Washington, D.C. - An official from the U.S. Office of Personnel Management (OPM) testified this afternoon in support of a Bush Administration proposal to phase out existing Cost-of-Living Adjustment (COLA) payments and extend locality pay to Federal employees in "non-foreign" areas not part of the continental United States. Charles D. Grimes, III, deputy associate director for Performance and Pay Systems, testified before the House Subcommittee on the Federal Workforce, Postal Service, and the District of Columbia.

Currently, Grimes said, Federal employees in Hawaii, Alaska, Guam, Puerto Rico, the U.S. Virgin Islands, and other U.S. territories and possessions receive COLA payments, whereas workers in the continental United States receive locality pay based on their work location.

The COLA program currently used by these "non-foreign" areas was enacted in 1948 to address recruitment and retention issues resulting from higher costs of living in these regions. Unlike locality pay, which is based on calculations denoting the cost of labor in a given geographic area, COLA is based on cost-of-living.

Grimes said that while employees benefit in the short term because COLA payments are not subject to Federal income tax, they affect retirement in the long term because they are not considered base pay for retirement purposes, thereby affecting annuities.

Grimes said the Administration proposal, in contrast to other proposals by the Senate and the Federal Managers Association (FMA), would phase in locality pay in these areas over a seven-year period. During the phase-in period, decreases to COLA payments would be limited to 85 percent of the increase in locality pay in order to reduce the impact tax liability and retirement contributions may have on the take-home pay of Federal employees in these areas.

OPM favors a seven-year phase-in period to reduce the potential for creating a retirement incentive, and to reduce the financial impact on agency budgets caused by higher employer retirement contributions.

While the Administration, Senate, and FMA proposals differ slightly, Grimes said all three agree the current system will gradually erode equity in pay and retirement benefits for Federal employees who live and work in non-foreign areas compared to similarly-situated Federal employees in the continental U.S.