-
munications facilities and financial services (expenses and
payroll) are also established by State and provided to
resident agencies.
Organizationally, each bureau uses a similar geogra-
phic regional structure to coordinate the activities of its
personnel at overseas missions. The distinction amongst
21 Letter of Instruction, 9/22/81; President Reagan to
all Ambassadors.
2/ Excluded are uniformed military personnel serving at
overseas military installations, military attaches and
certain other Agency personnel assigned to diplomatic
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State,
USIA and AID lies in the facet of international
affairs
for which each agency is responsible, as described
below:
Other
Prime function/activity
responsibilities
State
Conduct of official relations
Consular services
with host government
Refugee
Political reporting & analysis
assistance,
Economic reporting & analysis
Administrative
support
USIA Public affairs activities
Information distribution
programs & reporting
Broadcasting services
Cultural &
exchange programs
AID Developmental assistance Disaster
Economic support assistance
Personnel from these agencies performing the above func-
tions comprise 65 percent of the 33100-person overseas
workforce (exclusive of military). _
Because the conduct of international affairs inherently
requires the expenditure of U.S. taxpayer funds outside the
United States, close scrutiny and skepticism have been the
standard framework for hearings on funding requirements and
individual programs. Besides Congressional subcommittee
hearings and General Accounting Office (GAO) review reports,
the Office of Management and Budget (OMB) and Inspector
General (IG) staff reports document the oversight audit and
review of these agencies. These reports, on a collective
basis, have been used by our Task Force members as a start-
ing point for the identification of cost-saving issues and
opportunities to improve the efficiency of these governmental
operations.
During the issue development process, numerous fact-
finding interviews were conducted. We found that the
current relevance of many issues was confirmed both during
the interviews and by the existence of some other previous
study on the same issue. In addition to interviews and
analytical reviews in Washington during the
1/ 'Personnel performing military and political intelli-
gence functions, and commercial and agricultural trade
activities comprise 27 percent of the total, while*
personnel from 16 other agencies (e.g., Treasury) com-
prise the remaining 8 percent.
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detailed study phase, on-site interviews were conducted at
14 overseas diplomatic posts, where personnel from all
agencies were interviewed to the extent possible.
At first glance, a reviewer of the agencies assigned
to this Task Force could conclude that measurement of the
work product associated with the international affairs
functions is difficult. Another initial conclusion is that
the major expenditure amounts in each budget are "people
costs" -- salaries and other employee benefits. Lastly,. it
is observed that many decisions could ultimately be related
to "policy decisions" which are beyond the boundaries of
our mandate.
Each of these preliminary conclusions were found to be
correct to some extent with respect to substantive diplo-
macy conducted over long periods of time. Nevertheless,
our Task Force has*been able to apply business analysis
techniques and private sector examples to the preliminary
findings during our work. As a result, ample opportunity
for cost-savings was found within the administration of
international affairs funding.
Our recommendations present each Agency with oppor-
tunities to reduce costs, increase efficiency, obtain
managerial accountability and improve control. Several
instances where further study should reveal additional
savings have also been identified.
Significant Contributors
We found that personnel at each of the agencies were
cooperative and provided invaluable direction and support,
when requested. In particular, we thank Ambassador Robert
H. Miller and Mr. Roger B. Feldman at State; Messrs. James
T. Hackett and Stanley M. Silverman at AID; and Messrs.
Thomas Rollis and Ain Kivimae.
Budgetary Information - Summary Spreadsheet
The size, growth and the significance of an agency is
indicated in part by its budget. To allow the reader more
data to place these factors into perspective, a summary of
budgetary information since 1962 is included as background
information. Data shown include numbers of personnel,
compensation, operating expenses and capital spending.' These
data were prepared at the start of the Survey. In some
cases, they were updated in the Issue and Recommendation
Summaries (Section II). (See spreadsheet on following page.)
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detailed study phase, on-site interviews were conducted at
14 overseas diplomatic posts, where personnel from all
agencies were interviewed to the extent possible.
At first glance, a reviewer of the agencies assigned
to this Task Force could conclude that measurement of the
work product associated with the international affairs
functions is difficult. Another initial conclusion is that
the major expenditure amounts in each budget are "people
costs" -- salaries and other employee benefits. Lastly,. it
is observed that many decisions could ultimately be related
to "policy decisions" which are beyond the boundaries of
our mandate.
Each of these preliminary conclusions were found to be
correct to some extent with respect to substantive diplo-
macy conducted over long periods of time. Nevertheless,
our Task Force has*been able to apply business analysis
techniques and private sector examples to the preliminary
findings during our work. As a result, ample opportunity
for cost-savings was found within the administration of
international affairs funding.
Our recommendations present each Agency with oppor-
tunities to reduce costs, increase efficiency, obtain
managerial accountability and improve control. Several
instances where further study should reveal additional
savings have also been identified.
Significant Contributors
We found that personnel at each of the agencies were
cooperative and provided invaluable direction and support,
when requested. In particular, we thank Ambassador Robert
H. Miller and Mr. Roger B. Feldman at State; Messrs. James
T. Hackett and Stanley M. Silverman at AID; and Messrs.
Thomas Rollis and Ain Kivimae.
Budgetary Information - Summary Spreadsheet
The size, growth and the significance of an agency is
indicated in part by its budget. To allow the reader more
data to place these factors into perspective, a summary of
budgetary information since 1962 is included as background
information. Data shown include numbers of personnel,
compensation, operating expenses and capital spending.' These
data were prepared at the start of the Survey. In some
cases, they were updated in the Issue and Recommendation
Summaries (Section II). (See spreadsheet on following page.)
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.II. ISSUE AND RECOMMENDATION SUMMARIES
A. DEPARTMENT OF STATE
OVERVIEW
The primary role of the Department of State is to
advise the President in the formulation and execution of
foreign policy. Overall responsibility for*U.S. foreign
policy rests with the President. The Secretary of State,
as principal foreign policy spokesman and advisor to the
President, has responsibility for the activities of the
Department of State and the Foreign Service and also for
U.S. government activities abroad. Individual ambassadors,
appointed by the President as personal representatives,
share with the President and Secretary of State responsi-
bility for the conduct of U.S. relations in the host country
or organization to which they are appointed. As of January
1, 1982, Foreign Service posts were categorized as follows:
Embassies
136
Consulates
General
65
Consulates
34
Missions (international organizations)
12
Branch offices, liaison offices, etc.
6
253
Broadly, the objective of U.S. foreign relations is to
promote the long range security and well-being of the United
States. Specifically, State determines and analyzes infor-
mation relating to U.S. overseas interests, recommends
future political action and executes instructions relating
to foreign policy decisions. The following data depict
1/ Includes only countries where actual missions exist;
13 countries have ambassadors accredited to them, but
no mission exists.
2/
Excludes Consular Agencies numbering 34 at the time
this Report was prepared.
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State's personnel head-count and funding in selected years
over the past 20 years:
FY 1962
FY 1972
FY 1982
FY 1983
FY 1984
Number of
employees
22,919
22,948
22,918
23,230
24,649
Budget
authority
($ millions)
$352
$672
$2,540
$2,673
$3,093
The major resource for fulfilling the mission pre-
viously described is U.S. citizens who become Foreign
Service Officers. The Foreign Service is comprised of
individuals who have been selected through an examination
process with training in U.S. history and international
affairs and a willingness to serve abroad, who have been
tenured after a four-year evaluation period and who have an
ambassadorial position as a career objective. At overseas
posts, Foreign Service nationals provide staffing support
in almost all post functions. The Department of State in
Washington is staffed with Foreign Service Officers on
rotational interludes from overseas assignments and Civil
Service employees.
The staffing percentages as of October 1, 1982 were
approximately 40 percent Foreign Service officers, 42
percent Foreign Service nationals and 18 percent Civil
Service. Funding for personnel and related expenses
comprised 50 percent of the operating expenses of the
Department and, hence, became a focal point for our study.
Other major expenditure areas include contributions to
International Organizations and Refugee and Narcotics Pro-
grams, the costs of which are nearly $1 billion or 38
percent of the overall State Department budget. Lastly,
the appropriation for the construction, maintenance and
operation of foreign buildings represents almost 20 percent
of the operating budget.
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II. ISSUE AND RECOMMENDATION SUMMARIES (CONT'D)
A. DEPARTMENT OF STATE (CONT'D)
STATE 1: FOREIGN SERVICE PERSONNEL SYSTEM
Issue and Savings
Are there opportunities within the State Department's
Foreign Service Personnel Management System, which adminis-
ters payroll costs of $291 million (FY 1983), to improve
the system's effectiveness and reduce operating expenses?
The Foreign Service Personnel System is characterized
by the development of a top heavy skewedness, extensive
mismatching of personnel and positions and the presence of
numerous "overcomplement" employees. The Task Force has
developed recommendations to modify these aspects of the
personnel management system which can result in first year
savings of $25.8 million. Three years savings are esti-
mated to be $86.3 million.
Background
The Foreign Service Officer (FSO) corps has maintained
its status as an organization separate from the Federal
Civil Service by Congressional mandate through Foreign
Service Acts of 1924, 1946 and 1980. The Service has his-
torically been set apart due to the character of its mis-
sion -- official representation to foreign governments and
implementation of foreign policy overseas. The Service has
its own Director General, maintains a different pay scale
from the General Schedule, a separate benefits package, and
separate enabling legislation, to name a few of its unique
characteristics. The effect of recent legislation has been
to place into law most personnel policies and employee
benefits.
FSO corps personnel serve not only in the Department
of State (State), United States Information Agency (USIA),
Agency for International Development (AID) and Peace Corps,
but also serve 22 other governmental departments and
agencies directly or through "detail-out" assignments.
This'study deals only with personnel data for State's FSOs
because 70 percent of FSOs are under control of State
personnel direction and all FSOs are guided by the Foreign
Service Act of 1980.
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State's Foreign Service employees comprise 40 percent
of the Department's total employment with Foreign Service
nationals and Civil Service the remaining 60 percent.
Full-time Foreign Service personnel have ranged in number
from 8813 to 9700 in the years 1975 to 1981, while average
salaries have ranged from $20,487 to $31,126.
Salary costs for State's FSO corps for FY 198:3 are
estimated to be $290 million. While the number of em-
ployees has remained at the same level (within a 5 percent
variance) during the past 20 years, the salary costs have
risen at an annual increase level of 7.2 percent each year
during the period.
Members of the Foreign Service must be available for
worldwide service. Further, career members of the Foreign
Service are obligated to serve abroad for substantial por-
tions of their careers. Each member of the Service is
assigned to a salary class which is not affected by his/her
positional assignment. This personnel management practice
is known as the "rank-in-man" concept. Conversely, assign-
ment does not influence rank (or salary); on the other
hand, the "rank-in-job" system is found in the Civil
Service.
The Senior Foreign Service was created by 1980 legis-
lation and modelled after the Senior Executive Service of
the Civil Service. Mid-level and junior FSOs are separated
into the functional categories of generalists and special-
ists. The following data depict personnel by level:
Grade -12-31-80*
12-31-81
Senior Foreign
Service 11.0
10.7
Mid-level:
1 12.0
12.6
2 15.3
15.2
3 16.5
16.6
Junior level:
4 15.8
14.9
5 11.2
12.6
6 6.6
6.6
Clerical
7 5.0
5.3
8 4.9
4.2
9 1.7
1.3
100.0
100:0
*Reflects new grade schedule established by Foreign Service
Act of 1980.
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Generalists perform the "on-line" duties of reporting
and analysis of foreign affairs. Specialists are respon-
sible for staff functions such as auditor, medical officer,
etc. Our rationale for detailed review of the generalist
group includes the limited career growth of specialists and
their lower percentage in the Foreign Service.
Most generalists enter the Service through the exam-
ination process, as State follows a "promote from within"
policy. The Foreign Service exam is administered by the
Board of Examiners, reconstituted by the Foreign Service
Act of 1980. Each year 200 to 300 are accepted as junior
officers from approximately 18,000 university graduate
applicants.
Transition to mid-level officer occurs after a trial
period of service (currently four to five years), at which
time an officer may receive a career appointment. FSOs are
subject to performance evaluations at least annually and
may be "selected-out" for substandard performance.
Position assignments are handled by the Personnel
Bureau using an "open-assignment" process, whereby informa-
tion on available positions is publicized to employees, and
employees bid for those positions. Available positions
result from vacancies due to the announced rotation policy
and resignations. Assignments to one of State's 253 over-
seas posts are standardized as between two to four years in
length. Besides assignment to overseas posts, FSOs are
assignable to State positions as well as other governmental
agencies like the National Security Council (NSC) and
Department of Defense (DOD), the latter being known as
"detailed-out" assignments.
Promotion is also managed by the Personnel Department
by developing the range of possible promotions to be grant-
ed at each grade level. Promotion selection boards rank
order promotion candidates within each competition group,
and final promotions result from the matching of this rank
order listing and the number of promotions allowed by
management.
The 1980 Foreign Service Act defines the rules of
labor-management relations in the Department. Foreign
Service employees within State and AID are represented by
an elected bargaining agent, the American Foreign Service
Association (AFSA),' in the filing of grievances and negoti-
ation of conditions of employment and other personnel
matters.
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The substantial changes enacted in the 1980 legisla-
tion have placed into law many previous personnel prac-
tices. It was also an attempt to modernize the professional
career program at the Department of State which had been
studied with some intensity over the prior 15 years. Our
Task Force received, as briefing documents, reports that
gave evidence that personnel problems such as job grade
inflation and the use of senior personnel for lower level
positions were still in existence and would not be corrected
by the implementation of the 1980 legislation. These prob-
lems were not quantified or analyzed in detail in such
reports. Our Task Force validated their relevance through
interviews at State and at embassies and presents them in
the findings section on a quantified basis.
Methodology
The Task Force has combined in this review the ele-
ments of the Foreign Service Personnel Management System
that have been identified in previous studies and developed
their interrelationships. The Task Force also interviewed
key State personnel in Washington and at several overseas
posts and reviewed many aspects of the Foreign Service Act
of 1980 and subsequent implementation activities. Several
quantitative analyses were performed, including a review of
positions by grade level, a comparison between position
levels and ranks of incumbents and an evaluation of attri-
tion rates resulting from selection-out. Also, algebraic
models of personnel distributed by level were developed for
the Foreign Service and similar organizations.
Findings
As a result of the analysis and review, the Task Force
found that the distribution of State's Foreign Service
Officers (generalists) among senior, mid and junior level
ranks shows a top heavy profile; this pattern is dissimilar
to other government and private sector organizations as
shown below:
State
Military
Accounting
Banking
Senior
19.7%
6.1%
12.0%
8%
Mid-level
65.9
64.9
16.0
40
Junior
14.4
29.0
72.0
52
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The Task Force found these three levels have an inter-
active, dynamic relationship in that personnel from level 3
(junior level) provide the resource pool for level 2 (mid-
level) and personnel in level 2 in turn provide the pool for
level 1 (senior). In the three-part process flow among the
level, personnel pool overages or shortfalls will affect the
availability (both number and quality) of personnel input
to the next level. Such relationships can be expressed as
shown below:
Key
Level 3
Level 2
Level 1
Resource pool
449
2,062
616
Average years
in level
5
20
1.2
Annual turnover
rate
89.8
103.1
51.3
The Task Force found that the relationships between
resource pool size, average years in a. level, and turnover
rate are important factors in managing the composition of
the Service and are important to the management of promo-
tional opportunity.
The Task Force found that, when using data for
September 30, 1981, level 3 turnover, 89.8 personnel per
year, is slightly less than the demand of 103.1 personnel
created by level 2. Conversely, level 2 generates roughly
twice as many personnel outputs as can be absorbed by
level 1.
Due to the application of the "rank-in-man" concept,
more than 42 percent of the Service is assigned to posi-
tions one grade above or below their personnel rank, while
14 percent of Foreign Service personnel are assigned to
jobs two or more grades above or below their personnel
rank. In short, 56 percent are not matched job to rank/
salary.
Table II-1 depicts those Foreign Service personnel
assigned to positions two or more levels below their per-
sonnel grade (pay scale).
[Table II-1 on following page]
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Table II-1
FOREIGN SERVICE PERSONNEL OUT OF GRADE
Incumbents in positions below
their personnel grade
(pay scale)
Grade 2 3 4 5 Total
Counselor 2 2
FS-1 10 10
FS-2 14 14
FS-3 10 65 75
FS-4 19 47 66
FS-5 0 29 29
FS-6 12 43 55
FS-7 2 .6 3 16 27
FS-8 8 32 40 80
FS-9 6 5 9 20
Total 83 227 52 16 7$
An overcomplement committee has been formed to review
quarterly the status of approximately 150 personnel classi-
fied as overcomplement.
Typical classifications used by the committee to
describe the status of overcomplement personnel and the
numbers in such classification at two recent dates are
shown in Table 11-2.
[Table 11-2 on following page)
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Table 11-2
TYPICAL CLASSIFICATIONS OF OVERCOMPLEMENT PERSONNELS
Status description
Number of personnel
17-29/82 4/29/82
Pending establishment of position 17 15
Pending Department Assistant
Secretary approval 8 2
Pending Presidential/Senate action
confirmation 3 3
Pending movement to onward
assignment (working) 5 22
No funded position 9 6
Otherwise fully employed 75 69
Training 1 2
FS conversion to GS 3 1
Sick/annual leave 5 11
Board of Examiners 8 11
Time in class/retiring 7 7
AWOL 2 1
Nothing firm 14 2
Campbell cases - 2
157 154
Further, 40 senior officers were identified by State
Senior Department management to the Secretary of State as
surplus in July 1982 and were included in a group of 576
officers occupying positions outside the Department's
direct responsibilities.
The results of the present performance evaluation
process show most FSOs to be rated above average, e.g., 96
percent of Senior Foreign Service were rated as above
average in 1981. Hence, use of the evaluation system to
identify selection-out possibilities is limited.
Other findings identified by the Task Force include
the following:
o Supervising management and AFSA members repre-
sented by the bargaining unit can be the same
people under present definitions.
o Personnel assigned to senior levels of management
at embassies were found, in several instances, to
operate in a reactive mode rather than with modern
management techniques like objective setting and
integrated functional planning.
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0 Recruiting processes do not result in the selec-
tion of enough individuals with administrative
and managerial skills to fill the number of
administrative positions because recruiting is
not performed at business schools and the entrance
examination is oriented toward history and inter-
national affairs. Several ambassadors identified
management training as a specific need amongst
mid-level FSOs. Further, training programs for
entry and mid-level officers have not included
substantive management training.
Conclusions
The Task Force concludes that the present personnel
system has allowed FSOs to continue their careers to the
point that major imbalances in the personnel work force
have been created. Correlation of position rank and job
classification occurs in a minority of instances. Perfor-
mance evaluations do not appear to be useful in their
current form for identification of the most qualified
officers, and "selection-out"'has not been an effective
element in employee attrition. The current personnel
system does not cope with the inherent characteristics of
managing a carefully selected, elite group of professionals
from recruitment to the ultimate career goal -- an ambassa-
dorial assignment. Further, pressures to manage personnel
resources are countered by devices that encourage imbal-
ances, such as the "rank-in-man" concept and "detail-out"
assignments. In short, the system does not balance in-
dividual career development needs and position requirements.
Specific conclusions are:
o it is desirable and necessary to shift distri-
bution of personnel;
0 elimination of mismatching employees should
provide cost savings and increase job opportuni-
ties for mid-level employees, and
o the number of overcomplement employees is too
large.
Although State's personnel management believes that,s
in time, the overcomplement ranks will be reduced, we have
concluded that the "rank-in-man" concept and other factors
will-contribute to the process of creating more such per-
sonnel and that a more stringent approach is necessary.
There are opportunities for improvement in personnel
administrative practices in:
o performance evaluations,
0 selection-out,
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o union participation,
o management of embassies, and
o recruiting and training.
Recommendations
The Task Force recommends that the Secretary of State
initiate a reassessment of the Foreign Service personnel
system with the aim of conversion to a manager-oriented
personnel system with equally fixed position and manpower
levels and more stringent performance evaluations.
STATE 1-1: The State Department should use models to
correct skewed distribution. The Task Force recommends the
Secretary of State initiate a review of position rankings
to better match incumbents with position and to achieve
lower graded jobs where appropriate. The Task Force recom-
mends the use of more pyramid-shaped models to balance the
overall resource pools, promotion opportunity, and economic
costs.
STATE 1-2: The State Department should review ranking
of positions and realign personnel. The Secretary of State
should direct the reduction in the number of employees in
positions two grades below their personnel ranks by realign-
ment of mismatched personnel and by conducting a position
analysis to reexamine each position in relation to its
grade classification.
STATE 1-3: The State Department should eliminate the
overcomplement concept. The Secretary of State should
eliminate the concept of overcomplement employees and en-
force the policy of "selection-out" of any employee whose
contribution to the organization is minimal, or whose
skills are not needed by the Department.
STATE 1-4: The Secretary of State should direct the
redesigning of the performance evaluation system so that
meaningful standards are used for performance measurement
and appraisal. The results of this system should yield a
bell-shaped distribution curve of rankings. Additionally,
supervisors should be trained in preparing more critical
evaluations and counseling subordinates.
STATE 1-5: The Secretary of State should seek the
elimination of the conflict of interest situations-in
labor-management practices by requesting legislative amend-
ment to expand the definition of management official to
include all senior officers and other personnel serving in
supervisory positions.
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STATE 1-6: The Secretary of State should direct the
initiation of new recruiting procedures to attract officers
with skills in management and encourage the development of
supervisory skills in middle level and senior officers.
Savings and Impact Analysis*
1. Correction of Skewed Distribution (see State 1-1)
In order to calculate savings for correction of the
skewed distribution of personnel, we assumed that the
Department of State would adopt the following structure:
Junior
Mid-level
Senior
Proposed inventory level
885
1,732
510
Average years in classification
5
20
12
Average turnover rate
177
87
43
Promotion opportunity
49%
49%
This structure was assumed because we believe it is
the most likely model to follow and represents a conserva-
tive and realistic range of savings..
Using this model the first-year savings would be cal-
culated as follows:
Junior
Mid-level
Senior
Proposed inventory
885
1,732
510
Currrent State inventory
449.
2,062
616
Inventory difference
(436)
330
106
Average salary
$23,800
$41,900
$57,600
Salary savings ($10,376,800)
$13,827,000
$6,105,600
Savin
s
$9
555
800
g
,
,
Employees normal cost of retirement (34%)
$3,248,972
Total savings
$12,804,772
* All savings and impact analyses based on salary levels as
of December 31, 1982.
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2. Realignment to Match Position and Personnel Rank (see
STATE 1-2)
In order to estimate savings attributable to position
realignments, an analysis was made of the difference between
salaries of incumbents in the position and salaries commen-
surate with the positon grades. This analysis assumes:
o averages within senior ranks have displaced some
junior and mid-level employees, creating averages
at lower levels. Elimination of averages at
senior levels will remedy averages at lower
levels, and
o personal grade/position grade data supplied by
personnel are accurate.
Table 11-3 shows this analysis. Estimated first-year
savings are $6 million.
(Table 11-3 on following page]
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Table 11-3
ELIMINATION OF POSITION
GRADE/PERSONNEL GRADE OVERAGES-1/
a b c d
Average Potential Total
Overagesl Average salary savings potential
Position (number salary position for position savings
grade employees) employee grade (b-c) - (a x d)
OC-2 2 $58,500 $58,500 $ 0 $ 0
FS-1 10 57,632 51,310 6,322 63,220
14 57,632 41,441 16,191 226,674
FS-3 10 57,632
65 51,310
33,063 24,569 245,690
18,247 1,186,055
FS-4 19 51,310 27,214 24,096 457,824
47 41,441 14,227 668,669
FS-5 0 41,441 23,474 17,967
29 33,063 9,589 278,081
FS-6 12 33,063 20,627 12,436 149,232
43 27,214 6,587 283,241
FS-7 2 41,441 18,126 23,315 46,630
6 33,063 14,937 89,622
3 27,214 9,088 27,264
16 23,474 5,348 85,568
FS-8 8 33,063 16,024 17,039 136,312
32 23,474 7,450 238,400
40 20,627 _ 4,603 184,120
FS-9 9 23,474 14,500. 8,974 80,766
5 20,627 6,127 30,635
6 18,126 3,626 21,756
Savings on salary costs $4,472,759
Plus: Savings on employer's normal
retirement contribution $1,520,738
All data as of January 11, 1982, for Generalist and Specialist cate-
gories of Foreign Service Corps.
f Number of employees in positions two or more grades below their
personnel grades. Taken from Personnel Bureau computer run SPSS RAT
SYSTEM Full-time permanent (more than one year) Foreign Service
employees: creation date 8/5/82.
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3. Overcomplement Employees
Management estimates the number of "overcomplement"
Senior Foreign Service employees to be 70. Our cost
analysis is as follows:
THREE YEAR COST SAVINGS FROM ELIMINATION OF
CONCEPT OF OVERCOMPLEMENT SENIOR FOREIGN SERVICE EMPLOYEES
($ millions)
Salaryl/
costs
Plus
employer's
retirement
contribution2/
Total
potential
savings
Buy-out
costs3/
70 employees
Year 1 Year 2 Year 3
$4.03 $4.43 $4.87
Net
savings $4.06 $4.60
$5.19
Assumes average salary of $57,632 and 10% inflation
adjustment in years 2 and 3.
Approximately 34% of salary.
One year's salary distributed over three years.
Source: Memorandum to the Secretary of State by R. T.
Kennedy, 7/21/82
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?
?
?
As discussed above, the Task Force concluded that
other positions should be considered overcomplement. The
cost estimate for these positions is shown below:
Table 11-4
SALARY COSTS OF OTHER OVERCOMPLEMENT EMPLOYEES
# of overcomplementi/ Average
Grade 4/29/82 1/29/82 Average salary Savings
FS
1
22
26
24
$51,310
$1,231,440
FS
2
23
24
23
41,441
953,143
?
FS
3
14
7
10
33,063
330,630
FS
4
12
15
13
27,214
353,782
FS
5
4
4
4
23,474
93,896
$2,962,891
1/
Per overcomplement quarterly reports.
THREE YEAR COSTS SAVINGS FROM ELIMINATION OF
"OVERCOMPLEMENT" MID-LEVEL AND JUNIOR OFFICERS
?
($ millions)
Year 1
Year 2
Year 3
Salary costsl/
Plus employer's retire-
$2.96
$3.26
$3.58
?
ment contribution?/
1.01
1.12
1.22
Total potential savings
$3.97
$4.38
$4.80
Buy-out costsl/
.99
.99
.99
Net savings
$2.98
3.39
$3.81
1/
2/
3/
See Table 11-4 above for derivation of salary costs.
Includes 10% inflation adjustment in years 2 and 3.
Approximately 34% of salary.
One year's salary distributed over three years.
Table 11-5 summarizes overcomplement savings.
[Table 11-5 on following page]
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TABLE 11-5
SUMMARY OF OVERCOMPLEMENT SAVINGS
($ millions)
Year 1
I Senior (70)
$4.06
II Other (75)
2.98
Total
7.04
3. Summary of Cost Savings
Year 2
Year 3
$4.60
$5.19
3.39
3.81
7.99
9.00
1/
Correction of Skewed Distribution
(STATE 1-1)
Realignment to Match Position and
Personnel Rank
(STATE 1-2)
Elimination of Overcomplement
(STATE 1-3)
1/
Year 1
Year 2
Year 3
($ millions)
$12.8
$14.1.
$15.5
6.0
6.6
7.3
7.0
8.0
9.0
25.8
28.;~
31.8
The Task Force recognizes that certain positions could
be duplicated in the savings analysis; however, due to
the inability to identify specifically where duplica-
tion would occur, it has presented the total potential
savings.
Implementation
1. Agency Authority
STATE 1-1: Use models to correct skewed distribution
of personnel.
STATE 1-2: Review ranking of positions and realign
personnel.
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STATE 1-3: Reduce overcomplement employees and apply
more rigorous selection-out procedures in conjunction with
revised performance' evaluations.
STATE 1-4: Redesign the performance evaluation system
and train supervisory personnel in evaluation and manage-
ment methods.
STATE 1-6: Initiate a program to enhance managerial
skills.
2. Congressional Authority
STATE 1-5: Amend the Foreign Service Act of 1980 to
expand the definition of management official in Chapter 10.
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II. ISSUE AND RECOMMENDATION SUMMARIES (CONT'D)
A. DEPARTMENT OF STATE (CONT'D)
STATE 2: FOREIGN SERVICE RETIREMENT AND DISABILITY SYSTEM
Issue and Savings
Does the Foreign Service Retirement and Disability
System with an estimated FY 1983 cost of $372 million
present an opportunity to realize cost-savings from
comparisons to Civil Service and private sector retirement
programs?
Our recommendations result in a first-year savings of
$0.2 million if changes to the System are phased in begin-
ning with all new employees and $29.7 million if immediate,
full implementation is chosen. Savings for the three years
would total $3.9 million if phase-in implementation is
elected and $90.6 million if full implementation is chosen.
Background
1. Description
The Foreign Service Retirement and Disability System
covers all 13,000 Foreign Service employees. Most of the
participants are employed in the State Department (State),
but the system also includes those in the United States
Information Agency (USIA), Agency for International Devel-
opment (AID), Department of Agriculture and elsewhere. In
several important respects, the benefits are substantially
more generous than those under the Civil Service Retirement
System which covers most other civilian employees of the
Federal Government.
2. Budget Figures and Trends
The employees contribute 7 percent of their salary and
the Federal Government pays the balance of the funding cost
for the Retirement and Disability System.
The total Government funding cost for the system for
FY 1983 has been estimated by State to be $371.8 million,
or 93 percent of the annual payroll cost. Of this amount,
approximately $331 million is included in the State's
budget (including USIA) and most of the balance is for
AID. This $331 million represents approximately 13 percent
of State's total budget.
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The Department has estimated the
cost of the System as follows:
Government's budgeted
Fiscal year
Dollars
($ millions)
Percent
of annual
payroll costs
1983
$372
93
1984
387
95
1985
400
97
1986
412
98
1987
422
100
The above costs do not include the pension costs for
25,000 other international affairs employees, who are
covered by either the Civil Service Retirement System or
the programs for foreign service national employees.
Methodology
Estimated cost savings were developed by a Task Force
member who is an actuarial consultant using data provided
by State combined with the actuarial valuation report
prepared by the Department of the Treasury.
Personnel interviewed included those in the personnel
and accounting departments responsible for employee
benefits, and those personnel at Treasury charged with res-
ponsibility for actuarial computations.
Findings
The cost of the Foreign Service Retirement program is
increasing both in dollars and as a percent of pay. The
Government's estimated budgeted cost of the System equals
93 percent of pay in FY 1983, and is expected to rise to
100 percent within four years primarily due to "normal
cost" increases.
In contrast, the Government's cost for 1981 for the
U.S. Civil Service Retirement System, which covers most
Federal civilian employees, was 32.7 percent of actual pay.
Further, on a funded basis the cost of the Foreign Service
Retirement System was 112 percent of payroll compared to 85
percent for Civil Service in FY 1981. The Civil Service
System budgeted cost is substantially lower than the Foreign
Service System, in part because the Foreign Service System
provides more generous benefits and in part because the
budgeted amount for the Civil Service System does not
reflect the true accruing costs of that System. The Civil
Service Retirement System has a lower normal cost ;percent
than the Foreign Service System but requires higher past
service contributions as the result of past underfunding.
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Most private sector employers have pension costs under
both Social Security and under a private pension plan with
combined cost less than 15 percent of total payroll (Social
Security costs 6.7 percent of payroll).
Under the Foreign Service System, the normal retire-
ment age (the age at which an employee may first retire on
an unreduced pension) is 50 with 20 years of service, or 60
with 5 years of service.
This retirement plan aspect is far more liberal than
the Civil Service Retirement System.
A comparison of retirement ages for the two systems
for employees hired at various ages is as follows:
Retirement age
Age at hire
Foreign Service Civil Service
25
50
55
30
50
60
35
55
60
40
60
60
45
60
62
50
60
62
55
60
62
The Task Force is not aware of any
Foreign Service that renders employees u
their duties at age 50.
requirement
nable to per
of
for
the
m
The Foreign Service System provides larger benefits
than
are provided under the Civil Service Retirement System
for
employees with equal records of service and salary,
for
all
except a very small number of very long service
employees. The benefit payable upon retirement under the
Foreign Service System equals 2 percent of the employee's
average pay during the highest three consecutive years
multiplied by the years of credited service (maximum 35
years). Under the Civil Service Retirement System, the
benefit equals 1.5 percent of the three-year-average-pay
for each of the first five years of credited service, 1.75
percent for each of the next five years, and 2.0 percent
per year thereafter (maximum approximately 43 years).
For an employee retiring after 20 years of service,
the Foreign Service System provides a benefit which is 10.3
percent greater than the Civil Service Retirement System
would provide. There is no indication that the needs for
retirement income of the two groups differ and no ascer-
tainable reason for a difference in the benefit formulas.
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Conclusions
Because the Foreign Service Retirement and Disability
System and the Civil Service Retirement System are in most
aspects the same, there are broad cost reduction oppor-
tunities that apply equally to both systems. Where the two
systems are identical, we assume that any change made in
the Civil Service Retirement System would be made in the
Foreign Service System, and that any such changes would be
made primarily in response to a review of the much larger
Civil Service Retirement System. Therefore, this Report
addresses only the cost reduction opportunities related to
differences in the two systems.
Two cost reduction opportunities are considered in
this Report:
o an increase in retirement age to conform with the
Civil Service Retirement age, and
o a change in the benefit formula.
Both the retirement age and benefit formula provisions
of the Foreign Service plan are substantially more gene-
rous than those of the Civil Service Retirement System or
private sector plans, are not needed or justified, and
create substantial excessive costs.
Recommendations
STATE 2-1: Increase retirement age under the Foreign
Service Retirement and Disability System. It is recommended
that Congress amend the Foreign Service Act of 1980 to in-
crease the retirement age under the Foreign Service System
to be the same as that under the Civil Service Retirement
System, including any future increases in retirement age
adopted under the Civil Service Retirement System.
STATE 2-2: Change the benefit formula under the
Foreign Service Retirement and Disability System. It is
recommended that Congress amend the Foreign Service Act of
1980 to change the benefit formula for the Foreign Service
System to equal that of the Civil Service Retirement System.
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Savings and Impact Analysis
1. Increase Retirement Age Under the Foreign Service
Retirement and Disability System (See STATE 2-1).
The estimated total government expenditure for the
Foreign Service Retirement and Disability System if no
change is made, the estimated amount of savings which would
occur if the change were fully phased in, and the estimated
actual savings phased in for employees hired after April 1,
1983, are shown below for fiscal years 1982 through 1985.
($ millions)
Estimated annual
savings
Fiscal
year
Present program
estimated expense
If fully
phased-in
Partial
phase-in
1982
$343
1983
(year-1)
372
$18.6
$0.1
1984
(year-2)
387
18.9
0.8
1985
(year-3)
400
19.2
1.5
Estimated cost savings depend upon numerous actuarial
assumptions, including the following:
o number of new employees hired in future years and
their distribution by age, sex and salary;
o rates of mortality;
o rates of disability;
o rates of actual retirement among employees who
have become eligible;
o rates of termination of employment;
o rates of salary increase;
o rates of cost of living increase; and
o rate of interest.
The Task Force relied upon the actuarial methods,
assumptions and computations of the Government Actuary of
the Department of the Treasury, as contained in the report
for the Plan Year ending September 30, 1980.
The Retirement Division Chief provided information
that the average retiring employee does so at age 57 with
28 years of service. Under the proposal such an employee,
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hired at age 29, would first be eligible to retire at age
60. To obtain the approximate relative cost, the level
annual cost was determined to fund a pension of 2 percent
of pay times years of service for an individual hired at
age 29 and retiring at either age 57 or age 60. Because
only the relative cost, and not the absolute cost? was
sought, and because of the constraints, simplified assump-
tions were used, consisting solely of the 1971 group annui-
ty mortality table for males after retirement and 6 percent
interest. The level annual cost thus calculated for retire-
ment at age 60 was 11.23 percent less than for retirement
at age 57. The normal cost rate most recently determined by
the Government Actuary of the Department of the Tr.easuryl/
is 41.546 percent of covered payroll. Therefore the cost
savings was estimated to be 4.66 percent of covered payroll
(11.23 percent of 41.546 percent). This 4.66 percent was
multiplied by projections of covered salary prepared by
State to determine the estimated cost savings if the change
were fully phased in.
Projections were made of the proportion of covered
salary attributable to employees hired after April 1, 1983,
based upon data included in the "Report to the Speaker of
the House of Representatives and The Committee on Foreign
Relations of the Senate Concerning Implementation of the
Foreign Service Act of 1980." The proportions determined
were applied to calculate the portion of the cost phased-in
for each fiscal year. Because the retirement ages are set
forth in statute, legislative action is required to change
them. This could be accomplished by amendments to the
retirement age provisions of the Foreign Service Retirement
and Disability System.
2. Change the Benefit Formula Under the Foreign Service
Retirement and Disability System (see STATE 2-2).
The estimated total government expenditure for the
Foreign Service Retirement and Disability System if no
change is made, the estimated amount of savings which would
occur if the change were fully phased-in, and the estimated
Report for Plan Year Ending September 30, 1980, Table
Y.
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actual savings phased-in for employees hired after April 1,
1983, are shown below for fiscal years 1982 through 1985.
($ millions)
Estimated annual
savings
Fiscal
year
Present program
estimated expense
If fully
phased-in
Partial
phase-in
1982
$343
1983
372
$11.1
$0.1
1984
387
11.3
0.5
1985
400
11.5
0.9
As stated above, the average retiree was assumed to
have 28 years of service. An employee retiring under the
Foreign Service System would receive a pension of 56 per-
cent of average compensation, while'an employee retiring
under the Civil Service Retirement System would receive a
pension of 52.25 percent of average compensation. 52.25
percent is 93.3 percent of 56 percent. Hence this change
would reduce benefits and normal costs by an estimated 6.7
percent. We have estimated that the average retirement -
benefit under the revised. formula would be 6.7 percent
smaller than under the present formula, and that the
System's normal cost would be reduced by approximately that
percentage.
As stated above, the normal cost rate most recently
determined by the Government Actuary of the Department of
the Treasury is 41.526 percent of covered payroll. There-
fore the cost savings was estimated to be 2.78 percent of
covered payroll (6.7 percent of 41.526 percent). This
2.78 percent was multiplied by projections of covered salary
prepared by State to determine the estimated cost savings
if the change were fully phased-in. Projections were made
of the proportion of covered salary attributable to employ-
ees hired after April 1, 1983, based upon data included in
the "Report to the Speaker of the House of Representatives
and the Committee on Foreign Relations of the Senate Con-
cerning Implementation of the Foreign Service Act of 1980."
The proportions determined were applied to calculate the
portion of the cost phased-in for each fiscal year.
No change should be made in any benefits already
accrued. It would be possible to make the change effective
for all future accruals; this approach would have no effect
upon employees with ten or more years of service (for whom
the benefit formula would not change), a small effect upon
those with five to nine years service (reducing the accru-
als from 2.00 percent to 1.75 percent, and a larger effect
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upon those with less than five years service (from 2.00
percent to 1.50 percent. Any reduction-at all for existing
employees could be expected to meet strong opposition.
Therefore it is recommended that the change affect only
employees hired after the effective date of the change.-
The effect would be to provide Foreign Service employ-
ees hired in the future with benefits equal to those of
most other government civilian employees, rather than the
higher benefits they now receive. This would not have any
impact at all upon the Department or its operations.
Because the benefit formulas are set forth in statute,
legislative changes are required to change them. This could
be accomplished by amendments to the benefit amount provi-
sion of the Foreign Service Retirement and Disability
System.
The following recaps savings by year if implementation
is phased-in (P) starting with new employees and if elected
for all current members of State's Foreign Service (A):
($ millions)
Increase retire- $0.1
$18.6
$0.8
$18.9
$1.5
$19.2
$2.4
$56.7
ment age:
STATE 2-1
Change benefit
0.1
11.1
0.5
11.3
0.9
11.5
$1.5
$33.9
formula:
-
STATE 2-2
0.2
29.7
1.3
30.2
2.4
$30.7
3.9
90.6
Implementation
Recommendations STATE 2-1 and STATE 2-2 require
amendment of the Foreign Service Act of 1980 by Congress.
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II. ISSUE AND RECOMMENDATION SUMMARIES (CONT'D)
A. DEPARTMENT OF STATE (CONT'D)
STATE 3: OFFICE OF FOREIGN BUILDINGS
Issue and Savings
What cost-saving opportunities exist in the areas of
responsibility of the Office of Foreign Buildings (FBO)
which has a budget authority of $190 million for FY 1983?
Specific savings opportunities have not been quanti-
fied in this area, but should be significant with the
implementation of a real property management system. While
the Department of State's management has taken action by
proposing within its FY 1983 budget funds for design of
such a system, we believe that presentation of this Issue
in this Report may accelerate the approval process and
encourage quicker implementation and sharper attention to
the problems identified.
Background
FBO within the Bureau of Administration, is respon-
sible for the acquisition, maintenance, and disposal of
real property holdings, and leases in excess of 10 years,
for U.S. diplomatic and consular posts throughout the world.
The authority for the management of overseas building
programs stems from the Foreign Buildings Act of 1926, as
amended, and is vested in the'Deputy Assistant Secretary
for Foreign Buildings through delegation from the Secretary
of State.
The U.S. Government property holdings under the
responsibility of FBO are estimated to be more than 2,700
buildings and long-term leaseholdings at 287 foreign
locations. Currently FBO is supervising $34 million in
architectural and engineering contracts and $250 million in
construction contracts, and maintaining in excess of $5
billion in real property holdings.
The FY 1983 budget request for acquisition, operation,
and maintenance of buildings abroad was $190 million, an
increase of $4 million (2.2 percent) over the FY 1982
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budget of $186 million. The appropriation request is to
construct, acquire by purchase or long-term lease, and
operate and maintain office space and housing abroad. The
request detail shows that one major construction project
(RIYADH) accounts for 27.3 percent of the FY 1983 budget.
The FBO staff consists of 103 individuals; the office
is organized by area of technical expertise. These include
architectural, engineering, construction and maintenance,
interior design, contracts, budget and automated data
management staff in addition to executive and administra-
tion offices.
Within State, the Office of the Comptroller is respon-
sible for the Foreign Affairs Administration Support (FAAS)
System, which is designed to allocate certain administrative
costs based upon the support services provided to other
agencies present overseas.
The Comptroller had engaged outside consultants to
review the Department's financial accounting needs. The
study has recommended, and the Department has authorized
the design of a Financial Management System (FMS). The FMS
design concept includes a real property management module
because of the extensive existing problems revealed in the
study.
Several government investigative agencies have
addressed the problems associated with effectively perfor-
ming their responsibility for over a decade. According to
these reports, State's FBO has traditionally been viewed as
poorly organized, inefficient, and insufficiently concerned
with sound budget practices (especially in the area of
developing realistic cost estimates and construction sche-
dules for new construction projects). Buildings management
and maintenance have also been weak, according to these
studies.
Methodology
Two Task Force members were assigned.to determine
changes required to develop a comprehensive real property
management system and necessary to make informed, timely,
and effective decisions, as well as to determine the appro-
priateness of cost allocations. We conducted interviews
with the Deputy Assistant Secretary, Deputy Director and
other professional staff of FBO. Additional interviews
included the Department's Inspector General, and other
agency users.
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We reviewed the Inspector General's report entitled
"Management Audit of Management Information Systems, Office
of Foreign Buildings, Bureau of Administration" (September
1982). The inspectors reviewed FBO policies and ;practices,
legislation, budget documents and reports. This extensive
review resulted in 93 report recommendations, and recognized
that a number of the recommendations cannot be implemented
until a real property management system is installed and
functional.
In addition, we consulted with private sector execu-
tives with overseas real estate management expertise and
visited 14 overseas posts where the physical condition of
both office and residential property was examined.
Findings
FBO does not have a comprehensive real property manage-
ment information system:
o an inventory of property holdings is not complete,
in that all properties are not appraised nor is
their present condition recorded, and
o accurate inventories of furniture and furnishings
are not maintained at the consular posts or
communicated to FBO central office.
FBO action is based on reaction to specific problems
rather than on regularly scheduled reports that monitor
progress, measure performance, and identify developing
problems.
The present financial management system does not
provide the necessary financial information to identify
all costs associated with the operation of an individual
building.
FBO lacks an effective centrally-managed system for
identification and disposal of excess property.
FBO's role as the single overseas property manager is
undermined by Congressional funding for only 67 percent of
e fun s authorized to acquire, operate, and maintain
overseas property are under the control of FBO. Additional
property costs not reflected in FBO budgets are managed by
the geographic regional bureaus within State, and funded
from "Salaries and Expenses Appropriations."
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Policy guidelines to assist managers in examining
options and alternatives do not exist. Special examples of
excessive spending were obtained during visits to embassies
such as:
o failure to exercise an option to buy property
with lease renewal terms that would justify the
purchase (London), and
o failure to buy available property in depressed
markets when present and forecasted space needs
have justified the purchase and new construction
was subsequently authorized (Madrid).
As a related issue no longer under the control of FBO
but the Office of the Comptroller, the Task Force found
that the FAAS System-does not allocate any operating and
maintenance costs (approximately $87.7 million) in its
allocation of costs among.recipient agencies.
Conclusions
The absence of a complete information data base limits
management's capacity to make informed, critical decisions
relating to the following:
o lease versus purchase alternatives;
o preparation of an efficient maintenance program;
o timely identification of cost overruns;
o costing savings due to construction redesign;
o monitoring achievement of construction milestones;
o "red-flagging" potential construction delay; and
o justification of budget appropriations.
Significant maintenance needs and long-term capital
renewal needs cannot be recognized on a timely basis
because of lack of availability of critical information
required to plan and implement improvements. The lack of
such recognition can result in extensive cost overruns.
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The lack of identification of reusable furniture and
furnishings leads to the inability of accurately appro-
priating funds for this purpose.
The lack of a cost accounting system denies identity
of buildin operating costs and results in FBO o icials
basing their decisions upon incomplete facts.
Reluctance to identify excess property precludes use
of alternative means to finance new construction and
improvements.
Allocations of costs from State to other U.S. Govern-
ment agencies who utilize foreign offices and residential
facilities do not now represent full allocation of costs.
Recommendations
STATE 3-1: Develop a real property management system.
FBO should proceed with its plan to develop a real property
management system to compile a reliable accurate inventory
of worldwide property holdings. The management system
should be inclusive of a real property cost accounting
system.
FBO should ensure that the proposed real property
management system provides:
o construction cost reporting:
- original budget amounts,
- change orders to date,
- payment status,
- budget overrun amounts, and
- construction phase milestones;
o real property inventory capability:
cost and appraised value,
useful life, and
anticipated repair and renovation dates; and
o building operation costs.
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STATE 3-2: Expansion of the cost accumulation report.
We recommend that FBO design and implement an expanded cost
accumulation report (to be included in the FMS when
implemented) for individual capital projects which should
provide the original budget amounts based upon a realistic
financial construction plan. The plan should be detailed
enough to record and compare actual expenditures by budget
classifications (land acquisition, design and engineering
fees, demolition, excavation, foundation, etc.). In
addition, the cost report should include revised budget
estimates, contractual commitments, additions to contractual
amounts resulting from approved change orders, pending
change orders (if significant) and payments to date for
each respective detail budget classification.
STATE 3-3: Consolidation of fiscal authority. We
recommend that the Office of Management direct the consoli-
dation of fiscal authority inclusive of regional bureau
expenditures for property costs in Salaries and Expenses to
be appropriated and administered by FBO, commensurate with
their level of responsibility. Note that consolidation of
such funds should promote a more effective means of accumu-
lating cost information.
STATE 3-4: Provide guidelines for identification of
excess capacity. The Office of Management should direct
FBO to develop procedures to aid in the identification of
unused and potentially saleable property at the post level.
We recommend that FBO study the possibility of developing a
questionnaire to be answered at the post level in an attempt
to identify excess capacity.
In addition, FBO should provide performance incentives
to the geographic posts identifying excess capacity. We
recommend FBO study the possibility of offering posts
incentives in terms of percentage of proceeds realized for
the identification of excess capacity. This will result in
the timely identification of excess capacity.
STATE 3-5: Allocation of operating and maintenance
ex enditures. The FAAS coordinator should allocate the
million of operating expenses presently not being
allocated by the FAAS System on the basis of square footage
utilized; if this is too complex, the allocation should be
based on the number of U.S. personnel abroad. The alloca-
tion of operating and maintenance expenditures should
promote clear definition and responsibility for user agency
requirements.
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Savings and Impact Analysis
Cost savings can be anticipated from more effective
decision making based upon realistic, accurate information
prepared by a real property management system. The imple-
mentation of the real estate management information system
will require approximately $6.1 million. Such funding has
already been requested for FY 1983 through FY 1985 and
therefore, is not a cost attributable to this study.
We believe management's ability to operate more econo-
mically and efficiently overseas is inherently correlated
to comprehensive and reliable information, and future
management decisions could generate millions of dollars in
cost avoidance that are not measurable at this time but
could include cost justification of purchase versus lease
decisions, market value realizable from under utilized real
estate, more effective maintenance programs or monitoring
contractor compliance with preestablished timetables.
FBO appropriations for operations of buildings, and
maintenance and repairs of buildings, of approximately $61
million in the first year, $67 million in the second year,
and $74 million in the third year should be shifted to the
agencies utilizing the buildings abroad. Although the FBO
appropriations reduction is not a cost savings to the
Government, it is expected that allocating costs to the
appropriate user areas will result in proper accountability
and greater responsibility by the user agency for escalating
expenditures.
The reduction is based upon overseas personnel statis-
tics derived by the office of the Comptroller. Statistics
reveal that State personnel comprise approximately 30 per-
cent or 4,334 of the total 14,218 U.S. personnel abroad.
The. remaining 70 percent of U.S. personnel abroad will
utilize approximately $61 million of the- $87 million
proposed additional costs to be allocated. Other methods
for allocation are possible as hard data are developed.
For example, space utilized could be used when accurate
measurements are available.
Implementation
1. Agency Authority
STATE
3-1:
The State FBO should engage appropriate
consultants
to
perform the concept design phase of-the
development
of
a real estate management system.
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STATE 3-2: The Assistant Director for Construction
and Maintenance of FBO should develop a monthly cost
accumulation report to provide additional information, in a
more useful format, for decision making.
STATE 3-3: The Deputy Assistant Secretary for Foreign
Buildings should request an appropriation of the magnitude
commensurate with the level of funding included in Salaries
and Expenses Appropriations for operational costs asso-
ciated with real property overseas. In addition, the
Deputy Assistant Secretary for Foreign Buildings should
provide the necessary guidance and reporting requirements
to post level officials regarding the accumulation of a
complete accurate information data base.
STATE 3-4: The Deputy Assistant Secretary. should
perform a study to develop a checklist and/or questionnaire
to aid in the identification of excess capacity. In
addition, the study should address the opportunity to
provide incentives for recognition of excess capacity at
the post level.
STATE 3-5: The Office of the Comptroller should
provide for the allocation through FAAS of approximately
$87 million in operations and maintenance and repairs of
buildings in FY 1983. The Interagency Council on
Administrative Support should ensure during the FAAS
hearing process the allocation of operations and mainte-
nance expenditures.
2. Congressional Action
STATE
3-1:
Congress should be requested to favorably'
accept such
an
appropriation request to engage appropriate
consultants
to
perform the concept design phase of the
development
of
a real estate management system.
STATE 3-4: Congress should be requested to approve the
additional FBO appropriation to cover salaries and expenses
appropriations associated with operations of real property
overseas. Congressional approval will centralize funds
appropriated for overseas real property and therefore cen-
tralize responsiblity.
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II. ISSUE AND RECOMMENDATION SUMMARIES (CONT'D)
A. DEPARTMENT OF STATE (CONT'D)
STATE 4: PURCHASE OF FOREIGN CURRENCIES
Issue and Savings
Does the purchase of foreign currencies ($1.6 billion
in FY 1981) by the Department of State for payment of over-
seas operating expenses in other countries provide an oppor-
tunity for cost savings?
Our Task Force recommendations should reduce the ex-
posure to foreign currency fluctuations which are estimated
to have caused budget overruns of approximately $52 million
during the period FY 1972 to FY 1980 against the major
industrial countries' currencies. If similar conditions
prevail in the next three fiscal years, cost savings of over
$17.1 million could be achieved.
We believe this recommendation is justified :because the
State Department is always a purchaser in the foreign cur-
rency market and because the size of the purchases are in-
significant (less than .03 percent) to the total foreign
currency market.
During the same period -- FY 1972 to FY 1980 -- foreign
currency fluctuations for the military are estimated to have
caused budget overruns of approximately $1,265 million. If
similar conditions prevail in the next three fiscal years,
cost savings of over $421 million could be achieved.
Background
The United States buys foreign currencies for payment
of operating expenses in other countries, including salaries
of foreign nationals, contractual services, rents, supplies
and equipment, and travel. These expenses are financed from
appropriated funds and account for.more than 50 percent of
approximately $10 billion worth of foreign currency pur-
chased from outside sources (excluding the Treasury) in FY
1982. The remainder of the foreign currency purchased is
used for such nonappropriated fund activities as the post
exchange system and for sales to U.S. military, civilian,
and contractor personnel in exchange for dollars.
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The foreign exchange market is the largest market in
the world. On a busy day, the volume of transactions may
reach $100 billion, forty times the dollar volume on the
New York Stock Exchange. Further, in March 1980, gross
currency transactions by 90 banking institutions in the
U.S. foreign exchange market amounted to $491 billion. Of
this monthly amount, approximately 6 percent represented
outright forward contracts.
Although State's exposure to foreign currency
fluctuations was smaller than that of the Department of
Defense (DOD), purchases of foreign exchange by U.S.
disbursing officers (USDOs) have increased 233 percent from
$482 million in FY 1972 to $1.605 million in FY 1981. It
has been estimated by Department of State personnel that FY
1982 purchases of foreign currencies by USDOs exceeded $2
billion. Of this amount, approximately $488 million of
foreign currency disbursements (gross funds) were made
under State's budget. The difference between the USDOs and
State budget is accounted for in various other government
agencies' budgets who purchase through the USDOs.
In order to maintain approved levels of activity under
rapidly changing economic conditions, the Buying Power
Maintenance Account (BPMA) was established by Congress
(P.L. 97-241, Section 112) in 19.82 at the request of State's
Comptroller. This account provides budget authority to
offset losses in budgeted buying power due to adverse ex-
change rate fluctuations and to unanticipated but related
wage and price changes. Gains due to favorable exchange,
wage and/or price movements would be transferred into the
BPMA to offset future losses.
Methodology
The Task Force conducted interviews with responsible
State, Treasury, and General Accounting Office (GAO) per-
sonnel in order to define the issue, gather data on foreign
currency transactions, study the current procedures for
foreign currency purchases, and review departmental corres-
pondence on the issue.
The Task Force obtained historical information on
foreign currency purchases made by disbursing officers
(DOs) since FY 1972. We then constructed a model which
estimated foreign currency losses over the specified
period. In the model, it was assumed that losses could
have.been substantially avoided on currencies with active
trading markets through the use of forward or futures
contracts. The transaction costs and the discount or
premium to the spot rate associated with the use of these
contracts have not been estimated due to the difficulty of
making the appropriate assumptions. However, it is assumed
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that these costs would be substantially less than the
losses realized on foreign currency fluctuations during the
study period.
Findings
No system exists for forecasting and reporting foreign
currency expenditures. There is no system of gathering
data on foreign currency expenditures and matching them
with the budgeted information to determine the effects of
foreign currency fluctuations. The current Treasury reports
on foreign currency purchases are not agency specific
(denoting the budget source), and do not specify the amount
of foreign currency units purchased. In addition to the
lack of historical information, there is no system require-
ment for budget forecast reporting in both U.S. dollar and
foreign currency obligations.
Purchases of foreign currencies are always on a "spot
basis." Current Treasury regulations prohibit the use of
h de ging techniques to minimize foreign currency exchange
losses. The Treasury Fiscal Requirements Manual (I TFRM
6-8065.30) specifically states, "All exchange of dollars
for foreign currencies is to be conducted for spot delivery.
No use may be made of forward contacts, or of purchase at
negotiated rates directly from foreign governments or pri-
vate contractors." The Office of the Assistant Secretary
for International Affairs of the Department of the Treasury
informed us in a letter dated October 14, 1982 that they
would be willing to consider again the "pros and cons" of
buying currencies in the forward market.
The United States never sells currencies -- it only
buys. The USDOs in each embassy or consulate assesses
his/her daily foreign currency needs, maintains a financial
plan which tracks obligations and receivables, and informs
the Regional Administrative Management Center (RAMC) of
his/her foreign currency needs by forwarding vouchers for
payment of local goods and services. The RAMC purchases
the appropriate foreign currencies after aggregating the
daily requirements for each post. The RAMC then deposits
the necessary foreign currency in the posts' bank accounts
and checks are drawn and sent to the payees.
No studies on foreign currency hedging exist. The GAO
studies that have been published to date are directed at
government procedures for buying foreign currencies and
have.not addressed the subject of hedging. Treasury
personnel were not able to provide any studies on the
subject either. However, Treasury personnel provided
correspondence outlining their reasons for avoiding the
use of forward contracts.
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State has requested and received supplemental appro-
priations due to foreign currency losses. State made
supplemental appropriation requests in 1975 and 1979,
citing weakness of the U.S. dollar as a reason. An Office
of Management and Budget (OMB) submission for FY 1975 cited
a request for $10.5 million of which $2,500,500 was directly
associated with an "adverse dollar exchange rate." This
supplemental appropriation was granted. State also re-
quested a $6 million increase in FY 1979 in a Congressional
submission citing "exchange losses...in six Organization for
Economic Cooperation and Development (OECD) countries."
When the U.S. dollar strengthened, the resulting apprecia-
tions (gains) were removed from budgeted funds by OMB or
Congress to the extent not already spent.
Task Force estimates effects of current practice to
exceed $52 million. While the U.S. dollar lost approxi-
mately $52 million of its budgeted value against the indus-
trial countries' currencies for the period 1972 to 1980, it
gained approximately $196 million against the non-oil
developing countries (primarily in the Western Hemisphere)
and $9 million against.the oil-exporting countries for a
net gain of $153 million. Such gains have been experienced
in countries where inflation is so accelerated that gains
were not realized or realizable.
Active forward and futures contract markets exist in
the major foreign currencies. As noted earlier in the
Background section, the forward market is a significant
portion of the total foreign exchange market. In addition
to the forward market, trading in foreign exchange futures
(forward contracts for standardized. currency amounts and
maturities not tailored to the exact requirements of indi-
vidual parties or selected value dates) has been conducted
in the International Monetary Market (IMM) in Chicago since
1972, and in the Commodity Exchange (Comex) in New York
City since 1980. In addition, a foreign currency options
market has recently been established by the Philadelphia
Exchange to trade in put and call options for fixed amounts
of several major currencies.
Treasury and GAO have concerns regarding foreign
currency hedging. In an interview with Treasury personnel,
the following areas of concern were discussed regarding
implementation of a foreign currency hedging program: (1)
the staffing and procedures used to purchase the contracts,
(2) who would administer the program, (3) whether the
program gives the appearance of currency speculation (which
is undesirable), and (4) the impact that the program would
have on the foreign exchange markets. Specifically,
Treasury personnel were concerned that transactions would
imply a policy statement was being made on the U.S.
dollar's strength or weakness.
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Conversations with GAO personnel revealed other
concerns. GAO personnel felt that U.S. Government hedging
was undesirable since the U.S. Government is "self-insuring"
against all claims and losses, and gains and losses would
balance out over time.
Conclusions
State will continue to experience huge budget fluctua-
tions. State will continue to suffer foreign currency losses
in periods when the dollar is declining in value against the
major industrial countries' foreign currencies unless some
mechanism to remove that risk is implemented.
State needs a foreign currency forecasting system.
State needs a system to forecast foreign currency obli-
gations and purchases since current foreign currency
reports by Treasury are not agency specific. The new
Financial Management System (FMS) at the Department could
be used to gather this information.
BPMA does not prevent foreign currency losses. Al-
though BPMA will provide for a more orderly budgeting
process for foreign currency fluctuations, it does not
alleviate the risk of an unhedged foreign currency
obligation.
Recommendations
STATE 4-1: Develop an accounting system to gather
foreign currency needs. We recommend that the State
Department Comptroller develop a uniform system of
budgeting and reporting the forecasted statistics on
foreign currency obligations. This information system will
be necessary in order to estimate the size and maturity of
the contracts. The system will also require coordination
with all other agencies for which State acts as foreign
currency purchasing agent. Cost is estimated to be minimal
in that such systems are already developed by the banking
community and information is provided to clients free of
charge. Minimal cost may be experienced for clerical
staffing of the function.
STATE 4-2: Establish. foreign currency futures/forward
desk. We recommend that the Secretary of State request
exemption from Treasury regulations and establish a foreign
currency futures/forward/options positioning desk in
Washington. This forward positioning desk will buy or
direct the purchase of contracts in major industrial
countries' currencies and in amounts for which the U.S.
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Government has fixed and budgeted obligations for the
fiscal year ahead. No additional cost is expected since
several personnel perform the "buy function" at this time
(although only for three day periods).
STATE 4-3: Hire staff and define functions of trading
desk. A Washington staff consisting of a manager, an
analyst and a clerk/secretary will be necessary to collect
and process the forecasted disbursement data. This staff
will report to the Comptroller and be given an operating
budget of approximately $100,000 in their first year of
operation. The staff will determine: (1) the foreign
currency to be hedged, (2) the duration and the amount of
the contract, (3) the market or intermediary to be used for
the purchase of the contract, and (4) direct the purchase
or sale of a specified contract.
Savings and Impact Analysis
1. Savings could amount to $17.1 million over the next
three years.
Savings of $17.1 million (or $5.7 million per year)
represents approximately one-third of the loss that was
estimated for the nine-year period from FY 1972 to FY 1980
in the major industrial countries' foreign currencies. The
estimated over budget expenditure by the military (DOD) due
to foreign currency fluctuations during the period was
$1.265 million. Savings over the next three fiscal years
could.be as much as $421 million (one-third of the esti-
mated loss). This savings analysis assumes that the
historical pattern from FY 1972 to FY 1980 will be typical
of the future variation in foreign exchange rates.
2. Hedgings should be limited to major industrial
countries' currencies only.
State cannot be perfectly hedged against all budgeted
foreign currency obligations due to the limited number of
currencies for which futures and forward markets are
available, and the relatively small requirement in some
currencies. However, most of the major European currencies
and the Japanese yen have active forward/futures markets
with enough depth to permit large forward contract
purchases.
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3. Cost of forward contracts.
The cost of forward exchange contracts can be put into
annual percentage terms for analytical purposes. The pre-
mium or discount is calculated by the following simplified
formula:
Discount Foreign currency
(or premium) = spot minus forward rate X 12 X 100
in percent Spot rate Months
to
maturity
The timing of forward coverage is important, since any
delay while the U.S. dollar is deteriorating may involve a
higher cost as opposed to the initial spot rate used for
booking.
4. Cost of futures contracts.
The cost of futures contracts could involve a negoti-
ated commission but no advanced funds.
5. Cost of options contracts.
The cost of options contracts includes the option cost
and a margin deposit.
6. Addressing concerns over recommendations.
Treasury concerns:
The burden of staffing and the development
of procedures that are used to purchase the
contracts would fall within State, not
Treasury. State would be responsible for
developing procedures which would give
adequate notification of transactions to the
proper Treasury [and Federal Reserve Bank
(FRB)] personnel.
State would administer the program for DO
purchases. There would appear to be no
current advantage to the U.S. Government for
the Treasury (or FRB) to administer one or
both of these programs since they have no
system in place which is forecasting foreign
currency needs and they do not have'any
staff with administrative experience in
forward or futures trading other than the
swap desk at the Federal Reserve Bank of New
York (FRB NY).
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The program should not give the appearance
of currency speculation. Hedging is defined
as a temporary substitute for a transaction
in the spot market to protect against ad-
verse price movement. In this case, the
purchase of a forward or futures or options
contract is used as a substitute for a
future cash transaction.
The program should not have a significant
impact on the market in terms of dollar
volume. As discussed in the Background
section above, approximately 6 percent of
the foreign exchange market activity was
outright forward contracts. If the annual
activity in forward contracts is approxi-
mately $353 billion ($491 x 12 x .06), then
the $2 billion in foreign currency purchases
represents less than 1 percent (2 divided by
353). Furthermore, the industrialized
countries' currencies being hedged repre-
sented less than $1 billion of FY 1982
purchases.
0 GAO concerns:
The "self-insuring" policy works on the
premise of large numbers and unknown future
obligations. The argument for absorbing
foreign currency losses because the U.S.
Government can afford it is a weak one since
the obligations are known and have been
budgeted.
The assertion (or belief) that the foreign
currency fluctuations among industrial
countries' currencies (and therefore the
gains/losses experienced) will somehow
balance out over time has no empirical proof.
Implementation
1. Agency Authority -- State Department
STATE 4-1: The Secretary of State must direct the
Comptroller to develop this system. It is the Task Force's
understanding that this information can be gathered as part
of the new FMS currently being developed by State.
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STATE 4-2: The Secretary of State must request
exemption from Treasury regulations prohibiting the use of
future/forward/option contracts (I TFRM 6-8065.30).
STATE 4-3: The Secretary of State must direct the
Comptroller to hire staff and develop an operating
procedure (as described in the Recommendations section
above).
2. Agency Authority -- Treasury Department
STATE 4-2: The Secretary of the Treasury must rescind
or revise the rule prohibiting the use of future/forward/
option contracts (I TFRM 6-8065.30). The rule should state
that USDOs with authorization from Treasury will be per-
mitted to enter into contracts for future/forward/option
delivery of foreign currencies in amounts to satisfy their
projected foreign currency obligations.
Additional Information
The recommendations made in this Issue are consistent
with sound business practices where there is a requirement
to purchase foreign currencies on a regular basis. Inter-
national political considerations may extend beyond the
savings that have been estimated. Before implementation,
State should consider the international political implica-
tions of the recommendations. We were not in a position to
make. such an assessment.
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II. ISSUE AND RECOMMENDATION SUMMARIES (CONT'D)
A. DEPARTMENT OF STATE (CONT'D)
STATE 5: BUREAU FOR REFUGEE PROGRAMS
Issue and Savings
What changes pertaining to the Refugee Transportation
Loan Program can be made in the prevailing procedures in
order to maximize the collection rate?
Our recommendations result in savings and accelerated
collections of approximately $22.9 million in the first
year and $21.5 million in the second year and $20.2 million
in the third year.
What managerial improvements can be made to help
monitor the performance of voluntary agencies and
international organizations involved with Refugee Programs.
Although future savings are not presently
determinable, enhanced monitoring can reveal various
organizations dispensing funds that are not in the best
interest of U.S. foreign policy.
Background
The Bureau for Refugee Programs is surrounded by the
complexities and policy considerations consciously weighted
into foreign policy development to promote national interest
The FY 1983 budget for refugee programs is approximately
$419 million. The FY 1983 budget contains an allocation of
$67 million to replenish a transportation loan fund admini-
stered the International Committee for Migration (ICM).
Recent transportation loans range from $200 to $800 per
refugee on an unsecured basis with no fixed term.
The relief assistance for refugees (including esta-
blishment and collection of transportation loans) is
provided through voluntary agencies and international
organizations and totalled approximately $384 million of
the $419 million in FY 1983. The United States contribu-
tions approximate 30 percent of the funding level of each
international refugee relief program.
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In addition to the Department of State, other Federal
agencies incur major costs after refugee admission and
resettlement in the United States which is estimated to be
$1.1 billion for FY 1983.
Statistical information on the worldwide refugee
situation is based largely on information from the inter-
national community, foreign governments (if willing), and
U.S. diplomatic posts throughout the world and, accordingly,
is subject to considerable variation.
Methodology
During the initial phase of this study, discussions
held by Task Force personnel with the management personnel
of the Bureau for Refugee Programs identified various
issues. We also reviewed and analyzed various Bureau for
Refugee Programs' budget information, U.S. Coordinator for
Refugee Affairs' reports to the Congress, and audit reports
supplied by the Department of State Inspector General.
Evaluation of the effectiveness of the loan program
was not possible because there are no terms and conditions
on these loans. In addition, removal of the collection
responsibility to the Voluntary Agencies' (VOLAGs) further
complicates the analysis process. Nevertheless, we used
collections compared to loan balance as a measurement tool.
Findings
The actual transportation loan collection rate is 8.81
percent based on the total outstanding balance, as of June
30, 1982. There existed an outstanding receivable balance
of $165 million at that date. The loan collection rate of
8.81 percent is extremely low relative to private sector
experience. For example, the collection rate for personal
unsecured loans experienced by collection agencies is 21.7
percent. 1/
Since loan collection is administered by various
VOLAGs involved with resettling refugees, it is difficult
to estimate collectibility.
No formal procedures to monitor and evaluate the
effectiveness of VOLAGs and international organizations are
in use by State's Refugee Bureau. (Recently, a U.S. pay-
ment to a United Nations Agency, to which the United States
has contributed for many years, was withheld because the
Agency had supported terrorist activities.)
l Per American Collection Association, a composite of
2,800 agencies.
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Procedures to track secondary migration of refugees do
not exist. Hence, loan collection becomes difficult due to
inability to locate the refugees.
Accurate cost data on total refugee costs to the U.S.
Government were not availab e.
Conclusions
In general, the nature of the loan instrument is
inconsistent with standard, conventional loans and
resembles more a grant with provisional payback. More
specifically, the Task Force has concluded that:
o the inability to enhance the collection rate of
outstanding promissory notes results in annual
additional appropriations;
o the Bureau for Refugee Programs has not assessed
the VOLAG's ability to collect loans;
o without monitoring capabilities, management is
limited in its ability to maximize resources
utilization to the most effective VOLAGs and
international organizations, and
o the loan collection process is hampered by the
absence of refugee tracking systems.
Recommendations
STATE 5-1: To rectify the loan collection problem.
The Secretary of State should direct:
o establishment of the loan program on a more
conventional basis, to wit, with fixed terms and
security/guaranties;
o an assessment of the VOLAGs' ability to increase
loan collections;
o establishment of a centrally managed collection
activity within the Department;
o regulations be changed to obtain sponsor
guarantee for refugee promissory notes; and
o application of funds for future transportation
costs from loan receivable collections.
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STATE 5-2: The Secretary of State should require the
monitorinq process be documented as to the effectiveness of
voluntary agencies and international organizations.
Specifically:
o the Deputy Assistant Secretary for International
Refugee Assistance and Relief should develop per-
formance criteria for international organizations
upon which efficiency evaluation could be
compared, and
o the Deputy Assistant Secretary for Refugee
Resettlement should develop performance criteria
upon which to evaluate the private voluntary
agencies.
STATE 5-3: To develop tracking and integrated data
base, the Secretary of State should request funding for the:
o development of a computerized tracking system
which will provide refugee address information
(to respective VOLAGs), and for the
o integration of Refugee Bureau information with
that of other computer systems amongst varying
agencies supporting refugees in order to provide
complete cost data on refugees.
Savings and Impact Analysis
1. Rectify the Loan Collection Problem (see STATE 5-1).
The Task Force believes that increased loan collec-
tions will produce results similar to the private sectors.
We have chosen to apply the 21.7 percent rate because it
represents collection experience on loans which were in
default before being given to the collection agency. The
following data summarize the expected loan collections.
($ millions)
Year
Beginning
receivable
balance
Increased
collections
rate
Collections
Ending
balance
1
$165.00
12.89%
$21.27
$143.73
2
143.73
12.89
18.53
125.20
3
125.20
12.89
16.14
109.06
Total collections: 55.94
-51-
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These collections represent cash accelerations. The
interest savings can be calculated based on this cash
acceleration.
Year
($ millions)
cumulative
cash
accelerations
Interest
savings
1
$21.27
$2.13
2
39.80
3.98
55.94
5.59
Total savings
11.7.0
2. Improve the Monitoring Program (see STATE 5-2).
It is anticipated that the monitoring of the VOLAGs'
will identify cases of inefficiencies which will be used as
the basis for reducing contributions. However, since a
reasonable level of reductions cannot be determined, no
savings will be estimated.
3. Develop Tracking System and Integrated Data Base (see
STATE 5-3).
An essential element of the Task Force recommendation
is the development of a computerized tracking system and
integrated data base for refugee affairs. Until the
requirements for the system can be specified, it is not
possible to accurately estimate the design development and
operating costs. For analysis purposes we will use budge-
tary figures of $0.5 million, $1 million and $1.5 millions
as approximate cost figures.
In summary the estimated savings for this Issue are as
follows:
Recommendation
Improved collections
- cash acceleration
$21.27
$18.53
$16.14
$55.94
- interest savings
2.13
3.98
5.59
11.70
Monitoring VOLAGs
Development of
integrated system
(0.5)
(1.0)
(1.5)
(3.0)
Total savings
22.9
21.51
20.23
64.64
-52-
First Second Third
year year year Total
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Implementation
1. Agency Action
STATE 5-1: Assess the VOLAGs' ability to increase
loan collections, or establish a centrally managed collec-
tion activity within State. Future transportation cost
should be applied from loan receivable collections.
STATE 5-2: Require that the monitoring of VOLAGs and
international organizations be documented.
STATE 5-3: Request sufficient funding for the
development of a computerized tracking system and, inte-
grated information data bases. Approve funding for fully
integrated computerized system.
2. Congressional Action
STATE 5-1: Require sponsor guarantee for refugee
promissory notes.
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II. ISSUE AND RECOMMENDATION SUMMARIES (CONT'D)
B. AGENCY FOR INTERNATIONAL DEVELOPMENT
OVERVIEW
The Agency for International Development (AID) was
created by the Foreign Assistance Act of 1961. Its pre-
decessor agencies operated under the Marshall Plan (1948 to
1952) and the Mutual Security Act (1953 to 1961). AID
presently manages most of the foreign economic and develop-
ment assistance programs of the U.S. Government. AID does
not administer foreign military aid.
The avowed aim of AID is "to help people in the Third
World acquire the knowledge and resources to build the
economic, political and social institutions necessary for a
better life." Another AID objective is to further the
interests of U.S. foreign policy. This dual character is
reflected in the types of assistance AID dispenses:
0
Development Assistance -- includes loans and
grants in agriculture, rural development,
nutrition, family planning,
human resources, energy, and
technology (FY 1983 -- $1.3
health, education and
science and
billion); and
o
Economic Support Fund -- provides loans and
grants to selected countries of special political
and security interest to the U.S. (FY 1983 --
$2.9 billion)
In addition, AID administers the Food for Peace
Program (P.L. 480) with funds from the Department of
Agriculture, provides disaster relief to foreign countries,
and disburses multilateral assistance to international
organizations.
AID currently has 5,386 employees, including 2,224 in
Washington headquarters and 3,162 in field missions over-
seas. AID missions are in 71 countries in Africa, Asia,
Latin America and the Caribbean, and the Near East.
,The current AID personnel complement reflects'a 70
percent decrease from the peak of 17,600 personnel that was
attained in 1968. The AID staff has diminished in number
primarily as a result of the ending of the conflict in
Vietnam where AID was heavily involved in development and
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relief assistance. Other factors that have worked to
reduce the number of employees include a policy change that
has restricted AID to a planning role and prohibited direct
implementation of projects, and pressure from the Office of
Management and Budget (OMB) to reduce staff as part of
general budget cutting that has resulted in an understanding
to reduce staff by an additional 150 per year over the next
four years.
The following data depict AID's personnel headcount
and funding in selected years over the past 20 years:
FY 1962
FY 1972
FY 1982
FY 1.983
Number of
employees
14,800
12,800
5,386
5,137
Budget
authority
($ millions)
$2,508
$2,072
$4,607
$4,895
AID,'s total request of $4.9 billion represents 0.61
percent of the Federal budget for FY 1983, and is $288
million or 6.3 percent greater than the FY 1982 allocation.
Fifty-three million dollars of the increase is earmarked
for Latin America as part of the Caribbean Basin Initiative.
The Economic Support Fund is dispensed in two ways --
as a direct payment to the recipient or as an allocation to
fund a specific development project that has been planned,
approved, and contracted for by AID personnel.
In 1983, about $1.8 billion or 62 percent of the total
Economic Support Fund will be disbursed through direct
payments. This amount includes the entire $785 million to
be sent to Israel and approximately $350 million of the
funds budgeted for Egypt. With the exception of the grant
to Israel, most of the outright grants are disbursed
through Commodity Import Programs, Economic Stabilization
Grants and Balance of Payment Support.
The balance of AID assistance -- about $2.5 billion in
1983 -- is allocated to specific development projects.
This total includes all funds budgeted through the Develop-
ment Assistance program. AID projects are meticulously
planned by Agency personnel and carefully scrutinized by
Congress. AID's operating expenses are primarily dedicated
to planning these projects, overseeing their implementation,
and reporting on them to Congress. In 1983, operating
expenses were $376 million, up $45 million or 14 percent
over 1982. Over the last five years, operating expenses
have grown at a compound annual rate of 10 percent.
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AID's disbursements are classified as either grants or
(low interest rate) loans. Of the $4.3 billion budgeted
for FY 1983, approximately 67 percent is allocated to
grants and 33 percent to loans. The loans typically carry
an interest rate of 2 percent for the first ten years and 3
percent thereafter, usually with a term of 30 years and no
principal repayments for ten years.
The challenges facing AID in the near term center on
the difficulty of managing its extensive program with a
shrinking staff. The pressure on AID is intensified by the
need to respond quickly to unexpected new foreign policy
initiatives, such as the Caribbean Basin Initiative or a
proposed increase in aid to Pakistan. AID's difficulty is
compounded by the onerous reporting requirements imposed by
Congress.
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II. ISSUE AND RECOMMENDATION SUMMARIES (CC)NT'D)
B. AGENCY FOR INTERNATIONAL DEVELOPMENT (CONT'D)
STATE 6: IMPROVEMENTS IN THE PROJECT
PLANNING, APPROVAL AND MONITORING
Issue and Savings
How can the management process at the Agency for
International Development (AID) be improved so as to
eliminate waste and overcontrol in the planning, approval,
and monitoring of development projects?
The economies recommend in this Issue will reduce
personnel time spent planning, approving, and monitoring
AID projects. General changes in the management ;process we
are recommending will eliminate at least 10 percent of
personnel time currently dedicated to these functions,
resulting in a savings of $4.3 million in the first year.
Specific changes we are recommending will eliminate another
$5.6 million in personnel costs in the first year. Total
savings will amount to $9.9 million in the first Year,
$10.9 million in the second year and $12.0 million in the
third year.
Background
In FY 1983, AID will distribute $4.3 billion in funds
to the developing world through grants and low interest rate
loans. $2.5 billion of these funds will be disbursed to
finance specific development projects, which are planned,
approved, and controlled within a framework known as the
Project Assistance Cycle. In 1978, independent consultants
estimated that the following numbers of work-years were
spent on three important planning, approval, and monitoring
functions of the cycle:
Project development cycle
410
work-years
Annual budget submission
198
work-years
Congressional presentation
205
work-years
Total
8113
work-years
AID officials in the Bureau for Management and in the
Office for Financial Management estimated that total time
spent on the three identified phases of the cycle has been
reduced by 15 percent since 1978. Assuming the 15 percent
reduction, we calculate that 691 work-years are today dedi-
cated to planning, approval and monitoring.
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AID's total operating budget of $376 million for 1983
will be spent almost entirely to support AID's 5,300 (1983
average) employees, according to the Office of Financial
Management. We have calculated the all-inclusive current
cost of a work-year of service to be $71,000. Multiplying
the $71,000 amount by the 691 work-year figure derived
above, we have determined the current all-inclusive cost of
planning and control to be $49.06 million.
The Project Assistance Cycle includes only those AID
activities directed toward planning a project and, receiving
Congressional approval for the disbursement of funds. It
should be emphasized that the majority of AID's effort is
invested in other, primarily implementation, activities.
Since AID implements its programs in the less developed
countries throughout the world, it was impractical for the
Task Force to evaluate implementation procedures and
recommend cost savings with respect to them, The Task
Force therefore concentrated on finding cost savings in the
Project Assistance Cycle, which could be effectively moni-
tored in Washington. Furthermore, it was believed that the
Project Assistance Cycle, as the focus of planning,
oversight, and other activities, would prove to be the most
promising area for cost cutting.
Despite improvements made in recent years, the Project
Assistance Cycle remains a sluggish mechanism. Some of the
reasons for its persistent cumbersomeness include:
o the pressures of Congressional mandates and
oversight;
o the impingement of foreign policy and strategic
considerations;
o the bureaucratic inadequacies and socio-economic
weaknesses of beneficiary countries; and
o the bureaucratic inertia within AID itself.
Methodology
Interviews were carried out with senior AID executives
in Washington and in the field. An extensive round of
meetings were held with AID personnel in Egypt to explore
the problems of one of AID's largest and most complicated
field missions.
A review of available, appropriate AID documents was
made. Various AID internal memoranda, reports, and letters
were inspected. Historical personnel and cost data were
analyzed.
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Financial and personnel information was gathered from
other development agencies with project functions comparable
to AID's. Senior executives of outside agencies, including
CARE, the YMCA, United Nations Fund for Population Activi-
ties (UNFPA) and a selection of smaller agencies were
interviewed regarding their procedures and costs. Foreign
assistance programs of other donor countries, such as
Canada and Sweden, were also explored.
Findings
AID's procedures for planning, approving, and
controlling development projects are not as efficient as
those of other major development agencies.
AID's relative inefficiency can be demonstrated by
comparing AID to other major development agencies along two
broad measures:
o Operating expenses as a percentage of total
disbursements:
o Average elapsed time to develop and approve a
project.
Operating
Size of expenses
total as a % of Average elapsed
program total dis- time to plan
Agency ($ millions) bursements and approve
CARE
Meals for
Millions
Partnership
for Produc-
tivity
Technoserve
AID
$ 273.0
7.0%
9 months
3.6
4.8
9 months
2.5
10.0
9 months
2.6
13.5
4 months
2,500.0
13.5
16.7 months
We have compared AID to several international organi-
zations involved principally in development and human
welfare work, primarily Private Volunteer Organizations
(PVOs). Our results show that AID compares unfavorably
with most of these organizations, with respect to the
measures specified above.
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There are two possible explanations for AID's relative
inefficiency:
0 AID requires an excessive amount of scrutiny and
documentation of its projects, and
o many other development agencies are more verti-
cally integrated than AID.
Outside agencies provide other advantages. In addi-
tion to their economic advantages, outside agencies are
often preferable channels of disbursement because of their
ability to reach geographical areas where AID has no
presence. PVOs have also shown themselves willing to handle
politically sensitive projects that AID would rather avoid.
In addition, host governments would like to see PVOs
strengthened and expanded.
AID is less efficient than other national donor
agencies. Our research also shows AID to be less efficient
than other national donor agencies. The Swedish Interna-
tional Development Authority (SIDA), for example, is able
to disburse $1,025,000 per employee as compared to AID's
$416,667 per employee. If we assume that the two programs
are roughly equivalent in per dollar effectiveness, AID is
apparently achieving far less labor productivity-than SIDA.
(Labor productivity used here rather than operating expense
measures due to lack of expense data from SIDA.)
Operating expenses are growing as a percent of
allocations. Not only are AID operating expenses high in
relation to other development agencies, they are growing
over time as a percentage of allocations. Operating
expenses have grown from 6.4 percent of allocations in 1977
to 8.0 percent in 1983 or a 25 percent increase.
Centralization causes delays and excess costs. The
centralization of budgetary and decision-making authority
of AID in Washington (AID/W) is reported by officials in
the Bureau for Program and Policy Coordination and the
Bureau for Management to be a cause of program delay and
excess cost. These officials report that an excessive
amount of documentation and unconstructive review of field
operations occurs in Washington as a result of a reporting
and decision-making structure that concentrates too much
authority in the central office. These views are supported
by the outside consultants' study, which found that the
greater the degree of Bureau centralization, the More time
required to develop and approve project plans. The more
centralized Bureaus have not shown superior results,
despite their greater efforts.
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The deobligation/reobligation procedure is inefficient.
A major source of inefficiency within AID is the present
procedure for deobligation and reobligation of funds which
requires that funds unspent on a completed or terminated
project be deobligated (not used on other projects without
approval by Congress). Until 1977, AID missions in the
field enjoyed the management flexibility to deobligate funds
for projects which failed to meet objectives and to reobli-
gate those funds to successful or fast-moving projects which
could readily absorb the additional support.
In 1977, Congress decided that the reobligation
authority gave too much latitude to AID and disallowed the
procedure. Consequently, deobligated funds must now be
returned to the U.S. Treasury.
The present deobligation/reobligation procedure is
costly. Approximately $60 million in AID program funds
were deobligated in FY 1982. Before that $60 million can
be redirected to other AID projects, it must be requested
through the Project Assistance Cycle. That $60 million
will be approximately 7.8 percent of FY 1983 project-
oriented new program fund requests of $763 million. If AID
were allowed to escape the Cycle for the $60 million and
reobligate the funds on its own authority to other projects
which have already been approved, a theoretical 7.8 percent
of staff time dedicated to planning could be eliminated.
With staff planning time put at 348 work-years (derived by
taking the independent consultants estimate of Project
Development Cycle work years of 410 and reducing by 15
percent to account for recent improvements), the savings
would equal 27 work-years. (Savings in the budget submis-
sion and Congressional cycle are not claimed since it is
assumed that reobligated funds would still be reported
under these phases.)
Specific evidence of this inefficiency was seen during
the field visit to Egypt. Recently, AID officials have
publicly requested permission to reprogram $300 million in
obligated funds for "turkey" projects in Egypt (Washington
Post, January 27, 1983).
Returning deobligation/reobligation authority to AID
would provide the Agency with an excellent management tool
that it now lacks. AID administrators would have incentive
to terminate projects that are not succeeding and to re-
direct funds to those that are, and State will receive
fewer complaints from host countries and save operating
costs in the process.
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Congressional oversight cost AID $12.78 million in
1982. The high level of Congressional oversight of AID is
costly to the Agency in three ways:
o time spent reporting to Congressional Commit-
tees: Senate Foreign Relations Committee, House
Foreign Affairs Committee, and Foreign Operations
Subcommittees of the House and Senate;
o time spent answering written queries from
congressmen and senators; and
o time spent preparing the annual Congressional
Presentation.
AID sends approximately 94 reports per year to
Congress, not including the massive six volume annual
Congressional Presentation. In addition, AID personnel
spend approximately six work-years on correspondence. The
cost is estimated to total $12.78 million per year.
AID officials at all. levels called this burden
excessive and claimed that. much of it was self-imposed.
The form and length of the Congressional Presentation, for
example, is determined by AID itself, and not specified by
Congress.
The annual budget submission is redundant and wasteful.
AID is required to submit all projects for annual budget
review by the Office of Management and Budget (OMB) even
though most projects receive multi-year authorization. In
the years after the initial appropriation, this submission
is often a perfunctory exercise. AID will submit an
updated version of the previous year's submission and OMB
will generally give its approval. This mechanical process
consumes a significant amount of staff time without adding
to the effectiveness of Agency control.
The redundancy and waste in the current procedure for
annual budget submission could be largely eliminated if AID
were allowed to move from annual budget. authorization to
two-year authorization.
The process is inhibiting and counterproductive.
Management inefficiency and Congressional and bureaucratic
overcontrol are costly not only in terms of dollars, but
also in terms of effectiveness.
Conclusions
Outside agencies are preferred channels for AID funds.
AID is relatively less efficient at administering develop-
ment projects than are other major development agencies.
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If AID were to channel more of its funds through outside
agencies -- using the mechanism of block grants -- it would
be able to provide development assistance more efficiently
than it does through its current practice of dispensing
individual project grants. A block grant in this context
would be a lump sum allocation to the outside agency in
return for an accounting of how the funds will be spent.
Increased decentralization is needed. Funds that do
go through the AID network can be more efficiently admin-
istered if the system is more decentralized.
This conclusion is backed up by three of the Task
Force's findings:
o consultants have determined that the less central-
ized regional bureaus in AID spent significantly
less personnel time planning and monitoring
projects without suffering a loss in effectiveness;
o there is a widespread belief among AID/W personnel
that they spend too much time on paperwork and
"red tape" and that much of this time could be
eliminated if more authority were given to field
mission directors; and
o control procedures have been simplified in the
last four years but AID/W personnel -- who carry
out most of the control functions -- have remained
at nearly the same high percentage of total AID
personnel.
Returning deobligation/reobligation authority to AID
will cut costs. Planning costs can be cut 7.8 percent and
effectiveness improved if deobligation/reobligation author-
ity is substantially returned to AID and AID allows its
field mission directors wide latitude to deobligate and
reobligate funds.
The Task Force believes that the appropriate Congres-
sional oversight is at the level of country/regional
development and not at the level of specific project.
A return of deobligation/reobligation authority to AID
will be an effective measure only if AID does not lose any
budgetary authority in the process.
The work-years spent responding to Congressional de-
mands are excessive. Officials in AID's Bureau of.
Legislative Affairs believe that a reasonable amount of
oversight can be achieved with a cut of 15 percent in
work-years spent responding to Congress.
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Changes effected over the last three years have cut 15
percent from total time spent on the Congressional Presen-
tation and most AID officials believe that the quality of
AID reporting has improved. With this success behind them,
AID personnel have reason to believe that further cuts are
possible in what is still a 180 work-year reporting
procedure.
Moving to a two-year annual budget submission cycle
would eliminate needless paperwork. The Annual Budget
Submission consumed 198 work-years of staff time in 1978,
according to the consultants' report. If we assume that
this process, like other aspects of the Project Assistance
Cycle, has been cut by 15 percent, we can calculate that
168 work-years are still dedicated to it. Moving to a two-
year Annual Budget Submission cycle for multi-year projects
would cut personnel time spent on the function still
further. Half of the repetitive and time-consuming paper-
work for multi-year projects would be eliminated.
Recommendations
STATE 6-1: AID should increase the dollar value of
block grants. The Agency Director should channel more AID
funds through outside development agencies through the
mechanism of block grants.
At present, the Agency is disbursing $182 million, or
13 percent of total Development Assistance allocations
through PVOs. Congress has ordered that at least 12 per-
cent of disbursements continue to go through these agencies.
The Agency Director should set a higher target level -- for
example, 15 percent by 1984. Raised targets should be set
in future years as PVOs demonstrate the ability to make good
use of the funds.
As AID increases its allocations to PVOs, it should
explore the possibility of making multilateral/bilateral
(Multi/Bi) grants. A Multi/Bi grant is a grant with a
specific designation as to how and/or where a portion of
the funding is to be spent.
STATE 6-2: The Agency Director should request
Congressional action to return deobli ation/reobli.gation
authority to AID. AID should provide field mission
directors with latitude to cancel failing projects and
reallocate funds committed to them to other projects
within their mission.
The legislative action that returns this authority to
AID must provide that exercising deobligation/reobligation
authority will not lower overall budgetary authority.
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STATE 6-3: The Agency Director should empower a panel
of AID officers to study ways of further decentralizing
authority. The stated goal of the study should be to
reduce AID/Washington staff as a percentage of total AID
personnel.
STATE 6-4: The Agency Director should instruct
members of his/her staff to consult with Congressional
staffers about ways to reduce AID reporting time by 15
percent. Areas to target for cuts would include: length
of the Congressional Presentation, number of reports AID
sends to Congress, volume of correspondence between AID and
Congress, and number of Congressional committee meetings
AID staffers are required to attend.
STATE 6-5: The Agency should move to a two-year budget
submission c cle. The Agency Director should work with 0MB
an Congressional leaders to change Congress's policy of
reviewing all budget requests annually. The Director
should lobby for a two-year appropriation cycle for AID
budget requests. Under the two-year cycle, all AID appro-
priations would be made and reviewed by 0MB and Congress
every other year rather than annually.
Savings and Impact Analysis
The recommendations outlined above will result in a
projected $9.9 million in savings in the first year of
implementation. $5.6 million of this total are savings the
Task Force estimates will result from the specific changes
recommended. The remaining $4.3 million are potential
savings we believe will flow from the general changes
recommended.
Specific savings would result from the following
measures:
o Return deobligation/reobligation authority to
mission directors (see STATE 6-2). We estimate
that this change will result in a savings of 7.8
percent., or 27 work-years, of planning time. At
$71,000 per work-year, this savings amounts to
$1.9 million in the first year.
o Cut the level of Congressional reportin. (see
STATE 6-4). AID officials believe Congressional
reporting could be cut by 15 percent and still be
adequate to meet Congressional oversight needs.
The Task Force agrees with this estimate. The
savings in annual costs would be 27 work-years,
or $1.9 million per year.
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0 Move to a two-year budget submission cycle (see
STATE 6-5). A two-year Budget Submission cycle
will entail a full justification of each AID pro-
ject in its initial year, followed by bi-annual
rejustifications of the project over the course of
the project life. The current procedure requires
annual rejustification of already-approved
projects. Although these annual rejustifications
account for a minority of the time currently spent
on the annual budget submission, the personnel
time they require is still significant. If the
annual rejustifications were replaced by a
bi-annual procedure as suggested, the Task Force
estimates, based on the judgments of officials in
the office of Legislative Affairs and the Office
of Financial Managements, that 15 percent of the
current work-years expended on the ABS would be
eliminated. The savings in annual costs would
amount to $1.8 million per year.
Savings would be realized through the reduction of
personnel, in both Washington and the field missions. The
Task Force is not prepared to recommend specific :Bureaus
where these cuts should fall, but believes that a goal of
cutting personnel dedicated to planning, approving, and
monitoring by 10 percent in conjunction with these general
charges is a realizable one. With the cost of these acti-
vities projected to be $43.4 million, after the specific
cost savings of $5.6 million indicated above have been
realized, first year savings of $4.3 million are indicated.
General areas of savings will include:
o More funds disbursed through block grants (see
STATE 6-1). These lump-sum allocations should be
made to outside development agencies which
operate more efficiently than AID.
o Greater decentralization of authority (see STATE
6-3). Implementation of this measure will permit
a reduction in AID/W staff without necessitating
an equivalent increase in foreign-based personnel.
In addition, it will result in a reduction in
expenses for travel and meetings.
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Savings listed above are summarized below:
Year 1
($ millions)
Year 2
Year 3
STATE
6-2
1.9
2.1
2.3
STATE
6-4
1.9
2.1
2.3
STATE
6-5
1.8
2.0
2.2
STATE
6-1,
3
4.3
4.7
5.2
Total
9.9
10.9
12.0
Implementation
1. Agency Authority
STATE 6-1: The Agency Director must establish a higher
target for PVO block grants as a percentage of total AID
allocations. As a first cut, a target of 15 percent of
Development Assistance funds by 1985 should be mandated.
The Office of Private and Voluntary Cooperation should be
made into a separate bureau and strengthened so that it may
become the focal point for the increased PVO effort.
STATE 6-2: The Agency Director must select a panel to
study ways AID can further decentralize authority. The
panel should be composed equally of experienced personnel
from AID/W and the field. The panel should be given six
months to write its report and required to present concrete
recommendations at the end of its work.
STATE 6-4: The Agency Director should order that a
series of meetings be set up between officials of AID's
Bureau of Legislative Affairs and staff members of the House
and Senate Appropriations and Foreign Affairs Committees.
At these meetings AID officials will explain the need to
reduce Congressional reporting as a cost-cutting measure.
Congressional suggestions should be solicited and concerns
addressed. Once an appropriate amount of consultation has
taken place, the Agency Director should order cuts in the
Congressional Presentation and in other Congressional
reporting functions with the aim of reducing time spent on
these functions by 15 percent.
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2. Presidential Authority
STATE 6-5: The President must issue a directive to
OMB instructing that Agency to work with AID to persuade
Congress to accept the reobligation authority and a
two-year Budget Submission cycle. Once the two-year cycle
is accepted by Congress, OMB will be required to change its
own procedures with respect to AID budget requests to
reflect the new system.
3. Congressional Action
STATE 6-2: Congress should be requested to enact
legislation to provide AID with authority to deobligate and
reobligate funds. AID should be allowed to reobligate to
already-approved projects, so long as the reobligation does
not exceed the original obligation amount and is in the
same geographic or functional area as the deobligated
project.
STATE 6-5: Congress should pass legislation that would
allow AID to present projects for its approval biannually
instead of annually, as is now the practice.
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II. ISSUE AND RECOMMENDATION SUMMARIES (CONT'D)
B. AGENCY FOR INTERNATIONAL DEVELOPMENT (CONT'D)
STATE 7: INTEREST RATES ON AID LOANS
Issue and Savings
Do the interest rates on new Agency for International
Development (AID) loans provide an opportunity for addition-
al revenues?
Implementation of our Task Force recommendations
reduces government costs due to hidden foreign aid by as
much as $60.0 million for each year of new AID loans and,
if started in FY 1983, the cumulative effect in three years
alone would be $360.0 million in additional revenues.
Background
1. AID Made Over $1.4 Billion in Loans in FY 1982
From the outset, U.S. foreign economic assistance has
been provided through grants and loans. The level of loan
authorizations has risen over time and is currently chan-
neled through three separate funds administered by AID:
FY 1982
Development Assistance (DA)
$ 398,162,000
AID
Economic Support Fund (ESF)
365,690,000
AID
P.L. 480 (Food for Peace)
719,900,000
AGR
$1,483,752,000
(These amounts are presented in AID reports and are
included in several Budget Appendix categories.)
2. Maturity of Development Assistance Loans Governed By
Per Capita Gross National Product (GNP) of Recipient Country
Under the Foreign Assistance and Related Programs
Appropriations Act (FAA) of 1982, loans to less developed
countries (LDCs) with a per capita GNP greater than
$730
but less than $1,180 are repayable within
25
years;
loans
to countries with per capita GNP equal to
$1,180 are repayable within 20 years.
or
greater
than
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Methodology
The Task Force sought to determine historical trends
of AID loan terms and compare these with the borrowing cost
of the U.S. Government. In doing so, the Task Force re-
searched the legislative history of AID loans, determined
the current terms of interest of international development
banks, and conducted interviews with AID personnel.
Findings
U.S. loan terms show little change. It is U.S. policy
for loan terms to be determined by an LDC's income level
and not by the type of project being supported. A social
infrastructure project will be'funded on the same terms as
a project that generates revenue.
In 1979, Congress established loan maturities based on
the GNP of LDCs, using cutoffs patterned after those used
by the World Bank's International Development Agency (IDA).
It is AID policy to assess annually the individual
country situation to identify those countries that can
service loans on intermediate terms -- terms harder than
the authorized minimum.
This policy
applies to both
development assistance and economic
support fund loans.
AID officials state that only a few countries have been
offered loans on harder than standard development terms.
As for interest rates, the United States has not
changed the minimum loan rate shown below since 1968:
MIMINUM INTEREST RATE (%)
Principal grace period
Period thereafter
FAA of
(usually 10 years)
(usually 30 years)
1963
0.75%
2.0%
1964
1.00
2.5
1967
2.00
2.5
1968
2.0.0
3.0
Multilateral development banks have two loan windows
-- AID has only one. The multilateral development banks
TMU-BET-Have both a hard (capital) window, which provides
loans on near-market terms to higher income developing
countries, and a soft window, which provides loans on con-
cessional terms to lower income LDCs or, in some cases, for
projects with a strong social benefit in higher income LDCs.
The MDBs base the interest rate for their hard window loans
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on the cost of funds basis. The current interest: rates
charged on loans for each of these MDBs is shown below:
% INTEREST (GRACE PERIOD/THEREAFTER)
Hard window Soft window
IDB - Inter-American 10.5$/10.5$ 1%/2% to 4%
Development Bank
IBRD - World Bank 11.43/11.43 0/0
ADB - Asian Development
Bank 11.0/11.0 0/0
AFDB - African
Development Bank 9.5/9.5 0/0
AID, on the other hand, does not use a cost of funds
approach when determining its loan terms.
Interest on AID loans has not'reflected the cost of
borrowing by the U.S. Government. The interest rate on
U.S. Official Development Assistance (ODA) loans has borne
no relationship to the Treasury's cost of borrowing. Our
analysis reveals that as the annual interest rate on
Treasury bonds (marketable issue) has risen from 3.762
percent in 1970 to 9.321 percent in 1981 (a 148 percent
increase), the average interest rate on ODA loans has de=
creased from 2.6 percent to 2.5 percent for the same period.
Conclusions
Interest on ODA loans has not kept pace with the cost
of funds and represents hidden foreign aid. Whereas the
interest rate on the ODA loan represented 69 percent of the
Treasury bond rate in 1970, it represented only 27 percent
of the rate in 1981. The differential between cost of U.S.
borrowings and interest rate to LDC represents hidden
foreign aid.
There are no uniform loan terms for development
assistance, economic support and P.L. 480 funds. AID
personnel in the working group of the Food Aid Subcommittee
of the Development Coordination Committee are currently
drafting a document which would standardize criteria by
using the same AID eligibility criteria currently used for
DA loans for P.L. 480 Title I Loan Terms for use in the
interagency negotiations. However, there is no assurance
that this proposal will be adopted due to the conflict of
interagency foreign policy objectives.
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The State Department sets the terms for ESF loans with
advice from AID personnel. Although the current practice
is to use maturity criteria identical to DA loans when
possible, State has not established a set of guidelines so
that its flexibility is maintained.
Recommendations
STATE 7-1: Establish a "base" lending rate for all
ODA loans based upon cost of funds to the U.S. Government.
This base rate may be calculated on a periodic basis
(annually perhaps): (1) as a percentage of the interest on
Treasury bonds, or (2) as a percentage of the interest on
all outstanding Treasury debt, or (3) as a percentage of
the interest rate yield on the most recent Treasury bond
auction. The objective in choosing the most appropriate
Treasury rate is to match the borrowing cost to the
interest rate on the loan. The determination of an appro-
priate percentage of the borrowing rate should be fixed
after careful consideration of Agency objectives and
historical percentages. Our analysis reveals that ODA
interest rates ranged from 77 percent of Treasury bond
interest rates in 1971 to 27 percent in 1981.
STATE 7-2: After establishing a minimum base rate,
quantitative (objective) criteria can be applied to
borrowing countries in order to determine the appropriate
interest rate and maturity. Objective criteria based on
per capita GNP are already available from the MDBs. The
International Bank for Reconstruction and Development
(IBRD) publishes per capita GNP data annually to determine
IDA eligibility. This or other data available to AID could
be used to determine the appropriate "cutoff" levels in per
capita GNP. Once these cutoff levels are determined, the
appropriate interest rate and maturity for loans can be
applied.
STATE 7-3: Additional principal takedowns on loans
should not be granted to offset increased interest rates on
loans. AID policy personnel should be cognizant that bor-
rowers may request additional loan principal to pay the
higher interest rates. Careful analysis should reveal this
attempt to circumvent the U.S. objective. We recommend
that additional borrowings to pay the higher interest rates
be denied.
Savings and Impact Analysis
Savings could be $60.0 million in the first year and
$360.0 million after three years. The Task Force has
determined that, if the relationship between the average
interest rates on LDC loans of 2.5 percent and on U.S.
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borrowing costs of 3.6 percent were maintained at the 1968
level (when Congress last changed the minimum rate) for new
loans created in 1981, the interest rate on the 1981 loans
would be 6.5 percent as the Treasury rate was 9.3 percent
in 1981. Therefore, an additional $60 million in interest
income would be received in each year of the loan period
for those loans.
Since most loans are of, at least, a 40-year length,
the cost impact on the U.S. taxpayer is substantial in each
budget year. For example, the cumulative effect of this
change would be $360 million for a three-year period.
Further, to the extent that the average interest rate
on ODA loans were raised one percent, the incremental in-
terest earned on new ODA loans would be $15 million in the
first year and $90 million for the three years. This
analysis assumes that ODA loans remain at the 1982 level of
$1.5 billion for each of the next three years
($1,500,000,000 x .01 = $15,000,000 each year).
The following data illustrate how these savings are
achievable for each 1 percent increase in interest rate.
If the full 4 percent increase to 6.5 percent was in
effect, the savings would be four times each category.:
($ millions)
INTEREST EARNED DURING THE YEAR
Loan Year
Year 1
Year 2
Year 3
Total
First year
$15
$ 15
15
$-T5-
$ 45
Second year
-
15
15
30
Third year
-
-
15
15
Subtotal @ 1%
15
30
45
90
x 4
x 4
x 4
x 4
Total @ 4% increase
60
120
180
360
Implementation
1. Agency Authority -- AID
STATE 7-1: The Administrator of AID must direct AID
officers to establish a base lending rate (pursuant to F.1)
for (DA) loans. Economic Support Fund and P.L. 480 loans
will require the formation of an interagency task force to
determine appropriate base rates. It is to be hoped that
the same base rate will apply to all three funds.
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STATE 7-2: The Administrator of AID must direct his/
her staff to formulate a uniform set of criteria (presumably
per capita GNP) to determine a borrowing country's ability
to pay, to establish cutoff categories, and to formulate a
range of interest rates and maturities for each category.
2. Congressional Authority
Congressional action could be invoked and loan terms
legislated each year, but necessary changes can be accom-
plished through Agency authority.
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II. ISSUE AND RECOMMENDATION SUMMARIES (CONT'D)
B. AGENCY FOR INTERNATIONAL DEVELOPMENT (CONT'D)
STATE 8: FOREIGN SERVICE ROTATION POLICY
Issue and Savings
Can the Foreign Service rotation policy be changed to
reduce personnel transfer costs and make the performance of
the officers more effective?
By enforcing the policy of four-year minimum assign-
ments, annual transfer cost savings of $1.6 million could
be achieved, based on FY 1982 outlays, and project over-
sight and implementation would be improved. Three-year
savings are estimated at $5.3 million.
While AID is gradually closing the gap between
announced and actual tour lengths, we believe that presen-
tation. of this Issue in this Report may accelerate the
proces and produce savings within a shorter time frame.
Background
1. Nature of Foreign Service
The Foreign Service of AID and the Department of State
comprises a unique cadre of career professionals who are
prepared to accept the challenge of sequential assignments
in countries around the world. In each foreign post, they
make their home, acquaint themselves with the country and
its officials, and carry out their assigned responsibili-,
ties.
2. AID Service Is in Hardship Posts
As compared to that of State, AID Foreign Service is
chiefly in missions classified as hardship posts. U.S.
employees at such posts receive modest extra compensation
in the way of a salary differential and are eligible for
travel at Government expense to designated rest and relaxa-
tion (R&R) locations.
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3. AID Rotation Policy
AID's rotation policy has been for Foreign Service
officers to serve four years at a post, with an interval
for home leave (20 consecutive working days) at the end of
the first two years.
After four years at a post, the officer is eligible
for transfer, presumably to a different region. Travel
there will frequently be via the United States for briefing
and orientation. After eight years overseas, there is a
strong presumption of a Washington assignment.
4. Rules Governing Travel and Allowances
In general, AID follows State rules regarding Foreign
Service travel, allowances, salary differentials for hard-
ship posts, and eligibility for R&R travel at government
expense. Whereas State makes a general policy of shipping
the household furniture of officers transferred overseas,
AID ships certain personal effects, but generally places
overseas personnel in furnished quarters.
AID and State Foreign Service personnel availing them-
selves of R&R opportunities must use annual leave and pay
the first $100 of travel costs themselves. The remainder
is borne by the U.S. Government. Per diem is not included.
Those serving in maximum hardship posts (carrying a 20 to
25 percent salary differential) are eligible for :R&R travel
to the nearest point of entry into the United States.
Methodology
The Task Force conducted interviews with officials in
AID's Offices of Personnel Management and Financial Manage-
ment and with Personnel Officers of the Department of State.
It reviewed AID analyses and projections, cited in the
text, of the pattern of Foreign Service rotation and an AID
operating expense budget summary of September 1982.
Findings
Four-year tour of duty not enforced. In practice, the
four-year assignment rule has not been observed. AID
analyses and projections done in July 1981, and again in
October 1982, show the average tour of duty at a :Foreign
post to be 32 to 33 months in 1980, rising to 35 months in
1981 and averaging 36 to 38 months in 1982.
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Personnel and transfer data. As of September 30, 1982,
AID had 3,405 full-time U.S. employees, of which 1,462 were
assigned overseas. In FY 1981, AID spent $1,539,000 on
travel associated with post assignments and $4,874,700 on
freight charges associated with post assignments, for a
total of $6,413,700. As of September 1982, the combined
total for travel and freight had risen to $6,505,700.
AID intends to tighten rotation rules. According to
AID officials, it is the intention of the Agency to make
.stricter application in the future of the four-year rule
for Foreign Service assignments, enforcing it for all posts
where the hardship differential is less than 25 percent.
Statistical analyses project longer assignments in the
future. Based on samplings drawn from the Foreign Service
assignment system, AID has recently performed analyses
which project a rising trendline in the average number of
months spent by Foreign Service officers at each post of
assignment. The projected data.assume an average of 40 to
41 months in 1983. AID personnel officials. hope to be able
to fulfill this projected goal. These same analyses
project the possibility of an average tour of duty of 46 to
47 months in 1984, conceivably reaching 48 months in 1986.
Were AID to pursue a policy of five-year tours of duty
beginning in 1983, the analyses project a sharp uptrend in
average number of months per assignment, increasing at the
rate of four months per year to reach an average of 60-
month assignments toward the end of 1987.
Conclusions
Longer tours of duty at.a post present opportunities
for modest cost savings to AID. An increase in average
time on post from 36 months (the average length of tour in
1982) to 48 months (projected for 1986) would save approxi-
mately $1.6 million in personnel travel and freight
charges, based on the FY 1982 level of expenditures of $6.5
million.
The figure of $1.6 million is arrived at by assuming
that if the annual transfer costs of $6.5 million which
would obtain each year during a three-year (36-month)
period were stretched out over a four-year (48-month)
period, there would be a saving over the four years of $6.5
million (25 percent), or $1.6 million on an annual basis.
Assuming that 40 months were to become the average
length of tour during 1983, as projected in AID's analyses,
the costs associated with 40 months would be distributed
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over 48 months, with a saving of 16 percent, or $1,075,000
on an annual basis (using FY 1982 expenditures).
Should AID adopt a policy-of five-year average length
of tour, it is estimated that travel and transfer costs
would be reduced by approximately 40 percent, as comparea
with a 36-month average length of tour. The resulting
savings to AID would be $2.6 million on an annual basis.
(The costs associated with three years at $6.5 million per
year would be $19.5 million. If these same costs were
spread over five years, the total spent per year would be
$3.9 million, a saving of $2.6 million per year.)
Hardship posts pose a morale problem. Most AID
missions are classified as hardship posts. Longer tours of
duty pose health and morale problems and increase the
prospect of growing "stale" on the job. Thus, the more
highly qualified and experienced Foreign Service officers
may well become restive with longer assignments and be
lured away from AID by higher salaries in the private
sector or in international organizations.
Rapid rotation reduces project oversight. On the
other hand, under the present rotation system there is a
tendency for Foreign Service officers participating in the
design and approval of new projects to be transferred
before these projects are implemented. Not only may the
projects suffer from inadequate oversight, but the
officers, once transferred, are no longer held responsible
for the success or failure of projects which they initiated.
Recommendations
STATE 8-1: The Administrator should take immediate
steps to enforce the four-year length of tour (two years
plus home leave and return), making exceptions only on
compassionate grounds or for reasons relating to program
support.
The Administrator should instruct the Office of
Personnel to undertake an analysis of the extent to which
greater emphasis can be given to the rotation of Foreign
Service officers to posts within the same region. Regional
postings would make for some saving in travel and freight
costs and enhance the officers' qualifications as language
and area specialists and as experts in the development pro-
blems characteristic of particular regions.
The Administrator should also instruct the Office of
Personnel to undertake an analysis of the feasibility of
extending the four-year average tour of duty to a five-year
average tour, broken by home leave.
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The Administrator should further instruct the Office
of Personnel that in making its analyses it should weigh
the gains, in terms of direct financial savings and improved
project oversight, against the possible losses in terms of
deteriorating Foreign Service morale and resignations.
Savings and Impact Analysis
It is estimated that adherence to a four-year length
of tour, as compared with the recent 36-month average for
1982, should reduce by approximately 25 percent, or $1.6
million (based on FY 1982 outlays of $6.5 million) the cost
to the Government resulting from overseas travel, the travel
status of personnel, and the shipment of effects associated
with transfers. Using a 10 percent inflation factor the
savings would be:
Year 1 Year 2 Year 3 Total
$1.6 $1.8 $1.9 $5.3
Implementation
The Administrator has authority to implement the
.recommendations cited above.
Additional Information
This Issue has been referred to State and United
States Information Agency (USIA) for their review and
potential applicability within their areas of respon-
sibility.
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II. ISSUE AND RECOMMENDATION SUMMARIES (CONT'D)
B. AGENCY FOR INTERNATIONAL DEVELOPMENT (CONT'D)
STATE 9: CARGO PREFERENCE
Issue and Savings
What is the additional cost associated with the
requirement that U.S. flag ships be used to transport at
least 50 percent of commodities made available to needy
countries through the AID-financed commodity import pro-
grams, the Food for Peace program (P.L. 480, Title II), and
U.S.-monitored shipments to Israel?
If the cargo preference requirement were removed from
AID-sponsored shipments, first-year savings of over $35.8
million could be achieved. The total saving over three
years would be $118.5 million. The savings would not only
allow for purchasing and shipping more food to recipient
countries, without increasing program costs, they would
also eliminate dissatisfaction in the recipient country and
among U.S. farmers with the shortfall in the volume of food
and grain exported.
Background
1. Legislative Requirements
The Merchant Marine Act of 1936, as amended, requires
that U.S. flag ships carry at least 50 percent of the com-
modities shipped under the U.S. development assistance and
Food for Peace programs. Since U.S. freight rates on bulk
cargo vessels (tramps), in particular, exceed those charged
by foreign flag tramps, the incremental cost to the U.S.
Government is considerable. The implementation of the
Congressional mandate affects the following categories of
U.S. aid shipments:
o AID-financed commodities -- project and non-
project,
.0 commodities ("Food for Peace") shipped under
P.L. 480, Title II, and
o shipments to Israel on a global cash grant basis.
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2. Tonnage Affected
Total quantities shipped in 1981 amounted.to 4,090,000
metric tons at a cost of $373.6 million (see Table 11-6).
Approximately 59 percent of tonnage is shipped by tramps as
opposed to approximately 41 percent by liners. (AID can
monitor only the part of the grant to Israel that involves
the use of tramps for bulk shipments, 65 percent of which
is grain and subject to preferential rates provided for in
a side agreement.)
(See Table 11-7 for AID shipments by tonnage, use of
U.S. and foreign flag ships, and resulting costs for
calendar years 1980 and 1981.)
[Tables 11-6 and 11-7 on following pages)
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Table 11-6
CONSOLIDATION OF 1981 SHIPMENTS
Tramps Liners
Cost Cost
Tonnage ($ millions) Tonnage ($ millions)
AID-
Financed 882,000 $ 48.7 355,000 $ 64.2
P.L. 480,
Title II 221,000 19.7 1,233,000 193.0
To Israel
(cash
transfer) 1,399,000 48.0 - -
2,502,000 $116.4 1,588,000 257.2
Total tons shipped 4,090,000
Total cost shipments $373,600,000
Source: Data presented in Appendix.
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Table 11-7
AID SHIPMENTS ABROAD
1. AID-Financed Commodities; Project and Non-Project
(Calendar year) Tramps (bulk cargoes)
Cost
1980 Tonnage ($ millions)
U.S. ships 401,000 $33.3
Foreign ships 484,000 18.7
U.S. ships 240,000 $20.5
Foreign ships 642,000 28.2
2. P.L. 480, Title II
1980
U.S. ships 24,000
Foreign ships 347,000
$ 3.67
22.63
U.S. ships 38,000 $ 5.60
Foreign ships 183,000 14.19
3. To Israel (cash transfer)
1980
U.S. ships 396,000 $25.0
Foreign ships 1,380,000 31.7
U.S. ships 290,000 $22.4
Foreign ships 1,109,000 25.6
Source: AID Office of Commodity Management.
Liners
Cost
Tonnage mil.
273,000 $ 43.8
156,000 20.4
235,000 $ 44.9
120,000 19.3
826,000 $122.5
446,000 64.0
798,000 $125.0
435,000 68.0
None
None
None
None
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Methodology
Meetings were held with officials of the Office of
Commodity Management and its subordinate Transportation
Support Division. A relevant General Accounting Office
(GAO) report!/ was reviewed. Finally, an attempt was
made, with the assistance of AID's Office of'Commodity
Management, to determine the total savings possible if the
cargo preference subsidy were eliminated from freight ship-
ment costs.
Findings
Legislation results in extra shipping costs of over
$35 million. Section 901(b) of the Merchant Marine Act of
1936, as amended, which requires that U.S. flag ships carry
at least 50 percent of commodities shipped under AID-
financed programs, results in extra shipping costs of more
than $35 million (see Table 11-8 at the end of this Issue).
Extra shipping costs reduce AID commodities shipped.
Because foreign aid appropriations are inclusive of
shipping costs, the impact of the cargo preference subsidy
is to reduce the amount of AID funds available for the
purchase of food and other commodities for needy countries.
This shortfall represents a direct loss to the recipient
government and deprives the U.S. farmer of his/her full
export opportunities.
Liners vs. bulk cargo carriers (tramps). AID ship-
ments are made in two types of carriers: scheduled/regular
liners and bulk cargo/tramps. Shipments on the former are
governed primarily by international agreement, known as
"conference rates," while rates on the latter are deter-
mined by competitive bid.
Seventy-five percent of liner shipments conform to
conference rates. However, a sizeable tonnage is, not
subject to conference rates and is affected by other factors
such as the use of independent carriers, the shipment of
open-rated commodities not covered by conference rates,
differences in average time/distance between trips made by
U.S. and foreign ships and differences in rates applied to
commodities carried by them.
1/ op. cit.
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Shortage of U.S. tramps results in use of costlier
liners. U.S. flag tramps -- of which only 15 are in opera-
tion -- are reluctant to make costly port calls for small
tonnage shipments. GAO reports that in only four instances
were U.S. flag tramps used to transport P.L. 480, Title II,
commodities in 1981. Costwise, P.L. 480, Title II, ship-
ments represented 60 percent of all AID shipments abroad in
1981.
Due to the limited availability of U.S. flag tramps,
U.S. flag liners must carry more than 50 percent of all
Title II commodities to ensure that the overall.50 percent
cargo preference requirement is met. In FY 1981, U.S. flag
liners carried 65.7 percent of Title II commodities.
Shipments to Israel represent a special case, inasmuch
as AID assistance is on a cash transfer basis. A side
agreement provides for the usual 50 percent minimum cargo
preference. AID can monitor only that part which involves
the use of tramps for bulk shipments, of which 65 percent
are grain.
Comparative cost of U.S. vs. foreign vessels. Accord-
ing to the aforementioned GAO report, the U.S. Maritime
Administration estimates that despite the equivalence of
liner rates the operational costs of foreign built and
operated liners are 50 percent less than those of U.S.
liners.
Based on actual charges, the GAO report calculated
that the differential between the average cost per ton of
U.S. vs. foreign flag liners and tramps in 1981 was as
follows:
o liners -- $154.45 (U.S.) vs. $147.96 (foreign) or
$6.49 per ton, and
o tramps -- $152.44 (U.S.) vs. $74.53 (foreign) or
$77.91 per ton.
These comparative figures show that whereas charges
made by U.S. liners are only moderately higher than those
made by foreign liners, charges made by U.S. tramps are 104
percent higher than those by foreign flag tramps.
GAO estimates potential savings of $15.6 million for
Title II shipments alone. The GAO report is confined to an
examination of the impact of cargo preference on P.L. 480,
Title II, Food for Peace commodities. It estimates that in
FY 1981, the Government could have saved a maximum $2.6
million by substituting foreign flag tramps for U.S. flag
tramps, $5.5 million by substituting foreign flag liners
for U.S. flag liners, $8.2 million by consolidating liner
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shipments onto foreign flag tramps, and $15.6 million by
consolidating all Title II shipments onto foreign flag
tramps.
AID data indicate potential total savings of more than
$35 million. The AID Office of Commodity management has
estimated that the use of foreign flag vessels for all
commodities shipped by AID would have resulted in. savings
of $47.3 million in 1980 and $35.8 million in 1981, an
unusual year affected by shipping strikes and other
problems.
Loss of cargo preference would diminish profitability
of U.S. companies operating tramps. According to the GAO
estimate, the elimination of cargo preference in the case
of U.S. flag tramps would result in earnings losses of 17.9
percent, 12.7 percent and 1.6 percent respectively for the
three U.S. companies involved.
Conclusions
The Task Force concludes that changing the current
policy of requiring the use of U.S. ship bottoms would pro-
vide a cost-saving opportunity for AID, inasmuch as the
present olic results in incremental shipping charges
which could otherwise be avoided.
Further, as AID funds are now appropriated, with the
cost of-cargo preference charged against AID's program
budget, the volume of commodities provided to recipient
countries is reduced by the amount of the incremental
shipping charges, as
the income to the U.S. farmer-
exporter.
Finally, the Task Force concludes that affirmative
action to realize this considerable cost-saving will reap
political benefits abroad and among the farming community
at home.
Recommendations
STATE 9-1: AID should request relief from cargo
preference for AID-sponsored shipments. AID should iden-
tify the true cost and assess the overall impact of cargo
preference in the administration of its programs. The
Administrator should request total relief from the applica-
tion.of the cost of cargo preference to AID-sponsored
shipments.
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Alternatively, the cargo preference subsidy should be
transferred from the AID budget to that of the U.S. Mari-
time Administration.
If politically infeasible to obtain such relief, the
cargo preference subsidy should be identified as ,such and
be the subject of a separate allocation of funds. A
precedent exists, in that the U.S. Department of Agricul-
ture carries the cost of cargo preference in the shipment
of P.L. 480, Title I, commodities as an explicit budgetary
item.
Savings and Impact Analysis
The AID Office of Commodity Management has estimated
(see Table 11-8 at the end of the Issue) that the
elimination of cargo preference in the shipment of AID
commodities would have meant a saving to the U.S.
Government of $47.3 million in 1980 and $35.8 million in
1981,.a year marked by shipping strikes and other
problems.. Using the $35.8 million as the first-year
savings figure and applying a 10 percent inflation factor,
the three-year savings would be:
Year 1 Year 2 Year 3 Total
$35.8 $39.4 $43.3 $118.5
The removal of cargo preference costs of $35 million
per year from AID's program budget will have certain
political benefits both at home and abroad. It will satis-
fy the U.S. farmer as well as the recipient countries that
they are receiving the full value of the program funding
allocated to the purchase and distribution of commodities
by AID.
Implementation
1. Congressional Action
Congress should abolish cargo preference as applied to
AID-administered commodity shipments on the grounds that it
does not provide adequate benefits to the U.S. taxpayer and
it adversely affects the interests of the U.S. farmer-
exporter. Cargo preference is not a necessity for U.S.
liners whose rates are governed by conference and are thus
internationally competitive. As for bulk cargo carriers,
only three U.S. companies operate such vessels and only two
of them would be significantly affected.
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2. Agency Action
Pending Congressional action to abolish cargo
preference, the Administrator should seek the approval of
the office of Management and Budget (0MB) for relief from
the cost of cargo preference now applied to AID-sponsored
shipments of commodities.
The Administrator should seek first to assign the cost
of cargo preference to the budget of the U.S. Maritime
Administration.
Failing that, he/she should seek to remove the cost of
cargo preference from AID's program and project budget and
have it cited as a line item in AID's overall operating
budget.
3. State Department Action
Because the incremental cost of cargo preference is
charged against the funds appropriated for purchase and
shipment of AID-sponsored commodities, there is a
diminution of funds available for the purchase of these
commodities. The resulting shortfall in shipments creates
dissatisfaction in the recipient country and can have
adverse political consequences for its relations with the
United States. Therefore, the Secretary of State should
support the Administrator of AID in seeking relief from the
cost of cargo preference.
4. Presidential Action
The President should issue a directive to OMB
instructing the Agency to remove the cost of cargo
preference from AID's program and project budget. This
cost should either be identified as a line item in AID's
operating budget or be transferred to the budget of the
U.S. Maritime Administration.
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Table 11-8
SAVINGS RESULTING FROM USE OF FOREIGN SHIPPING
(BASED ON COMPARATIVE FREIGHT RATES GIVEN BELOW)
1980 1981
($ millions) ($ millions)
Tramp Liner Tramp Liner
AID-Financed $17.8 $ 8.1 $10.9 $7.2
P.L. 480, Title II 2.1 3.4 2.7 .079
Israel (cash) 15.9 - 14.9 -
Totals $35.8 $11.5 $28.5 $7.279
Grand Total $47.3 $35.8
COMPARATIVE FREIGHT RATES FOR U.S.
AND FOREIGN FLAG VESSELS
(dollars)
AID-Financed Title II Israel
Year Flag Tramps Liners Tramps Liners Tramps Liners
1980 U.S. 83.16 160.57 152.17 147.96 62.94 --
Foreign 38.73 130.96 65.21 143.87 22.92 --
Differential 29.61 86.96 4.09 40.02
1981 U.S. 85.24 191.14 148.03 156.84 74.94
Foreign 43.99 160.43 77.06 156.74 23.55
Differential 41.25 30.71 70.97 .10 51.39
N.B: Any apparent discrepancy in the amounts representing
potential savings (as for Title II) is attributed to
the use of calendar figures by AID and FY figures in
GAO's report.
Source: AID Office of Commodity Management.
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II. ISSUE AND RECOMMENDATION SUMMARIES (CONT'D)
C. UNITED STATES INFORMATION AGENCY
OVERVIEW
The United States Information Agency (USIA) plays a
central role in the implementation of U.S. foreign policy.
As a complement to the private diplomacy conducted by the
Department of State (State), USIA serves the national
interest through the performance of public diplomacy,
especially relating to the broadcasting of U.S. information
to foreign countries. Specific tasks identified by the
Agency are strengthening foreign understanding of U.S.
policies; advising on the implications of foreign opinion;
promoting exchange programs; cooperating with private
sector institutions and assisting the free flow of interna-
tional communication.
USIA's headcount and funding are shown below for
selected years over the past 20 years and with current
estimates:
Estimated
FY 1962
FY 1972
FY 1982
FY 1983
FY 1984
Number of
employees
11,454
9,987
7,793
8,114
8,636
Budget
authority
($ millions)
$203
$255
$496
$653
$828
For FY 1983, USIA staffing consisted of 4,416 U.S.
citizens and 3,698 foreign nationals. Of the U.S. comple-
ment, 992 (22 percent) are assigned to overseas missions,
with the remaining 3,424 based in the United States.
USIA is headed by a Director who reports to the
President with functional reporting to the Secretary of
State.
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The personnel assigned to 203 overseas posts in 124
countries receive instructions and report through five
regional bureaus, which are located in Washington and
organized geographically, as follows: Asian Affairs; Euro-
pean Affairs; East Asian and Pacific Affairs; American
Republics Affairs; and North African, Near Eastern and
South Asian Affairs. For the ten year period ending in FY
1982, the overseas missions' portion of the USIA budget was
at least 30 percent in each year. Four areas support the
posts and regional bureaus; Broadcasting Service; Pro-
grams; Educational and Cultural Affairs, and Management.
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II. ISSUE AND RECOMMENDATION SUMMARIES (CONT'D)
C. U.S. INFORMATION AGENCY (CONT'D)
STATE 10: EVALUATION PROCEDURES
Issue and Savings
What opportunities for cost savings exist at the United
States Information Agency (USIA) where FY 1983 appropria-
tions exceed $588 million and are estimated to exceed $828
million for FY 1984?
Our Task Force found that, while the Agency has
proposed major activity expansions costing $144 million for
FY 1984, it has not developed techniques that quantitatively
evaluate the existing programs. If USIA establishes an
analytical resource capacity by employment of a highly
experienced financial analyst and appropriate staff, and
defers the planned activity expansion until the effective-
ness for the current activities are measured, then such
actions will result in an expansion of the program that can
be better justified. Specific savings will depend on the
results of the evaluation'process and, therefore, cannot be
estimated at this time. The deferral of the expansion by
one or more years will result in cost reduction in each
budget year until the expenditures are made.
Background
USIA.has experienced significant growth in appropriated
funding in the ten year period ending FY 1982, with a 150
percent increase to $496 million. While the major expendi-
ture leaps occurred prior to 1978 with modest growth since.
The funding for FY 1983 and FY 1984 show another dramatic
increase with FY 1983 expected to increase by 19 percent
over FY 1982. The budget request for FY 1984 projects
another 41 percent increase:
Appropriations
($ millions)
1972
$198
1978
349
1982
496
1983
(estimate)
588
1984
(requested)
828
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This upsurge results from a combination of legislated
requirements, correction of identified deficiencies and
expansion of broadcasting and public affairs activities, as
well as inflationary effects on operating costs.
More specifically, P.L. 97-241 (August 24, 1982)
stipulates that USIA "grants for exchange of person activi-
ties shall be increased, through regular annual increases,
so that by FY 1986, the amount obligated for such grants is
at least double the amount (of)....FY 1982." Such expendi-
tures for FY 1982 were $96.7 million. This legislative
action -- the so-called Pell Amendment -- was enacted in
spite of objections by the Agency and the President.
Secondly, the National Security Council (NSC) performed
a study of international broadcasting during FY 1982, which
identified deficiencies at the Voice of America (VOA)
(operating arm of the Broadcasting Service section of USIA).
The NSC report identified six categories for improvement
which required additional funding of $35.4 million be
sought as augmentation to the FY 1983 budget and a total of
442 positions be added to VOA for initial improvement
implementation. More broadly, the two major technical
requirements were established by NSC, to wit:
0 to provide broadcasting service in additional
languages, and
o to meet minimum performance standards.
Implementation mandates the construction of new facilities,
an expansion of selected existing sites, and a rehabilita-
tion/modernization program of all existing facilities with
an estimated project cost of $625 million through FY 1989.
Lastly, an expansion of programs and staff at the
overseas missions in all regional bureaus is planned for
FY 1984; such expansion includes opening ten new posts, a 5
percent increase and expansion of programs in 40 countries
at a total increased cost of $8 million and headcount
increase of 127 personnel.
Methodology
This study focused on the justification for, and
evaluation of, the current activities in all three areas
(i.e., exchange of person activities, improvement of VOA
programs and expansion of programs and staff at overseas
missions) designated for expansion in the FY 1984 budget
estimate. Such budget estimate data were prepared by the
Agency on a preliminary basis and summarized for ;presenta-
tion in the Budget Submission. In addition, the adequacy
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of management controls and information systems as a basis.
for decision making was assessed.
Three Task Force members were assigned to perform the
study. Our methodology included:
o interviews with current USIA management person-
nel, staff assigned to Educational and Cultural
Affairs (ECA), VOA and the Inspector's staff;
o review of various financial information relating
to program spending;
o review of various General Accounting Office (GAO)
reports;
o review-of internal reports on:
foreign scholarships,
NSC study requirements, and
o review of budget request data.
Findings
Educational and cultural affairs program evaluation is
decentralized, subjective and incomplete. Our Task Force
found that the relative importance of ECA programs can only
be evaluated quantitatively at the individual post or
mission. ECA records showing program participants, their
employment position and follow-up data, are not forwarded
(nor copied for transmittal) to Washington.
We were informed that individuals at overseas posts
such as the Ambassador, Deputy Chief of Mission and USIA
officials are aware of the ECA program impact and, gener-
ally, maintain files documenting program results and
participants.
We also found that, as a starting point for an analy-
sis that we performed, it is assumed by USIA personnel that
measurement of public diplomacy results is either impossible
or extremely difficult. Therefore, evaluations are limited
in scope or at a superficial level. In our discussions
with Agency personnel, we learned that, although a survey
of ECA overseas activities is conducted annually, it is
limited to roughly 25 posts, the responses are difficult to
obtain and the usefulness of the information is "variable."
Further, the Task Force found that a budget analysis which
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establishes priorities for requested items is based on
hypothetical situations and data from a small number of
posts.
Our Task Force found that monitoring of exchange
program alumni was incomplete. Such monitoring is impor-
tant from the standpoint of determining the ongoing
political, social and cultural influence of the program
participants in their respective countries. Such informa-
tion is also of importance in assessing the effectiveness
of the exchange programs.
Although alumni of the International Visitors program
are tracked, those from the much larger Fulbright program
are not. The Fulbright program included approximately
3,800 participants at a cost of $35.5 million in FY 1980,
while the International Visitors program included nearly
1,800 individuals at a cost of $16.2 million.
Planning and goal setting at overseas missions is too
broad; available monitoring tools are unused. The Task
Force found that GAO had reviewed overseas missions earlier
in FY 1982 and reported thereon on February 11, 1982 (GAO
ID-82-1). Findings include:
0 "In the past two decades....the programs and
staffing patterns used by USIA to operate over-
seas....have remained the same in 125 countries."
"....Overseas missions do not set forth measura-
ble objectives to be achieved in their plans and
in carrying out their major objectives - personal
contact."
More specifically, the annual country plans prepared at
each mission were described as follows:
o Issues in country plans are enumerated without
stating specific measurable goals or objectives
to be accomplished...
o Examples included were: "Promote a full know-
ledge of U.S. Government; education and social
models; articulate U.S. foreign policy."
Further, a system for recording personal contacts has
been designed and installed at all overseas missions --
entitled "Distribution and Record System" (DRS). However,
our Task Force received commentary at foreign posts that
the number of Information/Public Affairs Officers who use
it or find it useful is small. The GAO study reports
similarly:
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 Approved For Release 2008/05/05: CIA-RDP85B01152R001201540002-5
"The DRS System...is severely hampered in achiev-
ing goals because it has failed to convince a
significant number of post officers of its utility
and has been plagued by delays in delivery,
installation and operational (equipment) readi-
ness.
International broadcasting deficiencies include lack
of identification and examination of performance require-
ments. The Task Force found that the NSC Study of
International Broadcasting identified as one of two primary
deficiencies the lack of an essential initial engineering
step -- identification and examination of the overall
performance requirements. The Agency has identified this
step as a "logical precursory effort for all specific
implementation projects."
Regular and methodical evaluation has been recommended.
The Task Force found that the 1982 Report of the United
States Advisory Commission on Public Diplomacy (submitted
to the Congress and the President by Mr. Leonard L.
Silverman, Chairman of the Commission) has recommended that
the Office of Research (within USIA) "....should have the
resources to carry out regular and methodical evaluation of
Agency programs and products." 1/
The report cites that this recommendation had been made
in its prior report and noted, "Regrettably, the shortage
of staff and funds limits the Agency's research activities."
Conclusions
The basis for expanded activities has not been esta-
blished within the Agency. The Task Force has concluded
from the findings recited that the expanded activities in
each of the areas:
o ECA,
0 overseas missions, and
o broadcasting,
have been projected without an objective evaluation of the
existing staff and facilities by the USIA staff. This con-
clusion has been reached from the reports reviewed and clear
evidence that the Agency does not have such evaluative
skills at this time. The Task Force concedes that a study
Page 34, Report of the United States Advisory Commis-
sion on Public Diplomacy, 1982
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 Approved For Release 2008/05/05: CIA-RDP85B01152R001201540002-5
of international broadcasting was performed; however, it
was done from outside the Agency, by NSC (and its results
focus on this same conclusion). Our Task Force further
concludes that projected expansion of headcount and program
activities has ignored the abilities and skills within the
existing staff in these areas.
Recommendations
STATE 10-1: Establish analytical resource capability
within the Agency. We recommend that. the Agency Director
esta ish an analytical resource capability within USIA
directed by a highly experienced financial analyst and
staffed by adequate supporting personnel.
We further recommend that a program review system be
established for the entire Agency which enables effective
measurement on an annual basis and also provides long-term
planning abilities.
STATE 10-2: Defer expenditure in planned expansions.
We recommend that program expansions planned for FY 1984 be
deferred until an initial evaluation of existing staff and
facilities can be completed. At that time a better (and
presumably smaller) amount for expansion could be
programmed.
Savings and Impact Analysis
No specific savings are claimed for this Issue. The
deferral of the planned expansion until the completion of
an adequate and detailed analysis will result in a better
program. Since no analysis of current activities is
available, it is difficult to speculate on the extent to
which the planned expansion might be curtailed.
Implementation
1. Agency Authority
Recommendations 10-1 and 10-2 require the Agency
Director to supplement his/her staff through the budgetary
process and also to initiate an amendment to P.L. 97-241.
2. Presidential Authority
Recommendation 10-2 requires Presidential endorsement
of the deferral of implementation steps for correction of
the NSC study deficiencies.
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 Approved For Release 2008/05/05: CIA-RDP85B01152R001201540002-5
3. Congressional Action
Recommendation 10-2 requires Amendment to P.L. 97-241
to relieve USIA from mandatory expenditures for ECA activi-
ties.
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 Approved For Release 2008/05/05: CIA-RDP85B01152R001201540002-5
OF
-RECOMMENDATIONS AND SAVINGS
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 Approved For Release 2008/05/05: CIA-RDP85B01152R001201540002-5
7mr . COT CONTROL OPPORTUNITIES
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FOR FURTHER STUDY
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IV. COST CONTROL OPPORTUNITIES FOR FURTHER STUDY
The Task Force has identified four issue areas for
further study that have been given varying amounts of
attention but require fuller consideration and/or major
policy decisions.
First, the Organization of International Affairs
Agencies should be reviewed; the three major agencies in
our review represent 70 percent of the U.S. personnel
abroad, but individually they represent a minority of U.S.
personnel from all agencies. Additionally, certain similar
functions are performed independently by each of the
agencies. A current review and consolidation process could
enhance our international affairs activities and produce
cost-saving opportunities.
Secondly, foreign currencies held abroad have been
identified as being slowly used but costing considerable
funding requirements. Other agencies are the major contri-
butors to the presence of such balances and should join in
a committee to speed their use.
Next, the U.S. contributions to international organi-
zations have grown by 76 percent in the past five years,
and our control over the budgetary process has been lost.
Major policy considerations must be addressed by the
Administration to gain control of this major expenditure
area.
Lastly, substantial reductions have been made in work-
man's compensation insurance costs for contractors and
personnel; application of a similar program at other over-
seas agencies, like the military, could substantially
reduce U.S. outlays.
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IV. COST CONTROL OPPORTUNITIES FOR FURTHER STUDY (CONT'D)
A. ORGANIZATION FOR INTERNATIONAL AFFAIRS ACTIVITIES
Issue and Savings
Are there significant financial or administrative
control advantages to reorganizing the structure of the
foreign affairs agencies, bureaus and/or diplomatic posts?
Many alternatives are available, each of which could
result in significant benefits. It is not possible to
estimate the actual dollar savings at this time.
Background
The U.S. Government maintains 253 diplomatic posts
outside the United States at which 33,000 U.S. citizens and
foreign nationals are employed. Presently, 28 U.S. govern-
ment agencies are represented at these posts by over 14,000
U.S. personnel.
Although the Secretary of State was the first cabinet
post established by the United States, the foreign policy
functions currently performed by the Department of State
have evolved since World War II, based on a combination of
factors-most predominant among which was the viewpoint of
each incumbent Secretary.
The U.S Information Officer/Public Affairs Officer
positions at State and the Voice of America were
transferred to a separate agency, United States Information
Agency (USIA) in 1953. Other functions (Exchange and
Cultural Affairs) performed by State Department were
transferred to USIA in 1977.
The Agency for International Development (AID) was
created in 1961 under the Foreign Assistance Act from
existing commissions as an adjunct to the State Department.
In 1979, AID's direct reporting line was moved to the Inter-
national Development and Cooperation Agency which reports
directly to the State Department. Today, the directors of
USIA and IDCA (AID) have "dotted-line" responsibility to
the Secretary of State.
As a means of providing support to foreign posts and
staffing areas of special concern, individual bureaus have
been established under State's Deputy Secretary, each of
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of which is headed by an Assistant Secretary. Presently,
there are 19 bureau chiefs at State.
Methodology
During the course of our study, interviews were
conducted with numerous personnel based in Washington and
at overseas posts from the three agencies -- State, USIA
and AID.
Manning chart data and organizational outlines were
reviewed. Functions of bureaus were outlined.
Findings
The separation of International Affairs Agencies has
emanated from two sources:
o The ongoing debate over the functions of Foreign
Service Officers amongst themselves; and
0 The actions of individual Secretaries of State,
particularly John Foster Dulles.
A Presidential letter dated September 22, 1981 has
underscored that the Secretary of State, as the principal
foreign policy spokesman, has responsibility for not only
Department of State and Foreign Service but also overall
policy directives, coordination and supervision of U.S.
government activities overseas.
Each of the three agencies has established a. regional
bureau in Washington to coordinate the European, African,
East Asian/Pacific, Inter-American and Near Eastern/South
Asian area activities. Headcount for the domestic
personnel at the regional bureaus by agencies is as follows:
Headcount
State
662
USIA
114
AID
519
1,295
.Administrative support for the agencies exceeds $330
million or 20 percent of the operating budgets as shown in
Table IV-1.
[Table IV-1 on following page]
-107-
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Table IV-1
ADMINISTRATIVE SUPPORT
Percentage
Management Operating management
Headcount & admin. expenses & admin.
State 2,842 $ 248. $1,021. 24%
USIA 907 40. 277. 14
AID 641 44. 376. 12
4,390 $332. $1,674. 20
Although the Agencies use State's administrative
support system overseas, each Agency maintains separate
support functions in Washington.
As a combined percentage, State/USIA/AID comprise over
70 percent of the workforce at our overseas missions.
In addition to the 600 personnel in regional bureaus
supporting directly the overseas posts, there are 14 bureaus
with a total of 1,700 personnel in Washington who provide
other staffing support in areas such as human rights,
environment, intelligence and policy planning. The head of
each suc bureau also reports to the Secretary/ Deputy
Secretary level.
There are 30 diplomatic embassies with 20 (or less)
State Department personnel and an additional 55 embassies
with to 50 State personnel. More than 50 percent of
these embassies are located on the African continent.
African Bureau personnel have indicated that staffing for
these posts is difficult and that duty tours are as short
as possible due to the remoteness of the posts. Several
Western allies have consolidated diplomatic functions for
remote countries into regional posts serving several
countries.
Task Force personnel questioned the ongoing need at
State for International Narcotics matters and Combatting
Terrorism, and at AID for the Bureau of External Relations,
Bureau for Private Enterprise and the Bureau for Science
and Technology.
Conclusions
Current mandates legitimize a thorough examination of
the similarities of functions amongst
the
three
agencies
and of the opportunities to cut costs by merging support
functions. Cursory examination reveals more similarities
than differences.
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Proliferation of bureaus to handle problems of the
moment has taken place without review of their oncoin need.
If each is justified, span of control concepts should be
applied for better management control.
Consideration of alternates to separate embassies for
each remote sovereignty is warranted.
Recommendations
The Task Force recomends consideration of the follow-
ing alternative courses of action:
STATE IV-1: Merge foreign affairs agencies. The
consolidation of State/USIA/AID will make explicit the
Presidential directive and provide the opportunity to merge
those basic functions, not already shared (e.g., personnel,
payroll, financial reporting) as well as to integrate the
common regional bureau functions.
STATE IV-2: Examine the bureaus; group where
possible. Examination of all bureaus not associated with
management and regional operations for current validity
should provide the opportunity to shift responsibilities to
line (embassy and bureau) organizations and provide cost
savings and, where not eliminated, control opportunities by
grouping into manageable control spans.
STATE IV-3: Examine the need for individual posts;
establish regional posts where feasible. By establishing
regional posts, consolidation of marginally functional
remote locations can be achieved on an embassy as well as
consular level.
The Administration should study the opportunity
further to identify the specific details and potential
extent of consolidation of similar activities among the
three agencies.
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IV. COST CONTROL OPPORTUNITIES FOR FURTHER STUDY (CONT'D)
B. FOREIGN CURRENCIES HELD BY THE U.S. GOVERNMENT
Issue and Savings
Can the foreign currencies held by the U.S. Government
(which totalled $1.0 bilion at the end of FY 1981) be uti-
lized more quickly to reduce interest costs on U.S. borrow-
ings, or reduce the foreign currency rate exposure or
reduce the deficit?
Alternative courses of action for use of the avenues
have been proposed which are worth exploring; quantifica-
tion of the savings is not determinable at this time.
Background
The U.S. Government acquires and spends large amounts
of foreign currencies in the course of its overseas opera-
tions. Some foreign currencies are received without direct
purchase using dollars (so called non-purchased foreign
currencies), primarily through:
o exchange for agricultural commodities financed by
the Department of Agriculture;
o repayment of loans financed by dollar assistance
under the Foreign Assistance Act of 1961;
o payment of interest on deposits of foreign cur-
rency in foreign banks; and
o various other programs.
The Department of Treasury, Fiscal Service, Bureau of
Government Fiscal Oporations, produces an annual report on
foreign currencies held by the U.S. Government. This report
categorizes the currencies as to the U.S. Government's free-
dom to convert or spend such currencies.. Where the supply
of a non-restricted currency meets more than a two-year
U.S. requirement, such currencies are designated as excess.
Methodology
The U.S. Treasury report for FY 1981 was reviewed, and
discussions held with personnel at Treasury and State.
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Findings
Of the $7,075 million of foreign currencies held by
the United States at September 30, 1981, $916 million were
available for U.S. use on a nonrestricted basis and $805
million of that amount was in excess of two yearss require-
ments.
Further, currencies of three countries -- India,
Pakistan and Poland -- totalled over $836 million of the
nonrestricted category.
A Wall Street Journal article dated July 21, 1982
cited the accumulated amount of these foreign currencies
and slow progress being made in their utilization by U.S.
agencies. Specifically, the article noted that $22,000
worth of Indian rupees had been spent by USDA to translate
its soil dictionary into French over an eight-year period.
This latter point was an example of the extremes to which
government agencies have sought to utilize such funds.
A total of $111 million in foreign currency losses
were experienced in FY 1981 for all currencies reported by
the Treasury.
Conclusions
Cost savings opportunities exist in substantial dollar
amounts in the areas of:
o foreign currency risks;
interest on U.S. government borrowings;
the projected budget deficit; to the extent that
these currencies can be utilized.
Recommendations
STATE IV-4: A joint study council should be formed,
consisting of the major U.S. agencies creating these non-
purchased currency balances, under State leadership to
determine methods to utilize them more quickly.
Specific considerations should be:
o Use of local currencies to purchase strategic
stockpile reserves like MICA from India, and
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o Sale of soft currencies to multinational private
sector companies operating in host countries
(either to cover their local costs or to purchase
goods for export).
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IV. COST CONTROL OPPORTUNITIES FOR FURTHER STUDY (CONT'D)
C. CONTRIBUTIONS TO INTERNATIONAL ORGANIZATIONS
Issue and Savings
Are there opportunities for cost savings or avoidance
in the area of contributions to international organizations
which are estimated at $723 milion for FY 1983?
Implementation of recommendations requires major policy
decisions and perhaps treaty negotiations, but could also
result in substantial dollar savings.
Background
The United States has been a major contributor to the
multilateral international organizations since their incep-
tions. The majority of these contributions have been made
according to assessments resulting from negotiated treaties,
while the remainder have been voluntary (see Table IV-2).
[Table IV-2 on following page]
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Table IV-2
INTERNATIONAL ORGANIZATIONS'CONTRIBUTIONS
ASSESSED
Total
United States
Total
budget
Percentage
Amount
Voluntary
United States
United Nations
$ 719.1
25.0
$179.8
$ -
$179.7
UNDB
-
-
0
106.8
106.8
UNICEF
-
-
-
26.0
26.0
UNESCO
199.2
25.0
49.8
-
49.8
WHO
247.0
25.0
61.7
-
61.7
FAO
198.4
25.0
49.6
1.0
50.6
ILO
111.0
25.0
27.7
-
27.0
Total UN & affil
$1,681.5
24.21/
41.4
15.5
56.0
PAHO
50.4
61.3
30.9
-
30.9
OAS
62.8
66.0
41.4
15.5
56.9
Total inter-American
132.6
63.6
84.3
15.5
99.8
NATO
76.5
24.2
18.5
-
18.5
OECD
110.5
25.0
29.8
-
29.8
Total regional
192.9
29.0
49.4
-
49.4
Other (24)
71.7
13.5
9.8
-
9.8
Total 1983
$2,078.8
26.48
$550.52/
$173.2
$737.7
Total 1982
$1,883.4
26.32
$495.92/
$210.1
$706.0
Growth percentage
10%
-
11%
-18%
3%
1/ Soviet Bloc 17.12
OPEC Countries 2.89
Saudi, Arabia .58
Funds Available - 1983 - $439.7
1982 - $375.9
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The assessments are made on a percentage basis from a
formula which involves dividing the countries' net national
product by the total net national product of all partici-
pating countries multiplied by 100. The percentages are
reviewed and adjusted biannually.
The growth in the budget of the international organiz-
ations over the past five years has been substantial -- as
has the U.S. assessment -- at 76.6 percent for representa-
tive agencies like the United Nations (UN); Food and Agri-
cultural Organization (FAO); United Nations Education,
Science and Cultural Organization (UNESCO); World Health
Organization (WHO); International Atomic Energy Agency
(IAEA) and International Labor Organization (ILO).
A recently issued House Investigations and Survey
Report on Selected Programs and Organizations of the United
States was critical of the UN contributions system and cited
the loss of U.S. control over the budgetary process --
because of inflation and Third World pressures/majority
vote.
Methodology
Two Task Force members conducted interviews with State
personnel of the Bureau of Internatinal Organizations,
developed statistical trend data and read the applicable
reports issued by the House, General Accounting Office (GAO)
and the Heritage Foundation.
Findings
Certain UN agencies have ignored the-zero growth policy
statement issued by the United States and Western allies by
passing substantial (10 percent) budget increases for FY
1983.
The Office of Management and Budget (OMB) has recom-
mended several alternative actions:
o the United States place a cap on appropriations
and vote against increases over their targets;
o the United States not pay more than 25 percent
above the change from each year;
the United States withhold payments when-it
disagrees with a budget; and
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o the United States give notice of withdrawal from
an organization which ignores our budget recom-
mendations.
Recently, West Germany temporarily withdrew its finan-
cial support from FAO because its Director refused to answer
to questions regarding its expenditures. Also, the United
States temporarily withdrew from ILO over a policy matter
and rejoined after ILO reconsidered its decision.
The House Survey Report cited in State's Bureau of
International Organizations (IOs):
o fragmentary documentation on policy and long-
range planning;
o lack of bureau structure and high leadership
turnover;
o contradictory information on lead agency respon-
sibility; and
information provided by IOs.
The UN contributions system allows equal vote to each
member no matter what its percentage contributions. Since
the UN's creation, the number of the Third World countries
has increased and now outnumbers the other countries in the
UN system -- 127 out of 157 countries; a typical contribu-
tion from one Third World country is .01 percent of the
total budget. By contrast, see the following UN contribu-
tion percentages for 1982:
20
Western Bloc Nations
69.92%
10
Eastern Bloc Nations
17.12%
13
OPEC Members
2.89%
Conclusions
The ability to control increases in U.S taxpayer
dollars contributed to IOs has been lost by the Federal
Government.
Alternative actions have been proposed and have been
taken by others and the United States.
The Bureau of International Organizations at State
does not appear equipped to monitor and control the contri-
bution process.
The voting process is a major hurdle that needs cor-
rective action, but will require hard political decisions.
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Recommendations
STATE IV-5: State should consider the UN agency policy
proposal to allow "cumulative voting' on budgetary matters
in proportion to percentage contribution and sovereignty
voting on all other matters.
STATE IV-6: State should consider the OMB courses of
action as alternatives to the first recommendation.
Savings and Impact Analysis
The Task Force believes that these recommendations
require the level of policy decisions that exceeds our
charter and has, therefore, not quantified any projected
cost-savings.
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IV. COST CONTROL OPPORTUNITIES FOR FURTHER STUDY (CONT'D)
D. REDUCTION OF COSTS FOR
WORKMAN'S COMPENSATION INSURANCE OVERSEAS
Issue and Savings
Can the cost of workman's compensation insurance be
reduced overseas?
The costs of workman's compensation insurance contracts
required by the Defense Base Act (DBA) have been reduced 50
percent by a plan developed at the Agency for International
Development (AID). This plan could be applied to other
departments with overseas personnel, especialy military.
AID estimates its contractors will save $45 million in
insurance premiums over the five-year life of its two
blanket contracts covering AID direct contracts and AID-
financed contracts between host governments and third
parties. The later contract accounts for a savings of $40
million of the total savings over the five-year life based
on contract awards of $175 million per year. Given the
size of contract awards in other departments of the Admini-
stration, the total savings could be substantial.
Since other task forces are assigned to other depart-
ments, we submit this Issue and potential savings as a
recommendation without attempting to present more than the
AID picture of it.
Background
DBA insurance is a form of workers' compensation
insurance required by P.L. 208 for U.S. citizens, residents
and persons hired in the United States for work overseas on
contracts approved and financed by the Federal Government.
DBA insurance is an extension of the Longshoreman and Harbor
Worker's Compensation Act and is intended to provide equita-
ble coverage for persons working outside the U.S. State's
workers' compensation varies widely, and is generally not
applicable outside territorial limits of a state.
.Benefits under DBA are subject to administrative and
judicial interpretation. Generally, however, the Act
provides 24-hour coverage for contract employees, and most
-118-
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sicknesses, accidents, injuries, and deaths are interpreted
as job related since the employee would not have been
exposed to the hazard except for his/her job overseas.
DBA insurance rates were relatively stable and reason-
able until late 1974 (averaging less than 1 percent of
payroll according to the Management Bureau of AID). At
that time, legislative amendments which increased benefits,
and more particularly, the Rasmussen Decision in November
1974, caused insurance premiums to suddenly skyrocket. In
the Rasmussen Case, an administrative law judge made the
interpretation that recent legislative amendments removed
the previous cap on benefits to survivors, thus exposing
insurance companies to unpredictable liability. As a
result, premium rates climbed at least 20-fold.
In February 1976, AID worked out an informal agreement
with the insurance industry which reduced rates from an
average of 20 percent of payroll to 14 percent of payroll
and eliminated minimum premiums. In October 1977, a formal
agreement was concluded which reduced rates 8.75 percent
and provided for an escalation/de-escalation formula which
subsequently reduced rates to 7.14 percent commencing in
November 1979, 4.84 percent in 1980 and 3.05 percent in
November 1981.
Since then, AID has concluded another agreement with
the insurance industry reducing rates on AID-financed host
country contracts written by other governments from previous
rates of 15 percent for construction and 10 percent for
services to new rates of 3.4 percent for construction and
2.3 percent for services.
The total savings to AID from the programs are esti-
mated by AID at $9.1 million annually. Based upon a study
and recommendations of the General Accounting Office (GAO),
other government agencies including the Department of
Defense (DOD) have been encouraged to adopt similar pro-
grams. Our Task Force strongly endorses this recommendation
as a substantial cost savings formula readily available for
immediate application.
Methodology
Interviews were carried out with senior AID executives
including the Administrator and Assistant Administrator for
Management to verify the accuracy of claims made for the
program. Correspondence from GAO to Departments of the
Army, Navy, Air Force, Labor, NASA, Army Corps of Engineers
and Defense Logistics Agency were studied. Summary reports
within AID were analyzed. An AID administrative bulletin
exists on the subject.
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Findings
Many AID contractors experienced difficulty obtaining
DBA coverage due to high premiums charged by carriers.
Often the minimum premium approached or even exceeded the
contractor's salary cost. To remedy the situation, AID
entered into a blanket contract at a guaranteed premium
rate at least 50 percent less than rates charged on individ-
ual contracts. Subsequent experience with this policy by
AID has resulted in even lower rates and the insurance has
been readily available to all contractors.
The Office of Longshoreman and Harbor Worker's Compen-
sation has called the matter to the attention of DOD in a
letter dated October 27, 1981. On May 27, 1982 simi lT ar
letters were sent to all the military branches by the GAO
International Division. GAO also met with representatives
of the military departments May 1982. However, to our
knowledge, no department has as yet effected this blanket
policy approach.
Conclusions
The potential savings, if this approach were applied
to other departments, would be substantial.
This Task Force has neither the time nor jurisdiction
to document such savings.
Based upon our verification of AID's experience with
this improved program, we conclude that the GAO recommenda-
tions to other departments are well taken.
Recommendations
STATE IV-7: The Administration should give instruc-
tions to study the applicability of the blanket policy
approach in workman's compensation for overseas personnel
and contractors used by other applicable departments.
Savings and Impact Analysis
Our Task Force cannot determine the cost impact for
other agencies but believes that departments with similar
overseas personnel and programs, especially the military
should, if they convert to the blanket policies referred to
in this Issue, be able to save a proportionally comparable
amount to AID's $45 million over five years. Since their
overseas operations are substantially larger than AID's,
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the savings across-the-board to the Government should count
in the hundreds of millions of dollars over the five-year
life of such insurance policies.
Implementation
STATE IV-7: An administrative order to investigate
the applicability of this plan to other departments should
be issued immediately. A one-month reporting date should
be set for such reports. The order should instruct all
departments where potential savings are found to implement
a similar plan as soon as possible and to report when the
plan is in effect.
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V. TASK FORCE MEMBERSHIP
A. John Allen
President and CEO
Allen & Associates, Inc.
Washington, D.C.
Nancy Holland
Associate
Deloitte, Haskins & Sells
Washington, D.C.
Louise S. Armstrong
Research Analyst
Office of Daniel Parker
Washington, D.C.
Dr. C. Cary Barton
President
C. Cary Barton Associates, Inc.
Los Angeles, California
Robert B. Calhoun, Jr.
Managing Director
First Boston Corporation
New York, N.Y.
James E. Connor
Managing Director
First Boston Corporation
New York, N.Y.
J. Rawles Fulgham*
Vice Chairman (Retired)
InterFirst Corp.
Dallas, Texas
K. Craig Gallenhugh
Credit Analyst
Mercantile Bank
Dallas, Texas
David Glazer
Student
Harvard University Law School
Cambridge, Mass.
Donald S. Grubbs, Jr. (o)
Consulting Actuary
George B. Buck Actuarial
Consultants
Washington, D.C.
Peter F. Heuzey
Partner
Deloitte, Haskins & Sells
New York, N.Y.
James A. Hynes
Chairman
Oak Partners, Inc.
Chicago, Illinois
Charles Katsainos, Ph.D.
Retired, U.S. Army,
U.S. Foreign Service
Washington, D.C.
Alice W. Lorillard
Owner/Manager
Bindon Farm
Far Hills, N.J.
Michael L. McAllister
Associate
First Boston Corporation
New York, N.Y.
Stacie E. McGinn
Credit Analyst
Republic Bank of Dallas
Dallas, Texas
Cheryl M. Neimuth
Auditor
Arthur Anderson & Co.
Dallas, Texas
Robert A. Pikul
PPSS Desk Officer
MITRE Corporation
Washington, D.C.
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Dr. Fred 0. Pinkham (0)
President
Population Crisis Committee
Washington, D.C.
Robert J. Reynolds
Student
Stanford University
Graduate School of
Business
Stanford, California
William Rita
Consultant
Deloitte, Haskins & Sells
Washington, D.C.
Mack F. Rossoff
Associate
First Boston Corporation
New York, N.Y.
Arthur M. Scutro, Jr. (+)
Vice President
First Boston Corporation
New York, N.Y.
*Co-chairman
(+)Project Manager
(o)Issue Coordinator
George L. Shinn*
Chairman of the Board
and CEO (Retired)
First Boston Corporation
New York, N.Y.
Lawrence A. Silverstein (o)
Senior Auditor
First Boston Corporation
New York, N.Y.
Chris D. Simpson
Partner
Price Waterhouse
Dallas, Texas
Robert J. Starry
Partner
Deloitte, Haskins-& Sells
Washington, D.C.
G. Wiliam Vining (o)
Partner
Deloitte, Haskins & Sells
Washington, D.C.
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