Section 1. Short Title. Non-Foreign Area Retirement Equity Assurance Act of 2008 or the Non-Foreign AREA Act of 2008.

Section 2. Extension of Locality Pay. Includes General Schedule (GS) employees in the non-foreign areas, including Hawaii, Alaska, and Puerto Rico, in a pay locality for purposes of locality pay.

States that cost-of-living allowance (COLA) rates will no longer be determined based on the differences in the cost of living with the District of Columbia, but will now be the rate in effect on December 31, 2008, except as adjusted under this Act.

New subsection (c) provides the adjustment process for the COLA rate payable to GS employees working in positions in the non-foreign areas eligible to receive locality pay pursuant to 5 U.S.C. 5304. Since COLA payments are generally not considered taxable income and are not considered basic pay for retirement purposes whereas locality pay is taxable income and considered basic pay for retirement purposes, new subsection (c) includes an adjustment factor of 65 percent to help protect employees' take-home pay as locality pay is extended to non-foreign areas. Adjusted allowance rates shall be calculated by subtracting 65 percent of the applicable locality pay from the applicable COLA rate in effect on December 31, 2008, and then dividing the resulting adjusted COLA rate by one plus the applicable locality pay percentage. No adjusted COLA rate may be less than zero to ensure employees are not significantly disadvantaged by the extension of locality pay. COLA rates will no longer apply when the locality pay exceeds the offset COLA rate.

Section 3. Adjustment of Special Rates. Employees who are working in the non-foreign areas and entitled to special rates will receive special rates that are adjusted in accordance with regulations provided by the Director of the Office of Personnel Management (OPM). Each special rate of pay established under 38 U.S.C. 7455 must be adjusted in accordance with regulations provided by the Secretary of Veterans Affairs consistent with regulations issued by the Director of OPM. Statutory limitations on the amount of special rates under either 5 U.S.C. 5305 or 38 U.S.C. 7455 may be temporarily raised to a higher level during the transition period ending on the first day of the first pay period beginning on or after January 1, 2011. At that time any special rate of pay in excess of the applicable limitation shall be converted to a retained rate under 5 U.S.C. 5363.

Section 4. Transition Schedule for Locality-Based Comparability Payments.
Phases-in the newly applicable locality pay over three years. The applicable rate will be computed:
(1) in calendar year 2009, by taking 1/3 of the locality pay percentage for the Rest of U.S. locality pay area;
(2) in calendar year 2010, by taking 2/3 of the applicable locality pay percentage approved by the President for each non-foreign area; and
(3) in calendar year 2011 and each subsequent year, by using the full amount of the applicable locality pay percentage approved by the President for each non-foreign area.

Section 5. Savings Provision. Requires that the amount of special rate and COLA in effect on the date of enactment not be reduced any more than the increase of locality pay paid to that employee. Also includes a Sense of Congress that employees will not have a decrease in take home pay due to the application of this Act.

Section 6. Application to Other Eligible Employees. States that all other federal employees receiving COLA, based in law or regulations, shall be covered by the provisions of this Act in the same way as if they were covered by 5 U.S.C. 5941. This covers employees at the Transportation Security Administration, United States Postal Service, Department of Defense, and Federal Aviation Administration, for example. It also covers employees in the Senior Executive Service. Pay provided under this Act is not subject to collective bargaining and cannot be reduced based on the employee's performance.

Section 7. Election of Additional Basic Pay for Annuity Computation by Employees. Employees covered by this Act who are subject to mandatory retirement provisions or otherwise will retire between January 1, 2009, and December 31, 2011, may file an election with OPM to pay into the Civil Service Retirement and Disability Retirement Fund additional funds to cover the amount of what they would have paid if they had been covered by 5 U.S.C. 5304(f) during that period and any interest prescribed under 5 U.S.C. 8334(e). The employing agency shall also pay an amount for applicable agency contributions. OPM shall issue regulations governing this section.

Section 8. Election of Coverage by Employees. An employee may make an irrevocable election no later than 60 days after the date of enactment to either be covered by the pay provisions of this Act related to 5 U.S.C. 5304(f) or continue to be paid the COLA rate in effect on December 31, 2008. All future employees shall be paid according to the provisions of this Act relating to 5 U.S.C. 5304(f).

Section 9. Regulations. The Director of the Office of Personnel Management shall prescribe regulations necessary to carry out the provisions of this Act.

Section 10. Effective Dates. The effective date of this Act is the date of enactment and the effective date of the amendments in sections 2 and 4 shall take effect the first day of the first applicable pay period on or after January 1, 2009.

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