Cost-of-Living Allowance Program in Alaska

Under present law, certain civilian employees in Alaska and other nonforeign areas outside the continental United States are authorized to receive cost-of-living allowances (COLA) when living costs are substantially higher than those in Washington, D.C. The allowance, which may not exceed 25 percent of base pay, is not subject to Federal income tax. The Office of Personnel Management (OPM) is responsible for prescribing regulations governing the allowance and must determine, at least once a year, the rates at which COLA will be paid for each eligible area. Allowances are authorized for Federal employees whose rates of base pay are the same regardless of where they work. Allowances are not authorized for blue-collar employees since their pay is based on prevailing local rates. GAO has long been concerned about the appropriateness of paying COLA in nonforeign areas. It has recommended that it be eliminated and replaced with special pay rates based on local private sector pay, where warranted. Proposed legislation would empower the President to establish locality rates of pay for General Schedule employees and would eliminate the nonforeign area COLA program. If the allowance is continued, GAO believes that it should be based on spendable income rather than base pay. GAO recognizes that private sector salaries in Alaska are substantially higher than salaries in the 48 contiguous States, and the Government already pays special rates to some occupational groups for recruitment and retention purposes. Therefore, GAO believes that if its recommendation is adopted, additional special pay rates would be necessary to retain well-qualified employees in Alaska. Currently, GAO is reviewing the OPM methodology for computing COLA rates and is also looking at methods used by the Department of Defense (DOD) for military personnel and the Department of State for civilians in foreign areas. In some respects, all the methods are similiar. However, the differences in the methods used by State, OPM, and DOD make it difficult for Federal personnel to understand and managers to explain how COLA rates are computed. Different base areas are used to set the rates. By law, OPM COLA rates must be based on Washington, D.C. prices, while the DOD statute does not specify a base. There are differing limits on COLA payments. DOD uses environmental factors in its COLA rate computation, while they are not considered in other COLA programs.