Lawmakers discuss expanding locality pay to areas covered by COLAs

The Office of Personnel Management raised cost-of-living allowance rates for federal employees in Puerto Rico and Hawaii County on Thursday, but the Bush administration, Democratic lawmakers and federal employee groups are pushing proposals to switch from a COLA system to locality pay for employees in far-flung locations.

"It has become increasingly clear that the nonforeign COLA is dated and in need of reform," said National Treasury Employees Union President Colleen Kelley. "Such an initiative must be done in a way that is fair to employees and does not make sudden, unplanned changes in their pay and compensation."

OPM sets COLAs by conducting cost-of-living surveys to determine the difference in costs between Washington, D.C., and Alaska, the Pacific region and the Caribbean. Each region is surveyed once every three years. Almost 50,000 employees in those areas receive COLAs ranging from 13 percent to 25 percent. OPM raised Puerto Rico's to 13 percent and Hawaii County's to 18 percent.

Proponents of a shift to locality pay cite a number of reasons. COLA payments do not count toward federal retirement benefits. They also do not count as part of basic pay eligible for Thrift Savings Plan matching funds, but COLAs also are not taxed as part of employees' income.

Michael Fitzgerald, president of the Federal Managers Association Chapter 187 in Hawaii, said COLAs were less competitive than locality payments in West Coast cities such as San Francisco and Los Angeles.

"It is easy to see why employees would be looking to complete their final three years [of federal employment] in these cities," he told lawmakers at a Senate Homeland Security and Governmental Affairs Federal Workforce Subcommittee field hearing on Thursday in Honolulu. "Specific data to document this migration is hard to come by, but the stories are endless. In my office alone, a husband and wife have separated for their careers…They plan to retire in the islands, but must endure a long-distance relationship in order to properly plan for their retirement."

At the president's direction, OPM in May 2007 proposed legislation to phase in locality pay and phase out COLA payments during a seven-year period. This May, Sen. Daniel Akaka, D-Hawaii, introduced a competing bill that would shift federal employees from COLAs to locality payments by 2012. The legislation is co-sponsored by Sen. Daniel Inouye, D-Hawaii, and Alaska Republicans Lisa Murkowski and Ted Stevens.

The time frame for the adjustment is not the only difference between the two bills. The OPM legislation would decrease COLAs by 85 cents per dollar of locality pay to compensate for the increased taxes employees would pay on locality payments. Unlike COLAs, locality payments are taxable income. The Federal Managers Association said at the Thursday hearing that the COLA reduction should be no more than 75 percent. Akaka's legislation sets a 65 percent reduction.

The Senate bill would allow federal employees to opt out of transitioning to locality pay. But they would not be allowed to opt back in.

Both NTEU and the Federal Managers Association said switching to locality pay would be critical for recruiting a new generation of federal employees to locations covered by the nonforeign COLA.

"Cutting the pay of federal workers simply because of where they live is unfair," Kelley said.