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110th Congress 
 2d Session                      SENATE                          Report
                                                                110-456
_______________________________________________________________________

                                     

                                                       Calendar No. 954


        NON-FOREIGN AREA RETIREMENT EQUITY ASSURANCE ACT OF 2008

                               __________

                              R E P O R T

                                 of the

                              COMMITTEE ON

                         HOMELAND SECURITY AND

                          GOVERNMENTAL AFFAIRS

                          UNITED STATES SENATE

                              to accompany

                                S. 3013


 TO PROVIDE FOR RETIREMENT EQUITY FOR FEDERAL EMPLOYEES IN NONFOREIGN 
 AREAS OUTSIDE THE 48 CONTIGUOUS STATES AND THE DISTRICT OF COLUMBIA, 
                         AND FOR OTHER PURPOSES




               September 11, 2008.--Ordered to be printed
        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

               JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan                 SUSAN M. COLLINS, Maine
DANIEL K. AKAKA, Hawaii              TED STEVENS, Alaska
THOMAS R. CARPER, Delaware           GEORGE V. VOINOVICH, Ohio
MARK L. PRYOR, Arkansas              NORM COLEMAN, Minnesota
MARY L. LANDRIEU, Louisiana          TOM COBURN, Oklahoma
BARACK OBAMA, Illinois               PETE V. DOMENICI, New Mexico
CLAIRE McCASKILL, Missouri           JOHN WARNER, Virginia
JON TESTER, Montana                  JOHN E. SUNUNU, New Hampshire

                  Michael L. Alexander, Staff Director
                     Kevin J. Landy, Chief Counsel
                   Lawrence B. Novey, Senior Counsel
  Jennifer L. Tyree, Counsel, Subcommittee on Oversight of Government 
    Management, the Federal Workforce, and the District of Columbia
     Brandon L. Milhorn, Minority Staff Director and Chief Counsel
         Amanda Wood, Minority Director of Governmental Affairs
    Jennifer A. Hemingway, Minority Staff Director, Subcommittee on 
  Oversight of Government Management, the Federal Workforce, and the 
                          District of Columbia
                  Trina Driessnack Tyrer, Chief Clerk
                            C O N T E N T S

                              ----------                              
                                                                   Page
  I. Purpose & Summary................................................1
 II. Background.......................................................2
III. Legislative History.............................................11
 IV. Section-by-Section Analysis.....................................12
  V. Estimated Cost of Legislation...................................14
 VI. Evaluation of Regulatory Impact.................................18
VII. Changes in Existing Law.........................................18
                                                       Calendar No. 954
110th Congress
                                 SENATE
                                                                 Report
 2d Session                                                     110-456

======================================================================
 
        NON-FOREIGN AREA RETIREMENT EQUITY ASSURANCE ACT OF 2008

                                _______
                                

               September 11, 2008.--Ordered to be printed

                                _______
                                

      Mr. Lieberman,  from the Committee on Homeland Security and 
             Governmental Affairs, submitted the following

                              R E P O R T

                         [To accompany S. 3013]

    The Committee on Homeland Security and Governmental 
Affairs, to which was referred the bill (S. 3013) to provide 
for retirement equity for Federal employees in non-foreign 
areas outside the 48 contiguous States and the District of 
Columbia, and for other purposes, reports favorably thereon 
with amendments and recommends that the bill, as amended, do 
pass.

                          I. Purpose & Summary

    Since 1948, federal employees in the non-foreign areas \1\ 
of the U.S. have received a non-foreign cost of living 
allowance (COLA) to ensure that their pay reflects the high 
cost of living in those areas compared to the cost of living in 
Washington, DC. To determine COLA rates, the Office of 
Personnel Management (OPM) conducts annual cost surveys of the 
prices of over 200 items in the non-foreign areas and in the 
Washington, DC area. OPM publishes the results of these surveys 
and any recommended changes to the COLA rates in the Federal 
Register for comment. A COLA is not subject to federal taxes 
and it does not count as part of base pay for retirement 
purposes.
---------------------------------------------------------------------------
    \1\ The term `non-foreign area' generally refers to the non-
contiguous U.S., including Alaska, Hawaii, territories, and 
possessions, and the Commonwealth of Puerto Rico and the Commonwealth 
of the Northern Mariana Islands.
---------------------------------------------------------------------------
    In 1990 Congress sought to close the pay gap between 
federal employees and workers in the private sector in 
metropolitan areas by providing locality pay to federal workers 
in the contiguous United States and the District of Columbia as 
authorized by the Federal Employees Pay Comparability Act 
(FEPCA).\2\ Unlike a COLA, locality pay is taxed and considered 
part of base pay, which is used to calculate an employee's 
retirement annuity. Another difference is while a COLA reflects 
the cost-of-living in a geographic area, locality pay reflects 
the cost of wages through a comparison of federal salaries to 
private sector salaries in specific geographic areas. A third 
difference is that U.S. Postal Service employees in the non-
contiguous areas are eligible to receive COLA, which the Postal 
Service calls Territorial COLA (T-COLA). However, postal 
employees in the contiguous United States do not receive 
locality pay.
---------------------------------------------------------------------------
    \2\ P.L. 101-509.
---------------------------------------------------------------------------
    Because locality pay counts towards employees' retirement 
whereas COLA does not, federal workers in the non-foreign 
areas, who do not receive locality pay, are disadvantaged in 
their retirement compared to federal workers in the contiguous 
states. S. 3013 would address this problem by phasing in 
locality pay and phasing out COLA.

                             II. Background


Non-Foreign COLA

    In the 1940s, military departments and federal agencies 
began paying differentials to U.S. citizens recruited for 
white-collar civilian positions in Alaska and areas outside the 
continental U.S. to help speed up the recruitment of personnel 
in those locations. In 1946, in response to widespread reports 
of a lack of uniformity in the payment of these differentials, 
President Harry S. Truman directed the Civil Service Commission 
(CSC) and the Bureau of the Budget to prepare a report on pay 
differentials outside the U.S. CSC prepared a draft report that 
recommended standardizing pay practices and establishing two 
types of adjustments: one based on relative living costs and a 
second based on undesirable living conditions. These 
recommendations became the basis for the current COLA and post 
differential programs.
    In 1948, President Truman issued an Executive Order that 
made federal employees in the non-foreign areas eligible to 
receive additional compensation in two separate programs: one 
based on living costs (i.e., the non-foreign area COLA program) 
and another based on conditions of environment (i.e., the post 
differential program).\3\ That same year, Congress enacted 
legislation that codified this pay differential for employees 
outside the continental U.S. or in Alaska.\4\
---------------------------------------------------------------------------
    \3\ E.O. 10,000, 13 Fed. Reg. 5453, 5455 (Sept. 18, 1948).
    \4\ Independent Officers Appropriation Act, 1949, ch. 219, sec. 207 
(1948) and Supplemental Independent Offices Appropriation Act, 1949, 
ch. 775, sec. 104 (1948). See also P.L. 89-554, 5 U.S.C. Sec. 5941.
---------------------------------------------------------------------------
    This legislation, codified as Section 5941 of title 5, 
United States Code, provides for the payment of an allowance 
based on differences in living costs or on differences in 
conditions of environment, or both. The total payment, however, 
may not exceed 25 percent of basic pay. COLAs are payments 
designed to recognize substantially higher living costs in the 
non-foreign areas relative to those in the Washington, DC area. 
The government pays COLAs to both local and non-local hires. 
Similar to other allowances,\5\ a COLA is not subject to 
federal taxes and does not count toward an employee's 
retirement.
---------------------------------------------------------------------------
    \5\ Most payments received by U.S. government civilian employees 
for working abroad, including pay differentials, are taxable. However, 
certain foreign area allowances, cost of living allowances, and travel 
allowances are tax free. See IRS guidance entitled ``Allowances, 
Differentials, and Other Special Pay,'' available at http://
www.irs.gov/businesses/small/international/article/0,,id=97187,00.html 
(accessed Aug. 14, 2008).
---------------------------------------------------------------------------
    Post differentials are recruitment incentives designed to 
encourage people from other areas to go to work for the federal 
government in a non-foreign area that has (a) extraordinarily 
difficult living conditions, (b) excessive physical hardships, 
or (c) notably unhealthful conditions compared with the 
continental U.S. Since a post differential is a recruitment 
incentive to get people to move to a non-foreign area, the 
government does not pay post differentials to people who are 
local hires. Like COLAs, post differentials do not count toward 
retirement but, unlike COLAs, they are subject to federal 
taxes.
    Post differentials are currently authorized for Guam, the 
Commonwealth of the Northern Mariana Islands (CNMI), American 
Samoa, and Johnston, Wake, and Midway Atolls. Non-local hired 
employees in Guam are eligible for a post differential of up to 
20 percent while those in CNMI and the other areas are eligible 
to receive a 25 percent differential. Guam and CNMI are the 
only areas that are authorized for both a post differential and 
COLA, which when combined cannot exceed 25 percent of base pay. 
Employees in Guam and CNMI currently receive the same 25 
percent COLA, but because of the cap do not receive a post 
differential.
    By law, a COLA is required to reflect the differences in 
the living costs between the COLA area and Washington, DC. Many 
factors other than price level differences affect the cost of 
living in a particular place. Employees have long argued that 
the COLA methodology is deficient and violates federal law by 
considering only price level differences and failing to 
consider differences in non-price factors such as remoteness, 
isolation, and quantity or quality of goods and services needed 
or available. As a result, the COLA program has been the 
subject of litigation since 1981.\6\
---------------------------------------------------------------------------
    \6\ See Alaniz v. OPM, No. A81-072 (D. Alaska); Karamatsu v. United 
States, No. 224-85C (C1. Ct.); and Arana v. United States, No. 389-86C 
(C1. Ct).
---------------------------------------------------------------------------
    In the early 1990s attorneys representing employees in the 
COLA litigation formulated a proposal to resolve all of the 
remaining controversies concerning the COLA program through 
what came to be known as the Safe Harbor Process. The name was 
chosen because, if an agreed methodology could be achieved, the 
government would receive a safe harbor against future 
litigation. In the interim, the plaintiffs filed four 
additional lawsuits that were stayed pending the conclusion of 
the Safe Harbor Process and court approval of a settlement 
agreement.\7\ On June 20, 2000, the parties involved filed a 
joint stipulation for settlement of the litigation with the 
District Court for the Virgin Islands, which was approved.
---------------------------------------------------------------------------
    \7\ Angelet v. United States, No. 97-1378RU (D.P.R.), Caraballo v. 
United States, No. 1997-0027 (D.V.I.), Cruz v. United States, No. 98-
00021 (D. Guam), and Matsuo v. United States, No. 97-01418 (D. Hawaii).
---------------------------------------------------------------------------
    The settlement agreement provided for employee involvement 
with OPM in implementing the Safe Harbor Principles and to 
ensure local employee input for the future. It also provided 
for expanded employee access to materials supporting the 
regular price surveys and it established parameters for the 
conduct of future surveys. The settlement made a number of 
technical improvements to the methodology used to determine 
COLA rates, which brought it into conformance with modern cost 
of living comparisons--such as the weighting of prices, sources 
of data, collection of prices, and the method of measuring 
housing costs. Under the settlement, OPM could not reduce COLA 
rates under the new methodology until the last survey of all 
three regions was finalized and any reductions to COLA rates 
thereafter could not exceed one point per year. In addition the 
settlement provided for an award of back pay and interest in 
the amount of $234 million.
    COLA rates in effect today are listed below:

------------------------------------------------------------------------
                       COLA area                            COLA rate
------------------------------------------------------------------------
Anchorage, AK..........................................             24%
Fairbanks, AK..........................................             24%
Juneau, AK.............................................             24%
Rest of Alaska.........................................             25%
City and County of Honolulu, HI........................             25%
Maui County, HI........................................             25%
Kauai County, HI.......................................             25%
Hawaii, County HI......................................             18%
Guam/Northern Mariana Islands..........................             25%
U.S. Virgin Islands....................................             23%
Puerto Rico............................................             13%
------------------------------------------------------------------------

    Due to an increase in the cost-of-living in Washington, DC, 
the differential between Washington, DC and the COLA areas has 
decreased. Therefore, OPM expects COLA rates to decrease by one 
percent in Guam and in all of the Hawaii COLA areas late in the 
summer of 2009. Anchorage, Fairbanks, and Juneau, Alaska are 
expected to fall by one percent as well in the fall of 2008.

Creation of Locality Pay

    Although the federal government's pay policy was supposed 
to set federal employee pay rates to be comparable with the 
private sector,\8\ it became increasingly evident in the late 
1980's that there was a large gap between federal salaries and 
the private sector across the country. These pay disparities 
seriously impeded the ability of federal agencies to recruit 
and retain highly-qualified employees. The Government 
Accountability Office (GAO) reported in 1990 that 78.3 percent 
of federal managers and personnel officers surveyed said that 
low pay was the reason employees left the federal government. 
The same GAO survey showed that 72.5 percent believed that job 
candidates declined job offers with the federal government 
because of the low pay offered.\9\
---------------------------------------------------------------------------
    \8\ 5 U.S.C. Sec. 5301.
    \9\ Recruitment and Retention: Inadequate Federal Pay Cited as 
Primary Problem by Agency Officials, (GAO/GGD-90-117) at 4, September 
1990.
---------------------------------------------------------------------------
    To address these disparities, Congress passed the Federal 
Employees Pay Comparability Act (FEPCA) of 1990. FEPCA requires 
the annual pay adjustment for General Schedule (GS) employees 
to be based on the Employment Cost Index (ECI), which measures 
change in private-sector wages and salaries. Under FEPCA, basic 
pay rates are to be increased.\10\
---------------------------------------------------------------------------
    \10\ In the event of a national emergency or serious economic 
conditions the President may issue an alternative pay plan. See 5 
U.S.C. Sec. Sec. 5301-5303 and 5304-5304a.
---------------------------------------------------------------------------
    Under FEPCA, federal employees also receive locality-based 
comparability payments. The locality pay procedure established 
by FEPCA provides that payments are to be made within each 
locality determined to have a nonfederal/federal pay disparity 
greater than five percent. When uniformly applied to GS 
employees within a locality, the adjustment is intended to make 
their pay rates substantially equal to those of non-federal 
workers in the same locality.
    All GS federal employees employed within the continental 
U.S. are entitled to receive locality pay.\11\ However, FEPCA 
specifically excludes federal employees in Hawaii and Alaska 
and the other non-foreign areas from receiving locality 
pay.\12\ The legislative history is silent as to why Congress 
chose to exclude Hawaii and Alaska employees from receiving 
locality pay.
---------------------------------------------------------------------------
    \11\ The President's Pay Agent has extended these payments to 
employees in other pay systems, including employees in senior level, 
scientific and professional positions, administrative law judges, 
administrative appeals judges, and contract appeals board members.
    \12\ 5 U.S.C. Sec. 5304(f)(1)(A) and 5 U.S.C. Sec. 5701(6).
---------------------------------------------------------------------------
    Not all employees received the full amount of the locality 
pay adjustment because of statutory maximum pay levels for GS 
level employees or because of other limitations in the law.\13\ 
In addition, GS special rate employees receive either the 
special rate supplement or the locality payment, whichever is 
higher. Law enforcement officers receiving special base rates 
receive both special base rates and locality pay.
---------------------------------------------------------------------------
    \13\ As of January 2008, basic pay cannot exceed $139,600 (EX Level 
V); basic pay and locality pay combined cannot exceed $149,000 (EX 
Level IV); and total compensation, including bonuses and allowances, 
cannot exceed $191,300 (EX Level I).
---------------------------------------------------------------------------
    Under the law, the Bureau of Labor Statistics (BLS) 
conducts surveys under the National Compensation Survey (NCS) 
program that document non-federal rates of pay in each locality 
pay area. In January 2009 there will be 32 pay areas 
nationwide.\14\ The BLS survey results are submitted to OPM, 
which serves as the staff to the Federal Salary Council \15\ 
and the President's Pay Agent.\16\ OPM documents federal rates 
of pay in each of the pay areas and compares non-federal and GS 
salaries by grade for each pay area. By law, the disparity 
between non-federal and federal salaries is to be reduced to 
five percent. The Federal Salary Council uses OPM's data to 
advise the President's Pay Agent on recommendations to the 
President on locality rates for each pay area.
---------------------------------------------------------------------------
    \14\ The Federal Salary Council recommended that the 32 locality 
pay areas recommended for 2008 continue in 2009. In not recommending 
any new pay areas, the council noted that, were new areas to be 
proposed, criteria for their establishment would have to be developed 
and the BLS would need additional funding. According to the council, 
BLS has indicated that, based on its current funding and resources, it 
cannot expand its current NCS program to increase samples in existing 
locality pay areas or to cover more areas. See Federal Salary Council 
Memorandum for January 2009, p. 6.
    \15\ The council consists of nine members: Terri Lacy, chair; 
George Nesterczuk, vice-chair; Rudy J. Maestas; and representatives of 
the American Federation of Government Employees; the National Treasury 
Employees Union; the National Federation of Federal Employees; the 
Association of Civilian Technicians; and the Fraternal Order of Police.
    \16\ The Pay Agent is comprised of the Secretary of Labor, the 
Director of the Office of Management and Budget, and the Director of 
OPM.
---------------------------------------------------------------------------
    FEPCA requires that a certain percentage of the adjusted 
gap between GS average salaries and non-federal average 
salaries in each pay area is to be closed each year. Twenty 
percent of the gap was closed in 1994, the first year of 
locality pay, as authorized by FEPCA. An additional 10 percent 
of the gap was supposed to be closed each year thereafter until 
January 2002, when pay rates should have been sufficient to 
reduce the pay disparity to five percent.
    However, FEPCA has never been implemented as originally 
enacted. The annual pay adjustment was not made in 1994 because 
the entire pay adjustment went to fund locality pay 
adjustments. During that year, federal employees in Alaska, 
Hawaii, and the other non-foreign areas did not receive a pay 
increase. For 1995 through 2008, reduced amounts of the 
locality payments were provided.\17\ As of 2008, only 58.3 
percent of the pay gap has been reduced. The amount needed to 
reduce this disparity to five percent averages 36.89 percent 
for 2009 and would cost approximately $12.1 billion.\18\
---------------------------------------------------------------------------
    \17\ The President usually includes a proposal on the federal 
civilian pay adjustment in the Budget of the United States issued in 
February of each year. The pay adjustment is considered annually by 
Congress, which may legislate an adjustment that is different from the 
one recommended by the President or that might be authorized by the 
President in an alternative plan. The January 1999, January 2000, and 
January 2002 through January 2006 overall pay adjustment amounts were 
set by Congress. P.L. 105-277, P.L. 106-58, P.L. 107-67, P.L. 108-7, 
P.L. 108-199, P.L. 108-447, and P.L. 109-115, respectively, provided 
the pay adjustments but reserved to the President the decision as to 
how the increases would be allocated between the annual and locality 
pay adjustments.
    \18\ Annual Report of the President's Pay Agent on Locality-Based 
Comparability Payments for the General Schedule, at 18 and 21, December 
6, 2007.
---------------------------------------------------------------------------

The problem and solution

    Because locality pay, but not a COLA, is included in 
calculating retirement contributions and annuities, the 
exclusion of Hawaii and Alaska federal employees and those in 
the other non-foreign areas from receiving locality pay under 
FEPCA means that these employees are not able to contribute as 
much or receive as much matching contributions from their 
employing agency to their retirement accounts under the Thrift 
Savings Plan as similarly situated employees in the contiguous 
U.S. Additionally, these non-foreign area employees' base pay 
for determining their highest three years (``high 3'') for 
calculating their retirement annuities is less than similarly 
situated contiguous U.S. employees who receive locality pay.
    Since FEPCA's enactment, the exclusion of Hawaii and Alaska 
federal employees and those in the non-foreign areas has 
influenced federal employees' decisions about whether to move 
to the contiguous U.S. to receive locality pay.\19\ As 
employees in the COLA areas near retirement, many consider and 
seek short term employment in the contiguous U.S. where their 
``high 3'' salaries are boosted by locality pay.\20\ As a 
result of this disparity, federal agencies in the non-foreign 
areas face staffing problems, especially for employees near 
retirement.
---------------------------------------------------------------------------
    \19\ Matsuo v. U.S., No. 05-00398 at 5 (D-Hawaii, Jan. 30, 2008).
    \20\ Non-Foreign COLA: Finding an Equitable Solution, Hearing 
before the Subcommittee on Oversight of Government Management, the 
Federal Workforce, and the District of Columbia of the Senate Committee 
on Homeland Security and Governmental Affairs, 110th Congress, May 29, 
2008, (Statement of Chuck Grimes, Office of Personnel Management) at 3-
4.
---------------------------------------------------------------------------
    On June 22, 2005, federal employees in Hawaii and Alaska 
filed a class action lawsuit against the federal government 
alleging that FEPCA's exclusion of federal employees who work 
and reside in Hawaii and Alaska violates the Equal Protection 
Clause of the Fifth Amendment to the U.S. Constitution. They 
also contend that federal employees have a property interest in 
their salary and that exclusion from locality pay violates 
their due process rights under the Fifth Amendment.\21\ The 
lawsuit seeks locality pay for federal employees who work in 
those jurisdictions dating back to the implementation of FEPCA.
---------------------------------------------------------------------------
    \21\ Supra note 19 at 2.
---------------------------------------------------------------------------
    On January 30, 2008, the U.S. District Court in Hawaii 
granted the government's motion to dismiss the case and urged 
Congress to rectify the situation. The Court said, ``Congress 
has a legitimate interest in creating and managing compensation 
packages for its employees to compensate employees adequately, 
to recruit and retain employees, and to allocate limited 
resources among employees. That Congress may have discharged 
its legislative responsibilities imperfectly does not give this 
Court fiat to rewrite the legislation to rectify the current 
disparity. It suggests strongly instead that Congress should 
correct the incongruity made so evident by this case.'' \22\ 
The plaintiffs filed an appeal of the decision on February 29, 
2008.
---------------------------------------------------------------------------
    \22\ Id. at 22.
---------------------------------------------------------------------------
    In an effort to address the retirement inequity of 
employees in the non-foreign areas and the issues raised by the 
litigation, President George W. Bush in his fiscal year 2008 
Budget proposed to extend locality pay to white-collar federal 
employees in the non-foreign areas. On May 30, 2007, OPM 
Director Linda Springer submitted the specific legislative 
proposal to Congress. Under the OPM proposal, COLA rates in 
effect on December 31, 2007, would be locked in place and OPM 
would no longer conduct COLA surveys. Beginning with the first 
pay period in January 2008, locality pay would begin to be 
phased in for federal employees in the non-foreign areas while 
the COLA program is phased out. This initial transition process 
would take seven years, with the locality rate for each area 
being phased in each year. In the first year, the locality pay 
rate for the ``Rest of the U.S.'' (i.e., the default rate that 
applies outside of the metropolitan areas where specific rates 
are established) would be applied to all areas in order to give 
BLS and OPM time to work with the Federal Salary Council and 
the President's Pay Agent to determine the locality pay rates 
for each non-foreign area. OPM has estimated that the locality 
pay rate for the State of Hawaii would be 20.38 percent, the 
rate for the State of Alaska would be 27.68 percent, and the 
rate for the other non-foreign areas would be the Rest of the 
U.S. locality pay rate, which is currently set at 13.18 
percent.\23\ An employee would continue to receive some amount 
of COLA until the locality pay rate is more than the locked-in 
COLA rate.
---------------------------------------------------------------------------
    \23\ Supra note 20 at 6. The estimated pay gap in Anchorage, AK is 
54.96 percent and in Honolulu, HI is 41.72 percent. Supra note 14 at 9.
---------------------------------------------------------------------------
    Under this OPM proposal, the Federal Salary Council would 
have the authority to set locality rates in all the non-foreign 
areas, including areas such as Guam, American Samoa, and Wake 
Atoll, that are currently authorized for post differentials. 
Right now, only Guam and CNMI are authorized for both a COLA 
and a post differential. Absent OPM making any regulatory 
change, once the reduction of a COLA begins under the proposed 
legislation, the post differential will start to increase. When 
the Guam and CNMI COLA drops to zero, the post differential 
paid to non-local hires would be 20 percent in Guam and 25 
percent in CNMI. OPM last reviewed the amount of and need for 
post differentials in 1995 and does not plan to review post 
differential rates at this time.\24\
---------------------------------------------------------------------------
    \24\ See Responses from OPM provided in 2007 to Senator Akaka's 
Frequently Asked Questions on the Administration's Proposal to Convert 
Non Foreign COLA to Locality Pay, available at: http://
akaka.senate.gov/public/index.cfm?FuseAction=Issues.Home&issue;=Non-
Foreign%20COLA%20Update&content;_id=33#Non-Foreign%20COLA%20Update 
(accessed August 14, 2008). See also information provided to Committee 
staff by OPM, June 16, 2008.
---------------------------------------------------------------------------
    To help address the adverse impact on a non-foreign 
employee's take home pay due to the increase in taxes and 
retirement contributions, OPM proposed that COLA be phased out 
at a slower rate than locality pay is phased in. Under this OPM 
proposal, the conversion to locality pay would be offset by a 
corresponding 85 percent reduction in COLA. Thus, for every 
dollar of locality pay that is phased in under the proposal, 
the employee's COLA would be reduced by 85 cents. After the 
initial seven-year phase in period, when 100 percent of 
locality pay would be provided, some fraction of the COLA rate 
could also continue to be paid until the locality pay rises 
high enough that subtraction of 85 percent would reduce the 
COLA payment to zero. According to OPM, this formula would 
protect the take home pay of federal workers at the GS-7 step 3 
level and below.\25\ Approximately 50 percent of the federal 
workers in Alaska and Hawaii are at or below this level.\26\ 
Postal employees, other than Postal Inspectors and employees of 
the Postal Service Inspector General, would continue to receive 
the locked-in COLA rates, because similarly situated postal 
employees in the contiguous U.S. do not receive locality pay.
---------------------------------------------------------------------------
    \25\ Information provided to Committee staff at a staff briefing by 
OPM, June 4, 2007.
    \26\ Information provided to Committee staff by OPM, April 1, 2008.
---------------------------------------------------------------------------
    During the week of July 1-7, 2007, the Oversight of 
Government Management Subcommittee of the Committee on Homeland 
Security and Governmental Affairs conducted fact finding 
meetings on the OPM proposal on the islands of Oahu and Maui in 
Hawaii. Subcommittee staff met with close to 1,000 federal 
employees in over 20 agencies. The questions and concerns 
raised by the federal workers can be broken down into several 
themes.
    First, employees were concerned about the impact on their 
take-home pay due to the conversion to locality pay. Given the 
current economic climate and the increasing gas prices, many 
federal workers stressed the importance of not reducing their 
take-home pay and believed that the 85 percent offset did not 
go far enough. The impact on take-home pay is one of the 
reasons that several employees have expressed an interest in 
retaining COLA and not converting to locality pay.
    Second, with an estimated 59.3 percent of federal workers 
in Hawaii and 62.1 percent in Alaska retirement eligible,\27\ 
many employees expressed concern over the seven year phase-in 
period, noting that they would have to work 10 additional years 
in order to take full advantage of locality pay. Several 
employees proposed an immediate conversion with no phase-in 
period or a two year phase in with the first year using the 
Rest of the U.S. locality rate.
---------------------------------------------------------------------------
    \27\ Information provided to Committee staff by OPM, May 1, 2008.
---------------------------------------------------------------------------
    Third, many employees raised concern over the scope of 
coverage. This included questions about which employees would 
be covered by the proposal, how the proposal would work in 
unique personnel systems such as the National Security 
Personnel System (NSPS) at the Department of Defense (DoD) and 
the system at the Postal Service, and how the proposal would 
treat employees receiving special rates, since federal 
employees in the non-foreign areas may receive both COLA and 
special rates, but employees in the contiguous U.S. receive the 
higher of special rates or locality pay.
    After considering the questions and concerns from employees 
and comments from federal agencies, Senators Daniel K. Akaka 
(D-HI), Ted Stevens (R-AK), Daniel K. Inouye (D-HI), and Lisa 
Murkowski (R-AK) introduced the Non-Foreign Area Retirement 
Equity Assurance Act of 2008, or the Non-Foreign AREA Act (S. 
3013), on May 13, 2008. The 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.
    S. 3013 is similar to OPM's proposal, in that it would lock 
in current COLA rates and phase in locality pay as COLA is 
phased out. However, S. 3013 differs from the OPM proposal in 
several important ways. The bill will phase in locality pay 
over a period of three years, compared to seven under the OPM 
proposal. Moreover, the bill will offset the locality pay by 
subtracting 65 percent of that pay from the COLA, which is a 
lower percentage than under the OPM proposal (85 percent). The 
65 percent offset is designed to better protect employees' 
take-home pay.
    In addition, S. 3013 establishes that employees who receive 
special rates and would not receive locality pay will not lose 
any pay, because the bill provides that their special rates 
will increase like locality pay during the conversion from COLA 
to locality pay. In addition, the bill includes a provision 
expressing the sense of Congress that an employee's take home 
pay should not decrease as a result of the bill. For those 
employees who continue to oppose the conversion to locality 
pay, S. 3013 would allow current employees to make an 
irrevocable choice to continue to receive the locked-in COLA 
rates and not covert to locality pay. All future employees 
would be converted to locality pay.
    In addition to having a shorter phase in period, S. 3013 
allows employees who retire within the three year phase in 
period to elect to treat any amount of COLA they receive during 
that period as part of their base pay (as if it were locality 
pay), up to the full amount of locality pay in place for that 
area notwithstanding the phase-in limitations. The employee 
would be required to pay additional retirement contributions on 
the additional amounts they elect to be part of their base pay.
    According to OPM, 62.1 percent of federal employees in 
Alaska and 59.3 percent of federal employees in Hawaii are 
eligible to retire within six years or less. In addition, it is 
well known that federal employees in the non-foreign areas seek 
out employment in the contiguous U.S. late in their careers to 
help improve their retirement annuity.\28\ OPM testified that 
agencies have succession plans and recruitment and retention 
strategies in place to address the impending retirement wave 
facing federal agencies across the country and the unique 
staffing problems facing federal agencies in the non-foreign 
areas.\29\ The Committee believes that a three year phase in 
with an opportunity for employees close to retirement to buy 
into the locality pay system would help those employees subject 
to mandatory retirement laws and those planning to retire in 
the next three years without adversely affecting the staffing 
of agencies in the non-foreign areas.
---------------------------------------------------------------------------
    \28\ Supra note 20.
    \29\ Id. Draft transcript, response from Mr. Grimes, at 34-36.
---------------------------------------------------------------------------
    The Federal Salary Council and the President's Pay Agent 
have recommended that the number of locality pay areas should 
remain at 32 for 2009, noting that, were new areas to be 
proposed, criteria for their establishment would need to be 
developed and BLS would need more funding to expand its current 
NCS program to cover more areas.\30\ However, the Committee 
believes that upon enactment of this Act, the number of 
locality pay areas should be increased by two--one covering the 
entire State of Alaska and one covering the entire State of 
Hawaii--because of the high cost of living in those areas, and 
S. 3013 states the sense of Congress that BLS should conduct 
surveys pursuant to the establishment of the two new locality 
pay areas.
---------------------------------------------------------------------------
    \30\ Supra note 14.
---------------------------------------------------------------------------
    S. 3013 also provides that all current and future employees 
in the non-foreign areas who are eligible to receive a COLA, 
whether or not they actually do receive it, are covered by this 
legislation and would therefore receive locality pay under the 
bill. This includes GS employees, administrative law judges, 
members of the Senior Executive Service, senior level and 
senior technical (SL/ST) employees, administratively determined 
employees, GS employees in the non-foreign areas that do not 
receive COLA, and employees in agencies with unique personnel 
systems such as the Transportation Security Administration, 
DoD, the Federal Aviation Administration, the Department of 
Veterans Affairs, and those agencies covered by the Financial 
Institution, Reform, Recovery and Enforcement Act.\31\ 
According to DoD it already has broad flexibility with regard 
to setting and changing pay rates for non-appropriated fund 
(NAF) employees. As such, should COLA be phased out and 
locality pay phased in, DoD would increase pay rates for those 
NAF employees who currently receive a COLA to offset the loss 
of that adjustment.\32\
---------------------------------------------------------------------------
    \31\ P.L. 101-73.
    \32\ Supra note 20. Draft transcript, response from Mr. Bunn, at 
29-30.
---------------------------------------------------------------------------
    Following OPM's submission of its proposal, many postal 
employees in the non-foreign areas expressed concern over how 
they would be treated, because postal employees in the 
contiguous U.S. generally do not receive locality pay. (Only 
employees of the Postal Service Inspector General and Postal 
Inspectors receive it.) Many postal employees outside of the 
contiguous U.S. expressed a desire to be treated like all other 
workers in the non-foreign areas, as they were concerned about 
ending up as the only group of employees receiving COLA. S. 
3013 as introduced would have allowed all postal employees to 
transition from T-COLA to Territorial Pay in the same manner 
that GS workers were converting from COLA to locality pay. (As 
noted earlier, ``T-COLA'' refers to Territorial COLA, which is 
the Postal Service's term for COLA, and ``Territorial Pay'' is 
similar to locality pay.) The Postal Service, while agreeing 
that the proposal in the OPM draft legislation was not a long 
term solution, expressed opposition to the provisions in S. 
3013 over the cost, estimated to be $12.5 million per year, and 
the precedent it would set for other postal workers.\33\ To 
address this concern, S. 3013 was amended to allow Postal 
Inspectors and employees of the Postal Service Inspector 
General in the non-foreign areas to transition to locality pay 
like other federal employees in the non-foreign areas. Other 
postal employees in the non-foreign areas, both current and 
future employees, would continue to receive T-COLA; however, 
the 25 percent cap would be lifted and employees would receive 
the greater of the locked in T-COLA rate in effect for the area 
or an amount equal to the locality pay rate in effect for the 
area. Consistent with current law, the T-COLA rates would not 
be subject to collective bargaining
---------------------------------------------------------------------------
    \33\ Letter to Senator Akaka from Marie Therese Dominguez, Vice 
President, Government Relations and Public Policy, May 16, 2008.
---------------------------------------------------------------------------

                        III. Legislative History

    S. 3013 was introduced by Senators Akaka, Stevens, Inouye, 
and Murkowski on May 13, 2008, and was referred to the 
Committee on Homeland Security and Governmental Affairs. The 
bill was referred to the Subcommittee on Oversight of 
Government Management, the Federal Workforce, and the District 
of Columbia (OGM) on June 19, 2008.
    On May 29, 2008, the OGM Subcommittee held a field hearing 
on the legislation and the Administration's proposal at the 
Oahu Veterans Center in Honolulu, Hawaii. Witnesses included 
Mr. Chuck D. Grimes, Deputy Associate Director, Strategic Human 
Resources Policy Division, OPM; Mr. Bradley Bunn, Program 
Executive Officer, NSPS, DoD; Ms. Jo Ann Mitchell, Manager, 
Accounting Services, United States Postal Service; Ms. Joyce 
Matsuo, President, Oahu COLA Defense Committee, Inc.; Ms. 
Sharon Warren, President, COLA Defense Committee of Anchorage, 
Inc.; Mr. Manuel Q. Cruz, President, COLA Defense Committee of 
Guam; Mr. Michael Fitzgerald, President, Chapter 187, Naval 
Facilities Engineering Command Hawaii, Federal Managers 
Association; and Ms. Terry Kaolulo, President, Hawaii State 
Association of Letter Carriers.
    On June 24, 2008, OGM favorably polled out S. 3013 and on 
June 25, 2008, the Committee considered S. 3013. Senators Akaka 
and Stevens offered an amendment that made technical 
corrections to the bill. Senator Thomas R. Carper offered an 
amendment to change the treatment of most postal employees 
under the legislation. Under the amendment, all current and 
future postal employees in Alaska, Hawaii, and the non-foreign 
areas would continue to receive T-COLA, but the way T-COLA is 
calculated would change. Specifically, postal employees would 
receive the greater of the T-COLA rates in effect on December 
31, 2008, or the locality pay rate in effect for that area. No 
employee would receive less than their current T-COLA rate, and 
the 25 percent cap on T-COLA would be removed. Employees of the 
Postal Service Inspector General and Postal Inspectors would 
transition from T-COLA to locality pay. Senator Akaka offered a 
second degree amendment making a technical correction to the 
Carper amendment. All three amendments were accepted and the 
bill, as amended, was ordered reported favorably by voice vote. 
Members present were Senators Lieberman, Akaka, Carper, Pryor, 
McCaskill, Tester, Collins, Stevens, Coleman, Coburn, and 
Sununu.

                    IV. Section-by-Section Analysis

    Section 1 states that the legislation may be cited as the 
``Non-Foreign Area Retirement Equity Assurance Act of 2008'' or 
the ``Non-Foreign AREA Act of 2008.''
    Section 2(a) amends section 5304 of title 5 by including 
the non-foreign areas in the list of areas where locality pay 
is paid to federal employees and clarifying that members of the 
Senior Executive Service in the non-foreign areas are eligible 
to receive locality pay regardless of whether their agencies 
are participating in an OPM-certified performance appraisal 
system under section 5382 of title 5.
    Section 2(b) amends section 5941 of title 5 to retain a 
COLA that is phased out as locality pay is phased in. Paragraph 
(1) adds a provision freezing the COLA rates that are in effect 
on December 31, 2008. Paragraphs (2) and (3) add further 
provisions adjusting these frozen COLA rates downward as 
locality pay is phased in pursuant to section 4 of the bill. 
This downward adjustment is governed by a formula in the 
legislation under which, for every dollar of locality pay that 
the employee receives, the employee will give up only 65 cents 
of the COLA that the employee would receive under the end-of-
2008 COLA rate, thereby helping to mitigate the additional cost 
burdens to employees due to the fact that locality pay is 
subject to federal income taxes and retirement contributions. 
(To achieve this result, the formula in the legislation will 
calculate the employee's COLA in four steps: (1) start with the 
COLA rate frozen as of the end of 2008, (2) subtract 65 percent 
of the applicable locality pay rate, (3) divide the resulting 
percentage by the sum of 1 plus the applicable locality pay 
rate, and (4) multiply this resulting percentage times the 
employee's basic pay, which is comprised of both base salary 
and the applicable locality-based payment.)
    Section 3 states that employees in the non-foreign areas 
who receive special rates shall not receive locality pay, but 
shall have their special rates increased by the same amount as 
locality pay increases for other federal employees in the non-
foreign areas who do not receive special rates. The increases 
for special rates would continue until the employees' COLA 
rates have been completely phased out. The Director of OPM, who 
regulates special rates generally, and the Secretary of 
Veterans Affairs, who regulates special rates for the 
Department of Veterans Affairs, may temporarily raise statutory 
limitations on special rates until the end of the transition 
period, at which time any special rate pay in excess of the cap 
shall be converted to a retained rate under section 5363 of 
title 5.
    Section 4 states that non-foreign COLA shall be phased out 
and that locality pay shall be phased in over a period of three 
years starting the first pay period beginning on or after 
January 1, 2009. During the first year, 2009, the amount of 
locality pay phased in shall be based on using one-third of the 
locality pay percentage for the rest of the U.S. locality pay 
area. The second year, 2010, the phased-in amount shall be 
based on using two-thirds of the applicable comparability 
payment approved by the President for each non-foreign area. 
The third year, 2011, and each subsequent year shall be based 
on the full amount of the applicable comparability payment for 
each non-foreign area.
    Section 5(a) expresses the sense of Congress that the 
application of the Non-Foreign AREA Act to any employee not 
result in a decrease in the take home pay of that employee.
    Section 5(b) states that it is the sense of Congress that 
the Bureau of Labor Statistics will conduct separate surveys 
pursuant to the establishment by the President's Pay Agent of 
one new locality area for the entire State of Hawaii and one 
new locality area for the entire State of Alaska, and that upon 
completion of the phase-in period no employee shall receive 
less than the rest of the U.S. locality pay rate.
    Section 5(c) states that employees who currently receive a 
special rate and continue to remain stationed in a non-foreign 
area shall receive an increase in the special rate consistent 
with increases in the special rate schedule. The minimum step 
rate for any grade of a special rate shall be increased at the 
time of an increase in the applicable locality rate percentage 
for the area by not less than the dollar increase in the 
locality payment for a non-special rate employee. In addition, 
this section states that if an employee currently receives a 
COLA and would receive a rate of basic pay and locality pay 
that would be in excess of the maximum rate limitation set 
under 5304(g) of title 5, United States Code, the employee 
would continue to receive the COLA rate in effect for the area 
until the employee leaves the allowance area or is eligible to 
receive a basic pay at a higher rate.
    Section 6(a) defines who is an employee covered by this 
Act. Covered employees include any current and future employee 
eligible to receive a COLA, whether or not they actually 
received it. This includes employees at the Transportation 
Security Administration, intelligence community employees, and 
postal employees. In addition, employees who receive locality 
pay as a result of the application of this Act shall not be 
eligible to bargain over the amount of locality pay they 
receive under this Act and shall not have any amount of 
locality pay provided under this Act reduced on the basis of 
the performance of that employee.
    Section 6(b) states that the provisions of this Act 
(converting T-COLA to locality pay) will apply to Postal 
Inspectors and employees of the Postal Service Inspector 
General, but will not apply to other postal employees such as 
mail handlers, letter carriers, and postal supervisors. Those 
postal employees in the non-foreign areas will continue to 
receive T-COLA. However, the method for calculating the T-COLA 
rate will change and the cap on the amount of T-COLA an 
employee may receive will be lifted. Under the Act, current and 
future postal employees will receive a T-COLA rate that is the 
greater of the frozen T-COLA rate on December 31, 2008, or the 
applicable locality pay percentage for the area.
    Section 7 states that employees who retire from federal 
service between January 1, 2009, and December 31, 2011, and who 
file an election with OPM by December 31, 2011, may count a 
certain amount of COLA they receive during that time period 
before they retire as if it is locality pay for purposes of 
computation of their retirement annuity. The limit on the 
amount of 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 section 4 of this Act.
    Section 8 states that current employees may make an 
irrevocable election no later than 60 days after the enactment 
of this Act to continue to receive COLA at the rate in effect 
on December 31, 2008, or phase into locality pay as provided 
under this Act. All future employees will be covered by the 
provisions of this Act and will not be able to opt out. To the 
greatest extent practicable, OPM shall provide timely notice of 
the election which may be filed under this section.
    Section 9 states that the Director of OPM shall prescribe 
regulations to carry out this Act, including rules for special 
rate employees, employees who are not entitled to receive 
locality pay, and for setting and adjusting retained rates. In 
addition, the administrator of a pay system not administered by 
OPM shall prescribe regulations with the concurrence of the 
Director of OPM that is consistent with OPM's regulations 
issued under this Act.
    Section 10 states the effective dates of this Act as the 
date of enactment, except as provided in sections 2 and 4 of 
the Act, which shall take effect on the first day of the first 
applicable pay period beginning on or after January 1, 2009.

                    V. Estimated Cost of Legislation

                                     U.S. Congress,
                               Congressional Budget Office,
                                     Washington, DC, July 29, 2008.
Hon. Joseph I. Lieberman,
Chairman, Committee on Homeland Security and Governmental Affairs, U.S. 
        Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for S. 3013, the Non-
Foreign AREA Act of 2008.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Amber 
Marcellino.
            Sincerely,
                                         Robert A. Sunshine
                                   (For Peter R. Orszag, Director).
    Enclosure.

S. 3013--Non-Foreign AREA Act of 2008

    Summary: S. 3013 would phase in the use of locality-based 
comparability payments (``locality pay'') to replace cost-of-
living allowances (COLAs) for federal employees in certain 
areas of the United States (Alaska, Hawaii, and the U.S. 
Territories).
    The bill would affect the amount of pay received by certain 
federal employees and the amount of future retirement benefits 
those employees receive. By increasing some salaries, S. 3013 
would result in additional agency payments for employees' 
retirement benefits and payroll taxes. In total, CBO estimates 
that discretionary spending would increase by $2.2 billion 
through 2018, assuming appropriation of the necessary amounts. 
The legislation also would increase the amount of pay included 
in the calculation of retirement and Social Security benefits, 
thereby increasing direct spending by an estimated $302 million 
over the 2009-2018 period. Furthermore, including additional 
pay in the calculation of retirement benefits would increase 
revenues--from higher employee contributions towards those 
benefits and from additional tax receipts--totaling an 
estimated $1 billion over the 2009-2018 period.
    S. 3013 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act (UMRA) 
and would impose no cost on state, local, or tribal 
governments.
    Estimated cost to the Federal Government: The estimated 
budgetary impact of S. 3013 is shown in the following table. 
The direct spending impacts of the bill fall within budget 
functions 600 (income security) and 650 (Social Security); the 
discretionary costs fall within many other budget functions.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                               By fiscal year, in millions of dollars--
                                             -----------------------------------------------------------------------------------------------------------
                                                                                                                                         2009-    2009-
                                                2009     2010     2011     2012     2013     2014     2015     2016     2017     2018     2013     2018
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                CHANGES IN SPENDING SUBJECT TO APPROPRIATION (On-Budget)

Salary Payments and Other Discretionary
 Spending:
    Estimated Authorization Level...........       35      117      181      175      170      167      164      163      163      163      677    1,498
    Estimated Outlays.......................       35      117      181      175      170      167      164      163      163      163      677    1,498
Employer Contributions\1\:
    Estimated Authorization Level...........       17       51       78       78       80       82       84       88       90       93      304      741
    Estimated Outlays.......................       17       51       78       78       80       82       84       88       90       93      304      741
Total Changes in Spending Subject to
 Appropriation:
    Estimated Authorization Level...........       52      168      259      253      250      249      250      251      253      256      981    2,239
    Estimated Outlays.......................       52      168      259      253      250      249      250      251      253      256      981    2,239

                                                          CHANGES IN DIRECT SPENDING (OUTLAYS)

Total Changes in Direct Spending............        2        7       13       21       28       35       42       47       52       56       71      302
    On-Budget Spending......................        2        7       12       21       28       34       41       46       50       54       70      295
    Off-Budget Spending.....................        0        0        *        *        *        1        1        1        2        2        *        7
                                                                   CHANGES IN REVENUES

Total Changes in Revenues...................       24       70      106      105      109      112      116      119      123      127      415    1,011
    On-Budget Revenues......................       19       54       82       81       84       86       89       91       94       97      321      778
    Off-Budget Revenues.....................        5       16       24       24       25       26       27       28       29       30       94      233
Memorandum:
Total Intragovernmental Collections from          -17      -51      -78      -78      -80      -82      -84      -88      -90      -93     -304     -741
 Employer Contributions \1\.................
    On-Budget...............................      -12      -35      -54      -54      -55      -56      -57      -60      -61      -63     -210     -508
    Off-Budget..............................       -5      -16      -24      -24      -25      -26      -27      -28      -29      -30      -94    -233
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes: Components may not sum to totals because of rounding.
* = costs of less than $500,000 annually.
\1\ Employer contributions are intragovernmental transactions that do not affect the deficit or surplus.
Sources: Congressional Budget Office and Joint Committee on Taxation.

    Basis of estimate: For this estimate, CBO assumes that S. 
3013 will be enacted near the beginning of fiscal year 2009 and 
that the necessary amounts will be appropriated for each year. 
The bill would affect approximately 46,000 federal employees 
working in Alaska, Hawaii, Puerto Rico, the U.S. Virgin 
Islands, Guam, and the Northern Mariana Islands.
    Currently, federal employees in those areas receive a COLA 
to offset higher costs of living in those areas. (In contrast, 
federal employees in the contiguous 48 states receive locality 
pay under the General Schedule to narrow the pay gap between 
comparable federal and non-federal positions.) S. 3013 would 
phase in the use of locality pay for employees in the specified 
areas over three years and would phase out the COLA, in most 
cases, over a longer period of time. Such changes would affect 
the federal budget because, while the COLA is not subject to 
federal income or payroll taxes and is not used to calculate 
federal retirement benefits, locality pay is both taxable and 
creditable for retirement benefits.

Spending subject to appropriation

    S. 3013 would increase discretionary spending by $2.2 
billion over the 2009-2018 period, assuming the appropriation 
of necessary amounts, primarily for increased salary payments 
and agencies' payments for retirement benefits and payroll 
taxes.
    Salary payments and other spending. Raising salaries for 
federal employees in the designated jurisdictions would result 
in $1.5 billion in additional discretionary spending over the 
2009-2018 period, CBO estimates.
    The conversion to locality pay for approximately 38,000 
eligible federal employees would increase salaries by $1.5 
billion over the next 10 years. For those employees, a 
provision in S. 3013 provides for a phase-out of COLAs over 
time, intended to preserve the take-home salaries of those 
employees as their non-taxable COLA pay is replaced with 
taxable locality pay. As a result, salaries would increase to 
maintain the take-home pay of affected employees.
    A small amount of savings--$2 million over 10 years--would 
result from discontinuing the surveys currently used by OPM to 
calculate the COLA adjustments for non-foreign areas.
    Employer contributions. Similar to the rise in employees' 
contributions due to the transition to locality pay (which is 
creditable towards retirement), federal agencies' costs for 
payroll taxes and retirement contributions also would increase. 
Assuming appropriation of the necessary amounts, CBO estimates 
that spending for those contributions would increase by $741 
million through 2018. Those payments are intragovernmental 
transactions that are recorded as offsetting receipts elsewhere 
in the budget.

Direct spending

    Increased retirement benefits (a product of increases in 
salaries) would accrue to approximately 13,000 federal 
employees anticipated to retire between 2009 and 2018. As a 
result, CBO estimates that direct spending would increase by a 
total of $302 million over 10 years--$295 million for 
additional retirement benefits and $7 million for higher Social 
Security benefits.
    Under S. 3013, an estimated 8,000 employees of the U.S. 
Postal Service (USPS) would not convert to locality pay and 
would continue to receive COLAs, but a provision of the bill 
would adjust the COLA calculation. If enacted, future 
calculations of COLAs for those employees would equal the 
greater of either the COLA in effect on December 31, 2008, or 
the locality pay applicable to other federal employees (that 
is, those who converted to locality pay under this bill) for 
that year and jurisdiction. CBO estimates that the provision 
could result in an increase in direct spending of about $50 
million (off-budget) over the 2009-2018 period. However, CBO 
assumes that any increase would be offset by additional 
receipts from postage rates charged by the USPS over the same 
period, and would have no net effect on the budget.

Revenues

    S. 3013 would increase the portion of salary on which 
employees must pay taxes and would increase the amount of pay 
used to calculate employees' contributions for federal 
retirement benefits. Accordingly, the legislation would 
increase revenues by a total of $1 billion over the next 10 
years from additional income and payroll tax collections and 
from additional retirement contributions from employees, CBO 
and the Joint Committee on Taxation estimate. That total 
revenue change represents both on- and off-budget activity. 
Additional on-budget revenues would total $778 million, 
including $739 million from Medicare payroll taxes and income 
tax collections and $39 million from higher contributions from 
employees toward retirement benefits. The increase in off-
budget revenues would total $233 million from additional Social 
Security tax receipts.
    Intergovernmental and private-sector impact: S. 3013 
contains no intergovernmental or private-sector mandates as 
defined in UMRA and would impose no cost on state, local, or 
tribal governments.
    Estimate prepared by: Federal costs: Amber G. Marcellino 
(retirement), Sheila M. Dacey (Social Security); Impact on 
federal revenues: Zach Epstein; Impact on state, local, and 
tribal governments: Elizabeth Cove; Impact on the private 
sector: Paige Piper/Bach.
    Estimate approved by: Theresa Gullo, Deputy Assistant 
Director for Budget Analysis.

                  VI. Evaluation of Regulatory Impact

    Pursuant to the requirements of paragraph 11(b) of rule 
XXVI of the Standing Rules of the Senate, the Committee has 
considered the regulatory impact of this bill. CBO states that 
there are no intergovernmental or private-sector mandates as 
defined in the Unfunded Mandates Reform Act and no costs on 
state, local, or tribal governments. The legislation contains 
no other regulatory impact.

                      VII. Changes in Existing Law

    In compliance with paragraph 12 of rule XXVI of the 
Standing Rules of the Senate, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic and existing law, in which no 
change is proposed, is shown in roman):

   TITLE 5, UNITED STATES CODE: GOVERNMENT ORGANIZATION AND EMPLOYEES

                          PART III--EMPLOYEES


                   CHAPTER 53--PAY RATES AND SYSTEMS


                 Subchapter I--Pay Comparability System


SEC. 5304. LOCALITY-BASED COMPARABILITY PAYMENTS.

           *       *       *       *       *       *       *


    (f) (1) The pay agent may provide for such pay localities 
as the pay agent considers appropriate, except that--
          [(A) each General Schedule position (excluding any 
        outside the continental United States, as defined in 
        section 5701(6) shall be included with a pay locality;]
          (A) each General Schedule position in the United 
        States, as defined under section 5921(4), and its 
        territories and possessions, including the Commonwealth 
        of Puerto Rico and the Commonwealth of the Northern 
        Mariana Islands, shall be included within a pay 
        locality; and
          (B) the boundaries of pay localities shall be 
        determined based on appropriate factors which may 
        include local labor market patterns, commuting 
        patterns, and practices of other employers.
    (2) (A) The establishment or modification of any such 
boundaries shall be effected by regulations which, 
notwithstanding subsection (a)(2) of section 553, shall be 
promulgated in accordance with the notice and comment 
requirements of such section.
          (B) Judicial review of any regulation under this 
        subsection shall be limited to whether or not it was 
        promulgated in accordance with the requirements 
        referred to in subparagraph (A).
    (g)(1) Except as provided in paragraph (2), comparability 
payments may not be paid at a rate which, when added to the 
rate of basic pay otherwise payable to the employee involved, 
would cause the total to exceed the rate of basic pay payable 
for level IV of the Executive Schedule.
    (2) The applicable maximum under this subsection shall be 
level III of the Executive Schedule for--
          (A) positions under subparagraphs (A)-(C) of 
        subsection (h)(1); [and]
          (B) positions under subsection (h)(1)(D) not covered 
        by appraisal systems certified under section 5382; and
          [B](C) any positions [under subsection (h)(1)(D)] 
        under subsection (h)(1)(E) which the President may 
        determine.
    (3) The applicable maximum under this subsection shall be 
level II of the Executive Schedule for positions under 
subsection (h)(1)(D) covered by appraisal systems certified 
under section 5307(d).
    (h)(1) For the purpose of this subsection, the term 
``position'' means--
          (A) a position to which section 5376 applies 
        (relating to certain senior-level positions);
          (B) a position to which section 5372 applies 
        (relating to administrative law judges appointed under 
        section 3105);
          (C) a position to which section 5372a applies 
        (relating to contract appeals board members); [and]
          (D) a Senior Executive Service position under section 
        3132 stationed within the United States, but outside 
        the 48 contiguous States and the District of Columbia 
        in which the incumbent the day before the date of 
        enactment of the Non-Foreign Area Retirement Equity 
        Assurance Act of 2008 was eligible to receive a cost-
        of-living allowance under section 5941; and 
          [(D)] (E) a position within an Executive agency not 
        covered under the General Schedule or any of the 
        preceding subparagraphs, the rate of basic pay for 
        which is (or, but for this section, would be) no more 
        than the rate payable for level IV of the Executive 
        Schedule; but does not include--
                  (i) a position to which subchapter IV applies 
                (relating to prevailing rate systems);
                  (ii) a position as to which a rate of pay is 
                authorized under section 5377 (relating to 
                critical positions);
                  (iii) a position to which subchapter II 
                applies (relating to the Executive Schedule) 
                stationed in the 48 contiguous States and the 
                District of Columbia, or stationed within the 
                United States, but outside the 48 contiguous 
                States and the District of Columbia, in which 
                the incumbent the day before the date of 
                enactment of the Non-Foreign Area Retirement 
                Equity Assurance Act of 2008 was not eligible 
                to receive a cost-of-living allowance under 
                section 5941; and;
                  (iv) a Senior Executive Service position 
                under section 3132;
                  (v) a position in the Federal Bureau of 
                Investigation and Drug Enforcement 
                Administration Senior Executive Service under 
                section 3151; or
                  (vi) a position in a system equivalent to the 
                system in clause (iv), as determined by the 
                President's Pay Agent designated under 
                subsection (d).
    (2)(A) Notwithstanding subsection (c)(4) or any other 
provision of this section, but subject to subparagraph (B) and 
paragraph (3), upon the request of the head of an Executive 
agency with respect to 1 or more categories of positions, the 
President may provide that each employee of such agency who 
holds a position within such category, and within the 
particular locality involved, shall be entitled to receive 
comparability payments.
    (B) A request by an agency head or exercise of authority by 
the President under subparagraph (A) shall cover--
          (i) with respect to the positions under subparagraphs 
        (A) through (C) of paragraph (1), all positions 
        described in the subparagraph or subparagraphs involved 
        (excluding any under clause (i), (ii), (iii), (iv), 
        (v), or (vi) of such paragraph); and
          (ii) with respect to positions under paragraph 
        (1)(D), such positions as may be considered appropriate 
        (excluding any under clause (i), (ii), (iii), (iv), 
        (v), or (vi) of paragraph (1)).
      (C) Notwithstanding subsection (c)(4) or any other 
provision of law, but subject to paragraph (3), in the case of 
a category with positions that are in more than 1 Executive 
agency, the President may, on his own initiative, provide that 
each employee who holds a position within such category, and in 
the locality involved, shall be entitled to receive 
comparability payments. No later than 30 days before an 
employee receives comparability payments under this 
subparagraph, the President or the President's designee shall 
submit a detailed report to the Congress justifying the reasons 
for the extension, including consideration of recruitment and 
retention rates and the expense of extending locality pay.
    (3) Comparability payments under this subsection--
          (A) may be paid only in any calendar year in which 
        comparability payments under the preceding provisions 
        of this section are payable with respect to General 
        Schedule positions within the same locality;
          (B) shall take effect, within the locality involved, 
        on the first day of the first applicable pay period 
        commencing on or after such date as the President 
        designates (except that no date may be designated which 
        would require any retroactive payments), and shall 
        remain in effect through the last day of the last 
        applicable pay period commencing during that calendar 
        year;
          (C) shall be computed using the same percentage as is 
        applicable, for the calendar year involved, with 
        respect to General Schedule positions within the same 
        locality; and
          (D) shall be subject to the applicable limitation 
        under subsection (g).

                         CHAPTER 59--ALLOWANCES


                Subchapter IV--Miscellaneous Allowances


SEC. 5941. ALLOWANCES BASED ON LIVING COSTS AND CONDITIONS OF 
                    ENVIRONMENT; EMPLOYEES STATIONED OUTSIDE 
                    CONTINENTAL UNITED STATES OR ALASKA

    (a) Appropriations or funds available to an Executive 
agency, except a Government controlled corporation, for pay of 
employees stationed outside the continental United States or in 
Alaska whose rates of basic pay are fixed by statute, are 
available for allowances to these employees. The allowance is 
based on--
          (1) living costs substantially higher than in the 
        District of Columbia;
          (2) conditions of environment which differ 
        substantially from conditions of environment in the 
        continental United States and warrant an allowance as a 
        recruitment incentive; or
          (3) both of these factors.
The allowance may not exceed 25 percent of the rate of basic 
pay. Except as otherwise specifically authorized by statute, 
the allowance is paid only in accordance with regulations 
prescribed by the President establishing the rates and defining 
the area, groups of positions, and classes of employees to 
which each rate applies. Notwithstanding any preceding 
provision of this subsection, the cost-of-living allowance rate 
based on paragraph (1) of this subsection shall be the cost-of-
living allowance rate in effect on December 31, 2008, except as 
adjusted under subsection (c). 
    (b) This section shall apply only to areas that are 
designated as cost-of-living allowance areas as in effect on 
December 31, 2008.
    (c)(1) The cost-of-living allowance rate payable under this 
section shall be adjusted on the first day of the first 
applicable pay period beginning on or after--
          (A) January 1, 2009; and
          (B) on January 1 of each calendar year in which a 
        locality-based comparability adjustment takes effect 
        under section 4 (2) and (3) of the Non-Foreign Area 
        Retirement Equity Assurance Act of 2008.
    (2)(A) In this paragraph, the term ``applicable locality-
based comparability pay percentage'' means, with respect to 
calendar year 2009 and each calendar year thereafter, the 
applicable percentage under section 4 (1), (2), or (3) of Non-
Foreign Area Retirement Equity Assurance Act of 2008.
    (B) Each adjusted cost-of-living allowance rate under 
paragraph (1) shall be computed by--
          (i) subtracting 65 percent of the applicable 
        locality-based comparability pay percentage from the 
        cost-of-living allowance percentage rate in effect on 
        December 31, 2008; and
          (ii) dividing the resulting percentage determined 
        under clause (i) by the sum of--
                  (I) one; and
                  (II) the applicable locality-based 
                comparability payment percentage expressed as a 
                numeral.
    (3) No allowance rate computed under paragraph (2) may be 
less than zero.
    (4) Each allowance rate computed under paragraph (2) shall 
be paid as a percentage of basic pay (including any applicable 
locality-based comparability payment under section 5304 or 
similar provision of law and any applicable special rate of pay 
under section 5305 or similar provision of law).
    [(b)] (d) An employee entitled to a cost-of-living 
allowance under section 5924 of this title may not be paid an 
allowance under subsection (a) of this section based on living 
costs substantially higher than in the District of Columbia.

              TITLE 39, UNITED STATES CODE: POSTAL SERVICE

                          PART III--PERSONNEL


            CHAPTER 10--EMPLOYMENT WITHIN THE POSTAL SERVICE


                 Subchapter I--Pay Comparability System


SEC. 1005. APPLICABILITY OF LAWS RELATING TO FEDERAL EMPLOYEES.

           *       *       *       *       *       *       *


    (b)(1) [Section 5941] Except as provided under paragraph 
(2), section 5941 of title 5 shall apply to the Postal Service. 
[For purposes of such section,] Except as provided under 
paragraph (2), for purposes of section 5941 of that title, the 
pay of officers and employees of the Postal Service shall be 
considered to be fixed by statute, and the basic pay of an 
employee shall be the pay (but not any allowance or benefit) of 
that officer or employee established in accordance with the 
provisions of this title.
    (2) On and after the date of enactment of the Non-Foreign 
Area Retirement Equity Assurance Act of 2008--
          (A) the provisions of that Act and section 5941 of 
        title 5 shall apply to officers and employees covered 
        by section 1003(b) and (c) whose duty station is in a 
        nonforeign area; and
          (B) with respect to officers and employees of the 
        Postal Service (other than those officers and employees 
        described under subparagraph (A)) section 6(b)(2) of 
        that Act shall apply.