In January 2004, federal white-collar employees received a 1.5% annual pay adjustment anda 0.5% locality-based comparability payment under Executive Order 13322, issued by PresidentGeorge Bush on December 30, 2003. (1) A larger payadjustment of 4.1% for 2004 was included inthe conference agreement for the Consolidated Appropriations Act for FY2004 ( H.R. 2673 ). (2) H.R. 2989 , the Departments ofTransportation and Treasury and IndependentAgencies Appropriations Bill, 2004, as passed by the House of Representatives and the Senate in thefirst session of the 108th Congress, provided a 4.1% pay adjustment to federal civilian employees. As the first session was drawing to a close, H.R. 2989 was incorporated in H.R.2673. The House of Representatives agreed to the conference report accompanying H.R.2673 on December 8, 2003, and the Senate agreed to the conference report on a 65-28 (No.3) vote on January 22, 2004. President Bush signed H.R. 2673 into law on January 23,2004, and it became P.L. 108-199 . The law provides an additional 2.1% pay adjustment to federalcivilian employees. The President issued Executive Order 13332 on March 3, 2004, to provide theadditional pay adjustment, which was allocated as an average 1.2% annual and 0.9% locality. (3) OPMpublished revised salary tables for 2004 on its website on March 4, 2004; these are available on theInternet at http://www.opm.gov . Table 1 shows the recommended locality payments, theauthorized locality payments, and the net annual and locality pay increases. Federal white-collar employees are to receive an annual pay adjustment and a locality-based comparability payment, effective in January of each year, under Section 529 of P.L. 101-509 , theFederal Employees Pay Comparability Act (FEPCA) of 1990. (4) Although the federal pay adjustmentsare sometimes referred to as cost-of-living adjustments, neither the annual adjustment nor the localitypayment is based on measures of the cost of living. FEPCA has never been implemented asoriginally enacted. The annual pay adjustment was not made in 1994, and in 1995, 1996, and 1998,reduced amounts of the annual adjustment were provided. For 1995 through 2004, reduced amountsof the locality payments were provided. Federal white-collar employees received a combined annualand locality pay adjustment of 4.1% in January 2003. (5) The nationwide average net pay increase inJanuary 2003, if the Employment Cost Index (ECI) and locality-based comparability payments hadbeen granted as specified by FEPCA, would have been 18.56%. In 2004, federal white-collaremployees also received a 4.1% combined annual and locality pay adjustment. The nationwideaverage net pay increase in January 2004, if the ECI and locality-based comparability payments hadbeen granted as specified by FEPCA, would have been 15.15%. This report discusses the January 2004 annual adjustment and locality payments. It does not cover salary adjustments for federal officials, federal judges, or Members of Congress. (6) Federal employees under the General Schedule (GS), Foreign Service Schedule, and Veterans Health Administration Schedule receive an annual pay adjustment. The President may annuallyadjust salaries of administrative law judges. Individuals in senior-level (SL) and scientific andprofessional (ST) positions may receive the annual adjustment at the discretion of agency heads. (7) Annual adjustments for contract appeals board members depend on whether Executive Schedule payis adjusted. The annual pay adjustment is based on the Employment Cost Index (ECI), which measures change in private sector wages and salaries. Basic pay rates are to be increased by an amount thatis 0.5 percentage points less than the percentage by which the ECI, for the quarter ending September30 of the year before the preceding calendar year, exceeds the ECI for that same quarter of thesecond year (if at all). The ECI shows that the annual across-the-board pay adjustment would be2.7% in January 2004, reflecting the September 2001 to September 2002 change in private sectorwages and salaries of 3.2%, minus 0.5%. (8) The payadjustment is effective as of the first day of thefirst applicable pay period beginning on or after January 1 of each calendar year. FEPCA authorizes the President to issue an alternative plan, calling for a different percentage than the ECI requires, in the event of a national emergency or of serious economic conditionsaffecting the general welfare. The alternative plan must be submitted to Congress before theSeptember 1 preceding the scheduled effective date. (9) On August 27, 2003, President Bush issuedan alternative plan to provide a 1.5% annual pay adjustment in January 2004. (10) Executive Order13322, issued by the President on December 30, 2003, implemented the alternative plan. (11) GS employees receive the locality-based comparability payments; the Pay Agent (12) may alsoextend those payments to employees in the Foreign Service and in senior-level, scientific andprofessional, administrative law judge, administrative appeals judge, and contract appeals boardmember positions. (13) These employees will receivea locality pay adjustment in 2004. (14) The PayAgent determines the applicable pay cap level for certain non-General Schedule employees to whomlocality pay is extended. (15) OPM published finalregulations in December 2001 to clarify and redefinethe limitations. (16) Blue-collar workers under theFederal Wage System (FWS) receive a prevailingrate adjustment that is generally capped at the average percentage pay adjustment received by federalwhite-collar employees. (17) Notwithstanding thecap, for 2004 the blue-collar pay adjustment in aparticular location will be no less than the increase received by GS employees in that location. Blue-collar workers in Alaska, Hawaii, and other non-foreign areas will receive a pay adjustmentthat is no less than the increase received by GS employees in the RUS pay area. (18) Special rateemployees receive either the special rate or the locality payment, whichever is higher. Lawenforcement officers receiving special rates under Section 403 of FEPCA get both special rates andlocality pay. (19) Federal employees in Alaska andHawaii, and outside the continental United States,receive a cost-of-living (COLA) allowance rather than locality pay. The locality-based comparability payments procedure was established by FEPCA. It provides that payments are to be made within each locality determined to have a non-federal/federal paydisparity greater than 5%. When uniformly applied to GS employees within a locality, theadjustment is intended to make their pay rates substantially equal, in the aggregate, to those ofnon-federal workers for the same levels of work in the same locality. FEPCA provides the President with the authority to fix an alternative level of locality-based comparability payments if, because of national emergency or serious economic conditions affectingthe general welfare, he considers the level that would otherwise be payable to be inappropriate. Atleast one month before those comparability payments would be payable (by November 30, 2003),he would have to prepare and transmit to Congress a report describing the alternative level ofpayments he intended to provide, including the reasons why that alternative level would benecessary. (20) President Bush issued an alternativeplan on August 27, 2003, to provide a 0.5%locality pay adjustment in January 2004. (21) Executive Order 13322, issued by the President onDecember 30, 2003, implemented the alternative plan. (22) Bureau of Labor Statistics (BLS) Surveys. Under the law, the BLS conducts surveys that document non-federal rates of pay in each pay area. Currently, there are 32 pay areas nationwide. Until October 1996, the surveys were conducted underthe Occupational Compensation Survey Program (OCSP), which had been approved by the FederalSalary Council and the Pay Agent. Since then, the surveys had been conducted under the NationalCompensation Survey (NCS) program, which was not approved for use with the January 2000,January 2001, January 2002, and January 2003 locality payments. For the January 2004 localitypayments, a phase-in of NCS survey data was approved. The survey results are submitted to OPM,which serves as the staff to the Federal Salary Council and the Pay Agent. OPM documents federalrates of pay in each of the pay areas and compares non-federal and GS salaries, by grade, for eachpay area. The average salaries at each grade, both federal and non-federal, are then aggregated andcompared to determine an overall average percentage pay gap for each area. By law, the disparitybetween non-federal and federal salaries is to be reduced to 5%. Therefore, the overall averagepercentage pay gap for each pay area is adjusted to this level each year by OPM. This adjusted gapis called the target gap. FEPCA also stipulates that a certain percentage of the target gap between GS average salaries and non-federal average salaries in each pay area is to be closed each year. Twenty percent of thegap was closed in 1994, the first year of locality pay, as authorized by FEPCA. An additional 10%of the gap was to be closed each year thereafter, meaning that 30% of the gap was to be closed in1995, 40% in 1996, 50% in 1997, 60% in 1998, 70% in 1999, 80% in 2000, and 90% in 2001. Ineach of these years, the locality pay increase has been implemented at a much lower percentage,reducing the gap slowly; 23.5% of the gap was closed in 1995, 25.9% in 1996, 28.3% in 1997,29.2% in 1998, 31% in 1999, 33.5% in 2000, 38.1% in 2001, 42.3% in 2002, and 44% in 2003. These percentages represent the gap as recalculated after each adjustment. By January 2002, andcontinuing each year thereafter, FEPCA specified that amounts payable could not be less than thefull amount necessary to reduce the pay disparity of the target gap to 5%. This percentage is appliedto the target gap in each pay area to determine the locality rates recommended by the Pay Agent tothe President, after receiving advice from the Federal Salary Council. (23) The pay gaps on which the locality payments are based are 22 months old by the effective date of the adjustment; thus, March 2002 gaps determine the January 2004 locality payments. Due to thefact that the NCS surveys were not approved for use in determining the January 2000, January 2001,January 2002, and January 2003 locality payments, and that the NCS surveys are being phased in forthe January 2004 locality payments, the gaps were determined as follows. The March 2002 gapswere determined by using the most recent OCSP survey data and NCS survey data, which rangedfrom December 2000 through October 2001 for each pay area. Since the BLS had discontinued theOCSP program in October 1996, the OCSP pay survey data for some of the largest pay areas wereat least seven years old. Specifically, the New York data were as of July 1995; the Washington, DC,data were as of October 1995; and the Los Angeles data were as of November 1995. Survey datafor each of the other 28 pay areas varied from January 1996 to November 1996. The data for the"Rest of the United States" pay area were as of November 1995 and aged to November 1996. In itsreport to the Pay Agent on the 2004 locality payments, the Federal Salary Council explained howthe pay gaps were determined, stating that "To ensure that local pay disparities are measured as ofone common date, it is necessary to 'age' the BLS survey data [using the ECI] to a commonreference date [March 2002] before comparing it to GS pay data of the same date." (24) Report of the Federal Salary Council. The council reported the following results from the application of this methodology. As of March 2002,the overall gap between GS average salaries (excluding existing locality payments, special rates, andcertain other payments) and non-federal average salaries was 32.02%. The amount needed to reducethis disparity to 5%, as mandated by FEPCA, averaged 25.73% for 2004. In order to meet the target for closing the pay gap, the council recommended locality pay raises ranging from 19.45% in the "Rest of the United States" (RUS) pay area to 47.64% in the SanFrancisco pay area. The payment recommended for the Washington, DC, pay area was 28.78%. (25) Because the new locality rate replaces the existing locality rate, the change in locality rates is derivedby comparing 2003 locality payments with those recommended for 2004. This comparison resultedin recommended increases in locality rates from 2003 to 2004 of 11.90% in the RUS pay area to25.23% in the San Francisco pay area, and 17.31% in the Washington, DC, pay area. Thenationwide average net pay increase, if the ECI and locality-based comparability payments weregranted as required by law, would have been 15.15% in 2004. As in previous years, the council recommended that areas with pay gaps below the pay gap in RUS receive the same adjustment as RUS. Under the methodology which has been used sincelocality pay was first implemented in 1994, areas with low publishability (did not meet BLSstandards for publishing data) and pay gaps that were two-tenths of a percentage point (0.2%) ormore below RUS for three surveys were to be dropped as surveyed discrete pay areas, and theresources used to conduct these surveys were to be redirected to new survey locations. The council,as it has done the last four years, recommended that these pay areas again be included with RUS in2004. Since not all of the improvements have been completed in NCS and because the list of cities below RUS varies depending on whether we use OCSP or NCSdata, we recommend that none of these locations [Indianapolis, Kansas City, Orlando, St. Louis] bedropped as separate pay areas at this time. The Council plans to consider whether some of theseareas should be dropped and the resources used to increase the sample in other locations or used toadd a few new locality pay surveys. (26) Basic criteria used to determine whether a county or installation would be included as part of a pay area for purposes of applying locality pay were established by the council in 1993 and remainunchanged. In its report, the council notes that "In 2000 and 2001, the Council concluded that itwould recommend no changes in locality pay area definitions until it had an opportunity to reviewnew commuting pattern and population data from the 2000 census and the new metropolitan areadefinitions to be produced by the Census Bureau and OMB in 2003." (27) Other criteria which wouldremain unchanged are that a county be contiguous to a pay area, contain at least 2,000 GSemployees, and demonstrate some economic linkage with the pay area. The council recommendedan exception, however, in the case of Barnstable County, MA, which was seeking to become an areaof application to the Boston pay area. According to the council, Barnstable County is the only county on the eastern seaboard from southern Maine to Delaware that is not in a separate locality pay area. It is also cut off from the remainderof the country by the Boston locality pay area and passes all our criteria except that it does not have2,000 GS employees. While we do not believe this is the time to make wholesale changes in localityarea boundaries, the Council concluded that something should be done for Barnstable County. Therefore, the Council as a whole voted at its October 1 meeting to recommend that the Pay Agentmake an exception and include Barnstable County, MA, in the Boston locality pay area in 2004 inorder to remedy what we consider to be an egregious situation. The Vice Chair of the Councildissented from this recommendation. (28) Since 1994, St. Mary's County, MD, has been included in the Washington, DC-Baltimore, MD, pay area. It continues to meet the county criteria, and the council recommended that it be includedwith this pay area for 2004. Santa Barbara County, CA, has been included in the Los Angeles payarea since 1994, and New London, CT, has been included in the Hartford, CT, pay area since 1998. Employment in New London, CT, and Santa Barbara County, CA, again has fallen below thethreshold of 2,000 employees that one criterion requires. The council recommended in 1997,however, "that once an area of application has been approved, it should not be removed for theduration of FEPCA's nine-year phase-in for the locality pay program (1994 through 2002)." (29) Therefore, the council recommended that New London and Santa Barbara continue to be areas ofapplication for their respective pay areas for 2004. The council noted that "new census data willsoon be available that will affect locality pay area definitions in the future" and "the Office ofManagement and Budget (OMB) and the Census Bureau are revamping how metropolitan areas aredefined." According to the council, it "plan[s] to conduct a major review of all aspects of the localitypay program [in 2003] when this new information is available. (30) (See the discussion under"Definition of Metropolitan Areas" below.) Monterey County, CA, which became an area ofapplication to the San Francisco pay area in 2001, meets the criteria and is recommended to beincluded with this pay area in 2004. The State of Rhode Island was designated as an area of application to the Boston pay area beginning in 2001. Because counties in Rhode Island are small in comparison to counties in otherstates, Rhode Island cannot meet the requirement that a county contain at least 2,000 GS employees. Therefore, the council recommended that "Full State" criteria be adopted in this case. Under therecommended criteria, "States smaller than 115 percent of the average county size in square milesin the lower 48 states and Washington, DC, are treated as a single county for applying the countycriteria." Thus, Rhode Island is "considered as a single county." (31) The state meets the criteria andis recommended for continued inclusion with the Boston pay area in 2004. As for the criteria for an installation, the portion of a federal facility that crosses pay area boundaries, and that is not in the pay area, must have at least 1,000 GS employees; the duty station(s)of the majority of GS employees must be within 10 miles of the prime-critical survey boundary area;and a significant number of the facility's employees must be commuting from the pay area. Since1994, a portion of Edwards Air Force Base has been included in the Los Angeles pay area. The baseno longer meets the employment criteria, but the council recommended that it continue to beincluded with the Los Angeles pay area in 2004 for the same reasons that New London and SantaBarbara were recommended to continue as areas of application. Methodology. (32) The council, in its report to the PayAgent on the 2001 locality payments, recommended that five improvements be made in the BLSNational Compensation Survey program. The council's memorandum to the Pay Agent on the 2004locality payments provided a progress report. Listed according to their levels of priority, theimprovements and progress to date are as follow. Use three-factors, rather than nine, to assign the correct federal grade level to the non-federal jobs surveyed, and provide grade level guides for occupational families. "OPM hascompleted development of a four-factor evaluation system for use in the surveys, and BLS hassuccessfully used the new approach in field tests. BLS will begin to phase the new approach intoBLS surveys in December 2003." Develop a model to estimate missing data. "BLS has designed and implemented an econometric model to estimate salaries for jobs not randomly selected in thesurveys." Improve the matching of federal survey jobs with non-federal survey jobs, and provide subcategories for occupations which are "not elsewhere classified." "OPM formed aninteragency working group that developed a crosswalk between Federal job classifications and thenew Standard Occupational Classification System. BLS used the new crosswalk and March 2001GS employment weights for data delivered this year .... We anticipate that additional improvementscould be made in the crosswalk and that OPM will provide updated GS employment information toBLS each year." For supervisory occupations, grade the highest level of work supervised. Adjust the grade level based on the level of supervision, instead of grading the supervisory job itself."BLS and Pay Agent staffs have designed a new approach based on grading the highest level of worksupervised and adding one, two, or three grades based on the level of supervision. Final tests of thenew approach are to be conducted this fall, and BLS hopes to be ready to implement the methodsin surveys conducted in December 2003." Develop criteria to identify and exclude jobs that would be classified above GS-15 in government. "BLS has developed methods for identifying and excluding non-Federal jobsthat would be classified above GS-15. These data were excluded from the data delivered to the PayAgent this year." (33) The council's report on the 2004 locality payments stated that while it "recommended the phase-in of NCS data beginning with locality payments in 2004, [it] continue[s] to have concernsabout the reliability of data produced by the NCS." The council recommended that [A]ny further implementation of (or additional weight given to) the NCS data must be expressly conditioned on action by BLS to implement the remainingtwo improvements identified by the Council. [A]dditional resources should be committed by BLS to increase the sample size of its surveys, particularly in those localities where the NCS data indicatea pay gap that is more than 5 percentage points below the gap measured using OCSP data, or, at aminimum, conducting "augmentation surveys" for areas under-represented in BLSsamples. (34) Definition of Metropolitan Areas. The component parts of the 32 locality pay areas are determined by using the OMB definitions of metropolitan areas.Whenever OMB revised the definitions, the locality pay areas changed automatically. On April 22,2003, OPM published final regulations which provide that locality pay areas no longer changeautomatically when the definitions of metropolitan areas change. (35) On June 6, 2003, OMB publishedrevised definitions for Metropolitan Statistical Areas (MSAs) based on new criteria and 2000 censusdata. (36) At the time, OPM advised that the newdefinitions would have no immediate or automatic impact on the GeneralSchedule (GS) locality pay program. As a result of previous recommendations made by the FederalSalary Council, ... OPM recently modified the GS locality pay regulations to maintain themetropolitan area portion of each locality pay area consistent with the former OMB statistical areadefinitions. This will provide the Federal Salary Council and the President's Pay Agent ... anopportunity to review the new statistical area definitions before making recommendations anddecisions later [in 2003]. (37) Some of the major changes that the council and the Pay Agent considered in autumn 2003 were these: The new statistical area definitions are different than the ones that have been used in [the] locality pay program since it was created in the early 1990s. The concept of 'Consolidated Metropolitan Statistical Areas' which is used to define 18 locality payareas, is no longer used. New concepts -- 'Micropolitan Statistical Areas' and 'Combined StatisticalAreas [CSAs] -- have been introduced. Population density is no longer a criterion for evaluatingoutlying counties and the threshold levels of commuting in or out of a core area have beenchanged. (38) A Federal Salary Council working group reviewed the new OMB definitions, commuting patterns, and other changes, and reports of the working group were discussed at two council meetingsthat were open to the public. At the first meeting conducted on September 3, 2003, the workinggroup presented its initial findings. According to the group's report, it "recommends that theCouncil seriously consider using the new MSA definitions in some fashion for the locality payprogram" and "asks that no decisions be made until the next public meeting because additional studyis needed." (39) The report stated that, "If the FederalSalary Council were to recommend that the newCSAs and MSAs be used for locality pay areas without any modifications, excluding the locality payareas in New England (Boston, Hartford, and part of New York), a total of 83 additional countieswould be added to existing metropolitan locality pay areas, and 10 counties currently in separatemetropolitan locality pay areas would be excluded (13 counties including pay areas in NewEngland)." (40) At a second council meeting conducted on October 7, 2003, the working group recommended "that the Council adopt the new MSA definitions as the basic definitions for locality pay areas,acknowledging that changes in MSAs are the result of both changes in demographics and changesin the criteria for establishing MSAs." (41) Withregard to the January 2005 pay adjustments, theworking group recommended that the largest defined areas, called Combined Statistical Areas(CSAs), be used; that the pay area definitions be revised (which in some pay areas expands thenumber of communities covered); and that three current discrete pay areas (Kansas City, Orlando,and St. Louis) with pay gaps below RUS be folded into RUS, and the resulting savings in resourcesbe used to survey other areas. (42) The counciladopted the working group recommendations in itsreport to the Pay Agent, which in turn tentatively approved the council's recommendations in itsreport to the President, on the January 2005 pay adjustments. (43) In 2004, OPM will publish theproposed changes on locality pay in the Federal Register and solicit public comments on thosechanges. An amendment to H.R. 2989 , Departments of Transportation and Treasury and Independent Agencies Appropriations Bill, 2004, offered by Representative Sam Farr was agreedto by voice vote by the House of Representatives on September 4, 2003. The amendment at Section742 states the sense of the Congress that none of the funds made available in theTransportation/Treasury bill could be used to disestablish any pay locality. Earlier, during markupof the bill by the House Committee on Appropriations, a similar amendment proposed byRepresentative Sam Farr was withdrawn after the Committee chairman, Representative ErnestIstook, agreed to work with Representative Farr on the issue. (44) Representative Farr testified beforethe Federal Salary Council at its September 3, 2003, meeting about the reduction in pay that wouldresult for federal employees in Monterey County, California, if the county was not continued as anarea of application to the San Francisco locality pay area. Senator Jack Reed offered an amendment ( S.Amdt. 1944 ) similar to Representative Farr's that was agreed to by the Senate by voice vote during its consideration of the Transportationand Treasury appropriations bill on October 23, 2003. Under the amendment, Section 646 of the billwould provide that none of the funds appropriated or otherwise made available by theTransportation/Treasury bill could be used to remove any area within a locality pay area fromcoverage under that locality pay area. The amendment would not be applicable to RUS. As the first session of the 108th Congress was drawing to a close, H.R. 2989 was incorporated in H.R. 2673 , the Consolidated Appropriations Act for FY2004. Theconference agreement for H.R. 2673, as agreed to by the House of Representatives and theSenate, at Section 644, provides that none of the funds in the Transportation/Treasury bill could beused to implement or enforce regulations for locality pay areas in FY2004 that are inconsistent withthe Federal Salary Council's October 7, 2003, recommendations. (45) This provision was enacted asSection 644 of P.L. 108-199 on January 23, 2004. (46) Pay Agent Report. After considering the council's recommendations, the Pay Agent submitted its annual report to the President on the 2004locality payments on December 5, 2002. (47) According to the Pay Agent: the "report shows theadjustments we would recommend for January 2004 if the methodology and rates required bycurrent law were to be implemented . (48) Given the current national emergency situation and theconsequent slowdown in the American economy, however, we believe it would be unwise to allowthe locality pay increases shown in this report to take effect in January 2004." Stating that "it is timeto consider alternative approaches to the compensation of Federal employees," the Pay Agent notedthat it "continues to have serious concerns about the utility of a process that requires a singlepercentage adjustment in the pay of all white-collar civilian Federal employees in each localitywithout regard to the differing labor markets for major occupational groups or the performance ofindividual employees." (49) The Pay Agent's reportdoes not include any further discussion of theseconcerns. The cost of the January 2004 locality-based comparability payments would be $8.830 billion if the full amount necessary to reduce the pay disparity of the target gap to 5% were provided inJanuary 2004 as required by FEPCA, according to the Pay Agent. (50) Table 1 includes the council'sand the Pay Agent's recommended locality payments for January 2004. The Pay Agent did not adopt the council's recommendation to include Barnstable County, Massachusetts, as part of the Boston locality pay area because it "continue[s] to believe any changesin locality pay area boundaries should be made after the Federal Salary Council and the Pay Agenthave had an opportunity to review new commuting patterns data and new metropolitan areadefinitions [released in 2003 and] based on the 2000 census." (51) As for the recommended improvements in the BLS National Compensation Survey Program, the Pay Agent stated that those focused on problems associated with random selection of survey jobs,matching federal and non-federal jobs, and excluding randomly selected jobs that would be classifiedabove GS-15 have been implemented and that those focused on assigning GS grades to randomlyselected survey jobs and to randomly selected survey jobs with supervisory duties were to beintroduced in December 2003. According to the Pay Agent, it looks "forward to reviewing theresults of NCS data delivered next year, when we will have 2 years of modeled data to consider" and"[t]he last two improvements in NCS surveys will begin to affect data delivered in 2005." The PayAgent encouraged BLS and Pay Agent staff to expedite completion of the remaining twoimprovements. (52) Once both the annual and locality pay percentage amounts are determined, the actual pay rates are calculated as follows. First, the basic General Schedule (GS) is increased by the annualadjustment percentage, resulting in a new GS schedule. These new basic GS rates are then increasedby the locality payment. The resulting pay rates (annual + locality) are compared with the 2003 payrates (annual + locality) to derive the net increase in pay for 2004. President George W. Bush issued his administration's FY2004 budget on February 3, 2003. The budget proposed a 2.0% federal civilian pay adjustment, but did not state how the increasewould be allocated between the annual and locality adjustments required by FEPCA in January2004. (53) The statutory annual pay adjustmentrequired in January 2004 is 2.7%. If the Presidentwants to change the required rate of the annual adjustment, he has to submit an alternative plan forthe annual adjustment to Congress by September 1, 2003. If he wants to change the amount oflocality-based comparability payments, he has to submit an alternative plan for the locality paymentsto Congress by November 30, 2003. He may include his locality pay authorization in the alternativeplan for the annual adjustment. The President issued an alternative plan to change the amount of the annual adjustment and locality-based comparability payments on August 27, 2003. The plan called for a 2.0% payadjustment in January 2004 allocated as 1.5% annual and 0.5% locality pay. The cost of the 2.0%adjustment would be about $2 billion dollars, according to OMB and OPM. The alternative planstates that implementation of the annual and locality pay adjustments as required by FEPCA wouldhave cost about $13 billion. Executive Order 13322, issued by the President on December 30, 2003,implemented the alternative plan. (54) In the plan, the President states that the pay adjustment should be complemented by a $500 million dollar Human Capital Performance Fund which would reward the highest-performing andmost valuable employees in an agency. The fund is authorized by Section 1129 of P.L. 108-136 , theNational Defense Authorization Act for FY2004 ( H.R. 1588 ), enacted on November24, 2003. (55) (The authorization was Section 1111of H.R. 1588 , as passed by the Houseof Representatives, amended, on May 22, 2003.) (56) The House Committee on Appropriations recommended an appropriation of $2.5 million ($497,500,000 less than the President's request) for the Human Capital Performance Fund in H.R. 2989 , the Departments of Transportation and Treasury and Independent AgenciesAppropriations Bill, 2004, as reported to the House on July 30, 2003, and passed by the House onSeptember 9, 2003. Obligation of the funding was contingent upon enactment of the legislationauthorizing the creation of the fund within OPM. No funds would be available until the OPMDirector notifies the relevant subcommittees of jurisdiction of the Committees on Appropriationsof the approval of a performance pay plan for an agency and the prior approval of the subcommitteeshas been attained. The committee directs OPM "to report annually to the Committees onAppropriations on the performance pay plans that have been approved, and the amounts that havebeen obligated or transferred." (57) The SenateCommittee on Appropriations, in reporting its versionof the Transportation and Treasury appropriations bill ( S. 1589 ) on September 8, 2003,did not recommend an appropriation for the fund. "The Committee believes that an initiative of thistype should be budgeted and administered within each individual agency," according to the reportaccompanying the bill. (58) Funding was notprovided in H.<108>R. 2989 as passedby the Senate, amended, on October 23, 2003. As the first session of the 108th Congress was drawing to a close, H.R. 2989 was incorporated in H.R. 2673 , the Consolidated Appropriations Act for FY2004. Theconference agreement for H.R. 2673, as agreed to by the House of Representatives and theSenate, provides an appropriation of $1 million for the Human Capital Performance Fund. Obligation or transfer of the funding was contingent upon the enactment of the legislation toestablish the fund within OPM. Funds shall not be obligated or transferred to any federal agency untilthe OPM director notifies and receives prior approval from the relevant subcommittees ofjurisdiction of the Committees on Appropriations of OPM approval of an agency's performance payplan. Such amounts as determined by the OPM Director may be transferred to federal agencies tocarry out the purposes of the fund. (59) Thisprovision was enacted in P.L. 108-199 on January 23,2004. (60) In his alternative plan, the President also said that, "since any pay raise above the 2 percent I have proposed would likely by unfunded, agencies would have to absorb the additional cost andcould have to freeze hiring in order to pay the higher rates." He noted that the quit rates for GeneralSchedule employees are at an all-time low of 1.7% per year. (61) Federal employee union representatives expressed discouragement about the 2.0% pay adjustment. (62) The National Commission on the Public Service, in its January 2003 report, "recommend[ed]that the General Schedule classification system be abolished." The commission mentioned thesubstantial "resources and effort needed to maintain the General Schedule system" and the "constanttinkering [needed] to define equal work so that it can ensure equal pay" as reasons behind theproposal. "As a default system," the commission suggested a broad-band system under which the 15 pay grades and salary ranges would be consolidated into six to eight broad bands with relatively wide salary ranges.Managers would be able to determine individual pay based on competence andperformance. The commission also acknowledged the possibility that "other agencies might adopt systems with an entirely different form." (63) Currently, pay banding systems are being implemented at several agencies, including the Federal Aviation Administration, the Transportation Security Administration, and the InternalRevenue Service. Pay parity provisions that "allow the SEC [Securities and Exchange Commission]to raise salaries for certain employees to levels comparable to the salaries of federal bank examiners"are included in P.L. 107-123 , enacted on January 16, 2002. (64) New human resources management(HRM) systems for civilian employees of the Departments of Homeland Security and Defense areauthorized in P.L. 107-296 , the Homeland Security Act of 2002, enacted on November 25, 2002, and P.L. 108-136 , the National Defense Authorization Act for FY2004, enacted on November 24, 2003. (65) Changes to the pay setting systems at both agencies are expected to include broad pay bands. The size of the federal white-collar pay adjustment is considered annually by Congress, whichmay legislate a pay adjustment that is different from the adjustment recommended by the Presidentin the budget or that might be authorized by the President in an alternative plan. The January 1999(3.6%), January 2000 (4.8%), January 2002 (4.6%), and January 2003 (4.1%) overall pay adjustmentamounts were set by Congress. (66) Concurrent resolutions introduced in the Senate by Senator Paul Sarbanes ( S.Con.Res. 1 ) on January 9, 2003 and in the House of Representatives byRepresentative Steny Hoyer ( H.Con.Res. 19 ) on January 28, 2003, expressed the senseof the Congress that there should be parity between the pay adjustments for the uniformed militaryand federal civilian employees. The resolutions noted the longstanding policy of parity between boththe military and civilian pay increases. Such resolutions are effective only in the chamber in whichthey are proposed, express nonbinding opinions on policies, and do not require the President'ssignature. A number of Members of Congress from the Washington, DC, metropolitan area reportedly wrote letters to President Bush and Representatives Jim Nussle and John Spratt, Jr., Chairman andRanking Member, respectively, of the House Committee on the Budget, on February 27, 2003,urging them to support equal pay raises for federal civilian employees and the uniformed military. (67) The FY2004 budget proposes an average 4.1% pay increase for the military and 2.0% for civilianemployees. (68) The Concurrent Resolution on the Budget for FY2004 ( H.Con.Res. 95 ) was agreed to by the House of Representatives by a 215 to 212 vote (Roll No. 82) on March 21, 2003. TheHouse Committee on the Budget report that accompanied the bill included language stating that"[t]he committee believes that rates of compensation for civilian employees of the United Statesshould be adjusted at the same time, and in the same proportion, as are rates of compensation formembers of the uniformed services." (69) The Senate version of the Concurrent Resolution on the Budget ( S.Con.Res. 23 ), as reported (without written report) from the Senate Committee on the Budget on March 14, 2003,included the exact same language as the House at Section 301 as a Sense of the Senate provision. The Concurrent Budget Resolution does not become law, but provides the framework within which Congress subsequently considers spending legislation. Any congressional recommendationon the civilian federal pay adjustment has usually been included in the Treasury, Postal Service, andGeneral Government Appropriations bill, which as of the 108th Congress has been combined withthe Department of Transportation Appropriations bill to be the Transportation, Treasury, PostalService, and General Government Appropriations bill. The Departments of Transportation and Treasury and Independent Agencies Appropriations Bill, 2004, as reported to the House of Representatives ( H.R. 2989 ) would provide a4.1% pay adjustment for federal civilian employees, including those in the Departments of Defenseand Homeland Security. The bill did not recommend how the increase should be divided betweenthe annual and locality pay adjustments. The House Subcommittee on Transportation, Treasury, andIndependent Agencies marked up H.R. 2989 on July 11, 2003, and by voice vote approvedthe bill, as amended, for consideration by the full committee. On July 24, 2003, the HouseCommittee on Appropriations marked up H.R. 2989 and by voice vote ordered it to bereported favorably to the House of Representatives. During the markup, the committee agreed toan amendment offered by Representative Steny Hoyer, joined by Representatives James Moran andFrank Wolf, to provide the 4.1% pay adjustment. H.R. 2989 was reported ( H.Rept.108-243 ) to the House by the House Appropriations Committee on July 30, 2003. (70) Section 740(a)includes the pay adjustment language. Section 602 would provide that the pay increase would beabsorbed within the levels appropriated in the act or in previous appropriations acts. The bill passedthe House on September 9, 2003, on a 381-39 (Roll No. 489) vote. The Bush Administration opposes the 4.1% pay adjustment for federal civilian employees. The Administration explained its views in comments submitted to the House of Representatives. According to a Statement of Administration Policy on H.R. 1588 , the National DefenseAuthorization Act for FY2004: Civilian and military pay linkage is not necessary. The Administration proposed a 2.0% pay raise for all civilian employees, which is very generous at thistime when many in the private sector are unemployed or facing shrinking paychecks. TheAdministration has proposed a Human Capital Performance Fund to finance higher pay raises forhigh-performing federal employees. DOD [Department of Defense] has different recruiting andretention needs for each group, and recent civilian pay raises have exceeded the rate of inflation. TheAdministration is particularly concerned that these additional civilian pay increases are unfunded(costing DOD about $660 million, and Government-wide about $2.1 billion if soapplied). (71) The Statement of Administration Policy on H.R. 2989 , Departments of Transportation and Treasury and Independent Agencies Appropriations Bill, FY2004, expressesextreme disappointment that the bill does not fund the President's request for a $500 million HumanCapital Performance Fund. It also states that the 4.1% pay adjustment included in the bill provides a percentage increase that exceeds inflation, the statutory base pay increase, and even exceeds the average increase in private-sector pay,measured by the Employment Cost Index. The higher pay raise ... does not address any particularissue related to Federal employee turnover. According to a recent survey of Federal employees, amajority are satisfied with their pay rate and the 'quit rate' (the rate at which Federal employeesleave the government voluntarily) among Federal employees is at an all-time low of 1.7 percent peryear, well below the overall average quit rate in privateenterprise. (72) The statement says that providing a 4.1% pay adjustment for civilian employees in the Departments of Defense and Homeland Security would limit the flexibility of those agencies as theydesign new personnel and pay systems. S. 1589 , the Senate version of the Transportation/Treasury appropriations bill, as forwarded to the Senate Committee on Appropriations by its Subcommittee on Transportation,Treasury and General Government on September 3, 2003, by voice vote, would provide a 4.1% payadjustment. The full committee approved the bill on a 29-0 roll call vote on September 4, 2003, andreported the measure to the Senate ( S.Rept. 108-146 ) on September 8, 2003. (73) Section 636 wouldprovide the 4.1% adjustment. Section 502 would provide that the pay increase would be absorbedwithin the levels appropriated in the act or in previous appropriations acts. When the Senateconsidered the Transportation and Treasury appropriations bill on October 23, 2003, Senator RichardShelby, for himself and Senator Patty Murray, offered an amendment ( S.Amdt. 1899 )to the House version of the appropriations bill, H.R. 2989 , which was agreed to by voicevote. Under the amendment, Section 636 would provide a 4.1% pay adjustment for federal civilianemployees, including those in the Departments of Defense and Homeland Security. Section 502would provide that the pay increase would be absorbed within the levels appropriated in the act orin previous appropriations acts. The Senate passed H.R. 2989, amended, on a 91 to 3 vote(No. 410) on October 23, 2003. At the Federal Salary Council's October 7, 2003, meeting, the council's methodology working group recommended that if the January 2004 pay adjustment were to be 4.1%, it be allocated as a2.7% annual pay adjustment and a 1.4% locality pay adjustment. According to OPM, the net (annualplus locality) pay adjustment in the Washington, DC, pay area under this allocation would be4.42%. (74) (The net pay adjustment was initiallyprojected at 4.41%.) As the first session of the 108th Congress was drawing to a close, H.R. 2989 was incorporated in H.R. 2673 , the Consolidated Appropriations Act for FY2004. TheHouse of Representatives agreed to the conference report accompanying H.R. 2673 onDecember 8, 2003, and the Senate agreed to the conference report on a 65-28 (No. 3) vote on January22, 2004. The conference agreement, at Section 640(a), provides a 4.1% pay adjustment for federalcivilian employees, including those in the Departments of Defense and Homeland Security. Theadjustment is effective as of the first day of the first applicable pay period beginning on or afterJanuary 1, 2004. Section 502 of the conference agreement requires the pay raises to be funded withinappropriated levels. (75) The conferees also directOPM to consider implementing the Federal SalaryCouncil's recommendation to include Franklin, Hampshire, and Hampden Counties in Massachusettsin the Hartford, CT pay area. (76) President Bushsigned H.R. 2673 on January 23, 2004, andit became P.L. 108-199 . The pay provisions are at Section 640(a) and Section 502 of the law. (77) The Consolidated Appropriations Act provides an additional 2.1% pay adjustment to federal civilian employees. On March 3, 2004, President Bush issued Executive Order 13332, whichallocated the additional amount as 1.2% annual and 0.9% locality. (78) According to OPM, the cost ofthe 4.1% (2.7% annual and 1.4% locality) pay adjustment is about $4.1 billion dollars. OPM issuedrevised salary tables for 2004 on its website the next day; these are available on the Internet at http://www.opm.gov . Table 1 shows the recommended locality payments, the authorizedlocalitypayments, and the net annual and locality pay increases. The Federal Salary Council and Pay Agent recommendations for the January 2005 pay adjustments are discussed in CRS Report RL32355 , Federal White-Collar Pay: FY2005 SalaryAdjustments . With regard to the federal white-collar pay-setting system, in addition to considering the recommendations of the National Commission on the Public Service, Congress could examine waysto amend FEPCA, which has never been implemented as enacted. As discussed above (underlocality-based comparability payments), FEPCA provides that the disparity between non-federal andfederal salaries is to be reduced to 5%. The overall average percentage pay gaps for each of the 32discrete pay areas are adjusted to this level to derive a target pay gap for each pay area. The lawprovided that, beginning in 1994, an increasing percentage of the target pay gaps was to be closedeach year. By January 2002, 100% of a pay area's target pay gap was to be closed. A much smallerpercentage of the target pay gaps has been closed each year, and as a result, the Federal SalaryCouncil and the Pay Agent report that the pay disparity between non-federal and federal salaries,rather than being 5%, averages 25.73% for 2004. The methodology for setting federal pay adjustments has been questioned since FEPCA's enactment. In 1993, a draft memorandum from the Pay Agent to the Federal Salary Councilconcluded that "the current methodology is flawed because the completeness of the data variesgreatly among survey areas, because the gaps are not credible in light of other labor marketindicators, and because the single percentage adjustment for all jobs in a locality is a poor reflectionof market realities." (79) Despite these concerns,no proposals were made to change FEPCA. Themethodology has remained a concern because the Bureau of Labor Statistics surveys documentingnon-federal rates of pay were not approved for use in determining the 2000, 2001, 2002, and 2003locality payments. Previous survey data from 1995 and 1996 have had to be aged to make themusable for purposes of the locality payments in these years. In P.L. 106-554 , the ConsolidatedAppropriations Act, 2001, Congress noted this situation and directed the President's Pay Agent toprepare a report for the Senate and House Committees on Appropriations, the Senate Committee onGovernmental Affairs, and the House Committee on Government Reform on the methodologicalconcerns. (80) The Pay Agent reported to Congresson May 15, 2001 and reiterated the methodologicalconcerns which are stated above under the methodology section. (81) Improvements to the surveymethodology are underway as discussed above. The Office of Personnel Management issued a white paper on compensation in April 2002, which reviewed current policies and the need for more flexibility in setting General Schedule pay,but did not include any recommendations. (82) Ina November 2002 study, the Congressional BudgetOffice (CBO) "compared the salaries of federal General Schedule employees with the pay (83) ofnonfederal employees in similar jobs." (84) Thecomparison yielded the following results: [F]ederal employees in selected professional and administrative occupations tended to hold jobs that paid less than comparable jobs in private firms. For about 85 percent of those federal employees their pay lagged behind private salaries by morethan 20 percent. By contrast, about 30 percent of federal employees in selected technical and clericaloccupations held jobs with salaries above those paid by private firms. In general, jobs in technicaland clerical occupations showed much smaller differences in pay between federal and privateworkers. About three-quarters of federal employees in this analysis held jobs in those occupationswith salaries that were within 10 percent, plus or minus, of privatelevels. (85) Acknowledging the limitations presented by comparing only selected jobs and localities, CBO concluded that the results nevertheless "reinforce a long-standing concern about the federal paysystem: it allows no variation in pay raises by occupation." According to CBO, this presents the potential result that employees in professional and administrative occupations may receive smaller pay raises than those needed to match privatesalaries for similar jobs, and employees in technical and clerical occupations may receive pay raisesthat are higher than those needed to match salaries in the private sector. Thus, even if the currentsystem was fully implemented as envisioned in FEPCA, it would fail in its aim to provide federalpay that was comparable to pay for nonfederal jobs. Granting the same percentage raise to allworkers in an area will result in above-market salaries for some occupational groups andbelow-market salaries for others. Moreover, the jobs that show the greatest pay disadvantage forfederal workers make up an increasing share of the federal workforce. From 1985 through 2000, forexample, federal employment in professional and administrative occupations rose from 41 percentto 56 percent of total federal civilian employment. (86) The cost of fully implementing FEPCA is another concern. The Pay Agent estimated that the January 2004 locality-based comparability payments would cost $8.830 billion if the full amountnecessary to reduce the pay disparity of the target gap to 5%, as required by FEPCA, were providedin January 2004. The American Federation of Government Employees (AFGE) and the National TreasuryEmployees Union (NTEU) endorse pay parity between federal civilian employees and the uniformedmilitary. The unions criticized the President's proposal on federal pay as inadequate anddisregarding of FEPCA. (87) According to AFGE, Bush's budget issues his standard rationale for failing to uphold the Federal Employees Pay Comparability Act (FEPCA) ... problems with the Departmentof Labor's methodology in determining the comparability of federal pay with the private sector. Yetnowhere does he ever describe his methodological problems. I have asked repeatedly -- whatchanges in methodology would you like to implement so that FEPCA can go forward? Previously,the methodological problems appeared to be related to the locality component of federal pay, whichBush has tried to eliminate for the past two years. Yet this year, his methodological problems seemto have spread to the Employment Cost Index (ECI) component. (88) Table 1. January 2004 Recommended Locality Payments, Authorized Locality Payments, and Net Annual and Locality Pay Increases Source: Memorandum for the President's Pay Agent from the Federal Salary Council, Level ofComparability Payments for January 2004 and Other Matters Pertaining to the Locality PayProgram (Washington: Oct. 17, 2002), Attachment 1; and Report on Locality-BasedComparability Payments for the General Schedule, Annual Report of the President's Pay Agent (Washington: 2002), p. 21. The Pay Agent stated: "This report shows the adjustments wewould recommend for January 2004 if the methodology and rates required by current law wereto be implemented. Given the current national emergency situation and the consequentslowdown in the American economy, however, we believe it would be unwise to allow thelocality pay increases ... to take effect in January 2004." U.S. President (Bush), "Adjustmentsof Certain Rates of Pay," Executive Order 13322, Federal Register , vol. 69, Jan. 2, 2004, pp.231-232. The Executive Order provides a 1.5% annual pay adjustment and a 0.5%locality-based comparability payment. U.S. President (Bush), "Further Adjustment of CertainRates of Pay," Executive Order 13332, Federal Register , vol. 69, Mar. 8, 2004, pp.10889-10900. The Executive Order provides an additional 2.1% pay adjustment, allocated asan average 1.2% annual adjustment and 0.9% locality-based comparability payment. Notes: The actual pay rates are calculated as follows. First, the basic General Schedule (GS) isincreased by the annual adjustment percentage, resulting in a new GS schedule. These newbasic GS rates are then increased by the locality payment. The resulting pay rates (annual +locality) are compared with the 2003 pay rates (annual + locality) to derive the net increase inpay for 2004. Salary tables for 2004 are available on the Internet at http://www.opm.gov . MSA refers to a Metropolitan Statistical Area. CMSA refers to a Consolidated MetropolitanStatistical Area. The component parts of each pay area are described at 5 CFR 531.603(b).

Summary: Federal white-collar employees are to receive an annual pay adjustment and a locality-based comparability payment, effective in January of each year, under Section 529 of P.L. 101-509 , theFederal Employees Pay Comparability Act (FEPCA) of 1990. In January 2004, they received a 1.5%annual pay adjustment and a 0.5% locality-based comparability payment under Executive Order13322, issued by President George W. Bush on December 30, 2003. P.L. 108-199 , enacted onJanuary 23, 2004, provides a 4.1% pay adjustment for 2004. Under the law, an additional 2.1% payadjustment, allocated as an average 1.2% annual and 0.9% locality, was provided to federal civilianemployees under Executive Order 13332, issued by the President on March 3, 2004. OPM publishedrevised salary tables for 2004 on its website the next day. Although the federal pay adjustments aresometimes referred to as cost-of-living adjustments, neither the annual adjustment nor the localitypayment is based on measures of the cost of living. The annual pay adjustment is based on the Employment Cost Index (ECI), which measures change in private-sector wages and salaries. The index showed that the annual across-the-boardincrease would be 2.7% in January 2004. The size of the locality payment is determined by thePresident, and is based on a comparison of non-federal and General Schedule (GS) salaries in 32 payareas nationwide. By law, the disparity between non-federal and federal salaries was to be graduallyreduced to 5% over the years 1994 through 2002; FEPCA requires that amounts payable may not beless than the full amount necessary to reduce the pay disparity to 5% in January 2004. The FederalSalary Council and the Pay Agent recommended that the 2004 locality payments range from 19.45%in the "Rest of the United States" (RUS) pay area to 47.64% in the San Francisco pay area. Thepayment recommended for the Washington, DC, pay area was 28.78%. Because the new localityrate replaces the existing locality rate, the change in locality rates is derived by comparing 2003locality payments with those recommended for 2004. This comparison resulted in recommendedincreases in locality rates from 2003 to 2004 of 11.90% in the RUS pay area to 25.23% in the SanFrancisco pay area, and 17.31% in the Washington, DC, pay area. The nationwide average net payincrease, if the ECI and locality-based comparability payments were granted as stipulated in FEPCA,would have been 15.15%. President Bush proposed a 2.0% federal civilian pay adjustment in hisFY2004 budget. On August 27, 2003, he issued an alternative plan to provide the 2.0% adjustmentin January 2004. H.R. 2989 , the Departments of Transportation and Treasury andIndependent Agencies Appropriations Bill, 2004, as passed by the House of Representatives and theSenate, and as incorporated in H.R. 2673 , the Consolidated Appropriations Act forFY2004, provides a 4.1% pay adjustment for federal civilian employees. H.R. 2673 wasenacted as P.L. 108-199 . FEPCA has never been implemented as originally enacted. Since 1995, locality payments have been much lower than FEPCA requires. Additionally, the Bureau of Labor Statistics surveysdocumenting non-federal rates of pay were not approved for use in determining the 2000, 2001,2002, and 2003 locality payments. A phase-in of BLS survey data was approved for 2004.