Summary

GAO completed a review of the methodology used to compute cost-of-living allowances (COLA's) for Federal personnel.

Certain deficiencies in the Department of State's data collection and computation practices may result in COLA payments that are not accurate. GAO found that: (1) State did not insure that the data it collected accurately reflected the living patterns of Federal personnel; (2) living pattern data were not always used to select retail outlets where price surveys are made; (3) State did not adjust base area prices to reflect changes that occurred between foreign and base surveys; and (4) State did not weigh sale prices in its COLA computations. The COLA computation could be improved by weighting prices of items and services on sale. COLA's are based on prices of a market basket of more than 160 goods and services in the foreign and nonforeign area compared with prices of a similar market basket area of Washington, D.C. The prices are averaged, and foreign or nonforeign average prices are divided by the base area average prices to obtain a ratio. These item price ratios are weighted by the relative importance of the expenditures they represent. Price surveys are made at least annually in COLA areas. COLA's are also revised periodically to reflect changes in currency exchange rates. Living pattern surveys are also made to identify retail outlets which the Federal personnel most frequently use and the relative importance of each source of supply.