The GS pay system covered 69 percent of federal civilian workers in 2011, with compensation costing about $147 billion (about 67 percent of total federal civilian compensation of about $220 billion). The GS workforce is divided into 15 pay grades, with 10 rates of pay (referred to as steps) within each grade. Agencies use a uniform set of classification standards to determine grade levels for their positions organized within five occupational categories—Professional, Administrative, Technical, Clerical, and Other White-Collar (PATCO). The GS system of classification was established by the Classification Act of 1949 in response to calls for a modernized system to ensure equity in pay setting. Until the late 1960s, general pay adjustments for federal employees were made through acts of Congress. The Federal Pay Comparability Act of 1970 permanently authorized the President to adjust GS pay rates annually, and established a system for recommending adjustments with the goal of increasing federal pay to be comparable with the private sector; however, we previously found that the gap between average federal and private sector salaries for similar jobs continued after implementation of the act because the recommended adjustments were not always made. The Federal Employees Pay Comparability Act of 1990 (FEPCA) created annual locality-based pay adjustments for GS employees to reduce reported gaps between federal and nonfederal pay in metropolitan areas. In addition, FEPCA maintained an annual across-the-board pay adjustment that is the same for each employee to keep the GS base pay schedule in line with salary growth in the general labor market, similar to what had already existed under the 1970 act. Before FEPCA, federal employees doing the same job at the same level anywhere in the country were paid the same amount. However, there was a growing concern that it was difficult to recruit and retain skilled federal employees in areas with higher nonfederal wages. We concluded that locality-based pay adjustments were necessary. FEPCA established locality pay, and the President’s Pay Agent designated pay localities based on Office of Management and Budget (OMB) Metropolitan Statistical Areas. FEPCA’s goal was to reduce the gap between federal and nonfederal pay in each locality, as measured by BLS data and reported by the President’s Pay Agent, to 5 percent over the course of 9 years. This goal was not met, but locality pay increases have been provided every year since locality pay was implemented in 1994, except during the pay freeze in 2011 and 2012. According to OPM, locality pay is now a broadly accepted practice in federal pay administration. See app. II for more information on the implementation of locality pay. Figure 1 illustrates the extent to which locality pay has been implemented for a representative employee. The annual pay (base plus locality) in 2012 for an employee at GS-11 (approximately the midpoint grade level), step 1 is shown for selected pay localities. Examples of positions that a GS-11 employee might hold are Administrative Officer, Scientist, Paralegal Specialist, Accountant, Engineer, Medical Records Administrator, Nurse Specialist, and Information Technology Specialist. There were 34 pay localities in the United States in 2012, composed of the states of Alaska and Hawaii, 31 metropolitan areas, and a residual locality called “Rest of U.S.” that includes all other areas in the United States and its territories and possessions. Rest of U.S. was the lowest- paying locality in 2012, with a GS-11, step 1 earning $57,408, and San Francisco was the highest, with a GS-11, step 1 earning $67,963. We selected additional localities with various pay rates and population sizes and from various regions to create figure 1. Across-the-board adjustments are designed to keep the GS base pay schedule in line with salary growth in the general labor market. FEPCA specifies that unless the President provides for alternative pay adjustments, across-the-board pay adjustments are to be determined using a simple formula: Pay rates are to be increased by the 12-month percentage increase in the wage and salary component of the Employment Cost Index (ECI) for private sector workers, minus one-half of one percentage point. For example, the ECI reference period for the January 2013 increase is the 12-month period ending September 2011. The ECI shows that during that period, pay for private sector workers rose Therefore, the across-the-board increase for 2013 would by 1.7 percent.be 1.2 percent. The ECI, an index compiled by the BLS and published quarterly, measures percentage changes in wages and salaries for private sector employees. As specified in FEPCA, the President may decide to either provide across-the-board pay adjustments based on this calculation, or provide alternative pay adjustments based on national emergency or serious economic conditions affecting the general welfare. Congress may legislate an increase that is different from the formula result or the President’s alternative plan; this is not part of the process specified by FEPCA. The FEPCA formula increase has gone into effect in An 12 of the 19 years since 1994; the largest increase was 3.8 percent. In evaluating economic conditions, the President is to consider a range of economic measures, including (but not limited to) Gross National Product, the unemployment rate, the budget deficit, and the Consumer Price Index. amount lower than the formula amount went into effect in the other 7 years due to President’s alternative pay plans and laws passed by Congress. The smallest increase was 0 percent, during the freeze on annual pay adjustments in 2011 and 2012. Locality adjustments are designed to reduce the gap between federal and nonfederal pay in each locality to no more than 5 percent based on surveys to be conducted by BLS. FEPCA specifies that locality pay adjustments are to be recommended by a Pay Agent designated by the President, which is to consider the views of employee organizations: The President’s Pay Agent recommends annual comparability payment amounts, establishes and modifies pay localities as it considers appropriate, and submits an annual report to the President on these items. The Secretary of Labor and the Directors of OMB and OPM serve as the Pay Agent. In making its recommendations, the President’s Pay Agent considers the views and recommendations of a Federal Salary Council and other employee organizations. The Federal Salary Council makes annual recommendations to the President’s Pay Agent on locality pay adjustments, including the establishment or modification of pay localities, the coverage of salary surveys used to set locality pay, the process for making pay comparisons, and the level of comparability payments that should be made. The Council is to be comprised of three experts in labor relations and pay policy and six representatives of employee organizations representing large numbers of GS employees. To recommend locality pay adjustments, the President’s Pay Agent compares the annual GS base pay rates of federal workers in each area to the annual pay rates of nonfederal workers in the same area for the same levels and types of work. The sidebar provides details on this process. The target locality pay is the amount that reduces these differences to 5 percent. The surveys and models used for making these pay comparisons have changed somewhat between the passage of FEPCA in 1990 and the 2011 President’s Pay Agent Report (which recommends pay adjustments for 2013 and is the most current report available). Some changes were initiated by BLS, and some changes were made in response to concerns expressed by the Federal Salary Council or President’s Pay Agent. For example, BLS changed the survey used to measure nonfederal pay in 1996; the Federal Salary Council and President’s Pay Agent expressed concerns, and BLS worked together with OPM and OMB to improve the suitability of the new survey for recommending locality payments. Improvements were phased in from 2002 to 2011. Changes are summarized in app. II. As specified in FEPCA and similar to the process for across-the-board adjustments, the President may decide to either provide locality pay adjustments based on the Pay Agent’s recommendation, or provide for alternative pay adjustments based on national emergency or serious economic conditions affecting the general welfare. Additionally, Congress may legislate an average percent increase that is different from the Pay Agent’s recommendation or the President’s alternative plan; this is not part of the process specified by FEPCA. For 1994, the first year that locality payments were made, FEPCA specified that the locality increase should be not less than one fifth of the amount needed to reduce the pay disparity to 5 percent. This amount, providing a 3.95 percent average locality pay rate for the average GS employee as recommended by the Pay Agent, went into effect. In subsequent years through 2012, the effective increase has usually been far less than the one recommended by the Pay Agent, either due to a President’s alternative pay adjustment or to a law passed by Congress. Nonetheless, some locality pay increase has been provided every year since locality pay was implemented in 1994 (except during the pay freeze in 2011 and 2012), and reported disparities between federal and nonfederal pay by locality have been reduced. The President’s Pay Agent reported that pay disparities were lower in 2011 than in 1994 in 16 of the 21 pay localities that existed in both of those years. Federal Salary Council members and OPM officials we spoke with said that FEPCA was successful in its goal of improving federal pay setting for large metropolitan areas by more closely aligning pay to local labor markets. Figure 2 summarizes pay adjustments during the past 6 years, illustrating the differences between the President’s Pay Agent recommendations and the final effective amounts. These differences were driven primarily by locality pay, since the across-the-board adjustments required under the FEPCA formula were smaller and were provided in some years, while the recommended locality adjustments were larger and were not provided. For example, for 2007, the President’s Pay Agent recommended a 1.7 percent across-the-board increase to comply with the formula in FEPCA, and a 7 percent average locality increase based on BLS salary survey data.