In January 2005, federal white-collar employees received a 2.5% annual pay adjustment anda 1.0% locality-based comparability payment under Executive Order 13368, issued by PresidentGeorge W. Bush on December 30, 2004. (1) The payincrease is authorized by Section 640 of Title VIof Division H of the Consolidated Appropriations Act for FY2005 ( H.R. 4818 ), whichwas signed by the President on December 8, 2004, and became P.L. 108-447 . The Office ofPersonnel Management (OPM) published the salary tables for 2005 on its website on December 31,2004, and these are available at http://www.opm.gov . Table 1 shows the recommended localitypayments, the authorized 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. (2) 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 2005, reduced amountsof the locality payments were provided. Table 2 shows annual and locality pay adjustments underFEPCA for the years 1991 through 2005. Federal white-collar employees received an average 4.1%pay adjustment in January 2004. (3) The nationwideaverage net pay increase in January 2004, if theEmployment Cost Index (ECI) and locality-based comparability payments had been granted asspecified by FEPCA, would have been 15.15%. In 2005, federal white-collar employees receiveda 3.5% combined annual and locality pay adjustment. The nationwide average net pay increase inJanuary 2005, if the ECI and locality-based comparability payments had been granted as specifiedby FEPCA, would have been 13.06%. This report discusses the January 2005 annual adjustment and locality payments. It does not cover salary adjustments for federal officials, federal judges, or Members of Congress. (4) 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. (5) 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 be2.5% in January 2005, reflecting the September 2002 to September 2003 change in private sectorwages and salaries of 3.0%, minus 0.5%. (6) 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 serious economic conditions affectingthe general welfare. The alternative plan must be submitted to Congress before the September 1preceding the scheduled effective date. (7) ThePresident did not issue an alternative plan. GS employees receive the locality-based comparability payments; the Pay Agent (8) may alsoextend these payments to employees in the Foreign Service and in senior-level, scientific andprofessional, administrative law judge, administrative appeals judge, and contract appeals boardmember positions. (9) The Pay Agent determines theapplicable pay cap level for certain non-GeneralSchedule employees to whom locality pay is extended. (10) OPM published final regulations inDecember 2001 to clarify and redefine the limitations. (11) Blue-collar workers under the Federal WageSystem (FWS) receive a prevailing rate adjustment that is generally capped at the average percentagepay adjustment received by federal white-collar employees. (12) For 2004, notwithstanding the cap, theblue-collar pay adjustment in a particular location will be no less than the increase received by GSemployees in that location. Blue-collar workers in Alaska, Hawaii, and other non-foreign areas willreceive a pay adjustment in 2004 that is no less than the increase received by GS employees in theRUS pay area. (13) Special rate employees receiveeither the special rate or the locality payment,whichever is higher. Law enforcement officers receiving special rates under Section 403 of FEPCAreceive both special rates and locality pay. Federal employees in Alaska and Hawaii, and outsideof the continental United States, receive a cost-of-living (COLA) allowance rather than locality pay. Under an interim rule published by OPM in the Federal Register on August 5, 2004, a locality rate of pay would be considered as basic pay in computing danger pay allowances and postdifferentials for certain employees who are temporarily assigned to foreign areas and for whom theDepartment of State has established allowances for danger. (14) 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 authorizes the President to fix an alternative level of locality-based comparability payments if, because of a national emergency or serious economic conditions affecting the generalwelfare, he considers the level that would otherwise be payable to be inappropriate. At least onemonth before these comparability payments would be payable (by November 30, 2004), he wouldhave to prepare, and transmit to Congress, a report describing the alternative level of payments heintended to provide, including the reasons why this alternative level would be necessary. (15) PresidentBush issued an alternative plan on November 29, 2004, stating that the locality pay percentagesauthorized in 2004 would remain in effect in 2005. (16) (See the discussion under "The President'sRecommendation," below.) Bureau of Labor Statistics (BLS) Surveys. Under the law, the BLS conducts surveys that document non-federal rates of pay in each pay area. InJanuary 2005, there will be 32 pay areas nationwide. Until October 1996, the surveys wereconducted under the Occupational Compensation Survey Program (OCSP), which had beenapproved by the Federal Salary Council and the Pay Agent. Since then, the surveys had beenconducted under the National Compensation Survey (NCS) program, which was not approved foruse with the January 2000, January 2001, January 2002, and January 2003 locality payments. Forthe January 2004 locality payments, a phase-in of NCS survey data was approved, and this phase-inwill continue for January 2005 by applying a weight of 75% to NCS results and a weight of 25% toOCSP results. The survey results are submitted to the Office of Personnel Management (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, 44% in 2003, and53.7% in 2004. These percentages represent the gap as recalculated after each adjustment. ByJanuary 2002, and continuing each year thereafter, FEPCA specified that amounts payable could notbe less than the full amount necessary to reduce the pay disparity of the target gap to 5%. Thispercentage is applied to the target gap in each pay area to determine the locality rates recommendedby the Pay Agent to the President, after receiving advice from the Federal Salary Council. (17) The pay gaps on which the locality payments are based are 22 months old by the effective date of the adjustment; thus, March 2003 gaps determine the January 2005 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, that the NCS surveys were being phased in forthe January 2004 locality payments, and that the phase-in continues for the January 2005 localitypayments, the gaps were determined by the following means. The March 2003 gaps were determinedby using the most recent OCSP survey data and NCS survey data which ranged from December 2001through October 2002 for each pay area. Since the BLS had discontinued the OCSP program inOctober 1996, the OCSP pay survey data for some of the largest pay areas were about eight yearsold. Specifically, the New York data were as of July 1995; the Washington, DC, data were as ofOctober 1995; and the Los Angeles data were as of November 1995. Survey data for each of theother pay areas varied from January 1996 to November 1996. The data for the "Rest of the UnitedStates" pay area were as of November 1996. In its report on the 2005 locality payments, the PayAgent explained how the pay gaps were determined, stating that, "To ensure that local pay disparitiesare measured as of one common date, it is necessary to 'age' the BLS survey data [using the ECIbased on wages and salaries for white-collar civilian workers, excluding those in sales] to a commonreference date [March 2003] before comparing [them] to GS pay data of the same date." (18) Report of the Federal Salary Council. The council reported the following results from the application of this methodology. As of March 2003,the overall gap between GS average salaries (excluding existing locality payments, special rates, andcertain other payments) and non-federal average salaries was 31.82%. The amount needed to reducethis disparity to 5%, as mandated by FEPCA, averages 25.54% for 2005. The calculation of the paygaps excludes existing locality payments. After considering the 12.12% average locality rate paidin 2003, the overall average pay gap in 2003 was 17.57%. (19) Locality Payments. In order to meet the target for closing the pay gap, the council recommended locality pay raises ranging from 18.14% in the "Restof the United States" (RUS) pay area to 47.96% in the San Jose-San Francisco pay area. Thepayment recommended for the Washington, DC, pay area is 29.66%. Because the new locality ratereplaces the existing locality rate, the change in locality rates is derived by comparing 2004 localitypayments with those recommended for 2005. This comparison results in recommended net increasesfor 2005, if the ECI and locality-based comparability payments were granted as required by law, of9.19% in the RUS pay area to 22.10% in the San Jose-San Francisco pay area, and 15.94% in theWashington, DC, pay area. The nationwide average net pay increase, if the ECI and locality-basedcomparability payments were granted as required by law, would have been 13.06% in 2005. Locality Pay Areas and Boundaries for 2005. The council recommended continuation of 29 of the 32 locality pay areas that existed in 2004. TheKansas City, Orlando, and St. Louis locality pay areas were recommended to become part of the"Rest of the United States" pay area, as discussed below under the section on locations with pay gapsbelow RUS. The council also recommended that the new Office of Management and Budget (OMB)definitions for metropolitan statistical areas be used to define locality pay area boundaries. Underthis recommendation, the largest defined areas, called Combined Statistical Areas (CSAs) would beused; the new Micropolitan Statistical Areas would be used only when part of larger CSAs; and theOMB definitions for counties in New England would be used. (20) Locations with Pay Gaps Below the "Rest of the United States" Pay Area. In previous years, the council recommended that areas with pay gapsbelow the pay gap in RUS receive the same adjustment as RUS. Under the methodology which hasbeen used since locality pay was first implemented in 1994, areas with little data available in BLSsurveys and pay gaps that were two-tenths of a percentage point (0.2%) or more below RUS or belowthe RUS pay area for three surveys were to be dropped as surveyed discrete pay areas, and theresources used to conduct these surveys were to be redirected to survey new locations. Under theOCSP surveys, pay gaps in four areas -- Huntsville, Indianapolis, Kansas City, and Orlando -- arebelow RUS in 2003 and have been below or close to RUS for several years. Under the NCS surveys,pay gaps in five areas -- Columbus, Dayton, Kansas City, Orlando, and St. Louis -- are below RUSin 2003. Kansas City, Orlando, and St. Louis are below RUS under the weighted averages of both the OCSP and NCS surveys. For 2005, the council recommended that salary surveys in these areas bediscontinued and that the three areas become part of RUS. The resources previously used to conductsurveys in Kansas City, Orlando, and St. Louis would be used to carry out surveys "in as many ofthe following locations as possible": Phoenix-Mesa-Scottsdale, AZ MSA; Memphis, TN-MS-ARMSA; Austin-Round Rock, TX MSA; Louisville-Elizabethtown-Scottsberg, KY-IN CSA;Buffalo-Cheektowaga-Tonawanda, NY MSA; and Raleigh-Durham-Cary, NC CSA. These six areashave more than 2,500 General Schedule (GS) employees, a nonfarm workforce of more than375,000, and a BLS pay differential of greater than five percent when compared to the RUS paydifferential. The additional areas listed above are ranked by GS employment totals. The councilrecommended that the additional areas be surveyed in the order in which they are listed. (21) Evaluating Areas in the Vicinity of Locality Pay Areas. To evaluate areas currently in the "Rest of the United States" payarea for possible inclusion in adjacent locality pay areas, the council recommended the followingcriteria. For adjacent MSAs and CSAs : To be included in an adjacent locality pay area, an adjacent MSA or CSA currently in the RUS locality pay area must haveat least 1,500 GS employees and an employment interchange measure (22) of at least 7.5percent. For adjacent counties that are not part of a multi-county MSA or CSA : To be included in an adjacent locality pay area, an adjacent county thatis currently in the RUS locality pay area must have at least 400 GS employees and an employmentinterchange measure of at least 7.5 percent. For federal facilities that cross locality pay area boundaries : To be included in an adjacent locality pay area, that portion of a federal facility outsideof a higher-paying locality pay area must have at least 750 GS employees; the duty stations of themajority of these employees must be within 10 miles of the separate locality pay area; and asignificant number of these employees must commute to work from the higher-paying locality payarea. (23) For counties currently included in an MSA-based locality pay area that would be excluded under the new MSA and CSA definitions : To continueto be included in the locality pay area, any county (or portion of a county in the case of York County,ME, where the full county was never in the adjacent locality pay area), must have an employmentinterchange rate of at least 15% . (24) The council also recommended that "areas already included in a locality pay area as a result of the new criteria should not be subject to further review." (25) Requests for Changes in Locality Pay Area Boundaries. Under another council recommendation, requests for changesin the boundaries of locality pay areas, to be considered by the council, would have to include thefollowing information. The credentials of the requesting group establishing how the group represents GS employees in the area. Identification of the geographic area covered by theproposal. The number of GS employees in the area by agency. A detailed explanation of why the area should be added to the adjacent localitypay area. Current job vacancy rates in the area for GS positions. Documentation of recruitment or retention problems for GS employees in thearea. Documentation that agencies have tried other pay flexibilities, includingrequests for special salary rates and use of recruitment, retention, and relocation payments, and thatthese flexibilities did not solve recruitment and retention problems. An indication that the headquarters of affected agencies know about andsupport the request. Distance measures by road between the requesting area and the locality payarea. A summary of transportation facilities linking the requesting area and thelocality pay area, including commuter rail or other mass transit facilities. Agency organizational relationships between activities covered by the proposaland activities in another locality pay area. (26) Methodology of the BLS Surveys. The council, in its memorandum to the Pay Agent on the 2001 locality payments (submitted on October 22, 1999),recommended that five improvements be made in the BLS National Compensation Survey program. The council provided a progress report on the improvements in its memorandum to the Pay Agenton the 2005 locality payments. The improvements and progress to date are the following. Use three factors, rather than nine, to assign the correct federal grade levels 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 and has already begun to use the Knowledge FactorGuide. BLS will begin to phase the new approach into BLS surveys in the next surveycycle." 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. The model is derived from survey data and estimates pay for missing jobs as a function oflocation, occupation, and grade level." 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 ... for data deliveredthis 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 ... BLS will beginto phase in the new approach in surveys conducted in the next survey cycle." 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" in 2003. (27) Pay Agent Report. After considering the council's recommendations, the Pay Agent endorsed them in its December 4, 2003, annual reportto the President on the 2005 locality payments. The Pay Agent stated that "it would be unwise toallow the locality pay increases shown in [its] report to take effect in January 2005" because of "thecurrent national emergency." (28) The endorsementof the council's recommendations on defininglocality pay areas was tentatively approved. According to the Pay Agent, OPM, on the Agent'sbehalf, will publish a notice in the Federal Register in 2004 to explain the proposed changes to thelocality pay area boundaries and solicit public comments. The final rule will be published in timefor implementation in January 2005. (29) On September 22, 2004, OPM published proposed regulations in the Federal Register to link the definitions of General Schedule locality pay area boundaries to the geographic scope of metropolitan area definitions established by [OMB]. Thisproposal makes use of new criteria for evaluating areas adjacent to locality pay areas. The proposedregulations would retain all of the existing locality pay areas, which would be expanded to includea number of additional locations. (30) According to OPM, under the proposed changes, about 15,000 (31) General Schedule (GS)employees would move from the Rest of the United States pay area to metropolitan locality pay areasand "about 16,000 GS employees [would be retained] in metropolitan locality pay areas that wouldhave been excluded if only the new MSA definitions were used." (32) OPM accepted comments on theproposed regulations through November 8, 2004. The final regulations were published in the Federal Register on December 17, 2004, and became effective immediately upon publication so as to be applicable for the January 2005 payadjustment. In its discussion accompanying the regulations, OPM noted that on October 21, 2004,the Federal Salary Council recommended to the Pay Agent that the York-Hanover-Gettysburg, PACSA, having met the criteria for inclusion, be added to the Washington-Baltimore locality pay area. The Pay Agent endorsed this recommendation and it was incorporated into the final rule. (33) The Pay Agent estimated that the cost of the January 2005 locality-based comparability payments would be about $8 billion if the full amount necessary to reduce the pay disparity of thetarget gap to 5% were provided in January 2005 as required by FEPCA. (34) Table 1 shows thecouncil's and the Pay Agent's recommended locality payments for January 2005. As for the recommended improvements in the BLS National Compensation Survey Program, the Pay Agent reiterated that those focused on matching federal and non-federal jobs, excludingrandomly selected non-federal jobs that would be classified above GS-15 in the government, andproblems associated with random selection of survey jobs, have been implemented. Improvementsfocused on assigning GS grades to randomly selected survey jobs and to randomly selected surveyjobs with supervisory duties will be phased-in beginning in 2004. (35) In endorsing the council's recommendation that Kansas City, Orlando, and St. Louis become part of the "Rest of the United States" pay area, the Pay Agent asked the BLS to discontinue salarysurveys in these three areas as soon as feasible and begin augmenting existing surveys in as manyof the six areas identified by the council as possible. (The six areas, as stated above, arePhoenix-Mesa-Scottsdale, AZ MSA; Memphis, TN-MS-AR MSA; Austin-Round Rock, TX MSA;Louisville-Elizabethtown-Scottsberg, KY-IN CSA; Buffalo-Cheektowaga-Tonawanda, NY MSA;and Raleigh-Durham-Cary, NC CSA.) BLS is to formulate a survey plan and report to the Pay Agentin August 2004 "on how many of the new areas could be surveyed for locality pay purposes andunder what timeline." (36) OPM's proposed regulations on locality pay area boundaries published in the Federal Register on September 22, 2004, state that further review revealed that "it would be advisable to continue tomonitor the disparity between Federal and non-Federal pay levels in the Kansas City, Orlando, andSt. Louis areas before determining whether those areas should be discontinued." (37) The finalregulations note that the Federal Salary Council recommended to the Pay Agent on October 21,2004, that the Kansas City, Orlando, and St. Louis pay areas be discontinued in 2006. OPM, onbehalf of the Pay Agent, will publish proposed regulations to implement this recommendation in2005. (38) The Pay Agent stated that, while it supported updating the boundaries of locality pay areas, such changes were "an interim measure, pending fundamental reforms in the Federal white-collar paysystem." The Agent has "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 locality payarea without regard to the differing labor markets for major occupational groups or the performanceof individual employees." (39) 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." (40) Despite these concerns,OPM has never submitted a legislative proposal toCongress to amend FEPCA. A white paper on compensation issued by OPM in April 2002 reviewedcurrent policies and the need for more flexibility in setting General Schedule pay, but did not includeany recommendations. (41) In August 2004, the Coalition for Effective Change (42) released a paper which strongly endorsedimplementation of a pay-for-performance system in the federal government. Among the factors thegroup identified as essential to establishing such a system are that it be flexible, reviewable,periodically evaluated and adjusted, and adequately funded. (43) Reform of the federal government'spay and performance management systems is identified as a top priority in a report entitled "OPM'sGuiding Principles for Civil Service Transformation," posted on the agency's website on October25, 2004. The report advocates government-wide legislation that provides personnel flexibilitiessimilar to those provided to the Departments of Homeland Security and Defense to other executivebranch agencies. Broad pay bands are one such flexibility. (44) 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 2004 payrates (annual + locality) to derive the net increase in pay for 2005. President George W. Bush issued his Administration's FY2005 budget on February 2, 2004. The budget proposed a 1.5% federal civilian pay adjustment, but did not state how the increasewould be allocated between the annual and locality adjustments required by FEPCA in January2005. (45) The statutory annual pay adjustmentrequired in January 2005 is 2.5%. If the Presidentwanted to change the required rate of the annual adjustment, he would have had to submit analternative plan for the annual adjustment to Congress by September 1, 2004. He did not issue analternative plan. To change the amount of locality-based comparability payments, he had to submitan alternative plan for the locality payments to Congress by November 30, 2004; otherwise thedouble-digit percentages stated in the Pay Agent report for the locality payments would have becomeeffective. The President issued such an alternative plan on November 29, 2004, which stated that the locality pay percentages in effect for 2004 would continue for 2005. According to the President, heissued the plan because the nation is in the midst of a national emergency, which includes operationsin Afghanistan and Iraq, and the locality pay adjustments required by law would "divert resourcesfrom and interfere with our Nation's ability to fight the war on terror." He stated that the localitypayments would average 10.6 percent, would cost about $9.8 billion in FY2005, and when coupledwith the 2.5% annual adjustment would result in an overall average pay increase of some 13.1%. This increase, said the President, would far exceed the 1.5% pay adjustment that he proposed in theFY2005 budget and, since the additional amount would have to be absorbed, could result in agencieshaving to freeze hiring. The alternative plan notes that the quit rate for the federal government is "atan all-time low of 1.6 percent per year, well below the overall average quit rate in private enterprise"and that recruitment and retention bonuses and special salary rates are available to address anystaffing difficulties. (46) The President's budget also proposed an appropriation of $300 million for the Human CapitalPerformance Fund. The FY2004 appropriation ( P.L. 108-199 ) was $1 million, but after the 0.59%rescission was $994,000. The fund is designed to create performance-driven pay systems for employees and reinforce the value of employee performance management systems. It willprovide additional pay over and above any annual, across-the-board pay raise to certain civilianemployees based on individual or organizational performance and/or other critical agency humancapital needs. Ninety percent of funds appropriated are to be distributed to agencies on a pro ratabasis, upon OPM approval of an agency's plan. The remainder, and any amount withheld fromagencies due to inadequate plans, will be allocated at the discretion ofOPM. (47) The Consolidated Appropriations Act for F2005, P.L. 108-447 , does not provide an appropriation for the fund. (See discussion under "Human Capital Performance Fund," below.) The Senate Subcommittee on Oversight of Government Management, the Federal Workforce, and the District of Columbia of the Committee on Governmental Affairs conducted a hearing toexamine the progress made in implementing human capital flexibilities on July 20, 2004. Testifyingbefore the subcommittee, OMB's Deputy Director for Management, Clay Johnson, identified payincreases targeted to meet specific recruitment or retention needs as an eventuality for the federalworkforce. According to him: Today, we have targeted, not widespread, recruitment and retention problems in our civilian workforce, and pay surveys reveal that we are currentlyoverpaying employees in some occupational groups in some locations.... [W]e certainly should notgrant all civilian employees the same increase no matter what the need because that wouldn't befocusing on the desired result: that would be providing too small an increase where we do haverecruitment and retention problems, and too large an increase where we do not have aproblem. (48) 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%), January 2003 (4.1%), and January 2004 (4.1%)overall pay adjustment amounts were set by Congress. (49) Concurrent resolutions introduced in the House of Representatives by Representative Steny Hoyer ( H.Con.Res. 356 ) on February 3, 2004, and in the Senate by Senator PaulSarbanes ( S.Con.Res. 88 ) on February 9, 2004, expressed the sense of the Congress thatthere should continue to be parity between the pay adjustments for the uniformed military and federalcivilian employees. The resolutions noted the longstanding policy of parity between both themilitary and civilian pay increases. Such resolutions are effective only in the chamber in which theyare proposed, express nonbinding opinions on policies, and do not require the President's signature. Ten Members of Congress from the Washington, DC, metropolitan area wrote a letter to President Bush on January 21, 2004, urging him to "embrace the principle of pay parity" for federalcivilian employees and the uniformed military. (50) The FY2005 budget proposes a 3.5% pay increasefor the military and a 1.5% pay increase for civilian employees. (51) The Concurrent Resolution on the Budget for FY2005 ( S.Con.Res. 95 ) was agreed to by the Senate by a 51 to 45 vote (Record No. 58) on March 12, 2004. Section 505 includes a Senseof the Senate provision regarding pay parity that states that "the rate of increase in the compensationof civilian employees should be equal to that proposed for the military in the President's Fiscal Year2005 Budget." On March 29, 2004, the House of Representatives struck all after the resolving clauseof S.Con.Res. 95 and inserted in lieu thereof the text of H.Con.Res. 393 (theHouse version of the concurrent resolution discussed below) and then agreed to S.Con.Res.95. As agreed to by the House, the concurrent resolution does not include a pay parityprovision. The conference report on S.Con.Res. 95 ( H.Rept. 108-498 ), agreed to by theHouse by a 216 to 213 vote (Roll No. 198) on May 19, 2004, also does not include a pay parityprovision. (52) The S.Con.Res. 95 conferencepapers are being held at the desk in the Senate. The House version of the Concurrent Resolution on the Budget ( H.Con.Res. 393 ), as agreed to by the House of Representatives by a 215 to 212 vote (Roll No. 92) on March 25, 2004,does not include a Sense of the House provision on pay parity. An amendment to provide such,offered by Representative James Moran during House Budget Committee markup of the concurrentresolution on March 17, 2004, was not agreed to by a 21 to 15 vote. Representatives Jim Nussle,the Budget Committee chairman; Ernest Istook Jr., the Transportation, Treasury, and IndependentAgencies Appropriations Subcommittee chair; and William Thornberry were among those whoopposed the amendment offered by Representative Moran. One argument against supporting the payparity amendment was that the job of a member of the uniformed military is more demanding thanthat of a civilian employee and the pay adjustment should reflect this difference. During discussions surrounding the vote on H.Con.Res. 393 , the Speaker of the House, Representative Dennis Hastert, agreed to allow a separate vote in the House ofRepresentatives on a pay parity resolution ( H.Res. 581 ) offered by Representative TomDavis and 22 cosponsors. The resolution states the Sense of the House that "in fiscal year 2005,compensation for civilian employees ... should be adjusted at the same time, and in the sameproportion, as are rates of compensation for members of the uniformed services." On March 31,2004, the House agreed to H.Res. 581 by a 299 to 126 vote (Roll No. 104). Supporters ofH.Res. 581 expressed the hope that the result of the vote would be considered by theconference committee on the Concurrent Budget Resolution. The resolution does not become law, but it provides the framework within which Congress subsequently considers spending legislation. Any congressional recommendation on the civilianfederal pay adjustment has usually been included in the Treasury, Postal Service, and GeneralGovernment Appropriations bill, which, as of the 108th Congress, has been combined with theDepartment of Transportation Appropriations bill to be the Departments of Transportation andTreasury and Independent Agencies Appropriations bill. Annual and Locality Pay Adjustments. Section 638 of the Departments of Transportation and Treasury and Independent Agencies AppropriationsBill, 2005, H.R. 5025 , as passed by the House of Representatives on September 22,2004, on a 397-12 (Roll No. 465) vote, would provide a 3.5% pay adjustment for federal civilianemployees, including those in the Departments of Defense and Homeland Security. The bill doesnot recommend how the increase should be divided between the annual and locality pay adjustments. The House Subcommittee on Transportation, Treasury, and Independent Agencies marked up thebill on July 15, 2004, and by voice vote approved the bill, as amended, for consideration by the fullcommittee. On July 22, 2004, the House Committee on Appropriations marked up the bill and byvoice vote ordered it to be reported favorably to the House of Representatives. H.R. 5025was reported to the House by the Appropriations Committee on September 8, 2004 ( H.Rept.108-671 ). (53) During the full committee markup,the committee agreed to an amendment offered byRepresentative Steny Hoyer, joined by Representatives James Moran and Frank Wolf, to provide the3.5% pay adjustment. Section 501 would provide that the pay increase would be absorbed withinthe levels appropriated in the act or in previous appropriations acts. Under Section 636, funds couldnot be used to implement or enforce regulations for locality pay inconsistent with recommendationsof the Federal Salary Council. The House Appropriations Committee report that accompanies the House bill directs OPM "to include with the 'Annual Report on Locality-Based Comparability Payments for the GeneralSchedule' in fiscal year 2005 and all future fiscal years a report comparing the total pay and non-paycompensation packages of the Federal workforce and the private sector." (54) OMB's Statement of Administration Policy on H.R. 5025 urged the House to adopt the President's proposal for a 1.5% pay adjustment and expressed concern that the Human CapitalPerformance Fund, "a more targeted approach to move the Federal pay system into one that wouldpromote high performance," is not fully funded. It also stated the Administration's opposition torestricting its "flexibility to adjust locality pay areas to meet changing needs and conditions" and to specifying a 3.5 percent across-the-board increase for Department of Homeland Security (DHS) and Department of Defense (DOD) civilian employees. This provision would limit flexibility as DHS and DOD use the new authorities ... to design andimplement a modern personnel and pay system.... [T]he Administration opposes the provisionrelating to pay adjustments for blue-collar employees, which would disregard the results of localblue-collar wage surveys and provide a pay increase identical to local General Schedule employees. These provisions could result in paying blue-collar employees at rates higher than local labor marketsand would create a host of technical and equity problems. (55) Section 640 of S. 2806 , the Senate version of the Transportation/Treasury appropriations bill, as reported to the Senate by the Committee on Appropriations, also wouldprovide a 3.5% pay adjustment for federal civilian employees, including those in the Departmentsof Defense and Homeland Security. Like the House bill, the Senate bill does not recommend howthe increase should be divided between the annual and locality pay adjustments. The SenateSubcommittee on Transportation, Treasury, and General Government marked up the bill onSeptember 9, 2004, and by voice vote approved the bill, as amended, for consideration by the fullcommittee. On September 14, 2004, the Senate Committee on Appropriations marked up the billand on a 29-0 vote ordered it to be reported to the Senate. S. 2806 was reported onSeptember 15, 2004 ( S.Rept. 108-342 ). (56) As the second session of the 108th Congress was drawing to a close, the Departments of Transportation and Treasury and Independent Agencies appropriations bill for 2005 was incorporatedin H.R. 4818 , the Consolidated Appropriations Act for FY2005, as Division H. TheHouse of Representatives agreed to the conference report accompanying H.R. 4818 on a344-51 (1 Present) vote (Roll No. 542) on November 20, 2004, and the Senate agreed to theconference report on a 65-30 (No. 215) vote the same day. (57) The conference agreement, at Section640(a), provides a 3.5% pay adjustment for federal civilian employees, including those in theDepartments of Defense and Homeland Security. The adjustment is effective as of the first day ofthe first applicable pay period beginning on or after January 1, 2005. Section 501 of the conferenceagreement requires the pay raises to be funded within appropriated levels. The conferees also directthe OPM Director to submit a report by March 4, 2005, comparing the pay and non-paycompensation packages of the federal workforce and the private sector. President Bush signed H.R.4818 on December 8, 2004, and it became P.L. 108-447 . The pay provisions are at Section640(a) and Section 501 of the law. On December 30, 2004, President Bush issued Executive Order 13368, which allocated the 3.5% pay increase as 2.5% annual and 1.0% locality. (58) OPM published the 2005 salary tables on itswebsite the next day, and these are available at http://www.opm.gov . Table 1 shows therecommended locality payments, the authorized locality payments, and the net annual and localitypay increases. In a November 17, 2004, letter to the Chairmen and Ranking Members of the House and Senate Committees on Appropriations, the OMB Director, Joshua Bolten, stated the Administration's strongopposition to a federal civilian pay raise in excess of 2.5%. The letter stated that a 3.5% payadjustment was $2.2 billion more than the President's request and provides a percentage increase that exceeds inflation, the statutory base pay increase, and the average increase in private sector pay as measured by theEmployment Cost Index. Any recruitment or retention problems facing the Government are limitedto a few areas and occupations and do not warrant such an arbitrary across-the-board increase. Anincrease to 3.5% across-the-board would be very difficult for agencies to absorb, particularly whencombined with any other across-the-board reductions used to meet overall spending targets, and willlikely require reductions-in-force or shifts of resources away from critical programmaticpriorities. (59) Human Capital Performance Fund. The House Committee on Appropriations recommended and the House passed in H.R. 5025 anappropriation of $12.5 million for the Human Capital Performance Fund. This amount is $287.5million less than the President's request. The House bill would authorize the OPM Director todetermine and transfer to federal agencies such amounts as necessary to carry out the purposes of thefund. No funds would be obligated or transferred until the Director has notified the relevantsubcommittees of the Committees on Appropriations of the approval of an agency's performanceplan and the prior approval of such subcommittees has been obtained. OPM is directed to reportannually to the House and Senate Appropriations Committees "on the performance pay plans thathave been approved, and the amounts that have been obligated or transferred." (60) The Senate Committee on Appropriations did not recommend funding for the performance fund in S. 2806 . The committee report accompanying the Senate bill states that such aninitiative "should be budgeted and administered within the salaries and expenses of each individualagency." (61) The Consolidated Appropriations Actfor FY2005, P.L. 108-447 , does not provide anappropriation for the fund. President Bush issued his Administration's FY2006 budget on February 7, 2005. The budgetproposes a 2.3% federal civilian pay adjustment, but does not state how the increase would beallocated between the annual and locality adjustments required by FEPCA in January 2006. (62) Thestatutory annual pay adjustment required in January 2006 is 2.1%. If the President wants to changethe required rate of the annual adjustment, he must submit an alternative plan for the annualadjustment to Congress by September 1, 2005. To change the amount of locality-basedcomparability payments, he must submit an alternative plan for the locality payments to Congressby November 30, 2005. The nationwide average net pay increase, if the annual and locality-basedcomparability payments were granted as required by law, would be 6.93% in 2006. Concurrent resolutions introduced in the House of Representatives by Representative StenyHoyer ( H.Con.Res. 40 ) on February 1, 2005, and in the Senate on the same day bySenator Paul Sarbanes ( S.Con.Res. 8 ) express the sense of the Congress that thereshould continue to be parity between the pay adjustments for the uniformed military and federalcivilian employees. The President's budget proposes a 3.1% pay adjustment for the uniformedmilitary. Such resolutions are effective only in the chamber in which they are proposed, expressnonbinding opinions on policies, and do not require the President's signature. Ten Members of Congress from the Washington, DC, metropolitan area wrote a letter to President Bush on January 25, 2005, urging him to "embrace the principle of pay parity" for federalcivilian employees and the uniformed military. (63) The letter states that the signatories "cannot expressstrongly enough the importance of continuing the tradition of pay parity" as the war on terrorismcontinues and as the retirement of the government's most experienced employees looms on thehorizon. The Members also state their willingness to explore initiatives on effectively allocatinghuman capital expenditures and ensuring that the federal government is able to recruit, retain, andreward employees. Earlier, on January 5, 2005, Representative Hoyer sent a letter to OMB DirectorClay Johnson III renewing his earlier offers "to discuss the administration's objectives regardingpay-for-performance and the implementation of FEPCA." (64) Table 1. January 2005 Recommended Locality Payments, Authorized Locality Payments, and Net Annual and Locality Pay Increase Source: Memorandum for the President's Pay Agent from the Federal Salary Council, Level ofComparability Payments for January 2005 and Other Matters Pertaining to the Locality PayProgram (Washington: Oct. 28, 2003), Attachment 1; and Report on Locality-Based ComparabilityPayments for the General Schedule, Annual Report of the President's Pay Agent (Washington: Dec.2003), p. 24. U.S. President (Bush), "Adjustments of Certain Rates of Pay," Executive Order 13368, Federal Register , vol. 70, Jan. 5, 2005, pp. 1145-1156. MSA refers to a Metropolitan StatisticalArea. CSA refers to a Combined Statistical Area. The component parts of each pay area aredescribed in U.S. Office of Management and Budget, Revised Definitions of Metropolitan StatisticalAreas, New Definitions of Micropolitan Statistical Areas and Combined Statistical Areas, andGuidance on Uses of the Statistical Definitions of These Areas , OMB Bulletin No. 03-04, June 6,2003. Table 2. Annual and Locality Pay Adjustments Under FEPCA, 1991 to 2005 Sources and Notes : Locality-based comparability payments began in 1994. For the ECI-requiredannual adjustment, see U.S. Department of Labor, Bureau of Labor Statistics, Employment CostIndex , September of each year. For the locality payments required by FEPCA, see Report onLocality-Based Comparability Payments for the General Schedule, Annual Report of the President'sPay Agent , December of each year. For the annual and locality pay adjustments authorized, see E.O.12736, Dec. 12, 1990; E.O. 12786, Dec. 26, 1991; E.O. 12826, Dec. 30, 1992; Presidentialmemorandum of Dec. 1, 1993; E.O. 12944, Dec. 28, 1994; E.O. 12984, Dec. 28, 1995; E.O. 13033,Dec. 27, 1996; E.O. 13071, Dec. 29, 1997; E.O. 13106, Dec. 7, 1998; E.O. 13144, Dec. 21, 1999;E.O. 13182, Dec. 23,2000; E.O. 13249, Dec. 28, 2001; E.O.'s 13282, Dec. 31, 2002 and 13291, Mar.21, 2003; E.O.'s 13322, Dec. 30, 2003 and 13332, Mar. 3, 2004; and E.O. 13368, Dec. 30, 2004. The net increase for each year was calculated by CRS. The actual pay rates are calculated by the following means. First, the basic General Schedule (GS) is increased by the annual adjustmentpercentage, resulting in a new GS schedule. These new basic GS rates are then increased by thelocality payment. The resulting pay rates (annual + locality) are compared with the pay rates (annual+ locality) for the previous year to derive the net increase in pay for the current year. Salary tablesfor 2005 are available on the Internet at http://www.opm.gov .

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. The law has never been implementedas originally enacted; annual and locality payments have been reduced. In January 2005, theyreceived a 2.5% annual pay adjustment and a 1.0% locality-based comparability payment underExecutive Order 13368, issued by President George W. Bush on December 30, 2004. Although thefederal pay adjustments are sometimes referred to as cost-of-living adjustments, neither the annualadjustment nor the locality payment 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 2.5% in January 2005. 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 2005. The FederalSalary Council and the Pay Agent recommended that, to carry out FEPCA, the 2005 localitypayments range from 18.14% in the "Rest of the United States" (RUS) pay area to 47.96% in the SanJose-San Francisco pay area. The payment recommended for the Washington, DC, pay area was29.66%. Because the new locality rate replaces the existing locality rate, the change in locality ratesis derived by comparing 2004 locality payments with those recommended for 2005. Thiscomparison results in recommended net increases for 2005, if the ECI and locality-basedcomparability payments were granted as required by law, of 9.19% in the RUS pay area to 22.10%in the San Jose-San Francisco pay area, and 15.94% 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 13.06% in 2005. President Bush's FY2005 budgetproposed a 1.5% federal civilian pay adjustment. He proposed a 3.5% pay adjustment for theuniformed military, and a number of Members of Congress advocated the same pay adjustment forfederal civilians. The Departments of Transportation and Treasury and Independent Agenciesappropriations bill, 2005 -- H.R. 5025 , as passed by the House of Representatives, and S. 2806 , as reported in the Senate -- provides a 3.5% pay adjustment for federal civilianemployees, including those in the Departments of Defense and Homeland Security. Thisappropriations bill was incorporated as Division H of the Consolidated Appropriations Act forFY2005 ( H.R. 4818 ) which was signed by the President on December 8, 2004, andbecame P.L. 108-447 . The President's budget for FY2006 proposes pay adjustments of 2.3% for federal civilian employees and 3.1% for the uniformed military. The same pay adjustment for both civilians and themilitary is advocated by several Members of Congress.