[Federal Register: August 2, 2006 (Volume 71, Number 148)]
[Rules and Regulations]
[Page 43897-43904]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02au06-12]
[[Page 43897]]
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OFFICE OF PERSONNEL MANAGEMENT
5 CFR Part 591
RIN 3206-AK67
Cost-of-Living Allowances (Nonforeign Areas); COLA Rate Changes
AGENCY: Office of Personnel Management.
ACTION: Final rule.
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SUMMARY: The Office of Personnel Management is issuing final
regulations to change the cost-of-living allowance rates received by
certain white-collar Federal and U.S. Postal Service employees in
Alaska, Hawaii, Guam and the Northern Mariana Islands, Puerto Rico, and
the U.S. Virgin Islands. The changes are the result of living-cost
surveys conducted in 2002, 2003, and 2004.
DATES: Effective date: September 1, 2006. Implementation date: First
day of the first pay period beginning on or after September 1, 2006.
FOR FURTHER INFORMATION CONTACT: Donald L. Paquin, (202) 606-2838; fax:
(202) 606-4264; or e-mail: COLA@opm.gov.
SUPPLEMENTARY INFORMATION: Section 5941 of title 5, United States Code,
authorizes Federal agencies to pay cost-of-living allowances (COLAs) to
white-collar Federal and U.S. Postal Service employees stationed in
Alaska, Hawaii, Guam and the Northern Mariana Islands, Puerto Rico, and
the U.S. Virgin Islands. Executive Order 10000, as amended, delegates
to the Office of Personnel Management (OPM) the authority to administer
nonforeign area COLAs and prescribes certain operational features of
the program. OPM conducts living-cost surveys in each allowance area
and in the Washington, DC, area to determine whether, and to what
degree, COLA area living costs are higher than those in the DC area.
OPM sets the COLA rate for each area based on the results of these
surveys.
Background
The 2002 Caribbean surveys were the first OPM conducted using the
new methodology we adopted pursuant to the stipulation of settlement in
Caraballo et al. v. United States, No. 1997-0027 (D.V.I), August 17,
2000. Caraballo was a class-action lawsuit in which the plaintiffs
contested the methodology OPM used to determine COLA rates. In the
Caraballo settlement, the parties agreed that if the Government adopted
and maintained certain changes in the COLA program, the plaintiffs
would be barred from bringing suit over these issues. The complete
stipulation for settlement is on OPM's Web site at http://www.opm.gov/oca/cola/settlement.asp
.
Before the settlement, the parties entered into a memorandum of
understanding under which they engaged in a cooperative process to
study living-cost and compensation issues. The research was exhaustive
and covered essentially all aspects of the COLA program. A summary of
that research is available on OPM's Web site at http://www.opm.gov/oca/cola/research.asp
.
Exhibit A of the Caraballo settlement agreement lists 26 ``Safe
Harbor Principles'' that outline the changes to which the parties
agreed. These principles formed the basis for a new COLA methodology,
which OPM incorporated into its regulations. In developing these
regulations, OPM consulted with the Survey Implementation Committee
(SIC), which was established under the Caraballo settlement and is
composed of representatives of the parties in Caraballo. The SIC in
turn consulted with the Technical Advisory Committee (TAC), which was
also established under the Caraballo settlement and is composed of
three economists with expertise in living-cost comparisons. OPM
published proposed regulations incorporating the new methodology in the
Federal Register for notice and comment on November 9, 2001, at 66 FR
56741, and a final rule on May 3, 2002, at 67 FR 22339. The SIC and the
TAC also worked closely with OPM in preparing for and implementing the
2002, 2003, and 2004 COLA surveys.
COLA Surveys
In 2002, OPM surveyed Puerto Rico, the U.S. Virgin Islands, and the
Washington, DC, area. We published the results of these Caribbean
surveys in the Federal Register on February 9, 2004, at 69 FR 6020. In
2003, OPM surveyed Anchorage, Fairbanks, and Juneau, Alaska, and the
Washington, DC, area. We published the results of these Alaska surveys
on March 12, 2004, at 69 FR 12002. In 2004, OPM surveyed Honolulu
County, Kailua Kona, Hilo, Kauai County, Maui County, Guam, and the
Washington, DC, area. We published the results of these Pacific surveys
on August 4, 2005, at 70 FR 44989. OPM also published the results of
new shelter (rent) price analyses for the 2002 Caribbean surveys and
the 2003 Alaska surveys in a Federal Register notice dated August 4,
2005, at 70 FR 44978.
COLA Rate Changes
As described in the survey reports, OPM compared the results of
each of the COLA area surveys with the results of the DC area survey to
derive a living-cost index for each of the COLA areas. We then added
adjustment factors as provided in 5 CFR 591.227. The final results
indicate an increase in the COLA rates for the U.S. Virgin Islands and
Kauai County, Maui County, and Hawaii County, HI; no change in the COLA
rates for the Rest of the State of Alaska, Guam and the Northern
Mariana Islands, and Honolulu County, HI; and a reduction in the COLA
rates for Puerto Rico and Anchorage, Fairbanks, and Juneau, Alaska.
Table 1 shows the old and new COLA rates and the survey living-cost
indexes for each area. Under 5 CFR 591.228(c), COLA rate reductions are
limited to no more than 1 percentage point per year. The living-cost
indexes OPM previously published at 70 FR 44979 and 70 FR 44990 have
been amended based on changes we implemented in response to comments we
received. These changes are described in the section of this notice on
Hedonic Regressions. OPM is publishing the new living-cost indexes in a
Federal Register notice that accompanies this final rule.
Table 1.--COLA Rates and Living-Cost Indexes
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Previously
Old COLA rates published Revised living- New COLA rates
Allowance area/category (percent) living-cost cost indexes (percent)
indexes
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Puerto Rico..................................... 11.5 105.10 103.04 10.5
U.S. Virgin Islands............................. 22.5 122.84 122.53 23.0
Anchorage, Alaska............................... 25.0 113.79 113.64 24.0
Fairbanks, Alaska............................... 25.0 115.61 115.62 24.0
[[Page 43898]]
Juneau, Alaska.................................. 25.0 118.03 118.09 24.0
Rest of the State of Alaska..................... 25.0 136.00 135.84 25.0
Honolulu County, Hawaii......................... 25.0 127.78 125.80 25.0
Hawaii County, Hawaii........................... 16.5 119.11 117.25 17.0 \1\
Kauai County, Hawaii............................ 23.25 130.58 127.63 25.0
Maui County, Hawaii............................. 23.75 134.49 131.50 25.0
Guam and the Northern Mariana Islands........... 25.0 127.65 127.40 25.0
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The 2004 Pacific survey report indicated a COLA rate increase for Hawaii County, HI, from 16.5 percent to 19
percent. OPM, however, refined the rental survey hedonic regressions after taking into consideration comments
received. The refined methodology results in a 17 percent COLA rate for Hawaii County. The refinements OPM
adopted pursuant to comments are discussed in the section on Hedonic Regressions.
OPM published a proposed rule in the Federal Register on August 4,
2005, at 70 FR 44976, inviting comments on the COLA rate changes.
Approximately 2,400 commenters responded to the proposed rule. Most of
the comments were from Federal employees or unions representing Federal
employees. Many of the commenters expressed opposition, without further
comment, to the planned COLA rate reductions. Other commenters
addressed specific issues and concerns with the COLA surveys. One
agency and two commenters concurred with the rate changes. We summarize
and evaluate the substantive comments in the ``Discussion of Comments''
section that follows.
Discussion of Comments
Rising Living Costs
Many of the commenters said OPM should not reduce COLA rates
because their living costs were increasing. A number of commenters
provided or referred to publications showing rising costs in their COLA
area. By law, OPM must compare costs in the COLA areas with costs in
the Washington, DC, area and adjust COLA rates according to the
relative difference. Therefore, if living costs rise faster in the COLA
area than in the DC area, we increase the COLA rate subject to the
statutory maximum. If living costs rise faster in the DC area than in
the COLA area, we reduce the COLA rate, but by no more than 1
percentage point per year, as provided by 5 CFR 591.228(c).
Numerous commenters noted that certain costs have increased since
OPM conducted the survey in their COLA area and that the survey data
were outdated. Many commenters requested that OPM survey again. They
cited the cost of gasoline, housing, utilities, grocery items, medical
needs, various fees and taxes, and other items. OPM recognizes that
prices for various items will increase in the COLA areas and/or the DC
area between surveys. We collect prices in each survey area every 3
years on a rotating basis according to a schedule agreed upon by the
parties in the Caraballo settlement. Beginning with the publication of
the 2005 Caribbean and DC COLA survey results, OPM will adjust price
indexes for areas not surveyed based on the relative change in the
Consumer Price Index (CPI) for the COLA area compared with the CPI for
the Washington, DC, area. Pursuant to the Caraballo settlement, we are
not implementing CPI adjustments at this time.
Several commenters said their current living costs are considerably
higher than living costs at their previous duty station in the lower 48
States. By law, OPM must compare the cost of living in the COLA areas
with the cost of living in the Washington, DC, area.
Consumer Goods
Several commenters noted that some goods available in the
contiguous States are not available in their COLA area. Other
commenters said certain items, such as water softeners, are necessary
in their COLA area, but not in the DC area. Two commenters said they
pay for certain services, such as garbage collection, that are covered
by taxes in some other areas. Issues such as these were discussed
extensively during the COLA litigation. As a result of the Caraballo
settlement and as provided by 5 CFR 591.227, OPM adds an adjustment
factor to the price index for each COLA area to reflect differences in
need, access to and availability of goods and services, and quality of
life in the COLA area relative to the DC area. With regard to the above
comments, we note that several water softener companies do business in
the DC area and assume this reflects a need for some DC area residents
to have water softeners. We also note that residents in several
communities in the DC area pay directly for garbage collection.
One commenter compared prices for a number of items at a department
store in Puerto Rico with mainland prices listed on the store's
Internet site, showing the prices for these items in Puerto Rico to be
higher. The same commenter also remarked on the high cost of vehicles,
including shipping, in Puerto Rico. Other commenters also noted that
many consumer goods must be shipped to COLA areas at high cost. In each
of the annual surveys, OPM contacted over 900 outlets and collected
more than 4,600 prices on over 240 items representing typical consumer
purchases. We surveyed the final cost to the consumer of services or
items, including automobiles. The final cost includes any overhead,
transportation and shipping costs, taxes, competition, and other price
influences. Additionally, OPM surveyed catalog prices for a number of
items and included in the price the costs for shipping, sales tax, and
excise tax, which are often higher in the COLA area relative to the
Washington, DC, area.
Inequity Among Areas
Many commenters claimed the COLA rate reductions in Puerto Rico
were discriminatory but did not elaborate. Some commenters, however,
noted that Puerto Rico historically has had the lowest COLA rate of all
of the COLA areas.
OPM conducts COLA surveys using the same methodology in all areas.
For many years, OPM's surveys have indicated that COLA rates should be
lower in several COLA areas. However, litigation and legislation barred
OPM from implementing COLA rate reductions. The bars have now expired,
and we are implementing rate reductions in certain areas. In the
future, it is possible that there may be more differentiation among
COLA rates than there is today.
Several commenters questioned the data collectors' familiarity with
Puerto
[[Page 43899]]
Rico and knowledge of the Spanish language. OPM used data collectors in
Puerto Rico who spoke Spanish and had formerly resided in Puerto Rico.
In addition, the two non-rental OPM data collectors were accompanied by
observers from the Puerto Rico COLA Advisory Committee (CAC), which is
composed of current Federal employees who live in Puerto Rico and speak
Spanish.
Before each survey, OPM establishes a CAC in each of the survey
areas. As described in 5 CFR 591.243, each CAC is composed of
approximately 12 agency and employee representatives from the survey
area and two representatives from OPM. To help OPM prepare for the COLA
surveys, OPM and the CACs held 3-day meetings in each area to be
surveyed to plan the COLA surveys. During the survey, the CAC members
assisted OPM staff in collecting non-rental data, and after the survey
the CAC members had the opportunity to review all of the survey
results, including the results of the rental survey. Although CAC
members helped plan the rental survey and had the opportunity to review
the rental survey results in detail, CAC members did not participate in
the rental data collection as observers.
A local union in Puerto Rico stated that in the rental survey, OPM
treated Puerto Rico COLA employees in a disparate fashion because of
national origin and without regard to unique linguistic and cultural
differences. The union cited misspellings in the rental data as
evidence that the data collectors encountered a serious language
barrier. The OPM contractor that surveyed rental properties in Puerto
Rico also employed Spanish-speaking data collectors, some of whom were
or are residents of Puerto Rico. Although there may have been
misspellings in business names and street addresses, we believe the
overall quality of the rental data was good and reflected the COLA
survey's specifications for rental prices in Puerto Rico.
Rental Surveys
OPM also received from the local union in Puerto Rico extensive
comments on the Caribbean and DC area rental surveys. A large number of
commenters wrote in support of the union's comments, made similar
comments, or addressed other issues relating to the rental surveys.
Many of the comments addressed 2005 survey issues based on pre-
publication rental data OPM provided to the Puerto Rico CAC for review.
Because we have not yet published the 2005 survey results and because
the Puerto Rico rate reduction is based on the 2002 Caribbean survey
results, we are responding in this final rule to the comments as they
apply to the 2002 survey.
The union and other commenters asserted that the rental survey did
not accurately reflect the areas or the types of housing units where
Federal employees live in Puerto Rico, was conducted in a careless and
negligent manner, and was conducted differently in Puerto Rico than in
the DC area and the U.S. Virgin Islands. Other commenters in Puerto
Rico charged that the rental survey was inaccurate, unfair, and
discriminatory, and many challenged the veracity, reliability, and
adequateness of the rental data.
OPM hired an experienced contractor to collect rental data in each
area, and the data were collected in essentially the same manner in all
areas. In Puerto Rico, we directed the contractor to collect in the San
Juan/Caguas area and in areas east of San Juan, including the Roosevelt
Roads area. We selected these areas based on the results of the 1992/93
Federal Employee Housing and Living Patterns Survey, which provided
information on where Federal employees live. As described in the survey
report, OPM collected over 80 housing characteristics on more than 400
rental observations throughout this area of Puerto Rico and over 900
observations in the Washington, DC, area. The housing characteristics
were described in Appendix 4 of the survey report (69 FR 6047).
Pursuant to the Caraballo settlement, OPM used hedonic regression
analysis, which is a type of statistical analysis, to compare rents in
the COLA areas with rents in the DC area. The use of hedonic
regressions allows OPM to hold quantity and quality of housing constant
to make rental rate comparisons. The hedonic regressions are described
in the survey notice at 69 FR 6029 and Appendix 5 at 69 FR 6048. (As
described in the notice of August 4, 2005, at 70 FR 44798, OPM revised
these hedonic regressions and published new rent indexes.) Therefore,
we believe the rental surveys and analyses were conducted in a fair and
professional manner in all of the COLA areas.
The union also noted that a high percentage of the Puerto Rico
observations were gathered from ``drive by'' listing sources. The
contractor collects information from five types of sources: local
newspaper/publication, Internet, agent/broker, drive-by/sign posted,
and other. The contractor collected data from all types except
``other'' in both Puerto Rico and the DC area, but the distribution of
observations by listing source type varied by area. To determine
whether listing source influenced rental rates, OPM added listing
source as a variable in the hedonic regression analysis. We found that
the variable was statistically significant, but that it raised the
standard error of the survey area parameter estimates. Therefore, we
are not using listing source as a variable in the final hedonic
regression. (See the section of this notice on Hedonic Regressions.)
The union also stated that a considerable percentage of the rental
observations were from individuals who refused to provide some or all
self-identifying information (i.e., the individual's name and/or his/
her home or business address). Approximately 30 percent of the rental
observations in Puerto Rico were from such individuals, and
approximately 4 percent of the observations in the DC area were from
such individuals. As with listing sources, OPM added self-
identification refusal as a variable to the hedonic regression
analysis. We found that self-identification refusal was not a
statistically significant variable and are not using it in the final
hedonic regression.
The union and a number of other commenters believe OPM should have
allowed observers to accompany the contractor on the rental surveys in
Puerto Rico. The contract did not provide for rental data collection
observers to accompany contractor data collectors, and we determined
that a contract modification to allow observers would increase contract
costs significantly. We are currently exploring with the contractor how
rental data collection observers might be involved in future COLA
surveys.
Various commenters noted expenses that affect the cost of shelter
in their area. A number of commenters said employees in Puerto Rico pay
more for living in gated communities or incur costs for security
systems because of the high crime rate. One commenter remarked on
higher mortgage rates in Puerto Rico. A commenter from Alaska noted
that some properties require water wells. To the extent that these
necessities influence the rental rate for a property, they are captured
by the rental survey. The rental survey also captures any separate
security fees added to rents.
One commenter asked why the COLA survey did not compare homeowner
data. Under the Caraballo settlement, the parties agreed to adopt a
rental equivalence approach similar to the one the Bureau of Labor
Statistics uses for the Consumer Price Index. Rental
[[Page 43900]]
equivalence compares the shelter value (rental value) of owned homes,
rather than total owner costs, because the latter are influenced by the
investment value of the home (i.e., what homeowners hope to realize as
a profit when they sell their homes). As a rule, living-cost surveys do
not compare how consumers invest their money.
The same commenter said one of the apartment units surveyed in the
2003 Juneau survey was listed as 960 square feet, but she said the
property was actually 690 square feet. OPM asked the contractor to
verify the information. The contractor found that the units in this
apartment complex varied in size and that some are 690 square feet,
while others are 960 square feet. The unit in the Juneau rental
database was correctly identified at 960 square feet.
The same commenter also objected to assigning all two-bedroom
apartments to the same class. For the purposes of drawing the rental
survey sample, OPM classifies rental units by location into six broad
categories. The six categories are as follows: Class A--four bedroom,
single family unit not to exceed 3200 square feet; Class B--three
bedroom, single family unit not to exceed 2600 square feet; Class C--
two bedroom, single family unit not to exceed 2200 square feet; Class
D--three bedroom apartment unit not to exceed 2000 square feet; Class
E--two bedroom apartment unit not to exceed 1800 square feet; and Class
F--one bedroom apartment unit not to exceed 1400 square feet. OPM uses
this information only to draw the survey sample. During the survey, OPM
obtains information on more than 80 housing characteristics, including
type, actual square footage, number of bedrooms and bathrooms, and
other characteristics of each rental unit. Instead of comparing houses
within each of the six broad classes, we use the detailed
characteristics of each rental unit and hedonic regressions as
described below to hold these characteristics constant between the COLA
and Washington, DC, area to make rental price comparisons.
One commenter asserted that OPM's contractor determined most
square-footage measurements without visiting the property. OPM's
contractor visited every property and used, where appropriate, special
equipment to estimate the square footage of living space. The
contractor also used living-space information provided by brokers,
realtors, owners, property tax records, and other reliable sources.
Hedonic Regressions
As described in the previous section, OPM received several comments
concerning the rental survey, some of which led us to revisit the
hedonic regression analyses we use to compute rental indexes. As
described at 69 FR 6029 and Appendix 1 at 70 FR 44979, OPM used hedonic
regression analysis, which is a type of multiple linear regression
analysis, to compare rents in the COLA areas with rents in the DC area.
Multiple linear regression is used to determine how the dependent
variable (in this case, rent) is influenced by one or more independent
variables (in this case, the characteristics of the rental unit
including some aspects of the neighborhood). As is common in this type
of analysis and as was done in the research leading to the Caraballo
settlement, OPM used semi-logarithmic regressions. The regression
produces parameter estimates for each independent variable, including
survey area. A parameter estimate is an estimate of the influence of
rental characteristics or variables on rent of a dwelling unit.
Variables may be continuous--like square footage, number of bedrooms,
or number of bathrooms--or class variables, like external condition
(good, fair, etc.), availability of air conditioning (yes, no), or the
particular COLA survey area in which the rental unit is located. For
example, ``Puerto Rico,'' ``St. Croix,'' and ``St. Thomas/St. John''
are the Caribbean COLA survey area class variables for which parameter
estimates are computed.
COLA survey area parameter estimates are of greatest interest in
the COLA rental model because, once converted, they become the survey
area rent index holding all of the other rental characteristics in the
regression constant. In other words, the exponent of the survey area
parameter estimate (i.e., after the estimate is converted from natural
logarithms with a correction for a slight bias caused by the use of
logarithms) multiplied by 100 is the survey area's rent index. This
index reflects the difference in rents for the COLA survey area
relative to the Washington, DC, area, while (in effect) holding other
significant housing characteristics constant.
To select the variables to use in the model, OPM adopted a
methodology developed by the TAC and OPM, in consultation with the SIC.
The methodology OPM used to produce the rent indexes published in the
notices (70 FR 44978 and 70 FR 44989) that accompanied the proposed
rule was an objective, multi-step process by which OPM eliminated
variables that were not statistically significant. After reviewing the
results of hedonic regressions OPM performed in response to comments we
received on the rental survey, the TAC recommended that we refine the
methodology to also eliminate variables that decreased the precision of
the rent index. Therefore, OPM modified the variable selection process
to eliminate variables that are not statistically significant and/or
decrease the precision of the rent index. The refined methodology
produces an improved hedonic regression model with somewhat different
rent indexes than those shown in the survey notices. (See notice that
accompanies this rule.)
A commenter from Puerto Rico supported in general the use of
hedonic techniques, but was critical of the variables in the OPM
regression model. The commenter noted a number of characteristics he
thought OPM should have included. OPM collected most of the
characteristics the commenter suggested. (See Appendix 4 at 69 FR
6047.) We then processed the characteristics using the methodology
described above and included many of them (e.g., square footage, number
of bedrooms and bathrooms) in the final hedonic regression analysis.
Therefore, although OPM collects more than 80 rental unit
characteristics, the multi-step process described above produces a
hedonic regression model with fewer characteristics, i.e., those that
are statistically most important and increase precision in terms of the
rent indexes.
OPM does not collect some of the variables (e.g., occupancy ratio)
noted by the commenter. These variables are often included in studies
related to the appraised value of properties, particularly apartment
complexes, because they might be important to a prospective commercial
buyer. We do not collect information such as occupancy ratios, however,
because they are not important for renters of single units within a
complex.
The commenter noted that location is an important variable and
recommended collecting information on neighborhoods and ``distance to
major employment centers.'' OPM added distance as a variable in the
hedonic regression analysis by computing the distance from each rental
observation to the major Federal building or intersection in each
survey area. We then treated distance as any other variable in the
model and examined its significance and its impact. As it turned out,
distance did not enter as a variable in any of the final models because
it either was not significant or decreased the precision of the rent
index.
With regard to neighborhoods, as shown in Appendix 4 at 69 FR 6047,
OPM already collects information that reflects the quality of the
neighborhood.
[[Page 43901]]
We use information from the Bureau of the Census to introduce
additional variables to the hedonic regressions that may reflect the
quality of the neighborhood. To do this, we identify the census tract
within which each rental observation is found and then add variables,
such as median income, percent school age persons, and percent of
people in the area with B.A. degrees or higher, to the hedonic
regressions. We process these characteristics using the methodology
described above and those that are statistically significant and
increase precision are used in the final hedonic regression analysis.
OPM was not able to add census tract data to the 2002 survey. We
did not have longitude and latitude coordinates for the 2002 rental
observations, and we are not aware of any software product that could
provide this information using Puerto Rico and U.S. Virgin Islands
addresses. We note, however, that we collected longitude and latitude
information in the 2005 Caribbean survey, and we anticipate using
census tract data in the analysis of the rental survey results.
The commenter described a type of logit model that appraisers find
useful in distinguishing ``atypical'' apartment complexes--possibly an
important tool in the appraisal field. Further, the logit model is
useful when the dependent variable is limited in range (e.g., the
probability of buying an apartment building of given characteristics)
but is not appropriate for a continuous variable, like rents for
similar accommodation across cities, which is the goal of OPM analysis.
The commenter said OPM did not say which statistical package it
used and did not describe its analyses. As stated at 70 FR 44978, OPM
used SAS, which is a common proprietary statistical package. Appendices
1 and 2 at 70 FR 44979 show the details of the regression models OPM
used and the results of the regressions.
The commenter also said OPM should provide the statistical
procedures used for the hedonic regressions to the CACs for review. OPM
provides the CACs with COLA survey materials that explain regression
analysis, contain graphs and charts, and provide the same details about
the rental survey and hedonic regressions OPM publishes in its Federal
Register notices. In addition, OPM staff meets with the CACs to explain
the procedures used, go over the hedonic regression results, and answer
questions.
Locality Pay and Retirement
Numerous commenters said Federal employees in the COLA areas should
receive locality pay. Several requested that OPM replace the COLA rate
with locality pay or take DC area locality pay into consideration when
setting COLA rates. Two commenters noted that the Rest of U.S. (RUS)
locality pay rate is higher than the COLA rate in Puerto Rico. One
commenter said OPM should set the lowest COLA rate to be equivalent to
the RUS locality pay rate. Several commenters noted that locality pay
is included in base pay for retirement purposes, while COLAs are not
included. One commenter said that not considering COLAs in retirement
calculations creates a disincentive to retire in a COLA area. Another
commenter said that employees in the COLA areas have to save more for
retirement.
The Federal Employees Pay Comparability Act of 1990 (FEPCA)
authorizes locality pay only for Federal employees in the contiguous 48
States and Washington, DC. OPM cannot consider DC area locality pay or
set COLA rates at certain locality pay levels because doing so would be
tantamount to implementing locality pay outside the 48 States.
Additionally, OPM cannot credit COLAs in the retirement calculation
because 5 U.S.C. 8331(3) and 8401(4) exclude allowances from base pay
for Federal retirement purposes. Changes in law would be required to
extend locality payments to Federal employees in the COLA areas or to
include COLAs in base pay for Federal retirement purposes.
Recruitment and Retention
Many commenters believe COLA reductions would cause recruitment and
retention problems. OPM is concerned about the Government's ability to
recruit and retain a well-qualified workforce and notes that the
Government has several pay authorities that are available to address
recruitment and retention problems. Among these are special salary
rates and recruitment, retention, and relocation incentives.
Financial Effect
Many commenters were concerned about the impact of COLA reductions
on personal financial commitments, such as mortgages, and other
financial obligations. Several commenters stated that the reductions
would have an adverse effect on the local economy of the COLA area. As
noted above, OPM's authority to set COLA rates is established in 5
U.S.C. 5941. However, our regulations provide that COLA rates may be
reduced by no more than 1 percentage point in any 12-month period,
which serves to minimize the financial impact of COLA rate reductions.
Utility Costs
Several commenters remarked that water, electricity, and other
utility costs are high in Alaska and Puerto Rico. One commenter noted
that increasing energy costs also affect costs for shelter,
transportation, and consumer goods. OPM surveyed utility costs and
included these costs in the price comparisons. We also surveyed costs
for shelter, transportation, and consumer goods and services. The
prices of goods and services include any energy and/or local
transportation costs associated with making these items available for
sale.
Some commenters reported that water utility prices have or are
going to increase significantly in Puerto Rico. To the extent that such
increases occur, they will be reflected in the results of the 2005
survey or in subsequent surveys and/or adjustments.
Transportation
Several commenters noted the cost of long distance travel from the
COLA areas to areas in the continental United States. The commenters
requested that OPM consider time, distance, and excessive travel
expenses in setting COLA rates. Two other commenters noted higher air
transportation costs in Juneau because of the lack of airline
competition.
The COLA methodology takes travel expenses into account in two
ways. First, OPM compares the cost of air travel from the various COLA
areas to common destinations in the contiguous States with the cost of
air travel from the DC area to those same destinations. This would
capture any higher ticket prices that result from reduced competition.
Second, as provided in 5 CFR 591.227, OPM adds to the overall price
index for the COLA area an adjustment factor that reflects differences
in need, access to and availability of goods and services, and quality
of life in the COLA area relative to the DC area. This adjustment
factor is designed to address such considerations as the difficulty of
traveling long distances.
Medical Services
Several commenters believe the survey underestimated the cost and
restricted availability of medical services in Alaska. They also noted
that doctor visits and dental care are more expensive in the COLA
areas. One commenter said none of the Federal health benefit plans in
Juneau offer supplemental dental coverage. Another commenter felt that
medical care in
[[Page 43902]]
Juneau was limited, resulting in higher health care costs and inferior
health care. Several commenters said there was a need for costly travel
outside the area to obtain some medical services.
OPM surveys the prices of several medical services (including
dental services) and items in each COLA area and in the DC area. The
medical services index reflects any relatively higher local prices. The
availability of medical services is not something OPM prices or
quantifies. Instead, it is part of the adjustment factor OPM adds to
the price index to reflect differences in need, access to, and
availability of goods and services, and quality of life in the COLA
areas relative to the Washington, DC, area.
One commenter noted that there were no Health Maintenance
Organizations (HMOs) in Juneau. As described at 69 FR 12005, OPM
compared average health insurance premium costs in the COLA area with
average health insurance premium costs in the DC area. Therefore, the
health insurance premium index reflects higher local costs to the
extent that an area has only higher cost plans available (i.e., to the
extent HMOs are not available).
Quality of Life
A number of commenters stated that the COLA reductions would affect
their quality of life. One commenter from Alaska said the COLA is an
incentive that helps with the isolation, extreme climate, support
issues, and darkness. As noted under the Transportation section, OPM
adds adjustment points in part to compensate for differences in quality
of life.
Taxes
Several commenters mentioned increased sales, excise, and local
taxes in Puerto Rico. Another commenter noted that Federal employees in
North Pole, Alaska, must pay a sales tax. OPM adds sales tax and, where
applicable, excise and other taxes to the prices it collects. In Puerto
Rico, excise taxes paid by importers and distributors are part of the
price for the item. In the case of catalog items, OPM adds such taxes
as applicable. To the extent any recent tax increases in Puerto Rico
have occurred, they will be reflected in the results of the 2005 survey
or in subsequent surveys and/or adjustments.
Local Conditions
Several commenters from Puerto Rico noted additional costs faced by
Federal employees on the island because of hurricanes and blackouts.
Among the costs mentioned were generators, special water tanks, storm
shutters, bottled water, road damage, electrical equipment repair, and
higher property insurance. OPM discusses property insurance under the
heading Insurance. As noted under the Transportation section, OPM adds
adjustment points pursuant to 5 CFR 591.227 in part to compensate for
differences in quality of life.
A number of commenters also remarked on weather conditions in
Alaska. They noted additional costs, such as four-wheel drive, studded
tires, winter clothes, high electric and heating bills, and vehicle
maintenance, because of the long winters, icy roads, and temperatures
that sometimes extend to 40 degrees or more below zero. As described in
Appendix 3 at 69 FR 12027, OPM priced in Alaska a four-wheel drive
vehicle with an engine block heater and regular and studded tires. We
also priced parkas, boots, and other cold weather items. The utility
model we use reflects Alaska's higher home energy costs.
Insurance
Several commenters noted high property insurance rates as a result
of escalating housing prices, hurricanes, or property located in flood
zones. OPM uses a rental equivalence approach to determine shelter
costs. The rental equivalence approach compares the rental values of
homes. Home insurance is implicit in these values. Therefore, we do not
survey any type of homeowner insurance, but we do survey renter
insurance. In doing so, we include the price of any special riders
necessary to cover hurricane or typhoon damage.
Education
Several commenters cited the necessity for placing children in
private schools in Puerto Rico. The commenters noted language, quality,
and danger issues with the public schools. One commenter said that the
quality of Puerto Rico public schools is poor, while the DC area has
some of the best public schools in the nation. Another commenter said
employees in Puerto Rico who want to compete for employment
opportunities in the mainland must place their children in costly
English language private schools. Several commenters remarked on the
high cost of private school tuition, school supplies, and various
school fees in Puerto Rico. Other commenters said the Department of
Defense school in San Juan is not available to many Federal employees,
so they must pay for private schools. One commenter from the island of
Hawaii said school choices and day care facilities there are limited,
and the only private school for high school students is in Waimea.
Another commenter said private schools in Juneau are limited,
increasing costs for those who must use out-of-state private schools.
OPM surveyed K-12 private education in the COLA and DC areas and
computed an average tuition price that reflected all grade levels.
Because not everyone sends children to private school, we made an
additional special adjustment for K-12 education by applying ``use
factors.'' These use factors reflect the relative extent to which
Federal employees make use of private education in the COLA and DC
areas. OPM described the process used for K-12 private education in the
Caribbean region at 69 FR 6030, in Alaska at 69 FR 12007, and in the
Pacific region at 70 FR 44995.
Two commenters said many Federal employees in Puerto Rico send
their children to colleges in the continental United States. A
commenter from Alaska said there were limited colleges and universities
in Alaska, so many employees send their children to colleges in the
lower 48 States and incur extra costs for non-resident tuition and
transportation. Another commenter said tuition at the University of
Puerto Rico will be increasing. Two commenters said Federal employees
and their families are not eligible for student grants in Puerto Rico.
OPM does not measure the price of college and university education
because where employees send their dependents to school is often a
matter of personal preference. For example, many Federal employees in
the Washington, DC, area send their children to colleges and
universities outside the DC area. To the extent OPM leaves an item,
such as college education, out of the COLA model, the effect is as if
OPM included it in the model at the overall price index for the area.
Therefore, if prices are generally higher in a COLA area relative to
the DC area, the implicit assumption is that college and university
prices are higher to the same extent. Any additional costs would be
reflected in the adjustment points added pursuant to 5 CFR 591.227.
Geographic Coverage
One commenter said there should be separate COLA rates for the east
(Kona) and west (Hilo) sides of the island of Hawaii because prices are
not equal. OPM does not plan to split Hawaii County into separate areas
at this time, but OPM may reconsider that decision after additional
surveys have been completed using the methodology
[[Page 43903]]
adopted pursuant to the Caraballo settlement.
One commenter requested that OPM consider Eielson Air Force Base as
part of the Rest of Alaska COLA area. The commenter noted that Eielson
is 26 miles from Fairbanks and that it is dangerous to drive that
distance for groceries, the hospital, or the airport during the winter
months. The commenter suggested changing the distance parameter for
Fairbanks to 20 miles. As stated in 5 CFR 591.206(b), the head of a
department or agency must submit a request to OPM to initiate any
reconsideration of the definition of a COLA area. We note that North
Pole, AK, is only 8 miles from Eielson, and that North Pole is part of
the Fairbanks survey area. OPM surveys a supermarket and other
businesses in North Pole and includes these in the calculation of the
Fairbanks living-cost index. We do not believe it would be appropriate
to change the definition of the Fairbanks, AK, COLA area.
Another commenter said the cost of living in Girdwood, AK, which is
40 miles outside of Anchorage, is significantly higher than in
Anchorage. The commenter asked that OPM consider the effect of the COLA
reduction on employees living and working in outlying communities of
Anchorage. As noted above, the head of a department or agency must
submit a request to OPM to initiate any reconsideration of the
definition of a COLA area.
One commenter noted that 5 U.S.C. 5941 states that COLAs are based
on ``living costs substantially higher than in the District of
Columbia.'' The commenter said the area OPM uses for comparison
includes areas in addition to the District of Columbia. The commenter
referred also to Executive Order 10000, which uses the term
``Washington, DC, area'' but precedes it with the phrase ``subject to
applicable law.'' The commenter requests that OPM survey only the
District of Columbia. The President directs OPM in Executive Order
10000 to designate nonforeign areas at locations in which living costs
are substantially higher than in the Washington, DC, area and set COLA
rates for such areas based on these higher living costs. OPM does not
plan to limit the scope of the Washington, DC, area survey to the
District of Columbia.
Survey Rates
An agency and one other commenter requested that OPM address the
total anticipated COLA rate reductions projected by the area surveys.
OPM conducts COLA surveys once every 3 years and will adjust COLA rates
pursuant to 5 CFR 591.224, beginning with the publication of the
results of the 2005 Caribbean survey. Therefore, we cannot predict what
COLA rates will be in future years. However, with each survey notice
OPM does publish final living-cost indexes that can easily be converted
to hypothetical COLA rates (prior to the 1 percentage point limitation
on COLA rate reductions) with the application of 5 CFR 591.228(a). This
essentially involves converting the living-cost index to a percentage
and rounding the result to the nearest whole percentage point. Table 1
includes the indexes that can be used for this purpose. However, it
should be noted that future surveys and adjustments will likely produce
different results.
Employee Involvement
Several commenters believe employees from their area were not
involved in the COLA surveys. As noted above, OPM established and
worked with local COLA Advisory Committees (CACs) in each survey area.
One commenter asked who represented Juneau on the CAC. The Juneau
CAC was composed of representatives from the Juneau Federal Executive
Association, the Juneau COLA Defense Committee, the National Federation
of Federal Employees, the Indian Educators Federation-American
Federation of Teachers, the National Weather Service Employees
Organization, Professional Airways Systems Specialists, the Department
of Agriculture, the Department of Commerce, the Department of the
Interior, the Department of Transportation, and OPM.
The same commenter wanted to know more about Federal employee input
into the COLA survey, units of measure, and formulas used in analyzing
the data. Federal employees serve on both the SIC and the CAC. As
explained in the Background section, the SIC worked closely with OPM as
we developed new COLA regulations pursuant to the Caraballo settlement.
The composition of the SIC is described in the Caraballo stipulation
for settlement, which is available on OPM's Web site at http://www.opm.gov/oca/cola/settlement.
The regulations we adopted describe
the methodology and formulas used to analyze the survey data. These
regulations can be found on OPM's Web site at http://www.opm.gov/oca/cola/RegsRpts.asp
.
As also explained in this final rule OPM worked closely with the
CACs to plan, conduct, and review the results of the COLA surveys. The
CACs are described in OPM regulations at 5 CFR 591.240 to 591.244.
Additional information about the surveys and analyses used may be found
in the survey reports, which are on OPM's Web site at http://www.opm.gov/oca/cola/index.asp
.
Military COLA
Several commenters thought the reductions in the proposed
regulation applied to the military COLA. These reductions apply only to
the COLA rates paid to certain civilian white-collar Federal employees
paid under the General Schedule and similar pay plans. Three commenters
remarked on the discrepancy between the civilian and military COLAs.
The Department of Defense sets the military COLA using a different
methodology as authorized under separate law. The methodology for the
civilian nonforeign area COLA derives from 5 U.S.C. 5941, Executive
Order 10000, and the Caraballo settlement.
Military Post Privileges
One commenter said all Federal employees should be allowed to shop
at military commissaries/exchanges. The Department of Defense operates
commissaries and exchanges. OPM does not have authority to regulate
commissary/exchange access.
Federal Wage System Employees
One employee felt Federal Wage System (FWS) employees should
receive the nonforeign area COLA. The law that authorizes nonforeign
area COLAs (5 U.S.C. 5941) allows payment of COLAs to employees whose
rates of pay are set by statute. When the COLA law was enacted, FWS pay
was set administratively according to local prevailing rates, rather
than by statute. Currently, FWS rates of pay are not set by statute,
and OPM cannot extend COLAs to FWS employees.
Communication of Changes
Three commenters thought OPM did not properly communicate the COLA
reductions to Federal employees. The Administrative Procedure Act
requires agencies to publish regulations in the Federal Register as a
means of notifying the public of rule changes. In addition to
publishing the proposed regulation in the Federal Register, OPM
distributed the regulation to agencies with a notice to be posted on
employee bulletin boards. OPM also summarized and linked to the
regulations on its Web site at http://www.opm.gov/fedregis/html/aug05.asp
and provided copies to COLA Advisory Committee members in
each area. As noted above, OPM received
[[Page 43904]]
more than 2,000 responses from COLA area employees during the public
comment period on the proposed regulations.
Correction
One commenter pointed out an error in the shelter index for Kauai
in Appendix 7 of the 2004 Survey Report. This error was made in
typesetting the survey notice. The ``1'' that precedes the PEG index
belongs to the previous column, so that the PEG Weight should show
``89.01'' and the PEG Index should show ``118.21.'' Because it was a
typesetting error, it does not affect OPM's calculations for Kauai.
Executive Order 12866, Regulatory Review
This rule has been reviewed by the Office of Management and Budget
in accordance with Executive Order 12866.
Regulatory Flexibility Act
I certify that this regulation will not have a significant economic
impact on a substantial number of small entities because it will affect
only Federal agencies and employees.
List of Subjects in 5 CFR Part 591
Government employees, Travel and transportation expenses, Wages.
Office of Personnel Management.
Linda M. Springer,
Director.
0
Accordingly, the Office of Personnel Management amends subpart B of 5
CFR part 591 as follows:
PART 591--ALLOWANCES AND DIFFERENTIALS
Subpart B--Cost-of-Living Allowance and Post Differential--
Nonforeign Areas
0
1. The authority citation for subpart B of 5 CFR part 591 continues to
read as follows:
Authority: 5 U.S.C. 5941; E.O. 10000, 3 CFR, 1943-1948 Comp., p.
792; and E.O. 12510, 3 CFR, 1985 Comp., p. 338.
0
2. Revise appendix A of subpart B to read as follows:
Appendix A to Subpart B of Part 591--Places and Rates at Which
Allowances are Paid
This appendix lists the places approved for a cost-of-living
allowance and shows the authorized allowance rate for each area. The
allowance percentage rate shown is paid as a percentage of an
employee's rate of basic pay. The rates are subject to change based
on the results of future surveys.
------------------------------------------------------------------------
Allowance
Geographic coverage Rate
(percent)
------------------------------------------------------------------------
State of Alaska:
City of Anchorage and 80-kilometer (50-mile) radius by 24.0
road..................................................
City of Fairbanks and 80-kilometer (50-mile) radius by 24.0
road..................................................
City of Juneau and 80-kilometer (50-mile) radius by 24.0
road..................................................
Rest of the State...................................... 25.0
State of Hawaii:
City and County of Honolulu............................ 25.0
Hawaii County, Hawaii.................................. 17.0
County of Kauai........................................ 25.0
County of Maui and County of Kalawao................... 25.0
Territory of Guam and Commonwealth of the Northern Mariana 25.0
Islands...................................................
Commonwealth of Puerto Rico................................ 10.5
U.S. Virgin Islands........................................ 23.0
------------------------------------------------------------------------
[FR Doc. 06-6624 Filed 8-1-06; 8:45 am]
BILLING CODE 6325-39-P