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How Pay Raises and Retiree COLAs Work

A primer on the annual process to determine current and former federal employee compensation.

As administration officials and lawmakers consider an array of proposals that could impact pay and benefits for federal employees and retirees, it’s worth going over the annual process federal agencies undertake to determine potential pay increases for workers, and cost of living adjustments for retired annuitants.

Last week, Office of Personnel Management Director Jeff Pon suggested that a proposal to reduce or eliminate cost-of-living adjustments for federal retirees was justified both because he didn’t “know of any other retirement system that actually pays COLAs,” and because COLAs are based on where a retiree lives. In a statement Monday, an OPM spokesperson clarified that Pon was referring to the fact that annuities are based on workers’ highest three years of total salary, which includes locality pay.

“In his testimony, the director sought to emphasize that locality pay is already factored into an annuitant’s retirement pay, and hence, no future increases based upon where a retiree chooses to live are appropriate,” the spokesperson wrote. “The director further outlined that the private sector trend has been to offer a retirement compensation package that does not include annuity COLAs, and that federal service annuities should follow suit and mirror this trend.”

Each year, deliberation over federal employee salaries begins with the release of the president’s budget for the upcoming fiscal year, which is typically released in February. That document includes the White House’s proposal for an across-the-board raise (or lack thereof) for both civilian federal employees and members of the military.

This year, President Trump proposed a pay freeze for civilian workers in 2019. Congress has the power to overrule the president on across the board pay increases, although in recent years it typically has deferred to the White House.

By the end of August, the president must reaffirm his compensation proposal for the following calendar year by issuing an alternative pay plan declaring that a so-called “economic emergency” exists, preventing a much larger automatic formula-based pay raise that would be triggered under the 1990 Federal Employees Pay Comparability Act.

Last year, Trump’s plan raised pay by 1.9 percent—an increase of 1.4 percent in base salary with an average increase of 0.5 percent in locality pay. Without the president’s intervention, the locality pay increase would have averaged 26.16 percent, costing the federal government $26 billion.

In December, the President’s Pay Agent must issue a report finalizing the White House’s planned pay increase. That report also formally implements previously approved changes and additions to the locality pay area program. Last year, the pay agent confirmed the overall 1.9 percent pay increase, and while it reaffirmed previously approved regional additions to the list of locality pay areas, it delayed implementation until 2019.

The process for determining cost of living adjustments for retirees is much simpler. According to OPM’s website, both Federal Employees Retirement System and Civil Service Retirement System COLAs are based on the annual third quarter change in the Labor Department’s Consumer Price Index for urban wage earners and clerical workers.

For CSRS retirees, the percentage change in CPI is applied directly to their monthly annuity. FERS annuitants receive a COLA equal to the percentage increase in the average CPI-W for the third quarter of the current year over the average CPI-W for the third quarter of the last year in which a COLA became effective, provided it is 2 percent or less. If the CPI-W increases between 2 and 3 percent, the COLA is 2 percent. And if the CPI-W increases by more than 3 percent, the COLA is that increase minus 1 percent.

Unlike across-the-board pay increases for current employees, the size of COLAs for retirees do not vary based on where they live. Changes to which regions’ current federal employees receive additional compensation based on location are proposed by the Federal Salary Council, a board made up of federal officials and representatives of unions and other employee groups. Those recommendations are then acted upon by the President’s Pay Agent, and if approved, the pay agent sends them to OPM for implementation via the standard rulemaking process.

Last year, no new locality pay areas were proposed, because the salary council was not reconstituted until December. The President’s Pay Agent, hamstrung by the lack of a permanent OPM director, also deferred action on locality pay areas recommended by the salary council in 2016. OPM now plans to conduct a rulemaking process for already approved locality pay areas—Birmingham, Alabama; Burlington, Vermont; San Antonio, Texas; and Virginia Beach and Norfolk, Virginia—as well as new areas recommended in April: Corpus Christi, Texas, and Omaha, Nebraska.

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