The legislative proposal seeks to correct potential disparities between locality-based comparability payments allowed under a 1990 law and nonforeign area COLAs authorized under general civil service law.
By law, locality pay is available only to employees in the 48 contiguous states and the District of Columbia, while the COLA program covers white-collar civilian federal employees in most other nonforeign areas, such as Alaska, Hawaii, Guam, the Northern Mariana Islands, Puerto Rico and the U.S. Virgin Islands.
COLAs are a major component of total pay for federal employees outside the contiguous states. Such payments are not subject to federal income tax, but also are not creditable for retirement. Locality pay, on the other hand, is counted as basic pay for computing retirement benefits.
In a letter accompanying the proposal, Office of Personnel Management Director Linda Springer said there is a perception that total pay and retirement benefits for employees in nonforeign areas have "eroded gradually" in comparison with those for employees in the contiguous states.
"These perceived disparities between the pay and retirement benefits of those two groups of employees generate actual and potential staffing problems for federal agencies in nonforeign areas, especially in retaining employees near retirement," Springer wrote.
Under the proposal, COLAs would gradually be replaced with locality pay over a seven-year period beginning in 2008.
Springer noted that during the last 20 years, the COLA program has been "fraught with litigation," costing the government hundreds of millions of dollars in settlement payments and attorney fees.
Under one settlement, OPM agreed to implement a new methodology for setting COLAs, including a three-year survey cycle beginning in 2002. The results of that survey confirmed that COLA rates under the current calculations would decrease for many areas, likely causing additional litigation. That, and a potential constitutional challenge to the lack of locality pay in nonforeign areas, opens the possibility of future liabilities, Springer said.
Springer said implementing the proposal would produce modest savings in mandatory expenditures of about $1 million the first year. But the net cost increase over the first five years would be about $2 million, with a total cost of $109 million over the next 10 years.
"We believe this extension of locality pay to the nonforeign areas will appropriately apply effective and contemporary compensation practices to more federal employees and eliminate the inefficiencies and conflicts inherent in the outmoded approach taken by the COLA program," Springer wrote.
Sen. Daniel Akaka, D-Hawaii, said Wednesday that he plans to carefully review the proposal while also seeking input from affected employees.
"Together we can work to ensure that these federal workers are not disadvantaged when it comes to their compensation or retirement," Akaka said.