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2. Locality Pay and COLA. Retirement benefits of white-collar civilian Federal employees in non-foreign areas are lower than their counterparts' benefits in the continental United States because locality pay does not apply outside the mainlandCOLA is not subject to Federal income tax and does not c

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    1. 1 Report Tile

    2. 2 Locality Pay and COLA Retirement benefits of white-collar civilian Federal employees in non-foreign areas are lower than their counterparts’ benefits in the continental United States because locality pay does not apply outside the mainland COLA is not subject to Federal income tax and does not count for retirement COLA compares living costs between Washington, DC, and each COLA area, not to exceed 25 percent COLA can go up or down. OPM had announced that COLA in Hawaii would go down later this year

    3. 3 Legislative History Senator Akaka introduced as S. 3013 in 2008 with Senators Inouye, Stevens, and Murkowski. Passed the Senate but Congress adjourned before House acted Senator Akaka introduced as S. 507 in 2009 with Senators Inouye, Murkowski, and Begich Non-Foreign AREA Act included in the National Defense Authorization Act for fiscal year 2010 (P.L. 111-84)

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    5. 5 Frozen COLA Rates as of October 28, 2009 Anchorage, Fairbanks, Juneau 23% Rest of Alaska 25% Hawaii County 18% City and County of Honolulu, Kauai County, Maui County 25% Guam and Commonwealth of The Northern Marianas 25% Puerto Rico 14% US Virgin Islands 25%

    6. 6 Coverage All General Schedule employees Members of the Senior Executive Service, senior level and senior technical employees, administrative law judges, and employees receiving special rates Administratively-determined pay employees Employees in agencies with unique personnel systems such as DoD, TSA, FAA, and the Department of Veterans Affairs Most postal employees will not receive locality pay because their counterparts do not receive locality pay on the mainland However, 25 percent cap on T-COLA is removed, and T-COLA rate will be greater of frozen T-COLA rate or amount of locality pay rate in effect for the area

    7. 7 Phases in Locality Pay Over Three Years In 2010, all non-foreign area locality rates will be set at 4.62%, 1/3 of the Rest of US (RUS) locality pay area (now 13.86%) In 2011, the locality pay rates will be set at 2/3 of the applicable rate for their areas as determined by the Federal Salary Council and President’s Pay Agent In 2012, locality pay rates will be set at the full applicable rate Alaska and Hawaii likely will be separate locality pay areas Remaining nonforeign areas (Guam, Commonwealth of the Northern Mariana Islands, US Virgin Islands, Puerto Rico, and American Samoa) likely will be part of the RUS locality pay area

    8. 8 Protects Employee Take-Home Pay COLA is not subject to Federal taxes, including Social Security and Medicare, or retirement contributions – locality pay is To protect take home pay, COLA rates will be reduced by only 65% of the locality pay rate – remaining 35% extra COLA will help offset taxes For example, 65% of 4.62% = 3.00% Therefore, in 2010, locality pay would increase to 4.62% and COLA in effect would be reduced by 3 percentage points A gradually reducing COLA will continue to be paid after the three year phase in period – COLA will not be eliminated until 65% of the locality pay equals the frozen COLA

    9. 9 Protects Employee Take-Home Pay (continued) In the COLA areas, COLA rates are paid on top of special rates In the contiguous 48 states, employees receive the greater of their special rate pay or the locality pay for their location To prevent take-home pay from being reduced as COLA is being reduced, the legislation specifies that during the three year phase in period special rates will be increased by at least the dollar amount of locality pay given to non-special rate employees at the same minimum step During the three year phase in period, special rates can exceed the Executive Level IV pay cap – at the end of the three year period, special rate employees whose pay is over the cap will be on retained pay

    10. 10 Senior Executive Service, Senior Level, and Scientific and Technical employees receive COLA but would not get locality pay in the contiguous 48 states To prevent take home pay from being reduced as COLA is being reduced, the legislation specifies that these employees, whose duty station is in one of the allowance areas on the first pay period beginning on or after January 1, 2010, will receive locality pay If the rate of basic pay with the addition of locality pay would exceed the EX-III pay cap (or EX-II for employees in certified plans) – the employee must continue to receive any applicable locality payment not in excess of maximum rate set in 5 U.S.C. 5304; and a reduced COLA payment equal to the rate computed using the 65% offset less locality pay received until they leave the allowance area or pay system or are entitled to receive basic pay at a higher rate Protects Employee Take-Home Pay (continued)

    11. 11 Results in Higher Pay Potential COLA is capped by law at 25% of basic pay while locality pay rates are not capped

    12. 12 Provides Greater Retirement Benefits Unlike COLA payments, locality pay is included in calculating your “high 3” average salary Annuity payments will be higher The Government’s Thrift Savings Plan automatic 1% contribution for FERS employees plus match for employee contributions will also increase by the locality pay rate Employees eligible for Social Security will also have higher lifetime earnings that Social Security uses to calculate retirement payments

    13. 13 Provides Greater Retirement Benefits (continued) To address concerns of employees near retirement, buy-back provisions are included This allows employees retiring before the end of 2012 to treat COLA received in the first 3 years as locality pay (up to the full amount of locality pay) Employees would be required to pay the retirement withholding amounts they would have paid had they received the unreduced locality pay rate, plus interest

    14. 14 Provides Greater Retirement Benefits (continued) For example, assuming the applicable 2010 locality pay rate is 13.86%, the first year phase in rate is 4.62% The difference between the two rates is 9.24% The dollar amount of COLA that can be considered as basic pay for annuity computations could be no more than 9.24% of basic pay Employees would have to pay an amount equal to the retirement withholdings that would have been made if the 9.24% had been included in their basic pay Employees would have to pay interest on this amount (this year’s rate is 3.875%)

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    16. 16 Prevents Further COLA Rate Reductions COLA rates have been reduced in Alaska and a further proposed reduction was in clearance in Office of Management and Budget (OMB) when the bill was enacted The final rule for a COLA rate reduction in Hawaii and Guam was also in clearance in the OMB Results of the 2008 Caribbean survey indicated a reduction in Puerto Rican COLA rate The legislation froze all COLA rates, canceling the proposed/potential reductions

    17. 17 What Will Happen in January?

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