U.S. Office of Personnel Management - Ensuring the Federal Government has an effective civilian workforce

Cost of Locality Payments

Estimated Cost of Locality Payments

The cost of locality payments is the sum of all individual locality payments during a calendar year, offset by special salary rates. This amount is estimated using OPM records of all Federal employees with duty stations within the continental United States (CONUS) as of March 2006 and covered by the General Schedule or other pay plan to which locality pay has been extended, together with the percentage locality payments from Table 2. The estimate assumes that the average number and distribution of employees (by locality, grade, and step) in CONUS in 2008 will not differ substantially from the number and distribution in March 2006. The estimate does not include increases in premium pay costs or Government contributions for retirement, life insurance, or other employee benefits that may be attributed to locality payments.

Cost estimates are derived as follows. First, both the "scheduled annual rate of pay," as defined in 5 CFR 531.602, and the annual rate inclusive of special rates are determined for each employee. These rates are adjusted to include an assumed 1.7 percent across-the-board increase in January 2007 and the 2.5 percent across-the-board increase that would become effective in January 2008 under current law (under FEPCA, across-the-board increases are based on the change in the applicable ECI minus 0.5 percentage points). Both annual rates are converted to expected annual earnings by multiplying each by an appropriate work schedule factor.⁸ The "gross locality payment" is computed for each employee by multiplying expected annual earnings from the scheduled annual rate by the proposed locality payment percentage for the employee's locality pay area. The sum of these gross locality payments is the cost of locality pay before offset by special rates.

Second, for each employee, the gross locality payment is compared to the amount by which expected annual earnings from the annual rate inclusive of special rates exceeds the expected annual earnings from the scheduled annual rate. This second amount is the "cost" of any special rate. If the gross locality payment is less than or equal to the cost of any special rate, the net locality payment is set at zero. In this case, the locality payment is completely offset by an existing special rate. If the gross locality payment is greater than the cost of any special rate, the net locality payment is equal to the gross locality payment minus the cost of any existing special rate. In this case, the locality payment is at most partially offset. If the scheduled annual rate is the same as the annual rate inclusive of special rates (i.e., the cost of any special rate is zero), then there is no offset and the net locality payment equals the gross locality payment. The sum of the net locality payments so derived is the estimated cost of local comparability payments. Note that both the cost of special rates and the amount of special rate offsets are lower this year than in the past. This is due to the cancellation of special rates that have been overtaken by locality payments and changes in pay administration practices.

Estimated Cost of Locality Payments in 2007

Table 4, below, compares the cost of the projected 2007 locality rates to those that would be authorized in 2008 under 5 U.S.C. 5304(a)(3)(I), as identified in Table 2. For the purpose of this cost estimate, we have assumed that there will be a 1.7 percent across-the-board increase in January 2007 and 0.5 percent of payroll allocated for locality pay increases. The "2007 Baseline" cost would be the cost of locality pay in 2008 if the assumed 2007 locality rates are not increased, i.e., the percentage locality payments in 2007 on top of 2006 (we are using a 2006 data file) base pay rates including an assumed 1.7 percent across-the-board adjustment in January 2007 and an assumed 2.5 percent adjustment in January 2008.

The "2008 Locality Pay" columns show what the total locality payments would be and the net increase in 2008. The "2008 Increase" column shows the 2008 total payment minus the 2007 baseline—i.e., the increase in locality payments in 2008 attributable to higher locality pay rates. Based on the assumptions outlined above, we estimate the total cost attributable to the locality rates shown in Table 2 to be about $9.3 billion on an annual basis. This amount does not include the cost of benefits or the cost of the 2.5 percent increase in rates of basic pay that would take effect in January 2008 under current law.

This cost estimate excludes 3,322 records (out of 1.3 million) of white-collar workers which were unusable because of errors. There were more error records this year likely due to changes in pay administration rules. Some agencies were unable to make the necessary changes in their data processing systems in time for March 2006 data submissions and automated techniques OPM used to update records reported under the old rules were unable to assess these 3,322 records. Many of these employees may receive locality payments. Including these records would add about $24 million to the net cost of locality payments. The cost estimate covers only General Schedule employees and employees covered by pay plans that receive locality pay by action of the Pay Agent. However, the cost estimate excludes members of the Foreign Service because the Department of State no longer reports these employees to the CPDF. The estimate also excludes the cost of pay raises for employees under other pay systems that may be linked in some fashion to locality pay increases. These other pay systems include the Federal Wage System for blue-collar workers, under which pay raises often are capped or otherwise affected by increases in locality rates for white-collar workers; pay raises for employees of the Federal Aviation Administration and other agencies that have independent authority to set pay; and pay raises for employees covered by various demonstration projects. The cost estimate also excludes the cost of benefits affected by pay raises.

Table 4.

Cost of Local Comparability Payments in 2008 (in millions of dollars)

[8]The work schedule factor equals 1 for full-time employees and one of several values less than 1 for the several categories of non-full-time employees.