|APPENDIX�J�-�COST-OF-LIVING�ALLOWANCES�(COLA)
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| | APPENDIX J - COST-OF-LIVING ALLOWANCES (COLA) | 
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| | PART I - INTRODUCTION | 
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| | A.� General.� | 
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| | COLAis paid to help members maintain purchasing power when assigned to high costOCONUSareas.� TheCOLAsystem compares the cost difference for goods and services (excluding shelter expenses) purchased in anOCONUSarea to similar purchases inCONUS.�COLAcompensates members when the cost of these goods and services is higher in theOCONUSarea. | 
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| | TwoOCONUSsurveys are conducted to determine prices:� the Living Pattern Survey (LPS) and the Retail Price Survey (RPS).� The LPS collects information from individual service members about where they shop (including names and addresses of local market outlets) and the percentage they purchase from each source. The LPS is required once every three years; it can be submitted, voluntarily, more frequently.� From the LPS, a percent-of-purchase is calculated for the goods and services.� A percent-of-purchase example is that 80 percent of eggs are bought in the commissary while the other 20 percent are purchased locally.� The LPS is conducted prior to the RPS so that the most frequently used local outlets can be identified for price collection. | 
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| | Prices are collected from the outlets identified in the LPS and in commissary and exchange facilities for approximately 160 goods and services by the RPS. Average RPS prices are calculated by applying the LPS percent-of-purchase data to the prices obtained from the RPS.� The RPS is required annually but also can be done, voluntarily, more frequently.� RPS items are selected from items normally purchased byCONUS-based families that also are available in mostOCONUSareas.� Each item is assigned a �weight,� according to its importance in the overall RPS, based on data collected by the Bureau of Labor Statistics (BLS) for military families in their Consumer Expenditure Survey.� Prices are only collected for items that can vary betweenCONUSandOCONUS.� Items that don�t vary for the member, such as life insurance and Federal Income Tax aren�t included.� Shelter expenses aren�t included in the RPS since they are covered by other allowances. | 
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| | In summary, Living Pattern Surveys and Retail Price Surveys are used to collect data inOCONUSandCONUSareas.� Price comparison determines the level ofCOLAneeded to equalize purchasing power betweenCONUS-based members and theirOCONUScounterparts. | 
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| | B.� Computing theCOLAIndex.� | 
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| | Using RPS and LPS data,PDTATACcalculates aCOLAindex for an area.� TheCOLAindex is a number that represents the RPS price difference (or purchasing power difference) between anOCONUSarea and aCONUSarea.� ACOLAindex of 110 means that prices are 10 percent more expensive overall than inCONUS.� An index of 100 indicates that while some prices may vary, the overall cost of the 160 goods and services is the same in theCONUSandOCONUSlocation, and noCOLAis warranted. | 
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| | To illustrate how aCOLAindex is computed, an example for the purchase of a loaf of white bread (one of the RPS items) follows. | 
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| | EXAMPLE:� First, an LPS is conducted to identify the outlets where members typically purchase bread.� In this example, members purchase bread from two local grocery stores and the commissary.� Prices are then collected from these outlets.� Local prices are converted into U.S.� dollars using the local rate of exchange.� In this example, the foreign currency exchange rate is 2 FC equals $1.00.� The average price of a loaf of bread in the local market was 3 FC, or $1.50.� The commissary price for the bread was $1.00.� From the LPS it�s determined that members purchase 60 percent of their bread in the commissary and 40 percent from local grocery stores.� The average price of a loaf of bread inCONUS(using both local market and commissary bread purchases) was $1.00. | 
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| | From the OCONUS LPS: | 
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| | Commissary Purchases60% Local Market Purchases40%�� | 
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| | From the OCONUS RPS: | 
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| | Commissary Price$1.00 Local Market Price$1.50 Weighted Price =� ((.60 x $1.00) + (.40 x $1.50))$1.20�� Compare Price Index: Foreign Price/U.S. Price =� $1.20/$1.00120 | 
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| | A 120 index means the average price of bread is 20 percent more expensive in theOCONUSlocation than inCONUS(120-100=20).� To compute theCOLAindex for anOCONUSlocation, the same calculations are made for each of the 160 items and the resulting indexes weighted according to their relative importance to the total RPS.� For example, white bread accounts for approximately 1/2 of 1 percent of spending covered by the RPS.� On average, each RPS item accounts for less than 1 percent of total spending.� However, some items such as gasoline and phone service each account for more than 4 percent of spending for the average service member.� Rapid price escalation for any particular item may not necessarily result in aCOLAchange. | 
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| | C.� ComputingCOLAPayments Using Spendable Income.� | 
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| | Once aCOLAindex is determined, the member receives aCOLApayment as a percentage of "Spendable Income," not total income.� ForCOLApurposes, spendable income is that portion of an individual's Regular Military Compensation (RMC) that is used to purchase those items in the RPS. RMC is defined in law to include Basic Pay, BAS,BAH-II, an averageVHAand the tax advantage associated with the tax free status of the allowances. Spendable income differs according to a member's grade, years of service, and number of dependents. The BLS publishes data showing how U.S. families typically allocate their budgets.� To determine spendable income amounts,PDTATACuses this data and subtracts the non-COLAitems from a member's RMC.� Non-COLAitems are shelter expenses, income taxes, life insurance, savings, gifts, and contributions.� Given the same RMC level (paygrade and years of service the same), spendable income is greater for a family with more dependents. This is because a larger family typically allocates a greater budget portion to items covered byCOLAand will normally pay less income tax, which isn�t covered byCOLA.� A detailed description of an individual'sCOLApayment calculation is in par. F below. | 
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| | D.� Foreign Currency Exchange Rates.� | 
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| | Foreign currency/U.S. dollar exchange rate changes causeCOLAindex revisions for that portion of purchases made in foreign currency as reported by members in the LPs. U.S. dollar purchases aren�t adjusted for exchange rate changes.� For many countries, the exchange rate is monitored daily.� Weekly averages are computed andCOLAindex adjustments can be made as frequently as every pay period.� The weekly average exchange rate members utilize in converting their dollars into local currency is compared to the exchange rate currently in use byPDTATAC(allowance rate).� A computer model keeps track of any imbalances and changes the allowance exchange rate when the cumulative effect of all the weekly imbalances equals plus or minus 10 percent.� The new allowance exchange rate is selected to compensate for this imbalance over an 8-week period.� Because of this compensatory approach, the allowance exchange rate selected shall be somewhat different from the rate at which members are actually exchanging their dollars. | 
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| | E.� Unique Expenses.� | 
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| | In someOCONUSlocations, members must purchase items of significant expense. These items are defined as items that are more than one percent of the spendable income for an average member, and that aren�t normally purchased byCONUS-based members, or for which theCONUScost is insignificant.� These unique expenses aren�t measured by indicator items collected in RPS.� An example is the television tax charged in the United Kingdom.� Unique expenses are reimbursed on a dollar-for-dollar basis with theCOLApayment. | 
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| | F.�COLAComputation. | 
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| | 1.� To determine a member�sCOLA, the following information on the member is required: | 
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| | a.grade | 
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| | b. years of service | 
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| | c.annual compensation (Regular Military Compensation) - Part II Table I | 
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| | d.number of dependents | 
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| | e.average annual spendable income - Part II Table II | 
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| | f.PDSandCOLAIndex - Part II Table III | 
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| | 2.� Computation Steps.� To determineCOLApayable, follow these steps: | 
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| | Step 1. Ascertain the member's annual compensation in Part II Table I based on the member's grade and years of service. | 
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| | Step 2. Locate the line in Part II Table II in the column headed "Annual Compensation" within the limits of which the annual compensation ascertained under Step 1 is included and read the member's "Average Annual Spendable Income" in the column corresponding to the member's dependency status. | 
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| | Step 3. Ascertain theCOLAIndex prescribed for the member's duty station.COLAIndexes are listed in Part II Table III. | 
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| | Step 4.� Subtract 100 from theCOLAIndex prescribed for the member's duty station and convert the remainder to a percentage (decimal). | 
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| | Step 5. Multiply the member's "Average Annual Spendable Income" ascertained in Step 2 by the percentage (decimal) derived in Step 4.� The result is the member's annual COLA.� Divide this amount by 360 and carry the result to 5 digits to the right of the decimal.� Multiply the result by the number of days for which the allowance is payable and round to the nearest cent.� The result is the member'sCOLA. | 
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| | EXAMPLE | 
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| | SITUATION:� | 
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| | A member in grade E-8 with 22 years service is assigned to an OCONUS PDS for which Part II Table III prescribesCOLAIndex 122.� The member is accompanied by a spouse and 3 children. The member is entitled toCOLAfor July (31 days). | 
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| | SOLUTION: | 
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| | Step 1. (E-8 with 22 years service) in Table I is $46,418. | 
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| | Step 2.The member�s "Average Annual Spendable Income" in Table II is $27,300 in the column for 4 dependents on the line $45,000-$47,999. | 
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| | Step 3. TheCOLAIndex in Table III for the member�s PDS is 122. | 
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| | Step 4.� Subtracting 100 fromCOLAIndex 122 ascertained in Step 3 results in a remainder of 22.� Converting the remainder (22) to a decimal produces the multiplier .22 to be used in Step 5. | 
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| | Step 5. Multiplying the member's "Average Annual Spendable Income"($27,300) ascertained in Step 2 by the multiplier (.22) ascertained in Step 4 results in an annual COLA of $6,006 (.22 x $27,300 = $6,006).� Divide this amount by 360 and carry the results to 5 digits to the right of the decimal ($6,006 divided by 360 = $16.68333).� Multiply the result ($16.68333) by the number of days for which the allowance is payable (31 days) and round to the nearest penny.� The result ($16.68333 x 31 days = $517.18323) = $517.18) is the member'sCOLA. | 
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| | 3.� Addition of Unique Expense Allowance. | 
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| | To determine the unique expense amount to add to theCOLApayment for selected localities, locate the annual dollar amount in the Part II footnotes.� Divide the annual dollar amount by 360 and carry the result to 5 digits to the right of the decimal.� Multiply the result by the number of days for which the allowance is payable and round to the nearest cent.� Add the result to the member�sCOLA. | 
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| | PART II - COST OF LIVING ALLOWANCES INDEXES | 
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| | TABLE I
 COST-OF-LIVING ALLOWANCES
ANNUAL COMPENSATION (MEMBERS WITHOUT DEPENDENTS)
EFFECTIVE 1 JANUARY 1997 | 
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| | YEARS OF SERVICE������ | 
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| | GRADE
������� UNDER 223468101214161820222426 | 
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| | O10110163113270113270113270113270116780116780122062122062129280129280130122130122130122130122 | 
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| | O9100116102168103881103881103881105966105966109465109465116780116780122062122062122062129280 | 
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| | O89273994867965989659896598102168102168105966105966109465113270116780119120119120119120 | 
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| | O7804198460084600846008754587545913899138994867102168107694107694107694107694107694 | 
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| | O6628896722770510705107051070510705107051072324810438430485769896139196495492 | 
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| | O5533235940362240622406224062240635616599869303732707653078360805278052780527 | 
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| | O4463555313055520555205622957946607226316365254673996883468834688346883468834 | 
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