U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

1 

69–010 

" ! SENATE 110th Congress 

2d Session 

REPORT

2008

110–456 

Calendar No. 954 

NON-FOREIGN AREA RETIREMENT EQUITY 

ASSURANCE ACT OF 2008 

R E P O R T 

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

TO ACCOMPANY

S. 3013 

TO PROVIDE FOR RETIREMENT EQUITY FOR FEDERAL EMPLOYEES IN NONFOREIGN AREAS OUTSIDE THE 48 CONTIGUOUS 

STATES AND THE DISTRICT OF COLUMBIA, AND FOR OTHER 

PURPOSES 

SEPTEMBER 11, 2008.—Ordered to be printed 


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(II) 

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

JOSEPH I. LIEBERMAN, Connecticut, Chairman 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK L. PRYOR, Arkansas 

MARY L. LANDRIEU, Louisiana 

BARACK OBAMA, Illinois 

CLAIRE MCCASKILL, Missouri 

JON TESTER, Montana 

SUSAN M. COLLINS, Maine 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

NORM COLEMAN, Minnesota 

TOM COBURN, Oklahoma 

PETE V. DOMENICI, New Mexico 

JOHN WARNER, Virginia 

JOHN E. SUNUNU, New Hampshire 

MICHAEL L. ALEXANDER, Staff Director 

KEVIN J. LANDY, Chief Counsel 

LAWRENCE B. NOVEY, Senior Counsel 

JENNIFER L. TYREE, Counsel, Subcommittee on Oversight of Government Management, the 

Federal Workforce, and the District of Columbia 

BRANDON L. MILHORN, Minority Staff Director and Chief Counsel 

AMANDA WOOD, Minority Director of Governmental Affairs 

JENNIFER A. HEMINGWAY, Minority Staff Director, Subcommittee on Oversight of Government 

Management, the Federal Workforce, and the District of Columbia 

TRINA DRIESSNACK TYRER, Chief Clerk 


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C O N T E N T S 

Page 

I. Purpose & Summary ..................................................................................... 1 

II. Background .................................................................................................... 2 

III. Legislative History ......................................................................................... 11 

IV. Section-by-Section Analysis .......................................................................... 12 

V. Estimated Cost of Legislation ....................................................................... 14 

VI. Evaluation of Regulatory Impact .................................................................. 18 

VII. Changes in Existing Law .............................................................................. 18 


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1The term ‘non-foreign area’ generally refers to the non-contiguous U.S., including Alaska, 

Hawaii, territories, and possessions, and the Commonwealth of Puerto Rico and the Commonwealth of the Northern Mariana Islands. 

Calendar No. 954 

110th Congress SENATE REPORT " ! 2d Session 110–456 

NON-FOREIGN AREA RETIREMENT EQUITY ASSURANCE 

ACT OF 2008 

SEPTEMBER 11, 2008.—Ordered to be printed 

Mr. LIEBERMAN, from the Committee on Homeland Security and 

Governmental Affairs, submitted the following 

R E P O R T 

[To accompany S. 3013] 

The Committee on Homeland Security and Governmental Affairs, 

to which was referred the bill (S. 3013) to provide for retirement 

equity for Federal employees in non-foreign areas outside the 48 

contiguous States and the District of Columbia, and for other purposes, reports favorably thereon with amendments and recommends that the bill, as amended, do pass. 

I. PURPOSE & SUMMARY

Since 1948, federal employees in the non-foreign areas 1 of the 

U.S. have received a non-foreign cost of living allowance (COLA) to 

ensure that their pay reflects the high cost of living in those areas 

compared to the cost of living in Washington, DC. To determine 

COLA rates, the Office of Personnel Management (OPM) conducts 

annual cost surveys of the prices of over 200 items in the non-foreign areas and in the Washington, DC area. OPM publishes the results of these surveys and any recommended changes to the COLA 

rates in the Federal Register for comment. A COLA is not subject 

to federal taxes and it does not count as part of base pay for retirement purposes. 

In 1990 Congress sought to close the pay gap between federal 

employees and workers in the private sector in metropolitan areas 

by providing locality pay to federal workers in the contiguous 

United States and the District of Columbia as authorized by the 


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2P.L. 101–509. 3 E.O. 10,000, 13 Fed. Reg. 5453, 5455 (Sept. 18, 1948). 

4 Independent Officers Appropriation Act, 1949, ch. 219, sec. 207 (1948) and Supplemental 

Independent Offices Appropriation Act, 1949, ch. 775, sec. 104 (1948). See also P.L. 89–554, 5 

U.S.C. § 5941. 

Federal Employees Pay Comparability Act (FEPCA).2 Unlike a 

COLA, locality pay is taxed and considered part of base pay, which 

is used to calculate an employee’s retirement annuity. Another difference is while a COLA reflects the cost-of-living in a geographic 

area, locality pay reflects the cost of wages through a comparison 

of federal salaries to private sector salaries in specific geographic 

areas. A third difference is that U.S. Postal Service employees in 

the non-contiguous areas are eligible to receive COLA, which the 

Postal Service calls Territorial COLA (T–COLA). However, postal 

employees in the contiguous United States do not receive locality 

pay. 

Because locality pay counts towards employees’ retirement 

whereas COLA does not, federal workers in the non-foreign areas, 

who do not receive locality pay, are disadvantaged in their retirement compared to federal workers in the contiguous states. S. 3013 

would address this problem by phasing in locality pay and phasing 

out COLA. 

II. BACKGROUND

Non-Foreign COLA 

In the 1940s, military departments and federal agencies began 

paying differentials to U.S. citizens recruited for white-collar civilian positions in Alaska and areas outside the continental U.S. to 

help speed up the recruitment of personnel in those locations. In 

1946, in response to widespread reports of a lack of uniformity in 

the payment of these differentials, President Harry S. Truman directed the Civil Service Commission (CSC) and the Bureau of the 

Budget to prepare a report on pay differentials outside the U.S. 

CSC prepared a draft report that recommended standardizing pay 

practices and establishing two types of adjustments: one based on 

relative living costs and a second based on undesirable living conditions. These recommendations became the basis for the current 

COLA and post differential programs. 

In 1948, President Truman issued an Executive Order that made 

federal employees in the non-foreign areas eligible to receive additional compensation in two separate programs: one based on living 

costs (i.e., the non-foreign area COLA program) and another based 

on conditions of environment (i.e., the post differential program).3

That same year, Congress enacted legislation that codified this pay 

differential for employees outside the continental U.S. or in Alaska.4

This legislation, codified as Section 5941 of title 5, United States 

Code, provides for the payment of an allowance based on differences in living costs or on differences in conditions of environment, or both. The total payment, however, may not exceed 25 percent of basic pay. COLAs are payments designed to recognize substantially higher living costs in the non-foreign areas relative to 

those in the Washington, DC area. The government pays COLAs to 


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5Most payments received by U.S. government civilian employees for working abroad, including pay differentials, are taxable. However, certain foreign area allowances, cost of living allowances, and travel allowances are tax free. See IRS guidance entitled ‘‘Allowances, Differentials, 

and Other Special Pay,’’ available at http://www.irs.gov/businesses/small/international/article/ 

0,,id=97187,00.html (accessed Aug. 14, 2008). 6See Alaniz v. OPM, No. A81–072 (D. Alaska); Karamatsu v. United States, No. 224–85C (C1. 

Ct.); and Arana v. United States, No. 389–86C (C1. Ct). 7 Angelet v. United States, No. 97–1378RU (D.P.R.), Caraballo v. United States, No. 1997–

0027 (D.V.I.), Cruz v. United States, No. 98–00021 (D. Guam), and Matsuo v. United States, 

No. 97–01418 (D. Hawaii). 

both local and non-local hires. Similar to other allowances,5 a 

COLA is not subject to federal taxes and does not count toward an 

employee’s retirement. 

Post differentials are recruitment incentives designed to encourage people from other areas to go to work for the federal government in a non-foreign area that has (a) extraordinarily difficult living conditions, (b) excessive physical hardships, or (c) notably 

unhealthful conditions compared with the continental U.S. Since a 

post differential is a recruitment incentive to get people to move to 

a non-foreign area, the government does not pay post differentials 

to people who are local hires. Like COLAs, post differentials do not 

count toward retirement but, unlike COLAs, they are subject to 

federal taxes. 

Post differentials are currently authorized for Guam, the Commonwealth of the Northern Mariana Islands (CNMI), American 

Samoa, and Johnston, Wake, and Midway Atolls. Non-local hired 

employees in Guam are eligible for a post differential of up to 20 

percent while those in CNMI and the other areas are eligible to receive a 25 percent differential. Guam and CNMI are the only areas 

that are authorized for both a post differential and COLA, which 

when combined cannot exceed 25 percent of base pay. Employees 

in Guam and CNMI currently receive the same 25 percent COLA, 

but because of the cap do not receive a post differential. 

By law, a COLA is required to reflect the differences in the living 

costs between the COLA area and Washington, DC. Many factors 

other than price level differences affect the cost of living in a particular place. Employees have long argued that the COLA methodology is deficient and violates federal law by considering only price 

level differences and failing to consider differences in non-price factors such as remoteness, isolation, and quantity or quality of goods 

and services needed or available. As a result, the COLA program 

has been the subject of litigation since 1981.6

In the early 1990s attorneys representing employees in the 

COLA litigation formulated a proposal to resolve all of the remaining controversies concerning the COLA program through what 

came to be known as the Safe Harbor Process. The name was chosen because, if an agreed methodology could be achieved, the government would receive a safe harbor against future litigation. In 

the interim, the plaintiffs filed four additional lawsuits that were 

stayed pending the conclusion of the Safe Harbor Process and court 

approval of a settlement agreement.7 On June 20, 2000, the parties 

involved filed a joint stipulation for settlement of the litigation 

with the District Court for the Virgin Islands, which was approved. 

The settlement agreement provided for employee involvement 

with OPM in implementing the Safe Harbor Principles and to ensure local employee input for the future. It also provided for expanded employee access to materials supporting the regular price 


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8 5 U.S.C. § 5301. 9 Recruitment and Retention: Inadequate Federal Pay Cited as Primary Problem by Agency 

Officials, (GAO/GGD–90–117) at 4, September 1990. 10 In the event of a national emergency or serious economic conditions the President may issue 

an alternative pay plan. See 5 U.S.C. §§ 5301–5303 and 5304–5304a. 

surveys and it established parameters for the conduct of future surveys. The settlement made a number of technical improvements to 

the methodology used to determine COLA rates, which brought it 

into conformance with modern cost of living comparisons—such as 

the weighting of prices, sources of data, collection of prices, and the 

method of measuring housing costs. Under the settlement, OPM 

could not reduce COLA rates under the new methodology until the 

last survey of all three regions was finalized and any reductions to 

COLA rates thereafter could not exceed one point per year. In addition the settlement provided for an award of back pay and interest 

in the amount of $234 million. 

COLA rates in effect today are listed below: 

COLA area COLA rate 

Anchorage, AK ...................................................................................................................................................... 24% 

Fairbanks, AK ....................................................................................................................................................... 24% 

Juneau, AK ............................................................................................................................................................ 24% 

Rest of Alaska ...................................................................................................................................................... 25% 

City and County of Honolulu, HI .......................................................................................................................... 25% 

Maui County, HI .................................................................................................................................................... 25% 

Kauai County, HI .................................................................................................................................................. 25% 

Hawaii, County HI ................................................................................................................................................. 18% 

Guam/Northern Mariana Islands .......................................................................................................................... 25% 

U.S. Virgin Islands ............................................................................................................................................... 23% 

Puerto Rico ........................................................................................................................................................... 13% 

Due to an increase in the cost-of-living in Washington, DC, the 

differential between Washington, DC and the COLA areas has decreased. Therefore, OPM expects COLA rates to decrease by one 

percent in Guam and in all of the Hawaii COLA areas late in the 

summer of 2009. Anchorage, Fairbanks, and Juneau, Alaska are 

expected to fall by one percent as well in the fall of 2008. 

Creation of Locality Pay 

Although the federal government’s pay policy was supposed to 

set federal employee pay rates to be comparable with the private 

sector,8 it became increasingly evident in the late 1980’s that there 

was a large gap between federal salaries and the private sector 

across the country. These pay disparities seriously impeded the 

ability of federal agencies to recruit and retain highly-qualified employees. The Government Accountability Office (GAO) reported in 

1990 that 78.3 percent of federal managers and personnel officers 

surveyed said that low pay was the reason employees left the federal government. The same GAO survey showed that 72.5 percent 

believed that job candidates declined job offers with the federal 

government because of the low pay offered.9

To address these disparities, Congress passed the Federal Employees Pay Comparability Act (FEPCA) of 1990. FEPCA requires 

the annual pay adjustment for General Schedule (GS) employees to 

be based on the Employment Cost Index (ECI), which measures 

change in private-sector wages and salaries. Under FEPCA, basic 

pay rates are to be increased.10


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11The President’s Pay Agent has extended these payments to employees in other pay systems, 

including employees in senior level, scientific and professional positions, administrative law 

judges, administrative appeals judges, and contract appeals board members. 12 5 U.S.C. § 5304(f)(1)(A) and 5 U.S.C. § 5701(6). 13 As of January 2008, basic pay cannot exceed $139,600 (EX Level V); basic pay and locality pay combined cannot exceed $149,000 (EX Level IV); and total compensation, including bonuses 

and allowances, cannot exceed $191,300 (EX Level I). 14The Federal Salary Council recommended that the 32 locality pay areas recommended for 

2008 continue in 2009. In not recommending any new pay areas, the council noted that, were 

new areas to be proposed, criteria for their establishment would have to be developed and the 

BLS would need additional funding. According to the council, BLS has indicated that, based on 

its current funding and resources, it cannot expand its current NCS program to increase samples in existing locality pay areas or to cover more areas. See Federal Salary Council Memorandum for January 2009, p. 6. 15The council consists of nine members: Terri Lacy, chair; George Nesterczuk, vice-chair; 

Rudy J. Maestas; and representatives of the American Federation of Government Employees; 

the National Treasury Employees Union; the National Federation of Federal Employees; the Association of Civilian Technicians; and the Fraternal Order of Police. 16The Pay Agent is comprised of the Secretary of Labor, the Director of the Office of Management and Budget, and the Director of OPM. 

Under FEPCA, federal employees also receive locality-based comparability payments. The locality pay procedure established by 

FEPCA provides that payments are to be made within each locality 

determined to have a nonfederal/federal pay disparity greater than 

five percent. When uniformly applied to GS employees within a locality, the adjustment is intended to make their pay rates substantially equal to those of non-federal workers in the same locality. 

All GS federal employees employed within the continental U.S. 

are entitled to receive locality pay.11 However, FEPCA specifically 

excludes federal employees in Hawaii and Alaska and the other 

non-foreign areas from receiving locality pay.12 The legislative history is silent as to why Congress chose to exclude Hawaii and Alaska employees from receiving locality pay. 

Not all employees received the full amount of the locality pay adjustment because of statutory maximum pay levels for GS level employees or because of other limitations in the law.13 In addition, GS 

special rate employees receive either the special rate supplement or 

the locality payment, whichever is higher. Law enforcement officers 

receiving special base rates receive both special base rates and locality pay. 

Under the law, the Bureau of Labor Statistics (BLS) conducts 

surveys under the National Compensation Survey (NCS) program 

that document non-federal rates of pay in each locality pay area. 

In January 2009 there will be 32 pay areas nationwide.14 The BLS 

survey results are submitted to OPM, which serves as the staff to 

the Federal Salary Council 15 and the President’s Pay Agent.16

OPM documents federal rates of pay in each of the pay areas and 

compares non-federal and GS salaries by grade for each pay area. 

By law, the disparity between non-federal and federal salaries is to 

be reduced to five percent. The Federal Salary Council uses OPM’s 

data to advise the President’s Pay Agent on recommendations to 

the President on locality rates for each pay area. 

FEPCA requires that a certain percentage of the adjusted gap between GS average salaries and non-federal average salaries in each 

pay area is to be closed each year. Twenty percent of the gap was 

closed in 1994, the first year of locality pay, as authorized by 

FEPCA. An additional 10 percent of the gap was supposed to be 

closed each year thereafter until January 2002, when pay rates 

should have been sufficient to reduce the pay disparity to five percent. 


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17The President usually includes a proposal on the federal civilian pay adjustment in the 

Budget of the United States issued in February of each year. The pay adjustment is considered 

annually by Congress, which may legislate an adjustment that is different from the one recommended by the President or that might be authorized by the President in an alternative plan. 

The January 1999, January 2000, and January 2002 through January 2006 overall pay adjustment amounts were set by Congress. P.L. 105–277, P.L. 106–58, P.L. 107–67, P.L. 108–7, P.L. 

108–199, P.L. 108–447, and P.L. 109–115, respectively, provided the pay adjustments but reserved to the President the decision as to how the increases would be allocated between the annual and locality pay adjustments. 18 Annual Report of the President’s Pay Agent on Locality-Based Comparability Payments for 

the General Schedule, at 18 and 21, December 6, 2007. 19Matsuo v. U.S., No. 05–00398 at 5 (D–Hawaii, Jan. 30, 2008). 20 Non-Foreign COLA: Finding an Equitable Solution, Hearing before the Subcommittee on 

Oversight of Government Management, the Federal Workforce, and the District of Columbia of 

the Senate Committee on Homeland Security and Governmental Affairs, 110th Congress, May 

29, 2008, (Statement of Chuck Grimes, Office of Personnel Management) at 3–4. 21Supra note 19 at 2. 

However, FEPCA has never been implemented as originally enacted. The annual pay adjustment was not made in 1994 because 

the entire pay adjustment went to fund locality pay adjustments. 

During that year, federal employees in Alaska, Hawaii, and the 

other non-foreign areas did not receive a pay increase. For 1995 

through 2008, reduced amounts of the locality payments were provided.17 As of 2008, only 58.3 percent of the pay gap has been reduced. The amount needed to reduce this disparity to five percent 

averages 36.89 percent for 2009 and would cost approximately 

$12.1 billion.18

The problem and solution 

Because locality pay, but not a COLA, is included in calculating 

retirement contributions and annuities, the exclusion of Hawaii 

and Alaska federal employees and those in the other non-foreign 

areas from receiving locality pay under FEPCA means that these 

employees are not able to contribute as much or receive as much 

matching contributions from their employing agency to their retirement accounts under the Thrift Savings Plan as similarly situated 

employees in the contiguous U.S. Additionally, these non-foreign 

area employees’ base pay for determining their highest three years 

(‘‘high 3’’) for calculating their retirement annuities is less than 

similarly situated contiguous U.S. employees who receive locality 

pay. 

Since FEPCA’s enactment, the exclusion of Hawaii and Alaska 

federal employees and those in the non-foreign areas has influenced federal employees’ decisions about whether to move to the 

contiguous U.S. to receive locality pay.19 As employees in the 

COLA areas near retirement, many consider and seek short term 

employment in the contiguous U.S. where their ‘‘high 3’’ salaries 

are boosted by locality pay.20 As a result of this disparity, federal 

agencies in the non-foreign areas face staffing problems, especially 

for employees near retirement. 

On June 22, 2005, federal employees in Hawaii and Alaska filed 

a class action lawsuit against the federal government alleging that 

FEPCA’s exclusion of federal employees who work and reside in 

Hawaii and Alaska violates the Equal Protection Clause of the 

Fifth Amendment to the U.S. Constitution. They also contend that 

federal employees have a property interest in their salary and that 

exclusion from locality pay violates their due process rights under 

the Fifth Amendment.21 The lawsuit seeks locality pay for federal 


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22 Id. at 22. 23Supra note 20 at 6. The estimated pay gap in Anchorage, AK is 54.96 percent and in Honolulu, HI is 41.72 percent. Supra note 14 at 9. 

employees who work in those jurisdictions dating back to the implementation of FEPCA. 

On January 30, 2008, the U.S. District Court in Hawaii granted 

the government’s motion to dismiss the case and urged Congress 

to rectify the situation. The Court said, ‘‘Congress has a legitimate 

interest in creating and managing compensation packages for its 

employees to compensate employees adequately, to recruit and retain employees, and to allocate limited resources among employees. 

That Congress may have discharged its legislative responsibilities 

imperfectly does not give this Court fiat to rewrite the legislation 

to rectify the current disparity. It suggests strongly instead that 

Congress should correct the incongruity made so evident by this 

case.’’ 22 The plaintiffs filed an appeal of the decision on February 

29, 2008. 

In an effort to address the retirement inequity of employees in 

the non-foreign areas and the issues raised by the litigation, President George W. Bush in his fiscal year 2008 Budget proposed to extend locality pay to white-collar federal employees in the non-foreign areas. On May 30, 2007, OPM Director Linda Springer submitted the specific legislative proposal to Congress. Under the 

OPM proposal, COLA rates in effect on December 31, 2007, would 

be locked in place and OPM would no longer conduct COLA surveys. Beginning with the first pay period in January 2008, locality 

pay would begin to be phased in for federal employees in the nonforeign areas while the COLA program is phased out. This initial 

transition process would take seven years, with the locality rate for 

each area being phased in each year. In the first year, the locality 

pay rate for the ‘‘Rest of the U.S.’’ (i.e., the default rate that applies 

outside of the metropolitan areas where specific rates are established) would be applied to all areas in order to give BLS and OPM 

time to work with the Federal Salary Council and the President’s 

Pay Agent to determine the locality pay rates for each non-foreign 

area. OPM has estimated that the locality pay rate for the State 

of Hawaii would be 20.38 percent, the rate for the State of Alaska 

would be 27.68 percent, and the rate for the other non-foreign 

areas would be the Rest of the U.S. locality pay rate, which is currently set at 13.18 percent.23 An employee would continue to receive some amount of COLA until the locality pay rate is more 

than the locked-in COLA rate. 

Under this OPM proposal, the Federal Salary Council would 

have the authority to set locality rates in all the non-foreign areas, 

including areas such as Guam, American Samoa, and Wake Atoll, 

that are currently authorized for post differentials. Right now, only 

Guam and CNMI are authorized for both a COLA and a post differential. Absent OPM making any regulatory change, once the reduction of a COLA begins under the proposed legislation, the post 

differential will start to increase. When the Guam and CNMI 

COLA drops to zero, the post differential paid to non-local hires 

would be 20 percent in Guam and 25 percent in CNMI. OPM last 


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24See Responses from OPM provided in 2007 to Senator Akaka’s Frequently Asked Questions 

on the Administration’s Proposal to Convert Non Foreign COLA to Locality Pay, available at: 

http://akaka.senate.gov/public/index.cfm?FuseAction=Issues.Home&issue=NonForeign%20COLA%20Update&contentlid=33#Non-Foreign%20COLA%20Update (accessed August 14, 2008). See also information provided to Committee staff by OPM, June 16, 2008. 25 Information provided to Committee staff at a staff briefing by OPM, June 4, 2007. 26 Information provided to Committee staff by OPM, April 1, 2008. 27 Information provided to Committee staff by OPM, May 1, 2008. 

reviewed the amount of and need for post differentials in 1995 and 

does not plan to review post differential rates at this time.24

To help address the adverse impact on a non-foreign employee’s 

take home pay due to the increase in taxes and retirement contributions, OPM proposed that COLA be phased out at a slower 

rate than locality pay is phased in. Under this OPM proposal, the 

conversion to locality pay would be offset by a corresponding 85 

percent reduction in COLA. Thus, for every dollar of locality pay 

that is phased in under the proposal, the employee’s COLA would 

be reduced by 85 cents. After the initial seven-year phase in period, 

when 100 percent of locality pay would be provided, some fraction 

of the COLA rate could also continue to be paid until the locality 

pay rises high enough that subtraction of 85 percent would reduce 

the COLA payment to zero. According to OPM, this formula would 

protect the take home pay of federal workers at the GS–7 step 3 

level and below.25 Approximately 50 percent of the federal workers 

in Alaska and Hawaii are at or below this level.26 Postal employees, other than Postal Inspectors and employees of the Postal Service Inspector General, would continue to receive the locked-in 

COLA rates, because similarly situated postal employees in the 

contiguous U.S. do not receive locality pay. 

During the week of July 1–7, 2007, the Oversight of Government 

Management Subcommittee of the Committee on Homeland Security and Governmental Affairs conducted fact finding meetings on 

the OPM proposal on the islands of Oahu and Maui in Hawaii. 

Subcommittee staff met with close to 1,000 federal employees in 

over 20 agencies. The questions and concerns raised by the federal 

workers can be broken down into several themes. 

First, employees were concerned about the impact on their takehome pay due to the conversion to locality pay. Given the current 

economic climate and the increasing gas prices, many federal workers stressed the importance of not reducing their take-home pay 

and believed that the 85 percent offset did not go far enough. The 

impact on take-home pay is one of the reasons that several employees have expressed an interest in retaining COLA and not converting to locality pay. 

Second, with an estimated 59.3 percent of federal workers in Hawaii and 62.1 percent in Alaska retirement eligible,27 many employees expressed concern over the seven year phase-in period, noting that they would have to work 10 additional years in order to 

take full advantage of locality pay. Several employees proposed an 

immediate conversion with no phase-in period or a two year phase 

in with the first year using the Rest of the U.S. locality rate. 

Third, many employees raised concern over the scope of coverage. 

This included questions about which employees would be covered 

by the proposal, how the proposal would work in unique personnel 

systems such as the National Security Personnel System (NSPS) at 

the Department of Defense (DoD) and the system at the Postal 


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28Supra note 20. 29 Id. Draft transcript, response from Mr. Grimes, at 34–36. 

Service, and how the proposal would treat employees receiving special rates, since federal employees in the non-foreign areas may receive both COLA and special rates, but employees in the contiguous U.S. receive the higher of special rates or locality pay. 

After considering the questions and concerns from employees and 

comments from federal agencies, Senators Daniel K. Akaka (D-HI), 

Ted Stevens (R-AK), Daniel K. Inouye (D-HI), and Lisa Murkowski 

(R-AK) introduced the Non-Foreign Area Retirement Equity Assurance Act of 2008, or the Non-Foreign AREA Act (S. 3013), on May 

13, 2008. The legislation would apply to federal employees in all of 

the non-foreign areas, including Alaska, Hawaii, the Virgin Islands, 

Puerto Rico, Guam, CNMI, American Samoa, and Johnston, Wake, 

and Midway Atolls. 

S. 3013 is similar to OPM’s proposal, in that it would lock in current COLA rates and phase in locality pay as COLA is phased out. 

However, S. 3013 differs from the OPM proposal in several important ways. The bill will phase in locality pay over a period of three 

years, compared to seven under the OPM proposal. Moreover, the 

bill will offset the locality pay by subtracting 65 percent of that pay 

from the COLA, which is a lower percentage than under the OPM 

proposal (85 percent). The 65 percent offset is designed to better 

protect employees’ take-home pay. 

In addition, S. 3013 establishes that employees who receive special rates and would not receive locality pay will not lose any pay, 

because the bill provides that their special rates will increase like 

locality pay during the conversion from COLA to locality pay. In 

addition, the bill includes a provision expressing the sense of Congress that an employee’s take home pay should not decrease as a 

result of the bill. For those employees who continue to oppose the 

conversion to locality pay, S. 3013 would allow current employees 

to make an irrevocable choice to continue to receive the locked-in 

COLA rates and not covert to locality pay. All future employees 

would be converted to locality pay. 

In addition to having a shorter phase in period, S. 3013 allows 

employees who retire within the three year phase in period to elect 

to treat any amount of COLA they receive during that period as 

part of their base pay (as if it were locality pay), up to the full 

amount of locality pay in place for that area notwithstanding the 

phase-in limitations. The employee would be required to pay additional retirement contributions on the additional amounts they 

elect to be part of their base pay. 

According to OPM, 62.1 percent of federal employees in Alaska 

and 59.3 percent of federal employees in Hawaii are eligible to retire within six years or less. In addition, it is well known that federal employees in the non-foreign areas seek out employment in 

the contiguous U.S. late in their careers to help improve their retirement annuity.28 OPM testified that agencies have succession 

plans and recruitment and retention strategies in place to address 

the impending retirement wave facing federal agencies across the 

country and the unique staffing problems facing federal agencies in 

the non-foreign areas.29 The Committee believes that a three year 

phase in with an opportunity for employees close to retirement to 


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30Supra note 14. 31P.L. 101–73. 32Supra note 20. Draft transcript, response from Mr. Bunn, at 29–30. 

buy into the locality pay system would help those employees subject to mandatory retirement laws and those planning to retire in 

the next three years without adversely affecting the staffing of 

agencies in the non-foreign areas. 

The Federal Salary Council and the President’s Pay Agent have 

recommended that the number of locality pay areas should remain 

at 32 for 2009, noting that, were new areas to be proposed, criteria 

for their establishment would need to be developed and BLS would 

need more funding to expand its current NCS program to cover 

more areas.30 However, the Committee believes that upon enactment of this Act, the number of locality pay areas should be increased by two—one covering the entire State of Alaska and one 

covering the entire State of Hawaii—because of the high cost of living in those areas, and S. 3013 states the sense of Congress that 

BLS should conduct surveys pursuant to the establishment of the 

two new locality pay areas. 

S. 3013 also provides that all current and future employees in 

the non-foreign areas who are eligible to receive a COLA, whether 

or not they actually do receive it, are covered by this legislation 

and would therefore receive locality pay under the bill. This includes GS employees, administrative law judges, members of the 

Senior Executive Service, senior level and senior technical (SL/ST) 

employees, administratively determined employees, GS employees 

in the non-foreign areas that do not receive COLA, and employees 

in agencies with unique personnel systems such as the Transportation Security Administration, DoD, the Federal Aviation Administration, the Department of Veterans Affairs, and those agencies 

covered by the Financial Institution, Reform, Recovery and Enforcement Act.31 According to DoD it already has broad flexibility 

with regard to setting and changing pay rates for non-appropriated 

fund (NAF) employees. As such, should COLA be phased out and 

locality pay phased in, DoD would increase pay rates for those NAF 

employees who currently receive a COLA to offset the loss of that 

adjustment.32

Following OPM’s submission of its proposal, many postal employees in the non-foreign areas expressed concern over how they would 

be treated, because postal employees in the contiguous U.S. generally do not receive locality pay. (Only employees of the Postal 

Service Inspector General and Postal Inspectors receive it.) Many 

postal employees outside of the contiguous U.S. expressed a desire 

to be treated like all other workers in the non-foreign areas, as 

they were concerned about ending up as the only group of employees receiving COLA. S. 3013 as introduced would have allowed all 

postal employees to transition from T–COLA to Territorial Pay in 

the same manner that GS workers were converting from COLA to 

locality pay. (As noted earlier, ‘‘T–COLA’’ refers to Territorial 

COLA, which is the Postal Service’s term for COLA, and ‘‘Territorial Pay’’ is similar to locality pay.) The Postal Service, while 

agreeing that the proposal in the OPM draft legislation was not a 

long term solution, expressed opposition to the provisions in S. 

3013 over the cost, estimated to be $12.5 million per year, and the 


smartinez on PROD1PC64 with REPORTS
11 

33Letter to Senator Akaka from Marie Therese Dominguez, Vice President, Government Relations and Public Policy, May 16, 2008. 

precedent it would set for other postal workers.33 To address this 

concern, S. 3013 was amended to allow Postal Inspectors and employees of the Postal Service Inspector General in the non-foreign 

areas to transition to locality pay like other federal employees in 

the non-foreign areas. Other postal employees in the non-foreign 

areas, both current and future employees, would continue to receive T–COLA; however, the 25 percent cap would be lifted and 

employees would receive the greater of the locked in T–COLA rate 

in effect for the area or an amount equal to the locality pay rate 

in effect for the area. Consistent with current law, the T–COLA 

rates would not be subject to collective bargaining 

III. LEGISLATIVE HISTORY

S. 3013 was introduced by Senators Akaka, Stevens, Inouye, and 

Murkowski on May 13, 2008, and was referred to the Committee 

on Homeland Security and Governmental Affairs. The bill was referred to the Subcommittee on Oversight of Government Management, the Federal Workforce, and the District of Columbia (OGM) 

on June 19, 2008. 

On May 29, 2008, the OGM Subcommittee held a field hearing 

on the legislation and the Administration’s proposal at the Oahu 

Veterans Center in Honolulu, Hawaii. Witnesses included Mr. 

Chuck D. Grimes, Deputy Associate Director, Strategic Human Resources Policy Division, OPM; Mr. Bradley Bunn, Program Executive Officer, NSPS, DoD; Ms. Jo Ann Mitchell, Manager, Accounting Services, United States Postal Service; Ms. Joyce Matsuo, 

President, Oahu COLA Defense Committee, Inc.; Ms. Sharon Warren, President, COLA Defense Committee of Anchorage, Inc.; Mr. 

Manuel Q. Cruz, President, COLA Defense Committee of Guam; 

Mr. Michael Fitzgerald, President, Chapter 187, Naval Facilities 

Engineering Command Hawaii, Federal Managers Association; and 

Ms. Terry Kaolulo, President, Hawaii State Association of Letter 

Carriers. 

On June 24, 2008, OGM favorably polled out S. 3013 and on 

June 25, 2008, the Committee considered S. 3013. Senators Akaka 

and Stevens offered an amendment that made technical corrections 

to the bill. Senator Thomas R. Carper offered an amendment to 

change the treatment of most postal employees under the legislation. Under the amendment, all current and future postal employees in Alaska, Hawaii, and the non-foreign areas would continue to 

receive T–COLA, but the way T–COLA is calculated would change. 

Specifically, postal employees would receive the greater of the T–

COLA rates in effect on December 31, 2008, or the locality pay rate 

in effect for that area. No employee would receive less than their 

current T–COLA rate, and the 25 percent cap on T–COLA would 

be removed. Employees of the Postal Service Inspector General and 

Postal Inspectors would transition from T–COLA to locality pay. 

Senator Akaka offered a second degree amendment making a technical correction to the Carper amendment. All three amendments 

were accepted and the bill, as amended, was ordered reported favorably by voice vote. Members present were Senators Lieberman, 


smartinez on PROD1PC64 with REPORTS
12 

Akaka, Carper, Pryor, McCaskill, Tester, Collins, Stevens, Coleman, Coburn, and Sununu. 

IV. SECTION-BY-SECTION ANALYSIS

Section 1 states that the legislation may be cited as the ‘‘NonForeign Area Retirement Equity Assurance Act of 2008’’ or the ‘‘Non-Foreign AREA Act of 2008.’’ Section 2(a) amends section 5304 of title 5 by including the nonforeign areas in the list of areas where locality pay is paid to federal employees and clarifying that members of the Senior Executive 

Service in the non-foreign areas are eligible to receive locality pay 

regardless of whether their agencies are participating in an OPMcertified performance appraisal system under section 5382 of title 

5. 

Section 2(b) amends section 5941 of title 5 to retain a COLA that 

is phased out as locality pay is phased in. Paragraph (1) adds a 

provision freezing the COLA rates that are in effect on December 

31, 2008. Paragraphs (2) and (3) add further provisions adjusting 

these frozen COLA rates downward as locality pay is phased in 

pursuant to section 4 of the bill. This downward adjustment is governed by a formula in the legislation under which, for every dollar 

of locality pay that the employee receives, the employee will give 

up only 65 cents of the COLA that the employee would receive 

under the end-of-2008 COLA rate, thereby helping to mitigate the 

additional cost burdens to employees due to the fact that locality 

pay is subject to federal income taxes and retirement contributions. 

(To achieve this result, the formula in the legislation will calculate 

the employee’s COLA in four steps: (1) start with the COLA rate 

frozen as of the end of 2008, (2) subtract 65 percent of the applicable locality pay rate, (3) divide the resulting percentage by the sum 

of 1 plus the applicable locality pay rate, and (4) multiply this resulting percentage times the employee’s basic pay, which is comprised of both base salary and the applicable locality-based payment.) 

Section 3 states that employees in the non-foreign areas who receive special rates shall not receive locality pay, but shall have 

their special rates increased by the same amount as locality pay increases for other federal employees in the non-foreign areas who do 

not receive special rates. The increases for special rates would continue until the employees’ COLA rates have been completely 

phased out. The Director of OPM, who regulates special rates generally, and the Secretary of Veterans Affairs, who regulates special 

rates for the Department of Veterans Affairs, may temporarily 

raise statutory limitations on special rates until the end of the 

transition period, at which time any special rate pay in excess of 

the cap shall be converted to a retained rate under section 5363 of 

title 5. 

Section 4 states that non-foreign COLA shall be phased out and 

that locality pay shall be phased in over a period of three years 

starting the first pay period beginning on or after January 1, 2009. 

During the first year, 2009, the amount of locality pay phased in 

shall be based on using one-third of the locality pay percentage for 

the rest of the U.S. locality pay area. The second year, 2010, the 

phased-in amount shall be based on using two-thirds of the applicable comparability payment approved by the President for each nonVerDate Aug 31 2005 04:09 Sep 15, 2008 Jkt 069010 PO 00000 Frm 00016 Fmt 6659 Sfmt 6602 E:\HR\OC\SR456.XXX SR456

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foreign area. The third year, 2011, and each subsequent year shall 

be based on the full amount of the applicable comparability payment for each non-foreign area. 

Section 5(a) expresses the sense of Congress that the application 

of the Non-Foreign AREA Act to any employee not result in a decrease in the take home pay of that employee. 

Section 5(b) states that it is the sense of Congress that the Bureau of Labor Statistics will conduct separate surveys pursuant to 

the establishment by the President’s Pay Agent of one new locality 

area for the entire State of Hawaii and one new locality area for 

the entire State of Alaska, and that upon completion of the phasein period no employee shall receive less than the rest of the U.S. 

locality pay rate. 

Section 5(c) states that employees who currently receive a special 

rate and continue to remain stationed in a non-foreign area shall 

receive an increase in the special rate consistent with increases in 

the special rate schedule. The minimum step rate for any grade of 

a special rate shall be increased at the time of an increase in the 

applicable locality rate percentage for the area by not less than the 

dollar increase in the locality payment for a non-special rate employee. In addition, this section states that if an employee currently 

receives a COLA and would receive a rate of basic pay and locality 

pay that would be in excess of the maximum rate limitation set 

under 5304(g) of title 5, United States Code, the employee would 

continue to receive the COLA rate in effect for the area until the 

employee leaves the allowance area or is eligible to receive a basic 

pay at a higher rate. 

Section 6(a) defines who is an employee covered by this Act. Covered employees include any current and future employee eligible to 

receive a COLA, whether or not they actually received it. This includes employees at the Transportation Security Administration, 

intelligence community employees, and postal employees. In addition, employees who receive locality pay as a result of the application of this Act shall not be eligible to bargain over the amount of 

locality pay they receive under this Act and shall not have any 

amount of locality pay provided under this Act reduced on the basis 

of the performance of that employee. 

Section 6(b) states that the provisions of this Act (converting T–

COLA to locality pay) will apply to Postal Inspectors and employees of the Postal Service Inspector General, but will not apply to 

other postal employees such as mail handlers, letter carriers, and 

postal supervisors. Those postal employees in the non-foreign areas 

will continue to receive T–COLA. However, the method for calculating the T–COLA rate will change and the cap on the amount of 

T–COLA an employee may receive will be lifted. Under the Act, 

current and future postal employees will receive a T–COLA rate 

that is the greater of the frozen T–COLA rate on December 31, 

2008, or the applicable locality pay percentage for the area. 

Section 7 states that employees who retire from federal service 

between January 1, 2009, and December 31, 2011, and who file an 

election with OPM by December 31, 2011, may count a certain 

amount of COLA they receive during that time period before they 

retire as if it is locality pay for purposes of computation of their 

retirement annuity. The limit on the amount of COLA an employee 

may count as locality pay is the amount of locality pay that would 


smartinez on PROD1PC64 with REPORTS
14 

be in effect for that area if not for the phase in provisions in section 

4 of this Act. 

Section 8 states that current employees may make an irrevocable 

election no later than 60 days after the enactment of this Act to 

continue to receive COLA at the rate in effect on December 31, 

2008, or phase into locality pay as provided under this Act. All future employees will be covered by the provisions of this Act and 

will not be able to opt out. To the greatest extent practicable, OPM 

shall provide timely notice of the election which may be filed under 

this section. 

Section 9 states that the Director of OPM shall prescribe regulations to carry out this Act, including rules for special rate employees, employees who are not entitled to receive locality pay, and for 

setting and adjusting retained rates. In addition, the administrator 

of a pay system not administered by OPM shall prescribe regulations with the concurrence of the Director of OPM that is consistent with OPM’s regulations issued under this Act. 

Section 10 states the effective dates of this Act as the date of enactment, except as provided in sections 2 and 4 of the Act, which 

shall take effect on the first day of the first applicable pay period 

beginning on or after January 1, 2009. 

V. ESTIMATED COST OF LEGISLATION

U.S. CONGRESS, 

CONGRESSIONAL BUDGET OFFICE, 

Washington, DC, July 29, 2008. 

Hon. JOSEPH I. LIEBERMAN, 

Chairman, Committee on Homeland Security and Governmental Affairs, U.S. Senate, Washington, DC. 

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for S. 3013, the Non-Foreign 

AREA Act of 2008. 

If you wish further details on this estimate, we will be pleased 

to provide them. The CBO staff contact is Amber Marcellino. 

Sincerely, 

ROBERT A. SUNSHINE

(For Peter R. Orszag, Director). 

Enclosure. 

S. 3013—Non-Foreign AREA Act of 2008 

Summary: S. 3013 would phase in the use of locality-based comparability payments (‘‘locality pay’’) to replace cost-of-living allowances (COLAs) for federal employees in certain areas of the United 

States (Alaska, Hawaii, and the U.S. Territories). 

The bill would affect the amount of pay received by certain federal employees and the amount of future retirement benefits those 

employees receive. By increasing some salaries, S. 3013 would result in additional agency payments for employees’ retirement benefits and payroll taxes. In total, CBO estimates that discretionary 

spending would increase by $2.2 billion through 2018, assuming 

appropriation of the necessary amounts. The legislation also would 

increase the amount of pay included in the calculation of retirement and Social Security benefits, thereby increasing direct spending by an estimated $302 million over the 2009–2018 period. FurVerDate Aug 31 2005 04:09 Sep 15, 2008 Jkt 069010 PO 00000 Frm 00018 Fmt 6659 Sfmt 6602 E:\HR\OC\SR456.XXX SR456

smartinez on PROD1PC64 with REPORTS
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thermore, including additional pay in the calculation of retirement 

benefits would increase revenues—from higher employee contributions towards those benefits and from additional tax receipts—totaling an estimated $1 billion over the 2009–2018 period. 

S. 3013 contains no intergovernmental or private-sector mandates as defined in the Unfunded Mandates Reform Act (UMRA) 

and would impose no cost on state, local, or tribal governments. 

Estimated cost to the Federal Government: The estimated budgetary impact of S. 3013 is shown in the following table. The direct 

spending impacts of the bill fall within budget functions 600 (income security) and 650 (Social Security); the discretionary costs fall 

within many other budget functions. 


smartinez on PROD1PC64 with REPORTS
By fiscal year, in millions of dollars— 

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2009

2013 

CHANGES IN SPENDING SUBJECT TO APPROPRIATION (On-Budget) 

Salary Payments and Other Discretionary Spending: 

Estimated Authorization Level ............................................................................................................. 35 117 181 175 170 167 164 163 163 163 6Estimated Outlays ............................................................................................................................... 35 117 181 175 170 167 164 163 163 163 6

Employer Contributions1: 

Estimated Authorization Level ............................................................................................................. 17 51 78 78 80 82 84 88 90 93 30Estimated Outlays ............................................................................................................................... 17 51 78 78 80 82 84 88 90 93 30

Total Changes in Spending Subject to Appropriation: 

Estimated Authorization Level ............................................................................................................. 52 168 259 253 250 249 250 251 253 256 98Estimated Outlays ............................................................................................................................... 52 168 259 253 250 249 250 251 253 256 98

CHANGES IN DIRECT SPENDING (OUTLAYS) 

Total Changes in Direct Spending ............................................................................................................... 2 7 13 21 28 35 42 47 52 56 

On-Budget Spending ........................................................................................................................... 2 7 12 21 28 34 41 46 50 54 Off-Budget Spending ........................................................................................................................... 0 0 * * * 1 1 1 2 2 

CHANGES IN REVENUES 

Total Changes in Revenues ......................................................................................................................... 24 70 106 105 109 112 116 119 123 127 4

On-Budget Revenues ........................................................................................................................... 19 54 82 81 84 86 89 91 94 97 32Off-Budget Revenues .......................................................................................................................... 5 16 24 24 25 26 27 28 29 30 

Memorandum: Total Intragovernmental Collections from Employer Contributions 1 ........................................................... ¥17 ¥51 ¥78 ¥78 ¥80 ¥82 ¥84 ¥88 ¥90 ¥93 ¥30

On-Budget ........................................................................................................................................... ¥12 ¥35 ¥54 ¥54 ¥55 ¥56 ¥57 ¥60 ¥61 ¥63 ¥2

Off-Budget ........................................................................................................................................... ¥5 ¥16 ¥24 ¥24 ¥25 ¥26 ¥27 ¥28 ¥29 ¥30 ¥9

Notes: Components may not sum to totals because of rounding. * = costs of less than $500,000 annually. 1 Employer contributions are intragovernmental transactions that do not affect the deficit or surplus. 

Sources: Congressional Budget Office and Joint Committee on Taxation. 


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17 

Basis of estimate: For this estimate, CBO assumes that S. 3013 

will be enacted near the beginning of fiscal year 2009 and that the 

necessary amounts will be appropriated for each year. The bill 

would affect approximately 46,000 federal employees working in 

Alaska, Hawaii, Puerto Rico, the U.S. Virgin Islands, Guam, and 

the Northern Mariana Islands. 

Currently, federal employees in those areas receive a COLA to 

offset higher costs of living in those areas. (In contrast, federal employees in the contiguous 48 states receive locality pay under the 

General Schedule to narrow the pay gap between comparable federal and non-federal positions.) S. 3013 would phase in the use of 

locality pay for employees in the specified areas over three years 

and would phase out the COLA, in most cases, over a longer period 

of time. Such changes would affect the federal budget because, 

while the COLA is not subject to federal income or payroll taxes 

and is not used to calculate federal retirement benefits, locality pay 

is both taxable and creditable for retirement benefits. 

Spending subject to appropriation 

S. 3013 would increase discretionary spending by $2.2 billion 

over the 2009–2018 period, assuming the appropriation of necessary amounts, primarily for increased salary payments and agencies’ payments for retirement benefits and payroll taxes. 

Salary payments and other spending. Raising salaries for federal employees in the designated jurisdictions would result in $1.5 billion in additional discretionary spending over the 2009–2018 period, CBO estimates. 

The conversion to locality pay for approximately 38,000 eligible federal employees would increase salaries by $1.5 billion over the 

next 10 years. For those employees, a provision in S. 3013 provides 

for a phase-out of COLAs over time, intended to preserve the takehome salaries of those employees as their non-taxable COLA pay 

is replaced with taxable locality pay. As a result, salaries would increase to maintain the take-home pay of affected employees. 

A small amount of savings—$2 million over 10 years—would result from discontinuing the surveys currently used by OPM to calculate the COLA adjustments for non-foreign areas. 

Employer contributions. Similar to the rise in employees’ contributions due to the transition to locality pay (which is creditable 

towards retirement), federal agencies’ costs for payroll taxes and 

retirement contributions also would increase. Assuming appropriation of the necessary amounts, CBO estimates that spending for 

those contributions would increase by $741 million through 2018. 

Those payments are intragovernmental transactions that are recorded as offsetting receipts elsewhere in the budget. 

Direct spending 

Increased retirement benefits (a product of increases in salaries) 

would accrue to approximately 13,000 federal employees anticipated to retire between 2009 and 2018. As a result, CBO estimates 

that direct spending would increase by a total of $302 million over 

10 years—$295 million for additional retirement benefits and $7 

million for higher Social Security benefits. 

Under S. 3013, an estimated 8,000 employees of the U.S. Postal 

Service (USPS) would not convert to locality pay and would conVerDate Aug 31 2005 04:09 Sep 15, 2008 Jkt 069010 PO 00000 Frm 00021 Fmt 6659 Sfmt 6602 E:\HR\OC\SR456.XXX SR456

smartinez on PROD1PC64 with REPORTS
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tinue to receive COLAs, but a provision of the bill would adjust the 

COLA calculation. If enacted, future calculations of COLAs for 

those employees would equal the greater of either the COLA in effect on December 31, 2008, or the locality pay applicable to other 

federal employees (that is, those who converted to locality pay 

under this bill) for that year and jurisdiction. CBO estimates that 

the provision could result in an increase in direct spending of about 

$50 million (off-budget) over the 2009–2018 period. However, CBO 

assumes that any increase would be offset by additional receipts 

from postage rates charged by the USPS over the same period, and 

would have no net effect on the budget. 

Revenues 

S. 3013 would increase the portion of salary on which employees 

must pay taxes and would increase the amount of pay used to calculate employees’ contributions for federal retirement benefits. Accordingly, the legislation would increase revenues by a total of $1 

billion over the next 10 years from additional income and payroll 

tax collections and from additional retirement contributions from 

employees, CBO and the Joint Committee on Taxation estimate. 

That total revenue change represents both on- and off-budget activity. Additional on-budget revenues would total $778 million, including $739 million from Medicare payroll taxes and income tax collections and $39 million from higher contributions from employees toward retirement benefits. The increase in off-budget revenues 

would total $233 million from additional Social Security tax receipts. 

Intergovernmental and private-sector impact: S. 3013 contains no 

intergovernmental or private-sector mandates as defined in UMRA 

and would impose no cost on state, local, or tribal governments. 

Estimate prepared by: Federal costs: Amber G. Marcellino (retirement), Sheila M. Dacey (Social Security); Impact on federal revenues: Zach Epstein; Impact on state, local, and tribal governments: Elizabeth Cove; Impact on the private sector: Paige Piper/ 

Bach. 

Estimate approved by: Theresa Gullo, Deputy Assistant Director 

for Budget Analysis. 

VI. EVALUATION OF REGULATORY IMPACT

Pursuant to the requirements of paragraph 11(b) of rule XXVI of 

the Standing Rules of the Senate, the Committee has considered 

the regulatory impact of this bill. CBO states that there are no 

intergovernmental or private-sector mandates as defined in the Unfunded Mandates Reform Act and no costs on state, local, or tribal 

governments. The legislation contains no other regulatory impact. 

VII. CHANGES IN EXISTING LAW

In compliance with paragraph 12 of rule XXVI of the Standing 

Rules of the Senate, changes in existing law made by the bill, as 

reported, are shown as follows (existing law proposed to be omitted 

is enclosed in black brackets, new matter is printed in italic and 

existing law, in which no change is proposed, is shown in roman): 


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19 

TITLE 5, UNITED STATES CODE: GOVERNMENT 

ORGANIZATION AND EMPLOYEES 

PART III—EMPLOYEES 

CHAPTER 53—PAY RATES AND SYSTEMS 

Subchapter I—Pay Comparability System 

SEC. 5304. LOCALITY-BASED COMPARABILITY PAYMENTS. 

* * * * * * * 

(f) (1) The pay agent may provide for such pay localities as the 

pay agent considers appropriate, except that— ø(A) each General Schedule position (excluding any outside 

the continental United States, as defined in section 5701(6) 

shall be included with a pay locality;¿ 

(A) each General Schedule position in the United States, as 

defined under section 5921(4), and its territories and possessions, including the Commonwealth of Puerto Rico and the 

Commonwealth of the Northern Mariana Islands, shall be included within a pay locality; and 

(B) the boundaries of pay localities shall be determined 

based on appropriate factors which may include local labor 

market patterns, commuting patterns, and practices of other 

employers. 

(2) (A) The establishment or modification of any such boundaries 

shall be effected by regulations which, notwithstanding subsection 

(a)(2) of section 553, shall be promulgated in accordance with the 

notice and comment requirements of such section. 

(B) Judicial review of any regulation under this subsection 

shall be limited to whether or not it was promulgated in accordance with the requirements referred to in subparagraph 

(A). 

(g)(1) Except as provided in paragraph (2), comparability payments may not be paid at a rate which, when added to the rate 

of basic pay otherwise payable to the employee involved, would 

cause the total to exceed the rate of basic pay payable for level IV 

of the Executive Schedule. 

(2) The applicable maximum under this subsection shall be level 

III of the Executive Schedule for—

(A) positions under subparagraphs (A)–(C) of subsection 

(h)(1); øand¿ 

(B) positions under subsection (h)(1)(D) not covered by appraisal systems certified under section 5382; and 

øB¿(C) any positions [under subsection (h)(1)(D)] under subsection (h)(1)(E) which the President may determine. 

(3) The applicable maximum under this subsection shall be level 

II of the Executive Schedule for positions under subsection (h)(1)(D) 

covered by appraisal systems certified under section 5307(d). 

(h)(1) For the purpose of this subsection, the term ‘‘position’’

means—

(A) a position to which section 5376 applies (relating to certain senior-level positions); 

(B) a position to which section 5372 applies (relating to administrative law judges appointed under section 3105); 


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(C) a position to which section 5372a applies (relating to contract appeals board members); [and] 

(D) a Senior Executive Service position under section 3132 

stationed within the United States, but outside the 48 contiguous States and the District of Columbia in which the incumbent the day before the date of enactment of the Non-Foreign 

Area Retirement Equity Assurance Act of 2008 was eligible to 

receive a cost-of-living allowance under section 5941; and 

ø(D)¿ (E) a position within an Executive agency not covered 

under the General Schedule or any of the preceding subparagraphs, the rate of basic pay for which is (or, but for this section, would be) no more than the rate payable for level IV of 

the Executive Schedule; but does not include— (i) a position to which subchapter IV applies (relating to 

prevailing rate systems); 

(ii) a position as to which a rate of pay is authorized 

under section 5377 (relating to critical positions); 

(iii) a position to which subchapter II applies (relating to 

the Executive Schedule) stationed in the 48 contiguous 

States and the District of Columbia, or stationed within the 

United States, but outside the 48 contiguous States and the 

District of Columbia, in which the incumbent the day before the date of enactment of the Non-Foreign Area Retirement Equity Assurance Act of 2008 was not eligible to receive a cost-of-living allowance under section 5941; and; 

(iv) a Senior Executive Service position under section 

3132; 

(v) a position in the Federal Bureau of Investigation and 

Drug Enforcement Administration Senior Executive Service under section 3151; or 

(vi) a position in a system equivalent to the system in 

clause (iv), as determined by the President’s Pay Agent 

designated under subsection (d). 

(2)(A) Notwithstanding subsection (c)(4) or any other provision of 

this section, but subject to subparagraph (B) and paragraph (3), 

upon the request of the head of an Executive agency with respect 

to 1 or more categories of positions, the President may provide that 

each employee of such agency who holds a position within such category, and within the particular locality involved, shall be entitled 

to receive comparability payments. 

(B) A request by an agency head or exercise of authority by the 

President under subparagraph (A) shall cover—

(i) with respect to the positions under subparagraphs (A) 

through (C) of paragraph (1), all positions described in the subparagraph or subparagraphs involved (excluding any under 

clause (i), (ii), (iii), (iv), (v), or (vi) of such paragraph); and 

(ii) with respect to positions under paragraph (1)(D), such positions as may be considered appropriate (excluding any under 

clause (i), (ii), (iii), (iv), (v), or (vi) of paragraph (1)). 

(C) Notwithstanding subsection (c)(4) or any other provision of 

law, but subject to paragraph (3), in the case of a category with positions that are in more than 1 Executive agency, the President 

may, on his own initiative, provide that each employee who holds 

a position within such category, and in the locality involved, shall 

be entitled to receive comparability payments. No later than 30 


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21 

days before an employee receives comparability payments under 

this subparagraph, the President or the President’s designee shall 

submit a detailed report to the Congress justifying the reasons for 

the extension, including consideration of recruitment and retention 

rates and the expense of extending locality pay. 

(3) Comparability payments under this subsection—

(A) may be paid only in any calendar year in which comparability payments under the preceding provisions of this section are payable with respect to General Schedule positions 

within the same locality; 

(B) shall take effect, within the locality involved, on the first 

day of the first applicable pay period commencing on or after 

such date as the President designates (except that no date may 

be designated which would require any retroactive payments), 

and shall remain in effect through the last day of the last applicable pay period commencing during that calendar year; 

(C) shall be computed using the same percentage as is applicable, for the calendar year involved, with respect to General 

Schedule positions within the same locality; and 

(D) shall be subject to the applicable limitation under subsection (g). 

CHAPTER 59—ALLOWANCES 

Subchapter IV—Miscellaneous Allowances 

SEC. 5941. ALLOWANCES BASED ON LIVING COSTS AND CONDITIONS 

OF ENVIRONMENT; EMPLOYEES STATIONED OUTSIDE 

CONTINENTAL UNITED STATES OR ALASKA 

(a) Appropriations or funds available to an Executive agency, except a Government controlled corporation, for pay of employees stationed outside the continental United States or in Alaska whose 

rates of basic pay are fixed by statute, are available for allowances 

to these employees. The allowance is based on—

(1) living costs substantially higher than in the District of 

Columbia; 

(2) conditions of environment which differ substantially from 

conditions of environment in the continental United States and 

warrant an allowance as a recruitment incentive; or 

(3) both of these factors. 

The allowance may not exceed 25 percent of the rate of basic pay. 

Except as otherwise specifically authorized by statute, the allowance is paid only in accordance with regulations prescribed by the 

President establishing the rates and defining the area, groups of 

positions, and classes of employees to which each rate applies. Notwithstanding any preceding provision of this subsection, the cost-ofliving allowance rate based on paragraph (1) of this subsection 

shall be the cost-of-living allowance rate in effect on December 31, 

2008, except as adjusted under subsection (c). 

(b) This section shall apply only to areas that are designated as 

cost-of-living allowance areas as in effect on December 31, 2008. 

(c)(1) The cost-of-living allowance rate payable under this section 

shall be adjusted on the first day of the first applicable pay period 

beginning on or after—

(A) January 1, 2009; and 


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(B) on January 1 of each calendar year in which a localitybased comparability adjustment takes effect under section 4 (2) 

and (3) of the Non-Foreign Area Retirement Equity Assurance 

Act of 2008. 

(2)(A) In this paragraph, the term ‘‘applicable locality-based comparability pay percentage’’ means, with respect to calendar year 

2009 and each calendar year thereafter, the applicable percentage 

under section 4 (1), (2), or (3) of Non-Foreign Area Retirement Equity Assurance Act of 2008. 

(B) Each adjusted cost-of-living allowance rate under paragraph 

(1) shall be computed by—

(i) subtracting 65 percent of the applicable locality-based comparability pay percentage from the cost-of-living allowance percentage rate in effect on December 31, 2008; and 

(ii) dividing the resulting percentage determined under clause 

(i) by the sum of—

(I) one; and 

(II) the applicable locality-based comparability payment 

percentage expressed as a numeral. 

(3) No allowance rate computed under paragraph (2) may be less 

than zero. 

(4) Each allowance rate computed under paragraph (2) shall be 

paid as a percentage of basic pay (including any applicable localitybased comparability payment under section 5304 or similar provision of law and any applicable special rate of pay under section 

5305 or similar provision of law). 

ø(b)¿ (d) An employee entitled to a cost-of-living allowance under 

section 5924 of this title may not be paid an allowance under subsection (a) of this section based on living costs substantially higher 

than in the District of Columbia. 

TITLE 39, UNITED STATES CODE: POSTAL 

SERVICE 

PART III—PERSONNEL 

CHAPTER 10—EMPLOYMENT WITHIN THE POSTAL 

SERVICE 

Subchapter I—Pay Comparability System 

SEC. 1005. APPLICABILITY OF LAWS RELATING TO FEDERAL EMPLOYEES. 

* * * * * * * 

(b)(1) [Section 5941] Except as provided under paragraph (2), section 5941 of title 5 shall apply to the Postal Service. [For purposes 

of such section,] Except as provided under paragraph (2), for purposes of section 5941 of that title, the pay of officers and employees 

of the Postal Service shall be considered to be fixed by statute, and 

the basic pay of an employee shall be the pay (but not any allowance or benefit) of that officer or employee established in accordance with the provisions of this title. 

(2) On and after the date of enactment of the Non-Foreign Area 

Retirement Equity Assurance Act of 2008—


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(A) the provisions of that Act and section 5941 of title 5 shall 

apply to officers and employees covered by section 1003(b) and 

(c) whose duty station is in a nonforeign area; and 

(B) with respect to officers and employees of the Postal Service (other than those officers and employees described under 

subparagraph (A)) section 6(b)(2) of that Act shall apply. 

Æ 


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