# Presentation: 522267

## Report Tile

**Non-Foreign Area**
**Cost of Living Allowance (COLA) Transformation**

- UNITED STATES OFFICE OF PERSONNEL MANAGEMENT

## COLA OVERVIEW

- Enacted in 1948
- Paid to about 49,800 Federal white-collar and U.S. Postal Service employees
- Compares living costs between Washington, DC, and each COLA area, not to exceed 25 percent
- Can go up or down
- Not subject to Federal income tax; does not count for retirement
*Caraballo v. United States* resulted in $234 million back pay settlement

## LOCALITY PAY AND COLA

- Retirement benefits of white-collar civilian Federal employees stationed in nonforeign areas are lower than their counterparts’ benefits in the continental United States
- _Reason:_  Locality pay provisions of the Federal Employees Pay Comparability Act of 1990 (FEPCA) do not apply outside CONUS
- _Impact:_  Disparities cause perceived staffing problems and raise equity concerns in nonforeign areas, especially for employees near retirement
- Base pay of COLA area employees is not keeping pace with  locality pay

## RECENT DEVELOPMENTS

- COLA rates have been reduced by one point in Anchorage, Juneau, Fairbanks, and Puerto Rico
- October proposed rule would further reduce Alaska and Puerto Rico rates one point, increase U.S. Virgin Islands rate to 25 percent
- Maui and Kauai reached the statutory limit of 25%; Big Island rate proposed to raise one point to 18%
- Puerto Rico area employees are formally protesting their rate reduction from 11.5% to 10.5%
- A new lawsuit (*Matsuo v. United States*) has been filed concerning constitutionality of excluding Hawaii and Alaska from receiving locality pay
- Pacific areas surveyed in March this year

## 		   COLA AREAS AND RATES

**	****	****   ****COLA AREAS AND RATES**

## 		   COLA EMPLOYMENT

**	****	****   ****COLA EMPLOYMENT**

## 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

## 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

## Key Elements (cont.) 

- Proposal provides seven year locality pay “phase-in”
- In first year, all areas will be extended locality pay based on RUS rate to give BLS, Federal Salary Council, and President’s Pay Agent time to properly implement new locality pay areas in those nonforeign areas where labor costs are higher than the default RUS rate
- Locality pay will be extended to all nonforeign areas, including areas where a post differential is authorized like American Samoa

## EXPECTED IMPACT OF PROPOSAL

- Assuming Federal Salary Council, Pay Agent Action—
- Alaska areas are likely to become a separate locality pay area
- All other non-foreign COLA areas are likely to be in the Rest of U.S. pay area, with phase-in of locality pay—
- Current RUS rate:  12.64%
- How soon locality pay would overtake COLA would vary by COLA area but could take 10 to 30 years depending on area
-  BLS data on Hawaii expected in the fall

## 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