How Can Locality Pay Be Smaller than a COLA?

Locality pay is determined using a complex system of comparing federal and private sector pay. It is not a COLA.

Locality pay has been part of the federal government’s pay system for a number of years. The Federal Employees Pay Comparability Act of 1990 (FEPCA) replaced the nationwide General Schedule (GS). The new system created a method for setting pay for white-collar employees with a combination of across-the-board and location-based pay adjustments. 

How FEPCA Was Supposed to Work

The intent of the law was to gradually increase locality pay over a nine-year period. In 1994, the minimum comparability increase was two tenths of the “target” pay disparity (i.e., the amount needed to reduce the pay disparity with the private sector to 5 percent).

For each successive year, the comparability increase was scheduled to be at least an additional one-tenth of the target pay disparity. Beginning in 2002, the idea was that the full pay increase necessary would be paid to reduce the pay disparity in each locality pay area to 5 percent.

FEPCA Has Not Been Fully Implemented

For those that pay attention to yearly pay changes, FEPCA has not been implemented as intended. As noted by the President’s Pay Agent in its most recent report, there is a reason FEPCA has not been implemented.

…[The] underlying methodology for locality pay, which relies on a singular locality rate to cover a locality pay area, has lacked credibility since the beginning of locality pay in 1994—to such a degree that the statutory formula for closing pay gaps has been overridden either by Congress or by successive Presidents each and every year since that first year.

Stated differently, the Federal Salary Council’s computation of the disparity between federal and private sector pay has not had credibility with any administration since the law was to be enacted. As noted in the most recent report of the Pay Agent, “we find that the overall scale of the pay disparities presented to us each year using the current locality pay methodology lacks credibility.”

Locality Pay vs. COLA

Each year, questions arise from readers about their discontent with locality pay. In part, there is understandable confusion about the difference between the various federal pay systems, including the one for federal retirees.

The most common question is along these lines: “Federal retirees got a higher increase than I did with my locality pay. Inflation and housing costs in my area went up much more than in other areas but our locality pay has not kept up with the cost-of-living where I live. Why does this keep happening?”

The increase federal retirees usually receive each January is a COLA, or Cost-of-Living-Adjustment. Any increase comes from a price index intended to mirror inflation.

This index (the CPI-W or Consumer Price Index for Urban Wage Earners and Clerical Workers) is compiled by the Bureau of Labor Statistics. It is a measure of the average price changes paid by consumers for a variety of goods and services. In effect, as prices for these products go up, the index goes up.

Locality pay is not based on inflation. In fact, the pay for federal employees who are still working is not based on the rate inflation either. The inflation increase rate only directly applies to the COLA calculation.

The locality portion of the annual pay adjustment under FEPCA was intended to be implemented over nine years.

In actuality, the schedule for reducing pay disparities by establishing locality pay adjustments under FEPCA has not been followed by any administration since 1994.

In the most recent report from the Federal Salary Council (FSC), the Council wrote: “when existing locality pay rates averaging 23.60 percent as of March 2020 are taken into account, the overall remaining pay disparity is estimated at 23.11 percent.”

In other words, according to the FSC, federal employees are still underpaid by about 23.11 percent even taking into account existing locality pay rates. No one should start counting on this level of a locality pay raise in 2022 as it is unlikely to happen.

While we do not know what the President’s Pay Agent will do under the Biden administration, the most recent report of the Pay Agent stated:

[A] Congressional Budget Office (CBO) report issued in April 2017 echoes the findings of many labor economists in identifying a significant overall compensation gap in favor of Federal employees relative to the private sector. CBO identified a 17 percent average compensation premium for Federal workers—with Federal employees receiving on average 47 percent higher benefits and 3 percent higher wages than counterparts in the private sector. 

In other words, the President’s Pay Agent prefers including the cost of federal employee benefits in calculating a pay disparity with the private sector. Again, we do not know what the new members of the Pay Agent will accept or report.

In effect, presidents since 1994 have proposed an alternative pay plan. President Trump followed this pattern in the most recent pay raise for federal employees including those in locality pay areas.

So How is Locality Pay Determined?

When FEPCA was set up, it required using non-Federal salary survey data from the U.S. Bureau of Labor Statistics (BLS) to set locality pay.

BLS uses information from two programs. Data from the National Compensation Survey (NCS) are used to estimate how salaries vary by level of work from the occupational average, and Occupational Employment Statistics (OES) data are used to estimate average salaries by occupation in each locality pay area. The process of combining the data from the two sources is called the NCS/OES model.

Keep in mind the data used is not the same as the inflation data used for an annual COLA. The actual computations are complex and would require an experienced statistician. This is an overly-simplified version of how locality pay is calculated. A much more detailed explanation is available from the Office of Personnel Management website.

Locality-based comparability payments are based on differences in Federal and non-Federal pay. Pay differences are measured for each locality pay area by comparing the base GS pay rates of Federal employees paid under the General Schedule pay plan in a geographic area to the annual rates generally paid to non-Federal workers for the same levels of work in the same geographic area.

In effect, the locality pay rates are determined by a complex formula that considers the amount paid for similar jobs in the private sector in particular geographic areas. To the extend inflation or the overall cost of living in a particular area is concerned, the impact is indirect.

The locality pay system has led to higher salaries for federal employees. New employees are frequently added to the system in many years. There are often significant differences in pay in different geographic areas as a result of locality pay.

Some of the “locality areas” are quite large and may encompass parts of more than one state. The result may be that some federal employees living in a fairly rural area may be getting a considerably higher salary than residents in their town. On the other hand, the daily commute to the actual job location may be two or more hours each way depending on traffic.

Of course, with an increase in telecommuting, there are some federal workers who are able to work at home on the outskirts of a large locality pay area, do not have a daily commute, and still are able to make the higher salary of those who work within the major city.

Individual circumstances vary widely. As is often the case, the system works much better for some than for others.

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