The President’s Management Agenda, recently released by the White House, lays out a plan for modernizing the federal government. Among the human resources related objectives discussed is reinforcing the suggestion of a 2019 pay freeze and other cuts to federal employees’ benefits to better align overall federal compensation with the private sector.
The following is a quote from the President’s Management Agenda document which captures the administration’s overall philosophy on federal employee pay and benefits:
Aligning total compensation with competitive labor market practice
It is important to appropriately compensate personnel based on mission needs and labor market dynamics. The existing compensation system fails in this regard.
The President’s Budget for FY 2019 foregoes an across- the-board pay increase for 2019, while proposing to realign incentives by enhancing performance-based pay and slowing the frequency of tenure-based step increases.
The Administration also proposes a $1 billion interagency workforce fund as part of the FY 2018 appropriations, and supplemented by an additional $50 million in the FY 2019 Budget. This fund will replace the across-the-board raise that increases Federal employee pay irrespective of performance with targeted pay incentives to reward and retain high performers and those with the most essential skills.
The Budget also proposes pension reforms that better align Federal retirement benefits with those offered by private sector employers, with whom the Government competes for talent.
One of the items mentioned in the quote above reiterates the plan to institute a pay freeze for the federal workforce in 2019.
While this is what the White House wants, the process moves slowly and we will not know for a while how it ultimately plays out. FedSmith.com author Ralph Smith recently described this in his article The Federal Budget, Shutdowns and a Pay Raise for Federal Employees:
The reality is we do not know whether there will be a pay freeze or a raise (in some amount) for 2019. In 2018, the final amount of the pay raise for the current year was announced in an Executive Order on December 22nd. That is not unusual. In fact, a date late in the year is usually when the amount of the raise for the following year is announced. It is likely a similar time frame will be followed for any raise for 2019.
Congress can override the proposed pay freeze, so it is not a done deal at this point. In fact, legislation was introduced earlier this year to implement a 3% pay raise.
Other Pay Reforms
In addition to a pay freeze in 2019, the White House’s 2019 budget proposal said that the current General Schedule pay system is an “antiquated structure” that “hinders the Federal Government’s ability to accomplish its mission.”
The quote above from the President’s Management Agenda reinforces this by proposing a performance based pay system to replace the annual across-the-board pay raise with more of a performance based pay system.
It also mentions pension reforms. So what might these reforms the White House is talking about look like?
These plans are laid out in one of the 2019 budget proposal documents. That document, titled “Strengthening the Federal Workforce,” cites a 2017 Congressional Budget Office report which said this about federal employee pay:
Overall, the federal government paid 17 percent more in total compensation than it would have if average compensation had been comparable with that in the private sector, after accounting for certain observable characteristics of workers.
The White House budget document also noted that the CBO study said that the defined benefit plan given to federal employees is the primary driver of the higher than average total compensation:
The generous beneﬁts package offered by the Federal Government includes a deﬁned beneﬁt annuity plan and retiree health care beneﬁts – both are increasingly rare in the private sector. The Federal deﬁned beneﬁt plan, according to CBO, is the single greatest factor contributing to the disparity in total compensation between the Federal and private sector workforce. To better align with the private sector, the Budget reduces Federal personnel compensation costs, primarily the annuity portion. (emphasis added)
Cuts to Benefits
Not surprisingly, if the White House believes that excessive defined benefit plan costs are skewing federal pay higher, cuts will be proposed to control these costs. The proposed reductions of federal employees’ benefits costs referenced by the budget include the following. For additional details, see Substantial Cuts to Federal Employee Benefits Proposed in FY 2019 Budget.
Reducing or Eliminating COLAs
Cost of living adjustments would be eliminated for retirees under the Federal Employees Retirement System (FERS) and reduce them by 0.5% for retired federal employees under the Civil Service Retirement System (CSRS).
Annuities would be calculated based on a high-5 instead of the current high-3.
Special Retirement Supplement
The FERS Special Retirement Supplement would be eliminated for those employees who retire before Social Security eligibility age.
G Fund Interest Rate
The G Fund interest rate would be reduced to base the yield on a short-term T-bill rate instead of the current rate (an average of medium and long term Treasury bond rates). “G fund investors beneﬁt from receiving a medium-term Treasury Bond rate of return on what is essentially a short-term security. The Budget would instead base the G-fund yield on a short-term T-bill rate,” states the budget proposal.
Federal employees should not panic when they read these proposals because they are just that: proposals. They ultimately must be codified into legislation by Congress, then run through the usual legislative process where both the House and Senate pass one or more bills that the president then signs into law.
After that, the respective federal agencies have to interpret the law and issue their own regulations to institute the changes. This likely would mean OPM would issue some regulations on how the changes to the benefits would be implemented for former, current and future federal employees.
As FedSmith.com author John Grobe has noted before, “Don’t panic, don’t lose sleep, and be confident that if changes come, there will be ample time to react and make decisions on what you will do.”
Another FedSmith author, Kelly Monroe, recently put together an article which took an in-depth look at the proposed benefits cuts and how signifiant the impact of each would likely be for the average federal employees’ retirement. It’s worth a read if you haven’t checked it out and are worried about some of these proposals. See What’s the Impact of the [PROPOSED] FERS Benefit Cuts?
Ann Vanderslice had a slightly different take in which she looked at the overall impact the proposed cuts would have on the federal budget. See What in the *~CSRDF*/@ is Going on?.
For a more in-depth reflection, including suggestions from other FedSmith readers about what to do about the proposed pay/benefits cuts, see Will I Be Included in the Proposed Benefits Cuts?.