Reform of Non-Foreign COLA

5/29/2008

Subcommittee on Oversight of Government Management, the Federal Workforce

Mr. Chairman, no issue is more important to federal employees than of pay. Without proper pay and benefits, the federal government will not attract the best and brightest of the labor force. It will not have the personnel needed to perform the critical functions of government—to protect the border and ports of entry, to collect revenue, to ensure that food and drugs marketed to the public are safe and pure, to defend the right to intellectual property through trademarks and patents, and to advance the common good.

In recent years, the Congress has taken a more engaged role on this matter. In large part through your leadership, Senator Akaka, innovation has been introduced to federal employee pay and benefits, including the recognition of the need for flexibilities and special pay rates in the federal sector. NTEU has been proud to have been a partner with you, Senator Akaka, on many of these innovations and flexibilities. Properly designed and implemented, these have been of great benefit to the nation and the civil service.

However, Mr. Chairman, while recent times have seen a high level of activity, the need for innovation far pre-dates the modern-day action on that matter. As our nation concluded one of its greatest endeavors, the war against and the defeat of fascism—with the then territories of the Pacific being the only American territory to come under direct enemy attack—it became clear that federal employees hired or transferred to these outlying territories bore costs that mainlanders did not. In 1948, there came to be what at the time was a very sensible and necessary action. Rather than being compensated at the then uniform pay rate across the United States, civilian workers in the outlying territories were given an additional payment based on a measure of the increased cost of living in these territories. This cost of living adjustment (COLA) was in addition to the employee’s base pay. Non-taxable for federal income tax or FICA taxes, it was also not counted towards federal retirement. This was termed the Non-Foreign COLA, distinct from pay systems for federal employees living outside the jurisdiction of the United States. This system remained in place following the admission of Alaska and Hawaii as states and continues as well in the territories and the Commonwealth of Puerto Rico, covering almost 50,000 federal employees.

It took the federal government 42 years to understand that within the contiguous states, there were also geographic differences that demanded various pay adjustments. In 1990, the Federal Employees Pay Comparability Act (FEPCA) was signed into law. FEPCA should not be considered the mainland equivalent of non-foreign locality pay. The development of these two methods of pay adjustment are separated by four decades of time. Needs and purposes have evolved. For example, FEPCA is not based on the cost of living but on the locality labor market. NTEU believes from an employee recruitment standpoint, locality pay better serves the goals of the civil service. Further, the exclusion of the non-foreign COLA from calculation of retirement is a great disservice to these employees.

Given that FEPCA was a significant departure from the previous geographically uniform pay rates on the mainland, it was not surprising that Congress exempted the areas under the non-foreign COLA, in essence “grandfathering” this program. But it has become increasingly clear that the non-foreign COLA is dated and in need of reform. With 18 years of experience with locality pay, it is now time to extend locality pay and retirement credit to the outlying areas. However, such an initiative must be done in a way that is fair to employees and does not make sudden, unplanned and adverse changes in their pay and compensation.

The Administration has asked for legislation that would phase in a conversion from COLA to locality pay over seven years. This proposal has many positive features. It would substantially improve retirement benefits for impacted employees. At the end of the seven year period, if the locality pay rate is less than the amount of non-foreign COLA for a particular area, employees would continue to receive the difference in non-foreign COLA and locality pay until the locality rate reaches the COLA amount. However, NTEU cannot support the Administration proposal at this time. It has several significant shortcomings that need to be corrected. Instead, we believe the Senate should use as a starting point S. 3013, the Non-Foreign Area Retirement Equity Assurance Act of 2008 introduced by Senators Akaka, Stevens, Inouye, and Murkowski.

S. 3013 is a much fairer and more sensible proposal and NTEU highly commends the sponsors for introducing it. Rather than the excessively lengthy seven year phase in period, S. 3013 calls for a three year phase in period. For employees concerned as to the retirement disadvantage under COLA, it allows for a speedier transition. Yet, for federal workers who feel the transition does not benefit them, the bill also allows for a one-time, irrevocable opt-out. The Akaka bill also allows for a retirement credit buy-back for the period of January 1, 2009 to December 31, 2011. The proposed legislation also includes provisions to guarantee that no employee would see an unfair reduction in his or her paycheck by implementing a fairer offset formula than the Administration’s proposal and protecting the pay standards of those employees under special rates.

Without the features of S. 3013 that have not been included in the Administration proposal, some federal employees could actually see their compensation decreased. Cutting the pay of federal workers simply because of where they live is unfair and would cause grave harm to employee morale.

The Administration proposal and S. 3013 both make important changes regarding postal employees. NTEU does not represent postal employees and would defer to our brothers and sisters in the postal unions on this matter. We do represent the workforce at the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Administration (NCUA). Employees at these agencies are exempt from Title V and have their own pay system. NTEU would like to work with you, Mr. Chairman, and the Subcommittee, to make sure this legislation properly addresses their situation.

Again, I want to commend you, Chairman Akaka, for your leadership on this matter. I am confident that with your guiding hand legislation can be enacted which enhances the civil service, improves recruitment and is fair to those dedicated federal employees who live in the jurisdictions addressed in this bill. Federal employees in Hawaii, the other 49 states as well as the territories are fortunate to have your leadership on civil service issues. I thank you for the opportunity to present this testimony on behalf of NTEU.