Report Tile

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Report Tile
Non-Foreign Area Cost of Living Allowance (COLA)
Transformation
UNITED STATES OFFICE OF PERSONNEL MANAGEMENT
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How Are COLA and Locality Pay Different?

• Cost-of-Living Allowance (COLA) compensates
  Federal employees for differences in prices of
  goods and services in each COLA area compared to
  Washington, DC
• Locality pay compensates Federal employees for
  the differences in the cost of labor in each
  locality pay area compared to the General Schedule

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COLA Overview

• Enacted in 1948
• Paid to about 49,000 Federal white-collar and
  U.S. Postal Service employees
• About 40 percent are in Hawaii
• Compares living costs between Washington, DC, and
  each COLA area
• Cannot exceed 25 percent
• Can go up or down
• Not subject to Federal income tax
• Not creditable for retirement

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Recent Developments

• COLA rates have been reduced by one point in
• Anchorage
• Juneau
• Fairbanks
• Puerto Rico
• Proposed rule would reduce Alaska rates another
  point
• Maui and Kauai have reached the statutory limit
  of 25
• Big Island rate proposed to increase one point to
  18
• Pacific areas surveyed in March, 2007
• Caribbean areas to be surveyed in March this year

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COLA Areas and Rates
Area Rate Index Anchorage, AK (Proposed
23) 24.0 10.0 Fairbanks, AK (Proposed
23) 24.0 19.0 Juneau, AK (Proposed
23) 24.0 20.0 Rest of Alaska 25.0 33.0
City and County of Honolulu, HI 25.0 27.0 Maui
County, HI 25.0 33.0 Kauai County,
HI 25.0 29.0 Hawaii County, HI (Proposed
18) 17.0 18.0 Guam/Northern Mariana
Islands 25.0 29.0 U.S. Virgin
Islands 25.0 38.0 Puerto Rico (Proposed
13) 10.5 13.0 Effective January, 2008
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COLA Employment
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COLA Affects Retirement, Pay

• Retirement benefits for COLA recipients are lower
  than for locality pay recipients
• COLA is not creditable for retirement locality
  pay is
• Disparity raises equity concerns, especially for
  employees near retirement, and may cause staffing
  problems
• COLA is capped at 25, locality pay is not capped
• Base pay in COLA areas is not keeping pace with
  base pay in locality pay areas, therefore
• Overtime rates are lower
• Premium pay rates are lower
• Life insurance amounts are lower

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Why Change Now?

• Administration desires a more uniform approach
  and simplified pay structure for Federal
  employees
• Administration wants equity in pension benefits
• Current law results in minimal increases, or even
  decreases, in pay and allowances in non-foreign
  areas although labor costs increase annually
• Cost of past, present, and future litigation
• Improve recruitment and retention of employees in
  non-foreign areas

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Key Elements of Proposal

• Discontinue COLA surveys
• For non-US Postal Service employees
• Freeze COLA rates as of date of enactment
• Extend locality pay to nonforeign areas
• Offset COLA rates by 85 of locality pay
  percentage to reduce impact on take home pay
• Abolish COLA payments once rates reach zero
• For most US Postal Service employees, freeze COLA
  rates as of date of enactment

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Key Elements (continued)

• Proposal provides seven year locality pay
  phase-in
• In first year, extend locality pay to all areas
  based on RUS rate (currently 13.18) to give
  Bureau of Labor Statistics, Federal Salary
  Council, and Presidents Pay Agent time to
  properly implement new locality pay areas
• Extend locality pay to all nonforeign areas,
  including areas where a post differential is
  authorized, like American Samoa

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Expected Impact of Proposal

• Assuming Federal Salary Council, Pay Agent
  Action
• Alaska and Hawaii areas are likely to become
  individual locality pay areas
• All other non-foreign COLA areas are likely to be
  in the Rest of U.S. pay area
• How soon locality pay would overtake COLA would
  vary by COLA area but could take 10 to 30 years
  depending on area

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How Does This Affect Me?

• With locality pay, retirement pay increases two
  ways
• Annuity increases by locality pay in your high-3
• TSP increases by Government, employee
  contribution
• What does this cost
• You would pay same percentage on locality pay
  that you pay on your base pay for retirement,
  social security contributions
• You would pay Federal income tax on locality pay,
  just like on your base pay, but proposed offset
  mitigates tax

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How Does This Affect Me? (continued)

• What is the payback period?
• Varies, depending on years of service, salary
  history
• For 20 year CSRS employee, first 24 to 30 months
  of annuity approximates employee contributions
• For 20 year FERS employee, first 6 to 8 months of
  annuity approximates employee contributions
• Most employees working now in COLA areas would
  not make retirement contributions on locality pay
  as long as on their base salaries, so the payback
  for contributions made on locality pay would be
  faster

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How Will It Work?
The chart below shows what happens in year one
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How Will It Work? (continued)

• Lets go to year seven
• Your 100 is now 119 after seven years of 2.5
  increases
• Assume locality pay starts at 20 and increases
  0.5 per year
• After seven years, locality pay is 23, COLA is
  5.45
• Your high-3 has been increased by 19.3, which
  means each and every annuity payment would be
  19.3 higher than it would have been

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Summary

• The proposal would
• Phase out COLA in favor of more market-sensitive
  compensation
• Protect employee take-home pay in all non-foreign
  COLA areas, including pay of USPS employees
• Provide greater retirement benefits for non-USPS
  employees
• Prevent further COLA rate reductions
• Result in higher pay potential for employees
• Provide equity in retirement benefits for
  employees in the nonforeign areas

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Questions?
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How Is Locality Pay Figured?

• BLS surveys random sample of private, State/local
  establishments
• Randomly samples up to 8 establishment jobs
  depending on establishment size
• Matches each sampled job to Standard Occupational
  Classification (SOC) System job, GS grade level
• Models missing data using linear regression
  techniques
• Weights data within PATCO categories and grade by
  GS employment in each SOC job, computes
  category/grade averages, and sends information to
  OPM
• OPM compares survey data to pay rates under base
  General Schedule, computes locality area pay gaps
• Honolulus gap 41.72 (http//www.opm.gov/oca/fs
  c/recommendation07.pdf)