6020 Federal Register / Vol. 69, No. 26 / Monday, February 9, 2004 / Proposed Rules 

OFFICE OF PERSONNEL 

MANAGEMENT 

5 CFR Part 591 

RIN 3206–AK29 

Cost-of-Living Allowances (Nonforeign 

Areas); Methodology Changes

AGENCY: Office of Personnel 

Management.

ACTION: Proposed rule.

SUMMARY: The Office of Personnel 

Management (OPM) is proposing 

technical changes in the methodology 

used to determine nonforeign area costof-living allowances (COLAs). The 

changes would correct minor drafting 

errors; provide consistent treatment of 

sale prices; allow the use of nonhousing price data collected on St. John, 

U.S. Virgin Islands; correct and clarify 

the definition of COLA survey areas; 

and allow a one-time prospective index 

adjustment for the Caribbean and Alaska 

areas concurrent with the effective date 

of any COLA rate changes resulting from 

the 2004 Pacific COLA surveys. OPM is 

proposing these changes in large part as 

the result of experience gained in the 

2002 COLA surveys and upon various 

recommendations of the Survey 

Implementation Committee, the 

Technical Advisory Committee, and/or 

the St. Thomas/St. John COLA Advisory 

Committee.

DATES: Comments must be received on 

or before April 9, 2004.

ADDRESSES: Send or deliver written 

comments to Donald J. Winstead, 

Deputy Associate Director for Pay and 

Performance Policy, Strategic Human 

Resources Policy Division, Office of 

Personnel Management, Room 7H31, 

1900 E Street NW., Washington, DC 

20415–8200; fax: (202) 606–4264; or 

email: COLA@opm.gov.

FOR FURTHER INFORMATION CONTACT:

Donald L. Paquin, (202) 606–2838; fax: 

(202) 606–4264; or email: 

COLA@opm.gov.

SUPPLEMENTARY INFORMATION: Section 

5941 of title 5, United States Code, 

authorizes the payment of cost-of-living 

allowances (COLAs) to employees of the 

Federal Government stationed in certain 

nonforeign areas outside the contiguous 

48 States whose rates of basic pay are 

fixed by statute. Executive Order 10000, 

as amended, delegates to OPM the 

authority to administer nonforeign area 

COLAs and prescribes certain 

operational features of the program. 

The Government pays nonforeign area 

COLAs to General Schedule, U.S. Postal 

Service, and certain other Federal 

employees in Alaska, Hawaii, Guam and 

the Commonwealth of the Northern 

Mariana Islands (CNMI), Puerto Rico, 

and the U.S. Virgin Islands. The Office 

of Personnel Management (OPM) 

conducts COLA surveys in each 

allowance area to determine whether, 

and to what degree, local living costs are 

higher than those in the Washington, 

DC, area. OPM sets the COLA rate for 

each area based on the results of these 

surveys. 

On May 3, 2002, OPM published final 

regulations in the Federal Register (67 

FR 22339) that significantly modified 

the current COLA survey methodology 

consistent with the settlement 

agreement in Caraballo, et al. v. United 

States, No. 1997–0027 (D.V.I.), August 

17, 2000. (Caraballo was a class-action 

lawsuit in which the plaintiffs contested 

the methodology OPM used to 

determine COLA rates.) Later in 2002, 

OPM conducted COLA surveys in 

Puerto Rico, the U.S. Virgin Islands, and 

the Washington, DC, area, using the new 

methodology. OPM is publishing with 

these proposed regulations the complete 

‘‘2002 Nonforeign Area Cost-of-Living 

Allowance Survey Report: Caribbean 

and Washington, DC, Areas.’’ 

While conducting the COLA surveys 

and analyzing the results, OPM became 

aware of technical errors in the newly 

implemented regulations. In addition, 

OPM received from the Survey 

Implementation Committee (SIC), the 

Technical Advisory Committee (TAC), 

and the St. Thomas/St. John COLA 

Advisory Committee recommendations 

for other technical changes. 

Collectively, the changes would (1) 

correct minor drafting errors; (2) provide 

consistent treatment of sale prices; (3) 

allow the use of non-housing price data 

collected on St. John, U.S. Virgin 

Islands; (4) correct and clarify the 

definition of COLA survey areas; and (5) 

allow a one-time prospective index 

adjustment for the Caribbean and Alaska 

areas concurrent with the effective date 

of any COLA rate changes resulting from 

the 2004 Pacific COLA surveys. 

Minor Drafting Errors 

OPM proposes to correct minor 

drafting errors. One of these relates to 

how OPM sets the COLA rate for an area 

as a whole when OPM combines data 

from multiple survey areas within the 

COLA area. For COLA areas with 

multiple survey areas, OPM uses the 

number of Federal employees in each 

survey area as weights to combine the 

data from each of the survey areas. This 

process is described in paragraph (b) of 

section 591.216, title 5, Code of Federal 

Regulations, but the description is not 

technically correct. The current 

regulation states that, to combine survey 

data for COLA areas that have multiple 

survey areas, OPM computes weighted 

average indexes at the primary 

expenditure group (PEG), major 

expenditure group (MEG), and overall 

level. However, OPM actually computes 

weighted average indexes at the item, 

PEG, MEG, and/or overall level, and 

OPM proposes to change 5 CFR 

591.216(b) accordingly.

Another technical error relates to how 

OPM uses expenditure weights, which 

are derived from the Bureau of Labor 

Statistics (BLS) Consumer Expenditure 

Survey (CES). In both the COLA area 

and in the Washington, DC, area, OPM 

computes a price index by dividing the 

average price in the COLA area by the 

average price in the DC area. OPM uses 

CES expenditure weights to combine the 

price indexes in a three-step process. 

Section 591.222 of the COLA 

regulations describes that process, but 

the description of the third step is 

incorrect. The regulations state that 

OPM produces an overall price index 

for the survey area. Instead, OPM 

produces an overall index for the COLA 

area. OPM’s proposed change to 5 CFR 

591.222 will correct this. 

Consistent Treatment of Sale Prices 

One of the changes OPM is proposing 

relates to the prices it collects in the 

survey. Section 591.213 of the 

regulations prescribes the prices OPM 

collects, which include sale prices. The 

survey of sale prices is a change from 

the way OPM priced items in previous 

surveys. OPM adopted the survey of sale 

prices pursuant to the Caraballo

settlement. 

The regulation provides for certain 

exceptions in the collection of sale 

prices, including going-out-of-business 

prices and area-wide distress sale 

prices. The reason OPM does not collect 

these prices is because unlike most sale 

prices, which are recurring, going-outof-business prices and area-wide 

distress prices are one-time events. In 

the case of going-out-of-business prices, 

for example, if OPM conducted the 

survey earlier, the business would not 

be discounting its prices, and if OPM 

conducted the survey later, the business 

would not be surveyed because it would 

not be in business. 

During the 2002 COLA surveys, OPM 

encountered clearance prices on items 

that were being discontinued and/or 

were seasonal. OPM concluded these 

clearance prices were similar to goingout-of-business prices. If OPM had 

conducted the survey earlier, the item 

would not have been offered as a 

discontinued item, and if OPM had 

conducted the survey later, the item 

would not have been available. 

Federal Register / Vol. 69, No. 26 / Monday, February 9, 2004 / Proposed Rules 6021

Furthermore, if OPM were to use 

clearance prices, it would be difficult or 

impossible to time the surveys to collect 

prices when the same items are in 

clearance in all areas. 

OPM consulted with the Survey 

Implementation Committee concerning 

this issue. The SIC was established 

under the Caraballo settlement and is 

composed of representatives of the 

parties in Caraballo. The SIC is advised 

by the Technical Advisory Committee, 

which was also established under the 

Caraballo settlement and is composed of 

three economists with expertise in 

living-cost comparisons. The TAC 

agreed that clearance prices were 

similar to going-out-of-business prices 

and that if clearance prices were used, 

survey timing would be compromised. 

Therefore, SIC and the TAC concurred 

with OPM that clearance prices should 

not be used, and OPM proposes to 

amend 5 CFR 591.213(b) to include 

clearance prices in the list of prices that 

OPM does not collect. 

St. John Non-Housing Price Data 

OPM is proposing to amend the 

definition of the St. Thomas/St. John, 

U.S. Virgin Islands survey area to allow 

the survey of non-housing price data on 

St. John. The St. Thomas/St. John COLA 

Advisory Committee (CAC) 

recommends the change. Current 

regulations provide that OPM only 

surveys housing data on St. John. 

As provided by 5 CFR 591.240, OPM 

established CACs in Puerto Rico and in 

the U.S. Virgin Islands prior to the 2002 

survey. Each CAC is composed of 

agency and employee representatives 

from the survey area and representatives 

from OPM, and one of the principal 

functions of the CACs is to advise and 

assist OPM in planning COLA surveys. 

In planning the St. Thomas/St. John 

survey, the CAC for that area 

recommended that OPM survey selected 

establishments on the island of St. John 

and include that data with the St. 

Thomas data. OPM regulations provide 

for the survey of housing on St. John but 

not for the collection of non-housing 

data. OPM agreed to conduct a test 

survey on St. John and collected data 

from the establishments that the CAC 

identified for the 2002 survey. OPM 

used the St. John data on a test basis 

with the St. Thomas data by weighting 

each island’s price data by the number 

of Federal employees stationed on the 

island. OPM found it was feasible to 

collect and use these data in the manner 

described and believes it is appropriate 

to continue to survey St. John in future 

surveys. Therefore, OPM is proposing to 

change the definition of the St. Thomas/

St. John survey area in 5 CFR 591.215(a) 

accordingly. 

Other Survey Area Definitions 

OPM is proposing changes and 

clarification to other survey area 

definitions. During the 2002 survey, 

OPM discovered that some of the 

geographic definitions of the survey 

areas in 5 CFR 591.215(a) were 

incomplete. For example, the 

Washington, DC, area is defined as 

specific cities and counties, but 

consistent with OPM’s practice in 

previous surveys, OPM surveys a few 

items in areas outside this geographic 

boundary. For example, OPM surveys 

the price of air travel from all three 

airports in the Washington, DC, area: 

Ronald Reagan Washington National 

Airport, Washington Dulles 

International Airport, and Baltimore/

Washington International Airport (BWI). 

OPM also surveys the price of a 5-mile 

taxi ride originating at these airports. 

Both Dulles and BWI are outside the 

geographic boundary shown in section 

591.215(a). Nevertheless, these airports 

are commonly used by residents of the 

DC area for air travel. 

OPM reviewed all of the survey area 

definitions in consultation with the SIC 

and TAC and found that other area 

definitions were inaccurate or 

incomplete. Therefore, OPM proposes 

technical changes in the survey area 

boundary definitions in 5 CFR 

591.215(a) to expand the definition of 

the DC area to allow the survey of 

selected items in additional geographic 

locations and to incorporate the 

recommendations of the SIC and TAC. 

OPM also proposes a related change in 

the definition of the Washington, DC, 

area in 5 CFR 591.201. 

Adjustment To Reflect Augmented 

Housing Data 

OPM is proposing a change to allow 

OPM to make a one-time prospective 

adjustment in the COLA index based on 

additional housing data that OPM 

anticipates collecting by the end of next 

year’s surveys. The SIC and the TAC 

recommend this change because shelter 

is the single most important COLA 

survey item in terms of its expenditure 

weight and because OPM is 

accumulating additional housing data 

and experience analyzing such data 

during the first survey cycle, i.e., the 

first 3 years of COLA surveys under the 

new methodology that OPM adopted 

pursuant to the Caraballo settlement. 

OPM concurs with the SIC and TAC 

recommendation. 

Under the new methodology, OPM 

surveys the COLA areas once every 3 

years on a rotating basis but surveys the 

DC area, which is the base or reference 

area, every year. The TAC recommends 

that OPM pool the DC area rental data 

across years, updating previous years’

rental data as appropriate, and thereby 

increasing the quantity of DC area data. 

Because shelter price comparisons that 

use this larger data base might be 

different from those that use each year’s 

data separately, the TAC and the SIC 

recommend a one-time prospective 

COLA index adjustment based on 

housing data analyses. 

In addition, OPM is currently 

examining the feasibility of collecting 

additional rent and rental equivalence 

information in a cost effective manner 

for research purposes. Under the 

Caraballo settlement, the parties agreed 

to adopt a rental equivalence approach 

similar to the one BLS uses for the 

Consumer Price Index. Rental 

equivalence compares the shelter value 

(rental value) of owned homes rather 

than total owner costs because the latter 

are influenced by the investment value 

of the home (i.e., influenced by what 

homeowners hope to realize as a profit 

when they sell their homes). As a rule, 

living-cost surveys do not compare how 

consumers invest their money. 

Currently, OPM surveys rents and 

uses that as a surrogate for rental 

equivalence. The SIC and TAC 

recommend that OPM research and 

compare market rents and homeowner 

estimated rents for comparable 

dwellings. If the research proves feasible 

and the results are available, the TAC 

recommends that OPM consider using 

these results in the one-time adjustment 

as well. The proposed change to 5 CFR 

591.224 would allow such an 

adjustment. 

Executive Order 12866, Regulatory 

Review 

This rule has been reviewed by the 

Office of Management and Budget in 

accordance with Executive Order 12866. 

Regulatory Flexibility Act 

I certify that these regulations would 

not have a significant economic impact 

on a substantial number of small entities 

because they would affect only Federal 

agencies and employees.

List of Subjects in 5 CFR Part 591 

Government employees, Travel and 

transportation expenses, Wages.

Office of Personnel Management. 

Kay Coles James, 

Director.

Accordingly, the Office of Personnel 

Management proposes to amend subpart 

B of 5 CFR Part 591 as follows:

6022 Federal Register / Vol. 69, No. 26 / Monday, February 9, 2004 / Proposed Rules 

PART 591—ALLOWANCES AND 

DIFFERENTIALS

Subpart B—Cost-of-Living Allowance 

and Post Differential—Nonforeign 

Areas 

1. The authority citation for subpart B 

of 5 CFR part 591 continues to read as 

follows:

Authority: 5 U.S.C. 5941; E.O. 10000, 3 

CFR, 1943–1948 Comp., p. 792; and E.O. 

12510, 3 CFR, 1985 Comp., p. 338.

2. In § 591.201, revise the definition of 

‘‘Washington, DC, area or DC area’’ to 

read as follows:

§ 591.201 Definitions. 

In this subpart—

* * * * *

Washington, DC, area or DC area

means the District of Columbia; 

Montgomery County, MD; Prince 

Georges County, MD; Arlington County, 

VA; Fairfax County, VA; Prince William 

County, VA; and the independent cities 

of Alexandria, Fairfax, Falls Church, 

Manassas, and Manassas Park, Virginia; 

and in the context of certain survey 

items, these jurisdictions and additional 

geographic locations beyond these 

jurisdictions. 

3. In § 591.213, revise paragraph (b)(1) 

to read as follows:

§ 591.213 What prices does OPM collect?

* * * * *

(b) * * * 

(1) OPM does not collect coupon 

prices, clearance prices, going-out-ofbusiness prices, or area-wide distress 

sale prices.

* * * * *

4. In § 591.215, revise paragraph (a) to 

read as follows:

§ 591.215 Where does OPM collect prices 

in the COLA and DC areas? 

(a) Survey areas. Each COLA area has 

one survey area, except Hawaii County, 

HI, and the U.S. Virgin Islands COLA 

areas. Hawaii County has two survey 

areas: the City of Hilo and the KailuaKona area. The U.S. Virgin Islands also 

has two survey areas: the Island of St. 

Croix and the Islands of St. Thomas and 

St. John. The Washington, DC, area has 

three survey areas: the District of 

Columbia, the Maryland suburbs of the 

District of Columbia, and the Virginia 

suburbs of the District of Columbia. 

OPM collects non-housing data 

throughout the survey area; and for 

selected items such as golf, snow skiing, 

and air travel, OPM collects nonhousing data in additional geographic 

locations. OPM may collect housing 

data throughout the survey area or in 

specific housing data collection areas. 

The following table shows the survey 

areas:

SURVEY AMD DATA COLLECTION

AREAS

COLA areas 

and reference 

areas 

Survey area 

Anchorage ..... City of Anchorage.1

Fairbanks ....... Fairbanks/North Pole area.1

Juneau ........... Juneau/Mendenhall/Douglas 

area.1

Rest of Alaska See paragraph (c) of this 

section. 

Honolulu ........ City and County of Honolulu. 

Hawaii County City of Hilo, Kailua-Kona 

area. 

Kauai ............. Kauai Island. 

Maui ............... Maui Island. 

Guam & CNMI Guam. 

Puerto Rico .... San Juan/Caguas area and 

eastern Puerto Rico.2

U.S. Virgin Islands.St. Croix, St. Thomas/St. 

John area.2

Washington, 

DC—DC.

District of Columbia.1

Washington, 

DC—MD.

Montgomery County and 

Prince Georges County.1

Washington, 

DC—VA.

Arlington County, Fairfax 

County, Prince William 

County, City of Alexandria, 

City of Fairfax, City of 

Falls Church, City of Manassas, and City of Manassas Park.1

1For selected items, such as golf, snow skiing, and air travel, these survey areas include 

additional geographic locations beyond these 

jurisdictions. 2OPM collects housing data in St. John and 

eastern Puerto Rico. OPM may also collect 

non-housing data from selected outlets in St. 

John and combine such data with St. Thomas 

data as provided in § 591.216(b). 

* * * * *

5. In § 591.216, revise paragraph (b) to 

read as follows:

§ 591.216 How does OPM combine survey 

data for the DC area and for COLA areas 

with multiple survey areas?

* * * * *

(b) COLA areas with multiple survey 

areas. OPM computes weighted average 

indexes at the item, PEG, MEG, and/or 

overall level by using the corresponding 

indexes and Federal employment 

weights from each survey area within 

the COLA area. 

6. In § 591.219, revise paragraph (b) to 

read as follows:

§ 591.219 How does OPM compute shelter 

price indexes?

* * * * *

(b) OPM then uses these 

characteristics and rental prices and/or 

estimates in hedonic regressions (a type 

of multiple regression) to compute for 

each COLA survey area the price index 

for rental and/or rental equivalent units 

of comparable quality and size between 

the COLA survey area and the 

Washington, DC, area. Exception: OPM 

does not compute separate rental and/or 

rental equivalence price indexes for St. 

John or eastern Puerto Rico. 

7. In § 591.222, revise paragraph (c) to 

read as follows:

§ 591.222 How does OPM use the 

expenditure weights to combine price 

indexes?

* * * * *

(c) Step 3. OPM repeats the process 

described in Step 2 at each level of 

aggregation within the PEG to produce 

a price index for the PEG, at the PEG 

level to produce an index for the MEG, 

and at the MEG level to produce the 

overall price index for the COLA area. 

8. In § 591.224, revise paragraph (b) 

and add paragraph (c) to read as follows:

§ 591.224 How does OPM adjust price 

indexes between surveys?

* * * * *

(b) Paragraph (a) of this section 

applies beginning with the effective date 

of the results of the second survey 

conducted in Puerto Rico and the U.S. 

Virgin Islands under these regulations. 

(c) Based on additional housing data 

that may be collected before the second 

survey conducted in Puerto Rico and 

the U.S. Virgin Islands, OPM will adjust 

as warranted the price indexes and 

COLA rates for Puerto Rico, the U.S. 

Virgin Islands, and the COLA areas in 

the State of Alaska. OPM will 

implement any such adjustments on a 

one-time basis on the effective date of 

the results of the first surveys conducted 

in Hawaii and Guam/CNMI under these 

regulations, and subject to § 591.228. 

OPM will publish such adjustments as 

provided in § 591.229.

[FR Doc. 04–2225 Filed 2–6–04; 8:45 am] 

BILLING CODE 6325–39–P