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43–090 PDF 2009

S. Hrg. 110–657 

NON-FOREIGN COLA: FINDING AN EQUITABLE 

SOLUTION 

HEARING 

BEFORE THE

OVERSIGHT OF GOVERNMENT MANAGEMENT, 

THE FEDERAL WORKFORCE, AND THE 

DISTRICT OF COLUMBIA SUBCOMMITTEE 

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

FIELD HEARING IN HONOLULU, HAWAII 

MAY 29, 2008 

Available via http://www.gpoaccess.gov/congress/index.html 

Printed for the use of the Committee on Homeland Security 

and Governmental Affairs 

( 

(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 

BRANDON L. MILHORN, Minority Staff Director and Chief Counsel 

TRINA DRIESSNACK TYRER, Chief Clerk 

OVERSIGHT OF GOVERNMENT MANAGEMENT, THE FEDERAL 

WORKFORCE, AND THE DISTRICT OF COLUMBIA SUBCOMMITTEE 

DANIEL K. AKAKA, Hawaii, Chairman 

CARL LEVIN, Michigan 

THOMAS R. CARPER, Delaware 

MARK L. PRYOR, Arkansas 

MARY L. LANDRIEU, Louisiana 

GEORGE V. VOINOVICH, Ohio 

TED STEVENS, Alaska 

TOM COBURN, Oklahoma 

JOHN WARNER, Virginia 

RICHARD J. KESSLER, Staff Director 

JENNIFER TYREE, Chief Counsel 

THOMAS RICHARDS, Professional Staff Member 

JENNIFER A. HEMINGWAY, Minority Staff Director 

JESSICA NAGASAKO, Chief Clerk 

(III) 

C O N T E N T S 

Opening statements: Page 

Senator Akaka .................................................................................................. 1 

WITNESSES 

THURSDAY, MAY 29, 2008 

Charles D. Grimes, III, Deputy Associate Director for Performance and Pay 

Systems, U.S. Office of Personnel Management ................................................ 3 

Bradley B. Bunn, Program Executive Officer, National Security Personnel 

System, U.S. Department of Defense ................................................................. 5 

Jo Ann Mitchell, Manager, Accounting Services, U.S. Postal Service ................ 7 

Joyce Matsuo, President, COLA Defense Committee of Oahu, Inc., on behalf 

of the Oahu and Maui COLA Defense Committees .......................................... 17 

Sharon Warren, President, COLA Defense Committee of Anchorage, Inc., 

on behalf of all Alaska COLA Defense Committees .......................................... 19 

Manuel Q. Cruz, President, COLA Defense Committee of Guam ....................... 21 

Michael FitzGerald, President, Chapter 187, NAVFAC Hawaii, Federal Managers Association .................................................................................................. 23 

Terry Kaolulo, President, Hawaii State Association of Letter Carriers and 

Letter Carrier, Kailua, Hawaii ........................................................................... 25 

ALPHABETICAL LIST OF WITNESSES

Bunn, Bardley B.: 

Testimony .......................................................................................................... 5 

Prepared statement .......................................................................................... 60 

Cruz, Manuel Q.: 

Testimony .......................................................................................................... 21 

Prepared statement .......................................................................................... 102 

FitzGerald, Michael: 

Testimony .......................................................................................................... 23 

Prepared statement .......................................................................................... 105 

Grimes, Charles D., III: 

Testimony .......................................................................................................... 3 

Prepared statement .......................................................................................... 52 

Kaolulo, Terry: 

Testimony .......................................................................................................... 25 

Prepared statement .......................................................................................... 112 

Matsuo, Joyce: 

Testimony .......................................................................................................... 17 

Prepared statement .......................................................................................... 69 

Supplemental testimony .................................................................................. 88 

Mitchell, Jo Ann: 

Testimony .......................................................................................................... 7 

Prepared statement .......................................................................................... 66 

Warren, Sharon: 

Testimony .......................................................................................................... 19 

Prepared statement .......................................................................................... 96 

Page

IV 

APPENDIX 

PowerPoint presentation entitled ‘‘Non-Foreign Area Retirement Equity Assurance Act of 2008, (S. 3013)’’ submitted by Senator Akaka .......................... 39 

Prepared statements: 

American Federal of Government Employees, AFL–CIO .............................. 116 

Hon. Luis G. Fortuno, a Representative in the U.S. Congress from Puerto 

Rico ................................................................................................................. 120 

Colleen M. Kelley, National President, National Treasury Employees 

Union ............................................................................................................. 122 

Benjamin T. Toyama, Western Federal Area Vice President, International 

Federation of Professional and Technical Engineers (IFPTE), AFL– 

CIO and CLC and President, IFPTE Local 121, Pearl Harbor Naval 

Shipyard ........................................................................................................ 126 

Pedro Romero, Vice President, Puerto Rico COLA Defense Committee ...... 133 

(1) 

NON-FOREIGN COLA: FINDING AN EQUITABLE 

SOLUTION 

THURSDAY, MAY 29, 2008 

U.S. SENATE, SUBCOMMITTEE ON OVERSIGHT OF GOVERNMENT

MANAGEMENT, THE FEDERAL WORKFORCE, AND THE DISTRICT OF COLUMBIA, OF THE COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS, Honolulu, Hawaii 

The Subcommittee met, pursuant to notice, at 1 p.m., at the 

Oahu Veterans Center, Honolulu, Hawaii, Hon. Daniel K. Akaka, 

Chairman of the Subcommittee, presiding. 

Present: Senator Akaka. 

OPENING STATEMENT OF SENATOR AKAKA 

Senator AKAKA. I call the Subcommittee on Oversight of Government and Management, Federal Workforce and the District of Columbia to order. 

First I want to extend my mahalo, and mahalo is ‘‘thank you’’, 

to the witnesses that traveled from Washington, DC, Alaska, and 

Guam to be here today. I appreciate your participation in this hearing to discuss one of the most pressing issues for Federal workers 

in Hawaii. 

In addition, I would like to say mahalo to Senators Inouye and 

Stevens for sending their staff to this hearing. I’d like to recognize 

them now. Could the representatives for Senator Stevens and Senator Inouye please stand? Good to see you. 

And, a special mahalo to my staff for hosting the numerous meetings this week discussing the legislative proposals to phase-out 

non-foreign cost-of-living allowance that we call COLA, and phasein locality pay. My staff has informed me of the comments and 

questions Federal workers have expressed to date, and I encourage 

all employees who may be affected by the conversion from COLA 

to contact me and let me know their views. My staff, of course, is 

seated up here, Jennifer Tyree and Thomas Richards. I also have 

other staff in the room from Hawaii who are seated here. Could 

you please stand? Thank you. 

As you all know, under current law Federal employees in Hawaii, 

Alaska, Guam, and the Northern Marianas, Puerto Rico and the 

U.S. Virgin Islands may receive up to 25 percent of base pay as 

non-foreign COLA. This allowance is not taxed and does not count 

toward retirement. The amount of COLA is based on the cost of living in the non-foreign areas compared to the cost of living in WashVerDate Aug 31 2005 13:07 Jan 23, 2009 Jkt 043090 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 P:\DOCS\43090.TXT SAFFAIRS PsN: PAT
2 

ington, DC. Locality pay is based on a comparison between Federal 

salaries and white collar salaries in the private and public sectors 

in a given region. 

Since the creation of locality pay in the 1990s, there has been 

much discussion over the disparity between employee’s pay and retirement in the non-foreign areas compared to the contiguous 48 

States. Despite the efforts of the COLA committees and others to 

resolve this issue, Federal workers in Hawaii and other non-foreign 

areas remain disadvantaged in their retirement benefits. 

Last year, the President proposed legislation in his fiscal year 

2008 budget request to transition from COLA to locality pay. The 

Administration’s proposal would freeze COLA rates for all General 

Schedule and postal employees at their current level; phase-in locality pay over a 7-year period as COLA is phased-out; reduce 

COLA by 85 percent of each dollar of locality pay that is phasedin to make up for the additional tax burden on employees who 

would begin receiving locality pay. This would not penalize any employee receiving non-foreign COLA who is at, or below, a GS–7 step 

3, which is less than half the GS Federal workforce in the non-foreign areas. 

However, the Administration’s proposal left many questions unanswered. It did not address how postal employees, members of the 

Senior Executive Service, and employees who receive special rates 

will be treated since they do not receive locality pay. The proposal 

was also unclear as to whether Federal workers in unique personnel systems would be covered by the legislation. 

Because this issue is so important to Federal workers in Hawaii, 

I sent my Subcommittee staff to Hawaii last July to conduct factfinding meetings and listen to employees’ questions and their concerns first hand. I then submitted those questions to Administration officials and posted the responses on my website. 

Based on the responses from Administration officials and comments received from affected Federal workers, Senators Stevens, 

Inouye, Murkowski, and I introduced S. 3013, the Non-Foreign 

Area Retirement Equity Assurance Act, also known as the NonForeign AREA Act, as a discussion piece to move this issue forward. Our bill seeks to address these unanswered questions in the 

Administration’s proposal and respond to the concerns raised by affected employees. Specifically, our bill would cover all Federal employees; protect employees’ take home pay; phase-in locality pay 

over 3 years; allow current employees a one-time option to receive 

frozen COLA rates or transition to locality pay; and allow employees who will retire in the next 3 years the opportunity to pay into 

the Federal retirement system and transition to locality pay before 

retirement. 

The Non-Foreign AREA Act is not to be seen as the last word, 

only the latest step forward in determining the best way to ensure 

retirement equity for Federal workers in the non-foreign areas. So 

again, I want to encourage employees in the audience and in the 

non-foreign areas to contact me with their questions and concerns 

on these proposals. After the hearing adjourns, we will hold a 

meeting where the Administration witnesses and my staff can answer questions from audience members on the proposals. Should 

anyone in the audience want to ask questions or speak out, you 

3 

1The prepared statement of Mr. Grimes appears in the Appendix on page 52. 

may do so at the town hall meeting. So please remain here and immediately after the hearing and a short break, we’ll convene the 

town hall meeting. 

My ultimate goal remains to ensure that Federal workers in the 

non-foreign areas are not disadvantaged when it comes to their pay 

and retirement. By working together I really believe we can come 

up with an equitable solution. 

And so with that, I want to introduce our first panel. Our first 

panel consists of three witnesses: Chuck Grimes, Deputy Associate 

Director at the Office of Personnel Management; Brad Bunn, Program Executive Oficer for the National Security Personnel System 

at the Department of Defense; and Jo Ann Mitchell, Manager of 

Accounting Services at the U.S. Postal Service. 

It is the custom of this Subcommittee, as you know, to swear in 

all witnesses. Please stand and raise your right hand. Do you solemnly swear that the testimony you are to give before this Subcommittee is the truth, the whole truth, and nothing but the truth, 

so help you, God? 

THE PANEL MEMBERS. I do. 

Senator AKAKA. Thank you very much. Let the record show that 

the witnesses responded in the affirmative. 

Although statements are limited to 5 minutes, I want all of our 

witnesses to know that their full statements will be included in the 

record. 

Mr. Grimes, will you please proceed with your statement? 

TESTIMONY OF CHARLES D. GRIMES III,1 DEPUTY ASSOCIATE 

DIRECTOR FOR PERFORMANCE AND PAY SYSTEMS, U.S. OFFICE OF PERSONNEL MANAGEMENT 

Mr. GRIMES. Thank you. Mr. Chairman and Members of the Subcommittee, my name is Chuck Grimes and I’m here today on behalf 

of Linda M. Springer, Director of the U.S. Office of Personnel Management (OPM), to discuss the proposals to extend locality pay in 

lieu of cost-of-living allowances (COLA’s) to Federal employees 

working in Hawaii, Alaska, Guam, Puerto Rico, the U.S. Virgin Islands, and other U.S. territories and possessions. 

Over the years, the focus of Federal pay policy has evolved from 

simply keeping pace with the overall labor market to effectively 

competing within that market. The implementation of locality pay 

under the Federal Employees Pay Comparability Act (FEPCA) of 

1990, is a tangible manifestation of that shift. However, FEPCA 

applies only in the contiguous 48 States. In the non-foreign areas, 

we have a conflicting compensation policy that provides for a 

COLA. 

The COLA program predates locality pay by nearly 50 years. It 

was originally designed to address recruitment and retention issues 

resulting from higher costs of living in the non-foreign areas. COLA 

rates are based on OPM surveys measuring the differences in the 

cost of living between each non-foreign area and the Washington, 

DC area. 

4 

COLA affects employees’ take-home pay and retirement annuities. For instance, some employees like the fact that COLA payments are not subject to Federal income tax. 

On the other hand, COLA payments are not considered base pay 

for retirement purposes and are capped at 25 percent. 

There is a growing perception that total pay and retirement benefits of white-collar civilian Federal employees in the non-foreign 

areas are gradually eroding in comparison with employees in the 

continental United States. 

We believe these issues are best addressed by extending locality 

pay in lieu of COLA to the non-foreign areas. Locality pay is retirement creditable and allows for larger Thrift Savings Plan contributions. 

Locality pay is not capped at 25 percent and continues to rise. 

COLA payments in contrast are trending downward. 

Finally, because of subjective elements in measuring relative living costs, the COLA program has been the subject of much litigation. The recent Caraballo settlement topped some $230 million. 

We expect the bill, once finalized, to reduce ongoing litigation risk. 

In May 2007, the Administration transmitted a proposal to Congress to address these issues. We are pleased that Senator Akaka, 

and Senators Inouye, Stevens, and Murkowski, have recently introduced S. 3013, the Non-Foreign Area Retirement Equity Assurance 

Act of 2008, to stimulate discussion on how best to transition from 

COLA to locality pay. Also, the Federal Managers Association 

(FMA) has put forth a proposal. The Administration’s proposal, the 

FMA’s proposal, and S. 3013 would extend locality pay to white-collar employees in the non-foreign areas over time, while gradually 

reducing COLA. However, the Administration’s proposal differs significantly from FMA’s proposal and S. 3013 regarding phase-in, the 

offset, and employee coverage. 

The Administration’s proposal would phase-in locality pay over a 

7-year period to limit the impact of locality pay on retirement behavior. During the phase-in period, decreases to COLA would be 

limited to 85 percent of the increase in locality pay in order to reduce the impact on take-home pay of increased deductions for retirement contributions and tax liability. S. 3013 would reduce the 

phase-in of locality pay to 3 years, and would set the offset of 

COLA at 65 percent of the increase to locality pay. The FMA proposal would phase-in locality pay over 2 years, with an offset of 75 

percent. 

The Administration’s proposal would permit OPM and other 

agencies to promulgate regulations for various categories of employees such as those on special rates. S. 3013 specifies employee 

coverage and further gives employees a chance to opt out of the 

coverage and keep a frozen COLA rate. One result of this specificity is that Senior Executive Service (SES) members in non-foreign areas would be granted locality pay, which SES members currently do not receive, regardless of location. 

Under any of the proposals we expect the Federal Salary Council 

and the President’s Pay Agent would establish locality areas for 

Hawaii and Alaska, and that Puerto Rico, Guam and the Virgin Islands would be covered by the rest of the United States (RUS) locality pay area. Based on existing data, we estimate the locality 

5 

1The prepared statement of Mr. Bunn appears in the Appendix on page 60. 

pay rates for Hawaii and Alaska would be 20.38 percent and 27.68 

percent, respectively. The current rate for the RUS area is 13.18 

percent. 

The Administration’s proposal addresses the issues in a responsible fashion, with regard to cost and reduced litigation risk. S. 

3013, though welcomed as a step forward in resolving these issues, 

would cost significantly more due to the shorter phase-in period 

and reduced offset. In addition, we believe the opt-out provision 

would lead to further litigation, rather than reducing litigation 

risk. 

We believe the time is upon us to extend locality pay to the nonforeign areas. Locality pay provides employees in the non-foreign 

areas a retirement benefit comparable to employees in the continental United States. 

Mr. Chairman, thank you for the opportunity to discuss this important issue with you today and for your support as we work towards a more market-based pay system in our non-foreign areas. 

We will continue to work closely with your Subcommittee and the 

cosponsors on S. 3013. I would be happy to address any questions 

you may have. 

Senator AKAKA. Thank you very much, Mr. Grimes, for your testimony in representing OPM. Now we’re going to hear from Mr. 

Bunn. Please proceed with your statement. 

TESTIMONY OF BRADLEY BUNN,1 PROGRAM EXECUTIVE OFFICER, NATIONAL SECURITY PERSONNEL SYSTEM, U.S. DEPARTMENT OF DEFENSE 

Mr. BUNN. Thank you, Mr. Chairman. My name is Brad Bunn, 

and I’m the Program Executive Officer for the National Security 

Personnel System, also known as NSPS, in the U.S. Department of 

Defense. I want to thank you for the opportunity to appear before 

you today to discuss the proposals to extend locality pay in lieu of 

cost-of-living allowance to employees working in Hawaii, Alaska, 

Guam, Puerto Rico, U.S. Virgin Islands and other U.S. territories 

and possessions. 

Let me at the start, Mr. Chairman, say thank you for your ongoing support of the 700,000 DOD civilian employees who work every 

day, worldwide, in support of our national defense, including the 

thousands of civilians employed by DOD right here in Hawaii. We 

appreciate your leadership on our critical civilian human capital 

issues facing the Department, including the issue that we talk 

about today. 

I’m here today representing the Department’s National Security 

Personnel System, a new personnel system and a key driver to our 

department’s human capital transformation. To date, we’ve successfully implemented NSPS to over 180,000 civilian employees 

across DOD, who are now working under a more modern, missionfocused, results-oriented personnel system. 

One of the features of NSPS that’s critical to the department is 

the ability to move towards a more market-based approach to compensation. So with respect to locality pay, NSPS includes an element of pay called a local market supplement, which is essentially 

6 

identical to GS locality pay. NSPS mirrors the GS locality pay 

areas and percentages for these local market supplements. Under 

NSPS, however, an employee must be performing above the unacceptable performance level in order to be eligible for these local 

market supplement increases. This aligns with the underlying principles of NSPS, as required in the law, that pay be linked to performance. NSPS employees with performance ratings above unacceptable receive local market supplement adjustments equal to the 

GS locality pay increases. 

Regarding COLA in non-foreign areas, NSPS does not affect the 

payment or the amount of non-foreign COLA. The NSPS statutory 

authorities do not extend to COLA, so employees under NSPS in 

these areas are receiving COLA, similar to their GS counterparts. 

As one of the largest Federal employers in these non-foreign 

COLA locations, we’re well aware of the issues surrounding COLA 

and locality pay. DOD employs over 26,000 appropriated fund civil 

servants in Hawaii, Alaska, Puerto Rico, and other U.S. Territories. 

Almost 18,000 of these employees are in white-collar occupations 

and are impacted by the non-foreign COLA issue. Currently, we 

have about 7,000 employees in these areas covered by NSPS. Over 

the years, we’ve heard concerns from our employees about COLA, 

in particular the issue of equity in retirement benefits. The perception that compensation and retirement benefits for our white-collar 

workforce in these areas are eroding would have a detrimental effect on our ability to recruit and retain the talent needed to carry 

out our natural security mission. So we applaud the Subcommittee 

and you, Mr. Chairman, for taking this issue on, and agree with 

our colleagues at the Office of Personnel Management as well as 

with you, Mr. Chairman, that the time has come to extend locality 

pay in lieu of COLA to these non-foreign areas. 

We realize there are a number of considerations and potential 

approaches to implementing this concept. Last year, the Department endorsed the OPM legislative proposal that would phase in 

locality pay over a 7-year period, while gradually reducing COLA 

payments. The Department continues to support that proposal. 

We’re also aware of the bill that you recently introduced along with 

Senators Inouye, Stevens, and Murkowski, which also phases in locality pay in these areas, while reducing COLA payments gradually. The Department hasn’t completed a full analysis of the introduced bill, but I’m prepared to speak to a few points. 

First, let me address how these proposals would affect employees 

under NSPS. Because NSPS local market supplements mirror the 

GS locality pay areas and percentages, if either of these proposals 

were enacted, the Department would establish and phase-in local 

market supplements equal to the GS locality pay that’s established 

by OPM. In other words, NSPS employees would be treated like GS 

employees for purposes of implementing these provisions. One significant difference, however, is that under NSPS, employees with 

a performance rating of unacceptable would not be eligible for 

these increases in accordance with the NSPS statue. The Department would not favor a proposal that doesn’t allow for this practice, 

as it would be contrary to the fundamental principles of NSPS and 

paid for performance and result in inconsistent treatment of employees within NSPS. 

7 

1The prepared statement of Ms. Mitchell appears in the Appendix on page 66. 

Second, we understand that the introduced bill proposes a shorter phase-in period of 3 years, and sets the offset to COLA at 65 

percent versus the 85 percent that OPM has proposed. As I previously stated, the Department hasn’t completed a full analysis of 

the proposal, but we would have to look very carefully at the cost 

of implementing these provisions over a shorter timeframe and determine the impact to our organizations’ budgets. While we support 

implementation plan that minimizes the impact to the take-home 

pay of our employees, we also believe we must accomplish this in 

a fiscally responsible, affordable manner. We’re also cognizant of 

the fact that the extension of locality pay in these areas would 

count towards retirement calculations and may influence retirement behavior. The Department would favor an approach that promotes stability in the workforce, so that our mission is not adversely affected. Finally, we understand the introduced bill provides affected employees the opportunity to opt out of the locality 

pay provisions, and continue to receive COLA. While we have serious concerns over the administrative burden this provision would 

impose, the Department also believes this would be contrary to the 

fundamental purpose of the proposed legislation, and would result 

in continued inconsistencies in compensation for employees. 

Mr. Chairman, we at DOD realize that this is not an easy issue, 

and we are gratified to be part of the conversation as we collectively wrestle with these matters. For our part, it’s critical for the 

Deprtment of Defense, and our organizations located in these important geographical areas, to be able to recruit, fairly compensate, 

and retain a civilian workforce that continues to provide worldclass support to our military in this dynamic and unpredictable national security environment. 

I appreciate the opportunity to testify and welcome your questions, sir. Thank you. 

Senator AKAKA. Thank you very much, Mr. Bunn. 

Now we will hear from Ms. Mitchell. Will you please proceed 

with your statement? 

TESTIMONY OF JO ANN MITCHELL,1 MANAGER OF 

ACCOUNTING SERVICES, U.S. POSTAL SERVICE 

Ms. MITCHELL. Thank you, Mr. Chairman. I am Jo Ann Mitchell, 

Manager of Accounting Services for the U.S. Postal Service. 

I am honored to be here with you today to discuss the Postal 

Service’s views on non-foreign COLA payments, but first let me 

begin by sharing some facts about the Hawaiian postal workforce 

with you, as well as some of our financial challenges. 

We employ approximately 2,700 employees throughout Hawaii. 

Together, these employees handle nearly 1.2 billion pieces of mail 

a year to more than 650,000 addresses in the Honolulu Postal District. And, they do a great job. For the most recent quarter of 2008, 

they delivered an impressive 98 percent overnight service, which 

was two points higher than the national average of 96 percent. 

We are proud of their outstanding service. They have excelled 

during a particularly challenging time for the Postal Service. For 

the quarter just ending, mail volume was down 3.3 percent from 

8 

last year, which is a very significant decline. The Postal Service is 

facing tough times as businesses and consumers nationwide are 

trying to manage their own budgets against rising prices that are 

affecting the economy of the whole Nation. We are engaged in the 

same struggle in managing rising costs and have embarked upon 

an aggressive cost reduction and revenue enhancement plan to, at 

best, financially break even this year. 

The Postal Service has weathered these economic storms before, 

and will again. We have done so by having one of the most dedicated workforces in America, and by benefiting from management 

tools, such as the collective bargaining process. In place since 1970, 

collective bargaining defines the way the Postal Service and its 

unions discuss wages and working conditions. The result is that 

the Postal Service policy is to pay employees comparable wages and 

benefits as compared to the private sector. These pay policies include the areas covered by the non-foreign COLA. 

As you know, the non-foreign COLA is a percentage of an employee’s base pay and is not subject to Federal income tax, nor is 

it considered pay for the purposes of retirement. The maximum 

non-foreign COLA payment is 25 percent of base pay. In Hawaii, 

percentages for 2008 ranged from 17 to 25 percent. 

Pay parity was brought about for Federal employees through legislation that set Federal salaries at a level comparable to non-Federal pay in the locality. However, this locality pay does not apply 

to postal employees in the 48 continental United States. 

Over time, the Postal Service and its unions have discussed 

forms of locality pay during contract negotiations; however, it has 

never been adopted. 

We have repeatedly stated to Congress, and do so respectfully 

again today, to let the collective bargaining process continue to deal 

with pay and other bargainable issues. We strongly oppose the 

statutory imposition of locality pay upon postal employees in the 

non-foreign COLA areas because this action will interfere with collective bargaining. The Postal Service bargains over pay with its 

unions, unlike other agencies in the Executive Branch. If Congress 

enacts legislation to provide a new benefit over and above the nonforeign COLA areas, it sets a dangerous precedent of interference, 

which could spill over to many other negotiated areas. 

The second reason that we strongly oppose requiring the Postal 

Service to pay locality pay for its employees is because Postal Service wages are already comparable to private sector wages, as required by Title 39. 

Finally, paying postal employees locality pay in the defined areas 

would greatly affect the Postal Service’s bottom line. Locality pay 

is considered base pay for retirement and the Postal Service cost 

for retirement, Thrift Savings Plan, Social Security, and Medicare 

would increase by some 12.5 million per year. That figure does not 

include the increased long-term retirement obligation that we 

would also face. This comes at a time when the Postal Service is 

struggling financially. 

The Postal Service shares Senator Akaka’s concern for postal employees and their long-term financial health when they retire. The 

agency regularly provides financial education seminars and mateVerDate Aug 31 2005 13:07 Jan 23, 2009 Jkt 043090 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 P:\DOCS\43090.TXT SAFFAIRS PsN: PAT
9 

rials to employees reminding them that non-foreign COLA is not 

part of their retirement benefits. 

While we understand the rationale behind S. 3013, we would like 

to state again that the Postal Service pay and compensation systems are very different than those of other Federal Government 

agencies. We hope that we can work with Congress and the Administration on finding solutions to this problem. 

Thank you and I would be pleased to answer questions that you 

may have. 

Senator AKAKA. Thank you very much, Ms. Mitchell. 

My first question is for the entire panel. For the past few days, 

you have been traveling with my staff and talking to employees 

about proposals to convert COLA to locality pay. Based on these 

meetings, what do you believe are the employees’ top concerns and 

what are your thoughts on how to address them? Let me start with 

Mr. Grimes. 

Mr. GRIMES. Thank you, Mr. Chairman. Time and time again we 

hear concern over the phase-in period, and we, too, are concerned 

about the long phase-in, but we also are concerned about staffing 

issues that might develop if that phase-in period is dramatically 

shortened. We’ve also heard many times about the offset, so that 

is clearly an employee concern. Thank you. 

Senator AKAKA. Thank you. Mr. Bunn. 

Mr. BUNN. I would echo that, that there seems to be a lot of concern over the impact that this will have on retirement. There’s a 

lot of support that I saw among employees who attended these 

meetings for this concept for phasing in locality and improving the 

retirement benefits and addressing that inequity. I think there’s a 

lot of different ways that it could be addressed and we have 

learned a lot from the feedback sessions we had with the employees. And certainly Mr. Grimes said the time the phase-in and the 

time that it would take to phase it in, and also the impact on takehome pay, frankly, as locality pay is phased in and now subject to 

Federal taxes, what is the bottom line. As we’ve heard, concerns 

over gas prices and generally, cost of living here in Hawaii, so all 

of those things are clearly major concerns for employees. 

Senator AKAKA. Ms. Mitchell. 

Ms. MITCHELL. Thank you, Mr. Chairman. I have spoken to several of our employees after the town hall meetings, and there’s a 

difference of opinion I think between the younger employees and 

the older employees. I think the younger employees favor the nonforeign COLA for tax purposes, and of course the older employees 

approaching retirement would favor moving to locality based pay. 

But regardless of that, it’s interesting to note that the employees 

understand it would actually create inequity for us, that they 

would be receiving something that the rest of postal employees 

would not receive. 

Senator AKAKA. Now, I know what you’re reporting here was 

based on your meetings in Hilo and Kona on Tuesday, and yesterday on Maui. This afternoon I’m sure you will hear additional questions and concerns from employees here in Honolulu and tomorrow 

in Kauai. 

Mr. Grimes, I firmly believe that we must protect employees’ 

take-home pay if we transition from COLA to locality pay. This has 

10 

become even more necessary given the current economic climate. 

Please explain the assumptions that the Administration made in 

determining that 85 percent offset could help protect employees’ 

take-home pay. 

Mr. GRIMES. Thank you, Mr. Chairman. I would like to say that 

there was no intent to protect take-home pay in the absolute by establishing an 85 percent offset. It was designed to mitigate the impact of increased taxes and retirement contributions, not eliminate 

the impact of those taxes and contributions. But we believe that in 

the interest of cost, that an 85 percent number is a fair number, 

but it is not a magic number. It wasn’t a calculated number. It’s 

a number that helps, not a number that solves. 

The other thing I’d like to say about protecting take-home pay 

is that there are a lot of issues that go into take-home pay, the 

number of deductions somebody claims, whether they’ve got allotments, whether their mortgage comes out of their paycheck and so 

forth. So it would be difficult to guarantee the take-home pay 

would go unchanged. 

In the bill the Administration presented, it would implement the 

bill if enacted on or about January 1, 2008 in conjunction with the 

Federal pay increase. That Federal pay increase would, we believe 

in the vast majority, if not all cases, prevent any decrease in takehome pay. What it would do, and I will not shy away from this, 

that it would limit—the increase would not be as great for those 

people who are transitioning as others. But once transition is complete and everybody is on an even playing field, then of course Hawaii and Alaska and the other non-foreign areas would be getting 

the same increases that employees in the contiguous 48 States get. 

Thank you. 

Senator AKAKA. Mr. Bunn, employees under NSPS are particularly concerned about protecting their home pay in the transition 

from COLA to what you’ve been talking about, local market supplements. Currently, non-foreign COLA is guaranteed, while LMS increases are based on an employee’s performance in NSPS. How 

could DOD adjust local market supplements to ensure employees’ 

take-home pay is not reduced? 

Mr. BUNN. The local market supplements if this were enacted 

and locality pay was extended to the non-foreign COLA areas and 

COLA was reduced, NSPS would mirror the GS locality pay increases, and that essentially is written into the NSPS statue, that 

as GS locality pay increases, employees under NSPS will get the 

same increase in the form of a local market supplement. 

And as I stated in my statement, the only difference would be 

that if there were employees who were performing unacceptably, 

which is the lowest possible level of performance, they would not 

be eligible for that increase and that in fact is also in the statute, 

and that mirrors the fundamental principles of pay for performance 

that individuals who fail in their performance are not eligible for 

a pay increase of any kind. 

Now, there are very few employees who are in that category, sir. 

In this past rating cycle we had less than a half percent of our employees under NSPS were rated as unacceptable, so that affects a 

very small portion. But it is a principle in NSPS and it is in fact 

11 

in the statute. But for the rest of the employees, they would get 

the increases just like their GS counterparts. 

Senator AKAKA. Mr. Grimes, as you know, S. 3013 covers all Federal employees in the non-foreign areas who currently receive 

COLA. However, the Administration’s proposal raises questions 

about who would be transitioned to locality pay and how they 

would be transitioned. Please list the groups of employees who 

would not be transitioned to locality pay under the Administration’s proposal and detail what pay changes OPM would make for 

those workers. 

Mr. GRIMES. It is true, Mr. Chairman, that the way that the Administration’s proposal was worded that we didn’t call out each and 

every group and say exactly what would happen. There are a number of different types of employees, for example, Senior Executives, 

that get COLA but don’t get as a rule locality pay. 

The Administration’s proposal would have OPM and other affected agencies promulgate regulations to deal with each of those 

groups. And as you know, regulations are in the form of a proposal 

with public notice and comment followed by final regulations, and 

we believe that dealing with Senior Executives and special rate employees in that manner would allow a lot of exposure and a lot of 

comment from the affected individuals and then we would arrive 

at a good solution. 

We are concerned if we codify approaches to these groups in legislation, if we make a mistake it will be hard to correct. So we prefer the regulatory approach. 

Senator AKAKA. Mr. Bunn, I understand that nonappropriated 

fund employees do not receive locality pay, but that DOD has discretion to grant NAF workers non-foreign COLA. The intent of S. 

3013 was to cover all employees currently receiving COLA. What 

are your thoughts about giving NAF employees locality pay? 

Mr. BUNN. We have several categories of our NAF workforce. The 

folks that are in the lower grades are prevailing rate employees 

similar to blue collar, so their pay is already based on prevailing 

rates of a local area. So those employees don’t currently get COLA 

and they’re handled within our authorities to set their pay. The 

NAF workforce and the higher grades do get COLA, and we have 

been exploring options on how we would address the issue if COLA 

were to be phased out. Most of our NAF employees do receive 

COLA in these areas. 

We have under the Title 10, nonappropriated funds, personnel 

authorities, a lot of discretion and flexibility in addressing those 

issues, and we would follow the principles that OPM would follow 

in ensuring that we take care of these employees, that they don’t 

take pay cuts, and we already have the statutory authority to do 

that. So we would be able under our existing authorities to address 

those issues with the phase-out of COLA by providing increases. 

We would likely not call it locality pay, but we would be able to 

provide an offset if the COLA were reduced using our existing Title 

10 authorities. Thank you, Mr. Chairman. 

Senator AKAKA. Let me ask about one particular group, and what 

are your thoughts about the intelligence community employees who 

receive locality pay and non-foreign COLA? 

12 

Mr. BUNN. Technically they don’t receive locality pay, they get 

something that’s equivalent to locality pay. And that was something that we did under our existing Title 10 statutory authorities 

for intelligence workforce, and that was to address recruiting and 

retention issues that we were having in filling jobs in these areas 

in that segment of our workforce, and I would at this point without 

making a commitment on what we would do, I have spoken to our 

experts who deal with the intelligence pay systems, and again, we 

do have the ability to deal with those matters under the existing 

Title 10 statutory authorities for our intelligence workforce, and we 

would ensure that those employees are treated fairly in terms of 

if they lose COLA, we would be able to offset that with other pay 

flexibilities that we have. 

So again, we don’t have all the answers yet. If S. 3013 or the Administration’s proposal or some combination is implemented, we 

would certainly go off and look at that and make sure that those 

employees were taken care of. Again, with the kind of the underlying principles being treating our employees fairly but doing it in 

an affordable manner. 

Senator AKAKA. Thank you. Ms. Mitchell, I’m concerned with Administration’s proposal to freeze COLA rates indefinitely for postal 

employees. We need a long-term solution for present and future 

employees that does not diminish their current benefits. I have proposed creating territorial pay in an effort to address this problem. 

How would the postal service propose to address this issue in the 

long run? 

Ms. MITCHELL. Well, Mr. Chairman, we agree as well that freezing COLA rates is not a long term solution, it’s a short term solution. So we would look at adopting something probably in the same 

respect as locality pay for just the percentage purposes of it, but 

treat it as if it were a non-foreign COLA payment, because as you 

know, we do not pay locality pay for the rest of the United States, 

so for us to take the bill as written would actually create an inequity for us, the same inequity it’s trying to resolve for the rest 

of the Federal sector. 

Senator AKAKA. Would this also apply to current and future employees? 

Ms. MITCHELL. We would work with you, Senator, on how we 

would handle that. 

Senator AKAKA. There is an inequity when postal employees retire in the non-foreign areas. The gap between take-home pay and 

retirement annuity of postal employees is significantly greater than 

postal employees in the other 48 States. How would you address 

this inequity? 

Ms. MITCHELL. Well, sir, we feel that through collective bargaining we negotiate standard rate of pay across the country. Consider an employee who is in the same level, earning the same 

amount of money in San Francisco than the employee in Hawaii, 

yet in Hawaii, or in any of the other non-foreign COLA States that 

employee enjoys a benefit that the employees in the rest of the 

country do not receive, even though locality percentages would actually be higher for them. So the only way we do address it now 

is through financial education, explaining to employees that they 

13 

have a benefit now that will not be there for them when they retire, and how to financially plan for that. 

Senator AKAKA. You testified to the benefits of collective bargaining. 

Ms. MITCHELL. Yes, sir. 

Senator AKAKA. And I’m a strong supporter of employees’ rights 

to bargain collectively and have a say in their working conditions. 

Is the postal service’s position that the best way to address the 

non-foreign COLA issue is through collective bargaining with postal workers from the non-foreign areas in the 48 states? 

Ms. MITCHELL. Locality pay have been discussed with the unions 

but not adopted. It’s always been silent as far as non-foreign COLA 

because it was a benefit prior to collective bargaining. However, if 

we were to do something that actually changed the way we calculated retirement for employees, then that would be better served 

through collective bargaining. 

Senator AKAKA. Mr. Grimes, you mentioned that OPM would 

issue regulations on how it would treat employees like the SES. 

Can you provide details on what exactly you had in mind? 

Mr. GRIMES. We have a number of ideas in mind, and one, for 

example, might be to even continue COLA for those folks or freeze 

it or grandfather the existing employees. We could increase the pay 

of the SESers, and again, grandfather them. But as you know, 

we’ve got a worldwide, nationwide schedule for SES employees, and 

we would be creating again a similar inequity if we were to turn 

that money into retirement credible pay in the non-foreign areas 

vis-a-vis the SESers in the contiguous 48 States. 

Senator AKAKA. Mr. Grimes, I understand that one of the reasons that the Administration proposed a 7-year phase-in of locality 

pay was to avoid an increase in the number of retirements. However, OPM itself estimates that one-third of the Federal work force 

will retire in the next 5 years, before the 7-year phase-in is complete. As you know, more than half of the Federal workers in Hawaii and Alaska are retirement eligible. Do agencies have succession plans in place and recruitment strategies to address the expected retirement wave despite any changes in COLA? 

Mr. GRIMES. We believe agencies have succession plans in place 

and recruitment and retention strategies in place to deal with the 

normal retirements that are taking place now. Since the introduction of this bill, I couldn’t speak to whether agencies have thought 

about the incentives to retire that may or may not occur depending 

on how the bill turns out. Just as an example, if we allow employees to opt in for those first 3 years, it’s not inconceivable that nobody would retire for 3 years. And then in year 4 they would all 

retire, the ones that would have retired each year, so that would 

create a bit of a hiccup, but we’ll just have to see how the final bill 

turns out, and I believe agencies would in fact prepare for it. 

Senator AKAKA. I understand that one of the reasons for the 7- 

year phase-in of locality pay is to avoid having Federal workers retire earlier than expected resulting in staffing shortages. With a 

longer phase-in period, wouldn’t employees continue to leave for 

California to earn their high three leave in Federal agencies in Hawaii and Alaska in the same situation? 

14 

Mr. GRIMES. That could be. We believe that with the Administration’s proposal as written, even with 2 or 3 years into the phasein period, employees’ retirement pay would be significantly higher 

than it would be without phasing in locality pay at all. Now, certainly you can make arguments that if you phase it in quicker, 

their retirement would be higher. At least that gives us a path to 

solve this vexing issue. And we definitely are not in favor of having 

our wonderful long-term employees start thinking about retirement 

and moving away just when we need them the most. So we’re in 

favor of phasing in locality pay and we believe that the 7-year 

phase-in period is appropriate. Thank you. 

Senator AKAKA. In my opinion, Mr. Grimes, the main reason for 

converting to locality pay is to help address the long standing retirement inequities between individuals in the 48 States and the 

non-foreign areas. Several witnesses on our second panel have 

mentioned the need to cover current retirees and allow them to 

apply to the locality pay system. What are your thoughts about 

that proposal? 

Mr. GRIMES. Generally speaking, changes in compensation policies are prospective in nature. It becomes very expensive to look 

back. It’s important to note that employee contributions and agency 

contributions are only a part of the amount of money that actually 

gets paid out in terms of annuities and there’s an unfunded liability that employees really wouldn’t be able to cover. So, we would 

look to prospective implementation of this bill. We understand that 

a number of years ago there was some concern about this issue and 

for whatever reason it didn’t go forward. We are very grateful to 

you, Mr. Chairman, for getting a bill on the table and hopefully 

now we’ll be able to get this solved. Thank you. 

Senator AKAKA. Mr. Grimes, if S. 3013 is passed, how many new 

locality areas will be established and how would they be defined? 

Will the new locality pay areas encompass entire States? 

Mr. GRIMES. The anticipation on the part of the Administration 

is that Hawaii and Alaska would be defined as new locality pay 

areas, that the other non-foreign areas will fall under the rest of 

the U.S. category. Now, we do have to note that the Federal Salary 

Council makes recommendations to the President’s Pay Agent, who 

has the final say in creating locality pay areas, but we would anticipate that that’s what they would do. Now, the fact that an entire State would be a locality pay area is a new concept. Generally 

speaking, we go by the census definitions for consolidated metropolitan statistical areas and so forth, but we believe that establishing the locality pay rate statewide for both Alaska and Hawaii 

is a good solution. 

Senator AKAKA. So the territories then would receive the rest of 

U.S. rate? 

Mr. GRIMES. The territories would fall under the so-called rest of 

the U.S. rate, which currently is about 13.18 percent. 

Senator AKAKA. Many employees are concerned that they may receive less than the rest of the U.S. locality pay rate. Could this 

ever happen? 

Mr. GRIMES. The rest of the United States is indeed a floor. So 

that’s inconceivable in the way that we currently do things. We 

also heard a concern that locality pay might go down. That has 

15 

happened once in one area, since 1994. I believe Dayton, Ohio, 

went down by six-hundredths of one percent 1 year, but with the 

methodology they would use to adjust locality pay rates now, it’s 

just about impossible for our rates to go down. 

Senator AKAKA. Mr. Grimes, non-foreign COLA rates go up or 

down and so what you said is helpful to those employees worried 

about locality pay going down. 

Mr. Bunn, instead of locality pay, employees in NSPS receive 

local market supplements. One concern with COLA is the fact that 

the rates are decreasing due to the increase in the cost of living 

in Washington DC. Can you tell me whether local market supplements can ever decrease, and if so, on what conditions? 

Mr. BUNN. The local market supplements that NSPS uses are essentially adopted from the GS locality areas and percentages, so I 

would refer to Mr. Grimes’ answer and essentially say the same 

thing. Local market supplements are very much hooked to the GS 

locality percentages, so the only way that a local market supplement under NSPS standard LMS, as we call it, would go down is 

if a GS locality pay were to decrease. And I would agree with Mr. 

Grimes, that the likelihood of that happening is very small. But the 

Department of Defense would not take the action to decrease the 

local market supplement because of the way that our statute reads 

now, after the defense authorization bill from last year that essentially hooked us to the GS locality rates. 

Senator AKAKA. Mr. Grimes, employees who receive special rates 

do not receive locality pay. However, employees receiving non-foreign COLA can also receive special pay rates. Under S. 3013, an 

employee would not lose their special rate due to the conversion. 

How would you propose to address the pay for special rates in a 

conversion from COLA? 

Mr. GRIMES. Again, Mr. Chairman, we would propose to address 

that through regulation, but in terms of the concept, we really 

would view the 25 percent COLA in the case of most of the islands 

as really part of that special rate. We don’t want to give locality 

payments to special rate employees, but we would propose to increase the special rate component of their pay in accordance with 

a decrease in COLA so that people’s pay rate does not go down during the phase-in period, for example. If at the end of the day after 

7 years, if the pay rates were over and above statutory limits on 

special rates, we would have the same pay provisions that could 

take care of it, but the essential concept if someone is receiving a 

30 percent special rate today, they would keep that differential 

over existing employees. Now, after the phase-in period, special 

rates, as you know, may be adjusted up or down. I will tell you 

from experience they don’t go down very often. It has happened but 

it’s pretty rare. 

Senator AKAKA. Mr. Bunn, under NSPS, special rates are covered 

by local market supplements. How would NSPS address employees 

receiving special rates as part of their local market supplement in 

the conversion from COLA? 

Mr. BUNN. Thank you, Mr. Chairman. We do have a feature in 

NSPS called a targeted local market supplement. Most of our special salary rate employees that we converted to NSPS, we were 

able to incorporate their special salary rates within the broad 

16 

bands under NSPS, and those special salary rates went away. They 

didn’t lose any money but they were now able to be paid within the 

broad NSPS pay bands. For those few employees that we were not 

able to incorporate that special salary rate, we created an additive 

called a targeted local market supplement, and we treat them very 

similar to GS special salary rate employees and we would adopt 

the same approach that OPM would take for special salary rates, 

meaning as COLA were to go down, we would ensure that our targeted local market supplements were to go up unless they were 

overtaken by a local market supplement or locality pay that turned 

out to be higher than the targeted local market supplement, so we 

would take a very similar approach to OPM in ensuring that differential remains. 

Senator AKAKA. I want to thank you for your responses, but I 

have a final question to all of you. Do you have any closing 

thoughts or recommendations as we move forward in this discussion on transitioning from COLA? Let me start with Ms. Mitchell. 

Ms. MITCHELL. Thank you, Mr. Chairman. Of course we want to 

work with the Senator and the Subcommittee to come up with the 

most equitable solution. We do not want to disadvantage the current situation with the employees who are in the non-foreign COLA 

areas, but then yet again, we do not want to jeopardize collective 

bargaining with the Postal Service or put the Postal Service in a 

worse financial situation than it is today. So we would continue to 

work with you. 

Senator AKAKA. Your thoughts, Mr. Bunn. 

Mr. BUNN. The thoughts I would like to share is that from an 

agency perspective, from the Department of Defense perspective, 

I’d like to, on behalf of DOD, thank you for bringing this issue to 

the fore so that we can get it behind us. It’s been, as Mr. Grimes 

said, a vexing issue for a very long time and it is time to resolve 

it, so we appreciate your help in doing that. We have a large DOD 

civilian population here in Hawaii and the other non-foreign COLA 

areas, so the quicker we can get a solution, the better off we’ll be, 

we’ll be able to focus on our national security mission, and one 

final thought is that if you would like to continue to discuss this 

matter, I am more than willing to come to Hawaii any time on behalf of the department and talk about it. So thank you, sir. 

Senator AKAKA. Thank you so much. Mr. Grimes. 

Mr. GRIMES. Thank you, Mr. Chairman. I think it’s probably best 

said by a comment that an employee made when I was here in January. This person said, ‘‘well, if we had done this 10 years ago, you 

wouldn’t be here right now.’’ And that would have been a shame, 

because I, too, enjoy the islands. But we did come close, we provided some technical assistance 10 or 15 years ago, and it just 

didn’t go anywhere, and we are exceedingly grateful to you and 

your staff for getting this bill introduced. We look forward to working with you and hope sincerely that we can get something accomplished this year. I would worry that if we don’t get it done this 

year then if not now, when? That would be my closing thought. 

Thank you very much. 

Senator AKAKA. Well, I thank you so much for your closing 

thoughts, and again, for your responses to all questions. It has 

been very helpful, and we look forward to continuing to work with 

17 

1The prepared statement of Ms. Matsuno appears in the Appendix on page 69. 

you and your agencies and departments as well. So thank you so 

much for being here and wish you a safe trip home. 

Ms. MITCHELL. Thank you, Mr. Chairman. 

Mr. GRIMES. Thank you, Mr. Chairman. 

Mr. BUNN. Thank you. 

Senator AKAKA. Thank you. And now I would like to call the second panel to come up. 

[Discussion off the record.] 

Senator AKAKA. The hearing will be in order. I want to thank our 

second panel again for being here, and I would like to introduce 

them to you. Joyce Matsuo, President of the Oahu COLA Defense 

Committee. Sharon Warren, President of the COLA Defense Committee of Anchorage. Thank you for being here. Manuel Cruz, 

President of the COLA Defense Committee of Guam. Michael FitzGerald, President of the Federal Managers Association, Chapter 

187. And Terry Kaolulo, President of the Hawaii State Association 

of Letter Carriers. 

As you know, it is the custom of the Subcommittee to swear in 

all witnesses, and I ask all of you to please stand and raise your 

right hand. Do you solemnly swear that the testimony you are 

about to give this Subcommittee is the truth, the whole truth, and 

nothing but the truth, so help you, God? 

THE PANEL MEMBERS. I do. 

Senator AKAKA. Thank you. May the record note that the witnesses responded in the affirmative. 

Ms. Matsuo, will you please proceed with your statement? 

JOYCE MATSUO,1 PRESIDENT, COLA DEFENSE COMMITTEE OF 

OAHU 

Ms. MATSUO. Chairman Akaka and Members of this Senate Subcommittee, my name is Joyce Matsuo, and I am President of the 

COLA Defense Committee of Oahu. The 15,000 or more Federal 

employees on Oahu is the largest group of COLA recipients covered 

by a COLA committee. In Hawaii, COLA committees were originally established on each island but only two remain today—the 

Oahu and Maui COLA Committees. 

Today, on their behalf, I would like to thank you for this opportunity to present our comments and recommendations on S. 3013 

which proposes to resolve the retirement inequity in COLA areas. 

To convert or not to convert COLA to locality pay. From the latest COLA survey results, we see that the COLA rates will continue 

to drop for all areas in Alaska, except Rural Alaska, and they will 

also begin to drop for the Pacific COLA areas. 

In 2007, your staff informed us that the estimated locality pay 

rates would be about 20 percent for Hawaii and 27 percent for 

Alaska. With the projected decreases in COLA, it would seem prudent that Alaska move to locality pay, and Hawaii should, too. It 

is more probable that future COLA rates in Hawaii will continue 

to decrease and locality pay will increase and eventually exceed the 

25 percent COLA statutory cap. A conversion of COLA to locality 

pay actually benefits Hawaii more than it does Alaska because a 

18 

conversion protects the remaining COLA until COLA is completely 

converted to locality pay. 

On the phase-in period to achieve full locality pay, in the Administration’s 2007 proposal, OPM proposed a 7-year phase-in period. 

S. 3013 improves the phase-in period to 3 years. 

I support the Federal Managers’ Association proposal of full locality pay in Year 1 because this will definitely help stop the exodus of experienced employees transferring to locality pay areas to 

earn their high-3 years for retirement purposes. 

This Senate bill proposes a 3-year phase-in. The first year locality pay rate would be one-third of RUS, which is 13.18 percent or 

about 4 percent in the first year. This 4 percent is a far cry from 

20 percent locality pay for Hawaii and 27 percent locality pay rate 

for Alaska. If full locality pay is not possible in Year 1, I would recommend that at least full RUS be used in the first year. 

On the impact on take-home pay, the Oahu COLA Committee 

made calculations of the impact on take-home pay and it supports 

that the proposed adjustment factor of 65 percent will minimize a 

negative impact on take-home pay. Without the 65 percent factor, 

Federal employees, especially FERS employees, cannot accept this 

conversion proposal due to the significant impact on their takehome pay from Federal taxes that would now be due on locality 

pay. 

On the buy-in provision as provided in Section 7, the conversion 

to full locality pay in Year 1 will give Federal employees their proper locality pay on which retirement benefits would be determined. 

The locality pay amounts and the resulting retirement benefits 

would be comparable to those received by Federal employees in the 

48 States. No buy-in provision would then be needed. 

There are two problems that we see with this provision. First, it 

is conceivable that an employee who makes this election could have 

the remaining unconverted COLA and the locality pay rates total 

more than their true locality pay rate. Hence, COLA employees 

would receive higher retirement benefits than Federal employees in 

the 48 States and this would not be fair to those in the 48 States. 

I believe that it is the intention of this bill to fix inequity and not 

to create another inequity. 

The second problem is that S. 3013 has no provision for retirees. 

These retirees are not provided any remedies for the retirement inequity that really began in 1994 due to the exclusion of Hawaii and 

Alaska from FEPCA. They are receiving significantly decreased retirement benefits because of this. If the buy-in provision of Section 

7 is included, I ask that the senators include a provision for retirees which, similar to Section 7, provides them with the opportunity 

to buy in to a retirement program that includes COLA or locality 

pay. If it can be part of this legislation, it would eliminate the inequity for all employees, past and present. 

How the NSPS impacts the conversion. Under the NSPS pay system, locality pay is frozen at the time of NSPS implementation. 

The year-to-year conversion of COLA to locality pay is dependent 

on the yearly increases to locality pay. If locality pay rates are frozen at the time of NSPS implementation, there will be no yearly 

locality pay increases and the COLA to locality pay conversion will 

become fixed for these DOD employees. So, the COLA conversion 

19 

1The prepared statement of Ms. Warren appears in the Appendix on page 96. 

must take place outside the NSPS system until COLA is completely 

converted to locality pay. 

For current retirees, as I stated earlier, I ask that this Subcommittee seriously consider adding some provision for current employees. As he wrote in his decision in Matsuo vs. the United 

States, which is currently on appeal, District Court Judge Phillip 

Pro opined that he felt the retirement inequity issue raised in that 

lawsuit should have been dealt with through legislation. Now 

would be a perfect time to fix the retirement inequity through legislation for all Federal employees, past and present. 

If legislation is not possible, we would have to continue to seek 

resolution through our current lawsuit. Should we prevail in the 

Supreme Court, the COLA conversion to locality pay would become 

moot as winning in the Supreme Court means employees in Hawaii 

and Alaska are entitled to locality pay—regardless of receiving 

COLA. 

We are seeking a fair and equitable retirement fix for both current and retired Federal employees. We could accept a fairer 

version of S. 3013 as a settlement for current Federal employees. 

For the remaining class members, the retirees, an additional provision to cover retirees could resolve our lawsuit. 

Mr. Chairman, I sincerely hope this information will aid your 

Subcommittee in finally developing a legislation that is both fair 

and equitable for Federal employees, and retirees, in the COLA 

areas. If you need any additional feedback or have any questions, 

I will be available to offer any assistance I can. 

Senator AKAKA. Thank you very much, Ms. Matsuo. 

And now we’ll proceed with testimony from Ms. Warren. 

TESTIMONY OF SHARON WARREN,1 PRESIDENT, COLA 

DEFENSE COMMITTEE OF ANCHORAGE 

Ms. WARREN. Good afternoon, Chairman Akaka. My name is 

Sharon Warren, President of the COLA Defense Committee of Anchorage, and representing all three Alaska COLA Defense Committees—Anchorage, Fairbanks, and Juneau. I would like to thank you 

for allowing us to express our views regarding the proposed plan 

for eliminating the COLA and including the non-foreign areas in 

the locality pay program. 

There are nearly 13,000 Federal and postal employees in Alaska 

who receive COLA. 

The Administration seeks to transition from the COLA program 

to the locality pay program. As you know, COLA is not included in 

the calculation of retirement benefits whereas locality pay is. This 

results in Alaskan retirees receiving significantly less retirement 

pay than their counterparts in the 48 States. 

The Administration also seeks to limit their exposure to future 

litigation arising out of the COLA program. The COLA program 

has given rise to much controversy in several lawsuits, which have 

cost the U.S. Government hundreds of millions of dollars. Currently, the Office of Personnel Management is working with the 

COLA Committee representatives through the Survey Implementation Committee to carry out the 2000 Caraballo Settlement AgreeVerDate Aug 31 2005 13:07 Jan 23, 2009 Jkt 043090 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 P:\DOCS\43090.TXT SAFFAIRS PsN: PAT
20 

ment. Denise Hernandez, President of the COLA Defense Committee of Fairbanks and I serve on the Committee with the Office 

of Personnel Management. 

The concept of transitioning from the COLA Program to the locality pay program has been discussed for a number of years. In 

2003, all Alaska COLA Defense Committees were pursuing the concept to transition to locality pay. Finally, after 4 years, the proposal 

was included in the President’s budget and submitted to Congress 

in May 2007. We support the Administration’s proposal to transition from COLA to locality pay with modifications, which are necessary to ensure Federal and Postal employees are treated fairly 

and equitably. 

Based on the 1996 locality pay surveys in Alaska, Alaska was 

projected to receive the highest locality pay rate in the Nation. The 

OPM estimated Alaska’s locality pay rate at 38 percent. Since 

1996, the method of the calculating locality pay rate has changed 

and now Alaska is estimated to have a locality pay rate of 27.68 

percent. 

Under the Administration’s proposal there is a 7-year phase-in 

provision. In the first year, Alaska Federal Employees would receive one-seventh of the Rest of the U.S. locality pay rate which is 

13.18 percent. Employees in Alaska are being asked to work many 

more years in their career to achieve retirement benefits similar to 

those received by Federal employees in the 48 States. 

At the two March 2008 town hall meetings in Anchorage and 

Fairbanks, Alaska sponsored by Senator Stevens, the overwhelming response by the employees was phasing in locality pay 

over 7 years was not acceptable. Since 2003, Alaska Federal employees have been waiting for the opportunity to convert from 

COLA to locality pay. The reason provided by OPM that the RUS 

rate should be used the first year in Alaska is not a separate locality pay area, and it would take the government a year to determine 

appropriate locality pay rate for Alaska. While it is true Alaska has 

not been designated a separate locality pay area, the OPM was 

nevertheless able to estimate the locality pay rate for Alaska when 

they provided information at your request, Senator Akaka, for the 

locality pay calculator. We recommend using the Alaska locality 

pay rate in the conversion. 

The Administration’s proposal protects Postal employees pay by 

permanently freezing their Territorial COLA. Postal employees 

have expressed concern over being the only employees left receiving 

a non-taxable income and becoming low hanging fruit only to be 

plucked at another time. Postal employees would like to stay under 

the umbrella of all Federal employees in the COLA areas, as they 

are now. S. 3013 successfully keeps Postal employees under that 

umbrella. 

Where there are shortfalls in the Administration’s proposal, S. 

3013 seeks to address these issues by using an adjustment factor 

of 65 percent instead of 85 percent, phasing in the conversion of locality pay over 3 years instead of 7 years, allowing Postal employees to benefit with their counterparts in the COLA areas regarding 

retirement benefits, allowing employees to elect to have additional 

basic pay for annuity computation during the phase-in period and 

allowing employees to pay into the Civil Service Retirement Fund. 

21 

1The prepared statement of Mr. Cruz appears in the Appendix on page 102. 

Overall S. 3013 addresses many of the concerns expressed by employees in Alaska, except retirees. Apparently, there is a reluctance 

to include provisions in legislation to recognize the retirement inequities experienced by retired Federal employees. I am sure Congress never intended to have such disparity of retirement benefits 

between the Federal employees in the COLA areas and the 48 

States. Implementation of the locality pay program drastically reduced the retirement benefits of Federal employees in Alaska. Federal employees who retired from Alaska were dedicated to Federal 

service and it cost them dearly in their retirement benefit. We recognize retirees have not paid into the retirement fund. Section 7 

of S. 3013 could be amended to include language for allowing retirees to pay into the Civil Service Retirement Fund or by an offset 

withheld from the increased retirement benefit. 

The Alaska COLA Committees support S. 3013. We understand 

that any legislation will not be perfect for everyone. The Alaska 

COLA Committees believe it is important to have a fair and equitable resolution with respect to both pay compensation and retirement inequities that have existed since the implementation of the 

locality pay program. 

Thank you again, Mr. Chairman, for the opportunity to testify 

before your Subcommittee, and for your time and attention to this 

important matter. If you need additional feedback or have questions, we would be glad to offer our assistance. 

Senator AKAKA. Thank you very much, Ms. Warren. 

And now we ask Mr. Cruz for your testimony. 

TESTIMONY OF MANUEL Q. CRUZ,1 PRESIDENT, COLA 

DEFENSE COMMITTEE OF GUAM 

Mr. CRUZ. Hafa Adai, Mr. Chairman and Members of the Subcommittee. My name is Manuel Q. Cruz and I am the President of 

the COLA Defense Committee of Guam. I want to thank you for 

the opportunity to appear before this Subcommittee to testify on S. 

3013. I also want to thank you and Senator Voinovich for inviting 

me to this hearing. 

Almost to the exact date last year, May 30, 2007, the Office of 

Personnel Management sent a legislative proposal to Congress that 

would phase-out the Non-Foreign Cost of Living Allowance and 

phase-in locality pay for the Federal employees in Alaska, Hawaii, 

Guam and the Commonwealth of the Northern Mariana Islands 

(CNMI), Puerto Rico, and the U.S. Virgin Islands. President George 

Bush proposed the change in compensation policy as part of his fiscal year 2008 budget. It would change the pay system that is in 

place since 1948. 

You will note in the President’s proposal that locality pay will be 

extended to white-collar Federal employees in the COLA areas, 

while reducing COLA payments gradually. The changes will be 

phased-in over a 7-year period, and at the same time, workers will 

be receiving their so-called locality pay, which would boost salaries 

based on surveys of what is paid by the private sector in local labor 

markets. 

22 

While not knowing the full details of the proposal, it was felt by 

many of the affected white-collar workers on Guam and the CNMI 

that the 25 percent COLA that were being received at the time 

could be in jeopardy. Locality pay was considered, in most cases, 

to be not as high as COLA. Thus, it would appear that some workers may benefit under the proposal, while others could be hurt. 

Since 1948, Federal employees in Guam have received COLA to 

ensure that their pay reflects the high cost of living. COLA is not 

subject to Federal or Social Security/Medicare taxes. Locality pay, 

on the other hand, is taxed and considered part of base pay, which 

is used to calculate an employee’s retirement annuity. COLA is 

based on living costs, while locality pay is based on differences in 

the cost of labor. Additionally, COLA payments can be reduced, 

while locality pay has been increasing in the last few years. 

With the introduction of the Non-Foreign Area Retirement Equity Assurance Act of 2008, S. 3013, it is my understanding that 

COLA rates will no longer be determined based on the difference 

in the cost of living in Washington DC, but will now be the rate 

in effect on December 31, 2008. The Office of Personnel Management has been seeking slowly to phase-out the COLA system in 

favor of the locality pay system, but this new legislative proposal 

will speed up the process. The result will be that the new system 

will be fully in place in 3 years rather than the 7 years that was 

suggested by OPM. 

It is also my understanding that the legislative process is intended to benefit all Federal employee groups whose counterparts 

in the U.S. Mainland currently receive locality pay. Employees, 

who will soon be forced to retire due to age and those intending to 

retire in 3 years or less, will be able to buy in to the program to 

ensure that they may fully participate in the new system. The legislative proposal, however, doesn’t address already retired employees. 

It must be noted that Guam and the CNMI have some unique 

situation that may not be fully addressed by the new legislative 

proposal. No. 1, Post differential. Post differential is based on environmental conditions being significantly different from the continental United States and used by Federal agencies for recruiting 

purposes. PDs are authorized for Guam and the CNMI. The PD 

rate for Guam and the CNMI has been set at 20 percent. Like 

COLA, PDs do not count toward retirement. It is not clear in the 

legislative proposal how PDs will be addressed. Locality pay has no 

effect on the price of goods either in Washington, DC, or in the foreign areas. 

No. 2, NSPS. The NSPS Program only applies to Department of 

Defense (DOD) civilian employees. The majority of Federal employees on Guam work for DOD activities. How are questions on NSPS 

features (local market supplements) going to be addressed? NSPS 

implementation apparently has no effect on COLAs, so employees 

continue to receive COLA at the time of conversion. But, what 

about locality pay? 

No. 3, Non-Appropriated Fund (NAF) Employees. NAF employees 

do not receive locality pay. Also, COLA is not granted to employees 

in NAF position in paybands NF–1 and NF–2. 

23 

1The prepared statement of Mr. FitzGerald appears in the Appendix on page 105. 

No. 4, CONUS COLA. As a requirement of their military service, 

members of the Uniformed Services move about the country. Many 

military members and their families are assigned to a variety of 

low, moderate and high-cost locations. Private sector pay scales 

tend to reflect local living costs in U.S. locations, but military pay 

tables do not. Would such a COLA Program become a problem 

when the non-foreign COLA Program is phased-out? 

No. 5, DODEA Schools. OPM claims that the change would benefit workers because locality pay, unlike COLA, counts toward retirement. However, there would be no true benefit since the locality 

pay in a location, such as Guam, would amount to less than 

DODEA employees have been receiving from their salaries alone 

under their current system. 

In closing, I have to admit that I still have some mixed feelings 

regarding the proposed legislative proposal. Until such time that I 

learn more of the various provisions and ramifications of the proposal, I have to keep an open mind regarding the matter. However, 

I do want to point out for the record that the COLA issue will continue to be of great importance to Federal employees in the COLA 

areas, since it truly represents such a significant portion of their 

cash compensation. The fact is that although Guam and the CNMI 

are currently under the COLA program, they have profoundly different economies, labor markets, climates, and access to various resources, including those purchased by the Washington, DC area’s 

‘‘typical’’ Federal employee household. It is possible that different 

solutions may be appropriate for the different COLA areas, and 

that while a continuation of the COLA program is warranted in 

some areas, it may not be in others. As such, I sincerely urge the 

Subcommittee to address problems in the COLA areas, taking into 

consideration the unique attributes of each area. 

So, on behalf of the COLA Defense Committee of Guam and all 

the Federal employees on Guam and the CNMI, thank you again, 

Mr. Chairman and Members of the Subcommittee, for this opportunity for me to appear before you all. Si Yu’os Ma’ase! I will be 

happy to answer any question you have at this time. 

Senator AKAKA. Thank you very much, Mr. Cruz. 

And now we will hear from Mr. FitzGerald. Will you please proceed with your testimony? 

TESTIMONY OF MICHAEL FITZGERALD,1 PRESIDENT, FEDERAL MANAGERS ASSOCIATION CHAPTER 187, NAVAL FACILITIES ENGINEERING COMMAND HAWAII 

Mr. FITZGERALD. Good afternoon, Chairman Akaka. My name is 

Michael FitzGerald and I’m the President of the Federal Managers 

Association Chapter 187, Naval Facilities Engineering Command 

Hawaii where I serve as the Utilities Supervisor for potable water. 

On behalf of the 200,000 managers and supervisors in the Federal 

Government whose interests are represented by FMA, I’d like to 

thank you for allowing us to express our views regarding proposals 

to change the pay system for Federal employees in Alaska, Hawaii, 

and U.S. Territories. 

24 

Since 1948, Federal employees outside the contiguous United 

States have received a non-foreign cost of living allowance to ensure that their pay reflects the high cost of living in these areas. 

In Hawaii, this non-taxable payment can be up to 25 percent of the 

employee’s basic pay; however, COLA is not credited toward retirement. At the time of its inception, COLA was viewed as hardship 

pay for Federal employees. Today, however, we are faced with a 

much different situation and population dynamic. 

Since 1990, employees in Hawaii and Alaska have not been included in the locality pay pool. Initially, locality pay was rather low 

and the COLA seemed to offer reasonable compensation for the 

high cost of living in these remote States. As time went on, however, it became apparent that retiring COLA recipients were disadvantaged by receiving smaller annuities than their fellow Federal employees on the mainland. 

High locality pay in the 48 States lures employees to leave Hawaii and seek an increased annuity toward the end of their careers. 

With the Los Angeles area offering a 25 percent locality pay adjustment and the San Francisco area offering 32 percent, it’s easy to 

see why employees would be looking to complete their final 3 years 

in these cities. Specific data to document this migration is hard to 

come by, but the stories are endless. In my office alone, a husband 

and wife have separated for their careers, with the wife heading to 

San Francisco and the husband staying here in Hawaii. They plan 

to retire in the islands, but must endure a long distance relationship in order to properly plan for their retirement. 

In May 2007, at the urging of the President, OPM issued the Locality Pay Extension Act, which proposed to phase in locality pay 

and phase out the non-foreign COLA. We at FMA appreciate the 

support and the attention the Administration is placing on this 

problem. However, we at FMA believe that the OPM plan does not 

go far enough to recognize the needs of today’s hardworking Federal employees outside the contiguous United States. In fact, it is 

our belief that the proposal continues the discriminatory and illogical denial of full locality pay for Federal employees in these areas. 

OPM’s 7-year phase-in is 7 years too late. We are facing real retention and recruitment issues and we need to move up the timetable 

on any COLA to locality pay conversion. 

More problematic is that the proposal actually reduces net take 

home pay for most Federal employees in Hawaii and Alaska, since 

the added locality pay component also brings with it a tax burden. 

OPM recognizes this with a 15 percent offset to adjust for added 

taxes, but most employees in Hawaii fall into the 25 or 28 percent 

tax bracket. By applying this 15 percent offset, most employees will 

see less money in their paychecks than if the system is left as is. 

Simply put, this is unacceptable and will only exacerbate our growing retention problem. 

In response, FMA submitted an alternative plan based on a similar formula with two key changes. We recommend full implementation of locality pay authorized by law in the first year of conversion. Additionally, we believe an offset to COLA must be at least 

25 percent to mitigate the tax burden associated with locality pay. 

Our members strongly believe that any plan must address retention and recruitment issues as well as protect take home pay. 

25 

1The prepared statement of Ms. Kaolulo appears in the Appendix on page 112. 

The baby boomer retirement period is upon us. However, contrary to OPM, we at FMA do not believe a phase-in period will 

delay the retirement tsunami. We are, however, sensitive to the 

cost burden of locality pay in the form of increased annuities. At 

the same time, the additional taxes collected as a result of locality 

pay, coupled with shrinking tax free COLA payments, would offset 

increased annuity amounts. After the first year of implementation, 

a Hawaii area locality pay should be established and the proper 

amount of compensation applied. We have seen some preliminary 

studies that put Hawaii’s locality pay around 20 percent and Alaska’s at 28 percent. 

I would like to take a moment to address recently introduced legislation, S. 3013, the Non-Foreign Area Retirement Equity Assurance Act, introduced by Senators Akaka, Inouye, Stevens and Murkowski. We are encouraged to read that several of our concerns are 

addressed in the bill and we congratulate the fine Senators from 

Alaska and Hawaii on developing this critical piece of legislation. 

The bill proposes a 3-year phase-in of locality pay combined with 

an annuity buy-in aimed at stabilizing the current retirement eligible workforce. The legislation also advises a 35 percent offset to 

COLA to protect the pay of all Federal employees as they transition from COLA to locality pay. This is critical to retaining younger 

employees who have told us they would oppose any change that 

would adversely affect their pay check. 

Additionally, Thrift Savings Plan participants will see increased 

eligible matching funds due to the rise in basic pay. The resulting 

compensation package will make the Federal Government more 

competitive in the current tight labor market. This is essential if 

the highly critical missions of Federal agencies in Hawaii and Alaska are to be met. 

COLA served its purpose half a century ago. It is now outdated 

and serves as a barrier to Federal employment. By acting now and 

implementing a market-oriented approach to determining local salaries, Congress can arm Hawaii and Alaska managers with one 

more tool to attract and retain today’s highly mobile and talented 

workforce. Thank you for your time and consideration of our views. 

I look forward to answering any questions you may have. 

Senator AKAKA. Thank you very much, Mr. FitzGerald. 

Now we will hear from Ms. Kaolulo. 

TESTIMONY OF TERRY KAOLULO,1 PRESIDENT, HAWAII STATE 

ASSOCIATION OF LETTER CARRIERS, U.S. POSTAL SERVICE, 

AND LETTER CARRIER, KAILUA, HAWAII 

Ms. KAOLULO. Aloha, Chairman Akaka, and thank you for the 

opportunity to appear before your Subcommittee today. My name 

is Terry Kaolulo and I have been a full-time letter carrier in Kailua 

for 23 years. In addition, I also serve as the President of the Hawaii State Association of Letter Carriers. On behalf of letter carriers in the non-foreign areas I would like to thank you for introducing S. 3013, the Non-Foreign Area Retirement Act of 2008. It 

is also my understanding that the postal employees represented by 

26 

other postal unions here in Hawaii share our general support of the 

legislation. 

Traditionally, postal employees have received a Territorial COLA 

or T–COLA in the non-foreign areas. This T–COLA is a percentage 

amount added to our base pay that is derived from a cost of living 

survey conducted by the Office of Personnel Management. It is a 

tax-free payment made to employees. However, these employees 

cannot factor these payments into their base pay and therefore 

they do not count towards retirement. Postal employees living in 

the non-foreign areas are generally supportive of the approach that 

your legislation takes to address this issue, though our national organizations do not support area COLA’s or locality pay in general. 

So while we can support your bill’s enhancement of a long established pay differential for workers employed in non-foreign areas, 

we would propose an amendment to the bill defining this change 

as Territorial Postal Pay as it pertains to postal employees. 

Bargaining unit employees of the Postal Service living in these 

non-foreign areas support the integration of T–COLAs into taxable 

base pay, as S. 3013 provides. We would also like the Territorial 

Postal Pay to be phased in and paid in the same manner as you 

propose for the other Federal workers under the General Services 

schedule—over a period of 3 years. 

Territorial Postal Pay would be set at the same level as the locality pay established for Federal employees in the non-foreign areas. 

A possible alternative to this pay methodology could be for postal 

employees to have their T–COLA completely phased into Territorial Postal Pay over the same 3-year period with one-third of T– 

COLA phased into Territorial Postal Pay each year. The phase-in 

would include the same 65 percent formula used for GS employees 

to compensate for lost take home pay due to additional taxes. 

Postal employees in the non-foreign areas realize that the price 

of goods has skyrocketed throughout the entire country and families everywhere are feeling the pain. However, postal employees 

here still pay a huge premium for both domestic and imported 

goods and services compared to our co-workers on the mainland. 

We, therefore, believe that continuation of a T–COLA or Territorial 

Postal Pay is not only essential to our members but also entirely 

justified. 

We look forward to working with you to ensure that this legislative proposal is effective and a bill that postal employees in the 

non-foreign areas can ultimately support. Thank you for the opportunity to testify here today and I would be happy to answer any 

questions that you may have. 

Senator AKAKA. Thank you very much, Ms. Kaolulo. I have a 

question here for all of the witnesses on the panel. I understand 

how important this issue is to each of you, and you expressed that 

very well. As you know, my goal is to protect employees’ take home 

pay and ensure retirement equity for employees in the non-foreign 

areas. 

I introduced the Non-Foreign AREA Act with Senators Stevens, 

Inouye, and Murkowski to further the discussion on conversion to 

locality pay and to resolve questions with the Administration’s proposal. 

27 

What recommendations do you have to improve upon the NonForeign AREA Act? Are we missing anything? Let me start with 

Ms. Matsuo. 

Ms. MATSUO. I think the Act, as proposed, encompassed all of the 

comments that your team gathered when they were here last year, 

so every aspect of concerns that people have, recommendations are 

captured in this proposal. So in terms of all the ideas being on the 

table, yes, they are on the table. Whether or not they mix, they 

blend well together or actually fix the problem, I think that’s still 

what needs to be discussed because there are some parts that just 

don’t seem to fit a permanent fix. So if a permanent fix is being 

sought after, there still needs to be some discussions on how to 

make things fit. 

Senator AKAKA. Ms. Warren. 

Ms. WARREN. I would agree with Ms. Matsuo concerning there’s 

a lot of information that is in the bill and expressed the concerns 

of employees. From Alaska’s standpoint, what I’ve heard from employees is that the 27.68 percent, using that as the amount to be 

used at the phase-in and having a phase-in—if 7 years is too long, 

3 years you have it and the buy-in is available there for those who 

would be able to buy in if they left earlier. 

But depending on how all the provisions of the Act stay in and 

work together will depend on what really will be best. I think it’s 

an excellent piece for discussion, and if one provision comes out, it 

will have to be looked at, how it affected another provision that 

was in there and whether or not it would place a permanent fix for 

this. 

And another issue is retirees. Retirees is not within the bill, and 

that is one thing that is missing out of the bill is those employees 

that have already retired. 

Senator AKAKA. Mr. Cruz. 

Mr. CRUZ. I believe that everything that we have on the floor has 

been taken care of. But one of the issues that was brought up by 

the younger employees had to do with the opt out, that saving 

clause provision. What happens after a person opts out, and have 

that 25 percent on COLA, then after 10 years, let’s say the locality 

pay went beyond 25 percent. Would that employee then feel that 

he made a mistake and that somehow the younger generation employees felt that he chose the wrong decision? And, I guess it’s a 

question that after 10 years, like I said, the COLA rate might have 

gone up more than the 25 percent. 

Senator AKAKA. Thank you. 

Mr. CRUZ. That’s one of the issues that I just wanted to put on 

the table. Thank you. 

Senator AKAKA. Thank you, Mr. Cruz. Mr. FitzGerald. 

Mr. FITZGERALD. The dangers of opting out notwithstanding, I 

think the biggest thing that caught us by surprise with the bill was 

the buy-in provision, and we are encouraged to see that because it 

helps stabilize the current retiree eligible work force, which was 

our biggest concern and the reason why we recommended full locality in the first year of inception. I think the mechanics of that buyin are not well known, and I think that’s where a lot of the discussion in the coming months will be focused, especially from our 

membership and groups that we’ve been working with. 

28 

How will that buy-in work? We have to run the numbers and can 

we extend that buy-in period, can we say look back 3 years from 

the inception to make sure that the high three is captured with 

COLA and can we extend it past 2011 or a 3-year phase-in period 

to ensure that all COLA is captured for the high three, if in fact 

the COLA continues, as we think it will, past the 3-year phase-in. 

So I think the buy-in is the one piece that really needs to be looked 

at. Thank you, sir. 

Senator AKAKA. Thank you. Ms. Kaolulo. 

Ms. KAOLULO. Chairman Akaka, I’m very pleased with the outcome of the bill that is before us. I believe that your staff has 

worked very hard on the fact-finding meetings that they held here 

in the islands and that they have taken everything into consideration and I’m very pleased to see what has come out of this bill and 

I think that you have not overlooked anything. Thank you. 

Senator AKAKA. Thank you. I have another question for the entire panel. I know many of you are concerned about retroactive coverage for retired Federal employees. You heard OPM’s response to 

my question about covering retirees. What are your reactions? Ms. 

Matsuo. 

Ms. MATSUO. Yes. Well, it’s no secret that we filed a lawsuit. We 

believe strongly that if Hawaii and Alaska were included from the 

inception that we would not have this problem and this huge meeting to discuss how we are going to resolve this problem that has 

grown out of proportion. So when I hear OPM say that there would 

be no retroactive, that’s a statement that I could expect from the 

government to say. But on the other hand, I would be asking them 

to be open to trying to fix an inequity that they were well aware 

of since 1994, and they even proposed trying to consider converting 

our COLA to locality pay at that time because there is an internal 

memo that was surfaced in our lawsuit that OPM discussed how 

do we take care of the retirement inequity in the COLA areas since 

they do not receive locality pay. So it’s been 14 years that this conversion idea has been out there. We even proposed working with 

OPM several times to try to do a conversion and they even proposed language that we could consider and it didn’t go anywhere, 

unfortunately. 

But getting back to your question of how do I respond to not 

being retroactive? I said, well, we have to fix that retirement inequity. It has been there for 14 years, I’m living it as a retiree not 

receiving my proper share of my proper retirement benefits so I 

definitely am experiencing it now. 

So I can only ask OPM to be open to this. We are trying to arrive 

at some kind of settlement in our lawsuit that will take care of all 

employees and if some kind of legislation could be done to include 

retirees in this fix, our lawsuit will go away. 

Senator AKAKA. Ms. Warren. 

Ms. MATSUO. And it is OPM’s desire not to have any more lawsuits, so what better way to discontinue this current lawsuit than 

to arrive at some kind of legislation. 

Senator AKAKA. Thank you, Ms. Matsuo. Ms. Warren. 

Ms. WARREN. Thank you, Chairman Akaka. I think there’s the 

term retroactive is out there for the retirees, and I think there 

needs to be a look at openness concerning what retirees I’ve heard 

29 

that are being looking at is starting from this date forward to receive an increase in the retirement benefits, so whether or not 

that’s really the term of retroactiveness that we think about when 

we’re going to go back clear in time and all, but what retirees are 

looking at is increase in retirement benefits, and that could be done 

a number of ways and how you look at that. And I really think this 

is an opportunity to be open, to have the discussions about it, and 

see if there is a way that would help the retirees get their increased retirement benefits that they should have had all along, 

settle the lawsuit that’s out there, and also have it simplified 

enough that the government will be able to implement it. 

Senator AKAKA. Mr. Cruz. 

Mr. CRUZ. As you know, the territories and the commonwealth, 

because we are not one of the 50 States, it’s almost like a double 

whammy and we’re in self denial in a sense because of the fact that 

if the FEPCA did not include the territories, and even if they tried 

to include them, only the contiguous States and Hawaii and Alaska 

should be included as States. More or less we need to really have 

a clear understanding whether we can be eligible for those retroactive retirement issues. 

So in a sense, because we don’t have a Senator, we look to the 

Senators of Hawaii and Alaska for answers regarding this matter 

because we do feel that it was an inequity on their part because 

we’re all Federal employees and if we’re entitled to this retroactive 

retirement issues, then we should be participating. Thank you. 

Senator AKAKA. Mr. FitzGerald. 

Mr. FITZGERALD. Senator, we have many retirees in our association, and they’re very active and vital members, and I believe that 

they align with us and focusing on today’s workforce in trying to 

come up with a solution that would keep our workforce in the Federal Government vital, keep Federal Government as the employer 

of choice, and while we’re open to any discussion for retirees, we 

didn’t really expect that any bill coming forward would include retirees, so we will definitely talk to our members, but the focus of 

the Federal Managers Association is to maintain a vital work force 

for today and tomorrow. Thank you. 

Senator AKAKA. Thank you. Ms. Kaolulo. 

Ms. KAOLULO. Well, I believe there needs to be a starting point, 

and I think that is a big topic of discussion. I think what we would 

really like to see is fairness being brought up. We’re not out here 

to take the world in our own hands, but we want to be fair, we 

want our employees to be treated fairly. And so that starting point 

will have to come up in a discussion with the postal service in regards to the postal service. Thank you. 

Senator AKAKA. Let me try your memories. I understand that a 

proposal similar to those we are discussing today was discussed 

about 5 years ago. What were the concerns with the proposals at 

that time? Do those concerns remain today? Ms. Matsuo. 

Ms. MATSUO. Actually the only two persons who can talk about 

that proposal are Ms. Warren and myself because we actually 

worked with OPM in that 2003 legislative language. And at that 

time, we were actually contemplating just a straight conversion of 

COLA to locality pay, and the employees would have to take the 

30 

brunt of the Federal income tax burden in our proposal just to get 

something done. 

But it was actually OPM that came back with that 65 percent 

factor, and when it was explained to us, OPM said, well, the only 

way we can keep your pay whole, intact is to provide you an additional COLA amount that would help cover the Federal income tax 

burden. So, Ms. Warren and I were totally shocked at that because 

we never expected it. But here was OPM saying that it is not the 

government’s intention to take away pay, so let’s do this adjustment to your COLA to give you an additional amount to help pay 

your Federal income taxes until COLA is completely phased into locality pay. 

So it was on the part of the government that this take home pay 

protection came about, not from any of us. We were extremely 

pleased because of our long working relationship with the OPM 

staff that we had established a trust and a fairness in our discussions in trying to find the best solution for our COLA employees. 

That 2003 proposal also took care of the special pay situation. At 

the time if it had been implemented then, we would not have had 

the budget concerns that we have today. That proposal could have 

passed, I think, we think, and OPM thought then, that it could 

have passed even the budget process, and so unfortunately for 

some reason, the proposal was not out in the public, but it was out 

to some people who felt that the conversion would not apply because they just didn’t understand the mechanics of that take home 

pay preservation. 

And so we got a lot of feedback from FERS employees who would 

benefit from it but who said they won’t do it because all they understood was now the locality pay is taxable and it will impact my 

take home pay. But that’s why we did the calculations, and our calculations show that there is very little impact on take home pay 

for FERS employees using the 65 percent factor. 

Senator AKAKA. So does S. 3013 address these concerns? 

Ms. MATSUO. Yes, it does. Definitely. 

Senator AKAKA. Ms. Warren. 

Ms. WARREN. Yes, it does. And in the 2003 legislative concept, 

it was a concept to lay out there to discussing, and Ms. Matsuo 

says it is, we had FERS employees who thought that they would 

be left out of it and didn’t understand that with the conversion that 

their take home pay would be protected, and we worked extensively 

with individuals when we were doing that and it just didn’t go anywhere, but yes, S. 3013 takes into those concerns. 

Senator AKAKA. Now, let me just ask the other three witnesses 

if you care to make a statement on this. 

Mr. CRUZ. Because of the fact that this only applies to the two 

of them, COLA areas, we’re just waiting on the wing to see how 

things happen. So that’s all I can say for now. 

Senator AKAKA. All right. Thank you, Mr. Cruz. Mr. FitzGerald. 

Mr. FITZGERALD. If I could add something, Senator, I wasn’t 

around during those initial discussions. I was around, but I wasn’t 

in the discussion, but I think one thing that changed since, from 

what I gather is the dissemination of information has increased 

greatly during that period, since May 2007, almost a year ago, 

until today, and a lot of people are more aware, and I think the 

31 

push back that was being felt by the FERS employees or the push 

back that the FERS employees were giving is less now as they 

start to understand the mechanics of how their base pay will be 

protected, how their TSP will grow, how they will be able to keep 

up with the counterparts on the mainland and how COLA is now 

starting to shrink. 

And I think that S. 3013 addresses a lot of the issues that were 

discussed in 2003, but with the heightened awareness, I think it 

is falling on more receptive ears now than it maybe had in the 

past. 

So I want to thank your staff, and your website is a great source 

of information and I think a lot of people have been taking a look 

at that. 

Senator AKAKA. Since you mention that, let me tell all of you in 

the audience that you can find a lot of information about S. 3013 

and the Administration’s proposal on my website. So please make 

use of that. 

Ms. Kaolulo, do you care to make any statement? 

Ms. KAOLULO. No. I think Ms. Matsuo is more knowledgeable on 

that part. 

Senator AKAKA. Ms. Kaolulo, the Administration’s proposal 

would freeze COLA rates for postal workers, but provides no additional information. You have heard the proposals from Ms. Mitchell 

on the first panel as to how the Postal Service would address this 

issue. What do you think of the postal service’s proposal? 

Ms. KAOLULO. Well, I’m a little concerned. I don’t think that it 

is concrete enough to really understand. I think that most of us 

have to have input into it, but I don’t think I would be afraid. I 

would be really afraid if they were to take it into their hands that 

our employees would be afraid. Later on down the road, 5 years 

from now, people would forget what T–COLA is all about and that 

it would go away. It would just disappear and nobody would remember what T–COLA was about. So I’m a little afraid of that, 

that it would disappear somewhere in the distance because we’d be 

the only ones receiving T–COLA. 

Senator AKAKA. Mr. FitzGerald, we consistently hear from the 

Senior Executives Association how the pay for performance system 

is a disincentive for GS–15 employees looking at the Senior Executive Service. If there is no locality pay or non-foreign COLA for 

SES employees in Hawaii, what impact will that have on the Federal managers looking to apply for the SES? 

Mr. FITZGERALD. Well, in my remarks I mentioned people leaving Hawaii to accept positions, on the West Coast especially, but 

the back end of that problem is it’s also hard to recruit at the 

upper level leadership levels of SES, higher level technicians, engineers, and leaders basically come from. 

As people get further along in their careers and assume lead positions of leadership and technical expertise, they become more 

recruitable and more mobile. A lot of them, so called empty nesters 

can take jobs on the West Coast, and so we see them leaving to 

finish out those 3 years and then backfilling those positions becomes increasingly difficult because people don’t want to give up 

their locality pay, especially high locality pay to come to live in Hawaii. So we have seen that happen at the Pearl Harbor Naval ShipVerDate Aug 31 2005 13:07 Jan 23, 2009 Jkt 043090 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 P:\DOCS\43090.TXT SAFFAIRS PsN: PAT
32 

yard and a couple positions which go months at a time unfilled, 

and that has an impact on project management and other vital 

functions that the shipyard now holds. 

Senator AKAKA. Mr. FitzGerald, recruitment and retention and 

Federal agencies is a big concern for many managers. What impact 

would S. 3013 have on recruitment and retention of employees in 

non-foreign areas? 

Mr. FITZGERALD. It would be huge, sir. It would put the pay in 

Hawaii comparable across the Nation. It would allow for people 

who are currently holding positions of importance to stay in Hawaii 

and to fulfill succession planning plans, make sure that the seamless changeover takes place, wouldn’t leave so called hiccups in 

leadership, and it would also allow people to retire on their own 

terms, so instead of stampeding out the door, or holding on too 

long, they could retire on their career plan. So we think that S. 

3013 really does address the recruitment and retention issue primarily. 

On the other side, for people coming into the service at the lower 

levels, the protection of take home pay and making sure that 

younger employees see the Federal Government as an attractive 

place to work is also important. The bill does that as well. 

Senator AKAKA. Ms. Matsuo and Mr. FitzGerald, the Department 

of Defense is the largest employer of Federal workers in Hawaii. 

As you know, the Department continues to roll out NSPS, which 

gives the Department the flexibility and pay to its employees. What 

concerns have you heard from DOD workers who are under NSPS 

about the conversion to locality pay? 

Ms. MATSUO. Let me answer that. First of all, I want everybody 

to know I’m not a DOD employee, so everything I know about 

NSPS is what I read, what I hear from other people and from my 

own husband, who is going under NSPS now. My understanding of 

this conversion is a lot of NSPS people have not really looked at 

how this conversion will impact on their program. And I think that 

Mr. Bunn, who spoke for NSPS, kind of indicated that there is no 

clear understanding of how this conversion will work out for the 

DOD people. 

For example, COLA is something that our employees currently 

receive and what we’re doing is converting that COLA over to locality pay intact as best as possible. So it’s not that they’re rolling 

over into locality pay per se under the NSPS system. It’s trying to 

convert COLA intact wholly over to locality pay so that they can 

enjoy the locality pay that their counterparts receive in the 48 

States. 

If we were to convert COLA to locality pay, and NSPS has been 

implemented in an area, what I understand about NSPS is locality 

pay is frozen at that point in time, so whatever you earn, you receive up to that point in time, is in your base pay permanently. It’s 

only the additional raises, locality pay raises that will now go into 

a pool from which that local pay supplement will be paid from. 

Mr. FITZGERALD. Market supplement. 

Ms. MATSUO. So we need to try to get this COLA over to that 

locality pay that they’re entitled to as you convert COLA, and so 

that needs to work outside of the NSPS pay system. And once it’s 

fully converted over, then the employees would—well, that’s not 

33 

quite true. We need to roll over COLA to locality pay outside of 

their system. 

Whatever is currently happening in NSPS with the annual pay 

increases henceforth will still continue to go into the pool from 

which that local market supplement will be paid. And so that needs 

to happen separately because it’s still COLA and we’re entitled to 

that full amount in that conversion process. And it can only happen 

if it works outside of the current system. 

So we’re trying to do something and it’s being placed into the 

box, but that box doesn’t help the conversion to occur fairly and 

properly. And so we need this additional attention to make sure 

that the COLA conversion converts completely to locality pay before they get put into this box. 

Senator AKAKA. Mr. Fitzgerald. 

Mr. FITZGERALD. As was related to the Subcommittee earlier by 

Mr. Bunn, the roll out in Hawaii has been rather slow for NSPS 

and it’s maybe a cautious approach or just the way it worked out, 

I’m not really sure. So there hasn’t been a lot of feedback on 

whether it’s good or bad. 

There has been some concerns with the pay banding and lumping 

of what traditionally would have been different GS levels into one 

pay band and how would that work, how would the local market 

supplement be for a traditional GS–9 now lumped in with a GS– 

11. There’s been concerns about that, and also, there’s been concerns about the slow roll out or phase in of locality pay during a 

conversion that the performance monies that would be paid for people who are your top performers just isn’t there. A slow roll out just 

means that money just dribbles in. 

Like Ms. Matsuo was saying, all you get is the annual increase 

to pay right now for the pay pools, so we advocate a quick conversion so that this local market supplement, which apparently is tied 

to locality pay, those issues can be worked out and the money will 

be there to reward the top performers, the people who are really 

out there making it happen for the DOD. And so that’s one of the 

concerns. 

Senator AKAKA. Well, thank you. You started to answer my final 

question. I have a final question for all of you on the panel, and 

it has to do with recommendations and suggestions. The question 

is are there any other recommendations or suggestions you would 

offer to address the retirement inequity for employees receiving 

non-foreign COLA? This would be your closing remarks, so you can 

make any other comment as well. So let me begin with Ms. 

Matsuo. 

Ms. MATSUO. Yes. On the retirement inequity, I believe that 

we’ve worked with OPM since 1995 on the COLA program, and our 

involvement with the COLA program then, we were able to get the 

COLA methodology fixed, so that is a more fair and accurate calculation of our COLA rates today and that’s probably why our 

COLA rates are decreasing because we fixed the program well. But 

we did it fairly with the objective being that we wanted something 

to be more fair and accurate in the COLA program. 

And in our relationship with OPM staff people in the COLA program, I think we’ve established a really good working relationship, 

one of respect, we listen. We listen to each other, we listen to the 

34 

goals, we try to find a common solution that will benefit both the 

government and Federal employees. 

So trying to fix something for retirees, I would strongly recommend that a group be formed where we can actually sit with 

OPM to try to craft something out for the retirees. And by doing 

that, it could possibly satisfy what we’re looking for in our lawsuit, 

too, so we would actually be killing two birds with one stone by 

doing that. 

Senator AKAKA. Ms. Warren. 

Ms. WARREN. Thank you, Chairman Akaka. I would like to thank 

the senators, Senator Inouye, Akaka, Murkowski and Stevens for 

introducing this bill, the Senate bill, because it is a start of looking 

at the issues concerning the COLA areas, and on the note of the 

retirement program, the inequities in the retirement, it is true that 

through the COLA program we work successfully with the Office 

of Personnel Management and made great strides in improving 

that COLA program, and I think with this retirement inequity 

issue, that is an opportunity to also work quickly with the Office 

of Personnel Management and others to really understand what 

the inequity is and how to really fix it so that it can be done. I really think it can be done if there’s an openness and an understanding 

by all parties. 

Senator AKAKA. Thank you so much. Mr. Cruz. 

Mr. CRUZ. Senator, the only big thing that I’d like to bring up 

is that, if you remember, Guam went through a contracting 

outsourcing a few years ago and we lost a lot of good Federal employees as a result. And a lot of these employees, in order to make 

good of this situation, a lot of them took early retirement and really lost out because there’s nothing else they can do, unless they 

have to leave the island, and we have a lot of them that left the 

island, thousands of them. In fact, some of them may be here in 

Hawaii in the shipyard, in NAVFAC Hawaii. We lost a lot of good 

employees. 

And when they heard about this retroactive retirement, a lot of 

them felt that maybe a lot of good things can come out of this. And 

also, the possibility that some of them are still young, in a sense. 

But, the fact remains that any future employment, unless the military build-up should bring in ‘‘contracting in,’’ like they did here in 

Hawaii, maybe some of these employees may want to come back 

and work for the government again. 

But, this is really an issue, more or less—and a lot of the employees right now are looking at their future. If they continue to 

be outsource, those retirement issues become very real in time. 

So, if we’re going to address any of these retirement issues, we 

have to be looking on both sides of the street here, those who left 

the service not of their own account, but wanted to keep whatever 

they can get, and those employees on the island who left the island 

and working all over the country now, but they’re still yearning to 

come home. And, if that day should ever be possible, maybe something good could come out of this. Thank you. 

Senator AKAKA. Thank you. Mr. FitzGerald. 

Mr. FITZGERALD. I think a lot of what’s been said we would echo 

at the FMA, that taking care of retirees is important to the Federal 

managers, supervisors and Federal agencies everywhere. We would 

35 

like to keep the dialogue open. We would offer the support of our 

association to continue to work on this issue. We have, like we stated earlier, many vital retirees who are keenly interested in this 

issue and we would like to offer our support and move forward 

with the current S. 3013, and hopefully include a provision for 

them, but if not, a parallel effort would be more than acceptable 

for us in the association. 

Senator AKAKA. Thank you. Ms. Kaolulo. 

Ms. KAOLULO. Chairman Akaka, I must express to you that we 

are an island, we all live on this island, we work on this island, 

and unfortunately we are apart from the United States, apart from 

the contiguous 48 States. As gas prices soar and our economy takes 

the slide it is in now, further on in maybe 5 to 10 years, I shudder 

to think what it would be for the cost of living here in Hawaii. I 

don’t want the postal employees to be left behind. I thank you very 

much for including us in your S. 3013. 

There is just too many things we take for granted, and one of 

them is we are on an island, but we do have to remember we are 

apart from the rest, so I thank you very much for your consideration. 

Senator AKAKA. I want to thank all of you, so let me say mahalo 

again to our witnesses for being here today. Your participation has 

helped address the questions and also the concerns raised by Federal workers in the non-foreign areas, and also by agency officials. 

I continue to believe that by working together we can ensure that 

employees in Hawaii, Alaska and the territories are not disadvantaged when it comes to their pay and retirement. I will continue 

to ask that employees write me and let me know their views on 

these proposals so that we can improve S. 3013 in the best interest 

of all parties. 

The hearing record will be open for 2 weeks for additional statements, and I would say that some of you, your comments and recommendations here will certainly help us in moving forward. 

Again, thank you all for coming. This hearing is adjourned. 

[Hearing was concluded at 3:33 p.m.] 

(37) 

A P P E N D I X 

PREPARED STATEMENT OF SENATOR STEVENS 

Thank you, Chairman Akaka for holding this important hearing on an issue that 

greatly affects Federal employees in both Alaska and Hawaii. 

I also thank the witnesses for traveling so far to be here today. We very much 

appreciate your input on this bill, S. 3013, which Senator Akaka, Senator Inouye, 

Senator Murkowski, and I introduced. 

It is our goal to produce the best legislation possible to finally bring equity in retirement to the many Federal employees in Alaska, Hawaii, and the territories. 

Alaska and Hawaii are the only States in which Federal employees do not receive 

locality pay. Instead, they receive what is called a non-foreign cost of living allowance, or COLA. 

COLA was put in place in 1949, before Alaska and Hawaii were States. It is based 

on the cost of living in an area compared to the cost of living in Washington, DC. 

COLA was not available to employees in the lower 48 States. 

When locality pay was established to benefit Federal employees in the lower 48, 

Alaska and Hawaii were not included because they were already under the COLA 

system. 

Locality pay brings Federal salaries closer to private industry salaries in an area. 

The key difference betwen these two systems is how it affects a Federal employee’s retirement. 

As you know, a Federal employee’s retirement is based on their ‘‘high three’’ years 

of service, usually the final 3 years of their base pay salary. 

COLA is non-taxable income that cannot exceed 25 percent of the base pay. It is 

currently being reduced in Alaska and Hawaii by 1 percent each year. 

Because COLA is not taxed, it is not considered as part of an employee’s base pay 

for retirement purposes. 

This means an employee in Alaska retires with a much lower ‘‘high three’’ than 

an equivalent position in the lower 48. 

Locality pay is taxable income, but is also considered part of an employee’s base 

pay for retirement purposes. This makes a big difference in the amount of retirement benefits an employee receives. 

Alaska has one of the highest costs of living in the Nation. Our Federal employees 

need to know they can continue to afford living in the State they call home on the 

money they receive through their retirement benefits. 

Many Alaskan Federal employees nearing retirement relocate to the lower 48 in 

order to receive locality pay for their ‘‘high three.’’ 

This puts my State at a disadvantage because we are losing highly skilled, seasoned employees. 

This is an inequitable and out-dated system. It is time to bring retirement equity 

to all States. 

While drafting this bill, Senator Akaka and I attempted to address several employee groups with unique circumstances, including postal employees. 

I understand that the legislation as currently written is problematic for the Postal 

Services, and I am confident we can work closely with them and the postal employee 

unions to ensure that postal employees in Alaska and Hawaii are protected. 

I have often said the Postal Serice is a lifeline for Alaskans, and I intend to do 

what is best for both the Postal Service and its employees during this transition. 

It is fortunate that Senator Akaka is the Chairman of the Subcommittee with jurisdiction over this issue, and I will continue to work very closely with him to pass 

this legislation before the 110th Congress concludes. 

Again, I thank all the witnesses and look forward to their testimony, comments, 

and suggestions. 

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