Mike Causey

Seven Year Itch Quiz

Given the choice would you rather have a 25 percent tax-free cost of living allowance or get a 32 percent taxable pay raise? The answer may surprise you! Check ...

Federal News Network Staff

July 9, 2008 4:00 am

3 min read

Federal workers in Alaska, Hawaii, Puerto Rico and other exotic places have it made. Up to a point. They live and work in some of the most beautiful areas of the world, enjoy great beaches, fishing, outdoor activities, etc. And they get tax-free cost of living allowances (COLAs) of up to 25 percent.

But many of the AHP feds are unhappy. How come? Take this quiz. And here’s a clue: If your post-retirement plan includes dropping dead immediately after your retirement luncheon or dinner, your answer is pointless. But for the rest of you, this is the question:

Would you rather have a tax-free COLA of 25 percent or get a 32 percent pay differential that was fully taxable?

This is a trick question (because being math-challenged, I don’t know the answer) but it appears that most people would rather have the higher amount and pay the taxes. How come?

Tax-free COLAs are not counted as part of regular salary. That’s fine while you are working (and paying those king-sized Alaska and Hawaii prices) but not so great when you retire. That’s because the COLAs are not considered part of regular salary. And your retirement annuity is based on your length-of-service and your high-3 year salary. The COLA differential is not part of your high-3 calculation.

The result is that when many Alaska or Hawaii-based feds retire they often find they can’t afford to live where they worked, have friends and ties and maybe children and grandchildren.

Feds in the lower 48 states, who are divided up among 32 locality pay areas, don’t get COLAs. They get pay differentials based on local private sector salaries (and the amount Congress and the White House approve for them). And those differentials are part of basic salary and therefore are part of the high-3 calculation. Feds in San Francisco, for example, enjoy a locality-based differential of more than 30 percent over their colleagues, doing the same jobs and at the same grade levels, in some other parts of the country. It is all part of the complex locality pay system.

All of the above is why Congress is moving – not real fast, but moving – toward approving a phase-out of the tax-free COLA and a phase-in of taxable differentials that would provide bigger future retirement checks for most people.

The White House, OPM and many members of Congress like the phase-in idea. One plan calls for it being done, once signed into law, over a 3-year period. Others say it would take about 7 years.

For the latest on the progress (OPM’s testimony to Congress) of the COLA to locality pay, click here.

If you want more information, including numbers, here’s part of the report the Federal Managers Association sent its members:

Federal employees who reside in Alaska and Hawaii receive a tax-free non-foreign area cost of living adjustment (COLA) in their pay; however, COLA is not credited to basic pay for retirement purposes and residents outside the contiguous United States do not receive the locality pay benefit most federal employees enjoy.

Read more: Mike Causey

…FMA National President Darryl Perkinson stated, “High locality pay in the continental 48 states lures managers, high-level technicians, and engineers to leave Hawaii and Alaska to seek higher pay and an increased annuity towards the end of their careers. With the Los Angeles area offering a 25.26 percent locality adjustment and the San Francisco area offering 32.53 percent, it is easy to see why employees nearing the end of their careers would be looking to complete their final three years in these cities.

Recently, Senators Akaka (D-Haw.), Inouye (D-Haw.), Ted Stevens (R-Ak.) and Murkowski (R-Ak.) introduced legislation, S. 3103, the Non-Foreign Area Retirement Equity Assurance Act, which proposes a three year phase-in of locality pay combined with an annuity buy-in aimed at stabilizing the current retirement eligible workforce. The legislation also advises a 35 percent offset to COLA to protect the pay of all federal employees as they transition to locality pay. On June 25, 2008, the Senate Homeland Security and Governmental Affairs Committee passed the bill unanimously.

Nearly Useless Factoid

According to NIST, the Washington Monument measured 555 feet, 5.9 inches tall in 1999. That’s a little less than half an inch taller than when it was surveyed in 1934.

To reach me: mcausey@federalnewsradio.com