Federal Register / Vol. 71, No. 148 / Wednesday, August 2, 2006 / Rules and Regulations 43897 

OFFICE OF PERSONNEL 

MANAGEMENT 

5 CFR Part 591 

RIN 3206–AK67 

Cost-of-Living Allowances (Nonforeign 

Areas); COLA Rate Changes 

AGENCY: Office of Personnel 

Management. 

ACTION: Final rule. 

SUMMARY: The Office of Personnel 

Management is issuing final regulations 

to change the cost-of-living allowance 

rates received by certain white-collar 

Federal and U.S. Postal Service 

employees in Alaska, Hawaii, Guam and 

the Northern Mariana Islands, Puerto 

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

changes are the result of living-cost 

surveys conducted in 2002, 2003, and 

2004. 

DATES: Effective date: September 1, 

2006. Implementation date: First day of 

the first pay period beginning on or after 

September 1, 2006. 

FOR FURTHER INFORMATION CONTACT: 

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

(202) 606–4264; or e-mail: 

COLA@opm.gov. 

SUPPLEMENTARY INFORMATION: Section 

5941 of title 5, United States Code, 

authorizes Federal agencies to pay costof-living allowances (COLAs) to whitecollar Federal and U.S. Postal Service 

employees stationed in Alaska, Hawaii, 

Guam and the Northern Mariana 

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

Islands. Executive Order 10000, as 

amended, delegates to the Office of 

Personnel Management (OPM) the 

authority to administer nonforeign area 

COLAs and prescribes certain 

operational features of the program. 

OPM conducts living-cost surveys in 

each allowance area and in the 

Washington, DC, area to determine 

whether, and to what degree, COLA area 

living costs are higher than those in the 

DC area. OPM sets the COLA rate for 

each area based on the results of these 

surveys. 

Background 

The 2002 Caribbean surveys were the 

first OPM conducted using the new 

methodology we adopted pursuant to 

the stipulation of settlement 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. In the Caraballo settlement, 

the parties agreed that if the 

Government adopted and maintained 

certain changes in the COLA program, 

the plaintiffs would be barred from 

bringing suit over these issues. The 

complete stipulation for settlement is on 

OPM’s Web site at http://www.opm.gov/ 

oca/cola/settlement.asp. 

Before the settlement, the parties 

entered into a memorandum of 

understanding under which they 

engaged in a cooperative process to 

study living-cost and compensation 

issues. The research was exhaustive and 

covered essentially all aspects of the 

COLA program. A summary of that 

research is available on OPM’s Web site 

at http://www.opm.gov/oca/cola/ 

research.asp. 

Exhibit A of the Caraballo settlement 

agreement lists 26 ‘‘Safe Harbor 

Principles’’ that outline the changes to 

which the parties agreed. These 

principles formed the basis for a new 

COLA methodology, which OPM 

incorporated into its regulations. In 

developing these regulations, OPM 

consulted with the Survey 

Implementation Committee (SIC), which 

was established under the Caraballo 

settlement and is composed of 

representatives of the parties in 

Caraballo. The SIC in turn consulted 

with the Technical Advisory Committee 

(TAC), which was also established 

under the Caraballo settlement and is 

composed of three economists with 

expertise in living-cost comparisons. 

OPM published proposed regulations 

incorporating the new methodology in 

the Federal Register for notice and 

comment on November 9, 2001, at 66 FR 

56741, and a final rule on May 3, 2002, 

at 67 FR 22339. The SIC and the TAC 

also worked closely with OPM in 

preparing for and implementing the 

2002, 2003, and 2004 COLA surveys. 

COLA Surveys 

In 2002, OPM surveyed Puerto Rico, 

the U.S. Virgin Islands, and the 

Washington, DC, area. We published the 

results of these Caribbean surveys in the 

Federal Register on February 9, 2004, at 

69 FR 6020. In 2003, OPM surveyed 

Anchorage, Fairbanks, and Juneau, 

Alaska, and the Washington, DC, area. 

We published the results of these Alaska 

surveys on March 12, 2004, at 69 FR 

12002. In 2004, OPM surveyed 

Honolulu County, Kailua Kona, Hilo, 

Kauai County, Maui County, Guam, and 

the Washington, DC, area. We published 

the results of these Pacific surveys on 

August 4, 2005, at 70 FR 44989. OPM 

also published the results of new shelter 

(rent) price analyses for the 2002 

Caribbean surveys and the 2003 Alaska 

surveys in a Federal Register notice 

dated August 4, 2005, at 70 FR 44978. 

COLA Rate Changes 

As described in the survey reports, 

OPM compared the results of each of the 

COLA area surveys with the results of 

the DC area survey to derive a livingcost index for each of the COLA areas. 

We then added adjustment factors as 

provided in 5 CFR 591.227. The final 

results indicate an increase in the COLA 

rates for the U.S. Virgin Islands and 

Kauai County, Maui County, and Hawaii 

County, HI; no change in the COLA 

rates for the Rest of the State of Alaska, 

Guam and the Northern Mariana 

Islands, and Honolulu County, HI; and 

a reduction in the COLA rates for Puerto 

Rico and Anchorage, Fairbanks, and 

Juneau, Alaska. 

Table 1 shows the old and new COLA 

rates and the survey living-cost indexes 

for each area. Under 5 CFR 591.228(c), 

COLA rate reductions are limited to no 

more than 1 percentage point per year. 

The living-cost indexes OPM previously 

published at 70 FR 44979 and 70 FR 

44990 have been amended based on 

changes we implemented in response to 

comments we received. These changes 

are described in the section of this 

notice on Hedonic Regressions. OPM is 

publishing the new living-cost indexes 

in a Federal Register notice that 

accompanies this final rule. 

TABLE 1.—COLA RATES AND LIVING-COST INDEXES

Allowance area/category 

Old COLA 

rates 

(percent) 

Previously 

published 

living-cost 

indexes 

Revised livingcost indexes 

New COLA 

rates 

(percent) 

Puerto Rico ...................................................................................................... 11.5 105.10 103.04 10.5 

U.S. Virgin Islands ........................................................................................... 22.5 122.84 122.53 23.0 

Anchorage, Alaska ........................................................................................... 25.0 113.79 113.64 24.0 

Fairbanks, Alaska ............................................................................................ 25.0 115.61 115.62 24.0 


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43898 Federal Register / Vol. 71, No. 148 / Wednesday, August 2, 2006 / Rules and Regulations 

TABLE 1.—COLA RATES AND LIVING-COST INDEXES—Continued 

Allowance area/category 

Old COLA 

rates 

(percent) 

Previously 

published 

living-cost 

indexes 

Revised livingcost indexes 

New COLA 

rates 

(percent) 

Juneau, Alaska ................................................................................................ 25.0 118.03 118.09 24.0 

Rest of the State of Alaska ............................................................................. 25.0 136.00 135.84 25.0

Honolulu County, Hawaii ................................................................................. 25.0 127.78 125.80 25.0

Hawaii County, Hawaii ..................................................................................... 16.5 119.11 117.25 17.0 1

Kauai County, Hawaii ...................................................................................... 23.25 130.58 127.63 25.0 

Maui County, Hawaii ........................................................................................ 23.75 134.49 131.50 25.0 

Guam and the Northern Mariana Islands ........................................................ 25.0 127.65 127.40 25.0 

The 2004 Pacific survey report indicated a COLA rate increase for Hawaii County, HI, from 16.5 percent to 19 percent. OPM, however, refined 

the rental survey hedonic regressions after taking into consideration comments received. The refined methodology results in a 17 percent COLA 

rate for Hawaii County. The refinements OPM adopted pursuant to comments are discussed in the section on Hedonic Regressions. 

OPM published a proposed rule in the 

Federal Register on August 4, 2005, at 

70 FR 44976, inviting comments on the 

COLA rate changes. Approximately 

2,400 commenters responded to the 

proposed rule. Most of the comments 

were from Federal employees or unions 

representing Federal employees. Many 

of the commenters expressed 

opposition, without further comment, to 

the planned COLA rate reductions. 

Other commenters addressed specific 

issues and concerns with the COLA 

surveys. One agency and two 

commenters concurred with the rate 

changes. We summarize and evaluate 

the substantive comments in the 

‘‘Discussion of Comments’’ section that 

follows. 

Discussion of Comments 

Rising Living Costs 

Many of the commenters said OPM 

should not reduce COLA rates because 

their living costs were increasing. A 

number of commenters provided or 

referred to publications showing rising 

costs in their COLA area. By law, OPM 

must compare costs in the COLA areas 

with costs in the Washington, DC, area 

and adjust COLA rates according to the 

relative difference. Therefore, if living 

costs rise faster in the COLA area than 

in the DC area, we increase the COLA 

rate subject to the statutory maximum. 

If living costs rise faster in the DC area 

than in the COLA area, we reduce the 

COLA rate, but by no more than 1 

percentage point per year, as provided 

by 5 CFR 591.228(c). 

Numerous commenters noted that 

certain costs have increased since OPM 

conducted the survey in their COLA 

area and that the survey data were 

outdated. Many commenters requested 

that OPM survey again. They cited the 

cost of gasoline, housing, utilities, 

grocery items, medical needs, various 

fees and taxes, and other items. OPM 

recognizes that prices for various items 

will increase in the COLA areas and/or 

the DC area between surveys. We collect 

prices in each survey area every 3 years 

on a rotating basis according to a 

schedule agreed upon by the parties in 

the Caraballo settlement. Beginning 

with the publication of the 2005 

Caribbean and DC COLA survey results, 

OPM will adjust price indexes for areas 

not surveyed based on the relative 

change in the Consumer Price Index 

(CPI) for the COLA area compared with 

the CPI for the Washington, DC, area. 

Pursuant to the Caraballo settlement, we 

are not implementing CPI adjustments 

at this time. 

Several commenters said their current 

living costs are considerably higher than 

living costs at their previous duty 

station in the lower 48 States. By law, 

OPM must compare the cost of living in 

the COLA areas with the cost of living 

in the Washington, DC, area. 

Consumer Goods 

Several commenters noted that some 

goods available in the contiguous States 

are not available in their COLA area. 

Other commenters said certain items, 

such as water softeners, are necessary in 

their COLA area, but not in the DC area. 

Two commenters said they pay for 

certain services, such as garbage 

collection, that are covered by taxes in 

some other areas. Issues such as these 

were discussed extensively during the 

COLA litigation. As a result of the 

Caraballo settlement and as provided by 

5 CFR 591.227, OPM adds an 

adjustment factor to the price index for 

each COLA area to reflect differences in 

need, access to and availability of goods 

and services, and quality of life in the 

COLA area relative to the DC area. With 

regard to the above comments, we note 

that several water softener companies 

do business in the DC area and assume 

this reflects a need for some DC area 

residents to have water softeners. We 

also note that residents in several 

communities in the DC area pay directly 

for garbage collection. 

One commenter compared prices for a 

number of items at a department store 

in Puerto Rico with mainland prices 

listed on the store’s Internet site, 

showing the prices for these items in 

Puerto Rico to be higher. The same 

commenter also remarked on the high 

cost of vehicles, including shipping, in 

Puerto Rico. Other commenters also 

noted that many consumer goods must 

be shipped to COLA areas at high cost. 

In each of the annual surveys, OPM 

contacted over 900 outlets and collected 

more than 4,600 prices on over 240 

items representing typical consumer 

purchases. We surveyed the final cost to 

the consumer of services or items, 

including automobiles. The final cost 

includes any overhead, transportation 

and shipping costs, taxes, competition, 

and other price influences. 

Additionally, OPM surveyed catalog 

prices for a number of items and 

included in the price the costs for 

shipping, sales tax, and excise tax, 

which are often higher in the COLA area 

relative to the Washington, DC, area. 

Inequity Among Areas 

Many commenters claimed the COLA 

rate reductions in Puerto Rico were 

discriminatory but did not elaborate. 

Some commenters, however, noted that 

Puerto Rico historically has had the 

lowest COLA rate of all of the COLA 

areas. 

OPM conducts COLA surveys using 

the same methodology in all areas. For 

many years, OPM’s surveys have 

indicated that COLA rates should be 

lower in several COLA areas. However, 

litigation and legislation barred OPM 

from implementing COLA rate 

reductions. The bars have now expired, 

and we are implementing rate 

reductions in certain areas. In the 

future, it is possible that there may be 

more differentiation among COLA rates 

than there is today. 

Several commenters questioned the 

data collectors’ familiarity with Puerto 


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Rico and knowledge of the Spanish 

language. OPM used data collectors in 

Puerto Rico who spoke Spanish and had 

formerly resided in Puerto Rico. In 

addition, the two non-rental OPM data 

collectors were accompanied by 

observers from the Puerto Rico COLA 

Advisory Committee (CAC), which is 

composed of current Federal employees 

who live in Puerto Rico and speak 

Spanish. 

Before each survey, OPM establishes 

a CAC in each of the survey areas. As 

described in 5 CFR 591.243, each CAC 

is composed of approximately 12 agency 

and employee representatives from the 

survey area and two representatives 

from OPM. To help OPM prepare for the 

COLA surveys, OPM and the CACs held 

3-day meetings in each area to be 

surveyed to plan the COLA surveys. 

During the survey, the CAC members 

assisted OPM staff in collecting nonrental data, and after the survey the CAC 

members had the opportunity to review 

all of the survey results, including the 

results of the rental survey. Although 

CAC members helped plan the rental 

survey and had the opportunity to 

review the rental survey results in 

detail, CAC members did not participate 

in the rental data collection as 

observers. 

A local union in Puerto Rico stated 

that in the rental survey, OPM treated 

Puerto Rico COLA employees in a 

disparate fashion because of national 

origin and without regard to unique 

linguistic and cultural differences. The 

union cited misspellings in the rental 

data as evidence that the data collectors 

encountered a serious language barrier. 

The OPM contractor that surveyed 

rental properties in Puerto Rico also 

employed Spanish-speaking data 

collectors, some of whom were or are 

residents of Puerto Rico. Although there 

may have been misspellings in business 

names and street addresses, we believe 

the overall quality of the rental data was 

good and reflected the COLA survey’s 

specifications for rental prices in Puerto 

Rico. 

Rental Surveys 

OPM also received from the local 

union in Puerto Rico extensive 

comments on the Caribbean and DC area 

rental surveys. A large number of 

commenters wrote in support of the 

union’s comments, made similar 

comments, or addressed other issues 

relating to the rental surveys. Many of 

the comments addressed 2005 survey 

issues based on pre-publication rental 

data OPM provided to the Puerto Rico 

CAC for review. Because we have not 

yet published the 2005 survey results 

and because the Puerto Rico rate 

reduction is based on the 2002 

Caribbean survey results, we are 

responding in this final rule to the 

comments as they apply to the 2002 

survey. 

The union and other commenters 

asserted that the rental survey did not 

accurately reflect the areas or the types 

of housing units where Federal 

employees live in Puerto Rico, was 

conducted in a careless and negligent 

manner, and was conducted differently 

in Puerto Rico than in the DC area and 

the U.S. Virgin Islands. Other 

commenters in Puerto Rico charged that 

the rental survey was inaccurate, unfair, 

and discriminatory, and many 

challenged the veracity, reliability, and 

adequateness of the rental data. 

OPM hired an experienced contractor 

to collect rental data in each area, and 

the data were collected in essentially 

the same manner in all areas. In Puerto 

Rico, we directed the contractor to 

collect in the San Juan/Caguas area and 

in areas east of San Juan, including the 

Roosevelt Roads area. We selected these 

areas based on the results of the 1992/ 

93 Federal Employee Housing and 

Living Patterns Survey, which provided 

information on where Federal 

employees live. As described in the 

survey report, OPM collected over 80 

housing characteristics on more than 

400 rental observations throughout this 

area of Puerto Rico and over 900 

observations in the Washington, DC, 

area. The housing characteristics were 

described in Appendix 4 of the survey 

report (69 FR 6047). 

Pursuant to the Caraballo settlement, 

OPM used hedonic regression analysis, 

which is a type of statistical analysis, to 

compare rents in the COLA areas with 

rents in the DC area. The use of hedonic 

regressions allows OPM to hold quantity 

and quality of housing constant to make 

rental rate comparisons. The hedonic 

regressions are described in the survey 

notice at 69 FR 6029 and Appendix 5 at 

69 FR 6048. (As described in the notice 

of August 4, 2005, at 70 FR 44798, OPM 

revised these hedonic regressions and 

published new rent indexes.) Therefore, 

we believe the rental surveys and 

analyses were conducted in a fair and 

professional manner in all of the COLA 

areas. 

The union also noted that a high 

percentage of the Puerto Rico 

observations were gathered from ‘‘drive 

by’’ listing sources. The contractor 

collects information from five types of 

sources: local newspaper/publication, 

Internet, agent/broker, drive-by/sign 

posted, and other. The contractor 

collected data from all types except 

‘‘other’’ in both Puerto Rico and the DC 

area, but the distribution of observations 

by listing source type varied by area. To 

determine whether listing source 

influenced rental rates, OPM added 

listing source as a variable in the 

hedonic regression analysis. We found 

that the variable was statistically 

significant, but that it raised the 

standard error of the survey area 

parameter estimates. Therefore, we are 

not using listing source as a variable in 

the final hedonic regression. (See the 

section of this notice on Hedonic 

Regressions.) 

The union also stated that a 

considerable percentage of the rental 

observations were from individuals who 

refused to provide some or all selfidentifying information (i.e., the 

individual’s name and/or his/her home 

or business address). Approximately 30 

percent of the rental observations in 

Puerto Rico were from such individuals, 

and approximately 4 percent of the 

observations in the DC area were from 

such individuals. As with listing 

sources, OPM added self-identification 

refusal as a variable to the hedonic 

regression analysis. We found that selfidentification refusal was not a 

statistically significant variable and are 

not using it in the final hedonic 

regression. 

The union and a number of other 

commenters believe OPM should have 

allowed observers to accompany the 

contractor on the rental surveys in 

Puerto Rico. The contract did not 

provide for rental data collection 

observers to accompany contractor data 

collectors, and we determined that a 

contract modification to allow observers 

would increase contract costs 

significantly. We are currently exploring 

with the contractor how rental data 

collection observers might be involved 

in future COLA surveys. 

Various commenters noted expenses 

that affect the cost of shelter in their 

area. A number of commenters said 

employees in Puerto Rico pay more for 

living in gated communities or incur 

costs for security systems because of the 

high crime rate. One commenter 

remarked on higher mortgage rates in 

Puerto Rico. A commenter from Alaska 

noted that some properties require water 

wells. To the extent that these 

necessities influence the rental rate for 

a property, they are captured by the 

rental survey. The rental survey also 

captures any separate security fees 

added to rents. 

One commenter asked why the COLA 

survey did not compare homeowner 

data. Under the Caraballo settlement, 

the parties agreed to adopt a rental 

equivalence approach similar to the one 

the Bureau of Labor Statistics uses for 

the Consumer Price Index. Rental 


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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., 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. 

The same commenter said one of the 

apartment units surveyed in the 2003 

Juneau survey was listed as 960 square 

feet, but she said the property was 

actually 690 square feet. OPM asked the 

contractor to verify the information. The 

contractor found that the units in this 

apartment complex varied in size and 

that some are 690 square feet, while 

others are 960 square feet. The unit in 

the Juneau rental database was correctly 

identified at 960 square feet. 

The same commenter also objected to 

assigning all two-bedroom apartments to 

the same class. For the purposes of 

drawing the rental survey sample, OPM 

classifies rental units by location into 

six broad categories. The six categories 

are as follows: Class A—four bedroom, 

single family unit not to exceed 3200 

square feet; Class B—three bedroom, 

single family unit not to exceed 2600 

square feet; Class C—two bedroom, 

single family unit not to exceed 2200 

square feet; Class D—three bedroom 

apartment unit not to exceed 2000 

square feet; Class E—two bedroom 

apartment unit not to exceed 1800 

square feet; and Class F—one bedroom 

apartment unit not to exceed 1400 

square feet. OPM uses this information 

only to draw the survey sample. During 

the survey, OPM obtains information on 

more than 80 housing characteristics, 

including type, actual square footage, 

number of bedrooms and bathrooms, 

and other characteristics of each rental 

unit. Instead of comparing houses 

within each of the six broad classes, we 

use the detailed characteristics of each 

rental unit and hedonic regressions as 

described below to hold these 

characteristics constant between the 

COLA and Washington, DC, area to 

make rental price comparisons. 

One commenter asserted that OPM’s 

contractor determined most squarefootage measurements without visiting 

the property. OPM’s contractor visited 

every property and used, where 

appropriate, special equipment to 

estimate the square footage of living 

space. The contractor also used livingspace information provided by brokers, 

realtors, owners, property tax records, 

and other reliable sources. 

Hedonic Regressions 

As described in the previous section, 

OPM received several comments 

concerning the rental survey, some of 

which led us to revisit the hedonic 

regression analyses we use to compute 

rental indexes. As described at 69 FR 

6029 and Appendix 1 at 70 FR 44979, 

OPM used hedonic regression analysis, 

which is a type of multiple linear 

regression analysis, to compare rents in 

the COLA areas with rents in the DC 

area. Multiple linear regression is used 

to determine how the dependent 

variable (in this case, rent) is influenced 

by one or more independent variables 

(in this case, the characteristics of the 

rental unit including some aspects of 

the neighborhood). As is common in 

this type of analysis and as was done in 

the research leading to the Caraballo 

settlement, OPM used semi-logarithmic 

regressions. The regression produces 

parameter estimates for each 

independent variable, including survey 

area. A parameter estimate is an 

estimate of the influence of rental 

characteristics or variables on rent of a 

dwelling unit. Variables may be 

continuous—like square footage, 

number of bedrooms, or number of 

bathrooms—or class variables, like 

external condition (good, fair, etc.), 

availability of air conditioning (yes, no), 

or the particular COLA survey area in 

which the rental unit is located. For 

example, ‘‘Puerto Rico,’’ ‘‘St. Croix,’’

and ‘‘St. Thomas/St. John’’ are the 

Caribbean COLA survey area class 

variables for which parameter estimates 

are computed. 

COLA survey area parameter 

estimates are of greatest interest in the 

COLA rental model because, once 

converted, they become the survey area 

rent index holding all of the other rental 

characteristics in the regression 

constant. In other words, the exponent 

of the survey area parameter estimate 

(i.e., after the estimate is converted from 

natural logarithms with a correction for 

a slight bias caused by the use of 

logarithms) multiplied by 100 is the 

survey area’s rent index. This index 

reflects the difference in rents for the 

COLA survey area relative to the 

Washington, DC, area, while (in effect) 

holding other significant housing 

characteristics constant. 

To select the variables to use in the 

model, OPM adopted a methodology 

developed by the TAC and OPM, in 

consultation with the SIC. The 

methodology OPM used to produce the 

rent indexes published in the notices 

(70 FR 44978 and 70 FR 44989) that 

accompanied the proposed rule was an 

objective, multi-step process by which 

OPM eliminated variables that were not 

statistically significant. After reviewing 

the results of hedonic regressions OPM 

performed in response to comments we 

received on the rental survey, the TAC 

recommended that we refine the 

methodology to also eliminate variables 

that decreased the precision of the rent 

index. Therefore, OPM modified the 

variable selection process to eliminate 

variables that are not statistically 

significant and/or decrease the precision 

of the rent index. The refined 

methodology produces an improved 

hedonic regression model with 

somewhat different rent indexes than 

those shown in the survey notices. (See 

notice that accompanies this rule.) 

A commenter from Puerto Rico 

supported in general the use of hedonic 

techniques, but was critical of the 

variables in the OPM regression model. 

The commenter noted a number of 

characteristics he thought OPM should 

have included. OPM collected most of 

the characteristics the commenter 

suggested. (See Appendix 4 at 69 FR 

6047.) We then processed the 

characteristics using the methodology 

described above and included many of 

them (e.g., square footage, number of 

bedrooms and bathrooms) in the final 

hedonic regression analysis. Therefore, 

although OPM collects more than 80 

rental unit characteristics, the multistep process described above produces a 

hedonic regression model with fewer 

characteristics, i.e., those that are 

statistically most important and increase 

precision in terms of the rent indexes. 

OPM does not collect some of the 

variables (e.g., occupancy ratio) noted 

by the commenter. These variables are 

often included in studies related to the 

appraised value of properties, 

particularly apartment complexes, 

because they might be important to a 

prospective commercial buyer. We do 

not collect information such as 

occupancy ratios, however, because 

they are not important for renters of 

single units within a complex. 

The commenter noted that location is 

an important variable and 

recommended collecting information on 

neighborhoods and ‘‘distance to major 

employment centers.’’ OPM added 

distance as a variable in the hedonic 

regression analysis by computing the 

distance from each rental observation to 

the major Federal building or 

intersection in each survey area. We 

then treated distance as any other 

variable in the model and examined its 

significance and its impact. As it turned 

out, distance did not enter as a variable 

in any of the final models because it 

either was not significant or decreased 

the precision of the rent index. 

With regard to neighborhoods, as 

shown in Appendix 4 at 69 FR 6047, 

OPM already collects information that 

reflects the quality of the neighborhood. 


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We use information from the Bureau of 

the Census to introduce additional 

variables to the hedonic regressions that 

may reflect the quality of the 

neighborhood. To do this, we identify 

the census tract within which each 

rental observation is found and then add 

variables, such as median income, 

percent school age persons, and percent 

of people in the area with B.A. degrees 

or higher, to the hedonic regressions. 

We process these characteristics using 

the methodology described above and 

those that are statistically significant 

and increase precision are used in the 

final hedonic regression analysis. 

OPM was not able to add census tract 

data to the 2002 survey. We did not 

have longitude and latitude coordinates 

for the 2002 rental observations, and we 

are not aware of any software product 

that could provide this information 

using Puerto Rico and U.S. Virgin 

Islands addresses. We note, however, 

that we collected longitude and latitude 

information in the 2005 Caribbean 

survey, and we anticipate using census 

tract data in the analysis of the rental 

survey results. 

The commenter described a type of 

logit model that appraisers find useful 

in distinguishing ‘‘atypical’’ apartment 

complexes—possibly an important tool 

in the appraisal field. Further, the logit 

model is useful when the dependent 

variable is limited in range (e.g., the 

probability of buying an apartment 

building of given characteristics) but is 

not appropriate for a continuous 

variable, like rents for similar 

accommodation across cities, which is 

the goal of OPM analysis. 

The commenter said OPM did not say 

which statistical package it used and 

did not describe its analyses. As stated 

at 70 FR 44978, OPM used SAS, which 

is a common proprietary statistical 

package. Appendices 1 and 2 at 70 FR 

44979 show the details of the regression 

models OPM used and the results of the 

regressions. 

The commenter also said OPM should 

provide the statistical procedures used 

for the hedonic regressions to the CACs 

for review. OPM provides the CACs 

with COLA survey materials that 

explain regression analysis, contain 

graphs and charts, and provide the same 

details about the rental survey and 

hedonic regressions OPM publishes in 

its Federal Register notices. In addition, 

OPM staff meets with the CACs to 

explain the procedures used, go over the 

hedonic regression results, and answer 

questions. 

Locality Pay and Retirement 

Numerous commenters said Federal 

employees in the COLA areas should 

receive locality pay. Several requested 

that OPM replace the COLA rate with 

locality pay or take DC area locality pay 

into consideration when setting COLA 

rates. Two commenters noted that the 

Rest of U.S. (RUS) locality pay rate is 

higher than the COLA rate in Puerto 

Rico. One commenter said OPM should 

set the lowest COLA rate to be 

equivalent to the RUS locality pay rate. 

Several commenters noted that locality 

pay is included in base pay for 

retirement purposes, while COLAs are 

not included. One commenter said that 

not considering COLAs in retirement 

calculations creates a disincentive to 

retire in a COLA area. Another 

commenter said that employees in the 

COLA areas have to save more for 

retirement. 

The Federal Employees Pay 

Comparability Act of 1990 (FEPCA) 

authorizes locality pay only for Federal 

employees in the contiguous 48 States 

and Washington, DC. OPM cannot 

consider DC area locality pay or set 

COLA rates at certain locality pay levels 

because doing so would be tantamount 

to implementing locality pay outside the 

48 States. Additionally, OPM cannot 

credit COLAs in the retirement 

calculation because 5 U.S.C. 8331(3) 

and 8401(4) exclude allowances from 

base pay for Federal retirement 

purposes. Changes in law would be 

required to extend locality payments to 

Federal employees in the COLA areas or 

to include COLAs in base pay for 

Federal retirement purposes. 

Recruitment and Retention 

Many commenters believe COLA 

reductions would cause recruitment and 

retention problems. OPM is concerned 

about the Government’s ability to recruit 

and retain a well-qualified workforce 

and notes that the Government has 

several pay authorities that are available 

to address recruitment and retention 

problems. Among these are special 

salary rates and recruitment, retention, 

and relocation incentives. 

Financial Effect 

Many commenters were concerned 

about the impact of COLA reductions on 

personal financial commitments, such 

as mortgages, and other financial 

obligations. Several commenters stated 

that the reductions would have an 

adverse effect on the local economy of 

the COLA area. As noted above, OPM’s 

authority to set COLA rates is 

established in 5 U.S.C. 5941. However, 

our regulations provide that COLA rates 

may be reduced by no more than 1 

percentage point in any 12-month 

period, which serves to minimize the 

financial impact of COLA rate 

reductions. 

Utility Costs 

Several commenters remarked that 

water, electricity, and other utility costs 

are high in Alaska and Puerto Rico. One 

commenter noted that increasing energy 

costs also affect costs for shelter, 

transportation, and consumer goods. 

OPM surveyed utility costs and 

included these costs in the price 

comparisons. We also surveyed costs for 

shelter, transportation, and consumer 

goods and services. The prices of goods 

and services include any energy and/or 

local transportation costs associated 

with making these items available for 

sale. 

Some commenters reported that water 

utility prices have or are going to 

increase significantly in Puerto Rico. To 

the extent that such increases occur, 

they will be reflected in the results of 

the 2005 survey or in subsequent 

surveys and/or adjustments. 

Transportation 

Several commenters noted the cost of 

long distance travel from the COLA 

areas to areas in the continental United 

States. The commenters requested that 

OPM consider time, distance, and 

excessive travel expenses in setting 

COLA rates. Two other commenters 

noted higher air transportation costs in 

Juneau because of the lack of airline 

competition. 

The COLA methodology takes travel 

expenses into account in two ways. 

First, OPM compares the cost of air 

travel from the various COLA areas to 

common destinations in the contiguous 

States with the cost of air travel from the 

DC area to those same destinations. This 

would capture any higher ticket prices 

that result from reduced competition. 

Second, as provided in 5 CFR 591.227, 

OPM adds to the overall price index for 

the COLA area an adjustment factor that 

reflects differences in need, access to 

and availability of goods and services, 

and quality of life in the COLA area 

relative to the DC area. This adjustment 

factor is designed to address such 

considerations as the difficulty of 

traveling long distances. 

Medical Services 

Several commenters believe the 

survey underestimated the cost and 

restricted availability of medical 

services in Alaska. They also noted that 

doctor visits and dental care are more 

expensive in the COLA areas. One 

commenter said none of the Federal 

health benefit plans in Juneau offer 

supplemental dental coverage. Another 

commenter felt that medical care in 


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Juneau was limited, resulting in higher 

health care costs and inferior health 

care. Several commenters said there was 

a need for costly travel outside the area 

to obtain some medical services. 

OPM surveys the prices of several 

medical services (including dental 

services) and items in each COLA area 

and in the DC area. The medical 

services index reflects any relatively 

higher local prices. The availability of 

medical services is not something OPM 

prices or quantifies. Instead, it is part of 

the adjustment factor OPM adds to the 

price index to reflect differences in 

need, access to, and availability of goods 

and services, and quality of life in the 

COLA areas relative to the Washington, 

DC, area. 

One commenter noted that there were 

no Health Maintenance Organizations 

(HMOs) in Juneau. As described at 69 

FR 12005, OPM compared average 

health insurance premium costs in the 

COLA area with average health 

insurance premium costs in the DC area. 

Therefore, the health insurance 

premium index reflects higher local 

costs to the extent that an area has only 

higher cost plans available (i.e., to the 

extent HMOs are not available). 

Quality of Life 

A number of commenters stated that 

the COLA reductions would affect their 

quality of life. One commenter from 

Alaska said the COLA is an incentive 

that helps with the isolation, extreme 

climate, support issues, and darkness. 

As noted under the Transportation 

section, OPM adds adjustment points in 

part to compensate for differences in 

quality of life. 

Taxes 

Several commenters mentioned 

increased sales, excise, and local taxes 

in Puerto Rico. Another commenter 

noted that Federal employees in North 

Pole, Alaska, must pay a sales tax. OPM 

adds sales tax and, where applicable, 

excise and other taxes to the prices it 

collects. In Puerto Rico, excise taxes 

paid by importers and distributors are 

part of the price for the item. In the case 

of catalog items, OPM adds such taxes 

as applicable. To the extent any recent 

tax increases in Puerto Rico have 

occurred, they will be reflected in the 

results of the 2005 survey or in 

subsequent surveys and/or adjustments. 

Local Conditions 

Several commenters from Puerto Rico 

noted additional costs faced by Federal 

employees on the island because of 

hurricanes and blackouts. Among the 

costs mentioned were generators, 

special water tanks, storm shutters, 

bottled water, road damage, electrical 

equipment repair, and higher property 

insurance. OPM discusses property 

insurance under the heading Insurance. 

As noted under the Transportation 

section, OPM adds adjustment points 

pursuant to 5 CFR 591.227 in part to 

compensate for differences in quality of 

life. 

A number of commenters also 

remarked on weather conditions in 

Alaska. They noted additional costs, 

such as four-wheel drive, studded tires, 

winter clothes, high electric and heating 

bills, and vehicle maintenance, because 

of the long winters, icy roads, and 

temperatures that sometimes extend to 

40 degrees or more below zero. As 

described in Appendix 3 at 69 FR 

12027, OPM priced in Alaska a fourwheel drive vehicle with an engine 

block heater and regular and studded 

tires. We also priced parkas, boots, and 

other cold weather items. The utility 

model we use reflects Alaska’s higher 

home energy costs. 

Insurance 

Several commenters noted high 

property insurance rates as a result of 

escalating housing prices, hurricanes, or 

property located in flood zones. OPM 

uses a rental equivalence approach to 

determine shelter costs. The rental 

equivalence approach compares the 

rental values of homes. Home insurance 

is implicit in these values. Therefore, 

we do not survey any type of 

homeowner insurance, but we do survey 

renter insurance. In doing so, we 

include the price of any special riders 

necessary to cover hurricane or typhoon 

damage. 

Education 

Several commenters cited the 

necessity for placing children in private 

schools in Puerto Rico. The commenters 

noted language, quality, and danger 

issues with the public schools. One 

commenter said that the quality of 

Puerto Rico public schools is poor, 

while the DC area has some of the best 

public schools in the nation. Another 

commenter said employees in Puerto 

Rico who want to compete for 

employment opportunities in the 

mainland must place their children in 

costly English language private schools. 

Several commenters remarked on the 

high cost of private school tuition, 

school supplies, and various school fees 

in Puerto Rico. Other commenters said 

the Department of Defense school in San 

Juan is not available to many Federal 

employees, so they must pay for private 

schools. One commenter from the island 

of Hawaii said school choices and day 

care facilities there are limited, and the 

only private school for high school 

students is in Waimea. Another 

commenter said private schools in 

Juneau are limited, increasing costs for 

those who must use out-of-state private 

schools. 

OPM surveyed K–12 private 

education in the COLA and DC areas 

and computed an average tuition price 

that reflected all grade levels. Because 

not everyone sends children to private 

school, we made an additional special 

adjustment for K–12 education by 

applying ‘‘use factors.’’ These use 

factors reflect the relative extent to 

which Federal employees make use of 

private education in the COLA and DC 

areas. OPM described the process used 

for K–12 private education in the 

Caribbean region at 69 FR 6030, in 

Alaska at 69 FR 12007, and in the 

Pacific region at 70 FR 44995. 

Two commenters said many Federal 

employees in Puerto Rico send their 

children to colleges in the continental 

United States. A commenter from 

Alaska said there were limited colleges 

and universities in Alaska, so many 

employees send their children to 

colleges in the lower 48 States and incur 

extra costs for non-resident tuition and 

transportation. Another commenter said 

tuition at the University of Puerto Rico 

will be increasing. Two commenters 

said Federal employees and their 

families are not eligible for student 

grants in Puerto Rico. 

OPM does not measure the price of 

college and university education 

because where employees send their 

dependents to school is often a matter 

of personal preference. For example, 

many Federal employees in the 

Washington, DC, area send their 

children to colleges and universities 

outside the DC area. To the extent OPM 

leaves an item, such as college 

education, out of the COLA model, the 

effect is as if OPM included it in the 

model at the overall price index for the 

area. Therefore, if prices are generally 

higher in a COLA area relative to the DC 

area, the implicit assumption is that 

college and university prices are higher 

to the same extent. Any additional costs 

would be reflected in the adjustment 

points added pursuant to 5 CFR 

591.227. 

Geographic Coverage 

One commenter said there should be 

separate COLA rates for the east (Kona) 

and west (Hilo) sides of the island of 

Hawaii because prices are not equal. 

OPM does not plan to split Hawaii 

County into separate areas at this time, 

but OPM may reconsider that decision 

after additional surveys have been 

completed using the methodology 


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Federal Register / Vol. 71, No. 148 / Wednesday, August 2, 2006 / Rules and Regulations 43903 

adopted pursuant to the Caraballo 

settlement. 

One commenter requested that OPM 

consider Eielson Air Force Base as part 

of the Rest of Alaska COLA area. The 

commenter noted that Eielson is 26 

miles from Fairbanks and that it is 

dangerous to drive that distance for 

groceries, the hospital, or the airport 

during the winter months. The 

commenter suggested changing the 

distance parameter for Fairbanks to 20 

miles. As stated in 5 CFR 591.206(b), the 

head of a department or agency must 

submit a request to OPM to initiate any 

reconsideration of the definition of a 

COLA area. We note that North Pole, 

AK, is only 8 miles from Eielson, and 

that North Pole is part of the Fairbanks 

survey area. OPM surveys a supermarket 

and other businesses in North Pole and 

includes these in the calculation of the 

Fairbanks living-cost index. We do not 

believe it would be appropriate to 

change the definition of the Fairbanks, 

AK, COLA area. 

Another commenter said the cost of 

living in Girdwood, AK, which is 40 

miles outside of Anchorage, is 

significantly higher than in Anchorage. 

The commenter asked that OPM 

consider the effect of the COLA 

reduction on employees living and 

working in outlying communities of 

Anchorage. As noted above, the head of 

a department or agency must submit a 

request to OPM to initiate any 

reconsideration of the definition of a 

COLA area. 

One commenter noted that 5 U.S.C. 

5941 states that COLAs are based on 

‘‘living costs substantially higher than 

in the District of Columbia.’’ The 

commenter said the area OPM uses for 

comparison includes areas in addition 

to the District of Columbia. The 

commenter referred also to Executive 

Order 10000, which uses the term 

‘‘Washington, DC, area’’ but precedes it 

with the phrase ‘‘subject to applicable 

law.’’ The commenter requests that 

OPM survey only the District of 

Columbia. The President directs OPM in 

Executive Order 10000 to designate 

nonforeign areas at locations in which 

living costs are substantially higher than 

in the Washington, DC, area and set 

COLA rates for such areas based on 

these higher living costs. OPM does not 

plan to limit the scope of the 

Washington, DC, area survey to the 

District of Columbia. 

Survey Rates 

An agency and one other commenter 

requested that OPM address the total 

anticipated COLA rate reductions 

projected by the area surveys. OPM 

conducts COLA surveys once every 3 

years and will adjust COLA rates 

pursuant to 5 CFR 591.224, beginning 

with the publication of the results of the 

2005 Caribbean survey. Therefore, we 

cannot predict what COLA rates will be 

in future years. However, with each 

survey notice OPM does publish final 

living-cost indexes that can easily be 

converted to hypothetical COLA rates 

(prior to the 1 percentage point 

limitation on COLA rate reductions) 

with the application of 5 CFR 

591.228(a). This essentially involves 

converting the living-cost index to a 

percentage and rounding the result to 

the nearest whole percentage point. 

Table 1 includes the indexes that can be 

used for this purpose. However, it 

should be noted that future surveys and 

adjustments will likely produce 

different results. 

Employee Involvement 

Several commenters believe 

employees from their area were not 

involved in the COLA surveys. As noted 

above, OPM established and worked 

with local COLA Advisory Committees 

(CACs) in each survey area. 

One commenter asked who 

represented Juneau on the CAC. The 

Juneau CAC was composed of 

representatives from the Juneau Federal 

Executive Association, the Juneau 

COLA Defense Committee, the National 

Federation of Federal Employees, the 

Indian Educators Federation-American 

Federation of Teachers, the National 

Weather Service Employees 

Organization, Professional Airways 

Systems Specialists, the Department of 

Agriculture, the Department of 

Commerce, the Department of the 

Interior, the Department of 

Transportation, and OPM. 

The same commenter wanted to know 

more about Federal employee input into 

the COLA survey, units of measure, and 

formulas used in analyzing the data. 

Federal employees serve on both the SIC 

and the CAC. As explained in the 

Background section, the SIC worked 

closely with OPM as we developed new 

COLA regulations pursuant to the 

Caraballo settlement. The composition 

of the SIC is described in the Caraballo 

stipulation for settlement, which is 

available on OPM’s Web site at http:// 

www.opm.gov/oca/cola/settlement. The 

regulations we adopted describe the 

methodology and formulas used to 

analyze the survey data. These 

regulations can be found on OPM’s Web 

site at http://www.opm.gov/oca/cola/ 

RegsRpts.asp. 

As also explained in this final rule 

OPM worked closely with the CACs to 

plan, conduct, and review the results of 

the COLA surveys. The CACs are 

described in OPM regulations at 5 CFR 

591.240 to 591.244. Additional 

information about the surveys and 

analyses used may be found in the 

survey reports, which are on OPM’s 

Web site at http://www.opm.gov/oca/ 

cola/index.asp. 

Military COLA 

Several commenters thought the 

reductions in the proposed regulation 

applied to the military COLA. These 

reductions apply only to the COLA rates 

paid to certain civilian white-collar 

Federal employees paid under the 

General Schedule and similar pay plans. 

Three commenters remarked on the 

discrepancy between the civilian and 

military COLAs. The Department of 

Defense sets the military COLA using a 

different methodology as authorized 

under separate law. The methodology 

for the civilian nonforeign area COLA 

derives from 5 U.S.C. 5941, Executive 

Order 10000, and the Caraballo 

settlement. 

Military Post Privileges 

One commenter said all Federal 

employees should be allowed to shop at 

military commissaries/exchanges. The 

Department of Defense operates 

commissaries and exchanges. OPM does 

not have authority to regulate 

commissary/exchange access. 

Federal Wage System Employees 

One employee felt Federal Wage 

System (FWS) employees should receive 

the nonforeign area COLA. The law that 

authorizes nonforeign area COLAs (5 

U.S.C. 5941) allows payment of COLAs 

to employees whose rates of pay are set 

by statute. When the COLA law was 

enacted, FWS pay was set 

administratively according to local 

prevailing rates, rather than by statute. 

Currently, FWS rates of pay are not set 

by statute, and OPM cannot extend 

COLAs to FWS employees. 

Communication of Changes 

Three commenters thought OPM did 

not properly communicate the COLA 

reductions to Federal employees. The 

Administrative Procedure Act requires 

agencies to publish regulations in the 

Federal Register as a means of notifying 

the public of rule changes. In addition 

to publishing the proposed regulation in 

the Federal Register, OPM distributed 

the regulation to agencies with a notice 

to be posted on employee bulletin 

boards. OPM also summarized and 

linked to the regulations on its Web site 

at http://www.opm.gov/fedregis/html/ 

aug05.asp and provided copies to COLA 

Advisory Committee members in each 

area. As noted above, OPM received 


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43904 Federal Register / Vol. 71, No. 148 / Wednesday, August 2, 2006 / Rules and Regulations 

more than 2,000 responses from COLA 

area employees during the public 

comment period on the proposed 

regulations. 

Correction 

One commenter pointed out an error 

in the shelter index for Kauai in 

Appendix 7 of the 2004 Survey Report. 

This error was made in typesetting the 

survey notice. The ‘‘1’’ that precedes the 

PEG index belongs to the previous 

column, so that the PEG Weight should 

show ‘‘89.01’’ and the PEG Index should 

show ‘‘118.21.’’ Because it was a 

typesetting error, it does not affect 

OPM’s calculations for Kauai. 

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 this regulation will not 

have a significant economic impact on 

a substantial number of small entities 

because it will 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. 

Linda M. Springer, 

Director. 

■ Accordingly, the Office of Personnel 

Management amends subpart B of 5 CFR 

part 591 as follows: 

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. Revise appendix A of subpart B to 

read as follows: 

Appendix A to Subpart B of Part 591— 

Places and Rates at Which Allowances 

are Paid 

This appendix lists the places approved for 

a cost-of-living allowance and shows the 

authorized allowance rate for each area. The 

allowance percentage rate shown is paid as 

a percentage of an employee’s rate of basic 

pay. The rates are subject to change based on 

the results of future surveys. 

Geographic coverage 

Allowance 

Rate 

(percent) 

State of Alaska: 

City of Anchorage and 80-kilometer (50-mile) radius by road ......................................................................................................... 24.0 

City of Fairbanks and 80-kilometer (50-mile) radius by road .......................................................................................................... 24.0 

City of Juneau and 80-kilometer (50-mile) radius by road .............................................................................................................. 24.0 

Rest of the State .............................................................................................................................................................................. 25.0 

State of Hawaii: 

City and County of Honolulu ............................................................................................................................................................ 25.0 

Hawaii County, Hawaii ..................................................................................................................................................................... 17.0 

County of Kauai ................................................................................................................................................................................ 25.0 

County of Maui and County of Kalawao .......................................................................................................................................... 25.0 

Territory of Guam and Commonwealth of the Northern Mariana Islands ............................................................................................... 25.0 

Commonwealth of Puerto Rico ................................................................................................................................................................ 10.5 

U.S. Virgin Islands ................................................................................................................................................................................... 23.0 

[FR Doc. 06–6624 Filed 8–1–06; 8:45 am] 

BILLING CODE 6325–39–P 


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