FMA OFFERS TESTIMONY ON INEQUITY OF PAY SYSTEMS IN HAWAII AND ALASKA - May 29, 2008

Transitioning from COLA to Locality Pay: A Vital Step to Recruiting and Retaining a Qualified Workforce in Hawaii

Alexandria, VA—The Federal Managers Association (FMA) Chapter 187, Naval Facilities Engineering Command (NAVFAC) Hawaii, President Mike FitzGerald will present testimony today - Thursday, May 29, 2008 - at 1:00 pm before the Senate Homeland Security and Governmental Affairs Subcommittee on the Oversight of Government Management, the Federal Workforce and the District of Columbia.

FitzGerald will present testimony on FMA’s stance regarding various proposals to phase-out the non-foreign area cost of living allowance (COLA) federal employees residing in Alaska, Hawaii and the U.S. Territories receive and phase-in locality pay in these areas. Federal employees who reside in Alaska and Hawaii receive a tax-free non-foreign area cost of living allowance in their pay; however, the federal government fails to credit the COLA to basic pay for retirement purposes. This practice has a devastating effect on the retirement benefits rightly earned by these hardworking civil servants.

Mike FitzGerald has worked for the Naval Facilities Engineering Command Hawaii since 1995. FitzGerald is a certified Backflow Prevention Specialist, a Potable Water Distribution Operator Class 4 in the State of Hawaii and a qualified pumping system assessment specialist with the Department of Energy. He has been president of FMA’s Chapter 187 since 2003.

The hearing will begin at 1:00 pm (7:00 pm EDT) at the Oahu Veterans Center in Honolulu, Hawaii, and FitzGerald will present on the second panel of witnesses. Below is a copy of his prepared oral statement. For a copy of the full testimony, please visit FMA’s Web site at www.fedmanagers.org.

My name is Michael FitzGerald and I am the President of the Federal Managers Association Chapter 187, Naval Facilities Engineering Command Hawaii where I serve as the Utilities Supervisor for potable water. On behalf of the 200,000 managers and supervisors in the federal government whose interests are represented by FMA, I would like to thank you for allowing us to express our views regarding proposals to change the pay system for federal employees in Alaska, Hawaii and the U. S. Territories.

Since 1948, federal employees outside of the contiguous U.S. have received a non-foreign cost of living allowance to ensure that their pay reflects the high cost of living in these areas. In Hawaii, this non-taxable payment can be up to 25 percent of an employee’s basic pay; however, COLA is not credited towards retirement. At the time of its inception, COLA was viewed as “hardship pay” for federal employees. Today, however, we are faced with a much different situation and population dynamic.

Since 1990, employees in Hawaii and Alaska have not been included in the locality pay pool. Initially, locality pay was rather low and a COLA seemed to offer reasonable compensation for the high cost of living in these remote states. As time went on, however, it became apparent that retiring COLA recipients were disadvantaged by receiving smaller annuities than their fellow feds on the mainland.

High locality pay in 48 states lures employees to leave Hawaii and seek an increased annuity towards the end of their careers. With the Los Angeles area offering a 25 percent locality pay adjustment and the San Francisco area offering 32 percent, it is easy to see why employees would be looking to complete their final three years in these cities. Specific data to document this migration is hard to come by, but the stories are endless. In my office alone, a husband and wife have separated for their careers, with the wife heading to San Francisco and the husband staying here in Hawaii. They plan to retire in the islands, but must endure a long distance relationship in order to properly plan for their retirement.

In May 2007, at the urging of the President, OPM issued the Locality Pay Extension Act, which proposed to phase in locality pay and phase out the non-foreign COLA. We at FMA appreciate the support and attention the Administration is placing on this problem. However, FMA believes that the OPM plan does not go far enough to recognize the needs of today’s hardworking federal employees outside the contiguous United States. In fact, it is our belief that the proposal continues the discriminatory and illogical denial of full locality pay for federal employees in these areas. OPM’s seven year phase in is seven years too late. Today we are facing real retention and recruitment issues and we need to move up the timetable on any COLA to locality pay conversion.

More problematic is that the proposal actually reduces net take home pay for most federal employees in Hawaii and Alaska, since the added locality pay component also brings with it a tax burden. OPM recognizes this with a 15 percent “offset” to adjust for the added taxes, but most employees in Hawaii fall into the 25 or 28 percent tax bracket. By applying a 15 percent offset, most employees will see less money in their paychecks than if the system as is. Simply put, this is unacceptable and will only exacerbate our growing retention problem.

In response, FMA submitted an alternative plan based on a similar formula with two key changes. We recommended full implementation of locality pay authorized by law in the first year of conversion. Additionally, we believe an offset to COLA must be at least 25 percent to mitigate the tax burden associated with locality pay. Our members strongly believe that any plan must address retention and recruitment issues as well as protect take home pay.

The baby boomer retirement period is upon us. However, contrary to OPM, we at FMA do not believe a phase in period will delay the retirement tsunami. We are, however, sensitive to the cost burden of locality pay in the form of increased annuities. At the same time, the additional taxes collected as a result of locality pay, coupled with shrinking tax free COLA payments, would offset increased annuity amounts. After the first year of implementation, a Hawaii area locality pay should be established and the proper amount of compensation applied. We have seen some preliminary studies that put Hawaii’s locality pay around 20 percent and Alaska’s at 28 percent.

I would like to take a moment to address recently introduced legislation, S. 3013, the Non-Foreign Area Retirement Equity Assurance Act, introduced by Senators Akaka, Inouye, Stevens and Murkowski. We are encouraged to read that several of our concerns are addressed in the bill and we congratulate the fine Senators from Alaska and Hawaii on developing this critical piece of legislation.

The bill 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 from COLA to locality pay. This is critical to retaining younger employees who have told us they would oppose any change that would adversely affect their pay check.

Additionally, Thrift Savings Plan participants will see increased eligible matching funds due to the rise in basic pay. The resulting compensation package will make the federal government more competitive in the current tight labor market. This is essential if the highly critical missions of the federal agencies in Hawaii and Alaska are to be met.

COLA served its purpose half a century ago. It is now outdated and serves as a barrier to federal employment. By acting now and implementing a market-oriented approach to determining local salaries, Congress can arm Hawaii and Alaska managers with one more tool to attract and retain today’s highly mobile and talented workforce. Thank you for your time and consideration of our views. I look forward to answering any questions you may have.