Pay Raise, a COLA and Locality Pay

What are the differences in a COLA, pay raise and locality pay? Who is impacted by each of these?

This is the time of year when federal employees and retirees start to think about their income in the year ahead. Will their income go up in 2020 or stay about the same?

There are several reasons for this. The Cost of Living Adjustment (COLA) will be revealed in October. During that month, federal retirees and Social Security recipients will learn what the COLA adjustment will be when they receive their first paycheck in January of the new year.

This is also the time when there is news about the federal government’s budget for the new fiscal year that will also begin in October. In theory, there will be a new budget for the next fiscal year by that date. In practice, that almost never happens but, at a minimum, interested parties are issuing press releases and seeking headlines supporting their proposal for more (or less) spending in the next year.

Along with the budget, there is also news about the federal pay raise for 2020. Will there be a raise? How much will the raise be? Will it be more or less than the COLA adjustment or is there even a difference?

Many, perhaps most, federal employees are also wondering about locality pay. We just learned of two changes to the locality pay areas for 2020 (adding Des Moines, Iowa as a new pay area and Imperial County, California to the Los Angeles pay locality area).

As the number and size of locality pay areas expand almost every year, those who are impacted are wondering how much of an increase they will get in 2020. And, along with this, many are also wondering why they did not receive a larger locality pay increase.

The federal pay system is large, complex, diverse and difficult to understand. That is probably the major reason there is often confusion and misunderstanding about how the system applies to different groups.

Common Questions (and Answers)

Along with the yearly changes, many of the same questions pop up every year. Here are many of these questions:

  • Do I get a pay raise for my locality pay area in addition to a COLA?
  • I received a COLA adjustment in January. When does the pay raise become effective for my monthly income?
  • Why did a place like Des Moines become a locality pay area? The cost of living is much higher in (pick a location) but I am in the “rest of the U.S.” area.
  • Inflation last year was higher than the raise I received, including the locality pay adjustment. How can that happen?

So, confusion about federal pay, retirement, COLA’s and locality pay sometimes seem rampant in the federal workforce.

Here are some quick answers knowing full well none of these answers satisfy the underlying question: How come I am not getting a bigger paycheck next year?

There is a difference between a raise, a COLA, locality pay and retirement income. Current federal employees often receive a yearly raise. The raise may be larger or smaller than the yearly COLA adjustment that retirees receive.

Annual Federal Pay Raise

The annual federal pay raise is determined through the political process. Congress and the president have a role. Oftentimes, the president makes a recommendation for the next raise (or lack of one) and Congress goes along with it.

In other years, Congress passes legislation that determines the size of the annual federal employee pay raise. The amount given through the legislative process may be greater or smaller than the amount recommended by the president.

The amount of the COLA for federal retirees and Social Security recipients is not directly related to any annual federal pay raise for current employees.

Annual COLA Increase

The annual federal employee pay raise is different than the COLA for federal retirees.

The COLA amount is automatically determined by a formula that plays out automatically. In some years, federal retirees receive a higher increase than current federal employees. In other years, the COLA amount is less than the pay raise and, in some years, there is no COLA increase at all. It all depends on the rate of inflation as defined in the legislation that applies when calculating the COLA amount.

Locality Pay

Locality pay areas do not apply to federal retirees or Social Security recipients. A former federal employee receiving an annuity will receive the same percentage increase (a COLA) regardless of the employee’s geographic location. This is why some federal employees move after retirement—their retirement income is worth more in purchasing power in a low-cost area (often a small town or rural area) than in an area with a higher cost of living (often a large city).

Locality pay does impact many current federal employees. Locality pay is determined by the cost of labor as measured by the Bureau of Labor Statistics (BLS). BLS conducts locality pay surveys in 47 geographic areas, with survey data representing non-federal salaries (including state and local) at distinct levels of work. In the locality pay program, federal pay is compared to non-Federal pay for the same levels of work as measured by BLS. The cost of labor is not the same as the cost of living, although BLS measures both of these.

In effect, readers who comment that the cost of living in their area is higher than Des Moines may be correct. But, the cost of labor may be higher regardless of the cost of living.

The Federal Salary Council reviews locality pay areas and makes recommendations on locality pay for the coming year—including whether to add new locality pay area or modify existing pay areas.

The President’s Pay Agent may (or may not) accept the Salary Council recommendations. The Pay Agent issues an annual report with its conclusions and the Office of Personnel Management implements the decision of the Pay Agent.

The pay system is constantly changing in some way. Understanding how it impacts a particular person’s income for the coming year can be difficult to project or understand. We hope this brief overview is helpful.

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47