[Senate Hearing 110-657]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 110-657
 
            NON-FOREIGN COLA: FINDING AN EQUITABLE SOLUTION

=======================================================================


                                HEARING

                               before the

                  OVERSIGHT OF GOVERNMENT MANAGEMENT,
                     THE FEDERAL WORKFORCE, AND THE
                   DISTRICT OF COLUMBIA SUBCOMMITTEE

                                 of the

                              COMMITTEE ON
                         HOMELAND SECURITY AND
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                   FIELD HEARING IN HONOLULU, HAWAII

                              MAY 29, 2008

                               __________

       Available via http://www.gpoaccess.gov/congress/index.html

       Printed for the use of the Committee on Homeland Security
                        and Governmental Affairs



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Washington, DC 20402-0001



        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

               JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan                 SUSAN M. COLLINS, Maine
DANIEL K. AKAKA, Hawaii              TED STEVENS, Alaska
THOMAS R. CARPER, Delaware           GEORGE V. VOINOVICH, Ohio
MARK L. PRYOR, Arkansas              NORM COLEMAN, Minnesota
MARY L. LANDRIEU, Louisiana          TOM COBURN, Oklahoma
BARACK OBAMA, Illinois               PETE V. DOMENICI, New Mexico
CLAIRE McCASKILL, Missouri           JOHN WARNER, Virginia
JON TESTER, Montana                  JOHN E. SUNUNU, New Hampshire

                  Michael L. Alexander, Staff Director
     Brandon L. Milhorn, Minority Staff Director and Chief Counsel
                  Trina Driessnack Tyrer, Chief Clerk


  OVERSIGHT OF GOVERNMENT MANAGEMENT, THE FEDERAL WORKFORCE, AND THE 
                   DISTRICT OF COLUMBIA SUBCOMMITTEE

                   DANIEL K. AKAKA, Hawaii, Chairman
CARL LEVIN, Michigan                 GEORGE V. VOINOVICH, Ohio
THOMAS R. CARPER, Delaware           TED STEVENS, Alaska
MARK L. PRYOR, Arkansas              TOM COBURN, Oklahoma
MARY L. LANDRIEU, Louisiana          JOHN WARNER, Virginia

                   Richard J. Kessler, Staff Director
                     Jennifer Tyree, Chief Counsel
               Thomas Richards, Professional Staff Member
             Jennifer A. Hemingway, Minority Staff Director
                     Jessica Nagasako, Chief Clerk

                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Akaka................................................     1

                               WITNESSES

                         Thursday, May 29, 2008

Charles D. Grimes, III, Deputy Associate Director for Performance 
  and Pay Systems, U.S. Office of Personnel Management...........     3
Bradley B. Bunn, Program Executive Officer, National Security 
  Personnel System, U.S. Department of Defense...................     5
Jo Ann Mitchell, Manager, Accounting Services, U.S. Postal 
  Service........................................................     7
Joyce Matsuo, President, COLA Defense Committee of Oahu, Inc., on 
  behalf of the Oahu and Maui COLA Defense Committees............    17
Sharon Warren, President, COLA Defense Committee of Anchorage, 
  Inc., on behalf of all Alaska COLA Defense Committees..........    19
Manuel Q. Cruz, President, COLA Defense Committee of Guam........    21
Michael FitzGerald, President, Chapter 187, NAVFAC Hawaii, 
  Federal Managers Association...................................    23
Terry Kaolulo, President, Hawaii State Association of Letter 
  Carriers and Letter Carrier, Kailua, Hawaii....................    25

                     Alphabetical List of Witnesses

Bunn, Bardley B.:
    Testimony....................................................     5
    Prepared statement...........................................    60
Cruz, Manuel Q.:
    Testimony....................................................    21
    Prepared statement...........................................   102
FitzGerald, Michael:
    Testimony....................................................    23
    Prepared statement...........................................   105
Grimes, Charles D., III:
    Testimony....................................................     3
    Prepared statement...........................................    52
Kaolulo, Terry:
    Testimony....................................................    25
    Prepared statement...........................................   112
Matsuo, Joyce:
    Testimony....................................................    17
    Prepared statement...........................................    69
    Supplemental testimony.......................................    88
Mitchell, Jo Ann:
    Testimony....................................................     7
    Prepared statement...........................................    66
Warren, Sharon:
    Testimony....................................................    19
    Prepared statement...........................................    96

                                APPENDIX

PowerPoint presentation entitled ``Non-Foreign Area Retirement 
  Equity Assurance Act of 2008, (S. 3013)'' submitted by Senator 
  Akaka..........................................................    39
Prepared statements:
    American Federal of Government Employees, AFL-CIO............   116
    Hon. Luis G. Fortuno, a Representative in the U.S. Congress 
      from Puerto Rico...........................................   120
    Colleen M. Kelley, National President, National Treasury 
      Employees Union............................................   122
    Benjamin T. Toyama, Western Federal Area Vice President, 
      International Federation of Professional and Technical 
      Engineers (IFPTE), AFL-CIO and CLC and President, IFPTE 
      Local 121, Pearl Harbor Naval Shipyard.....................   126
    Pedro Romero, Vice President, Puerto Rico COLA Defense 
      Committee..................................................   133


            NON-FOREIGN COLA: FINDING AN EQUITABLE SOLUTION

                              ----------                              


                         THURSDAY, MAY 29, 2008

                                 U.S. Senate,      
              Subcommittee on Oversight of Government      
                     Management, the Federal Workforce,    
                            and the District of Columbia,  
                      of the Committee on Homeland Security
                                        and Governmental Affairs,  
                                                   Honolulu, Hawaii
    The Subcommittee met, pursuant to notice, at 1 p.m., at the 
Oahu Veterans Center, Honolulu, Hawaii, Hon. Daniel K. Akaka, 
Chairman of the Subcommittee, presiding.
    Present: Senator Akaka.

               OPENING STATEMENT OF SENATOR AKAKA

    Senator Akaka. I call the Subcommittee on Oversight of 
Government and Management, Federal Workforce and the District 
of Columbia to order.
    First I want to extend my mahalo, and mahalo is ``thank 
you'', to the witnesses that traveled from Washington, DC, 
Alaska, and Guam to be here today. I appreciate your 
participation in this hearing to discuss one of the most 
pressing issues for Federal workers in Hawaii.
    In addition, I would like to say mahalo to Senators Inouye 
and Stevens for sending their staff to this hearing. I'd like 
to recognize them now. Could the representatives for Senator 
Stevens and Senator Inouye please stand? Good to see you.
    And, a special mahalo to my staff for hosting the numerous 
meetings this week discussing the legislative proposals to 
phase-out non-foreign cost-of-living allowance that we call 
COLA, and phase-in locality pay. My staff has informed me of 
the comments and questions Federal workers have expressed to 
date, and I encourage all employees who may be affected by the 
conversion from COLA to contact me and let me know their views. 
My staff, of course, is seated up here, Jennifer Tyree and 
Thomas Richards. I also have other staff in the room from 
Hawaii who are seated here. Could you please stand? Thank you.
    As you all know, under current law Federal employees in 
Hawaii, Alaska, Guam, and the Northern Marianas, Puerto Rico 
and the U.S. Virgin Islands may receive up to 25 percent of 
base pay as non-foreign COLA. This allowance is not taxed and 
does not count toward retirement. The amount of COLA is based 
on the cost of living in the non-foreign areas compared to the 
cost of living in Washington, DC. Locality pay is based on a 
comparison between Federal salaries and white collar salaries 
in the private and public sectors in a given region.
    Since the creation of locality pay in the 1990s, there has 
been much discussion over the disparity between employee's pay 
and retirement in the non-foreign areas compared to the 
contiguous 48 States. Despite the efforts of the COLA 
committees and others to resolve this issue, Federal workers in 
Hawaii and other non-foreign areas remain disadvantaged in 
their retirement benefits.
    Last year, the President proposed legislation in his fiscal 
year 2008 budget request to transition from COLA to locality 
pay. The Administration's proposal would freeze COLA rates for 
all General Schedule and postal employees at their current 
level; phase-in locality pay over a 7-year period as COLA is 
phased-out; reduce COLA by 85 percent of each dollar of 
locality pay that is phased-in to make up for the additional 
tax burden on employees who would begin receiving locality pay. 
This would not penalize any employee receiving non-foreign COLA 
who is at, or below, a GS-7 step 3, which is less than half the 
GS Federal workforce in the non-foreign areas.
    However, the Administration's proposal left many questions 
unanswered. It did not address how postal employees, members of 
the Senior Executive Service, and employees who receive special 
rates will be treated since they do not receive locality pay. 
The proposal was also unclear as to whether Federal workers in 
unique personnel systems would be covered by the legislation.
    Because this issue is so important to Federal workers in 
Hawaii, I sent my Subcommittee staff to Hawaii last July to 
conduct fact-finding meetings and listen to employees' 
questions and their concerns first hand. I then submitted those 
questions to Administration officials and posted the responses 
on my website.
    Based on the responses from Administration officials and 
comments received from affected Federal workers, Senators 
Stevens, Inouye, Murkowski, and I introduced S. 3013, the Non-
Foreign Area Retirement Equity Assurance Act, also known as the 
Non-Foreign AREA Act, as a discussion piece to move this issue 
forward. Our bill seeks to address these unanswered questions 
in the Administration's proposal and respond to the concerns 
raised by affected employees. Specifically, our bill would 
cover all Federal employees; protect employees' take home pay; 
phase-in locality pay over 3 years; allow current employees a 
one-time option to receive frozen COLA rates or transition to 
locality pay; and allow employees who will retire in the next 3 
years the opportunity to pay into the Federal retirement system 
and transition to locality pay before retirement.
    The Non-Foreign AREA Act is not to be seen as the last 
word, only the latest step forward in determining the best way 
to ensure retirement equity for Federal workers in the non-
foreign areas. So again, I want to encourage employees in the 
audience and in the non-foreign areas to contact me with their 
questions and concerns on these proposals. After the hearing 
adjourns, we will hold a meeting where the Administration 
witnesses and my staff can answer questions from audience 
members on the proposals. Should anyone in the audience want to 
ask questions or speak out, you may do so at the town hall 
meeting. So please remain here and immediately after the 
hearing and a short break, we'll convene the town hall meeting.
    My ultimate goal remains to ensure that Federal workers in 
the non-foreign areas are not disadvantaged when it comes to 
their pay and retirement. By working together I really believe 
we can come up with an equitable solution.
    And so with that, I want to introduce our first panel. Our 
first panel consists of three witnesses: Chuck Grimes, Deputy 
Associate Director at the Office of Personnel Management; Brad 
Bunn, Program Executive Oficer for the National Security 
Personnel System at the Department of Defense; and Jo Ann 
Mitchell, Manager of Accounting Services at the U.S. Postal 
Service.
    It is the custom of this Subcommittee, as you know, to 
swear in all witnesses. Please stand and raise your right hand. 
Do you solemnly swear that the testimony you are to give before 
this Subcommittee is the truth, the whole truth, and nothing 
but the truth, so help you, God?
    The Panel Members. I do.
    Senator Akaka. Thank you very much. Let the record show 
that the witnesses responded in the affirmative.
    Although statements are limited to 5 minutes, I want all of 
our witnesses to know that their full statements will be 
included in the record.
    Mr. Grimes, will you please proceed with your statement?

    TESTIMONY OF CHARLES D. GRIMES III,\1\ DEPUTY ASSOCIATE 
   DIRECTOR FOR PERFORMANCE AND PAY SYSTEMS, U.S. OFFICE OF 
                      PERSONNEL MANAGEMENT

    Mr. Grimes. Thank you. Mr. Chairman and Members of the 
Subcommittee, my name is Chuck Grimes and I'm here today on 
behalf of Linda M. Springer, Director of the U.S. Office of 
Personnel Management (OPM), to discuss the proposals to extend 
locality pay in lieu of cost-of-living allowances (COLA's) to 
Federal employees working in Hawaii, Alaska, Guam, Puerto Rico, 
the U.S. Virgin Islands, and other U.S. territories and 
possessions.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Grimes appears in the Appendix on 
page 52.
---------------------------------------------------------------------------
    Over the years, the focus of Federal pay policy has evolved 
from simply keeping pace with the overall labor market to 
effectively competing within that market. The implementation of 
locality pay under the Federal Employees Pay Comparability Act 
(FEPCA) of 1990, is a tangible manifestation of that shift. 
However, FEPCA applies only in the contiguous 48 States. In the 
non-foreign areas, we have a conflicting compensation policy 
that provides for a COLA.
    The COLA program predates locality pay by nearly 50 years. 
It was originally designed to address recruitment and retention 
issues resulting from higher costs of living in the non-foreign 
areas. COLA rates are based on OPM surveys measuring the 
differences in the cost of living between each non-foreign area 
and the Washington, DC area.
    COLA affects employees' take-home pay and retirement 
annuities. For instance, some employees like the fact that COLA 
payments are not subject to Federal income tax.
    On the other hand, COLA payments are not considered base 
pay for retirement purposes and are capped at 25 percent.
    There is a growing perception that total pay and retirement 
benefits of white-collar civilian Federal employees in the non-
foreign areas are gradually eroding in comparison with 
employees in the continental United States.
    We believe these issues are best addressed by extending 
locality pay in lieu of COLA to the non-foreign areas. Locality 
pay is retirement creditable and allows for larger Thrift 
Savings Plan contributions.
    Locality pay is not capped at 25 percent and continues to 
rise. COLA payments in contrast are trending downward.
    Finally, because of subjective elements in measuring 
relative living costs, the COLA program has been the subject of 
much litigation. The recent Caraballo settlement topped some 
$230 million. We expect the bill, once finalized, to reduce 
ongoing litigation risk.
    In May 2007, the Administration transmitted a proposal to 
Congress to address these issues. We are pleased that Senator 
Akaka, and Senators Inouye, Stevens, and Murkowski, have 
recently introduced S. 3013, the Non-Foreign Area Retirement 
Equity Assurance Act of 2008, to stimulate discussion on how 
best to transition from COLA to locality pay. Also, the Federal 
Managers Association (FMA) has put forth a proposal. The 
Administration's proposal, the FMA's proposal, and S. 3013 
would extend locality pay to white-collar employees in the non-
foreign areas over time, while gradually reducing COLA. 
However, the Administration's proposal differs significantly 
from FMA's proposal and S. 3013 regarding phase-in, the offset, 
and employee coverage.
    The Administration's proposal would phase-in locality pay 
over a 7-year period to limit the impact of locality pay on 
retirement behavior. During the phase-in period, decreases to 
COLA would be limited to 85 percent of the increase in locality 
pay in order to reduce the impact on take-home pay of increased 
deductions for retirement contributions and tax liability. S. 
3013 would reduce the phase-in of locality pay to 3 years, and 
would set the offset of COLA at 65 percent of the increase to 
locality pay. The FMA proposal would phase-in locality pay over 
2 years, with an offset of 75 percent.
    The Administration's proposal would permit OPM and other 
agencies to promulgate regulations for various categories of 
employees such as those on special rates. S. 3013 specifies 
employee coverage and further gives employees a chance to opt 
out of the coverage and keep a frozen COLA rate. One result of 
this specificity is that Senior Executive Service (SES) members 
in non-foreign areas would be granted locality pay, which SES 
members currently do not receive, regardless of location.
    Under any of the proposals we expect the Federal Salary 
Council and the President's Pay Agent would establish locality 
areas for Hawaii and Alaska, and that Puerto Rico, Guam and the 
Virgin Islands would be covered by the rest of the United 
States (RUS) locality pay area. Based on existing data, we 
estimate the locality pay rates for Hawaii and Alaska would be 
20.38 percent and 27.68 percent, respectively. The current rate 
for the RUS area is 13.18 percent.
    The Administration's proposal addresses the issues in a 
responsible fashion, with regard to cost and reduced litigation 
risk. S. 3013, though welcomed as a step forward in resolving 
these issues, would cost significantly more due to the shorter 
phase-in period and reduced offset. In addition, we believe the 
opt-out provision would lead to further litigation, rather than 
reducing litigation risk.
    We believe the time is upon us to extend locality pay to 
the non-foreign areas. Locality pay provides employees in the 
non-foreign areas a retirement benefit comparable to employees 
in the continental United States.
    Mr. Chairman, thank you for the opportunity to discuss this 
important issue with you today and for your support as we work 
towards a more market-based pay system in our non-foreign 
areas. We will continue to work closely with your Subcommittee 
and the cosponsors on S. 3013. I would be happy to address any 
questions you may have.
    Senator Akaka. Thank you very much, Mr. Grimes, for your 
testimony in representing OPM. Now we're going to hear from Mr. 
Bunn. Please proceed with your statement.

   TESTIMONY OF BRADLEY BUNN,\1\ PROGRAM EXECUTIVE OFFICER, 
 NATIONAL SECURITY PERSONNEL SYSTEM, U.S. DEPARTMENT OF DEFENSE

    Mr. Bunn. Thank you, Mr. Chairman. My name is Brad Bunn, 
and I'm the Program Executive Officer for the National Security 
Personnel System, also known as NSPS, in the U.S. Department of 
Defense. I want to thank you for the opportunity to appear 
before you today to discuss the proposals to extend locality 
pay in lieu of cost-of-living allowance to employees working in 
Hawaii, Alaska, Guam, Puerto Rico, U.S. Virgin Islands and 
other U.S. territories and possessions.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Bunn appears in the Appendix on 
page 60.
---------------------------------------------------------------------------
    Let me at the start, Mr. Chairman, say thank you for your 
ongoing support of the 700,000 DOD civilian employees who work 
every day, worldwide, in support of our national defense, 
including the thousands of civilians employed by DOD right here 
in Hawaii. We appreciate your leadership on our critical 
civilian human capital issues facing the Department, including 
the issue that we talk about today.
    I'm here today representing the Department's National 
Security Personnel System, a new personnel system and a key 
driver to our department's human capital transformation. To 
date, we've successfully implemented NSPS to over 180,000 
civilian employees across DOD, who are now working under a more 
modern, mission-focused, results-oriented personnel system.
    One of the features of NSPS that's critical to the 
department is the ability to move towards a more market-based 
approach to compensation. So with respect to locality pay, NSPS 
includes an element of pay called a local market supplement, 
which is essentially identical to GS locality pay. NSPS mirrors 
the GS locality pay areas and percentages for these local 
market supplements. Under NSPS, however, an employee must be 
performing above the unacceptable performance level in order to 
be eligible for these local market supplement increases. This 
aligns with the underlying principles of NSPS, as required in 
the law, that pay be linked to performance. NSPS employees with 
performance ratings above unacceptable receive local market 
supplement adjustments equal to the GS locality pay increases.
    Regarding COLA in non-foreign areas, NSPS does not affect 
the payment or the amount of non-foreign COLA. The NSPS 
statutory authorities do not extend to COLA, so employees under 
NSPS in these areas are receiving COLA, similar to their GS 
counterparts.
    As one of the largest Federal employers in these non-
foreign COLA locations, we're well aware of the issues 
surrounding COLA and locality pay. DOD employs over 26,000 
appropriated fund civil servants in Hawaii, Alaska, Puerto 
Rico, and other U.S. Territories. Almost 18,000 of these 
employees are in white-collar occupations and are impacted by 
the non-foreign COLA issue. Currently, we have about 7,000 
employees in these areas covered by NSPS. Over the years, we've 
heard concerns from our employees about COLA, in particular the 
issue of equity in retirement benefits. The perception that 
compensation and retirement benefits for our white-collar 
workforce in these areas are eroding would have a detrimental 
effect on our ability to recruit and retain the talent needed 
to carry out our natural security mission. So we applaud the 
Subcommittee and you, Mr. Chairman, for taking this issue on, 
and agree with our colleagues at the Office of Personnel 
Management as well as with you, Mr. Chairman, that the time has 
come to extend locality pay in lieu of COLA to these non-
foreign areas.
    We realize there are a number of considerations and 
potential approaches to implementing this concept. Last year, 
the Department endorsed the OPM legislative proposal that would 
phase in locality pay over a 7-year period, while gradually 
reducing COLA payments. The Department continues to support 
that proposal. We're also aware of the bill that you recently 
introduced along with Senators Inouye, Stevens, and Murkowski, 
which also phases in locality pay in these areas, while 
reducing COLA payments gradually. The Department hasn't 
completed a full analysis of the introduced bill, but I'm 
prepared to speak to a few points.
    First, let me address how these proposals would affect 
employees under NSPS. Because NSPS local market supplements 
mirror the GS locality pay areas and percentages, if either of 
these proposals were enacted, the Department would establish 
and phase-in local market supplements equal to the GS locality 
pay that's established by OPM. In other words, NSPS employees 
would be treated like GS employees for purposes of implementing 
these provisions. One significant difference, however, is that 
under NSPS, employees with a performance rating of unacceptable 
would not be eligible for these increases in accordance with 
the NSPS statue. The Department would not favor a proposal that 
doesn't allow for this practice, as it would be contrary to the 
fundamental principles of NSPS and paid for performance and 
result in inconsistent treatment of employees within NSPS.
    Second, we understand that the introduced bill proposes a 
shorter phase-in period of 3 years, and sets the offset to COLA 
at 65 percent versus the 85 percent that OPM has proposed. As I 
previously stated, the Department hasn't completed a full 
analysis of the proposal, but we would have to look very 
carefully at the cost of implementing these provisions over a 
shorter timeframe and determine the impact to our 
organizations' budgets. While we support implementation plan 
that minimizes the impact to the take-home pay of our 
employees, we also believe we must accomplish this in a 
fiscally responsible, affordable manner. We're also cognizant 
of the fact that the extension of locality pay in these areas 
would count towards retirement calculations and may influence 
retirement behavior. The Department would favor an approach 
that promotes stability in the workforce, so that our mission 
is not adversely affected. Finally, we understand the 
introduced bill provides affected employees the opportunity to 
opt out of the locality pay provisions, and continue to receive 
COLA. While we have serious concerns over the administrative 
burden this provision would impose, the Department also 
believes this would be contrary to the fundamental purpose of 
the proposed legislation, and would result in continued 
inconsistencies in compensation for employees.
    Mr. Chairman, we at DOD realize that this is not an easy 
issue, and we are gratified to be part of the conversation as 
we collectively wrestle with these matters. For our part, it's 
critical for the Deprtment of Defense, and our organizations 
located in these important geographical areas, to be able to 
recruit, fairly compensate, and retain a civilian workforce 
that continues to provide world-class support to our military 
in this dynamic and unpredictable national security 
environment.
    I appreciate the opportunity to testify and welcome your 
questions, sir. Thank you.
    Senator Akaka. Thank you very much, Mr. Bunn.
    Now we will hear from Ms. Mitchell. Will you please proceed 
with your statement?

    TESTIMONY OF JO ANN MITCHELL,\1\ MANAGER OF ACCOUNTING 
                 SERVICES, U.S. POSTAL SERVICE

    Ms. Mitchell. Thank you, Mr. Chairman. I am Jo Ann 
Mitchell, Manager of Accounting Services for the U.S. Postal 
Service.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Mitchell appears in the Appendix 
on page 66.
---------------------------------------------------------------------------
    I am honored to be here with you today to discuss the 
Postal Service's views on non-foreign COLA payments, but first 
let me begin by sharing some facts about the Hawaiian postal 
workforce with you, as well as some of our financial 
challenges.
    We employ approximately 2,700 employees throughout Hawaii. 
Together, these employees handle nearly 1.2 billion pieces of 
mail a year to more than 650,000 addresses in the Honolulu 
Postal District. And, they do a great job. For the most recent 
quarter of 2008, they delivered an impressive 98 percent 
overnight service, which was two points higher than the 
national average of 96 percent.
    We are proud of their outstanding service. They have 
excelled during a particularly challenging time for the Postal 
Service. For the quarter just ending, mail volume was down 3.3 
percent from last year, which is a very significant decline. 
The Postal Service is facing tough times as businesses and 
consumers nationwide are trying to manage their own budgets 
against rising prices that are affecting the economy of the 
whole Nation. We are engaged in the same struggle in managing 
rising costs and have embarked upon an aggressive cost 
reduction and revenue enhancement plan to, at best, financially 
break even this year.
    The Postal Service has weathered these economic storms 
before, and will again. We have done so by having one of the 
most dedicated workforces in America, and by benefiting from 
management tools, such as the collective bargaining process. In 
place since 1970, collective bargaining defines the way the 
Postal Service and its unions discuss wages and working 
conditions. The result is that the Postal Service policy is to 
pay employees comparable wages and benefits as compared to the 
private sector. These pay policies include the areas covered by 
the non-foreign COLA.
    As you know, the non-foreign COLA is a percentage of an 
employee's base pay and is not subject to Federal income tax, 
nor is it considered pay for the purposes of retirement. The 
maximum non-foreign COLA payment is 25 percent of base pay. In 
Hawaii, percentages for 2008 ranged from 17 to 25 percent.
    Pay parity was brought about for Federal employees through 
legislation that set Federal salaries at a level comparable to 
non-Federal pay in the locality. However, this locality pay 
does not apply to postal employees in the 48 continental United 
States.
    Over time, the Postal Service and its unions have discussed 
forms of locality pay during contract negotiations; however, it 
has never been adopted.
    We have repeatedly stated to Congress, and do so 
respectfully again today, to let the collective bargaining 
process continue to deal with pay and other bargainable issues. 
We strongly oppose the statutory imposition of locality pay 
upon postal employees in the non-foreign COLA areas because 
this action will interfere with collective bargaining. The 
Postal Service bargains over pay with its unions, unlike other 
agencies in the Executive Branch. If Congress enacts 
legislation to provide a new benefit over and above the non-
foreign COLA areas, it sets a dangerous precedent of 
interference, which could spill over to many other negotiated 
areas.
    The second reason that we strongly oppose requiring the 
Postal Service to pay locality pay for its employees is because 
Postal Service wages are already comparable to private sector 
wages, as required by Title 39.
    Finally, paying postal employees locality pay in the 
defined areas would greatly affect the Postal Service's bottom 
line. Locality pay is considered base pay for retirement and 
the Postal Service cost for retirement, Thrift Savings Plan, 
Social Security, and Medicare would increase by some 12.5 
million per year. That figure does not include the increased 
long-term retirement obligation that we would also face. This 
comes at a time when the Postal Service is struggling 
financially.
    The Postal Service shares Senator Akaka's concern for 
postal employees and their long-term financial health when they 
retire. The agency regularly provides financial education 
seminars and materials to employees reminding them that non-
foreign COLA is not part of their retirement benefits.
    While we understand the rationale behind S. 3013, we would 
like to state again that the Postal Service pay and 
compensation systems are very different than those of other 
Federal Government agencies. We hope that we can work with 
Congress and the Administration on finding solutions to this 
problem.
    Thank you and I would be pleased to answer questions that 
you may have.
    Senator Akaka. Thank you very much, Ms. Mitchell.
    My first question is for the entire panel. For the past few 
days, you have been traveling with my staff and talking to 
employees about proposals to convert COLA to locality pay. 
Based on these meetings, what do you believe are the employees' 
top concerns and what are your thoughts on how to address them? 
Let me start with Mr. Grimes.
    Mr. Grimes. Thank you, Mr. Chairman. Time and time again we 
hear concern over the phase-in period, and we, too, are 
concerned about the long phase-in, but we also are concerned 
about staffing issues that might develop if that phase-in 
period is dramatically shortened. We've also heard many times 
about the offset, so that is clearly an employee concern. Thank 
you.
    Senator Akaka. Thank you. Mr. Bunn.
    Mr. Bunn. I would echo that, that there seems to be a lot 
of concern over the impact that this will have on retirement. 
There's a lot of support that I saw among employees who 
attended these meetings for this concept for phasing in 
locality and improving the retirement benefits and addressing 
that inequity. I think there's a lot of different ways that it 
could be addressed and we have learned a lot from the feedback 
sessions we had with the employees. And certainly Mr. Grimes 
said the time the phase-in and the time that it would take to 
phase it in, and also the impact on take-home pay, frankly, as 
locality pay is phased in and now subject to Federal taxes, 
what is the bottom line. As we've heard, concerns over gas 
prices and generally, cost of living here in Hawaii, so all of 
those things are clearly major concerns for employees.
    Senator Akaka. Ms. Mitchell.
    Ms. Mitchell. Thank you, Mr. Chairman. I have spoken to 
several of our employees after the town hall meetings, and 
there's a difference of opinion I think between the younger 
employees and the older employees. I think the younger 
employees favor the non-foreign COLA for tax purposes, and of 
course the older employees approaching retirement would favor 
moving to locality based pay. But regardless of that, it's 
interesting to note that the employees understand it would 
actually create inequity for us, that they would be receiving 
something that the rest of postal employees would not receive.
    Senator Akaka. Now, I know what you're reporting here was 
based on your meetings in Hilo and Kona on Tuesday, and 
yesterday on Maui. This afternoon I'm sure you will hear 
additional questions and concerns from employees here in 
Honolulu and tomorrow in Kauai.
    Mr. Grimes, I firmly believe that we must protect 
employees' take-home pay if we transition from COLA to locality 
pay. This has become even more necessary given the current 
economic climate. Please explain the assumptions that the 
Administration made in determining that 85 percent offset could 
help protect employees' take-home pay.
    Mr. Grimes. Thank you, Mr. Chairman. I would like to say 
that there was no intent to protect take-home pay in the 
absolute by establishing an 85 percent offset. It was designed 
to mitigate the impact of increased taxes and retirement 
contributions, not eliminate the impact of those taxes and 
contributions. But we believe that in the interest of cost, 
that an 85 percent number is a fair number, but it is not a 
magic number. It wasn't a calculated number. It's a number that 
helps, not a number that solves.
    The other thing I'd like to say about protecting take-home 
pay is that there are a lot of issues that go into take-home 
pay, the number of deductions somebody claims, whether they've 
got allotments, whether their mortgage comes out of their 
paycheck and so forth. So it would be difficult to guarantee 
the take-home pay would go unchanged.
    In the bill the Administration presented, it would 
implement the bill if enacted on or about January 1, 2008 in 
conjunction with the Federal pay increase. That Federal pay 
increase would, we believe in the vast majority, if not all 
cases, prevent any decrease in take-home pay. What it would do, 
and I will not shy away from this, that it would limit--the 
increase would not be as great for those people who are 
transitioning as others. But once transition is complete and 
everybody is on an even playing field, then of course Hawaii 
and Alaska and the other non-foreign areas would be getting the 
same increases that employees in the contiguous 48 States get. 
Thank you.
    Senator Akaka. Mr. Bunn, employees under NSPS are 
particularly concerned about protecting their home pay in the 
transition from COLA to what you've been talking about, local 
market supplements. Currently, non-foreign COLA is guaranteed, 
while LMS increases are based on an employee's performance in 
NSPS. How could DOD adjust local market supplements to ensure 
employees' take-home pay is not reduced?
    Mr. Bunn. The local market supplements if this were enacted 
and locality pay was extended to the non-foreign COLA areas and 
COLA was reduced, NSPS would mirror the GS locality pay 
increases, and that essentially is written into the NSPS 
statue, that as GS locality pay increases, employees under NSPS 
will get the same increase in the form of a local market 
supplement.
    And as I stated in my statement, the only difference would 
be that if there were employees who were performing 
unacceptably, which is the lowest possible level of 
performance, they would not be eligible for that increase and 
that in fact is also in the statute, and that mirrors the 
fundamental principles of pay for performance that individuals 
who fail in their performance are not eligible for a pay 
increase of any kind.
    Now, there are very few employees who are in that category, 
sir. In this past rating cycle we had less than a half percent 
of our employees under NSPS were rated as unacceptable, so that 
affects a very small portion. But it is a principle in NSPS and 
it is in fact in the statute. But for the rest of the 
employees, they would get the increases just like their GS 
counterparts.
    Senator Akaka. Mr. Grimes, as you know, S. 3013 covers all 
Federal employees in the non-foreign areas who currently 
receive COLA. However, the Administration's proposal raises 
questions about who would be transitioned to locality pay and 
how they would be transitioned. Please list the groups of 
employees who would not be transitioned to locality pay under 
the Administration's proposal and detail what pay changes OPM 
would make for those workers.
    Mr. Grimes. It is true, Mr. Chairman, that the way that the 
Administration's proposal was worded that we didn't call out 
each and every group and say exactly what would happen. There 
are a number of different types of employees, for example, 
Senior Executives, that get COLA but don't get as a rule 
locality pay.
    The Administration's proposal would have OPM and other 
affected agencies promulgate regulations to deal with each of 
those groups. And as you know, regulations are in the form of a 
proposal with public notice and comment followed by final 
regulations, and we believe that dealing with Senior Executives 
and special rate employees in that manner would allow a lot of 
exposure and a lot of comment from the affected individuals and 
then we would arrive at a good solution.
    We are concerned if we codify approaches to these groups in 
legislation, if we make a mistake it will be hard to correct. 
So we prefer the regulatory approach.
    Senator Akaka. Mr. Bunn, I understand that nonappropriated 
fund employees do not receive locality pay, but that DOD has 
discretion to grant NAF workers non-foreign COLA. The intent of 
S. 3013 was to cover all employees currently receiving COLA. 
What are your thoughts about giving NAF employees locality pay?
    Mr. Bunn. We have several categories of our NAF workforce. 
The folks that are in the lower grades are prevailing rate 
employees similar to blue collar, so their pay is already based 
on prevailing rates of a local area. So those employees don't 
currently get COLA and they're handled within our authorities 
to set their pay. The NAF workforce and the higher grades do 
get COLA, and we have been exploring options on how we would 
address the issue if COLA were to be phased out. Most of our 
NAF employees do receive COLA in these areas.
    We have under the Title 10, nonappropriated funds, 
personnel authorities, a lot of discretion and flexibility in 
addressing those issues, and we would follow the principles 
that OPM would follow in ensuring that we take care of these 
employees, that they don't take pay cuts, and we already have 
the statutory authority to do that. So we would be able under 
our existing authorities to address those issues with the 
phase-out of COLA by providing increases. We would likely not 
call it locality pay, but we would be able to provide an offset 
if the COLA were reduced using our existing Title 10 
authorities. Thank you, Mr. Chairman.
    Senator Akaka. Let me ask about one particular group, and 
what are your thoughts about the intelligence community 
employees who receive locality pay and non-foreign COLA?
    Mr. Bunn. Technically they don't receive locality pay, they 
get something that's equivalent to locality pay. And that was 
something that we did under our existing Title 10 statutory 
authorities for intelligence workforce, and that was to address 
recruiting and retention issues that we were having in filling 
jobs in these areas in that segment of our workforce, and I 
would at this point without making a commitment on what we 
would do, I have spoken to our experts who deal with the 
intelligence pay systems, and again, we do have the ability to 
deal with those matters under the existing Title 10 statutory 
authorities for our intelligence workforce, and we would ensure 
that those employees are treated fairly in terms of if they 
lose COLA, we would be able to offset that with other pay 
flexibilities that we have.
    So again, we don't have all the answers yet. If S. 3013 or 
the Administration's proposal or some combination is 
implemented, we would certainly go off and look at that and 
make sure that those employees were taken care of. Again, with 
the kind of the underlying principles being treating our 
employees fairly but doing it in an affordable manner.
    Senator Akaka. Thank you. Ms. Mitchell, I'm concerned with 
Administration's proposal to freeze COLA rates indefinitely for 
postal employees. We need a long-term solution for present and 
future employees that does not diminish their current benefits. 
I have proposed creating territorial pay in an effort to 
address this problem. How would the postal service propose to 
address this issue in the long run?
    Ms. Mitchell. Well, Mr. Chairman, we agree as well that 
freezing COLA rates is not a long term solution, it's a short 
term solution. So we would look at adopting something probably 
in the same respect as locality pay for just the percentage 
purposes of it, but treat it as if it were a non-foreign COLA 
payment, because as you know, we do not pay locality pay for 
the rest of the United States, so for us to take the bill as 
written would actually create an inequity for us, the same 
inequity it's trying to resolve for the rest of the Federal 
sector.
    Senator Akaka. Would this also apply to current and future 
employees?
    Ms. Mitchell. We would work with you, Senator, on how we 
would handle that.
    Senator Akaka. There is an inequity when postal employees 
retire in the non-foreign areas. The gap between take-home pay 
and retirement annuity of postal employees is significantly 
greater than postal employees in the other 48 States. How would 
you address this inequity?
    Ms. Mitchell. Well, sir, we feel that through collective 
bargaining we negotiate standard rate of pay across the 
country. Consider an employee who is in the same level, earning 
the same amount of money in San Francisco than the employee in 
Hawaii, yet in Hawaii, or in any of the other non-foreign COLA 
States that employee enjoys a benefit that the employees in the 
rest of the country do not receive, even though locality 
percentages would actually be higher for them. So the only way 
we do address it now is through financial education, explaining 
to employees that they have a benefit now that will not be 
there for them when they retire, and how to financially plan 
for that.
    Senator Akaka. You testified to the benefits of collective 
bargaining.
    Ms. Mitchell. Yes, sir.
    Senator Akaka. And I'm a strong supporter of employees' 
rights to bargain collectively and have a say in their working 
conditions. Is the postal service's position that the best way 
to address the non-foreign COLA issue is through collective 
bargaining with postal workers from the non-foreign areas in 
the 48 states?
    Ms. Mitchell. Locality pay have been discussed with the 
unions but not adopted. It's always been silent as far as non-
foreign COLA because it was a benefit prior to collective 
bargaining. However, if we were to do something that actually 
changed the way we calculated retirement for employees, then 
that would be better served through collective bargaining.
    Senator Akaka. Mr. Grimes, you mentioned that OPM would 
issue regulations on how it would treat employees like the SES. 
Can you provide details on what exactly you had in mind?
    Mr. Grimes. We have a number of ideas in mind, and one, for 
example, might be to even continue COLA for those folks or 
freeze it or grandfather the existing employees. We could 
increase the pay of the SESers, and again, grandfather them. 
But as you know, we've got a worldwide, nationwide schedule for 
SES employees, and we would be creating again a similar 
inequity if we were to turn that money into retirement credible 
pay in the non-foreign areas vis-a-vis the SESers in the 
contiguous 48 States.
    Senator Akaka. Mr. Grimes, I understand that one of the 
reasons that the Administration proposed a 7-year phase-in of 
locality pay was to avoid an increase in the number of 
retirements. However, OPM itself estimates that one-third of 
the Federal work force will retire in the next 5 years, before 
the 7-year phase-in is complete. As you know, more than half of 
the Federal workers in Hawaii and Alaska are retirement 
eligible. Do agencies have succession plans in place and 
recruitment strategies to address the expected retirement wave 
despite any changes in COLA?
    Mr. Grimes. We believe agencies have succession plans in 
place and recruitment and retention strategies in place to deal 
with the normal retirements that are taking place now. Since 
the introduction of this bill, I couldn't speak to whether 
agencies have thought about the incentives to retire that may 
or may not occur depending on how the bill turns out. Just as 
an example, if we allow employees to opt in for those first 3 
years, it's not inconceivable that nobody would retire for 3 
years. And then in year 4 they would all retire, the ones that 
would have retired each year, so that would create a bit of a 
hiccup, but we'll just have to see how the final bill turns 
out, and I believe agencies would in fact prepare for it.
    Senator Akaka. I understand that one of the reasons for the 
7-year phase-in of locality pay is to avoid having Federal 
workers retire earlier than expected resulting in staffing 
shortages. With a longer phase-in period, wouldn't employees 
continue to leave for California to earn their high three leave 
in Federal agencies in Hawaii and Alaska in the same situation?
    Mr. Grimes. That could be. We believe that with the 
Administration's proposal as written, even with 2 or 3 years 
into the phase-in period, employees' retirement pay would be 
significantly higher than it would be without phasing in 
locality pay at all. Now, certainly you can make arguments that 
if you phase it in quicker, their retirement would be higher. 
At least that gives us a path to solve this vexing issue. And 
we definitely are not in favor of having our wonderful long-
term employees start thinking about retirement and moving away 
just when we need them the most. So we're in favor of phasing 
in locality pay and we believe that the 7-year phase-in period 
is appropriate. Thank you.
    Senator Akaka. In my opinion, Mr. Grimes, the main reason 
for converting to locality pay is to help address the long 
standing retirement inequities between individuals in the 48 
States and the non-foreign areas. Several witnesses on our 
second panel have mentioned the need to cover current retirees 
and allow them to apply to the locality pay system. What are 
your thoughts about that proposal?
    Mr. Grimes. Generally speaking, changes in compensation 
policies are prospective in nature. It becomes very expensive 
to look back. It's important to note that employee 
contributions and agency contributions are only a part of the 
amount of money that actually gets paid out in terms of 
annuities and there's an unfunded liability that employees 
really wouldn't be able to cover. So, we would look to 
prospective implementation of this bill. We understand that a 
number of years ago there was some concern about this issue and 
for whatever reason it didn't go forward. We are very grateful 
to you, Mr. Chairman, for getting a bill on the table and 
hopefully now we'll be able to get this solved. Thank you.
    Senator Akaka. Mr. Grimes, if S. 3013 is passed, how many 
new locality areas will be established and how would they be 
defined? Will the new locality pay areas encompass entire 
States?
    Mr. Grimes. The anticipation on the part of the 
Administration is that Hawaii and Alaska would be defined as 
new locality pay areas, that the other non-foreign areas will 
fall under the rest of the U.S. category. Now, we do have to 
note that the Federal Salary Council makes recommendations to 
the President's Pay Agent, who has the final say in creating 
locality pay areas, but we would anticipate that that's what 
they would do. Now, the fact that an entire State would be a 
locality pay area is a new concept. Generally speaking, we go 
by the census definitions for consolidated metropolitan 
statistical areas and so forth, but we believe that 
establishing the locality pay rate statewide for both Alaska 
and Hawaii is a good solution.
    Senator Akaka. So the territories then would receive the 
rest of U.S. rate?
    Mr. Grimes. The territories would fall under the so-called 
rest of the U.S. rate, which currently is about 13.18 percent.
    Senator Akaka. Many employees are concerned that they may 
receive less than the rest of the U.S. locality pay rate. Could 
this ever happen?
    Mr. Grimes. The rest of the United States is indeed a 
floor. So that's inconceivable in the way that we currently do 
things. We also heard a concern that locality pay might go 
down. That has happened once in one area, since 1994. I believe 
Dayton, Ohio, went down by six-hundredths of one percent 1 
year, but with the methodology they would use to adjust 
locality pay rates now, it's just about impossible for our 
rates to go down.
    Senator Akaka. Mr. Grimes, non-foreign COLA rates go up or 
down and so what you said is helpful to those employees worried 
about locality pay going down.
    Mr. Bunn, instead of locality pay, employees in NSPS 
receive local market supplements. One concern with COLA is the 
fact that the rates are decreasing due to the increase in the 
cost of living in Washington DC. Can you tell me whether local 
market supplements can ever decrease, and if so, on what 
conditions?
    Mr. Bunn. The local market supplements that NSPS uses are 
essentially adopted from the GS locality areas and percentages, 
so I would refer to Mr. Grimes' answer and essentially say the 
same thing. Local market supplements are very much hooked to 
the GS locality percentages, so the only way that a local 
market supplement under NSPS standard LMS, as we call it, would 
go down is if a GS locality pay were to decrease. And I would 
agree with Mr. Grimes, that the likelihood of that happening is 
very small. But the Department of Defense would not take the 
action to decrease the local market supplement because of the 
way that our statute reads now, after the defense authorization 
bill from last year that essentially hooked us to the GS 
locality rates.
    Senator Akaka. Mr. Grimes, employees who receive special 
rates do not receive locality pay. However, employees receiving 
non-foreign COLA can also receive special pay rates. Under S. 
3013, an employee would not lose their special rate due to the 
conversion. How would you propose to address the pay for 
special rates in a conversion from COLA?
    Mr. Grimes. Again, Mr. Chairman, we would propose to 
address that through regulation, but in terms of the concept, 
we really would view the 25 percent COLA in the case of most of 
the islands as really part of that special rate. We don't want 
to give locality payments to special rate employees, but we 
would propose to increase the special rate component of their 
pay in accordance with a decrease in COLA so that people's pay 
rate does not go down during the phase-in period, for example. 
If at the end of the day after 7 years, if the pay rates were 
over and above statutory limits on special rates, we would have 
the same pay provisions that could take care of it, but the 
essential concept if someone is receiving a 30 percent special 
rate today, they would keep that differential over existing 
employees. Now, after the phase-in period, special rates, as 
you know, may be adjusted up or down. I will tell you from 
experience they don't go down very often. It has happened but 
it's pretty rare.
    Senator Akaka. Mr. Bunn, under NSPS, special rates are 
covered by local market supplements. How would NSPS address 
employees receiving special rates as part of their local market 
supplement in the conversion from COLA?
    Mr. Bunn. Thank you, Mr. Chairman. We do have a feature in 
NSPS called a targeted local market supplement. Most of our 
special salary rate employees that we converted to NSPS, we 
were able to incorporate their special salary rates within the 
broad bands under NSPS, and those special salary rates went 
away. They didn't lose any money but they were now able to be 
paid within the broad NSPS pay bands. For those few employees 
that we were not able to incorporate that special salary rate, 
we created an additive called a targeted local market 
supplement, and we treat them very similar to GS special salary 
rate employees and we would adopt the same approach that OPM 
would take for special salary rates, meaning as COLA were to go 
down, we would ensure that our targeted local market 
supplements were to go up unless they were overtaken by a local 
market supplement or locality pay that turned out to be higher 
than the targeted local market supplement, so we would take a 
very similar approach to OPM in ensuring that differential 
remains.
    Senator Akaka. I want to thank you for your responses, but 
I have a final question to all of you. Do you have any closing 
thoughts or recommendations as we move forward in this 
discussion on transitioning from COLA? Let me start with Ms. 
Mitchell.
    Ms. Mitchell. Thank you, Mr. Chairman. Of course we want to 
work with the Senator and the Subcommittee to come up with the 
most equitable solution. We do not want to disadvantage the 
current situation with the employees who are in the non-foreign 
COLA areas, but then yet again, we do not want to jeopardize 
collective bargaining with the Postal Service or put the Postal 
Service in a worse financial situation than it is today. So we 
would continue to work with you.
    Senator Akaka. Your thoughts, Mr. Bunn.
    Mr. Bunn. The thoughts I would like to share is that from 
an agency perspective, from the Department of Defense 
perspective, I'd like to, on behalf of DOD, thank you for 
bringing this issue to the fore so that we can get it behind 
us. It's been, as Mr. Grimes said, a vexing issue for a very 
long time and it is time to resolve it, so we appreciate your 
help in doing that. We have a large DOD civilian population 
here in Hawaii and the other non-foreign COLA areas, so the 
quicker we can get a solution, the better off we'll be, we'll 
be able to focus on our national security mission, and one 
final thought is that if you would like to continue to discuss 
this matter, I am more than willing to come to Hawaii any time 
on behalf of the department and talk about it. So thank you, 
sir.
    Senator Akaka. Thank you so much. Mr. Grimes.
    Mr. Grimes. Thank you, Mr. Chairman. I think it's probably 
best said by a comment that an employee made when I was here in 
January. This person said, ``well, if we had done this 10 years 
ago, you wouldn't be here right now.'' And that would have been 
a shame, because I, too, enjoy the islands. But we did come 
close, we provided some technical assistance 10 or 15 years 
ago, and it just didn't go anywhere, and we are exceedingly 
grateful to you and your staff for getting this bill 
introduced. We look forward to working with you and hope 
sincerely that we can get something accomplished this year. I 
would worry that if we don't get it done this year then if not 
now, when? That would be my closing thought. Thank you very 
much.
    Senator Akaka. Well, I thank you so much for your closing 
thoughts, and again, for your responses to all questions. It 
has been very helpful, and we look forward to continuing to 
work with you and your agencies and departments as well. So 
thank you so much for being here and wish you a safe trip home.
    Ms. Mitchell. Thank you, Mr. Chairman.
    Mr. Grimes. Thank you, Mr. Chairman.
    Mr. Bunn. Thank you.
    Senator Akaka. Thank you. And now I would like to call the 
second panel to come up.
    [Discussion off the record.]
    Senator Akaka. The hearing will be in order. I want to 
thank our second panel again for being here, and I would like 
to introduce them to you. Joyce Matsuo, President of the Oahu 
COLA Defense Committee. Sharon Warren, President of the COLA 
Defense Committee of Anchorage. Thank you for being here. 
Manuel Cruz, President of the COLA Defense Committee of Guam. 
Michael FitzGerald, President of the Federal Managers 
Association, Chapter 187. And Terry Kaolulo, President of the 
Hawaii State Association of Letter Carriers.
    As you know, it is the custom of the Subcommittee to swear 
in all witnesses, and I ask all of you to please stand and 
raise your right hand. Do you solemnly swear that the testimony 
you are about to give this Subcommittee is the truth, the whole 
truth, and nothing but the truth, so help you, God?
    The Panel Members. I do.
    Senator Akaka. Thank you. May the record note that the 
witnesses responded in the affirmative.
    Ms. Matsuo, will you please proceed with your statement?

   JOYCE MATSUO,\1\ PRESIDENT, COLA DEFENSE COMMITTEE OF OAHU

    Ms. Matsuo. Chairman Akaka and Members of this Senate 
Subcommittee, my name is Joyce Matsuo, and I am President of 
the COLA Defense Committee of Oahu. The 15,000 or more Federal 
employees on Oahu is the largest group of COLA recipients 
covered by a COLA committee. In Hawaii, COLA committees were 
originally established on each island but only two remain 
today--the Oahu and Maui COLA Committees.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Matsuno appears in the Appendix 
on page 69.
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    Today, on their behalf, I would like to thank you for this 
opportunity to present our comments and recommendations on S. 
3013 which proposes to resolve the retirement inequity in COLA 
areas.
    To convert or not to convert COLA to locality pay. From the 
latest COLA survey results, we see that the COLA rates will 
continue to drop for all areas in Alaska, except Rural Alaska, 
and they will also begin to drop for the Pacific COLA areas.
    In 2007, your staff informed us that the estimated locality 
pay rates would be about 20 percent for Hawaii and 27 percent 
for Alaska. With the projected decreases in COLA, it would seem 
prudent that Alaska move to locality pay, and Hawaii should, 
too. It is more probable that future COLA rates in Hawaii will 
continue to decrease and locality pay will increase and 
eventually exceed the 25 percent COLA statutory cap. A 
conversion of COLA to locality pay actually benefits Hawaii 
more than it does Alaska because a conversion protects the 
remaining COLA until COLA is completely converted to locality 
pay.
    On the phase-in period to achieve full locality pay, in the 
Administration's 2007 proposal, OPM proposed a 7-year phase-in 
period. S. 3013 improves the phase-in period to 3 years.
    I support the Federal Managers' Association proposal of 
full locality pay in Year 1 because this will definitely help 
stop the exodus of experienced employees transferring to 
locality pay areas to earn their high-3 years for retirement 
purposes.
    This Senate bill proposes a 3-year phase-in. The first year 
locality pay rate would be one-third of RUS, which is 13.18 
percent or about 4 percent in the first year. This 4 percent is 
a far cry from 20 percent locality pay for Hawaii and 27 
percent locality pay rate for Alaska. If full locality pay is 
not possible in Year 1, I would recommend that at least full 
RUS be used in the first year.
    On the impact on take-home pay, the Oahu COLA Committee 
made calculations of the impact on take-home pay and it 
supports that the proposed adjustment factor of 65 percent will 
minimize a negative impact on take-home pay. Without the 65 
percent factor, Federal employees, especially FERS employees, 
cannot accept this conversion proposal due to the significant 
impact on their take-home pay from Federal taxes that would now 
be due on locality pay.
    On the buy-in provision as provided in Section 7, the 
conversion to full locality pay in Year 1 will give Federal 
employees their proper locality pay on which retirement 
benefits would be determined. The locality pay amounts and the 
resulting retirement benefits would be comparable to those 
received by Federal employees in the 48 States. No buy-in 
provision would then be needed.
    There are two problems that we see with this provision. 
First, it is conceivable that an employee who makes this 
election could have the remaining unconverted COLA and the 
locality pay rates total more than their true locality pay 
rate. Hence, COLA employees would receive higher retirement 
benefits than Federal employees in the 48 States and this would 
not be fair to those in the 48 States. I believe that it is the 
intention of this bill to fix inequity and not to create 
another inequity.
    The second problem is that S. 3013 has no provision for 
retirees. These retirees are not provided any remedies for the 
retirement inequity that really began in 1994 due to the 
exclusion of Hawaii and Alaska from FEPCA. They are receiving 
significantly decreased retirement benefits because of this. If 
the buy-in provision of Section 7 is included, I ask that the 
senators include a provision for retirees which, similar to 
Section 7, provides them with the opportunity to buy in to a 
retirement program that includes COLA or locality pay. If it 
can be part of this legislation, it would eliminate the 
inequity for all employees, past and present.
    How the NSPS impacts the conversion. Under the NSPS pay 
system, locality pay is frozen at the time of NSPS 
implementation. The year-to-year conversion of COLA to locality 
pay is dependent on the yearly increases to locality pay. If 
locality pay rates are frozen at the time of NSPS 
implementation, there will be no yearly locality pay increases 
and the COLA to locality pay conversion will become fixed for 
these DOD employees. So, the COLA conversion must take place 
outside the NSPS system until COLA is completely converted to 
locality pay.
    For current retirees, as I stated earlier, I ask that this 
Subcommittee seriously consider adding some provision for 
current employees. As he wrote in his decision in Matsuo vs. 
the United States, which is currently on appeal, District Court 
Judge Phillip Pro opined that he felt the retirement inequity 
issue raised in that lawsuit should have been dealt with 
through legislation. Now would be a perfect time to fix the 
retirement inequity through legislation for all Federal 
employees, past and present.
    If legislation is not possible, we would have to continue 
to seek resolution through our current lawsuit. Should we 
prevail in the Supreme Court, the COLA conversion to locality 
pay would become moot as winning in the Supreme Court means 
employees in Hawaii and Alaska are entitled to locality pay--
regardless of receiving COLA.
    We are seeking a fair and equitable retirement fix for both 
current and retired Federal employees. We could accept a fairer 
version of S. 3013 as a settlement for current Federal 
employees. For the remaining class members, the retirees, an 
additional provision to cover retirees could resolve our 
lawsuit.
    Mr. Chairman, I sincerely hope this information will aid 
your Subcommittee in finally developing a legislation that is 
both fair and equitable for Federal employees, and retirees, in 
the COLA areas. If you need any additional feedback or have any 
questions, I will be available to offer any assistance I can.
    Senator Akaka. Thank you very much, Ms. Matsuo.
    And now we'll proceed with testimony from Ms. Warren.

    TESTIMONY OF SHARON WARREN,\1\ PRESIDENT, COLA DEFENSE 
                     COMMITTEE OF ANCHORAGE

    Ms. Warren. Good afternoon, Chairman Akaka. My name is 
Sharon Warren, President of the COLA Defense Committee of 
Anchorage, and representing all three Alaska COLA Defense 
Committees--Anchorage, Fairbanks, and Juneau. I would like to 
thank you for allowing us to express our views regarding the 
proposed plan for eliminating the COLA and including the non-
foreign areas in the locality pay program.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Warren appears in the Appendix on 
page 96.
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    There are nearly 13,000 Federal and postal employees in 
Alaska who receive COLA.
    The Administration seeks to transition from the COLA 
program to the locality pay program. As you know, COLA is not 
included in the calculation of retirement benefits whereas 
locality pay is. This results in Alaskan retirees receiving 
significantly less retirement pay than their counterparts in 
the 48 States.
    The Administration also seeks to limit their exposure to 
future litigation arising out of the COLA program. The COLA 
program has given rise to much controversy in several lawsuits, 
which have cost the U.S. Government hundreds of millions of 
dollars. Currently, the Office of Personnel Management is 
working with the COLA Committee representatives through the 
Survey Implementation Committee to carry out the 2000 Caraballo 
Settlement Agreement. Denise Hernandez, President of the COLA 
Defense Committee of Fairbanks and I serve on the Committee 
with the Office of Personnel Management.
    The concept of transitioning from the COLA Program to the 
locality pay program has been discussed for a number of years. 
In 2003, all Alaska COLA Defense Committees were pursuing the 
concept to transition to locality pay. Finally, after 4 years, 
the proposal was included in the President's budget and 
submitted to Congress in May 2007. We support the 
Administration's proposal to transition from COLA to locality 
pay with modifications, which are necessary to ensure Federal 
and Postal employees are treated fairly and equitably.
    Based on the 1996 locality pay surveys in Alaska, Alaska 
was projected to receive the highest locality pay rate in the 
Nation. The OPM estimated Alaska's locality pay rate at 38 
percent. Since 1996, the method of the calculating locality pay 
rate has changed and now Alaska is estimated to have a locality 
pay rate of 27.68 percent.
    Under the Administration's proposal there is a 7-year 
phase-in provision. In the first year, Alaska Federal Employees 
would receive one-seventh of the Rest of the U.S. locality pay 
rate which is 13.18 percent. Employees in Alaska are being 
asked to work many more years in their career to achieve 
retirement benefits similar to those received by Federal 
employees in the 48 States.
    At the two March 2008 town hall meetings in Anchorage and 
Fairbanks, Alaska sponsored by Senator Stevens, the 
overwhelming response by the employees was phasing in locality 
pay over 7 years was not acceptable. Since 2003, Alaska Federal 
employees have been waiting for the opportunity to convert from 
COLA to locality pay. The reason provided by OPM that the RUS 
rate should be used the first year in Alaska is not a separate 
locality pay area, and it would take the government a year to 
determine appropriate locality pay rate for Alaska. While it is 
true Alaska has not been designated a separate locality pay 
area, the OPM was nevertheless able to estimate the locality 
pay rate for Alaska when they provided information at your 
request, Senator Akaka, for the locality pay calculator. We 
recommend using the Alaska locality pay rate in the conversion.
    The Administration's proposal protects Postal employees pay 
by permanently freezing their Territorial COLA. Postal 
employees have expressed concern over being the only employees 
left receiving a non-taxable income and becoming low hanging 
fruit only to be plucked at another time. Postal employees 
would like to stay under the umbrella of all Federal employees 
in the COLA areas, as they are now. S. 3013 successfully keeps 
Postal employees under that umbrella.
    Where there are shortfalls in the Administration's 
proposal, S. 3013 seeks to address these issues by using an 
adjustment factor of 65 percent instead of 85 percent, phasing 
in the conversion of locality pay over 3 years instead of 7 
years, allowing Postal employees to benefit with their 
counterparts in the COLA areas regarding retirement benefits, 
allowing employees to elect to have additional basic pay for 
annuity computation during the phase-in period and allowing 
employees to pay into the Civil Service Retirement Fund.
    Overall S. 3013 addresses many of the concerns expressed by 
employees in Alaska, except retirees. Apparently, there is a 
reluctance to include provisions in legislation to recognize 
the retirement inequities experienced by retired Federal 
employees. I am sure Congress never intended to have such 
disparity of retirement benefits between the Federal employees 
in the COLA areas and the 48 States. Implementation of the 
locality pay program drastically reduced the retirement 
benefits of Federal employees in Alaska. Federal employees who 
retired from Alaska were dedicated to Federal service and it 
cost them dearly in their retirement benefit. We recognize 
retirees have not paid into the retirement fund. Section 7 of 
S. 3013 could be amended to include language for allowing 
retirees to pay into the Civil Service Retirement Fund or by an 
offset withheld from the increased retirement benefit.
    The Alaska COLA Committees support S. 3013. We understand 
that any legislation will not be perfect for everyone. The 
Alaska COLA Committees believe it is important to have a fair 
and equitable resolution with respect to both pay compensation 
and retirement inequities that have existed since the 
implementation of the locality pay program.
    Thank you again, Mr. Chairman, for the opportunity to 
testify before your Subcommittee, and for your time and 
attention to this important matter. If you need additional 
feedback or have questions, we would be glad to offer our 
assistance.
    Senator Akaka. Thank you very much, Ms. Warren.
    And now we ask Mr. Cruz for your testimony.

    TESTIMONY OF MANUEL Q. CRUZ,\1\ PRESIDENT, COLA DEFENSE 
                       COMMITTEE OF GUAM

    Mr. Cruz. Hafa Adai, Mr. Chairman and Members of the 
Subcommittee. My name is Manuel Q. Cruz and I am the President 
of the COLA Defense Committee of Guam. I want to thank you for 
the opportunity to appear before this Subcommittee to testify 
on S. 3013. I also want to thank you and Senator Voinovich for 
inviting me to this hearing.
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    \1\ The prepared statement of Mr. Cruz appears in the Appendix on 
page 102.
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    Almost to the exact date last year, May 30, 2007, the 
Office of Personnel Management sent a legislative proposal to 
Congress that would phase-out the Non-Foreign Cost of Living 
Allowance and phase-in locality pay for the Federal employees 
in Alaska, Hawaii, Guam and the Commonwealth of the Northern 
Mariana Islands (CNMI), Puerto Rico, and the U.S. Virgin 
Islands. President George Bush proposed the change in 
compensation policy as part of his fiscal year 2008 budget. It 
would change the pay system that is in place since 1948.
    You will note in the President's proposal that locality pay 
will be extended to white-collar Federal employees in the COLA 
areas, while reducing COLA payments gradually. The changes will 
be phased-in over a 7-year period, and at the same time, 
workers will be receiving their so-called locality pay, which 
would boost salaries based on surveys of what is paid by the 
private sector in local labor markets.
    While not knowing the full details of the proposal, it was 
felt by many of the affected white-collar workers on Guam and 
the CNMI that the 25 percent COLA that were being received at 
the time could be in jeopardy. Locality pay was considered, in 
most cases, to be not as high as COLA. Thus, it would appear 
that some workers may benefit under the proposal, while others 
could be hurt.
    Since 1948, Federal employees in Guam have received COLA to 
ensure that their pay reflects the high cost of living. COLA is 
not subject to Federal or Social Security/Medicare taxes. 
Locality pay, on the other hand, is taxed and considered part 
of base pay, which is used to calculate an employee's 
retirement annuity. COLA is based on living costs, while 
locality pay is based on differences in the cost of labor. 
Additionally, COLA payments can be reduced, while locality pay 
has been increasing in the last few years.
    With the introduction of the Non-Foreign Area Retirement 
Equity Assurance Act of 2008, S. 3013, it is my understanding 
that COLA rates will no longer be determined based on the 
difference in the cost of living in Washington DC, but will now 
be the rate in effect on December 31, 2008. The Office of 
Personnel Management has been seeking slowly to phase-out the 
COLA system in favor of the locality pay system, but this new 
legislative proposal will speed up the process. The result will 
be that the new system will be fully in place in 3 years rather 
than the 7 years that was suggested by OPM.
    It is also my understanding that the legislative process is 
intended to benefit all Federal employee groups whose 
counterparts in the U.S. Mainland currently receive locality 
pay. Employees, who will soon be forced to retire due to age 
and those intending to retire in 3 years or less, will be able 
to buy in to the program to ensure that they may fully 
participate in the new system. The legislative proposal, 
however, doesn't address already retired employees.
    It must be noted that Guam and the CNMI have some unique 
situation that may not be fully addressed by the new 
legislative proposal. No. 1, Post differential. Post 
differential is based on environmental conditions being 
significantly different from the continental United States and 
used by Federal agencies for recruiting purposes. PDs are 
authorized for Guam and the CNMI. The PD rate for Guam and the 
CNMI has been set at 20 percent. Like COLA, PDs do not count 
toward retirement. It is not clear in the legislative proposal 
how PDs will be addressed. Locality pay has no effect on the 
price of goods either in Washington, DC, or in the foreign 
areas.
    No. 2, NSPS. The NSPS Program only applies to Department of 
Defense (DOD) civilian employees. The majority of Federal 
employees on Guam work for DOD activities. How are questions on 
NSPS features (local market supplements) going to be addressed? 
NSPS implementation apparently has no effect on COLAs, so 
employees continue to receive COLA at the time of conversion. 
But, what about locality pay?
    No. 3, Non-Appropriated Fund (NAF) Employees. NAF employees 
do not receive locality pay. Also, COLA is not granted to 
employees in NAF position in paybands NF-1 and NF-2.
    No. 4, CONUS COLA. As a requirement of their military 
service, members of the Uniformed Services move about the 
country. Many military members and their families are assigned 
to a variety of low, moderate and high-cost locations. Private 
sector pay scales tend to reflect local living costs in U.S. 
locations, but military pay tables do not. Would such a COLA 
Program become a problem when the non-foreign COLA Program is 
phased-out?
    No. 5, DODEA Schools. OPM claims that the change would 
benefit workers because locality pay, unlike COLA, counts 
toward retirement. However, there would be no true benefit 
since the locality pay in a location, such as Guam, would 
amount to less than DODEA employees have been receiving from 
their salaries alone under their current system.
    In closing, I have to admit that I still have some mixed 
feelings regarding the proposed legislative proposal. Until 
such time that I learn more of the various provisions and 
ramifications of the proposal, I have to keep an open mind 
regarding the matter. However, I do want to point out for the 
record that the COLA issue will continue to be of great 
importance to Federal employees in the COLA areas, since it 
truly represents such a significant portion of their cash 
compensation. The fact is that although Guam and the CNMI are 
currently under the COLA program, they have profoundly 
different economies, labor markets, climates, and access to 
various resources, including those purchased by the Washington, 
DC area's ``typical'' Federal employee household. It is 
possible that different solutions may be appropriate for the 
different COLA areas, and that while a continuation of the COLA 
program is warranted in some areas, it may not be in others. As 
such, I sincerely urge the Subcommittee to address problems in 
the COLA areas, taking into consideration the unique attributes 
of each area.
    So, on behalf of the COLA Defense Committee of Guam and all 
the Federal employees on Guam and the CNMI, thank you again, 
Mr. Chairman and Members of the Subcommittee, for this 
opportunity for me to appear before you all. Si Yu'os Ma'ase! I 
will be happy to answer any question you have at this time.
    Senator Akaka. Thank you very much, Mr. Cruz.
    And now we will hear from Mr. FitzGerald. Will you please 
proceed with your testimony?

TESTIMONY OF MICHAEL FITZGERALD,\1\ PRESIDENT, FEDERAL MANAGERS 
 ASSOCIATION CHAPTER 187, NAVAL FACILITIES ENGINEERING COMMAND 
                             HAWAII

    Mr. FitzGerald. Good afternoon, Chairman Akaka. My name is 
Michael FitzGerald and I'm 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'd 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 U.S. Territories.
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    \1\ The prepared statement of Mr. FitzGerald appears in the 
Appendix on page 105.
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    Since 1948, Federal employees outside the contiguous United 
States 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 the employee's basic pay; however, COLA is not 
credited toward 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 the 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 Federal employees on the mainland.
    High locality pay in the 48 States lures employees to leave 
Hawaii and seek an increased annuity toward 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's easy to see why employees would be looking to 
complete their final 3 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 the attention the Administration is placing on 
this problem. However, we at FMA believe 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 7-year phase-in is 7 
years too late. 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 added taxes, but most employees in Hawaii fall into 
the 25 or 28 percent tax bracket. By applying this 15 percent 
offset, most employees will see less money in their paychecks 
than if the system is left 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 recommend 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 3-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 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.
    Senator Akaka. Thank you very much, Mr. FitzGerald.
    Now we will hear from Ms. Kaolulo.

    TESTIMONY OF TERRY KAOLULO,\1\ PRESIDENT, HAWAII STATE 
ASSOCIATION OF LETTER CARRIERS, U.S. POSTAL SERVICE, AND LETTER 
                    CARRIER, KAILUA, HAWAII

    Ms. Kaolulo. Aloha, Chairman Akaka, and thank you for the 
opportunity to appear before your Subcommittee today. My name 
is Terry Kaolulo and I have been a full-time letter carrier in 
Kailua for 23 years. In addition, I also serve as the President 
of the Hawaii State Association of Letter Carriers. On behalf 
of letter carriers in the non-foreign areas I would like to 
thank you for introducing S. 3013, the Non-Foreign Area 
Retirement Act of 2008. It is also my understanding that the 
postal employees represented by other postal unions here in 
Hawaii share our general support of the legislation.
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    \1\ The prepared statement of Ms. Kaolulo appears in the Appendix 
on page 112.
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    Traditionally, postal employees have received a Territorial 
COLA or T-COLA in the non-foreign areas. This T-COLA is a 
percentage amount added to our base pay that is derived from a 
cost of living survey conducted by the Office of Personnel 
Management. It is a tax-free payment made to employees. 
However, these employees cannot factor these payments into 
their base pay and therefore they do not count towards 
retirement. Postal employees living in the non-foreign areas 
are generally supportive of the approach that your legislation 
takes to address this issue, though our national organizations 
do not support area COLA's or locality pay in general. So while 
we can support your bill's enhancement of a long established 
pay differential for workers employed in non-foreign areas, we 
would propose an amendment to the bill defining this change as 
Territorial Postal Pay as it pertains to postal employees.
    Bargaining unit employees of the Postal Service living in 
these non-foreign areas support the integration of T-COLAs into 
taxable base pay, as S. 3013 provides. We would also like the 
Territorial Postal Pay to be phased in and paid in the same 
manner as you propose for the other Federal workers under the 
General Services schedule--over a period of 3 years.
    Territorial Postal Pay would be set at the same level as 
the locality pay established for Federal employees in the non-
foreign areas. A possible alternative to this pay methodology 
could be for postal employees to have their T-COLA completely 
phased into Territorial Postal Pay over the same 3-year period 
with one-third of T-COLA phased into Territorial Postal Pay 
each year. The phase-in would include the same 65 percent 
formula used for GS employees to compensate for lost take home 
pay due to additional taxes.
    Postal employees in the non-foreign areas realize that the 
price of goods has skyrocketed throughout the entire country 
and families everywhere are feeling the pain. However, postal 
employees here still pay a huge premium for both domestic and 
imported goods and services compared to our co-workers on the 
mainland. We, therefore, believe that continuation of a T-COLA 
or Territorial Postal Pay is not only essential to our members 
but also entirely justified.
    We look forward to working with you to ensure that this 
legislative proposal is effective and a bill that postal 
employees in the non-foreign areas can ultimately support. 
Thank you for the opportunity to testify here today and I would 
be happy to answer any questions that you may have.
    Senator Akaka. Thank you very much, Ms. Kaolulo. I have a 
question here for all of the witnesses on the panel. I 
understand how important this issue is to each of you, and you 
expressed that very well. As you know, my goal is to protect 
employees' take home pay and ensure retirement equity for 
employees in the non-foreign areas.
    I introduced the Non-Foreign AREA Act with Senators 
Stevens, Inouye, and Murkowski to further the discussion on 
conversion to locality pay and to resolve questions with the 
Administration's proposal.
    What recommendations do you have to improve upon the Non-
Foreign AREA Act? Are we missing anything? Let me start with 
Ms. Matsuo.
    Ms. Matsuo. I think the Act, as proposed, encompassed all 
of the comments that your team gathered when they were here 
last year, so every aspect of concerns that people have, 
recommendations are captured in this proposal. So in terms of 
all the ideas being on the table, yes, they are on the table. 
Whether or not they mix, they blend well together or actually 
fix the problem, I think that's still what needs to be 
discussed because there are some parts that just don't seem to 
fit a permanent fix. So if a permanent fix is being sought 
after, there still needs to be some discussions on how to make 
things fit.
    Senator Akaka. Ms. Warren.
    Ms. Warren. I would agree with Ms. Matsuo concerning 
there's a lot of information that is in the bill and expressed 
the concerns of employees. From Alaska's standpoint, what I've 
heard from employees is that the 27.68 percent, using that as 
the amount to be used at the phase-in and having a phase-in--if 
7 years is too long, 3 years you have it and the buy-in is 
available there for those who would be able to buy in if they 
left earlier.
    But depending on how all the provisions of the Act stay in 
and work together will depend on what really will be best. I 
think it's an excellent piece for discussion, and if one 
provision comes out, it will have to be looked at, how it 
affected another provision that was in there and whether or not 
it would place a permanent fix for this.
    And another issue is retirees. Retirees is not within the 
bill, and that is one thing that is missing out of the bill is 
those employees that have already retired.
    Senator Akaka. Mr. Cruz.
    Mr. Cruz. I believe that everything that we have on the 
floor has been taken care of. But one of the issues that was 
brought up by the younger employees had to do with the opt out, 
that saving clause provision. What happens after a person opts 
out, and have that 25 percent on COLA, then after 10 years, 
let's say the locality pay went beyond 25 percent. Would that 
employee then feel that he made a mistake and that somehow the 
younger generation employees felt that he chose the wrong 
decision? And, I guess it's a question that after 10 years, 
like I said, the COLA rate might have gone up more than the 25 
percent.
    Senator Akaka. Thank you.
    Mr. Cruz. That's one of the issues that I just wanted to 
put on the table. Thank you.
    Senator Akaka. Thank you, Mr. Cruz. Mr. FitzGerald.
    Mr. FitzGerald. The dangers of opting out notwithstanding, 
I think the biggest thing that caught us by surprise with the 
bill was the buy-in provision, and we are encouraged to see 
that because it helps stabilize the current retiree eligible 
work force, which was our biggest concern and the reason why we 
recommended full locality in the first year of inception. I 
think the mechanics of that buy-in are not well known, and I 
think that's where a lot of the discussion in the coming months 
will be focused, especially from our membership and groups that 
we've been working with.
    How will that buy-in work? We have to run the numbers and 
can we extend that buy-in period, can we say look back 3 years 
from the inception to make sure that the high three is captured 
with COLA and can we extend it past 2011 or a 3-year phase-in 
period to ensure that all COLA is captured for the high three, 
if in fact the COLA continues, as we think it will, past the 3-
year phase-in. So I think the buy-in is the one piece that 
really needs to be looked at. Thank you, sir.
    Senator Akaka. Thank you. Ms. Kaolulo.
    Ms. Kaolulo. Chairman Akaka, I'm very pleased with the 
outcome of the bill that is before us. I believe that your 
staff has worked very hard on the fact-finding meetings that 
they held here in the islands and that they have taken 
everything into consideration and I'm very pleased to see what 
has come out of this bill and I think that you have not 
overlooked anything. Thank you.
    Senator Akaka. Thank you. I have another question for the 
entire panel. I know many of you are concerned about 
retroactive coverage for retired Federal employees. You heard 
OPM's response to my question about covering retirees. What are 
your reactions? Ms. Matsuo.
    Ms. Matsuo. Yes. Well, it's no secret that we filed a 
lawsuit. We believe strongly that if Hawaii and Alaska were 
included from the inception that we would not have this problem 
and this huge meeting to discuss how we are going to resolve 
this problem that has grown out of proportion. So when I hear 
OPM say that there would be no retroactive, that's a statement 
that I could expect from the government to say. But on the 
other hand, I would be asking them to be open to trying to fix 
an inequity that they were well aware of since 1994, and they 
even proposed trying to consider converting our COLA to 
locality pay at that time because there is an internal memo 
that was surfaced in our lawsuit that OPM discussed how do we 
take care of the retirement inequity in the COLA areas since 
they do not receive locality pay. So it's been 14 years that 
this conversion idea has been out there. We even proposed 
working with OPM several times to try to do a conversion and 
they even proposed language that we could consider and it 
didn't go anywhere, unfortunately.
    But getting back to your question of how do I respond to 
not being retroactive? I said, well, we have to fix that 
retirement inequity. It has been there for 14 years, I'm living 
it as a retiree not receiving my proper share of my proper 
retirement benefits so I definitely am experiencing it now.
    So I can only ask OPM to be open to this. We are trying to 
arrive at some kind of settlement in our lawsuit that will take 
care of all employees and if some kind of legislation could be 
done to include retirees in this fix, our lawsuit will go away.
    Senator Akaka. Ms. Warren.
    Ms. Matsuo. And it is OPM's desire not to have any more 
lawsuits, so what better way to discontinue this current 
lawsuit than to arrive at some kind of legislation.
    Senator Akaka. Thank you, Ms. Matsuo. Ms. Warren.
    Ms. Warren. Thank you, Chairman Akaka. I think there's the 
term retroactive is out there for the retirees, and I think 
there needs to be a look at openness concerning what retirees 
I've heard that are being looking at is starting from this date 
forward to receive an increase in the retirement benefits, so 
whether or not that's really the term of retroactiveness that 
we think about when we're going to go back clear in time and 
all, but what retirees are looking at is increase in retirement 
benefits, and that could be done a number of ways and how you 
look at that. And I really think this is an opportunity to be 
open, to have the discussions about it, and see if there is a 
way that would help the retirees get their increased retirement 
benefits that they should have had all along, settle the 
lawsuit that's out there, and also have it simplified enough 
that the government will be able to implement it.
    Senator Akaka. Mr. Cruz.
    Mr. Cruz. As you know, the territories and the 
commonwealth, because we are not one of the 50 States, it's 
almost like a double whammy and we're in self denial in a sense 
because of the fact that if the FEPCA did not include the 
territories, and even if they tried to include them, only the 
contiguous States and Hawaii and Alaska should be included as 
States. More or less we need to really have a clear 
understanding whether we can be eligible for those retroactive 
retirement issues.
    So in a sense, because we don't have a Senator, we look to 
the Senators of Hawaii and Alaska for answers regarding this 
matter because we do feel that it was an inequity on their part 
because we're all Federal employees and if we're entitled to 
this retroactive retirement issues, then we should be 
participating. Thank you.
    Senator Akaka. Mr. FitzGerald.
    Mr. FitzGerald. Senator, we have many retirees in our 
association, and they're very active and vital members, and I 
believe that they align with us and focusing on today's 
workforce in trying to come up with a solution that would keep 
our workforce in the Federal Government vital, keep Federal 
Government as the employer of choice, and while we're open to 
any discussion for retirees, we didn't really expect that any 
bill coming forward would include retirees, so we will 
definitely talk to our members, but the focus of the Federal 
Managers Association is to maintain a vital work force for 
today and tomorrow. Thank you.
    Senator Akaka. Thank you. Ms. Kaolulo.
    Ms. Kaolulo. Well, I believe there needs to be a starting 
point, and I think that is a big topic of discussion. I think 
what we would really like to see is fairness being brought up. 
We're not out here to take the world in our own hands, but we 
want to be fair, we want our employees to be treated fairly. 
And so that starting point will have to come up in a discussion 
with the postal service in regards to the postal service. Thank 
you.
    Senator Akaka. Let me try your memories. I understand that 
a proposal similar to those we are discussing today was 
discussed about 5 years ago. What were the concerns with the 
proposals at that time? Do those concerns remain today? Ms. 
Matsuo.
    Ms. Matsuo. Actually the only two persons who can talk 
about that proposal are Ms. Warren and myself because we 
actually worked with OPM in that 2003 legislative language. And 
at that time, we were actually contemplating just a straight 
conversion of COLA to locality pay, and the employees would 
have to take the brunt of the Federal income tax burden in our 
proposal just to get something done.
    But it was actually OPM that came back with that 65 percent 
factor, and when it was explained to us, OPM said, well, the 
only way we can keep your pay whole, intact is to provide you 
an additional COLA amount that would help cover the Federal 
income tax burden. So, Ms. Warren and I were totally shocked at 
that because we never expected it. But here was OPM saying that 
it is not the government's intention to take away pay, so let's 
do this adjustment to your COLA to give you an additional 
amount to help pay your Federal income taxes until COLA is 
completely phased into locality pay.
    So it was on the part of the government that this take home 
pay protection came about, not from any of us. We were 
extremely pleased because of our long working relationship with 
the OPM staff that we had established a trust and a fairness in 
our discussions in trying to find the best solution for our 
COLA employees.
    That 2003 proposal also took care of the special pay 
situation. At the time if it had been implemented then, we 
would not have had the budget concerns that we have today. That 
proposal could have passed, I think, we think, and OPM thought 
then, that it could have passed even the budget process, and so 
unfortunately for some reason, the proposal was not out in the 
public, but it was out to some people who felt that the 
conversion would not apply because they just didn't understand 
the mechanics of that take home pay preservation.
    And so we got a lot of feedback from FERS employees who 
would benefit from it but who said they won't do it because all 
they understood was now the locality pay is taxable and it will 
impact my take home pay. But that's why we did the 
calculations, and our calculations show that there is very 
little impact on take home pay for FERS employees using the 65 
percent factor.
    Senator Akaka. So does S. 3013 address these concerns?
    Ms. Matsuo. Yes, it does. Definitely.
    Senator Akaka. Ms. Warren.
    Ms. Warren. Yes, it does. And in the 2003 legislative 
concept, it was a concept to lay out there to discussing, and 
Ms. Matsuo says it is, we had FERS employees who thought that 
they would be left out of it and didn't understand that with 
the conversion that their take home pay would be protected, and 
we worked extensively with individuals when we were doing that 
and it just didn't go anywhere, but yes, S. 3013 takes into 
those concerns.
    Senator Akaka. Now, let me just ask the other three 
witnesses if you care to make a statement on this.
    Mr. Cruz. Because of the fact that this only applies to the 
two of them, COLA areas, we're just waiting on the wing to see 
how things happen. So that's all I can say for now.
    Senator Akaka. All right. Thank you, Mr. Cruz. Mr. 
FitzGerald.
    Mr. FitzGerald. If I could add something, Senator, I wasn't 
around during those initial discussions. I was around, but I 
wasn't in the discussion, but I think one thing that changed 
since, from what I gather is the dissemination of information 
has increased greatly during that period, since May 2007, 
almost a year ago, until today, and a lot of people are more 
aware, and I think the push back that was being felt by the 
FERS employees or the push back that the FERS employees were 
giving is less now as they start to understand the mechanics of 
how their base pay will be protected, how their TSP will grow, 
how they will be able to keep up with the counterparts on the 
mainland and how COLA is now starting to shrink.
    And I think that S. 3013 addresses a lot of the issues that 
were discussed in 2003, but with the heightened awareness, I 
think it is falling on more receptive ears now than it maybe 
had in the past.
    So I want to thank your staff, and your website is a great 
source of information and I think a lot of people have been 
taking a look at that.
    Senator Akaka. Since you mention that, let me tell all of 
you in the audience that you can find a lot of information 
about S. 3013 and the Administration's proposal on my website. 
So please make use of that.
    Ms. Kaolulo, do you care to make any statement?
    Ms. Kaolulo. No. I think Ms. Matsuo is more knowledgeable 
on that part.
    Senator Akaka. Ms. Kaolulo, the Administration's proposal 
would freeze COLA rates for postal workers, but provides no 
additional information. You have heard the proposals from Ms. 
Mitchell on the first panel as to how the Postal Service would 
address this issue. What do you think of the postal service's 
proposal?
    Ms. Kaolulo. Well, I'm a little concerned. I don't think 
that it is concrete enough to really understand. I think that 
most of us have to have input into it, but I don't think I 
would be afraid. I would be really afraid if they were to take 
it into their hands that our employees would be afraid. Later 
on down the road, 5 years from now, people would forget what T-
COLA is all about and that it would go away. It would just 
disappear and nobody would remember what T-COLA was about. So 
I'm a little afraid of that, that it would disappear somewhere 
in the distance because we'd be the only ones receiving T-COLA.
    Senator Akaka. Mr. FitzGerald, we consistently hear from 
the Senior Executives Association how the pay for performance 
system is a disincentive for GS-15 employees looking at the 
Senior Executive Service. If there is no locality pay or non-
foreign COLA for SES employees in Hawaii, what impact will that 
have on the Federal managers looking to apply for the SES?
    Mr. FitzGerald. Well, in my remarks I mentioned people 
leaving Hawaii to accept positions, on the West Coast 
especially, but the back end of that problem is it's also hard 
to recruit at the upper level leadership levels of SES, higher 
level technicians, engineers, and leaders basically come from.
    As people get further along in their careers and assume 
lead positions of leadership and technical expertise, they 
become more recruitable and more mobile. A lot of them, so 
called empty nesters can take jobs on the West Coast, and so we 
see them leaving to finish out those 3 years and then 
backfilling those positions becomes increasingly difficult 
because people don't want to give up their locality pay, 
especially high locality pay to come to live in Hawaii. So we 
have seen that happen at the Pearl Harbor Naval Shipyard and a 
couple positions which go months at a time unfilled, and that 
has an impact on project management and other vital functions 
that the shipyard now holds.
    Senator Akaka. Mr. FitzGerald, recruitment and retention 
and Federal agencies is a big concern for many managers. What 
impact would S. 3013 have on recruitment and retention of 
employees in non-foreign areas?
    Mr. FitzGerald. It would be huge, sir. It would put the pay 
in Hawaii comparable across the Nation. It would allow for 
people who are currently holding positions of importance to 
stay in Hawaii and to fulfill succession planning plans, make 
sure that the seamless changeover takes place, wouldn't leave 
so called hiccups in leadership, and it would also allow people 
to retire on their own terms, so instead of stampeding out the 
door, or holding on too long, they could retire on their career 
plan. So we think that S. 3013 really does address the 
recruitment and retention issue primarily.
    On the other side, for people coming into the service at 
the lower levels, the protection of take home pay and making 
sure that younger employees see the Federal Government as an 
attractive place to work is also important. The bill does that 
as well.
    Senator Akaka. Ms. Matsuo and Mr. FitzGerald, the 
Department of Defense is the largest employer of Federal 
workers in Hawaii. As you know, the Department continues to 
roll out NSPS, which gives the Department the flexibility and 
pay to its employees. What concerns have you heard from DOD 
workers who are under NSPS about the conversion to locality 
pay?
    Ms. Matsuo. Let me answer that. First of all, I want 
everybody to know I'm not a DOD employee, so everything I know 
about NSPS is what I read, what I hear from other people and 
from my own husband, who is going under NSPS now. My 
understanding of this conversion is a lot of NSPS people have 
not really looked at how this conversion will impact on their 
program. And I think that Mr. Bunn, who spoke for NSPS, kind of 
indicated that there is no clear understanding of how this 
conversion will work out for the DOD people.
    For example, COLA is something that our employees currently 
receive and what we're doing is converting that COLA over to 
locality pay intact as best as possible. So it's not that 
they're rolling over into locality pay per se under the NSPS 
system. It's trying to convert COLA intact wholly over to 
locality pay so that they can enjoy the locality pay that their 
counterparts receive in the 48 States.
    If we were to convert COLA to locality pay, and NSPS has 
been implemented in an area, what I understand about NSPS is 
locality pay is frozen at that point in time, so whatever you 
earn, you receive up to that point in time, is in your base pay 
permanently. It's only the additional raises, locality pay 
raises that will now go into a pool from which that local pay 
supplement will be paid from.
    Mr. FitzGerald. Market supplement.
    Ms. Matsuo. So we need to try to get this COLA over to that 
locality pay that they're entitled to as you convert COLA, and 
so that needs to work outside of the NSPS pay system. And once 
it's fully converted over, then the employees would--well, 
that's not quite true. We need to roll over COLA to locality 
pay outside of their system.
    Whatever is currently happening in NSPS with the annual pay 
increases henceforth will still continue to go into the pool 
from which that local market supplement will be paid. And so 
that needs to happen separately because it's still COLA and 
we're entitled to that full amount in that conversion process. 
And it can only happen if it works outside of the current 
system.
    So we're trying to do something and it's being placed into 
the box, but that box doesn't help the conversion to occur 
fairly and properly. And so we need this additional attention 
to make sure that the COLA conversion converts completely to 
locality pay before they get put into this box.
    Senator Akaka. Mr. Fitzgerald.
    Mr. FitzGerald. As was related to the Subcommittee earlier 
by Mr. Bunn, the roll out in Hawaii has been rather slow for 
NSPS and it's maybe a cautious approach or just the way it 
worked out, I'm not really sure. So there hasn't been a lot of 
feedback on whether it's good or bad.
    There has been some concerns with the pay banding and 
lumping of what traditionally would have been different GS 
levels into one pay band and how would that work, how would the 
local market supplement be for a traditional GS-9 now lumped in 
with a GS-11. There's been concerns about that, and also, 
there's been concerns about the slow roll out or phase in of 
locality pay during a conversion that the performance monies 
that would be paid for people who are your top performers just 
isn't there. A slow roll out just means that money just 
dribbles in.
    Like Ms. Matsuo was saying, all you get is the annual 
increase to pay right now for the pay pools, so we advocate a 
quick conversion so that this local market supplement, which 
apparently is tied to locality pay, those issues can be worked 
out and the money will be there to reward the top performers, 
the people who are really out there making it happen for the 
DOD. And so that's one of the concerns.
    Senator Akaka. Well, thank you. You started to answer my 
final question. I have a final question for all of you on the 
panel, and it has to do with recommendations and suggestions. 
The question is are there any other recommendations or 
suggestions you would offer to address the retirement inequity 
for employees receiving non-foreign COLA? This would be your 
closing remarks, so you can make any other comment as well. So 
let me begin with Ms. Matsuo.
    Ms. Matsuo. Yes. On the retirement inequity, I believe that 
we've worked with OPM since 1995 on the COLA program, and our 
involvement with the COLA program then, we were able to get the 
COLA methodology fixed, so that is a more fair and accurate 
calculation of our COLA rates today and that's probably why our 
COLA rates are decreasing because we fixed the program well. 
But we did it fairly with the objective being that we wanted 
something to be more fair and accurate in the COLA program.
    And in our relationship with OPM staff people in the COLA 
program, I think we've established a really good working 
relationship, one of respect, we listen. We listen to each 
other, we listen to the goals, we try to find a common solution 
that will benefit both the government and Federal employees.
    So trying to fix something for retirees, I would strongly 
recommend that a group be formed where we can actually sit with 
OPM to try to craft something out for the retirees. And by 
doing that, it could possibly satisfy what we're looking for in 
our lawsuit, too, so we would actually be killing two birds 
with one stone by doing that.
    Senator Akaka. Ms. Warren.
    Ms. Warren. Thank you, Chairman Akaka. I would like to 
thank the senators, Senator Inouye, Akaka, Murkowski and 
Stevens for introducing this bill, the Senate bill, because it 
is a start of looking at the issues concerning the COLA areas, 
and on the note of the retirement program, the inequities in 
the retirement, it is true that through the COLA program we 
work successfully with the Office of Personnel Management and 
made great strides in improving that COLA program, and I think 
with this retirement inequity issue, that is an opportunity to 
also work quickly with the Office of Personnel Management and 
others to really understand what the inequity is and how to 
really fix it so that it can be done. I really think it can be 
done if there's an openness and an understanding by all 
parties.
    Senator Akaka. Thank you so much. Mr. Cruz.
    Mr. Cruz. Senator, the only big thing that I'd like to 
bring up is that, if you remember, Guam went through a 
contracting outsourcing a few years ago and we lost a lot of 
good Federal employees as a result. And a lot of these 
employees, in order to make good of this situation, a lot of 
them took early retirement and really lost out because there's 
nothing else they can do, unless they have to leave the island, 
and we have a lot of them that left the island, thousands of 
them. In fact, some of them may be here in Hawaii in the 
shipyard, in NAVFAC Hawaii. We lost a lot of good employees.
    And when they heard about this retroactive retirement, a 
lot of them felt that maybe a lot of good things can come out 
of this. And also, the possibility that some of them are still 
young, in a sense. But, the fact remains that any future 
employment, unless the military build-up should bring in 
``contracting in,'' like they did here in Hawaii, maybe some of 
these employees may want to come back and work for the 
government again.
    But, this is really an issue, more or less--and a lot of 
the employees right now are looking at their future. If they 
continue to be outsource, those retirement issues become very 
real in time.
    So, if we're going to address any of these retirement 
issues, we have to be looking on both sides of the street here, 
those who left the service not of their own account, but wanted 
to keep whatever they can get, and those employees on the 
island who left the island and working all over the country 
now, but they're still yearning to come home. And, if that day 
should ever be possible, maybe something good could come out of 
this. Thank you.
    Senator Akaka. Thank you. Mr. FitzGerald.
    Mr. FitzGerald. I think a lot of what's been said we would 
echo at the FMA, that taking care of retirees is important to 
the Federal managers, supervisors and Federal agencies 
everywhere. We would like to keep the dialogue open. We would 
offer the support of our association to continue to work on 
this issue. We have, like we stated earlier, many vital 
retirees who are keenly interested in this issue and we would 
like to offer our support and move forward with the current S. 
3013, and hopefully include a provision for them, but if not, a 
parallel effort would be more than acceptable for us in the 
association.
    Senator Akaka. Thank you. Ms. Kaolulo.
    Ms. Kaolulo. Chairman Akaka, I must express to you that we 
are an island, we all live on this island, we work on this 
island, and unfortunately we are apart from the United States, 
apart from the contiguous 48 States. As gas prices soar and our 
economy takes the slide it is in now, further on in maybe 5 to 
10 years, I shudder to think what it would be for the cost of 
living here in Hawaii. I don't want the postal employees to be 
left behind. I thank you very much for including us in your S. 
3013.
    There is just too many things we take for granted, and one 
of them is we are on an island, but we do have to remember we 
are apart from the rest, so I thank you very much for your 
consideration.
    Senator Akaka. I want to thank all of you, so let me say 
mahalo again to our witnesses for being here today. Your 
participation has helped address the questions and also the 
concerns raised by Federal workers in the non-foreign areas, 
and also by agency officials. I continue to believe that by 
working together we can ensure that employees in Hawaii, Alaska 
and the territories are not disadvantaged when it comes to 
their pay and retirement. I will continue to ask that employees 
write me and let me know their views on these proposals so that 
we can improve S. 3013 in the best interest of all parties.
    The hearing record will be open for 2 weeks for additional 
statements, and I would say that some of you, your comments and 
recommendations here will certainly help us in moving forward. 
Again, thank you all for coming. This hearing is adjourned.
    [Hearing was concluded at 3:33 p.m.]
                            A P P E N D I X

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                 PREPARED STATEMENT OF SENATOR STEVENS
    Thank you, Chairman Akaka for holding this important hearing on an 
issue that greatly affects Federal employees in both Alaska and Hawaii.
    I also thank the witnesses for traveling so far to be here today. 
We very much appreciate your input on this bill, S. 3013, which Senator 
Akaka, Senator Inouye, Senator Murkowski, and I introduced.
    It is our goal to produce the best legislation possible to finally 
bring equity in retirement to the many Federal employees in Alaska, 
Hawaii, and the territories.
    Alaska and Hawaii are the only States in which Federal employees do 
not receive locality pay. Instead, they receive what is called a non-
foreign cost of living allowance, or COLA.
    COLA was put in place in 1949, before Alaska and Hawaii were 
States. It is based on the cost of living in an area compared to the 
cost of living in Washington, DC. COLA was not available to employees 
in the lower 48 States.
    When locality pay was established to benefit Federal employees in 
the lower 48, Alaska and Hawaii were not included because they were 
already under the COLA system.
    Locality pay brings Federal salaries closer to private industry 
salaries in an area.
    The key difference betwen these two systems is how it affects a 
Federal employee's retirement.
    As you know, a Federal employee's retirement is based on their 
``high three'' years of service, usually the final 3 years of their 
base pay salary.
    COLA is non-taxable income that cannot exceed 25 percent of the 
base pay. It is currently being reduced in Alaska and Hawaii by 1 
percent each year.
    Because COLA is not taxed, it is not considered as part of an 
employee's base pay for retirement purposes.
    This means an employee in Alaska retires with a much lower ``high 
three'' than an equivalent position in the lower 48.
    Locality pay is taxable income, but is also considered part of an 
employee's base pay for retirement purposes. This makes a big 
difference in the amount of retirement benefits an employee receives.
    Alaska has one of the highest costs of living in the Nation. Our 
Federal employees need to know they can continue to afford living in 
the State they call home on the money they receive through their 
retirement benefits.
    Many Alaskan Federal employees nearing retirement relocate to the 
lower 48 in order to receive locality pay for their ``high three.''
    This puts my State at a disadvantage because we are losing highly 
skilled, seasoned employees.
    This is an inequitable and out-dated system. It is time to bring 
retirement equity to all States.
    While drafting this bill, Senator Akaka and I attempted to address 
several employee groups with unique circumstances, including postal 
employees.
    I understand that the legislation as currently written is 
problematic for the Postal Services, and I am confident we can work 
closely with them and the postal employee unions to ensure that postal 
employees in Alaska and Hawaii are protected.
    I have often said the Postal Serice is a lifeline for Alaskans, and 
I intend to do what is best for both the Postal Service and its 
employees during this transition.
    It is fortunate that Senator Akaka is the Chairman of the 
Subcommittee with jurisdiction over this issue, and I will continue to 
work very closely with him to pass this legislation before the 110th 
Congress concludes.
    Again, I thank all the witnesses and look forward to their 
testimony, comments, and suggestions.
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