Regarding Government Service, here's my perspective...
Be sure to recognize that different parts of the government will offer you a different experience. Regarding the military, there's even a big difference between the Army's Corps of Engineers and the Navy's NAVFAC. I think NAVFAC is a great organization to work for (OK... so maybe my perspective is a bit jaded!) and I think most would find it very rewarding. There are *VERY FEW* NAVFAC civil servants working in Iraq (unlike the Corps of Engineers, who own that geographic area), but I can tell you the Navy's Contingency Engineers are doing some great work as reach-back resources.
Also, regarding pay and the civil service, you "old-timers" should read up on
NSPS which replaces the General Schedule (GS) pay system for non-bargaining unit employees. Who knows if it will really work as advertised, but the concepts are certainly sound.
There's certainly been a shift towards best-value contracting and design-build construction... but I'm not sure that's had a negative impact on the military engineering profession. I do agree you'll get a lot more "management" experience with government service than "get your hands dirty" engineering experience.