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111th Congress                                                   Report
                                 SENATE
 1st Session                                                     111-88
_______________________________________________________________________

                                     

                                                       Calendar No. 179

 
        NON-FOREIGN AREA RETIREMENT EQUITY ASSURANCE ACT OF 2009

                               __________

                              R E P O R T

                                 of the

                   COMMITTEE ON HOMELAND SECURITY AND

                          GOVERNMENTAL AFFAIRS

                          UNITED STATES SENATE


                              to accompany

                                 S. 507

 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






                October 14, 2009.--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              TOM COBURN, Oklahoma
THOMAS R. CARPER, Delaware           JOHN McCAIN, Arizona
MARK L. PRYOR, Arkansas              GEORGE V. VOINOVICH, Ohio
MARY L. LANDRIEU, Louisiana          JOHN ENSIGN, Nevada
CLAIRE McCASKILL, Missouri           LINDSEY GRAHAM, South Carolina
JON TESTER, Montana                  ROBERT F. BENNETT, Utah
ROLAND W. BURRIS, Illinois
PAUL G. KIRK, Jr., Massachusetts

                  Michael L. Alexander, Staff Director
                     Kevin J. Landy, Chief Counsel
                   Lawrence B. Novey, Senior Counsel
Lisa M. Powell, Staff Director, 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 for 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


                                                       Calendar No. 179
111th Congress                                                   Report
                                 SENATE
 1st Session                                                     111-88

======================================================================




        NON-FOREIGN AREA RETIREMENT EQUITY ASSURANCE ACT OF 2009

                                _______
                                

                October 14, 2009.--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. 507]

    The Committee on Homeland Security and Governmental 
Affairs, to which was referred the bill (S. 507) to provide for 
retirement equity for federal employees in non-foreign areas 
outside the 48 contiguous States and the District of Columbia, 
reports favorably thereon with amendments and recommends that 
the bill, as amended, do pass.

                                CONTENTS

                                                                   Page
  I. Purpose & Summary................................................1
 II. Background.......................................................2
III. Legislative History.............................................11
 IV. Section-by-Section Analysis.....................................12
  V. Estimated Cost of Legislation...................................15
 VI. Evaluation of Regulatory Impact.................................18
VII. Changes in Existing Law.........................................18

                         I. Purpose and Summary

    Since 1948, federal employees stationed in Alaska, Hawaii 
and areas of U.S. sovereignty outside the continental United 
States--so called ``non-foreign areas''--have received non-
foreign cost of living allowance (non-foreign COLA) payments to 
ensure that their pay reflects the high cost of living in those 
areas compared to the cost of living in Washington, DC.\1\ Non-
foreign COLA is not subject to federal income taxes, and it 
does not count as part of base pay for retirement purposes. For 
federal employees in the 48 contiguous states and the District 
of Columbia, Congress in 1990 sought to close the pay gap 
between federal employees and higher-paid private-sector 
employees by authorizing an annual comparability payment for 
federal employees that varies by locality.\2\ Unlike non-
foreign COLA, locality pay is taxed and is considered part of 
base pay, which is used to calculate an employee's retirement 
annuity.
---------------------------------------------------------------------------
    \1\Non-foreign areas include the Commonwealth of Puerto Rico, the 
Commonwealth of the Northern Mariana Islands, and U.S. territories and 
possessions, including American Samoa, Guam, Johnson Atoll, Wake Atoll, 
and the U.S. Virgin Islands.
    \2\Federal Employees Pay Comparability Act (FEPCA), P.L. 101-509.
---------------------------------------------------------------------------
    Because locality pay counts towards employees' retirement 
whereas non-foreign 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. 507 would address this problem by 
phasing in locality pay for employees in non-foreign areas and 
phasing out non-foreign COLA.

                             II. Background

    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. in order to facilitate 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 and the Bureau of the Budget to 
prepare a report on pay differentials outside the U.S. Based on 
that report, President Truman issued an Executive Order in 
1948, under which federal employees in the non-foreign areas 
became eligible to receive additional compensation under two 
separate programs: the non-foreign area COLA program, based on 
living costs, and the post differential program, based on 
undesirable conditions of environment.\3\
---------------------------------------------------------------------------
    \3\E.O. 10,000, 13 Fed. Reg. 5453, 5455 (Sept. 18, 1948).
---------------------------------------------------------------------------
    In that same year, 1948, Congress enacted the pay 
allowances for non-foreign area employees into statute,\4\ now 
codified at 5 U.S.C. Sec. 5941. Employees in non-foreign areas 
may receive either non-foreign COLA payments, if local living 
costs are substantially higher than those in the District of 
Columbia, or post differential allowances, if differences in 
conditions of environment warrant a recruitment incentive, or 
both, provided that the total may not exceed 25 percent of 
basic pay.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

Non-foreign COLA

    Non-foreign COLA is designed to compensate for 
substantially higher living costs in the non-foreign areas 
relative to those in the Washington, DC, area. The government 
may pay non-foreign COLA to both local and non-local hires who 
are under the General Schedule (GS) system or other statutory 
pay systems. Like other similar allowances,\5\ non-foreign COLA 
is not subject to federal income 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 September 8, 2009).
---------------------------------------------------------------------------
    Due to an increase in the cost of living in Washington, DC, 
the differential in living costs between Washington, DC and 
non-foreign COLA areas has decreased in recent years. On 
December 3, 2008, Office of Personnel Management (OPM) 
regulations went into effect lowering non-foreign COLA rates 
for Anchorage, Fairbanks, and Juneau, Alaska, from 24 percent 
to 23 percent. OPM issued regulations on February 20, 2009, 
providing an interim adjustment from 13 percent to 14 percent 
for the non-foreign COLA rate in Puerto Rico based on a review 
of the Consumer Price Index in Puerto Rico.\6\ However, OPM 
expects non-foreign COLA rates to decrease by one percent in 
all of the non-foreign COLA areas in late summer or fall of 
2009.
---------------------------------------------------------------------------
    \6\5 CFR Part 591, Federal Register Vol. 74, No. 33, Page 7777, 
Friday, February 20, 2009.
---------------------------------------------------------------------------
    The current non-foreign COLA rates are:

------------------------------------------------------------------------
                         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%
------------------------------------------------------------------------

Post differentials

    In addition to, or instead of, receiving a non-foreign 
COLA, certain federal employees in non-federal areas other than 
Hawaii and Alaska receive post differentials--recruitment 
incentives designed to encourage people to go to work for the 
federal government in a non-foreign area that has 
extraordinarily difficult living conditions, excessive physical 
hardships, or notably unhealthful conditions compared with the 
continental U.S. Because post differentials are intended to 
encourage potential employees to move to a non-foreign area, 
they are not paid to local hires. Like non-foreign COLA, post 
differentials do not count toward retirement, but, unlike non-
foreign COLA, they are subject to federal income tax.
    Post differentials are currently authorized for Guam, the 
Commonwealth of the Northern Mariana Islands (CNMI), American 
Samoa, and Johnston, Wake, and Midway Atolls. Non-locally hired 
employees in Guam are eligible for a post differential of up to 
20 percent, while those in CNMI and the other areas are set at 
25 percent. Guam and CNMI are the only areas in which payment 
of both a post differential and a non-foreign COLA is 
authorized. However, because the combined payment may not 
exceed 25 percent of base pay and employees in Guam and CNMI 
currently receive 25 percent non-foreign COLA, those employees 
do not currently receive a post differential.

Locality pay

    In the late 1980's, it became increasingly evident that a 
large gap existed between federal salaries and the higher 
private-sector salaries in various localities across the 
country. These pay disparities caused serious difficulties for 
federal agencies in recruiting and retaining 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.\7\ 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.
---------------------------------------------------------------------------
    \7\Recruitment and Retention: Inadequate Federal Pay Cited as 
Primary Problem by Agency Officials, (GAO/GGD-90-117) September 1990, 
at p. 4.
---------------------------------------------------------------------------
    To address these disparities, Congress in 1990 passed the 
Federal Employees Pay Comparability Act (FEPCA).\8\ To keep up 
with annual increases in private-sector salaries, FEPCA 
provides that GS employees receive annual across-the-board pay 
adjustments, based on annual changes in the Employment Cost 
Index (ECI), which is a measure of private-sector wages and 
salaries published by the Bureau of Labor Statistics (BLS). In 
addition, in localities where non-federal salaries exceed 
federal salaries by more than five percent, FEPCA provides that 
GS employees receive an annual locality-based comparability 
adjustment. Under statute, the amount of the locality pay is 
designed to reduce pay disparities by making GS employees' pay 
rates nearly equal to those of non-federal workers in the same 
locality.
---------------------------------------------------------------------------
    \8\P.L. 101-509, 5 U.S.C. Sec. Sec. 5301-5304.
---------------------------------------------------------------------------
    By statute, all GS federal employees in the contiguous U.S. 
where a pay disparity exists are entitled to receive locality 
pay. Moreover, the government has, by administrative action, 
extended the right to receive locality payments to employees in 
certain other pay systems, including employees in senior level, 
scientific and professional positions, administrative law 
judges, administrative appeals judges, and contract appeals 
board members. However, FEPCA explicitly provides that federal 
employees in Hawaii and Alaska and the other non-foreign areas 
may not receive locality pay.\9\
---------------------------------------------------------------------------
    \9\5 U.S.C. Sec. Sec. 5304(f)(1)(A) and 5701(6).
---------------------------------------------------------------------------
    The amount of locality pay is based on empirical surveys 
and is established by a multi-step process. Non-federal pay 
levels are estimated by means of salary surveys conducted by 
the BLS under its National Compensation Survey program. OPM 
receives the BLS survey results, documents federal rates of pay 
in each of the pay areas, and compares non-federal and GS 
salaries by grade for each pay area. This data is then made 
available to the Federal Salary Council (a nine-member advisory 
body appointed by the President\10\) and to the President's Pay 
Agent (comprised, by Executive Order, of the Secretary of 
Labor, the Director of the Office of Management and Budget, and 
the Director of OPM). The Federal Salary Council makes 
recommendations to the Pay Agent on the establishment of 
locality pay areas, the level of locality payments, and other 
matters regarding implementation of the locality pay system. 
Then the Pay Agent makes final decisions on the establishment 
of locality pay areas, and it submits recommendations to the 
President on the amount of locality pay needed in each pay area 
to reach FEPCA's target of federal pay rates that are five 
percent below non-federal rates. Finally, the amount of 
locality payments is fixed by the President. In practice, most 
years Congress has enacted a different pay rate, superseding 
the rate fixed by the President.
---------------------------------------------------------------------------
    \10\By statute, the Federal Salary Council is comprised of three 
experts in labor relations and pay policy and six representatives of 
Federal labor unions or other employee organizations. 5 U.S.C. 
Sec. 5304(e)(1).
---------------------------------------------------------------------------
    FEPCA has not been implemented as originally intended. 
FEPCA provides that a certain percentage of the gap between 
non-federal and federal salaries should be closed each year. 
During 1994, which was the first year of locality pay, 20 
percent of the gap was closed. An additional 10 percent of the 
gap was then supposed to be closed each year until the five 
percent pay disparity was reached. However, in every year since 
1995, the President has exercised his authority to fix (subject 
to Congress's power to set a different rate) a lower level of 
locality pay, relying on the ``national emergency or serious 
economic condition'' exception in 5 U.S.C. Sec. 5304a, and, in 
most of those years, Congress enacted a pay adjustment that 
exceeded the one that would otherwise have been fixed by the 
President, but that still fell short of the adjustment called 
for under FEPCA. As a result, as of 2008, only 58.3 percent of 
the pay gap between federal salaries and those in the private 
sector has been eliminated.\11\
---------------------------------------------------------------------------
    \11\See Annual Report of the President's Pay Agent on Locality-
Based Comparability Payments for the General Schedule, at 18 and 21, 
December 6, 2007.
---------------------------------------------------------------------------

Inequity, controversy, and litigation regarding the current system

    As mentioned, locality pay is included in calculating 
federal employees' retirement contributions and annuities, but 
non-foreign COLA is not. As a result, federal employees in 
Hawaii, Alaska, and the other non-foreign areas covered by non-
foreign COLA see a smaller amount--one that does not reflect 
their actual pay--used to calculate their retirement annuities 
than the amount used to calculate annuities for similarly 
situated employees in the contiguous states who receive 
locality pay. Likewise, employees in non-foreign areas receive 
from their employing agencies lower matching contributions to 
their retirement accounts under the Thrift Savings Plan than do 
similarly-situated employees in the contiguous U.S.
    Since FEPCA's enactment, the lack of locality pay for 
employees in Hawaii and Alaska and other non-foreign areas has 
influenced these employees' decisions about whether to move to 
the contiguous U.S. where locality pay is available.\12\ Many 
employees who are near retirement in the non-foreign COLA areas 
seek employment in the contiguous U.S. where their ``high 3'' 
salaries--the average of their three consecutive, highest paid 
years and the amount on which their annuities are based--are 
boosted by locality pay.\13\ As a result of this disparity, 
federal agencies in the non-foreign areas face staffing 
problems, especially for employees near retirement.\14\
---------------------------------------------------------------------------
    \12\See Matsuo v. United States, 532 F. Supp. 2d 1238, 1243-44 (D. 
Haw. 2008).
    \13\See Statement of Charles Grimes, Deputy Associate Director for 
Performance and Pay Systems, Office of Personnel Management, at hearing 
on ``Non-Foreign COLA: Finding an Equitable Solution,'' 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, May 29, 2008, at pp. 3-4.
    \14\See Matsuo v. United States, 532 F. Supp. 2d at 1244-45.
---------------------------------------------------------------------------
    For over 25 years, the non-foreign COLA program has been 
the subject of extensive litigation. In 1981, employees claimed 
that the non-foreign COLA methodology used by OPM violates 
federal law by considering only price level differences and 
failing to consider differences in non-price factors affecting 
the cost of living, such as remoteness, isolation, and quantity 
or quality of goods and services needed or available.\15\ In 
the early 1990s, the plaintiffs and the government agreed on a 
procedure for resolving those controversies concerning the non-
foreign COLA program, and on June 20, 2000, they filed a joint 
stipulation for settlement that was approved by the District 
Court for the Virgin Islands. The settlement agreement provides 
for employee involvement with OPM in developing certain 
principles\16\ to form the basis for changing the non-foreign 
COLA program and made a number of technical improvements to 
modernize the methodology by which the amount of non-foreign 
COLA is determined. Under the settlement, OPM cannot reduce 
non-foreign COLA rates by more than one percentage point per 
year, and the plaintiff class members received $234 million for 
back pay, interest, attorneys' fees, and expenses.\17\
---------------------------------------------------------------------------
    \15\See Alaniz v. Office of Personnel Management, 728 F.2d. 1460 
(Fed. Cir. 1984); Karamatsu v. United States, No. 224-85C (Cl. Ct.); 
Arana v. United States, No. 389-86C (Cl. Ct.).
    \16\These were called ``Safe Harbor Principles'' because the 
settlement process was intended to provide the government a ``safe 
harbor'' against future litigation.
    \17\See Caraballo et al. v. United States, et al., No. 1997-0027 
(D.V.I.), Stipulation for Settlement, June 20, 2000.
---------------------------------------------------------------------------
    Then in 2005, federal employees in Hawaii and Alaska filed 
a new class action against the federal government, alleging 
that FEPCA's exclusion of federal employees who work and reside 
in Hawaii and Alaska violates their right to equal protection 
under the Fifth and Fourteenth Amendments 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.\18\ The lawsuit seeks locality pay for federal 
employees who work in those jurisdictions dating back to the 
implementation of FEPCA.
---------------------------------------------------------------------------
    \18\See Matsuo v. United States, 532 F. Supp. 2d at 1242.
---------------------------------------------------------------------------
    On January 30, 2008, the U.S. District Court in Hawaii 
granted the government's motion for summary judgment. The Court 
observed that ``Congress may have discharged its legislative 
responsibilities imperfectly,'' creating ``inequities resulting 
from Plaintiffs' exclusion from the locality pay system.''\19\ 
However, the Court held for the government, reasoning that 
``[w]hen FEPCA was enacted, Congress rationally could have 
concluded the two pay supplements [COLA and locality pay] were 
roughly parallel, even if it has turned out, in practice, that 
FEPCA's exclusion has worked to the disadvantage of Hawaii and 
Alaska employees with respect to their retirement 
benefits.''\20\ Being unable to provide relief, the Court urged 
that ``Congress should correct the incongruity made so evident 
by this case.''\21\ On February 29, 2008, the plaintiffs filed 
an appeal, which is still pending.
---------------------------------------------------------------------------
    \19\Id. at 1253-54.
    \20\Id. at 1254.
    \21\Id. at 1253.
---------------------------------------------------------------------------

OPM's proposal

    In an effort to address the retirement inequity and to 
resolve the pending litigation, President George W. Bush 
announced in his fiscal year 2008 Budget a proposal to extend 
locality pay to federal employees in the non-foreign areas. On 
May 30, 2007, then-Director of OPM Linda Springer submitted a 
legislative proposal to Congress. Under the OPM proposal, non-
foreign COLA rates in effect on December 31, 2007, would be 
locked in place and OPM would no longer conduct non-foreign 
COLA surveys. Beginning in January 2008, locality pay would 
begin to be phased in for federal employees in the non-foreign 
areas while non-foreign COLA would be phased out over seven 
years. Under the proposal, the locality pay rate in the first 
year for the ``Rest of the U.S.'' (i.e., the rate that applies 
outside of the metropolitan areas where specific rates are 
established) would be applied to all parts of the non-foreign 
areas in order to provide time to determine the pay rates for 
each non-foreign locality. Employees in the non-foreign areas 
would continue to receive a portion of non-foreign COLA until 
the applicable locality pay rate exceeds the locked-in non-
foreign COLA rate.
    Under this proposal, the Federal Salary Council would have 
the authority to recommend locality rates in all the non-
foreign areas, including areas authorized for post 
differentials. As noted above, only in Guam and CNMI are 
employees currently authorized to be paid both non-foreign COLA 
and a post differential, but those employees do not actually 
receive a post differential because of the 25 percent cap on 
the total of the non-foreign COLA and post differential. Absent 
OPM making any regulatory change, they would begin receiving 
the authorized post differential when the reduction of non-
foreign COLA begins under the proposal. When non-foreign COLA 
is completely phased-out in Guam and CNMI, 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.\22\
---------------------------------------------------------------------------
    \22\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 September 8, 2009).
---------------------------------------------------------------------------
    OPM proposed that non-foreign COLA be phased out at a rate 
lower than the rate at which locality pay is phased in, because 
employees' taxes and retirement contributions will increase 
with locality pay. Under the OPM proposal, the conversion to 
locality pay would be offset by an 85 percent reduction in non-
foreign COLA. Thus, for every dollar of locality pay received, 
an employee's non-foreign 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 non-
foreign COLA rate could also continue to be paid until the 
locality pay rises high enough that subtraction of 85 percent 
would reduce the non-foreign 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.\23\ Approximately 
50 percent of the federal workers in Alaska and Hawaii are at 
or below this level.\24\
---------------------------------------------------------------------------
    \23\Information provided to Committee staff at a staff briefing by 
OPM, June 4, 2007.
    \24\Information provided to Committee staff by OPM, April 1, 2008.
---------------------------------------------------------------------------
    Non-foreign COLA and locality pay are treated differently 
for Postal Service employees than for GS employees. Postal 
employees generally do not receive locality pay. Only Postal 
Inspectors and employees of the Postal Service Office of 
Inspector General receive locality pay. However, postal 
employees in the non-contiguous areas are eligible to receive 
non-foreign COLA, which the Postal Service calls Territorial 
COLA (T-COLA). Because there is no locality pay, there is no 
retirement inequity among postal employees like the inequity 
suffered by other federal employees in non-foreign COLA areas. 
Therefore, under OPM's proposal, postal employees who receive 
T-COLA would not receive locality pay, but would instead 
continue to receive T-COLA at the locked-in non-foreign COLA 
rates.

Subcommittee fact-finding regarding OPM's proposal

    In July 2007, this Committee's Subcommittee on Oversight of 
Government Management, the Federal Workforce, and the District 
of Columbia conducted fact-finding meetings on the OPM proposal 
on the islands of Oahu and Maui in Hawaii. Subcommittee staff 
met with nearly 1,000 federal employees from more than 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, many federal workers stressed the 
importance of not reducing their take-home pay, and they 
believed that the 85 percent offset in the 2007 Administration 
proposal did not go far enough. Some employees expressed a 
preference for retaining the non-foreign COLA versus converting 
to locality pay under OPM's proposal because of the expected 
reduction in many employees' take-home pay.
    Second, many employees expressed concern over the seven-
year phase-in period, noting that they would have to work an 10 
additional years in order to take full advantage of locality 
pay. The long proposed phase-in period was particularly 
troubling because an estimated 59.3 percent of federal workers 
in Hawaii and 62.1 percent in Alaska will be eligible to retire 
in six years or less.\25\ 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.
---------------------------------------------------------------------------
    \25\Information provided to Committee staff by OPM, May 1, 2008.
---------------------------------------------------------------------------
    Third, many employees raised concerns over the scope of the 
proposal. This included questions about which employees would 
be covered by the proposal and 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. Additionally, some employees 
asked how the proposal would treat employees receiving special 
rates (i.e., rates of basic pay higher than those ordinarily 
authorized, which OPM may establish to address specific 
recruitment or retention problems), since, under current law, 
federal employees in the non-foreign areas may receive both 
non-foreign COLA and special rates, but employees in the 
contiguous U.S. receive only the higher of special rates or 
locality pay.

The proposed legislation

    After considering and taking account of the questions and 
concerns from employees and comments from federal agencies, 
Senators Akaka, Stevens, Inouye, and Murkowski introduced the 
Non-Foreign Area Retirement Equity Assurance Act of 2008, or 
the Non-Foreign AREA Act (S. 3013), on May 13, 2008. As 
described more fully in the Legislative History section of this 
report (below), this Committee held a hearing on the bill and 
reported it to the full Senate, and the bill passed the Senate 
on October 2, 2008, but failed to move through the House before 
the 110th Congress adjourned sine die. On March 2, 2009, 
Senators Akaka, Murkowski, Inouye, and Begich reintroduced the 
legislation as the Non-Foreign Area Retirement Equity Assurance 
Act of 2009 (S. 507).
    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. For these employees, S. 507 is nearly 
identical to S. 3013 as passed by the Senate and is similar in 
many respects to OPM's proposal, in that it would lock in 
current non-foreign COLA rates and phase in locality pay as 
non-foreign COLA is phased out.
    However, S. 507 differs from the OPM proposal in several 
important ways. The bill would phase in locality pay over a 
period of three years and would offset the locality pay by 
subtracting 65 percent of that pay from the COLA, rather than 
85 percent as OPM had proposed. The 65 percent offset is 
designed to better protect employees' take-home pay.
    S. 507 would also ensure that employees who now receive 
both special rates and non-foreign COLA will not be unfairly 
harmed by the transition to locality pay, because the bill 
provides that their special rates will increase in the same way 
as locality pay during the conversion period. 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.
    In addition to having a shorter phase-in period than the 
OPM proposal, S. 507 allows an employee who retires within the 
three-year phase-in period to elect to treat any amount of non-
foreign COLA received during that period as part of base pay 
(as if it were locality pay) for purposes of establishing the 
amount of annuity, up to the full amount of locality pay in 
place for that area. The employee would be required to pay 
additional retirement contributions on the additional amounts 
that he or she elects to treat as part of their base pay.
    The shorter phase-in period and ability of certain 
employees to treat non-foreign COLA as base pay will help 
address concerns, which are noted above, with the high 
percentage of employees in Hawaii and Alaska nearing 
retirement, and will mitigate pressure on federal employees in 
the non-foreign areas to seek employment in the contiguous U.S. 
late in their careers to enhance their retirement annuities. 
Additionally, the three-year phase-in period will help those 
who are planning to retire within the next few years or who 
will retire because of mandatory retirement laws. Although OPM 
testified that agencies have strategies in place to address the 
impending retirement wave and the unique staffing problems 
facing federal agencies in the non-foreign areas,\26\ the 
Committee believes that the three-year phase-in and the ability 
to treat non-foreign COLA as base pay for employees close to 
retirement are preferable to OPM's proposal.
---------------------------------------------------------------------------
    \26\Responsive testimony of Mr. Grimes at hearing, supra note 14.
---------------------------------------------------------------------------
    The legislation also states that it is the sense of 
Congress that BLS should conduct surveys to determine the 
extent of pay disparities in the new locality-pay areas. 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, among other things, that BLS would need 
more funding to expand its current National Compensation Survey 
program to more areas.\27\ However, the Committee intends 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--and, 
because of the high cost of living in those areas, BLS surveys 
of these and other new locality-pay areas will therefore be 
necessary.
---------------------------------------------------------------------------
    \27\See Federal Salary Council Memorandum for January 2009, page 6.
---------------------------------------------------------------------------
    S. 507 also provides that all current and future employees 
in the non-foreign areas to whom the Government is authorized 
to pay non-foreign COLA are covered by this legislation, 
whether or not they are actually paid non-foreign COLA or 
whether they instead receive some other kind of pay adjustment. 
This includes GS employees, administrative law judges, members 
of the Senior Executive Service (SES), senior level and senior 
technical (SL/ST) employees, administratively determined 
employees, GS employees in the non-foreign areas that do not 
receive non-foreign 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 (with respect to employees under 
title 38 of the U.S. Code), and those agencies covered by the 
Financial Institution, Reform, Recovery and Enforcement 
Act.\28\ To ensure that SES and other senior level employees do 
not suffer a decrease in salary as non-foreign COLA is phased 
out, the legislation provides that these employees, who are 
eligible for non-foreign COLA, will become eligible for 
locality pay under the bill. Moreover, with respect to 
employees who are eligible for non-foreign COLA but now receive 
other kinds of pay adjustments instead, the bill grants 
regulatory authority to OPM (or other agencies, if appropriate) 
to phase out those alternative pay adjustments as locality pay 
phases in under the legislation.
---------------------------------------------------------------------------
    \28\P.L. 101-73.
---------------------------------------------------------------------------
    According to DoD, it already has broad flexibility with 
regard to setting and changing pay rates for non-appropriated 
fund (NAF) employees. Therefore, a representative of DoD 
testified that, should non-foreign COLA be phased out and 
locality pay phased in, DoD would increase pay rates for those 
NAF employees who currently receive the non-foreign COLA in 
order to offset the loss of non-foreign COLA.\29\
---------------------------------------------------------------------------
    \29\Statement of Mr. Bradley Bunn, Program Executive Officer, 
National Security Personnel System, Department of Defense, at hearing, 
supra note 14; responsive testimony of Mr. Bunn at the hearing.
---------------------------------------------------------------------------
    To any agency offering special pay rates, S. 507 provides 
authority to modify those rates as appropriate to implement the 
Act. The measure was modified during Committee consideration to 
ensure that agencies have the regulatory authority to carry out 
such actions. The bill also extends coverage of this statute to 
employees under alternative hiring authorities, such as 
Department of Veterans Affairs employees whose pay is 
authorized under title 38 of the U.S. Code, who currently 
receive a non-foreign COLA, but who might otherwise be 
ineligible to receive locality pay.
    Many postal employees in the non-foreign areas expressed 
concern over how they would be treated under OPM's proposal, 
under which they would continue to receive T-COLA payments. 
Many of these employees expressed a desire to receive locality 
pay like all other workers in the non-foreign areas, as they 
were concerned about being the only group of employees 
receiving non-foreign COLA. S. 3013 as introduced in May of 
2008 would have allowed postal employees to transition from T-
COLA to Territorial Pay, which would have been similar to 
locality pay, in the same manner that GS workers were 
converting from non-foreign COLA to locality pay. The Postal 
Service expressed opposition to these provisions because of the 
cost, which was estimated to be $12.5 million per year, and 
because the payment of an allowance similar to locality pay to 
some postal employees could be seen as setting a precedent for 
other postal workers.\30\ To reconcile these competing 
concerns, S. 3013 as amended by this Committee, and S. 507 as 
introduced, would allow Postal Inspectors and employees of the 
Postal Service Office Inspector General in the non-foreign 
areas to transition to locality pay like other federal 
employees in the non-foreign areas, because these classes of 
postal employees in the contiguous U.S. now receive locality 
pay. Other postal employees in the non-foreign areas would 
continue to receive T-COLA. However, the 25 percent cap would 
be lifted for these employees, and they 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.
---------------------------------------------------------------------------
    \30\Letter to Senator Akaka from Marie Therese Dominguez, Vice 
President, Government Relations and Public Policy, May 16, 2008.
---------------------------------------------------------------------------

                        III. Legislative History

    On May 13, 2008, Senators Akaka, Stevens, Inouye, and 
Murkowski introduced the Non-Foreign Area Retirement Equity 
Assurance Act of 2008, or the Non-Foreign AREA Act (S. 3013). 
On May 29, 2008, the Subcommittee on Oversight of Government 
Management, the Federal Workforce, and the District of Columbia 
of the Committee on Homeland Security and Governmental Affairs 
held a field hearing at the Oahu Veterans Center in Honolulu, 
Hawaii, to consider S. 3013 and OPM's proposal.\31\ Witnesses 
included Mr. Charles 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 
25, 2008, this Committee ordered S. 3013 reported favorably 
with amendments,\32\ and on October 2, 2008 the bill passed the 
Senate by unanimous consent with a further amendment. However, 
S. 3013 failed to move through the House before the 110th 
Congress adjourned sine die.
---------------------------------------------------------------------------
    \31\``Non-Foreign COLA: Finding an Equitable Solution,'' Hearing 
before the Oversight of Government Management, the Federal Workforce, 
and the District of Columbia Subcommittee of the Senate Committee on 
Homeland Security and Governmental Affairs, S. Hrg. 110-657 (May 29, 
2008).
    \32\S. Rep. 110-456 (Sept. 11, 2008).
---------------------------------------------------------------------------
    S. 507 was introduced by Senators Akaka, Murkowski, Inouye, 
and Begich on March 2, 2009, and was referred to this Committee 
and further referred to the Subcommittee. On March 31, 2009, 
the Subcommittee favorably polled out S. 507, and the Committee 
considered the bill on April 1, 2009. Senator Akaka offered an 
amendment that made technical corrections to ensure that the 
bill covers Senior Level Scientific and Technical professionals 
and to provide agencies the authority to make pay adjustments 
through regulations to comply with the provisions of this Act. 
The amendment was accepted and the bill, as amended, was 
ordered reported favorably by voice vote. Members present were 
Chairman Lieberman; Senators Akaka, Carper, Pryor, Tester, 
Burris, and Bennet; Ranking Minority Member Collins; and 
Senators Coburn, and Voinovich.

                    IV. Section-by-Section Analysis


Section 1. Short title

    This section states that the legislation may be cited as 
the ``Non-Foreign Area Retirement Equity Assurance Act of 
2009'' or the ``Non-Foreign AREA Act of 2009.''

Section. 2. Extension of locality pay

    Subsection (a,) Locality-Based Comparability Payments. This 
subsection amends section 5304 of title 5, United States Code, 
to include the non-foreign areas in the list of areas where 
locality pay is paid to federal employees, and to clarify that 
members of the Senior Executive Service (SES), including those 
in the Drug Enforcement Administration and Federal Bureau of 
Investigation, and senior level scientific and technical 
professionals 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.
    Subsection (b), Allowances Based on Living Costs and 
Conditions of Environment. This subsection amends section 5941 
of title 5 to retain a cost-of-living allowance (COLA) that is 
phased out as locality pay is phased in. Paragraph (1) freezes 
the non-foreign COLA rates that are in effect on the date of 
enactment. Paragraphs (2) and (3) establish a transition period 
beginning January 1, 2010, and adjust non-foreign COLA rates 
downward as locality pay is phased in. This downward adjustment 
is governed by a formula under which, for every dollar of 
locality pay that the employee receives, the employee will give 
up 65 cents of the frozen non-foreign COLA, helping to mitigate 
the cost burdens from federal income taxes and additional 
retirement contributions due on locality pay.

Section 3. Adjustment of special rates

    Subsection (a), In General; Subsection (b), Agencies with 
Statutory Authority. These subsections state that employees in 
the non-foreign areas who receive special rates under 5 U.S.C. 
Sec. 5305 or similar authority will not receive locality pay. 
Instead, their special rates will be increased by the same 
amount as locality pay increases for other federal employees in 
the non-foreign areas who do not receive special rates. These 
increases continue until the employees' non-foreign COLA rates 
have been completely phased out. (Special rates are rates of 
basic pay higher than those ordinarily authorized, which OPM 
may establish to address specific recruitment or retention 
problems.)
    Subsection (c), Temporary Adjustment. The Director of OPM 
and the heads of other agencies may raise statutory limitations 
otherwise applicable to special rates until the end of the 
transition period, at which time any special rate pay in excess 
of those limitations will be converted to a ``retained rate'' 
to which the affected employees would remain eligible under 
section 5363 of title 5.

Section 4. Transition schedule for locality-based comparability 
        payments

    This section states that non-foreign COLA will be phased 
out and that locality pay will be phased in over a period of 
three years starting the first pay period beginning on or after 
January 1, 2010. During 2010, the amount of locality pay phased 
in will be one-third of the locality pay percentage for the 
``rest of the U.S.'' locality pay area. In 2011, the phased-in 
amount will be two-thirds of the applicable comparability 
payment approved by the President for each non-foreign area. In 
the third year, 2012, and each subsequent year, the full amount 
of the applicable comparability payment for each non-foreign 
area will be used.

Section 5. Savings provision

    Subsection (a), Sense of Congress. This subsection 
expresses the sense of Congress that the application of the Act 
should not result in a decrease in the take-home pay of any 
employee and that no employee should receive less than the 
``rest of U.S.'' locality pay rate after the phase-in period. 
It also states that it is Congress's sense that the Bureau of 
Labor Statistics should conduct surveys in all of the non-
foreign areas to determine if there are pay disparities, and 
the President's Pay Agent should take necessary steps to 
address any pay disparity discovered. Furthermore, it expresses 
the sense of the Congress that the President's Pay Agent will 
establish one new locality area for the State of Hawaii and one 
new locality area for the State of Alaska.
    Subsection (b), Savings Provision. This subsection states 
that employees who currently receive a special rate and 
continue to be stationed in a non-foreign area will 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 will 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 non-foreign COLA, and if 
the amount of locality pay under this bill plus the amount of 
employee's basic pay would exceed the cap on basic pay plus 
locality pay established under section 5304(g) of title 5, the 
employee would continue to receive the non-foreign COLA rate in 
effect for the area until the employee either leaves the 
allowance area or is eligible to receive a basic pay plus 
locality pay at a higher rate.

Section 6. Application to other eligible employees

    Subsection (a), In General. This subsection defines who is 
an employee covered by this Act. Covered employees include 
current and future employees to whom the Government is 
authorized to pay non-foreign COLA, whether or not they are 
actually paid it. This includes employees at the Transportation 
Security Administration, intelligence community employees, 
Veterans' Administration, and postal employees. Employees who 
receive locality pay as a result of this Act will not be 
permitted to bargain over the amount of locality pay they 
receive and will not have any amount of locality pay provided 
under this Act withheld on the basis of employee performance. 
Further, except for postal employees, covered employees will 
receive locality pay whether or not they are eligible for 
locality pay under current law, including Department of 
Veterans Affairs employees whose pay is authorized under title 
38 of the United States Code.
    Subsection (b), Postal Employees in Non-Foreign Areas. This 
subsection states that the provisions of this Act converting 
Territorial COLA to locality pay will apply to Postal 
Inspectors and employees of the Postal Service Office of 
Inspector General, but not 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, 2009, or the 
applicable locality pay percentage for the area.

Section 7. Election of additional basic pay for annuity computation by 
        employees

    This section states that employees who retire from federal 
service between January 1, 2010, and December 31, 2012, may 
file an election with OPM to count a certain amount of non-
foreign COLA they receive during that time period as if it were 
locality pay for purposes of computing their retirement 
annuity. The limit on the amount of non-foreign 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. An employee who files 
an election must pay into the Civil Service Retirement and 
Disability Retirement Fund additional funds to cover the amount 
they would have paid if they had been in a locality-pay area 
during that period, plus any interest prescribed under 5 U.S.C. 
8334(e). The employing agency shall also pay an amount for 
applicable agency contributions.

Section 8. Regulations

    This section states that the Director of OPM will issue 
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 and not required to pay locality adjustments to its 
employees will prescribe regulations consistent with OPM's 
regulations and with the concurrence of the Director of OPM.

Section 9. Effective dates

    This section makes the date of enactment the effective date 
of this Act, except for the phase-in periods starting January 
1, 2010, as specified in sections 2 and 4 of the Act.

                    V. Estimated Cost of Legislation


S. 507--Non-Foreign AREA Act of 2009

    Summary: S. 507 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. 507 
would result in additional agency payments for employees' 
retirement benefits and payroll taxes. In total, CBO estimates 
that discretionary spending would increase by $2.5 billion 
through 2019, 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 $276 million 
over the 2010-2019 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 $979 million over the 2010-2019 period.
    S. 507 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. 507 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--
                                                  ------------------------------------------------------------------------------------------------------
                                                    2010    2011    2012    2013    2014    2015     2016    2017    2018    2019   2010-2014  2010-2019
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                CHANGES IN SPENDING SUBJECT TO APPROPRIATION (On-Budget)

Salary payments and other discretionary spending:
    Estimated authorization level................      37     119     197     197     200     202      203     207     212     217        750      1,791
    Estimated outlays............................      37     119     197     197     200     202      203     207     212     217        750      1,791
Employer contributions:\1\
    Estimated authorization level................      17      50      77      77      78      79       80      81      83      86        299        708
    Estimated outlays............................      17      50      77      77      78      79       80      81      83      86        299        708
Total changes in spending subject to
 appropriation:
    Estimated authorization level................      55     169     273     274     278     281      283     289     295     303      1,049      2,500
    Estimated outlays............................      55     169     273     274     278     281      283     289     295     303      1,049      2,500

                                                          CHANGES IN DIRECT SPENDING (OUTLAYS)

Total changes in direct spending:................       2       6      12      20      26      32       38      43      46      50         67        276
    On-budget revenues...........................       2       6      12      20      26      31       37      42      45      48         66        269
    Off-budget revenues..........................       0       *       *       *       *       1        1       1       2       2          *          7

                                                                   CHANGES IN REVENUES

Total changes in revenues:.......................      26      70     105     104     107     109      110     113     116     120        412        979
    On-budget revenues...........................      20      54      81      80      82      83       84      86      89      91        317        751
    Off-budget revenues..........................       5      16      24      24      25      25       26      27      27      28         95        229
Memorandum:
    Total intragovernmental collection from           -17     -50     -77     -77     -78     -79      -80     -81     -83     -86       -299       -708
     employer contributions:\1\..................
    On-budget....................................     -12     -34     -52     -52     -53     -54      -54     -55     -56     -57       -204       -480
    Off-budget...................................      -5     -16     -24     -24     -25     -25      -26     -27     -27     -28        -95       -229
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\Employer contributions are intragovernmental transactions that do not affect the deficit.
Sources: Congressional Budget Office and Joint Committee on Taxation.
Notes: Components may not sum to totals because of rounding. * = costs of less than $500,000.

    Basis of estimate: For this estimate, CBO assumes that S. 
507 will be enacted near the end of fiscal year 2009 and that 
the necessary amounts will be appropriated for each year 
beginning in 2010. The bill would affect over 50,000 federal 
employees working in Alaska, Hawaii, Puerto Rico, the U.S. 
Virgin Island, 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 nonfederal positions.) S. 507 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 appropriations

    S. 507 would increase discretionary spending by $2.5 
billion over the 2010-2019 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. The conversion to 
locality pay for eligible current and future federal employees 
in the designated jurisdictions would increase salaries by $1.8 
billion over the next 10 years. For those employees, a 
provision in S. 507 provides for a phase-out of COLAs over 
time, intended to preserve the take-home salaries of those 
employees as their nontaxable 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 savinigs--$2 million over 10 years--would 
result from discontinuing the surveys currently used by Office 
of Personnel Management to calculate the COLA adjustments for 
nonforeign 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 contribution also would increase. 
Assuming appropriation of the necessary amounts, CBO estimates 
that spending for those contributions would increase by $708 
million through 2019. 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 2010 and 2019. As a 
result, CBO estimates that direct spending would increase by a 
total of $276 million over 10 years--$269 million for 
additional retirement benefits and $7 million for higher Social 
Security benefits.
    Under S. 507, an estimated 8,300 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 upon enactment of S. 507, 
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 increase gross spending of about $50 million (off-budget) 
over the 2010-2019 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. 507 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 $979 million 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 $751 million, 
including $708 million from Medicare payroll taxes and income 
tax collections and $43 million from higher contributions from 
employees toward retirement benefits. The increase in off-
budget revenues would total $229 million from additional Social 
Security tax receipts.
    Intergovernmental and private-sector impact: S. 507 
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 Spending: Retirement--Amber 
G. Marcelino, Social Security--Sheila M. Dacey; Impact on 
Federal Revenues: Zachary Epstein; Impact on State, Local, and 
Tribal Governments: Elizabeth Cove Delisle; 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) any positions under subsection (h)(1)(D) which 
        the President may determine; and
          (C) positions under subsection (h)(1)(C) not covered 
        by appraisal systems certified under section 5382; and
    (3) The applicable maximum under this subsection shall be 
level II of the Executive Schedule for positions under 
subsection (h)(1)(C) 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); [and]
          (C) a Senior Executive Service position under section 
        3132 or 3151 or a senior level position under section 
        5376 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) 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);
                  (iv) a Senior Executive Service position 
                under section 3132, except for members covered 
                by subparagraph C;
                  (v) a position in the Federal Bureau of 
                Investigation and Drug Enforcement 
                Administration Senior Executive Service under 
                section 3151, except for members covered by 
                subparagraph C; 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 the date of enactment of the 
Non-Foreign Area Retirement Equity Assurance Act of 2009, 
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, 2009.
    (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, 2010; 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 2009.
    (2)(A) In this paragraph, the term ``applicable locality-
based comparability pay percentage'' means, with respect to 
calendar year 2010 and each calendar year thereafter, the 
applicable percentage under section 4(1), (2), or (3) of the 
Non-Foreign Area Retirement Equity Assurance Act of 2009.
    (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, 2009; 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 2009--
          (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.