Department of Defense Pay Practices for German Nationals Should Be Changed

Published by the Government Accountability Office on 1977-12-02.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                         DOCUMENT   ESUME
04314 - [B33946,5]

Department of Defense Pay Practices for German Nationals Should
Be Changed. FPCD-77-86; B-179343. December 2, 1977. 1 pp. +
appendix (14 pp.).

Report to Sen. arren G. agnuson, Acting Chairman, Senate
  ~um'~Lct.: - ~,~r~ations; by Elmer B. Staate, Comptroller
Issue Area: Personnel anagement arĀ£ Compensation (300); Federal
    Personnel Management and Compensation: Pay Principles and
    Pay Determination Processes (306);Federal Personnel
    Management and Compensation: Retirement Policies and
    Practices (307).
Contact: Federal Personndl and Compensation Div.
Budget Function: Naticnal Defense: Department of Defense -
    Military (except procurement & contracts) (051); Income
    Security: Federal Employee Retirement and Disability (02).
Organization Concerned: Department of Defense,
Congressional Relevance: House Committee on Post Office and
    Civil service; Senate Committee on Appropriations.
Authozity: Foreign Service Act, sec. 444, as amended.
    Classification Act of 1949, as amended. P.L. 92-129, sec.

          The Army and the Air Force employ ever 67,000 German
 nationals at an annual cost of over 67C million. The Department
ot Defense's (DOD's) employment system in Germany is based on
multilateral and bilateral agreements and years of precedent and
tradition. Although its personnel policies there generally
appear in line with prevailing private practices, some aspects
 of compensation setting and administration should be changed.
Recommendations: The Secretary of Defense should: periodically
survey wages in the German private sector in order to strengthen
the U.S. position in negotiations; periodically survey private
sector practices to determine how private industry is reducing
over-tariff supplements and adjust DOD's reductions accordingly;
examine, with the German Government, labor cost sharing
opportunities, such as guaranteeing a minimum exchange rate in
billing payrolls; explore methods to increase American hires by
assuring that ceilings placed on American hires do not reduce
present employment levels, determining the impact on DOD's
payroll costs and employment flexibility of a German proposal
that provides certain dependents and other Americans with the
same compensation as German nationals, and having the Air Force
adopt the Army's dependent hiring policy of giving priority to
dependents in filling vacant German national positions; and
initiate a realistic assessment of the estimated severance
liability for both appropriated and nonappropriated fund
activities in Germany. (Author/SC)

       Department Of Defense
       Pay Practices For German
       Nationals Should Be Changed
       This report on foreign national employment
       practices in West Germanv is GAO' third in a
       series on five countries. It addresses the high
       cost of compensation benefits and separation
       allowances, possible substitutes for German
       nationals, and barriers limiting U.S. control
       over wage increases.

       The Army and Air Force empl,, over 67,000
       German nationals at 3n annual cost of over
       $670 million. The Department of Defense's
       employment system in Germany is base on
       multilateral and bilateral agreements and
       years of precedent and tradition. Although its
       personnel policies there generally appear in
       line with prevailing private practices, some
       aspects of compensation setting and adminis-
       tretion snould be changed.

       GAO recommends that the Secretary of
       Defense conduct periodic wage surveys in
       Germany, reassess severance liabilities, exam-
       ine labor cost haring opportunities with the
       German Govermnllit, and explore ways of
       hiring more Americans.

       FPCD-77-86                                        DECEMBER 2, 1977
                                             UNITED STAYE
                            WASHINGTON. D.C.   ng&I


The Honorable Warren G. Magnuson
Acting Chairman, Committee on Appropriations
United States Senate
Dear Mr. Acting Chairman:

     In response to your request of April
reviewing the compensation and use        29, 1977, we are
                                   overseas of foreign
national employees by he Department
the possibility of using alternative of Defense, including
                                     labor sources that
might be less costly to the Government.

     We are recommending to the
which would reduce local employeeSecretary of Defense changes
provide tighter control over such payroll costs and/or
                                   costs in West Germany.
     As requested by your office, we did
comments from the Department of Defense;  not obtain formal
cussed the rsults of our work with        however, we dis-
                                     Army and Air Force
officials in Germany and considered
                                     their comments. As
agreed with your office. we are sending
port to the Department of Defense.       copies of the re-
available to other interested partiesCopies will also be
                                       who request them.

                                  Sincerely yours,

                                  Comptroller General
                                  of the United States
 APPENDIX I                                             APPENDIX I


      Section 444 of the Foreign Service Act, as amended,
 provides that compensation for foreign national employees
 will be based on locally prevailing wage rates that are
 consistent with the public interest.

      In Germany an indirect hire system is used as estab-
 lished by the NATO Status of Forces Agreement of 1951 and
 later clarified in a 1959 Supplementary Agreement. Although
 the U.S. Government is the actual employer of the German
nationals, these employees are nevertheless considered in-
direct hires because ot the German Government's role in
se'ting wages and conditions of employment. Detailed em-
ployment practices are set out in the Collective Tariff
Agreement of 1966 between the unions aid the German Govern-
ment on behalf of NATO countries having military forces
stationed in Germany--the United States, United Kingdom,
France, Belgium, and Canada.   In addition, the employees
are paid by the German Office of Defense Costs using funds
advanced by various Department of Defense (DOD) finance
offices. For this service DOD pays an administrative
fee equaling 1.25 percent of its total German national
payroll, or about $8.4 million in 1977.

     Pay and benefits under the tariff agreement are
renegotiated annually by German labor unions and the German
Ministry of Finance, the latter acting as a spokesman for
the NATO forces. U.S. policy for local personnel matters
in Germany is handled by a Civilian Personnel Coordinating
Committee consisting of civilian personnel officials from
the Army, Air Force, and the Army and Air Force Exchane a
Service (AAFES)--a nonappropriated fund activity which man-
ages the post exchanges. The Army employs over 80 percent
of the German nationals paid with appropriated funds, and
U.S. Army-Europe (USAREUR) has been designated the lead
agent in dealing with the German Government on local em-
ployment matters.

     As of April 1977, DOD employed over 67,000 German
nationals. This makes it Germany's fourteenth largest em-
ployer among industrial corporations and banks. Slightly
over 50,000 of the German national employees were paid
with appropriated funds estimated at an annual $550 mil-
lion. The remainder were paid with nnappropriated funds

APPENDIX I                                           APPENDIX I

totaling an estimated $120 million.   Under a separate agree-
ment, Defense employees in Berlin are paid entirely by the
German Government.  The table below shows the breakout of
German national employees.

                Appropriated       Nonappropriiate
Employer            fund                 fund         Total

Army               44,495               2,744        47,239
Air Force           6,419                 367         6,786
AAFS                  -                 8,914         8,914
Berlin              4,496                  98         4,594

    Total          55,410              12,123        67,533

     German employee payroll costs have increased signifi-
cantly in the past decade.   USAREUR estimated the average
annual cost per employee has increased from $3,000 in 1967
to over S10,000 in 1977.   And, even though the Army's
German national strength has been cut by about 20 percent
during this period, total German enplcyee payroll costs have
more than doubled.

     Much of this increased cost can be traced to the decline
in the value of the dollar relative to the German mark.   Since
1973, not only have negctiated pay increases averaged 7.7 per-
cent annually, but the dollar has declined an average of
5.4 percent a year relative to the mark.  Thus, total payroll
costs have increased an average of more than 13 percent a
year, and DOD is, to a great extent, at the mercy of dollar
fluctuations in controlling wage increases.


      In the German private sector, wage or "tariff" schedules
are negotiated annually between the labor unions and the ma-
jor German industries.   Similarly, wage schedules for German
nationals are negotiated annually between German labor unions
and the   erman Ministry of Finance which represents the five
NATO countries having troops in Germany.   The United States,
however, despite having an estimated 60 percent of the total
NATO employees in Germany, has limited control over this wage
setting process.   We believe this control should be strength-

     The United States has no more power or voting rights in
developing an overall negotiating position than any other NATO

APPENDIX I                                         APPENDIX I

country. Its input into these negotiations is diluted,
first in reaching an agreement with the other NATO countries,
and then in providing a position acceptable to the Finance
Ministry. Also, the Ministry can and does exert consider-
ablc influence in reaching a final settlement with employee
unions. Because of this limited input and particularly in
view of the high payroll cost associated with a final
settlement--a 1-percent increase means additional payroll
costs of over $6 million a year--it is essential that any
U.S. input be based on a sound, independent assessment of
German private sector wages.

     At the time of our review, the United States had
conducted an overall wage survey in Germany since 1974.not Army
officials indicated such surveys would carry little weight in
the egotiations because the unions press for tariff increases
reported by the media and the German Government. Recently,
DOD has tended to rely on tariff increases published by the
news media in preparing for annual negotiations. Despite
DOD's inability to directly control wage increases, final
settlements in recent years were well below the unions' orig-
inal demands and, according to USAREUR officials, were close
to the average increases granted by German private industry.

     We believe that periodic assessments of wages in
Germany should add credibility to and thus strengthen the
U.S. position in future negotiations. In late October
USAREUR began such a wage survey in Germany. This survey
is expected to be completed about mid-January.


     Employers in Germany may pay more than the negotiated
tariff rates for many skilled positions, especially in the
blue-collar trades, such as plumberE and carpeniters. These
higher rates--termed over-tariff supplements--are used to
establish or maintain pay rates that are reasonably com-
petitive with rates paid locally for comparable work. They
are intended to resolve recruitment and retention problems
in times o full employment and to continue until employets
decide that economi2 conditions no longer justify them.

     In the early 1970s, virtually 11 DOD blue-collar
German employees were paid supplements. With higher un-
employment in Germany since 1975, however, private industry
has been reducing the supplements. Defense has also begun
such reductions and has saved an estimated $5.6 million in

APPENDIX I                                         APPENDIX I

the last 2 years. Further reductions in the supplements
will be made this year. USAREUR now estimates that 75 per-
cent of its wage earners receive supplements totaling about
$9.3 million annually. About one-half of the Air Force wage
earners are paid supplements costing about $616,000 annually.
We were also told that most new employees do not receive
supplements unless they are justified by a separate survey.
      The amount of DOD's supplement cuts was apparently set
without supporting data. An Army official stated that De-
fense had not surveyed the rate or extent of the reductions
in the private sector. DOD does not want to eliminate the
supplements immediately because resultant pay cuts might re-
sult in labor problems. Instead, reductions are now linked
with annual tariff increases, whereby the decrease in the
supplement offsets part of the tariff increases, resu.:ing in
lower tariff increases for the affected employees. Air Force
officials favor a more rapid reduction but are acceding  to
USAREUR's request for a more gradual reduction. Local per-
sonnel officers were unsure about what the effects of more
rapid reductions might be.
     We believe that periodic surveys of private economy
practices are needed to determine how private industry is
reducing supplements. This is especially important now,
in view of Germany's current employment situation and the
potential savings to be derived if prevailing practice sup-
ports a faster reduction in the supplements, The recent
wage survey initiated by USAREUR will consideL overtariff
supplements, and survey teams will try to determine how
private industry is handling the reduction.

     In a June 15, 1977, report 1/ discussing the high cost
of te DOD presence in Japan, we recommended that the State
Department and DOD examine, among other things, labor cost
sharing opportunities with the Government of Japan and dis-
cussions between the two governments are currently underway
to examine possible alternatives. We believe similar op-
portunities exist for labor cost sharing in Germany.

l/"The United States and Japan Should Seek a More Equitable
  Defense Cost Sharing Arrangement," ID-77-8.

 APP .DIX I                                        APPENDIX I

     The need for cost reductions in Europe has been
recognized by the Congress. The 1974 Defense Appropriation
Authorization Act required the President to seek substantial
reduction of the amounts the United States pays in budgetary
costs as a result of stationing U.S. Forces in Europe.
Specifically included as an example, among ther items, were
wages paid to foreign nationals by the United States. In
our April 28, 1976, report 1/ to the Congress, we took the
position that this provision of the law had not been met.

     The German Government has expressed considerable
interest in maintaining the high level of German national
employment but has not offered to share or help stabilize the
cost of that employment. Part of the cost is due to the de-
cline of the dollar relative to the German mark.

      DOD's German employees are paid by the German Office of
Defense Costs, and local DOD finance offices are billed
monthly for the estimated payroll. Payments are made in
German marks at the then prevailing exchange rate. DOD,
which prepares its budgets in dollars at the beginning of
each fiscal year, is faced with the problem of predicting oay-
roll costs that may vary from month to month depending on he
exchange rate. For example, in February 1977 the German na-
tional payroll was about 115 million marks, or about $47.9 mil-
lion. By July 1977, using the then prevailing exchange rate,
the same payroll of 115 million marks would be equal to $50.4
million--a $2.5 million increase. When the dollar's va'ue
drops relative to the mark, as it has in 1977, DOD must either
obtain supplemental funds or lay off employees to stay within
its budget.

     Because it is in DOD's interest to stabilize costs
in Germany's interest to stabilize employment, we believeand
that the State Department and DOD should examine, with the
German Government, labor cost sharing opportunities, such as
guaranteeing a minimum exchange rate in billing these pay-
rolls. Any payroll costs incurred because the exchange rate
fell below the guaranteed minimum rate would be borne bv the
German Government.


     The Army and Air Force survey their manpower
ments and determine those positions that can best require-
                                                  be filled

l/"Additional Costs of Stationing U.S. Forces in Eurone,"

APPENDIX I                                         APPENDIX I

by German nationals. Many positions are reserved for career
U.S. civilian employees because of managerial, technical,
or security clearance requirements. The remainder--generally
blue-collar and lower graded clerical arid middle manager
positions--are designated as foreign national positions and
have traditionally been filled by locally recruited Germans
or third country nationals.    number of these positions,
however, are filled by dependents of DOD employees stationed
in Germany.

     The following table shows the approximate number of U.S.
Forces dependent hires in Germany.

                     Number of dependent hires (note a)
                          U.S.          Poreqgn
                       positions   national positions   Total
   Appropriated          3,800            5,800         9,600
   Nonappropriated         200            2,000         2,200
Air Force:
   Appropriated            600              100           700
   Nonappropriated         3C0              700         1,000
AAFES                       -             6,600         6,600
        Total           4 900           1520           20,100
a/Includes full-time and part-time personnel as of March-
  April 1977.

     On a grade-by-grade basis, American white-collar workers
below U.S. Civil Service General Schedule (GS) grade 9 are
less costly than German employees in comparable positions.
Under DOD's dependent hire program, the Army in Germany has
hired many dependents at these levels at considerable savings
over both Germans and career U.S. civil service employees.
For example, dependents do not receive change-of-station
benefits, area differentials, or quarters allowances, and are
generally not eligible for civil service retirement.

     Although German national base pay rates are lower, em-
ployer contributions for benefits and allowances cost an
additional 31 percent, in contrast with only 6 to 7 percent
for locally hired Americans. The table below breaks out
annual employer costs for a typical clerical worker at grade
GS-4, step 1, and a comparable German employee.

APPENDIX I                                         APPENDIX

                         hired       German
                       American     national    Savings from
   Pay category        (note a)     (note a)    American hire
Base pay                $8,316       $7,736        $ (580)
Bonuses                    -            644           644
"Property accrual'
  (note b)                 -            133           133
Insurance premiums         601        1,558           957
Service charge             -            126           126
    Total payroll
      cost              $8,91       $10,197        $1,280
a/Represents wage and exchange rates (2.j5 to 1) effective
  as of June 1977.
b/A German savings program required by law under which em-
  ployers contribute to an employee's investment program.
  For most DOD employees, this contribution is 312 marks,
  or about $133 per year.

     In addition, employing Americans offers other advan-
tages. For example:

     -- German national employees receive as many as 13 paid
        holidays per year, compared to 9 for U.S. employees;
        annual leave for German nationals starts with 21 days
        a year, compared to 13 days for Americans; and German
        nationals are entitled to as many as 6 weeks of sick
        leave per illness, compared to only 13 days a year
        for an American employee.
    -- German nationals receive faster longevity step in-
       creases in each grade level, advancing to step 4
       in about 8 months while an American advances to
       step 2.
    -- Part of an American's pay returns to the U.S. Gover.-
       ment through income taxes; German nationals pay no
       taxes to the United States.
    -- Hiring Americans has much less impact on the inter-
       nrtional balance of payments because a substantial
       part of employees' income will be spent in DOD facili-
       ties, such as post exchanges and commissaries.

                                                      APPENDIX I

       The Army and Air Force (including
  employ about 15,000 Americans--either AAFES) currently
                                         part time or full time
  in German positions. They face numerous
  ing the number of locally hired Americans,obstacles in expand-
 currently employ another 16,000 German        even though they
 clerical positions. Some positions       nationals in similar
 capability or other special skills require German language
                                     which dependents and
 other locally available U.S. citizens
 possess. Moreover, the political        do not generally
 cussions of a wholesale shift in hiringlabor relations reper-
 detrimental. Nevertheless, we believe practices could be
                                          increased hiring of
 Americans is possible, and Air Force
 that, in some areas, they have an      officials  have indicated
 with the needed skills to fill manyadequate  pool  of dependents
 GS-8 level and below. USAREUR, however,  their  positions at the
 of the greatest constraints is a shortage  believes  that one
 ents in the geographic locations when       of  qualified depend-
 considerations and constraints in       they are needed. Other
                                    hiring additional Americans
 in Germany are discussed below.
 Civil Service Commission opposition
 to the dependenthire program
      The dependent hi:e program,
Civil Service Commission in 1972, which was approved by the
                                   allows DOD to give hiring
preferences to dependents of overseas
other available U.S. citizens. RecentlyDOD employees over
tempted to terminate the program.         the Commission at--
violate section 106 of Public Law It feels the program may
                                   92-129, which prohibits
discrimination in the hiring of U.S.
ties overseas. However, because of citizens y DOD activi-
                                     opposition raised by DOD,
the Commission has extended the authority
the legality of the issue is determined    until such time as
                                         by the Justice De-
partment. As of October 1977, the
                                    issue has not been re-

     According to USAREUR, if the
giving dependents preferences is special authority for
ment will oppose further hiring ofrevoked, the German Govern-
                                    dependents in German posi-
tions to prevent DOD from also hiring
retired military personnel. In the     American tourists and
ment has allowed DOD to hire dependents    the German Govern-
of the need for a supplemental income     in  tacit recognition
stationed in Germany. Without the      for   service families
this permission might be withdrawn  preferential   program,
                                    and DOD might be pres-
sured to hire only German nationals.

                                                        APPENDIX I

 German Government seeks to limit
 dependents in German positions

      The German Government has already complained
 about the loss of German Jobs caused                   formally
 ents and other Americans in positions by   the  hiring  of depend-
 mans. It has demanded a limit on such   formerly   held  by Ger-
 1977, USAREUR tentatively agreed to limithires, and in early
                                               the number of
Americans in German positions (Army and
priated and nonappropriated fund positions)Air Force appro-
below the current level of around 15,000.        to 11,0C0--well
      The USAREUR negotiator old us that the
old" figure was based on estimates available 11,000 'thresh-
                                                  in early 1977.
He pointed out that, if the limit is
                                       reached, the agreement
would call for meetings to discuss appropriate
action could be raising the threshold
of dependent hires. As of October 1977, or cutting the number
                                             the draft agreement
had not yet been finalized. We believe
sure that the agreement will not reduce that DOD should as-
                                           the current number of
       If, as a result o the agreement,
 to reduce the number of Americans, we it becomes necessary
                                         believe that DOD should
 consider decreasing the number of dependents
 positions in Germany. The Army employs           in blue-collar
 in these positions, most of which were    over   1,700  dependents
 mans. There is presently a large discrepancy        held  by Ger-
 paid to Americans in these positions              between   rates
                                       and  rates   paid  to  Ger-
mans, primarily because the U.S. overseas
 ules are based on the average of geographic b.ue-collar     sched-
                                                 age areas in
 the United States. USAREUR estimated
as much as $3,000 a year for some positions.   the  difference is
                                                   If Germans
held the 1,700 Army blue-collar
Americans, USAREUR would save an positions   currently held by
                                  estimated $1,761 per em-
ployee annually--a total annual savings
                                           of over $3 million.
      An undesirable side effect of the large
in pay rates is that German nationals
                                        complain because
American dependents receive substantially
same work. This leads to morale problems more pay for the
German employees to restrict the hiring      and pressure by
                                          of Americans.

l/This figure, however, includes 4,000
                                        to 5,000 part-time
  positions held by Americans which the
                                         Germans are not
  concerned about.

APPENDIX I                                         APPENDIX I

USAREUR is studying an alternative payment
met    or ep     endetsin local posiion
     Besides requesting a limit on Americans in German na-
tional positions, the German Government also proposed that
these Americans be administered under the German wage agree-
ment rather than the U.S. system. Americans so affected
would be paid in marks and receive the same wages and bene-
fits as German employees.

     OSAREUR believes the proposal could have considerable
merit. One advantage could be reduced payroll costs. The
USAREUR personnel director believes employer and employee
contributions totaling 17 percent of compensation earned by
German employees would not have to be paid because American
employees would already receive such benefits or have no
need for them. Examples are health insurance, property
accrual bonuses, and unemployment insurance. As a result,
USAREUR estimates U.S. Forces in Germany would save about
$6 million in 1977 if dependents were paid under German
wage schedules rather than U.S. Federal wage plans. Primary
savings would be for blue-collar workers who are already
paid more than their German counterparts. (See p. 9.)

     Also, the need for dependent preference authority might
be eliminated because all Americans in German positions would
become indirect hires--hired by the German Government   As
such, nondependents would require work permits from tne Ger-
man Government, which under current labor conditions could
be difficult to obtain. We were told that depen.dents would
not need permits or would be issued Epecial permits under a
prearranged agreement.

     Despite the obvious advantages to DOD under such a
proposal, the legal and worldwide implications must also
be weighed.  For example, Americans are currently hired
under the authority of the Classification Act of 1949, as
amended. While the Department of the Army believes that, as
indirect hires, dependents paid under the tariff agreement
may not come under the purview of the act, as of October 1977
a final DOD position on the legality of hiring dependents
outside the Classification Act had not been reached.

     DOD would have to negotiate reciprocal agreements
regarding collection of income tax and social security ay-
ments and on eliminating current employer contributions to
German unemployment, life insurance, and health programs.
In addition, dependents would receive greater holiday,

APPENDIX I                                         APPENDIX I

sick leave, and annual leave benefits, and would be repre-
sented by German unions and work councils, all of which
could affect employee productivity. Army officials be-
lieve dependents paid in local currency would continue to
spend the same proportion of wages in American exchanges and
commissaries; however, the proposal's effect on balance of
payments is also a consideration.

      Under the proposal, German nationals and those Americans
covered under the German wage agreement would receive equal
pay for equal work. However, the same wage equality would
not exist between Americans covered under the German wage
agreement and Americans in U.S. positions who continued to
be paid under the U.S. system. This could have an adverse
impact on the morale and productivity of dependents in Ger-

     We believe that before DOD agrees to the German proposal
it should study these implications. The impact on DOD depend-
ents in Germany as well as its possible applicability to em-
ployees of other U.S. agencies overseas must be determined.

Air Force and Army dependent
hiiing practices aiffer

     Army appropriated fund activities employ about 5,900
dependents in German positions, while Air Force appropriated
fund activities employ only about 100 ependents. Hiring
practices account for the difference. In filling vacant
German positions, the Army gives priority to dependents if
the position cannot be filled by promoting a German employee.
In contrast, the Air Fore hires dependents for German posi-
tions only if a qualified German national is not available.
Air Force officials told us they have many qualified depend-
ents available, but they feel adverse labor reactions would
prevent them from adopting the Army's policy. In view of
the Army's success in placing dependents in German posi-
tions, we believe the Air Force should adopt a similar hir-
ing strategy.


     The current German national tariff agreement specifies
that everance pay will be paid to employees separated by:
reductions in force, physical disability, premature retire-
ments, illness contracted while on work, or pregnancy. No
payments are made if the employee quits or is fired for
cause, starts a new job immediately after termination, or

 APPENDIX I                                        APPENDIX I

rejects a job offered to him. The severance entitlement
amounts to one-quarter of an employee's latest month's pay
for each year of continuous service since 1967. The present
maximum entitlement is 2.5 months' pay, and the limit will
reach 4 months' pay in 1984. Payments are reduced by the
amount of any unemployment or social insurance received by
the employee and cease if he begins a new job before he re-
ceives his entitlement. Moreover, under an agreement with
the German Government, major severance costs incurred be-
cause of military movements are paid entirely by the German
Government with no cost to the U.S.

     The limited circumstances under which severance pay-
ments are made make budgeting for severance obligations dif-
ficult. Army andsAir Force officials could not tell us how
much has been paid in severance in recent years, but they
believed it was extremely mell and was no drain on their
personnel budgets. One local civilian personnel office with
severe personnel cuts in renelt years estimated that only
15 employees received severance pay and the total paid was
only 30,000 marks (abo it $13,000) from July 1976 to June
1977. Because of the limited liability, Army and Air Force
units do not currently accrue and fund their severance pay
liability for appropriated funds.

      The Army, however, requires its nonappropriated fund
 activities to accrue severance liabilities for all German
 national employees and to maintain a cash fund covering at
 least half the total liability. Some revenue producing
 nonappropriated fund activities, whose financial condition
permit, maintain a 100-percent cash fund, and other activi-
 ties are encouraged to establish up to a 10C-percent fund
as financial position permits. The funds estimated their
liability at $12 million, and they are required to maintain
cash funds of about $6 million to cover it. If needed,
U&AREUR headquarters would use cash from nonappropriated
fund alcoholic beverage outlets or construction funds to
cover the portion of the liability not covered directly by
the activities themselves. This policy is aimed at meeting
the "worst-case" scenario of all eplolees being separated
at one time.   It appears to result in an overcommitment of
cash funds because, as in the case with appropriated fund
employees, many employees would not be eligible for severance
pay or wo,ld be paid entirely by the German Governmcnts Air
Force officials told us they have no similar requireme-: for
their nonappropriated fund activities because of the limited
severance liability.

APPENDIX I                                        APPENDIX I

     USAREUR nonappropriated fund officials were not aware
of their limited severance liability and their overcommitment
of cash funds. One official estimated that only about half
their employees would ever have a chance of being paid
severance and that the requirement for the individual funds
to maintain $6 million in cash reserves could probably be
eliminated. The money would then be available for morale
and recreation activities.
     We believe that a realistic determination of the esti-
mated severance liability in Germany is needed for both ap-
propriated and nonappropriated fund activities. Once that is
determined, the question of funding the liability can be ad-

     The Army and Air Force, including the AAFES, employ
over 67,000 German nationals at an annual cost of over $670
million. An additional 15,000 U.S. citizens, mostly depend-
ents of DOD employees stationed in Germany, are employed in
German positions. In general, we believe German nationals
are ompensated according to prevailing practice. However,
we believe DOD could reduce and/or more tightly control its
German national payroll costs. We therefore recommend that
the Secretary of Defense:

     -- Pericdically survey wages in the German private
        sector in order to strengthen the U.S. position in

     -- Periodically survey private sector practices to
        determine how private industry is reducing over-
        tariff supplements and adjust DOD's eductions ac-
     --Examine, with the German Government, labor cost
       sharing opportunities, such as guaranteeing a
       minimum exchange rate in billing payrolls.
    -- Explore methods to increase American hires by (1)
       assuring that ceilings placed on American hires do
       not reduce present employment levels, (2) determin-
       ing the impact on DOD's payroll costs and employment
       flexibility in Germany of a German proposal that pro-
       vides certain dependents and other Americans with
       the same compensation as German nationals, and (3)
       having the Air Force adopt the Army's dependent

                                                     APPENDIX I

           hiring policy of giving priority to dependents
           filling vacant German national positions.      in

      -- Initiate a realistic assessment of the
         severance liability for both appropriated
                                                   and non-
         appropriated fund activities in Germany.