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%.