Nonforeign Cost-of-Living Allowances and Possible Transition to Locality Pay

Nonforeign Cost-of-Living Allowances and Possible Transition to Locality Pay

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Pr
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More than 41,000 white-collar federal civilian employees, including U.S. Postal Service
employees, are stationed in the following “nonforeign” areas outside the contiguous United
States: Alaska, Hawaii, Guam, the Commonwealth of Northern Mariana Islands (CNMI), Puerto
Rico, and the U.S. Virgin Islands (USVI). These employees receive nonforeign cost-of-living
allowances (COLAs) in addition to their regular pay. Nonforeign COLAs, which are authorized
by 5 U.S.C. § 5941 and Executive Order 10000 (as amended), were first enacted in 1948 to aid
federal white-collar job recruitment in nonforeign areas outside the contiguous United States or in
the Alaska territory where “living costs [are] substantially higher than in the District of
Columbia.” Nonforeign COLAs have faced legal challenges because they create differences in
pay between employees who receive a nonforeign COLA and employees within the contiguous
United States who, instead, receive locality-based comparability pay.
Three plans to replace the nonforeign COLA with locality pay have been proposed. On May 30,
2007, the Office of Personnel Management (OPM) released a proposal to phase out the
nonforeign COLA system. The Federal Managers Association (FMA) released a plan to eliminate
the nonforeign COLA shortly after the OPM plan was unveiled. On May 13, 2008, Senator Daniel
K. Akaka and others introduced S. 3013, a bill “[t]o provide for retirement equity for Federal
employees in nonforeign areas outside the 48 contiguous States and the District of Columbia, and
for other purposes.” All three plans would replace the nonforeign COLA program with locality-
based comparability payments—or a combination of locality-based pay and a COLA. The most
prominent differences among the three plans are the length of time each allots for the COLA
phase out, the length of time COLAs are paid once the transition period is completed, and the
percentage of every COLA dollar removed from an employee’s pay for every dollar of locality
pay added to it.
Nonforeign COLAs and locality pay are different in several ways. First, nonforeign COLAs are
based on OPM surveys that determine cost-of-living differences between nonforeign COLA areas
and Washington, DC. In contrast, locality pay is based on Bureau of Labor Statistics research that
determines cost-of-labor differences between federal and nonfederal workers in the same
geographic area. Second, a nonforeign COLA is not added to an employee’s basic rate of pay
when calculating retirement benefits, life insurance, and premium pay. Locality pay is counted
toward those benefits. Finally, pursuant to 25 U.S.C. § 912, a nonforeign COLA may not be taxed
at the federal level, while locality pay is federally taxed.
This report provides an overview of the history of the nonforeign COLA and locality pay
programs; identifies and describes potential changes to the existing nonforeign COLA system,
including the possibility of instituting locality pay; and analyzes the potential effects of keeping
the existing system or adopting a nonforeign COLA phase-out plan. This report will be updated as
events warrant.

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Introduction ..................................................................................................................................... 1
History of Nonforeign COLAs........................................................................................................ 3
Legislation Establishing the Program ....................................................................................... 3
Executive Order 10000 ............................................................................................................. 5
Subsequent Efforts to Modify the Nonforeign COLA Program................................................ 6
Current Nonforeign COLA Program ............................................................................................... 7
Covered Geographic Areas and Pay Systems ........................................................................... 7
Recent Nonforeign COLA Rate Changes and Proposals .......................................................... 9
Nonforeign Area Employees ................................................................................................... 10
American Samoa................................................................................................................11
Methodology for Determining Nonforeign COLA Rates.........................................................11
Estimated Locality Pay Rates.................................................................................................. 12
Litigation................................................................................................................................. 13
Transition Proposals ...................................................................................................................... 14
The Legislative Proposal......................................................................................................... 15
Calculating the Legislative Proposal Phase-in.................................................................. 16
The COLA Offset.............................................................................................................. 21
Pay Comparisons .............................................................................................................. 21
Retirement Effects ............................................................................................................ 22
Retirement Projections...................................................................................................... 23
Estimated Cost of S. 3013................................................................................................. 24
Unique Pay Scales............................................................................................................. 25
U.S. Postal Service............................................................................................................ 25
OPM’s Recommendation ........................................................................................................ 26
Calculating the OPM Proposal Phase-in........................................................................... 26
The COLA Offset.............................................................................................................. 31
Pay Comparisons .............................................................................................................. 31
Retirement Rates............................................................................................................... 31
Estimated Cost of the OPM Proposal ............................................................................... 32
The U.S. Postal Service .................................................................................................... 32
The Federal Managers Association Proposal .......................................................................... 32
Calculating the Federal Managers Association Proposal .................................................. 32
The COLA Offset.............................................................................................................. 36
Pay Comparisons .............................................................................................................. 36
Retirement Effects ............................................................................................................ 36
The U.S. Postal Service .................................................................................................... 37
Analysis of Legislative Options .................................................................................................... 37
Transition Proposals................................................................................................................ 37
Timing of Phase-in............................................................................................................ 37
The Continued COLA....................................................................................................... 38
Federal Tax Rates.............................................................................................................. 39
Personal Income Federal Tax ............................................................................................ 40
Concluding Observations .............................................................................................................. 40

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Table 1. Nonforeign Area COLA Rates, July 2008 ......................................................................... 8
Table 2. Federal Civilian Nonforeign COLA Recipients by Agency, June 2008 .......................... 10
Table 3. OPM Projected Locality Payments in the Nonforeign Areas and Comparative
Areas in the Contiguous United States....................................................................................... 13
Table 4. Estimated Salary for a Hypothetical GS-9, Step 5, Working in Anchorage, AK, if
S. 3013 Were Enacted................................................................................................................. 18
Table 5. Estimated Salary for a Hypothetical GS-9, Step 5, Working in Anchorage, AK, if
S. 3013 Were Not Enacted.......................................................................................................... 20
Table 6. Estimated CSRS Retirement Annuity Comparison Between Hypothetical GS-9,
Step 5, Employees in Puerto Rico Who Retired in 2013............................................................ 22
Table 7. Estimated FERS Retirement Annuity Comparison Between Two Hypothetical
GS-9, Step 5, Employees in Puerto Rico Who Retired in 2014 ................................................. 23
Table 8. Cumulative Retirement Projections for Nonforeign Areas, 2008 Through 2016 ............ 23
Table 9. Estimated Salary for a GS-9, Step 9, Working in Honolulu, HI, if Locality Pay
Transition Were Implemented .................................................................................................... 28
Table 10. Estimated Salary for a GS-9, Step 5, Working in Honolulu, HI, if Locality Pay
Transition Were Not Implemented ............................................................................................. 30
Table 11. Estimated Salary for a Hypothetical GS-9, Step 5, Working in Puerto Rico if the
Federal Managers Association Plan Were Enacted .................................................................... 34
Table 12. Estimated Salary for a GS-9, Step 5, Working in Puerto Rico if the Federal
Managers Association Proposal Were Not Enacted ................................................................... 35
Table 13. Total Pay for Hypothetical GS 9, Step 5, Employees Working in Anchorage,
AK, and Houston, TX................................................................................................................. 38

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Author Contact Information .......................................................................................................... 42

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The General Schedule (GS) is the primary pay system for federal white-collar employees. As of
June 2008, the GS and GS-related pay systems covered nearly 1.26 million of the 1.93 million
employees in the federal workforce.1 Most GS employees in the contiguous United States receive
locality-based comparability payments in addition to their basic pay, with the amount of locality
pay based on differences between federal and private sector pay rates for particular sets of jobs
within particular pay areas.2 Locality payments are federally taxed as regular wages, and are
considered basic pay when determining an employee’s retirement benefits,3 life insurance, and
premium pay.4
In contrast, most GS and other white-collar employees in “nonforeign” areas outside of the
continental United States do not receive locality pay. Instead, they receive cost-of-living
allowances (COLAs), which are based on differences in the cost of living in those areas when
compared to the Washington, DC, area.5 The current nonforeign areas are Alaska, Hawaii, Guam,
the Commonwealth of Northern Mariana Islands (CNMI), Puerto Rico, and the U.S. Virgin
Islands (USVI). Nonforeign COLAs were initially authorized in 1948 as a way to attract
employees to, and retain employees in, remote areas in a consistent manner. As of June 2008,
more than 41,000 federal employees in those areas (including employees in the U.S. Postal
Service) received nonforeign COLAs of up to 25% of basic pay, with total annual nonforeign
COLA program payments estimated to be more than $544 million.6 In contrast to locality pay,
nonforeign COLAs are not federally taxed and are not considered basic pay in determining an
employee’s retirement benefits, life insurance, or premium pay. According to media reports,
federal employees may choose to leave a nonforeign area and work within the contiguous United
States in their final years of federal service in order to receive locality pay and thereby increase
retirement benefits.7 Differences in pay between the nonforeign COLA and locality pay
authorities have prompted litigation against the nonforeign COLA program. In addition, some
executive branch employees and private organizations claim that continued use of the COLAs
may lead to recruitment and retention problems in nonforeign areas.8

1 U.S. Office of Personnel Management, Central Personnel Data File, available at http://www.fedscope.opm.gov/.
FedScope does not provide detailed location information for certain agencies (e.g., the Federal Bureau of Investigation,
the Drug Enforcement Agency, and the U.S. Secret Service).
2 Section 529 of P.L. 101-509, the Federal Employees Pay Comparability Act of 1990 (FEPCA). For more information
on the GS locality pay system, see CRS Report RL34463, Federal White-Collar Pay: FY2009 Salary Adjustments, by
Barbara L. Schwemle.
3 For more information see CRS Report 94-971, Federal Employees: Pay and Pension Increases Since 1969, by Patrick
Purcell.
4 Premium pay is any pay that is at a higher rate than basic pay. Premium pay can include, but is not limited to, night
pay, Sunday pay, holiday pay, and hazardous duty pay.
5 This report refers only to nonforeign areas as defined in 5 U.S.C. § 5941 and does not include U.S. embassies around
the world.
6 Estimate developed by CRS, based on a salary of $57,709 per year (a GS-12, step 1) and a 23% nonforeign COLA
rate for 41,000 nonforeign COLA recipients.
7 “Congress Studies Locality Pay Proposal,” Pacific Business News, May 31, 2007, available at
http://pacific.bizjournals.com/pacific/stories/2007/05/28/daily40.html?jst=s_cn_hl.
8 U.S. Congress, Senate Committee on Homeland Security and Governmental Affairs, Subcommittee on Oversight of
Government Management, the Federal Workforce and the District of Columbia, Nonforeign COLA: Finding an
Equitable Solution, hearing on S. 3013, 110th Cong., 2nd sess., testimony of Charles Grimes III, May 29, 2008, available
at http://hsgac.senate.gov/public/_files/GrimesTestimony052908.pdf. See also testimony of Michael FitzGerald, May
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In the 110th Congress, two similar bills—one in the House and one in the Senate—were
introduced that would phase out the nonforeign COLA program and convert federal, nonforeign
employees to locality pay.9 The Office of Personnel Management (OPM) and the Federal
Managers Association (FMA) also have sent transition proposals to Congress. The three plans
primarily differ in three ways: the length of time allotted to the transition, the length of time
COLAs are paid once the transition is completed, and the percentage of every COLA dollar
removed from an employee’s pay for every dollar of locality pay added to it. In all three transition
proposals, COLAs would be removed from a nonforeign employee’s pay at a rate that is lower
than the introduction of locality pay. Employees who transitioned to locality pay, therefore, could
concurrently receive both a COLA and locality pay. The continued COLA payment is meant to
offset federal tax payments for the employee who historically would not have paid federal taxes
on his or her COLA. The employee would have to pay taxes on locality pay.
The legislative proposal requires three years to phase in locality pay, would continue a COLA
past the transition period, and removes 65% of each COLA dollar for each dollar of locality pay
added to an employee’s pay.10 The OPM proposal would phase in locality pay over seven years,
continue a COLA payment once the transition was completed, and remove 85% of each COLA
dollar for each added dollar of locality pay.11 The FMA proposal would switch to locality pay in
one year, eliminate COLA payments in the second year, and remove 75% of each COLA dollar
for each dollar of locality pay added.
This report explores the history and current status of nonforeign COLAs; identifies and describes
proposals to change the COLA system, including the possibility of instituting locality pay; and
analyzes the potential effects of keeping the existing system or adopting one of the three
nonforeign COLA phase-out plans.

(...continued)
29, 2008, available at http://hsgac.senate.gov/public/_files/FitzGeraldTestimony052908.pdf; and U.S. Office of
Personnel Management, “Cost-of-Living Allowances (Nonforeign Areas); Partnership Pilot Project,” 61 Federal
Register 59175, Nov. 21, 1996.
9 S. 3013. H.R. 6516, a similar bill to S. 3013, was introduced in the House, but was not reported from committee. This
report focuses on S. 3013, which has passed the Senate and was referred to the House Committee on Oversight and
Government Reform.
10 None of the proposals state the assumed flat tax rate. Instead, each proposal selects a COLA offset rate, which
represents the percentage of each COLA dollar that would be removed for each dollar in locality pay that is added to an
employee’s pay. The remaining COLA percentage was designed to cover increased tax payments for employees
switching from COLAs to locality pay. If the COLA offset rate is 65%—as it is in the legislative proposal—the bill
assumes a 35% flat tax rate for federal employees.
11 In both the OPM proposal and the legislation, COLAs would continue to be paid after the transition is completed to
ensure that nonforeign area employees do not have a reduction in their take-home (post federal tax) pay. The continued
COLA, in other words, is designed to make certain nonforeign area employees do not experience a reduction in their
paychecks because of the transition to locality pay. The COLA that remained after the transition was completed aims to
be roughly equal in value to a nonforeign area employee’s estimated reduction in take-home pay caused by federal
taxes on his or her locality pay.
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The nonforeign COLAs12 were developed after World War II in response to concerns about
inequities in federal pay between employees working in nonforeign areas and those working in
the contiguous United States. During the war, various agencies began offering pay differentials in
certain areas to aid employee recruitment pursuant to the Brookhart Salary Act of 1930 and the
Mead-Ramspeck Act of 1940.13 In 1977, William L. Camp, then-area manager of the U.S. Civil
Service Commission (now the Office of Personnel Management (OPM)), testified about the post-
war period, saying that, “[b]ecause agencies acted independently, often with varying degrees of
legal authority, employees of the various agencies could and did receive significantly different
compensation treatment in the same geographic area.”14
In 1946, President Harry S Truman asked the Civil Service Commission (now the Office of
Personnel Management) and the Bureau of the Budget to conduct jointly a “study of pay
differentials and related compensation problems in the Federal service outside the States.”15 The
study recommended creating a standardized pay scale for all federal employees working in
nonforeign areas and basing that structure on two factors: regional costs of living and desirability
of living conditions. Both the legislative and executive branches used this study to shape
contemporary nonforeign COLA management and operation.
In 1948, Representative Richard Bowditch Wigglesworth introduced an executive office
appropriations bill (H.R. 5214, 80th Congress), which would have, among other things, given the
President authority to establish higher rates of pay in areas outside of the contiguous United
States. On February 4, 1948, the House Committee on Appropriations reported the bill, stating its
desire to create a “uniform standard ... applicable to all agencies” for payment to all federal
employees serving in agencies or companies operating outside the contiguous United States.16
The committee report noted that a handful of departments—including State, War, and Navy—
already paid employees living outside of the continental United States additional compensation,
and that the goal of the legislation was to extend the practice to other federal employees living in
the same geographic areas. The bill capped the intended pay supplement at 25% of an employee’s
salary.17

12 The term nonforeign area was not used until 1985 (E.O. 12510). This report, however, will adopt the use of the term
“nonforeign” throughout.
13 46 Stat. 1003; and 44 Stat. 614. Executive Orders 8657 and 8955 also governed federal civilian employee pay prior
to the implementation of nonforeign COLAs. The executive orders authorized the War Department and the Department
of the Navy to award pay differentials to federal civilian white-collar employees who worked in Alaska or Atlantic
naval bases. The pay aimed to increase recruitment in those areas.
14 U.S. Congress, Committee on Post Office and Civil Service, Cost of Living Allowance, hearings, 95th Cong., 2nd
sess., July 8, 1977 (Washington: GPO, 1977) p. 13. This testimony examined the history and contemporary state of
nonforeign COLAs.
15 U.S. Civil Service Commission, 63rd Annual Report: The Transition From War to Peace in the Federal Personnel
Administration (Washington: GPO, 1946).
16 U.S. Congress, House Committee on Appropriations, Independent Offices Appropriation Bill, 1949, report to
accompany H.R. 5214, 80th Cong., 2nd sess., H.Rept. 80-1288 (Washington, GPO, 1948), pp. 4-5.
17 House debate, Congressional Record, vol. 94, Part XX (Jan. 30, 1948), p. 782. Locality pay, COLAs, and other types
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The Committee of the Whole House on the State of the Union considered the bill that same day.
Representative Joseph Rider Farrington stated that differentials in pay for areas outside the
continental United States originally “came about through the necessity of moving a great many
people to those areas for the purpose of prosecuting the war and also because of the high cost of
living in those areas.”18 The pay differential should be extended to all federal employees living in
nonforeign territories outside of the continental United States, Farrington said, because it would
be unfair to allow certain employees living in an area to receive a 25% increase in pay and
prohibit others from receiving the same. The appropriations bill was amended and brought before
the House for a vote, where it passed 339 to 10.19
The bill then was received by the Senate and referred to the Committee on Appropriations, which
held several days of hearings on the legislation—from March 2 through March 5, 1948. During
the hearings, some concern over the pay differential was expressed by Harry See, the national
legislative representative of the Brotherhood of Railroad Trainmen. In his testimony, See
discussed fears that the 25% cap on the pay differential “would operate to the disadvantage of the
Federal Government and its employees outside th[e] continental limits.”20 See asked that federal
railroad employees be excluded from the provision:
Most of the comforts and many of what the people in the United States regard as necessities
are not available in Alaska.... On the other hand, as the last war amply demonstrated, Alaska
is of vital importance to the United States, and our defense program requires that we have
large numbers of Federal employees continuously in the Territory. Not only would it be
unfair but it would be impossible to induce people to go to Alaska as Federal employees if
some provision were not made to adjust wage scales to the higher cost of living, and without
some incentive in the form of additional pay.21
According to his testimony, See did not disagree with the adoption of a pay supplement. Instead,
he wanted Congress to eliminate the 25% ceiling on the pay supplement because he believed
Alaska was already operating at an even larger cost-of-living disparity when compared to the
continental United States.
In spite of See’s testimony, the Senate reported the bill on March 15, 1948, with several requested
amendments, but none that exempted railroad workers from the new pay differential.22 The
Senate and House passed the bill on April 12, 1948, and President Truman signed it on April 20,
1948.23
On June 8, 1948, Representative Wigglesworth introduced H.R. 6829 (80th Congress), a
supplemental Executive Office appropriations bill. The Committee on Appropriations reported the

(...continued)
of federal pay increases that can be added to basic pay may be referred to in the aggregate as pay supplements
throughout this report.
18 House debate, Congressional Record, vol. 94, (Feb. 4, 1948), p. 1088.
19 Eighty-one members did not vote. The amendments made to the bill did not affect the pay differential.
20 U.S. Congress, Senate Committee on Appropriations, Subcommittee of the Committee on Appropriations,
Independent Offices Appropriation Bill, 1949, hearing on H.R. 5214, 80th Cong., 2nd sess., S.Rept 80-984 (Washington:
GPO, 1948), p. 289.
21 Ibid., pp. 289-290.
22 Ibid.
23 P.L. 80-491.
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bill, which amended the previous legislation by adding more detail.24 As reported, the bill would
have granted the President power to establish pay differential rates and prohibited federal
employees from receiving other pay differentials if they received this cost-of-living allowance.
On June 19, 1948, the House and Senate agreed to the final conference version of H.R. 6829. The
President signed the bill into law on June 30, 1948.25
The second law applied “to all persons stationed outside the continental United States or in
Alaska whose rates of basic compensation are fixed by statute.” Pursuant to the law, these
qualifying federal employees could receive “additional compensation as a recruitment incentive”
if their living costs were “substantially higher than in the District of Columbia.”26 The President
was still charged with establishing the additional compensation rates, defining the areas to be
considered for the additional pay, and determining which classes and groups of employees would
be eligible for the pay. The public law maintained the 25% of compensation cap on the pay
differential rate.
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Pursuant to P.L. 80-862, on September 16, 1948, President Truman issued Executive Order
10000.27 The order defined the non-continental U.S. territories and states that were eligible to
receive the new pay differentials as including “Alaska, Hawaii, other territories and possessions
of the United States, the Trust Territory of the Pacific Islands, and such additional Areas located
outside the continental United States as the Secretary of State shall designate as being within the
scope of the new provisions.”28 The executive order charged the U.S. Civil Service Commission
(now OPM) with determining the nonforeign areas to receive cost-of-living compensation.29
According to E.O. 10000, the Civil Service Commission was also to determine cost-of-living
compensation rates and any necessary accompanying policies and procedures to ensure federal
employees received additional pay. The rates were to be re-examined “periodically, but at least
annually.”30
Subsequent executive orders have modified E.O. 10000. Executive Order 12107, issued in 1978,
granted OPM much of the authority formerly held by the Civil Service Commission. Executive
Order 12510, issued in 1985, replaced the term “territory” with “nonforeign area,” and made
other changes. Executive Order 13207, issued in 2001, modified OPM’s procedures to reduce
nonforeign COLA rates where cuts were warranted.31

24 U.S. Congress, House Committee on Appropriations, Supplemental Independent Offices Appropriation Bill, 1949,
report to accompany H.R. 6829, 80th Cong., 2nd sess., H.Rept. 80-2245, (Washington: GPO, 1948).
25 P.L. 80-862.
26 Ibid. Later codified at 5 U.S.C. § 5941(a). Additional justifications for creating nonforeign COLAs are available in 5
C.F.R. §§ 591.202-591.203.
27 U.S. President Harry S Truman, “Regulations Governing Additional Compensation And Credit Granted Certain
Employees of the Federal Government Service Outside the United States,”13 Federal Register 5453, Sept. 18, 1948.
28 Ibid.
29 Ibid., sec. 205.
30 Ibid., sec. 210. The language “at least annually” was removed from the executive order by Executive Order 13207,
66 Federal Register 18399, which was signed Apr. 5, 2001.
31 Executive Order 12107, “Relating to the Civil Service Commission and Labor-Management in the Federal Service,”
44 Federal Register 1055, Dec. 28, 1978; Executive Order 12510, “Non-Foreign Area Cost-Of-Living Allowances,” 50
Federal Register 15535, Apr. 17, 1985; Executive Order 13207, “Further Amendment to Executive Order 10000,
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˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
śȱ

˜—?˜›Ž’?—ȱ˜œ?Ȭ˜?Ȭ’Ÿ’—?ȱ••˜ Š—ŒŽœȱŠ—?ȱ˜œœ’‹•Žȱ›Š—œ’?’˜—ȱ?˜ȱ˜ŒŠ•’?¢ȱŠ¢ȱ
ȱ
ž‹œŽšžŽ—?ȱ??˜›?œȱ?˜ȱ˜?’?¢ȱ?‘Žȱ˜—?˜›Ž’?—ȱȱ›˜?›Š–ȱ
Numerous efforts have been made during the past 60 years to change or eliminate the nonforeign
COLA program. For example, legislation was introduced in 1965 (H.R. 7401, 88th Congress) and
1966 (H.R. 8390, 89th Congress) that would have eliminated the nonforeign COLA program.
Neither bill was enacted. In 1973, Representative Spark M. Matsunaga introduced a bill (H.R.
2062, 93rd Congress) that would have permitted qualifying employees in nonforeign areas to
receive both a full post differential32 and a full nonforeign COLA concurrently. Under current
statutes, an employee who is eligible for both a nonforeign COLA and a post differential may
receive both, provided the supplements—when added together—are capped at 25% of the
employee’s basic pay.33 Representative Matsunaga’s bill was never reported from the House
Committee on Post Office and Civil Service. An identical bill was reintroduced in the 94th
Congress (H.R. 1916) and also was not reported from the committee.
In 1976, the General Accounting Office (GAO, now the Government Accountability Office)
recommended eliminating the nonforeign COLA program in favor of a “more equitable means of
compensation.”34 According to the GAO report, the designated nonforeign areas had witnessed
rapid population growth and steady increases in both employment and per capita income. As a
result, GAO said the nonforeign COLA program “had outlived its usefulness and [was] no longer
an appropriate means of compensation.”35 GAO also recommended modifying the calculation of
nonforeign COLAs in a variety of ways, including incorporating an employee’s family size,
income level, and state and federal taxes into the computation. Another recommendation called
for the creation of more specific nonforeign COLA areas to be carved out within existing ones to
recognize cost differences across larger nonforeign areas.36 The Civil Service Commission (now
OPM) took no position on GAO’s recommendations, concluding that reform of the nonforeign
COLA program should be part of a larger reform of the federal pay system.37
In 1992, Congress required OPM to report on the practices of nonforeign area employers other
than the federal government, as well as analyze the options and alternatives to the nonforeign
COLA program that would “take into account all costs of living.”38 OPM was also instructed to
examine possible effects of implementing any alternative system on recruiting and retaining
federal employees in nonforeign areas. Congress then froze nonforeign COLAs through

(...continued)
Regulations Governing Additional Compensation and Credit Granted Certain Employees of the Federal Government
Serving Outside the United States,” 66 Federal Register 18399, Apr. 9, 2001.
32 Post differentials are granted to employees working in “extraordinarily difficult working conditions,” “excessive
physical hardship,” or “notably unhealthful conditions.” 5 U.S.C. § 5925. See also U.S. Office of Personnel
Management, “Nonforeign Area Cost-of-Living Allowances: Post Differentials,” available at http://www.opm.gov/oca/
cola/postdifferential.asp.
33 If the nonforeign COLA and post differential together are greater than 25% of the employee’s basic pay, the
employee will receive the full nonforeign COLA and as much of the pay differential possible up to the 25% cap.
34 U.S. Government Accountability Office, Policy of Paying Cost-Of-Living Allowances To Federal Employees In
Nonforeign Areas Should Be Changed, GAO Report FPCD-75-161, Feb. 12, 1976, p. i.
35 Ibid., p. i.
36 Ibid., p. ii.
37 Ibid., p. 19. OPM later substantively complied with one of GAO’s recommendations, carving out Anchorage, Juneau,
and Fairbanks, AK, as separate nonforeign COLA areas from the rest of the state, and providing separate rates for
Honolulu, the County of Hawaii, the County of Kauai, and the counties of Maui and Kalawao in Hawaii.
38 P.L. 102-141.
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
Ŝȱ

˜—?˜›Ž’?—ȱ˜œ?Ȭ˜?Ȭ’Ÿ’—?ȱ••˜ Š—ŒŽœȱŠ—?ȱ˜œœ’‹•Žȱ›Š—œ’?’˜—ȱ?˜ȱ˜ŒŠ•’?¢ȱŠ¢ȱ
ȱ
December 31, 2000, and required submission of the report by March 1, 2000.39 The Nonforeign
Area Cost-of-Living Allowance Final Report40 was released July 26, 1999. A Technical Advisory
Group, a panel of economic advisers hired as advisers by OPM on the nonforeign COLA issue,41
published an analysis of the final report on July 17, 2000, which concluded that locality pay
should not replace COLAs.
[The research] concludes that locality pay is not a sufficient alternative to a COLA
supplemented by a direct adjustment for non-price factors, and that the current methodology
under-compensates COLA area employees to the extent that it ignores the locality pay
received by employees in the [contiguous United States].42
ž››Ž—?ȱ˜—?˜›Ž’?—ȱȱ›˜?›Š–ȱ
The statutory, executive order, and regulatory requirements governing the nonforeign COLA
program are codified in 5 U.S.C. § 5941 or included in 5 C.F.R. § 591. The following description
of the program is drawn from those sources as well as from OPM, the Federal Register, and the
U.S. Code Annotated.
˜ŸŽ›Ž?ȱ Ž˜?›Š™‘’Œȱ›ŽŠœȱŠ—?ȱŠ¢ȱ¢œ?Ž–œȱ
As of July 2008, the nonforeign COLA program includes white-collar federal employees who
work in Alaska, Hawaii, Guam, the Commonwealth of the Northern Mariana Islands (CNMI),
Puerto Rico or the U.S. Virgin Islands.43 As shown in Table 1, there are 11 total pay areas with
varying nonforeign COLA rates.

39 Ibid. From 1991 through Dec. 31, 2000, Congress barred COLA rate reductions.
40 The Nonforeign Area Cost-of-Living Allowance Final Report is available as an appendix at http://www.opm.gov/oca/
Cola/Rsrch_ap.pdf, pg. 14.
41 The Technical Advisory group is a panel of three economic experts selected to help a committee of OPM employees
and nonforeign COLA recipients determine ways to modify nonforeign COLAs to better reflect costs of living. See
“Special Research Relating to the Nonforeign COLA Area Cost-of-Living Allowance (COLA) Program,” available at
https://www.opm.gov/oca/cola/Rsrch_ap.pdf.
42 Appendix B. Report of the Technical Advisory Group, July 17, 2000, available at http://www.opm.gov/oca/cola/App-
b.pdf.
43 U.S. Office of Personnel Management, “Nonforeign Area Cost-of-Living Allowances,” available at
http://www.opm.gov/oca/Cola/INDEX.asp.
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ŝȱ

˜—?˜›Ž’?—ȱ˜œ?Ȭ˜?Ȭ’Ÿ’—?ȱ••˜ Š—ŒŽœȱŠ—?ȱ˜œœ’‹•Žȱ›Š—œ’?’˜—ȱ?˜ȱ˜ŒŠ•’?¢ȱŠ¢ȱ
ȱ
Table 1. Nonforeign Area COLA Rates, July 2008
Nonforeign COLA Rate Percentage
Geographic Area
(to be multiplied by basic rate of pay to determine
nonforeign COLA pay)
Anchorage (within 50-mile road radius)
24%
Fairbanks (within 50-mile road radius)
24%
Alaska
Juneau (within 50-mile road radius)
24%
Rest of Alaska
25%
Honolulu (city and county)
25%
County of Hawaii
18%
Hawaii
County of Kauai
25%
County of Maui and County of Kalawao
25%
Territory of Guam and Commonwealth of the
Northern Mariana Islands
25%
Commonwealth of Puerto Rico
13%
U.S. Virgin Islands
25%
Source: U.S. Office of Personnel Management, “Nonforeign Area Cost-Of-Living Allowances,” available at
https://www.opm.gov/oca/cola/rates.asp.
Notes: Nonforeign COLA rates suggest that living cost differences between the designated areas and the
Washington, DC, area range between 13% and 25%. Other private-sector methods for comparing costs of living,
however, suggest that living cost differences are not as high as are reflected in existing nonforeign COLA rates.
In fact, some cost-of-living calculators find that living costs are higher in Washington, DC than in some
nonforeign COLA areas. For example, Salary.com’s “Cost of Living Wizard Tool” calculates that living costs in
San Juan, Puerto Rico are 39% lower than in Washington, DC. The website also calculates that Anchorage,
Alaska’s living costs are 22.9% lower. Honolulu, Hawaii’s living costs are 1.9% higher than in Washington, DC,
according to Salary.com. For more information, including the website’s methodology, see Salary.com, “Cost of
Living Wizard,” available at http://swz.salary.com/costoflivingwizard/layoutscripts/coll_start.asp. For another cost-
of-living calculator, see CNNMoney.com, “How far will my salary go in another city?” available at
http://cgi.money.cnn.com/tools/costofliving/costofliving.html. Some nonforeign COLA areas, like Guam, are not
included as comparison cities on the cost-of-living calculators.
Within those areas, nonforeign COLAs apply to white-collar employees who are paid under the
following schedules:
• the General Schedule;
• the Veterans Health Administration Schedule;
• the Foreign Service Schedule; or
• the Postal Service Schedule.
Other federal workers are also eligible for COLAs, including the following employees:
• administrative law judges paid under 5 U.S.C. § 5372
• employees in the Senior Executive Service (including the Federal Bureau of
Investigation and Drug Enforcement Administration Senior Executive Service);
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
Şȱ

˜—?˜›Ž’?—ȱ˜œ?Ȭ˜?Ȭ’Ÿ’—?ȱ••˜ Š—ŒŽœȱŠ—?ȱ˜œœ’‹•Žȱ›Š—œ’?’˜—ȱ?˜ȱ˜ŒŠ•’?¢ȱŠ¢ȱ
ȱ
• employees in senior-level scientific or professional positions paid under 5 U.S.C.
§ 5376; or
• administrative appeals judges paid under 5 U.S.C. § 5941.44
An agency may also extend a nonforeign COLA to other employees if authorized “by specific
law” to do so.45
ŽŒŽ—?ȱ˜—?˜›Ž’?—ȱȱŠ?Žȱ‘Š—?ŽœȱŠ—?ȱ›˜™˜œŠ•œȱ
On May 29, 2008, OPM published a final rule in the Federal Register to change the nonforeign
COLA rates in Puerto Rico and Hawaii County, HI. Effective June 30, 2008, Puerto Rico’s
nonforeign COLA rate rose to 13% from 10.5% and Hawaii County’s rate rose to 18% from 17%.
The changes are the “result of interim adjustments OPM calculated based on relative Consumer
Price Index differences between the cost-of-living allowance areas and the Washington, DC,
area.”46
Further changes in nonforeign COLA rates may be forthcoming. On January 3, 2008, OPM
published a proposed rule in the Federal Register to reduce the nonforeign COLA rates in
Fairbanks, Anchorage, and Juneau, AK.47 The change would reduce the nonforeign COLA in
those areas by one percent—from 24% to 23%.48 The change would also limit the Alaska
nonforeign COLA area boundaries to a “50-mile radius ... by the shortest route using paved
roads.”49 Comments on the proposed change were accepted until March 3, 2008.
On August 25, 2008, OPM again published a proposed rule in the Federal Register that would
reduce the COLA rate for employees in Anchorage, Fairbanks, and Juneau an additional 1%
(from 23% to 22%).50 The reduction proposals cannot be implemented within the same 12-month
period because COLA rates can only be reduced by up to 1% per year. Also, in the August 25
notice, OPM proposed raising Puerto Rico’s COLA rate by 1% (from 13% to 14%). Puerto Rico’s
proposed increase is not contingent on Alaska’s rate reduction. Comments on Alaska’s most
recent rate decrease proposal and Puerto Rico’s proposed increase were accepted until October
24, 2008.

44 5 C.F.R. § 591.204(a).
45 5 C.F.R. § 591.204(b).
46 U.S. Office of Personnel Management, “NonForeign Area Cost-of-Living-Allowance Rates; Puerto Rico and Hawaii
County, HI,” 75 Federal Register 30727, May 29, 2008.
47 U.S. Office of Personnel Management, “Nonforeign Area Cost-of-Living Allowance Rates; Alaska,” 73 Federal
Register 772, Jan. 3, 2008.
48 According to 5 C.F.R. § 591.228(c), “OPM may reduce the COLA rate in any area by no more than 1 percentage
point in any 12-month period. Any reduction in the COLA rate for any COLA area cannot be effective until the
effective date of the first survey conducted in Hawaii and Guam and CNMI under these regulations.”
49 Ibid., p. 772.
50 Office of Personnel Management, “Nonforeign Area Cost-of-Living Allowances; 2007 Interim Adjustments,” 73
Federal Register 50177, Aug. 25, 2008.
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
şȱ

˜—?˜›Ž’?—ȱ˜œ?Ȭ˜?Ȭ’Ÿ’—?ȱ••˜ Š—ŒŽœȱŠ—?ȱ˜œœ’‹•Žȱ›Š—œ’?’˜—ȱ?˜ȱ˜ŒŠ•’?¢ȱŠ¢ȱ
ȱ
˜—?˜›Ž’?—ȱ›ŽŠȱ–™•˜¢ŽŽœȱ
More than 41,000 federal employees on the General Schedule—or on a similar pay schedule—
work in nonforeign areas and receive a COLA. Table 2 shows the departments and agencies in
which these nonforeign COLA worked as of June 2008. As the table shows, more than 90% of the
nonforeign COLA recipients worked in Alaska, Hawaii, or Puerto Rico, and nearly 25% of all
recipients worked in the Department of Defense.
Table 2. Federal Civilian Nonforeign COLA Recipients by Agency, June 2008
Department/
Northern
US Puerto
Agency
Alaska Hawaii Guam Mariana
Islands
VI
Rico
Total
Air
Force
635 903 193 0 0 166 1,897
Army
1,469 1,647
2
1 87 629 3,835
Navy
1 3,180 473
0
0 72 3,726
Other
Defense
168 535 133 0 0 157 993
Total
Defense
2,273 6,265 801
1
87 1,024 10,451
Agriculture
1,155 774 32 6 11 586
2,564
Commerce
561 341 23 0 0 86
1011
Education
0 0 0 0 1 8 9
Energy
1 1 0 0 0 0 2
Health and Human
Services
357 149 1 0 4 120 631
Homeland
Security 414 562 114 99 159 1,334 2,682
Housing and Urban
Development
39 29 1 0 0 73
142
Interior
2,670 478 10 9 79 120
3,366
Justice
52 245 27 4 39 324 691
Labor
22 26 2 1 0 32 83
State
2 20 0 0 0 1 23
Transportation 158 80 0 0 0 40
278
Treasury
80 137 0 0 6 534 757
Veteran’s
Affairs 445
563 0 13 8
2,284
3,313
Other
Agencies 177 266 19 12 24 541
1,039
Total Non-
Defense
6,133
3,671 229 144 331
6,083
16,591
U.S. Postal Service
8,116
2,611
119
12
229
2,949
14,036
Grand
Total
16,522 12,547 1,149
157
647 10,056 41,078
Source: U.S. Office of Personnel Management, Central Personnel Data File, available at
http://www.fedscope.opm.gov/. The U.S. Postal Service employee count was supplied by USPS as of January 2008.
Note: The Central Personnel Data File does not include employee counts from several federal agencies,
including the Central Intelligence Agency, the Defense Intelligence Agency, the National Geospatial-Intelligence
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ŗŖȱ

˜—?˜›Ž’?—ȱ˜œ?Ȭ˜?Ȭ’Ÿ’—?ȱ••˜ Š—ŒŽœȱŠ—?ȱ˜œœ’‹•Žȱ›Š—œ’?’˜—ȱ?˜ȱ˜ŒŠ•’?¢ȱŠ¢ȱ
ȱ
Agency, the Postal Rate Commission, and USPS. The employee count does not include Senior Executive Service
employees, administrative judges, or other federal employees who are not paid on the General Schedule.
–Ž›’ŒŠ—ȱŠ–˜Šȱ
Federal personnel in American Samoa who do not receive a nonforeign COLA are also not
included in the employee count. On March 29, 2007, Representative Eni F.H. Faleomavaega
introduced a bill (H.R. 1786) that would provide nonforeign COLAs to federal white-collar
employees living in American Samoa. OPM does not classify American Samoa as a nonforeign
COLA area.51 Federal employees who move to American Samoa for their job receive a pay
differential, which is distinct from a COLA and is provided in areas considered “unhealthful” or
“extraordinarily difficult” when compared to the U.S. mainland. Native American Samoans who
are federal employees do not receive any pay supplement. On April 16, 2007, H.R. 1786 was
referred to the House Oversight and Government Reform Committee’s Subcommittee on Federal
Workforce, Post Office and the District of Columbia. It was not reported from committee. As of
June 2008, 50 white-collar federal employees work in American Samoa.
Although S. 3013 does not explicitly state whether American Samoa’s federal employees would
receive locality pay if enacted, the Senate report that accompanied the bill (S.Rept. 110-456)
stated, “[t]he legislation would apply to federal employees in all of the non-foreign areas,
including Alaska, Hawaii, the Virgin Islands, Puerto Rico, Guam, CNMI, American Samoa, and
Johnston, Wake, and Midway Atolls.” OPM has stated that American Samoa would receive
locality pay under its transition proposal. The FMA proposal does not state whether American
Samoa would be eligible for locality pay.
Ž?‘˜?˜•˜?¢ȱ?˜›ȱŽ?Ž›–’—’—?ȱ˜—?˜›Ž’?—ȱȱŠ?Žœȱ
Nonforeign COLAs are based on OPM price surveys that compare cost-of-living rates between
designated nonforeign COLA areas and the Washington, DC, area. In contrast, locality pay is
based on Bureau of Labor Statistics (BLS) data that compare federal and nonfederal salaries for
similar occupations within a single geographic area. Nonforeign COLAs are also distinct from
post differentials, which are provided in areas considered “unhealthful” or “extraordinarily
difficult” when compared to the U.S. mainland.52
To conduct the nonforeign COLA price surveys, OPM collects information on the prices of more
than 300 items in each of the 11 nonforeign COLA areas and uses the information to create a
nonforeign COLA area price index.53 To gather the necessary information, OPM employees visit
stores; call retail outlets; and use catalogs, the Internet, or similar sources.54 When creating the
index, OPM gives greater weight to essential consumer goods like food and housing.55 OPM is

51 The decision not to include American Samoa as a nonforeign COLA area is not found in statute. OPM determines
which areas qualify for nonforeign COLAs. OPM did not state why American Samoa or other American territories
were not included as COLA areas when asked on September 16, 2008. OPM provided the information to the author by
telephone on September 16, 2008.
52 5 C.F.R. § 591.203 and 5 C.F.R. § 591.232.
53 U.S. Office of Personnel Management, “2006 Nonforeign Area Cost-of-Living Allowance Survey Report: Alaska
and Washington, DC, Areas,” 73 Federal Register 775.
54 5 C.F.R. § 591.214.
55 U.S. Executive Office of the President, Office of Management and Budget, Nonforeign Area Cost-of-living
(continued...)
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ŗŗȱ

˜—?˜›Ž’?—ȱ˜œ?Ȭ˜?Ȭ’Ÿ’—?ȱ••˜ Š—ŒŽœȱŠ—?ȱ˜œœ’‹•Žȱ›Š—œ’?’˜—ȱ?˜ȱ˜ŒŠ•’?¢ȱŠ¢ȱ
ȱ
also required to consider the availability of goods and services, the concentration of federal
employees, and the “existence of a well-defined economic community” in determining whether
an area should receive a nonforeign COLA.56 OPM conducts the price surveys in each nonforeign
COLA area once every three years on a staggered schedule. For example, in the first year, Puerto
Rico and the U.S. Virgin Islands are surveyed. In the following year, all areas in the state of
Alaska are surveyed. In the third year, the nonforeign COLA areas of Hawaii, Guam, and CNMI
were surveyed.57 A department or agency head or a designee may request an OPM review to
determine if employees in an organization meet nonforeign COLA area requirements.58
A nonforeign COLA may be established if living costs in the area are “substantially higher” than
in the Washington, DC, area.59 Once established, the nonforeign COLA rate is then multiplied by
the employee’s basic pay rate (not including overtime pay, night differentials, extra holiday pay,
or other allowance differentials) to determine the precise dollar amount of the employee’s total
paycheck, including the nonforeign COLA.60 Nonforeign COLA rates may not exceed 25% of
basic pay. If surveys warrant, the nonforeign COLA rates may rise any number of percentage
points per year, but they may be lowered only up to one percentage point per year.61
œ?’–Š?Ž?ȱ˜ŒŠ•’?¢ȱŠ¢ȱŠ?Žœȱ
OPM has conducted surveys to estimate what locality pay rates would be in some nonforeign
areas if COLAs were eliminated. OPM’s estimated locality pay rates for the current nonforeign
COLA areas in 2008 are shown in Table 3. In some areas, the estimated locality pay rate is higher
than the current COLA rate. In other areas, the estimated locality pay rate is lower than the
current COLA rate.
OPM estimated, for example, that Anchorage’s 2008 locality pay rate would have been 27.74%—
2.75% higher than its 24% nonforeign COLA rate in 2008. This locality pay rate is comparable to
the Houston, TX, locality pay rate (27.39%). The differences in federal and non-federal pay rates
in Anchorage, therefore, are estimated to be similar to the pay differences in Houston. OPM
estimates that Anchorage employees would receive pay that would be similar to that of employees
in Houston if a transition were enacted.
Honolulu’s OPM-estimated locality percentage of 20.38% is 4.12% lower than the current COLA
rate (25%). The estimated locality pay rate is similar to the locality pay percentage in the
Washington, DC, area (20.89%). Honolulu employees, according to OPM’s estimates, would

(...continued)
Allowances, available at http://www.opm.gov/oca/cola/index.asp.
56 5 C.F.R. § 591.206(a).
57 5 C.F.R. § 591.223. The “rest of the state of Alaska” nonforeign COLA area is excluded from this three-year survey
schedule unless it appears that the nonforeign COLA rate might need to be reduced. In this case, OPM conducts on-site
surveys in “one or more” locations in Alaska to determine if a rate reduction is warranted (5 C.F.R. § 591.215(b)).
58 5 C.F.R. § 591.206(b).
59 5 U.S.C. § 5941(a).
60 5 C.F.R. § 591.201. Overtime pay of firefighters is included in the calculation of basic pay.
61 5 U.S.C. § 5941(a). The one percentage point cap on nonforeign COLA reduction is written in the lawsuit settlement
for Roberto Caraballo, et al. v. United States of America No. 1997-0027 (D. V.I. 1997), an electronic copy of the
settlement as issued from the District Court of the Virgin Islands is available at http://www.colasettlement.com/images/
notice.pdf, p. 3.
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ŗŘȱ

˜—?˜›Ž’?—ȱ˜œ?Ȭ˜?Ȭ’Ÿ’—?ȱ••˜ Š—ŒŽœȱŠ—?ȱ˜œœ’‹•Žȱ›Š—œ’?’˜—ȱ?˜ȱ˜ŒŠ•’?¢ȱŠ¢ȱ
ȱ
receive pay checks comparable to federal employees in the Washington, DC, area if they received
locality pay instead of a COLA.
OPM estimates that the labor cost comparisons in the other nonforeign COLA areas would yield a
percentage that is lower than the existing Rest of United States (RUS) locality pay percentage of
13.18%. Areas with labor comparison costs lower than the RUS rate automatically receive the
RUS rate. Therefore, employees in Puerto Rico, U.S. Virgin Islands, the Northern Mariana
Islands, and Guam would, most likely, receive the RUS locality pay rate (13.18% for 2008). OPM
estimates that locality pay rates will climb, on average, 1% per year until the pay disparity
between federal and non-federal employees is 5% or less in each individual locality pay area.
Table 3. OPM Projected Locality Payments in the Nonforeign Areas and
Comparative Areas in the Contiguous United States
Nonforeign Area
2008 Estimated Locality Payment (%)
Anchorage 27.74%
Honolulu 20.38%
Puerto Rico
13.18%a
Guam 13.18%a
Commonwealth of the Northern Mariana Islands
13.18%a
U.S. Virgin Islands
13.18%a
Locality Pay Area
2008 Actual Locality Payment (%)b
Houston-Baytown-Huntsville, TX,
27.39%
San Jose-San Francisco, CA
32.53%
Washington, DC
20.89%
Rest of U.S. (RUS)
13.18%
Source: U.S. Office of Personnel Management, Center for Performance and Pay Systems, 2006 report of
Locality-based Comparability Payments for the General Schedule, at http://www.opm.gov/oca/payagent/2007/
2007PayAgentReport.pdf. 2007 recommendations of the Federal Salary Council are available at
http://www.opm.gov/oca/fsc/recommendation07.pdf, attachments 1 and 3.
a. Rest of U.S. locality pay rate is shown for locations not surveyed by BLS. According to OPM, locality pay
estimates for these areas, which are provided by OPM, should not be considered robust estimates.
b. Because a 12-month “reference period” is used to establish rate increases, locality rates in effect in 2008
are based on pay gaps as of 2006 (extra time is needed to calculate increases once the 12-month period has
expired). Estimated locality rates for nonforeign areas are based on 2007 pay disparity calculations. See the
U.S. Office of Personnel Management, Report on Locality-based Comparability Payments for the General
Schedule, available at http://www.opm.gov/oca/payagent/2007/2007PayAgentReport.pdf.
’?’?Š?’˜—ȱ
According to OPM, since 1981, the nonforeign COLA program has been “fraught with
litigation.”62 Many lawsuits emerged from both real and perceived pay differences between

62 Letter from Linda M. Springer, Director of the Office of Personnel Management, to Richard B. Cheney, President of
the U.S. Senate, May 30, 2007, available at http://www.opm.gov/news_events/congress/proposals/
Locality_Pay_Extension_Act.pdf.
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ŗřȱ

˜—?˜›Ž’?—ȱ˜œ?Ȭ˜?Ȭ’Ÿ’—?ȱ••˜ Š—ŒŽœȱŠ—?ȱ˜œœ’‹•Žȱ›Š—œ’?’˜—ȱ?˜ȱ˜ŒŠ•’?¢ȱŠ¢ȱ
ȱ
nonforeign COLA area employees and other federal employees who receive locality pay.63. One
of the more significant nonforeign COLA lawsuits, Roberto Caraballo, et al., v. United States of
America, culminated in a class action settlement that required the federal government to award
$234 million in back pay to all nonforeign COLA employees of a qualifying class and modified
the methodology for determining the nonforeign COLA rate. According to the settlement’s “Safe
Harbor Process,” the federal government must now ensure that nonforeign COLA rates better
reflect regional costs of living by including “non-price factors” in the calculations.64. Under the
settlement, nonforeign COLA survey schedules were changed from one survey per year to one
every three years, and rate settings were required to be rounded to the nearest whole percentage
point.65
On January 30, 2008, the U.S. District Court in Hawaii dismissed another nonforeign COLA
lawsuit, Matsuo v. United States of America.66. The suit, filed on June 22, 2005 by 10 current and
former nonforeign federal employees from Alaska and Hawaii, claimed that locality pay
unconstitutionally granted non-COLA area federal employees a larger retirement annuity than
those who received a nonforeign COLA.67. The employees argued that because locality pay and
nonforeign COLAs “serve different purposes,” federal employees should “be entitled to locality
pay regardless of the fact that they receive COLA.”68. The plaintiffs have appealed the court’s
dismissal, and the case currently is pending.
›Š—œ’?’˜—ȱ›˜™˜œŠ•œȱ
Currently, three proposals to transition nonforeign areas from COLAs to locality pay have been
offered. A legislative proposal (S. 3013) calls for a three year phase-in.69. OPM’s proposal
suggests a seven-year phase-in. The Federal Managers Association’s proposal posits a one-year
replacement.

63 See, for example, Alaniz v. Office of Pers. Mgmt., 728 F.2d 1460 (Fed. Cir. 1984); Roberto Caraballo, et al. v.
United States of America No. 1997-0027 (D. V.I. 1997); Matsuo v. United States of America 532 F. Supp. 2d 1238 (D.
Haw. 2008); Alaniz v. OPM, 728 F.2d 1460 (Fed.Cir. 1984); Angelet v. United States of America No. 97-1378RU (Fed.
Cir. 1994); Cruz v. United States No. 98-00021 (D. Guam 1998).
64 Roberto Caraballo, et al. v. United States of America No. 1997-0027 (D. V.I. 1997). See also “Exhibit A: Safe
Harbor Principles,” D.C. Civil No. 1997/27 http://colasettlement.com/images/exhibit_a.pdf, pg. 5. According to the
notice of proposed settlement, non-price factors include “differences in need, availability of and access to goods and
services, and quality of life.” These factors are calculated together and incorporated into COLA rates as an adjustment
factor. Each nonforeign COLA area is assigned its own adjustment factor rate.
65 Ibid., p. 3.
66 Matsuo v. United States of America 532 F. Supp. 2d 1238 (D. Haw. 2008).
67 Ibid. As noted previously, locality pay is considered part of basic pay and included when calculating retirement and
pension benefits, nonforeign COLAs are not.
68 Ibid. See also Locality Pay Disparity (Hawaii and Alaska), p. 1, at http://www.wmlaborlaw.com/assets/cases/cola/.
69 A similar bill was introduced in the House (H.R. 6516) by Representative Neil Abercrombie of Hawaii and others on
July 16, 2008. This analysis, however, will focus on S. 3103, which was passed in the Senate and was introduced and
referred to multiple committees in the House.
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ŗŚȱ

˜—?˜›Ž’?—ȱ˜œ?Ȭ˜?Ȭ’Ÿ’—?ȱ••˜ Š—ŒŽœȱŠ—?ȱ˜œœ’‹•Žȱ›Š—œ’?’˜—ȱ?˜ȱ˜ŒŠ•’?¢ȱŠ¢ȱ
ȱ
‘ŽȱŽ?’œ•Š?’ŸŽȱ›˜™˜œŠ•ȱ
The Senate Committee on Homeland Security and Governmental Affairs’s Subcommittee on
Oversight and Government Management, the Federal Workforce, and the District of Columbia
held a series of town hall, fact-finding meetings with constituents in Oahu and Maui, HI,
throughout 2007.70. At those meetings, the subcommittee reported that federal employees
expressed concerns that their pay and benefits were not keeping pace with those of employees
working within the contiguous United States.71 “Alaska’s federal employees have been telling me
that they want to switch from a federal tax-free COLA to locality pay that counts toward their
future retirement benefits. The high cost of living in Alaska makes this legislation essential to
ensuring that federal retirement benefits are fair,” said Senator Lisa Murkowski, a co-sponsor of
the bill, in a joint press release with Senator Akaka.72 According to news reports, some federal
workers in nonforeign COLA areas have sought transfers “to the Mainland in the years
immediately before retirement because it gets them better retirement pay.”73
To respond to these constituent concerns, on May 13, 2008, Senator Akaka and others introduced
legislation (S. 3013) that would transition federal employees who currently receive a nonforeign
COLA74 to locality pay.75 The locality pay phase-in would occur over a three-year period starting
January 2009. When introducing the legislation, Senator Akaka called it “the latest step forward
toward determining the best way to ensure retirement equity for federal workers in the non-
foreign areas.”76
The bill seeks to phase in locality pay over three years. In each of those three years, one-third of
the locality pay rate would be added to a federal employee’s pay. Concurrently with the
introduction of locality pay, the nonforeign area employee would have his or her COLA reduced.
Pursuant to S. 3013, for every dollar an employee received in locality pay, 65 cents in nonforeign
COLA pay would be removed from his or her pay. After the three year phase in, the nonforeign
employee would receive full locality pay in addition to a COLA. The COLA would continue to be

70 According to a committee report issued after the meetings, the “[s]ubcommittee staff met with close to 1,000 federal
employees in over 20 agencies.” See U.S. Congress, Senate Committee on Homeland Security and Governmental
Affairs, Non-foreign Area Retirement Equity Assurance Act of 2008, report to accompany S. 3013, 110th Cong., 2nd
sess., S.Rept. 110-456 (Washington: GPO, 2008), p. 5.
71 Ibid., p. 6. According to the committee report, nonforeign federal employees expressed a variety of concerns about
the transition. Among the concerns were a possible reduction in take home (post-federal tax) pay if taxable locality pay
replaced nontaxable COLAs. Another concern was the possibility of having to postpone retirement if the phase-in
process took several years to complete. Still other employees were uncertain whether employees in unique, non-GS pay
scales would be included in the possible transition.
72 Senator Daniel K. Akaka, “Senators Introduce Legislation to Ensure Fair Retirement Benefits for Federal Workers in
Hawaii, Alaska and U.S. Territories,” press release, May 13, 2008, available at http://akaka.senate.gov/public/
index.cfm?FuseAction=PressReleases.Home&month=5&year=2008&release_id=2193.
73 “Congress studies locality pay proposal,” Pacific Business News (Honolulu), May 31, 2007, available at
http://www.bizjournals.com/pacific/stories/2007/05/28/daily40.html.
74 While most employees affected by the legislation are granted nonforeign COLAs under 5 U.S.C. § 5941, defense
intelligence employees covered by 10 U.S.C. § 1603(b) are also eligible to transition to locality pay pursuant to S. 3013
Sec. 6(B).
75 When the bill was introduced by Senator Akaka, it contained language that would have permitted nonforeign area
employees to choose whether to transition to locality pay. The option was removed from the bill when it was reported
by the Senate Homeland Security and Governmental Affairs Committee.
76 Daniel K. Akaka, “Statements and Speeches: Nonforeign Area Retirement Equity Assurance Act of 2008,” available
at http://akaka.senate.gov/public/index.cfm?FuseAction=Speeches.Home&month=5&year=2008&release_id=2194.
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ŗśȱ

˜—?˜›Ž’?—ȱ˜œ?Ȭ˜?Ȭ’Ÿ’—?ȱ••˜ Š—ŒŽœȱŠ—?ȱ˜œœ’‹•Žȱ›Š—œ’?’˜—ȱ?˜ȱ˜ŒŠ•’?¢ȱŠ¢ȱ
ȱ
paid until the employee’s post-tax pay is equal to or higher than what the employee’s take home
pay would have been if the transition had never occurred.
S. 3013 was favorably reported by the Senate Homeland Security and Governmental Affairs
committee on September 11, 2008.77 The Senate passed the bill by unanimous consent on October
1, 2008. On October 2, the bill was referred to the House Committee on Oversight and
Government Reform and the House Committee on Veterans Affairs.
Š•Œž•Š?’—?ȱ?‘ŽȱŽ?’œ•Š?’ŸŽȱ›˜™˜œŠ•ȱ‘ŠœŽȬ’—ȱ
S. 3013 would affect the pay of a federal employee living in a nonforeign area who is on a GS or
similar pay scale. Each employee would be affected differently, according to a variety of variables
that include the employee’s location, grade, and step. This section uses a hypothetical GS-9, step
5 federal employee living in Anchorage, AK to demonstrate the possible effects of S. 3013.
A GS-9, step 5 in Anchorage, with 2008 basic pay of $45,103 currently receives a 24%
nonforeign COLA rate, which calculates to an $10,825 annual nonforeign COLA ($45,103 x
0.24). Total pay in 2008 for this employee, therefore, equals $55,928 ($45,103 + $10,825).
Pursuant to S. 3013, the changes in pay for that same employee living in Fairbanks, AK (a GS-9,
step 5)—with basic pay in 2008 of $45,103—would occur as shown in Table 4.
In Column A, the General Schedule rate of pay is the pay any federal employee on the GS
schedule at the GS-9 level, would receive annually. That rate of pay is scheduled to increase 2.9%
in January 2009 (pursuant to P.L. 110-329). OPM estimates that the GS rate of basic pay climbs,
on average, 2.5% per year.78 The GS basic pay rate for 2009, therefore is 2.9% higher than in
2008. Each additional basic pay increase is estimated at 2.5%.
Column B shows the percentage of the locality pay rate that would be added to the hypothetical
employee’s salary each year. In 2008, nonforeign employees do not receive locality pay, so the
percentage is 0%. In 2009, 1/3, or 33.3% of the locality pay rate is added to the employee’s pay.
By 2011, 100% of the locality pay rate would be added to a federal employee’s salary. Column C
shows the estimated dollar amount of locality pay that would be added to the employee’s salary
each year.
Column D shows the employee’s depleting nonforeign COLA pay. For every dollar in locality
pay added to the employee’s salary, 65 cents of the COLA is removed. At the end of the three
year phase in, when 100% of the locality pay rate is being added to the employee’s salary,
COLAs will continue to be paid. According to the estimates, COLAs would continue to be paid to
this hypothetical employee until 2018. Pursuant to the legislation, after completion of the three-
year phase-in, the nonforeign employee would continue to receive both a nonforeign COLA and
locality pay until post-federal tax take home pay eclipsed the post-tax take home pay if the

77 U.S. Congress, Senate Committee on Homeland Security and Governmental Affairs, Non-foreign Area Retirement
Equity Assurance Act of 2008,” report to accompany S. 3013, 110th Cong. 2nd sess., S.Rept. 110-456 (Washington:
GPO, 2008).
78 All federal employees working in the contiguous United States receive locality pay. The lowest locality pay rate is
the Rest of U.S. rate, which as of January 2008 was 13.18%. The lowest total pay in 2008 for a GS-9, step 5, living in
the contiguous United States, therefore, is $51,048.
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ŗŜȱ

˜—?˜›Ž’?—ȱ˜œ?Ȭ˜?Ȭ’Ÿ’—?ȱ••˜ Š—ŒŽœȱŠ—?ȱ˜œœ’‹•Žȱ›Š—œ’?’˜—ȱ?˜ȱ˜ŒŠ•’?¢ȱŠ¢ȱ
ȱ
transition had not occurred. As a result, in 2011, the employee would receive $2,131 more in
basic pay than a GS-9, step 5, in other locality pay areas with similar costs of labor (e.g., a
Houston employee would be estimated to receive $63,578 in 2015.79
Column E shows the employee’s total pay, which includes the GS annual rate of pay, locality pay,
and the nonforeign COLA. In contrast, Column F shows the pay that would be both taxable on
the federal level and would count when the employee’s retirement benefits were calculated—the
GS annual rate of pay and locality pay. This column demonstrates the rapid increase in retirement
creditable income a nonforeign employee would experience if S. 3013 would pass. As this
column’s value increases over time, federal taxes also grow. For the nonforeign employee,
therefore, the transition to S 3013 would increase retirement benefits and concurrently increase
federal taxes.
Column G estimates the hypothetical employee’s federal taxes as they increase with the phase in
and beyond. Although S. 3013 does not directly state that it assumes a 35% flat tax rate, it does
stipulate a 65% COLA offset factor. Because only 65 cents of every COLA dollar is removed for
every locality pay dollar added to the employee’s pay, 35 cents of the COLA continues to be
included in the employee’s paycheck. This 35 cents is meant to offset the federal tax payments for
the transitioning nonforeign area employee who historically has not paid federal taxes on his or
her pay supplement. Locality pay can be taxed on the federal level, and, under S. 3013, locality
pay will increase throughout the transition. An employee who goes through the transition,
therefore, would be paying more in federal taxes than if the transition had not occurred. The
remaining COLA pay is what S. 3013 assumes the employee will have to pay in federal taxes.
The 65% COLA offset factor, therefore, assumes a 35% flat tax rate for all nonforeign area
federal employees. Column H shows what the employee’s take home pay would be after the 35%
assumed tax rate is removed from his or her total pay. This column is the difference if Column G
is subtracted from Column D.

79 According to OPM’s assumption (a 1% increase in locality pay rate per year), Anchorage would have a 30.74%
estimated locality pay rate in 2011, while Houston would have a 30.39% locality pay rate that same year.
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ŗŝȱ

ȱ
Table 4. Estimated Salary for a Hypothetical GS-9, Step 5, Working in Anchorage, AK, if S. 3013 Were Enacted
Column A
Column B
Column C
Column D
Column E
Column F
Column G
Column H

Federally

General Schedule Percentage of

Taxable/
Annual Federal After Federal
Annual Rate
Locality Pay

Nonforeign

Retirement
Taxes (35%
Tax, Take
Year
of Pay
Phased In
Locality Pay
COLA
Total Pay Creditable Pay
Flat Rate)
Home Pay
2008
$45,103 0% $0
$10,825
$55,928
$45,103
$15,786
$40,141
2009 $46,411
33.3%
$2,191 $9,715 $58,317 $48,602
$17,011 $41,306
2010 $47,571
66.6%
$9,264 $5,396 $62,231 $56,835
$19,892 $42,338
2011 $48,761
100%
$14,989 $1,960 $65,709 $63,750
$22,312 $43,397
2012 $49,980
100%
$15,864 $1,684 $67,527 $65,843
$23,045 $44,482
2013 $51,229
100%
$16,772 $1,393 $69,934 $68,001
$23,801 $45,594
2014 $52,520
100%
$17,717 $1,086 $71,313 $70,227
$24,579 $46,734
2015 $53,833
100%
$18,698
$764 $73,284 $72,520
$25,382 $47,902
2016 $55,168
100%
$19,717
$424 $75,309 $74,885
$26,210 $49,100
2017 $56,547
100%
$20,775
$67 $77,390 $77,323
$27,063 $50,327
2018 $57,961
100%
$21,874
$0 $79,528 $79,835
$27,942 $51,585
Source: CRS calculations using S. 3013.
Notes: These calculations are estimates, and not the actual benefits an employee would receive if the S. 3103 were enacted. The estimates are rounded to the nearest
dollar. The calculations do not account for maximum limitations on pay, promotions, or step increases. In 2009, pursuant to S. 3013, locality pay is calculated by using the
Rest of US locality pay rate, which is currently estimated at 13.18%. In the second and subsequent years, the OPM estimated locality rate for the Anchorage, AK nonforeign
COLA area of 27.74% is used to calculate pay. The calculations adopt OPM’s assumption that locality pay will increase 1% per year, so the estimated locality pay rate for
2009, for example, is 14.18%.
ȬŗŞȱ

˜—?˜›Ž’?—ȱ˜œ?Ȭ˜?Ȭ’Ÿ’—?ȱ••˜ Š—ŒŽœȱŠ—?ȱ˜œœ’‹•Žȱ›Š—œ’?’˜—ȱ?˜ȱ˜ŒŠ•’?¢ȱŠ¢ȱ
ȱ
Table 5 estimates the salary of an employee who would transition to locality pay. Similar to
Table 4, this table shows the same hypothetical employee’s GS rate of pay (Column A), locality
pay (Column B), nonforeign COLA (Column C), and total pay (Column D). Column E shows the
pay that is both taxable on the federal level and included when calculating retirement and other
benefits. If a transition to locality pay were not enacted, the federally taxable pay would be equal
to the GS rate of pay because COLAs are not federally taxable, which would be the only pay
supplement received by the employee. The employee’s taxes, as shown in column F, therefore,
would be lower than if the transition were enacted. After-tax, take-home pay (Column G),
however, would be equal whether or not S. 3013 were enacted.
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ŗşȱ

ȱ
Table 5. Estimated Salary for a Hypothetical GS-9, Step 5, Working in Anchorage, AK, if S. 3013 Were Not Enacted
Column A
Column B
Column C
Column D
Column E
Column F
Column G
General Schedule

After Federal
Annual Rate of
Locality
Nonforeign

Federally Taxable/
Annual Federal Taxes
Tax,
Year
Pay
Pay
COLA
Total Pay
Retirement Creditable Pay
(35% Rate)
Take Home Pay
2008
$45,103 $0 $10,825 $55,928
$45,103
$15,786 $40,141
2009 $46,411
$0
$11,139
$58,316
$46,411
$16,244
$41,306
2010 $47,571
$0
$11,417
$62,231
$47,571
$16,650
$42,338
2011 $48,761
$0
$11,703
$65,709
$48,761
$17,066
$43,397
2012 $49,980
$0
$11,995
$61,975
$49,980
$17,493
$44,482
2013 $51,229
$0
$12,295
$63,524
$51,229
$17,930
$45,594
2014 $52,520
$0
$12,605
$65,125
$52,520
$18,378
$46,734
2015 $53,833
$0
$12,929
$66,753
$53,833
$18,838
$47,902
2016 $55,168
$0
$13,240
$68,408
$55,168
$19,309
$49,100
2017 $56,547
$0
$13,547
$70,118
$56,547
$19,792
$50,327
2018 $57,961
$0
$13,911
$71,872
$57,961
$20,286
$51,585
Source: CRS calculations, using the current OPM nonforeign COLA rate for Anchorage, AK.
Notes: These calculations are estimates, and not the actual benefits an employee would receive if S. 3013 were enacted. The estimates are rounded to the nearest dollar.
The calculations do not account for maximum limitations on pay, promotions, or step increases. The COLA rate remains 24% throughout the calculations.
ȬŘŖȱ

˜—?˜›Ž’?—ȱ˜œ?Ȭ˜?Ȭ’Ÿ’—?ȱ••˜ Š—ŒŽœȱŠ—?ȱ˜œœ’‹•Žȱ›Š—œ’?’˜—ȱ?˜ȱ˜ŒŠ•’?¢ȱŠ¢ȱ
ȱ
‘Žȱȱ??œŽ?ȱ
The COLA offset rate of 65% under S. 3013 may overestimate the pay needed to ensure that
nonforeign employees who transition to locality pay do not have their take-home (post-federal
tax) pay affected. Senator Akaka stated that the COLA offset would “help protect employees’ take
home pay as locality pay is extended to non-foreign areas.”80 As stated earlier, the 85% COLA
offset leaves 35% of the allowance to pay federal taxes. According to the Internal Revenue
Service, an individual would have to have earned at least $357,700 in 2008 to qualify for a 35%
federal tax rate.81 The General Schedule pay scale for 2008 does not go above $149,000 (the pay
for a GS-15, step 10, in Houston, TX—the locality pay area with the highest rate). The 35%
federal tax rate estimate may be higher than the actual federal tax rate in the nonforeign areas. If
the estimated federal tax rate is higher than the actual federal tax rate, the nonforeign area
employees may receive COLAs that are in excess of what would be needed to ensure their take
home pay is not affected.
Š¢ȱ˜–™Š›’œ˜—œȱ
In 2009, an employee who transitioned to locality pay would receive $2,191 more in federally
taxable/retirement creditable pay than an employee who did not. Moreover, an employee who
transitioned would receive $767 more in take home (post-federal tax) pay than an employee who
did not transition. The $767 is 35% of $2,191—the estimated difference in federal taxes for an
employee depending on whether S. 3013 were enacted ($17,011 - $16,244 = $767). By 2010, the
employee who elected to transition to locality pay is estimated to receive $9,264 more in federally
taxable/retirement creditable pay and $3,243 more in total pay than and employee who did not opt
to transition.
Under S. 3013, an Anchorage employee would continue to receive a COLA in addition to locality
pay at the end of the three-year transition. The COLA would continue to be paid until after-tax
locality pay was worth more than the COLA. According to CRS calculations, COLAs in
Anchorage could be paid through 2017 under this proposal.
S. 3013 concurrently attempts to ensure that a nonforeign area employee’s take home pay is
unaffected by a transition, and that the employee’s retirement and other benefits are calculated
identically to those of federal employees who work within the contiguous United States. By
maintaining the COLA even after the transition is completed, however, employees in the
contiguous United States may receive less in take home pay than a similar employee living in a
nonforeign area. This discrepancy in take home pay between nonforeign and contiguous federal
employees could lead to future claims of unfair pay differences among federal employees with
similar work profiles.

80 Daniel K. Akaka, “Statements and Speeches: Section-by-Section Analysis of The Non-Foreign Area Retirement
Equality Assurance Act of 2008,” press release, May 14, 2008, available at http://www.senate.gov/~akaka/public/
index.cfm?FuseAction=Speeches.Home&month=5&year=2008&release_id=2195.
81 Internal Revenue Service, “Part III: Administrative, Procedural, and Miscellaneous,” Revenue Procedure, available at
http://www.irs.gov/pub/irs-drop/rp-07-66.pdf.
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
Řŗȱ

˜—?˜›Ž’?—ȱ˜œ?Ȭ˜?Ȭ’Ÿ’—?ȱ••˜ Š—ŒŽœȱŠ—?ȱ˜œœ’‹•Žȱ›Š—œ’?’˜—ȱ?˜ȱ˜ŒŠ•’?¢ȱŠ¢ȱ
ȱ
Ž?’›Ž–Ž—?ȱ??ŽŒ?œȱ
If a transition to locality pay occurred, nonforeign area employees’ retirement annuities would be
affected. As noted previously, nonforeign COLAs are not considered part of basic pay when
calculating retirement benefits, life insurance, and premium pay. Locality pay is considered basic
pay for the purpose of calculating such benefits. The transition from nonforeign COLAs to
locality pay, therefore, could increase future retirement benefits for nonforeign employees.
A federal employee’s retirement pay is calculated by first determining the employee’s “highest
average annual pay produced by the employee’s basic pay rates during any three consecutive
years of service.”82 For most federal employees, the previous three years of service will produce
his or her “high-3” average. Within-grade pay increases, quality-step increases, and locality pay
are included when calculating an employee’s “high-3.”83 A nonforeign COLA is not included
when calculating a “high-3.” An employee who lives in a nonforeign area, therefore, may seek to
transition to locality pay at least three years prior to retirement to ensure he or she generates a
“high-3” average that includes a pay supplement in addition to the GS basic rate of pay.84
Each employee’s retirement benefits are dependent on a number of factors, which include his or
her age, years of federal service, and retirement system (Civil Service Retirement System (CSRS)
or Federal Employees Retirement System (FERS)).Table 6 shows a pension benefit comparison
between hypothetical GS-9, step 5, employees working in Puerto Rico. The employees are both
least 55 years old, retired in 2013, were employed by the federal government for 30 years, and are
covered by CSRS. One employee demonstrates the retirement annuity if S. 3013 were not
enacted. The other employee demonstrates the retirement annuity if it were enacted.
Table 6. Estimated CSRS Retirement Annuity Comparison Between Hypothetical
GS-9, Step 5, Employees in Puerto Rico Who Retired in 2013

If S. 3013 Were Not Enacted
If S. 3013 Were Enacted
“High 3”
$49,990
$58,593
Retirement Annuity
$28,119
$32,959
Retirement Benefit Over 20 Years
$562,380
$659,180
Source: CRS calculations pursuant to CSRS (P.L. 66-215; 5 U.S.C. § 8348). For details on calculating CSRS
retirement benefits see CRS Report 98-810, Federal Employees’ Retirement System: Benefits and Financing, by
Patrick Purcell. CSRS employees must have been hired prior to January 1, 1984.

82 See CRS Report 98-810, Federal Employees’ Retirement System: Benefits and Financing, by Patrick Purcell, pp. 7-8.
These three consecutive years are often referred to as an employee’s “high-3.”
83 Employees on the GS scale performing at a satisfactory or better level receive within-grade step increases and may
receive a quality-step increase. Federal employees receive within-grade increases (WGIs) if they serve a specified
amount of time and have acceptable job performance ratings. These increases are provided for by Chapter 53 of Title 5
of the U.S. Code. Regulations for within-grade increase distribution are at 5 C.F.R. § 531, Subpart D. Federal
Employees receive quality-step increases (QSIs) if they receive the highest rating available and meet other agency
criteria. A QSI allows the employee to progress through GS scale pay steps more rapidly than under regular
circumstances. QSIs are provided for under 5 C.F.R. § 531, Subpart E.
84 Federal Employees hired after 1983 are automatically enrolled in the Federal Employees Retirement System (FERS),
which calculates retirement benefits differently than the Civil Service Retirement System (CSRS). CSRS serves most
employees hired prior to 1983.
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ŘŘȱ

˜—?˜›Ž’?—ȱ˜œ?Ȭ˜?Ȭ’Ÿ’—?ȱ••˜ Š—ŒŽœȱŠ—?ȱ˜œœ’‹•Žȱ›Š—œ’?’˜—ȱ?˜ȱ˜ŒŠ•’?¢ȱŠ¢ȱ
ȱ
If S. 3013 were enacted, a GS-9, step 5, in Puerto Rico could receive an estimated $4,840 more
per year in retirement annuity than if S. 3013 were not enacted. Over a 20 year retirement period,
the GS-9, step 5, would receive $96,800 more in nominal retirement benefits under S. 3013 than
if it was not enacted.
For two similar employees in Puerto Rico who are 60 years old,85 employed by the federal
government for 30 years, and covered by FERS, pension benefits are estimated in Table 7
Table 7. Estimated FERS Retirement Annuity Comparison Between Two
Hypothetical GS-9, Step 5, Employees in Puerto Rico Who Retired in 2014

If S. 3013 Was Not Enacted
If S. 3013 Were Enacted
“High 3”*
$51,240
$60,563
Retirement Annuity
$15,372
$18,169
Retirement Benefit Over 20 Years
$307,440
$363,380
Source: CRS calculations pursuant to FERS (P.L. 99-335; 5 U.S.C. (Part III, Subsection G, Chapter 84)). For
details on calculating FERS retirement benefits see CRS Report 98-810, Federal Employees’ Retirement System:
Benefits and Financing, by Patrick Purcell. All full-time white-collar federal employees hired on or after January 1,
1984 are FERS employees.
Under FERS, the GS-9, step 5, would be estimated to receive $2,797 more in annual pension
benefits if S. 3013 was enacted than if it was not. Over 20 years, the federal employee would
receive an estimated $55,940 more in pension benefits if S. 3013 were enacted.
Ž?’›Ž–Ž—?ȱ›˜“ŽŒ?’˜—œȱ
The number of employees nearing retirement age in nonforeign areas is rising. In general, the
average age of civilian employees across federal government has risen to 46.9 in 2005, up from
44.2 in 1995.86 Retirement rates are expected to climb by 0.3% per year in average across all
areas of federal government through 2010, according to the OPM’s retirement statistics.87 Recent
retirement trends, however, have been less than expected. In nonforeign areas specifically, 3,916
employees are older than 60 years of age, and 1,096 of those employees are older than 65.88 Table
8 shows cumulative retirement projections in the nonforeign areas from 2008 through 2016.
Table 8. Cumulative Retirement Projections for Nonforeign Areas,
2008 Through 2016

2008 2010 2012 2014 2016
Alaska
386 1,171 1,956 2,714 3,439

85 Benefits for employees who retire at age 62 or older will be slightly larger than those who retire prior to age 62
because of statutes governing the FERS retirement system. For more information see CRS Report 98-810, Federal
Employees’ Retirement System: Benefits and Financing, by Patrick Purcell.
86 U.S. Congressional Budget Office, “Characteristics of Pay and Civilian Employees,” March 2007, p. 23, available at
http://www.cbo.gov/ftpdocs/78xx/doc7874/03-15-Federal_Personnel.pdf . According to the same study, the average
age of private sector employees is 40 (p. 5).
87 The Office of Personnel Management, “Retirement Statistics,” http://www.opm.gov/feddata/retire/rs2004.pdf.
88 Information provided electronically to the author by OPM on Aug. 5, 2008.
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
Řřȱ

˜—?˜›Ž’?—ȱ˜œ?Ȭ˜?Ȭ’Ÿ’—?ȱ••˜ Š—ŒŽœȱŠ—?ȱ˜œœ’‹•Žȱ›Š—œ’?’˜—ȱ?˜ȱ˜ŒŠ•’?¢ȱŠ¢ȱ
ȱ

2008 2010 2012 2014 2016
Guam
62 181 293 405 516
Hawaii
857 2,523 4,136 5,618 6,969
Northern Mariana Islands
1
5
8
11
14
Puerto
Rico
241 741 1,249 1,750 2,238
U.S. Virgin Islands
15
47
78
108
137
TOTAL
1,562 4,669 7,719 10,607 13,312
Source: OPM.
Notes: Projections are based on employee counts as of October 1, 2007 (40,973). As of March 2008, 54,815
federal employees worked in nonforeign areas. The projections do not include U.S. Postal Service employees.
The retirement projections are cumulative, and, therefore, the number of projected retirees in 2008 is included
within the total projections for 2010. Projections for 2016 include retirement projections for all previous years
shown.
S. 3013 states that employees planning to retire during the transition could “pay into the Civil
Service Retirement and Disability Retirement Fund” and increase his or her benefits before the
transition were complete. By paying into the fund, the employee may be able to retire during the
transition and still have accrued the same retirement benefits as a similar employee who had been
receiving locality pay throughout their federal career.89
According to S. 3013, employees who retire between January 1, 2009 and December 31, 2011,
would be permitted to include some of their COLA pay when calculating retirement benefits. The
Senate Homeland Security and Governmental Affairs Committee reported that “[t]he limit on the
amount of the COLA an employee may count as locality pay is the amount of locality pay that
would be in effect for that area if not for the phase in provisions” in the bill.90 A federal employee
in Anchorage who retired in March 2011, therefore, may be allowed to count his or her entire
COLA as locality pay because the COLA rate is lower than the estimated locality pay rate. The
employee’s COLA would be subject to federal taxes, but could also be included when calculating
the employee’s retirement benefits.
œ?’–Š?Ž?ȱ˜œ?ȱ˜?ȱǯȱřŖŗř
The Congressional Budget Office (CBO) estimated that S. 3103 would increase federal
discretionary spending by $2.2 billion from 2009 through 2018.91 The cost increases would be a
combination of increased salaries ($1.5 billion over 10 years), federal government contributions
toward creditable retirement ($741 million over 10 years), and payment of benefits to retiring

89 S. 3013, Sec. 7, see also Daniel K. Akaka, “Statements and Speeches: Section-by-Section Analysis of The Non-
Foreign Area Retirement Equity Assurance Act of 2008,” available at
http://akaka.senate.gov/public/index.cfm?FuseAction=Speeches.Home&month=5&year=2008&release_id=2195.
90 U.S. Congress, Senate Committee on Homeland Security and Governmental Affairs, Non-foreign Area Retirement
Equity Assurance Act of 2008, report to accompany S. 3103, 110th Cong., 2nd sess., S.Rept. 110-456 (Washington:
GPO, 2008), p. 7.
91 U.S. Congressional Budget Office, Congressional Budget Office Cost Estimate, S. 3013, Non-Foreign AREA Act of
2008, July 29, 2008, p.1.The CBO’s federal employee estimates use Central Personnel Data File counts from December
2007. The counts do not include USPS employees.
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ŘŚȱ

˜—?˜›Ž’?—ȱ˜œ?Ȭ˜?Ȭ’Ÿ’—?ȱ••˜ Š—ŒŽœȱŠ—?ȱ˜œœ’‹•Žȱ›Š—œ’?’˜—ȱ?˜ȱ˜ŒŠ•’?¢ȱŠ¢ȱ
ȱ
employees ($302 million over 10 years).92 CBO estimated that 13,000 nonforeign employees
would retire between 2009 and 2018, leading to $295 million in “additional retirement benefits
and $7 million for higher Social Security benefits.”
—’šžŽȱŠ¢ȱŒŠ•Žœȱ
Some white-collar federal employees are not paid under the General Schedule. Employees in non-
GS pay systems who receive a nonforeign COLA would be included in the transition to locality
pay—including employees at the Transportation and Security Administration (TSA), the
Department of Defense (DOD), and the Federal Aviation Administration (FAA) who are in
performance-based pay systems. Employees in some performance-based pay scales are required
to receive satisfactory performance ratings to be eligible to receive locality pay. S. 3013, however,
includes language prohibiting a reduction in locality pay that is prompted by a poor performance
rating.93
In addition, some federal employees receive a “special rate,” which is additional pay used to
attract qualified employees to areas facing recruitment difficulties.94 According to OPM,
employees in nonforeign area who receive a special rate would be able to keep that pay
differential under S. 3013 unless the locality pay rate was larger than their special rate.
Employees automatically receive the pay differential that gives them the highest pay rate.95
ǯǯȱ˜œ?Š•ȱŽ›Ÿ’ŒŽȱ
More than 14,000 of the 54,815 total nonforeign COLA recipients are employees of the United
States Postal Service (USPS).96 USPS employees living in the continental United States are not
eligible to receive locality pay. Under S. 3013, USPS employees would not be permitted to
transition to locality pay.97 Instead, USPS employees would continue to receive a COLA. The
COLA, however, would be tied to the locality pay rate.
If the locality pay rate climbs higher than the COLA rate, USPS employees would then receive
the locality pay rate—although the pay supplement would still be considered a COLA for tax and
other purposes. The USPS nonforeign area COLA would not be federal taxable on the federal
level, and would not count when calculating retirement and other benefits—even if the rate was
linked to the locality pay rate. Unlike current statutes that govern COLAs, however, S. 3013
would allow the USPS nonforeign COLA rate to climb above 25% if Bureau of Labor Statistics
data warranted the increase.

92 $295 million in “additional retirement benefits and $7 million for higher Social Security benefits.” Ibid., p. 3.
93 S. 3013, Sec. 6(2)(C).
94 U.S. Office of Personnel Management, “Special Salary Rates,” at http://apps.opm.gov/ssr/tables/index.cfm.
95 See Sen. Daniel K. Akaka, “Non-Foreign COLA Update: Frequently Asked Questions,” question number three,
available at [http://akaka.senate.gov/public/index.cfm?FuseAction=Issues.Home&issue=Non-
Foreign%20COLA%20Update&content_id=33#Non-Foreign%20COLA%20Update].
96 USPS employees sometimes refer to their nonforeign COLAs as territorial COLAs or T-COLAs.
97 When S. 3013 was introduced by Senator Akaka, it included language that would have permitted USPS employees to
decide individually whether to transition to locality pay. That language was amended when the bill was reported by the
Senate Committee on Homeland Security and Governmental Affairs.
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
Řśȱ

˜—?˜›Ž’?—ȱ˜œ?Ȭ˜?Ȭ’Ÿ’—?ȱ••˜ Š—ŒŽœȱŠ—?ȱ˜œœ’‹•Žȱ›Š—œ’?’˜—ȱ?˜ȱ˜ŒŠ•’?¢ȱŠ¢ȱ
ȱ
ȂœȱŽŒ˜––Ž—?Š?’˜—ȱ
In May 2007, OPM proposed that employees in nonforeign areas transition from nonforeign
COLAs to locality pay.98 The phase-in would occur over a seven-year period, and COLAs would
continue to be paid when the transition was complete.
OPM director Linda M. Springer stated that the proposal aimed to stem the “growing perception
that total pay and retirement benefits of the white-collar civilian Federal employees in nonforeign
areas ... have eroded gradually in relation to the pay and retirement benefits of similarly situated
employees in the 48 States and D.C.”99 Springer also said that the perception of a disparity in pay
between the nonforeign COLA areas and the contiguous United States has made staffing for
nonforeign federal agencies more difficult—especially retention of federal employees who are
nearing retirement.
Š•Œž•Š?’—?ȱ?‘Žȱȱ›˜™˜œŠ•ȱ‘ŠœŽȬ’—ȱ
Under the OPM proposal, pay changes for a hypothetical GS-9, step 5, living in Honolulu, HI—
with a 2008 basic pay of $45,103 and a COLA rate of 25%—may trend as shown in Table 9.100
Similar to Table 4, Table 9 has nine columns of information. In column A, the GS rate of pay is
the pay any federal employee on the GS schedule at the GS-9 level, would receive annually. That
rate of pay is scheduled to increase 2.9% in January 2009 (pursuant to P.L. 110-329). OPM
estimates that the GS rate of basic pay climbs, on average, 2.5% per year.101 The GS basic pay
rate for 2009, therefore, is 2.9% higher than in 2008. Each additional basic pay increase is
estimated at 2.5%.
Column B shows the percentage of the locality pay rate that would be added to the hypothetical
employee’s salary each year. In 2008, nonforeign employees did not receive locality pay, so the
percentage is 0%. In 2009, 1/7, or 14.29% of the locality pay rate is added to the employee’s pay.
By 2015, 100% of the locality pay rate would be added to a federal employee’s salary. Column C
shows the estimated dollar amount of locality pay that would be added to the employee’s salary
each year.
Column D shows the employee’s depleting nonforeign COLA pay. For every dollar in locality
pay added to the employee’s salary, 85 cents of the COLA is removed. At the end of the three
year phase in, when 100% of the locality pay rate is being added to the employee’s salary,
COLAs will continue to be paid. According to the estimates, COLAs would continue to be paid to
this hypothetical employee until 2018—the first year that the employee’s after-tax pay under the
transition would be greater than the after-tax pay if the transition had not occurred. As a result of

98 Letter from Linda M. Springer, Director of the Office of Personnel Management, to Richard B. Cheney, President of
the U.S. Senate, May 30, 2007, available at http://www.opm.gov/news_events/congress/proposals/
Locality_Pay_Extension_Act.pdf.
99 Ibid.
100 The table includes a number of assumptions that demonstrate what may occur in a transition, but are not to be used
as definitive estimates.
101 All federal employees working in the contiguous United States receive locality pay. The lowest locality pay rate is
the Rest of U.S. rate, which as of January 2008 was 13.18%. The lowest total pay in 2008 for a GS-9, step 5 living in
the contiguous United States, therefore, is $51,048.
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
ŘŜȱ

˜—?˜›Ž’?—ȱ˜œ?Ȭ˜?Ȭ’Ÿ’—?ȱ••˜ Š—ŒŽœȱŠ—?ȱ˜œœ’‹•Žȱ›Š—œ’?’˜—ȱ?˜ȱ˜ŒŠ•’?¢ȱŠ¢ȱ
ȱ
the continued COLA, the employee would receive roughly $655 more in basic pay in 2015 than a
GS-9, step 5, in other locality pay areas with nearly identical labor costs (e.g., a Washington, DC
employee who would be estimated to receive $68,834 in 2015.102
Column E shows the employee’s total pay, which includes the GS annual rate of pay, locality pay,
and the nonforeign COLA. In contrast, Column F shows the pay that would be both taxable on
the federal level and would count when the employee’s retirement benefits were calculated. This
column includes the GS annual rate of pay and the locality pay. As this column’s value increased
over time, the employee’s federal taxes would also increase. For a nonforeign employee,
therefore, OPM’s proposal would concurrently increase federal taxes and retirement benefits.
Column G estimates the hypothetical employee’s federal taxes as they increase with the phase in
and beyond. While the OPM proposal does not directly state that it assumes a 15% flat tax rate, it
does stipulate an 85% COLA offset factor. Because only 85 cents of every COLA dollar is
removed for every locality pay dollar added to the employee’s pay, 15 cents of the COLA
continues to be included in the employee’s paycheck. This 15 cents is meant to offset the federal
tax payments for the transitioning nonforeign area employee who historically has not paid federal
taxes on his or her pay supplement. Locality pay can be taxed on the federal level, and, under
OPM’s proposal, locality pay will increase throughout the transition. An employee who goes
through the transition, therefore, would be paying more in federal taxes than if the transition had
not occurred. The remaining COLA pay is what the OPM proposal assumes the employee will
have to pay in federal taxes each year. The 85% COLA offset factor, therefore, assumes a 15%
flat tax rate for all nonforeign area federal employees. Column H shows what the employee’s take
home pay would be after the 15% assumed tax rate is removed from his or her total pay. This
column is the difference if Column G is subtracted from Column D.

102 In 2015, using OPM’s assumption (1% increase in locality pay rate per year) Honolulu is estimated to have a
locality pay rate of 27.38% while Washington, DC is estimated to have a locality pay rate of 27.39%.
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
Řŝȱ

ȱ
Table 9. Estimated Salary for a GS-9, Step 9, Working in Honolulu, HI, if Locality Pay Transition Were Implemented
Column A
Column B
Column C Column D Column E
Column F
Column G
Column H

General

Percentage of
Schedule

Federally Taxable/

Locality Pay Annual Rate of
Locality
Nonforeign

Retirement
Annual Federal After Federal Tax
Year
Phased In
Pay
Pay
COLA
Total Pay
Creditable Pay
Taxes (15% Rate) Take Home Pay
2008 0% $45,103 $0
$11,275
$56,378
$45,103 $6,765 $49,613
2009 14.28% $46,411 $940
$10,803
$58,155 $47,351
$7,103
$51,052
2010 28.57% $47,571 $3,042 $9,307
$59,920 $50,613
$7,592
$52,328
2011 42.86% $48,761 $4,886 $8,037
$61,684 $53,647
$8,047
$53,637
2012 57.14% $49,980 $6,963 $6,577
$63,519 $56,942
$8,541
$54,978
2013 71.43% $51,229 $9,287 $4,913
$65,429 $60,516
$9,077
$56,352
2014 85.71% $52,520 $11,873 $3,036
$67,418 $64,382
$9,657
$57,761
2015 100% $53,833 $14,736 $930
$69,489 $68,559
$10,284
$59,205
2016 100% $55,168 $15,657 $483
$71,309 $70,825
$10,624
$60,685
2017 100% $56,547 $16,614 $15
$73,176 $73,161
$10,974
$62,202
2018
100% $57,961
$17,609 $0
$75,092 $75,570 $11,335 $63,757
Source: CRS calculations using information provided by OPM on May 23, 2008.
Notes: These calculations are estimates, and not the actual benefits an employee would receive if the OPM proposal were enacted. The calculations do not account for
maximum limitations on pay, promotions, or step increases. In the first year of the transition, pursuant to its proposal, OPM would use the Rest of US locality pay rate
(13.18% in 2008) to calculate actual locality pay amounts. In the second and subsequent years of the phase-in, a Honolulu employee’s locality pay rate would be calculated
by BLS. OPM hosts a website that includes an online calculator to help federal employees determine potential effects a transition to locality pay would have on their salaries
https://www.opm.gov/news_events/congress/proposals/COLA-TransitionEstimator.asp.
ȬŘŞȱ

˜—?˜›Ž’?—ȱ˜œ?Ȭ˜?Ȭ’Ÿ’—?ȱ••˜ Š—ŒŽœȱŠ—?ȱ˜œœ’‹•Žȱ›Š—œ’?’˜—ȱ?˜ȱ˜ŒŠ•’?¢ȱŠ¢ȱ
ȱ
Table 10 shows the pay rate of a hypothetical employee if a transition to locality pay were not
enacted. Similar to Table 9, this table shows the same hypothetical employee’s GS rate of pay
(Column A), locality pay (Column B), nonforeign COLA (Column C), and total pay (Column D).
Column E shows the pay that is both taxable on the federal level and counted toward retirement
and other benefits. If a transition to locality pay were not enacted, the federally taxable pay would
be equal to the GS rate of pay because COLAs are not federally taxable. If a transition were not
enacted, a COLA would be the only pay supplement received by the employee. The employee’s
taxes, as shown in column F, therefore, would be lower than if the transition were enacted. After-
tax, take-home pay (Column G), however, would be equal whether or not the OPM proposal were
enacted.
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
Řşȱ

ȱ
Table 10. Estimated Salary for a GS-9, Step 5, Working in Honolulu, HI,
if Locality Pay Transition Were Not Implemented
Column A
Column B Column C Column D
Column E
Column F
Column G

Federally

General Schedule Annual Locality Nonforeign

Taxable/Retirement
Annual Federal
After Federal Tax
Year
Rate of Pay
Pay
COLA
Total Pay
Creditable Pay
Taxes (15%)
Take Home Pay
2008
$45,103 $0
$11,276
$56,379 $45,103
$6,765
$49,614
2009 $46,411
$0
$11,603
$58,014
$46,411
$6,962
$51,052
2010 $47,571
$0
$11,893
$59,464
$47,571
$7,136
$52,328
2011 $48,761
$0
$12,190
$60,951
$48,761
$7,314
$53,637
2012 $49,980
$0
$12,495
$62,474
$49,980
$7,496
$54,978
2013 $51,229
$0
$12,807
$63,036
$51,229
$7,684
$56,352
2014 $52,520
$0
$13,128
$65,637
$52,510
$7,876
$57,761
2015 $53,833
$0
$13,456
$67,278
$53,823
$8,073
$59,205
2016 $55,168
$0
$13792
$68,960
$55,168
$8,275
$60,685
2017 $56,547
$0
$14,137
$70,684
$56,547
$8482
$62,202
2018 $57,961
$0
$14,490
$72,451
$57,961
$8694
$63,757
Source: CRS calculations using U.S. Office of Personnel Management data.
Notes: These calculations are estimates, and not the actual benefits an employee would receive if the OPM proposal were enacted. The calculations do not account for
maximum limitations on pay, promotions, or step increases.
ȬřŖȱ

˜—?˜›Ž’?—ȱ˜œ?Ȭ˜?Ȭ’Ÿ’—?ȱ••˜ Š—ŒŽœȱŠ—?ȱ˜œœ’‹•Žȱ›Š—œ’?’˜—ȱ?˜ȱ˜ŒŠ•’?¢ȱŠ¢ȱ
ȱ
‘Žȱȱ??œŽ?ȱ
If an employee had not been converted to locality pay, his or her basic salary plus his or her
nonforeign COLA would have equaled $58,014 in 2009. In the first year of the OPM transition,
therefore, a Honolulu employee may receive $141 more in total pay than if the transition did not
occur—for a total pay of $58,155. The $141 in additional take home pay for the employee in the
transition is equal to the estimated difference in take-home (post-federal-tax) pay if the transition
had not occurred. The COLA offset is included to ensure an employee’s take home pay is not
affected by the transition. As noted earlier the 85% COLA offset assumes a 15% flat federal tax
rate for employees. According to the Internal Revenue Service, an employee earning between
$11,450 and $43,650 would qualify for a 15% federal tax rate.103 This estimated federal tax rate,
therefore, may not accurately estimate the federal taxes for many nonforeign area federal
employees. Nonforeign area federal employees who earn more than $43,650 would not receive a
COLA that would be large enough to ensure their take home pay would not be reduced.
Š¢ȱ˜–™Š›’œ˜—œȱ
The continued COLA pay may also create pay differences between the nonforeign area and an
area in the contiguous United States with similar labor costs. The estimated locality pay rate for
Honolulu is nearly identical to the locality pay rate for Washington, DC (22.38% for Honolulu
and 22.29% for Washington, DC in 2008). The 2011 estimated total pay for a GS-9, step 5,
working in Honolulu, however, is $1,362 more than the estimated total pay for a similar
employee if he or she were working in Washington, DC.104 In 2012, the pay difference between
the two employees is $1,071. Federal employees working in the contiguous United States may
have concerns about the pay differences prompted by the COLA offset.
Ž?’›Ž–Ž—?ȱŠ?Žœȱ
OPM stated that its locality pay proposal stretches the transition to locality pay over seven years
to ease effects on the employee retirement fund.105 At a May 29, 2008 congressional hearing
Charles D. Grimes III, the deputy associate director for performance and pay systems, stated that
the extended phase-in period was intended to mitigate the economic affects of retirees on OPM’s
budget.
We believe it is not advisable to exacerbate staffing problems by creating an incentive to
retire, as might be the case if there were a shorter phase-in period. The phase-in period also
reduces the financial impact on agency budgets caused by higher employer retirement
contributions.106

103 Internal Revenue Service, “Part III: Administrative, Procedural, and Miscellaneous,” Revenue Procedure, available
at [http://www.irs.gov/pub/irs-drop/rp-07-66.pdf].
104 The employee working in Honolulu is estimated to receive $64,941. If the employee lived in Washington, DC, he or
she is estimated to receive $63,579.
105 U.S. Congress, Senate Committee on Homeland Security and Governmental Affairs, Subcommittee on Oversight of
Government Management, the Federal Workforce and the District of Columbia, Nonforeign COLA: Finding an
Equitable Solution, hearing on S. 3013, 110th Cong, 2nd sess., testimony of Charles D. Grimes III, May 29, 2008,
available at http://www.opm.gov/news_events/congress/testimony/110thCongress/05_29_2008.asp.
106 Ibid.
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
řŗȱ

˜—?˜›Ž’?—ȱ˜œ?Ȭ˜?Ȭ’Ÿ’—?ȱ••˜ Š—ŒŽœȱŠ—?ȱ˜œœ’‹•Žȱ›Š—œ’?’˜—ȱ?˜ȱ˜ŒŠ•’?¢ȱŠ¢ȱ
ȱ
œ?’–Š?Ž?ȱ˜œ?ȱ˜?ȱ?‘Žȱȱ›˜™˜œŠ•ȱ
OPM estimates first-year costs for the transition proposal at $15.7 million and second year costs
at $31.4 million.107 The President’s FY2008 executive budget included funding “for a legislative
proposal to transition from non-foreign COLAs to locality pay for employees working in non-
foreign areas,” but does not provide any details about the proposal.108 The President’s FY2008
budget estimates that the COLA transition will cost $50 million from FY2008 through FY2017.109
Therefore, less than $3 million would be available in the remaining five years of the transition.
According to OPM, the seven-year phase-in period would allow transition costs to be more easily
absorbed by agency budgets.110 CBO’s budget estimate for S. 3013, which involves a three-year
transition period, estimates a cost of $2.2 billion. In comparison, OPM’s cost estimates may be
low.
‘Žȱǯǯȱ˜œ?Š•ȱŽ›Ÿ’ŒŽȱ
OPM’s proposal does not mention USPS employees. According to both OPM and the American
Postal Workers Union, however, USPS employees would not be included in OPM’s nonforeign
COLA phase out.111 USPS employees, instead, would continue to receive nonforeign COLAs
with the rate frozen at its December 31, 2008 level.
‘ŽȱŽ?Ž›Š•ȱŠ—Š?Ž›œȱœœ˜Œ’Š?’˜—ȱ›˜™˜œŠ•ȱ
At a May 29, 2008, congressional hearing, Michael FitzGerald, representing the Federal
Managers Association (FMA), introduced a third transition proposal, which would fully
implement the switch to locality pay the first year it is authorized.112 The FMA proposal would
convert nonforeign area employees to locality pay in one year, and would eliminate nonforeign
COLAs in the second year. Table 11 estimates employee pay for a hypothetical GS-9, step 5,
living in Puerto Rico if the FMA proposal were enacted.
Š•Œž•Š?’—?ȱ?‘ŽȱŽ?Ž›Š•ȱŠ—Š?Ž›œȱœœ˜Œ’Š?’˜—ȱ›˜™˜œŠ•ȱ
Similar to both the OPM proposal and S. 3013, the FMA proposal would remove only a portion
(75%) of every dollar of a nonforeign COLA for every full dollar added to an employee’s salary
in locality pay. In the first year of implementation, an employee’s locality pay would be

107 Information provided electronically to the author by OPM on Feb. 1, 2008.
108 U.S. Executive Office of the President, Office of Management and Budget, Budget of the United States Government
Fiscal Year 2008; Appendix (Washington: GPO, 2007), p. 1007.
109 Ibid., Table S-6 Effect of Proposals on Receipts, available at http://www.whitehouse.gov/omb/budget/fy2008/
summarytables.html.
110 See Daniel K. Akaka, “Non-Foreign COLA Update: Frequently Asked Questions,” question number three, available
at http://akaka.senate.gov/public/index.cfm?FuseAction=Issues.Home&issue=Non-
Foreign%20COLA%20Update&content_id=33#Non-Foreign%20COLA%20Update.
111 Information provided to the author by telephone from the American Postal Workers Union and OPM on Feb. 8,
2008.
112 U.S. Congress, Senate Committee on Homeland Security and Governmental Affairs, Subcommittee on Oversight of
Government Management, the Federal Workforce and the District of Columbia, Nonforeign COLA: Finding an
Equitable Solution, hearing on S. 3013, 110th Cong, 2nd sess., testimony of Michael FitzGerald, May 29, 2008,
available at http://hsgac.senate.gov/public/_files/FitzGeraldTestimony052908.pdf.
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
řŘȱ

˜—?˜›Ž’?—ȱ˜œ?Ȭ˜?Ȭ’Ÿ’—?ȱ••˜ Š—ŒŽœȱŠ—?ȱ˜œœ’‹•Žȱ›Š—œ’?’˜—ȱ?˜ȱ˜ŒŠ•’?¢ȱŠ¢ȱ
ȱ
calculated using the Rest of US (RUS) percentage (currently 13.18%). In the second and final
year of implementation, OPM would use BLS locality pay rates to determine an employee’s
locality pay. If BLS determined the locality pay rate in Puerto Rico were below the RUS rate,
federal employees in Puerto Rico would automatically receive the RUS rate. Under the FMA
proposal, nonforeign COLA pay would be completely eliminated in the second year of
implementation. FMA favors the rapid transition to allow employees “to retire on their own
terms, in their own homes and in their own communities.”113
As in the previous tables, Column A shows the annual GS rate of pay for any federal employee on
the GS schedule at the GS-9 level. That rate of pay is scheduled to increase 2.9% in January 2009
(pursuant to P.L. 110-329). OPM estimates that the GS rate of basic pay climbs, on average, 2.5%
per year. The GS basic pay rate for 2009, therefore is 2.9% higher than in 2008. Each additional
basic pay increase is estimated at 2.5%.
Column B shows the total locality pay that could be added to a hypothetical employee’s salary
each year under the FMA proposal. Unlike S. 3013 and OPM’s proposal, the FMA proposal does
not phase in locality pay. Instead, locality pay would be instated in full in 2009.
Column D shows the employee’s depleting nonforeign COLA pay. For every dollar in locality
pay added to the employee’s salary, 75 cents of the COLA is removed. In 2009, when 100% of
the locality pay rate would be added to the employee’s salary, COLAs would continue to be paid.
According to the FMA proposal, however, COLAs could be eliminated in 2010.
Column E shows the employee’s total pay, which includes the GS annual rate of pay, locality pay,
and the nonforeign COLA. In contrast, Column F shows the pay that would be both taxable on
the federal level and would count when the employee’s retirement benefits were calculated. This
column includes only the GS annual rate of pay and locality pay. As this column’s value increased
over time, the employee’s federal taxes would also increase. Like the previous proposals, FMA’s
proposal could concurrently increase federal taxes and retirement benefits.
Column G estimates the hypothetical employee’s federal taxes as they increase with the phase in
and beyond. While the OPM proposal does not directly state that it assumes a 25% flat tax rate, it
does stipulate an 75% COLA offset factor. Because only 75 cents of every COLA dollar is
removed for every locality pay dollar added to the employee’s pay, 25 cents of the COLA
continues to be included in the employee’s paycheck. This 25 cents is meant to offset the federal
tax payments for the transitioning nonforeign area employee who historically has not paid federal
taxes on his or her pay supplement. Locality pay can be taxed on the federal level, and, under
OPM’s proposal, locality pay will increase throughout the transition. An employee who goes
through the transition, therefore, would pay more in federal taxes than if the transition had not
occurred. The remaining COLA pay is what the OPM proposal assumes the employee will have
to pay in federal taxes each year. The 75% COLA offset factor, therefore, assumes a 25% flat tax
rate for all nonforeign area federal employees. Column H shows what the employee’s take home
pay would be after the 25% assumed tax rate is removed from his or her total pay. This column is
the difference if Column G is subtracted from Column D.

113 U.S. Congress, Senate Committee on Homeland Security and Governmental Oversight, Subcommittee on Oversight
of Government Management, the Federal Workforce and the District of Columbia, Nonforeign COLA: Finding an
Equitable Solution, hearing on S. 3013, 110th Cong., 2nd sess., testimony of Michael FitzGerald, May 29, 2008,
available at http://hsgac.senate.gov/public/_files/FitzGeraldTestimony052908.pdf.
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
řřȱ

˜—?˜›Ž’?—ȱ˜œ?Ȭ˜?Ȭ’Ÿ’—?ȱ••˜ Š—ŒŽœȱŠ—?ȱ˜œœ’‹•Žȱ›Š—œ’?’˜—ȱ?˜ȱ˜ŒŠ•’?¢ȱŠ¢ȱ
ȱ
Table 11. Estimated Salary for a Hypothetical GS-9, Step 5, Working in Puerto Rico
if the Federal Managers Association Plan Were Enacted
Column A Column B Column C Column D Column E Column F Column G

Federally
Annual

General

Taxable/
Federal

Schedule

Retirement Tax (25% After Tax
Annual
Locality Nonforeign

Creditable Flat Tax Take Home
Year Rate of Pay
Pay
COLA
Total Pay
Pay
Rate)
Pay
2008
$45,103 $0 $5,863 $50,966
$45,103
$11,275
$39,691
2009
$46,411 $6,117 $1,446 $53,974 $52,527 $13,132 $40,842
2010
$47,571 $6,746 $0 $54,317 $54,317 $13,579 $40,738
Source: CRS estimates using information from congressional testimony. U.S. Congress, Senate Committee on
Homeland Security and Governmental Oversight, Subcommittee on Oversight of Government Management, the
Federal Workforce and the District of Columbia, Nonforeign COLA: Finding an Equitable Solution, hearing on S.
3013, 110th Cong., 2nd sess., testimony of Michael FitzGerald, May 29, 2008, available at http://hsgac.senate.gov/
public/_files/FitzGeraldTestimony052908.pdf.
Notes: These calculations are estimates, and not the actual benefits an employee would receive if the OPM
proposal were enacted. The calculations do not account for maximum limitations on pay, promotions, or step
increases. Estimates are rounded to the nearest dollar. The COLA rate is estimated at 13% for all three years.
Also for all three years, locality pay is calculated by using the Rest of US locality pay rate, which is currently
estimated at 13.18%.
Table 12 shows the pay rate of a hypothetical employee the FMA proposal were not enacted.
Similar to Table 11 this table shows the same hypothetical employee’s GS rate of pay (Column
A), locality pay (Column B), nonforeign COLA (Column C), and total pay (Column D). Column
E shows the pay that is both taxable on the federal level and counted toward retirement and other
benefits. If a transition to locality pay were not enacted, the federally taxable pay would be equal
to the GS rate of pay because COLAs are not federally taxable. If a transition were not enacted, a
COLA would be the only pay supplement received by the employee. The employee’s taxes, as
shown in Column F, therefore, would be lower than if the transition were enacted.
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
řŚȱ

ȱ
Table 12. Estimated Salary for a GS-9, Step 5, Working in Puerto Rico if the
Federal Managers Association Proposal Were Not Enacted
Column A
Column B
Column C
Column D
Column E
Column F
Column G

General Schedule
Locality Pay
Nonforeign

Federally Taxable/
Annual Federal
After Tax Take
Year
Annual Rate of Pay
Amount
COLA
Total Pay
Retirement Creditable
Tax (25%)
Home Pay
2008
$45,103 $0
$5,863
$50,966
$45,103 $11,276
$39,691
2009
$46,411 $0
$6,033
$52,444
$46,411 $11,603
$40,841
2010
$47,571 $0
$6,184
$53,756
$47,571 $11,893
$41,863
Source: CRS estimates using OPM COLA rates.
Notes: These calculations are estimates, and not the actual benefits an employee would receive if the OPM proposal were enacted. Estimates are rounded to the nearest
dollar. The calculations do not account for maximum limitations on pay, promotions, or step increases.
Ȭřśȱ

˜—?˜›Ž’?—ȱ˜œ?Ȭ˜?Ȭ’Ÿ’—?ȱ••˜ Š—ŒŽœȱŠ—?ȱ˜œœ’‹•Žȱ›Š—œ’?’˜—ȱ?˜ȱ˜ŒŠ•’?¢ȱŠ¢ȱ
ȱ
‘Žȱȱ??œŽ?ȱ
According to Table 11, an employee living in Puerto Rico would receive a $1,446 COLA in 2009
in addition to $6,117 in locality pay. When compared to any other employee working in an area in
the contiguous United States that receives the RUS locality pay rate, a Puerto Rico employee
would receive an additional $1,446 in pay. According to the FMA, the additional pay is meant to
offset the loss in take home pay for a transitioning employee who historically had not paid taxes
on his or her pay supplement. An GS-9, step 5, working in the contiguous United States in a
market with similar labor costs, however, would not receive the COLA and would pay the same
federal taxes.
The employee would receive pay and retirement benefits comparable to a similar employee living
in any of the areas designated as RUS. As noted earlier, the FMA proposal includes a 75% COLA
offset rate, which assumes a 25% federal tax rate. According to the IRS, an employee who earns
between $32,550 and $78,850 would have a federal tax rate of 25%.114 This federal tax rate
estimate would cover most federal employees, but would not cover the federal tax increase costs
for a federal employee who is a GS-13, step 6, or higher.
Š¢ȱ˜–™Š›’œ˜—œȱ
As Table 12 demonstrates, a GS-9, step 5 living in Puerto Rico would receive nearly $1,125 less
in after federal tax pay in 2010 than he or she would have if the switch to locality pay had not
occurred ($40,738 take home if the transition occurred, $41,863 if it did not). Unlike the other
transition proposals, the FMA proposal would not ensure that nonforeign area employees do not
experience a reduction in post-tax, take-home pay. In 2009, however, the Puerto Rico employee
would receive $1,446 in COLA offset pay. No federal employee working in the contiguous
United States in a locality pay area with the RUS rate would receive the additional COLA. The
Puerto Rico employee, therefore, would receive $1,446 more in total pay than counterparts in the
contiguous United States. The additional COLA may prompt concern about pay differences for
employees working the contiguous United States.
Ž?’›Ž–Ž—?ȱ??ŽŒ?œȱ
As stated earlier in this report, a federal employee’s retirement benefits are calculated using his or
her highest salary (plus other eligible pay) for three consecutive years. An employee living in a
nonforeign area may choose to wait until locality pay is fully implemented before he or she retires
because it will increase his or her retirement benefits. A more rapid transition to locality pay
under the FMA proposal may encourage employees to retire earlier. The earlier retirements may
increase federal pension costs. In addition, the federal government may have difficulty finding
new hires or moving current employees into positions formerly held by retirees.
S. 3013 and the OPM proposal phase in COLAs over a number of years. In contrast, FMA
institutes full locality pay in one year and eliminates the COLA in the following year. FMA’s one-

114 Internal Revenue Service, “Part III: Administrative, Procedural, and Miscellaneous,” Revenue Procedure, available
at [http://www.irs.gov/pub/irs-drop/rp-07-66.pdf].
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
řŜȱ

˜—?˜›Ž’?—ȱ˜œ?Ȭ˜?Ȭ’Ÿ’—?ȱ••˜ Š—ŒŽœȱŠ—?ȱ˜œœ’‹•Žȱ›Š—œ’?’˜—ȱ?˜ȱ˜ŒŠ•’?¢ȱŠ¢ȱ
ȱ
year replacement proposal may encourage employees to retire sooner because their retirement-
creditable pay will reach its maximum level in a shorter amount of time.
‘Žȱǯǯȱ˜œ?Š•ȱŽ›Ÿ’ŒŽȱ
The FMA proposal intentionally does not address whether USPS employees would be included in
the transition because postal workers are not members of the organization.115
—Š•¢œ’œȱ˜?ȱŽ?’œ•Š?’ŸŽȱ™?’˜—œȱ
›Š—œ’?’˜—ȱ›˜™˜œŠ•œȱ
The three transition proposals differ most drastically from one another in the timing of the phase-
in, the length of time the nonforeign COLA continues to be paid once the transition period is
completed, and the percentage of every COLA dollar removed from an employee’s pay for every
dollar of locality pay added to it. While S. 3013 would phase-in locality pay over three years, the
OPM proposal would do so over seven. The Federal Managers Association plan switches to
locality pay in one year and eliminates the nonforeign COLAs in the second year of
implementation. For both S. 3013 and the OPM proposal, the percentage of nonforeign COLA
pay that remains and the length of time it would continue to be paid after the phase-in is complete
would vary by location. As stated earlier, OPM estimates that nonforeign COLAs could continue
to be paid between 10 and 30 years after enactment of the seven-year transition—depending on
the location. All three proposals could increase federal personal income tax collections.
’–’—?ȱ˜?ȱ‘ŠœŽȬ’—ȱ
Phasing in locality pay over several years may prompt certain employees to postpone retirement.
As noted earlier, Charles D. Grimes III, deputy associate director for performance and pay
systems at OPM, said that the longer phase-in periods may reduce an older employee’s incentive
to retire quickly so he or she could ensure they receive the largest retirement benefits possible.
The postponed retirement could save the federal government large retirement benefit costs.
Shorter phase-in times, like the three-year proposal of S. 3013 or the one-year proposal from
FMA could precipitate earlier retirements.
We believe it is not advisable to exacerbate staffing problems by creating an incentive to
retire, as might be the case if there were a shorter phase-in period. The phase-in period also
reduces the financial impact on agency budgets caused by higher employer retirement
contributions.... S. 3013, though welcomed as a step forward in resolving these issues, would
cost significantly more due to the shorter phase-in period and reduced offset.116

115 Information provided to the author by FMA on Oct. 22, 2008.
116 U.S. Congress, Senate Committee on Homeland Security and Governmental Oversight, Subcommittee on Oversight
of Government Management, the Federal Workforce and the District of Columbia, Nonforeign COLA: Finding an
Equitable Solution, hearing on S. 3013, 110th Cong, 2nd sess., testimony of Charles Grimes III, May 29, 2008, available
at [http://hsgac.senate.gov/public/_files/GrimesTestimony052908.pdf].
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
řŝȱ

˜—?˜›Ž’?—ȱ˜œ?Ȭ˜?Ȭ’Ÿ’—?ȱ••˜ Š—ŒŽœȱŠ—?ȱ˜œœ’‹•Žȱ›Š—œ’?’˜—ȱ?˜ȱ˜ŒŠ•’?¢ȱŠ¢ȱ
ȱ
A longer transition period, however, could cost the federal government more money in pay for
employees still in the workforce, because the three- and seven-year transition plans give
employees both a COLA and locality pay for an unspecified number of years. If locality pay rates
never become high enough to exceed COLA pay, eligible employees could receive both forms of
pay in perpetuity.
‘Žȱ˜—?’—žŽ?ȱȱ
Paying a nonforeign employee both locality pay and a nonforeign COLA may lead to
considerable inequities in pay and retirement benefits between nonforeign employees and those
who work in the contiguous United States. In 2013, under S. 3013, a GS-9, step 5 in Anchorage,
AK, would receive $179 more per year in retirement creditable pay than an identical employee
with similar labor costs living in Houston, TX, ($68,001 for the employee in Anchorage, $67,822
for the employee in Houston).117 Table 13 shows the estimated annual difference in total pay
(annual rate of pay + locality pay + COLA) between two hypothetical employees who are hired at
the same grade and step if S. 3013 were enacted. One employee lives in Houston and the other in
Anchorage.
Table 13. Total Pay for Hypothetical GS 9, Step 5, Employees Working in Anchorage,
AK, and Houston, TX
GS Schedule Annual Rate Total Pay for the Employee in Total Pay for the Employee in
Year
of Pay
Houston
Anchorage
2008 $45,103
$57,457
$55,927
2009 $46,411
$59,587
$58,317
2010 $47,571
$61,552
$62,231
2011 $48,761
$63,579
$65,709
2012 $49,980
$65,688
$67,527
2013 $51,229
$67,882
$69,394
Source: CRS calculations using S. 3013.
Notes: These calculations are estimates, and not the actual benefits an employee would receive if S. 3103 were
enacted. The calculations do not account for maximum limitations on pay, promotions, or step increases. The
annual base pay adjustment in 2009 is 2.9%, pursuant to P.L. 110-329. In subsequent years of the phase in, annual
basic pay adjustments are estimated at 2.5%. In the first year of the phase-in, locality pay is calculated by using the
RUS locality pay rate, which is currently estimated at 13.18%—the 2008 RUS rate. In the second and subsequent
years, the OPM estimated 2008 locality pay rate for the Anchorage, AK COLA area of 27.74% is used to
calculate pay. In the final year of the phase-in, nonforeign COLAs are still allotted because the ratio between
reduction in nonforeign COLAs and increasing locality pay is not one to one. The nonforeign COLA offset factor
is 65%—for every dollar added in locality pay, 65% of each nonforeign COLA dollar is removed—to help defray
the impact of the transition to federally taxable income.
According to Table 13, the employee in Anchorage, who has an OPM-estimated locality pay rate
that is 0.35% higher than the rate for the Houston employee (27.74% in Anchorage and 27.39% in
Houston), is estimated to receive $1,512 additional dollars in total pay in 2013. The additional
pay for the Anchorage employee largely consists of continued COLA pay.

117 OPM estimates that the locality pay rate will increase 1% per year. Houston, TX, has a locality pay rate in 2008
(27.39%) similar to OPM’s estimated 2008 locality pay rate for Anchorage (27.74%).
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
řŞȱ

˜—?˜›Ž’?—ȱ˜œ?Ȭ˜?Ȭ’Ÿ’—?ȱ••˜ Š—ŒŽœȱŠ—?ȱ˜œœ’‹•Žȱ›Š—œ’?’˜—ȱ?˜ȱ˜ŒŠ•’?¢ȱŠ¢ȱ
ȱ
Both S. 3013 and the OPM proposal continue to pay nonforeign federal workers a COLA after the
transition is completed. The continued COLA is meant to offset the federal tax payments for
nonforeign area employees who historically have not paid federal taxes on their COLAs, but must
now pay federal taxes on their locality pay. These ongoing COLA payments, however, may
prompt concerns of pay equity between employees living in nonforeign areas and those living in
areas of the contiguous United States with similar labor costs. Employees within the contiguous
United States who have similar labor costs would not receive COLA offsets, but could face
similar federal tax bills.
Ž?Ž›Š•ȱŠ¡ȱŠ?Žœȱ
The COLA offsets provided in the transition proposals aim to ensure that nonforeign-area
employees do not take home less pay than they would have if the proposal had not been enacted.
The continued COLA attempts to cover the federal taxes a nonforeign employee would pay on his
or her locality pay that he or she had not paid on a COLA. A 65% COLA offset, like the one
proposed in S. 3013, therefore, assumes that a nonforeign employee will pay the remaining 35%
of his or her COLA in federal taxes. The COLA offset, therefore, assumes a 35% flat tax rate for
all nonforeign employees.
If the federal tax rate estimate is too high, nonforeign area employees may receive more federal
pay than needed to maintain their take-home pay. Too low of an assumed federal tax rate may
force some federal employees to owe more in federal taxes than they received in their COLA
offset, leaving nonforeign employees with less take-home pay than they would have had if the
transition had not occurred. S. 3013 assumes a 35% federal tax rate, which is a federal tax bracket
for workers who earn more than $357,000 per year. No federal white-collar employee on the GS
scale earned more than $149,000 in 2008.118 The OPM proposal assumes a 15% federal tax rate,
which includes federal employees who earn between $8,025 and $32,550. Federal employees
above GS-7 pay federal taxes at a rate higher than 15%. Under this proposal, many nonforeign
area federal employees would pay more in federal taxes than provided by the COLA offset to
ensure the transition did not affect their take-home pay. The FMA proposal assumes a 25%
federal tax rate. Employees who earn between $32,550 and $78,850 are in a 25% federal tax
bracket. Under this proposal, some employees in the lowest grades may receive more money than
necessary to ensure their take home pay is not reduced as a result of the transition. Federal
employees above the GS-13, step 6 level, however, may not receive a COLA large enough to
ensure the transition would not reduce their take home pay.
At a May 29, 2008, congressional hearing, Sharon Warren, president of the COLA Defense
Committee of Anchorage, Inc., said OPM’s plan was “not acceptable.” Moreover, she said that
the 85% COLA offset factor in the OPM proposal “assumes an unrealistically low federal income
federal tax of 15 percent, and does not account for other mandatory deductions (e.g., Social
Security and Medicare federal taxes).”119 Warren continued her testimony by expressing the

118 A GS-15, step 10 living in Houston, TX, earned $149,000 in 2008. Houston had the largest locality pay rate in 2008
at 27.39%. The pay cap does not include one-time lump sum pay bonuses that may have been awarded to an employee.
119 U.S. Congress, Senate Committee on Homeland Security and Governmental Oversight, Subcommittee on Oversight
of Government Management, the Federal Workforce and the District of Columbia, Nonforeign COLA: Finding an
Equitable Solution, hearing on S. 3013, 110th Cong., 2nd sess., testimony of Sharon Warren, May 29, 2008, available at
[http://hsgac.senate.gov/public/_files/WarrenTestimony052908.pdf].
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ
řşȱ

˜—?˜›Ž’?—ȱ˜œ?Ȭ˜?Ȭ’Ÿ’—?ȱ••˜ Š—ŒŽœȱŠ—?ȱ˜œœ’‹•Žȱ›Š—œ’?’˜—ȱ?˜ȱ˜ŒŠ•’?¢ȱŠ¢ȱ
ȱ
Defense Committee’s support of S. 3013, saying the legislation was a positive step, but not
“perfect for everyone.”120
Ž›œ˜—Š•ȱ —Œ˜–ŽȱŽ?Ž›Š•ȱŠ¡ȱ
Switching to locality pay would likely result in an increase in federal personal income federal tax
collections. This increase in personal income federal tax collections is the result of several
factors. First, the shift from excluded nonforeign COLA payments to federal taxable locality pay
would increase federal taxable income, and, in turn, increase federal tax collections directly.
Secondly, the inclusion of locality pay, that is creditable for retirement purposes, would likely
result in an increase in federal taxable retirement benefits. In turn, this would also result in a
direct increase in federal tax collections. Finally, both of these increases in federal taxable forms
of income may interact with the alternative minimum federal tax (AMT) and other federal tax
provisions, resulting in an indirect increase in federal tax collections.121
˜—Œ•ž?’—?ȱ‹œŽ›ŸŠ?’˜—œȱ
Congress created both the nonforeign COLA and the locality pay authorities to help attract and
retain federal workers to specific locations. Nonforeign COLAs attempt to compensate for high
living costs. Locality pay, on the other hand, attempts to narrow the pay gap between federal and
nonfederal workers who live in separate, designated areas. Three proposals have been introduced
that would replace nonforeign COLAs with locality pay. The proposals would place federal
employees who work in nonforeign areas in the same pay system as federal employees in the
contiguous United States. Congress may choose to adopt any of the proposed transition plans or it
may maintain the current COLA system.
If none of the proposals were enacted and the nonforeign COLA program were maintained,
federal employees in nonforeign areas may continue to be concerned with the differences in how
their supplemental pay is calculated in comparison to federal employees in the contiguous United
States. Regardless of fluctuations in nonforeign COLA rates, nonforeign area employees may
believe their pay and benefits are not equal to pay and benefits of federal employees in other
areas.
If locality pay were phased in, some nonforeign areas may see a reduction in the rate percentage
of their supplemental pay. In Honolulu, for example, the nonforeign COLA rate is currently 25%.
OPM’s estimated locality pay rate for Honolulu is 20.38%—4.6% lower than the current COLA
rate. The rate reduction, however, would be supplemented by continued use of COLA pay to
attempt to ensure that the take-home pay of nonforeign employees is not affected by a transition.
According to OPM’s estimates on annual locality pay increases, Honolulu’s locality pay rate
could reach 25% by 2013 if a transition were implemented. Under S. 3013, a Honolulu resident
may receive more total pay and greater retirement benefits than if the transition did not occur
because he or she would receive both locality pay and a COLA concurrently. If the locality pay
rate in Honolulu did not increase at the OPM-estimated 1% per year, however, the employee may

120 Ibid.
121 CRS Report RS21817, The Alternative Minimum Tax (AMT): Income Entry Points and “Take Back” Effects, by
Steven Maguire.
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receive a pay supplement at a lower rate of pay than if he or she had continued to receive the
nonforeign COLA.122 In 2011 and 2012, for example, OPM estimates that a Honolulu employee
could have a 23.38% and 24.38% locality pay rate, respectively—both rates are lower than the
current COLA rate (25%). In Anchorage, however, the OPM-estimated locality pay rate in 2011
(30.24%) is 6.24% higher than the current nonforeign COLA rate (24%).
The cost of each of the three transition plans may also be a concern to lawmakers. In 2014,
nonforeign area employees in Honolulu, HI, would be receiving both a nonforeign COLA and
locality pay. If the locality pay rates increase one percentage point per year, the federal
government could pay a nonforeign COLA to Honolulu employees until 2017 or longer.123 The
total transition time to phase in locality pay under S. 3103, therefore, could last nine or more
years.124 If locality pay did not continue to increase, the federal government could pay employees
nonforeign COLAs in perpetuity.
Under OPM’s transition proposal, a nonforeign area employee in Honolulu, Hawaii would
continue to receive a nonforeign COLA rate until 2017.125 This transition to locality pay could last
nine or more years. Like under S. 3013, the federal government could pay employees a
nonforeign COLA in perpetuity under the OPM proposal if the locality pay did not continue to
increase. As noted earlier, OPM estimates first year phase-in costs for its transition plan at $15.7
million. Second year costs are estimated at $31.4 million.126 According to CBO’s $2.2 billion cost
estimate for the transition, OPM’s estimate may be low.
If locality pay were instituted in full in one year—like in the FMA proposal—some agencies may
struggle to pay benefits to retirees. The pace of any locality pay phase-in may affect federal
retirement rates in nonforeign COLA areas. Employees who plan to retire may do so soon after
acquiring a “high 3” average basic salary that includes locality pay—and, in some cases, both
locality pay and a COLA. A more rapid transition to locality pay, therefore, may encourage
employees to retire as soon as three years after locality pay is fully implemented. Agency budgets
may need to be increased, or programs streamlined, to ensure that a retiring employee receives his
or her earned benefits. A longer transition period may spread retirements out over the phase-in
period, but may also cause challenges for federal employees who served government and planned
to retire before the longer phase-in were completed.

122 If locality pay increased 1% per year, as estimated by OPM, Honolulu employees would receive a continued COLA
through 2017 under the OPM transition proposal.
123 CRS estimate using S. 3013.
124 Three years of transition and six years to eliminate the COLA.
125 CRS estimate using OPM’s transition provisions. The estimate assumes locality pay will increase OPM’s estimated
annual increase of 1% per year.
126 U.S. Executive Office of the President, Office of Management and Budget, Budget of the United States Government
Fiscal Year 2008; Appendix (Washington: GPO, 2007), p. 1007.
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ž?‘˜›ȱ˜—?ŠŒ?ȱ —?˜›–Š?’˜—ȱ

Wendy R. Ginsberg

Analyst in Government Organization and
Management
wginsberg@crs.loc.gov, 7-3933

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