[Federal Register Volume 69, Number 26 (Monday, February 9, 2004)]
[Proposed Rules]
[Pages 6020-6022]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-2225]



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Part II





Office of Personnel Management





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5 CFR Part 591



Cost-of-Living Allowances (Nonforeign Areas); Methodology Changes; 2002 
Nonforeign Area Cost-of-Living Allowance Survey Report: Caribbean and 
Washington, DC, Areas; Proposed Rule and Notice

  Federal Register / Vol. 69 , No. 26 / Monday, February 9, 2004 / 
Proposed Rules  

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OFFICE OF PERSONNEL MANAGEMENT

5 CFR Part 591

RIN 3206-AK29


Cost-of-Living Allowances (Nonforeign Areas); Methodology Changes

AGENCY: Office of Personnel Management.

ACTION: Proposed rule.

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SUMMARY: The Office of Personnel Management (OPM) is proposing 
technical changes in the methodology used to determine nonforeign area 
cost-of-living allowances (COLAs). The changes would correct minor 
drafting errors; provide consistent treatment of sale prices; allow the 
use of non-housing price data collected on St. John, U.S. Virgin 
Islands; correct and clarify the definition of COLA survey areas; and 
allow a one-time prospective index adjustment for the Caribbean and 
Alaska areas concurrent with the effective date of any COLA rate 
changes resulting from the 2004 Pacific COLA surveys. OPM is proposing 
these changes in large part as the result of experience gained in the 
2002 COLA surveys and upon various recommendations of the Survey 
Implementation Committee, the Technical Advisory Committee, and/or the 
St. Thomas/St. John COLA Advisory Committee.

DATES: Comments must be received on or before April 9, 2004.

ADDRESSES: Send or deliver written comments to Donald J. Winstead, 
Deputy Associate Director for Pay and Performance Policy, Strategic 
Human Resources Policy Division, Office of Personnel Management, Room 
7H31, 1900 E Street NW., Washington, DC 20415-8200; fax: (202) 606-
4264; or email: [email protected].

FOR FURTHER INFORMATION CONTACT: Donald L. Paquin, (202) 606-2838; fax: 
(202) 606-4264; or email: [email protected].

SUPPLEMENTARY INFORMATION: Section 5941 of title 5, United States Code, 
authorizes the payment of cost-of-living allowances (COLAs) to 
employees of the Federal Government stationed in certain nonforeign 
areas outside the contiguous 48 States whose rates of basic pay are 
fixed by statute. Executive Order 10000, as amended, delegates to OPM 
the authority to administer nonforeign area COLAs and prescribes 
certain operational features of the program.
    The Government pays nonforeign area COLAs to General Schedule, U.S. 
Postal Service, and certain other Federal employees in Alaska, Hawaii, 
Guam and the Commonwealth of the Northern Mariana Islands (CNMI), 
Puerto Rico, and the U.S. Virgin Islands. The Office of Personnel 
Management (OPM) conducts COLA surveys in each allowance area to 
determine whether, and to what degree, local living costs are higher 
than those in the Washington, DC, area. OPM sets the COLA rate for each 
area based on the results of these surveys.
    On May 3, 2002, OPM published final regulations in the Federal 
Register (67 FR 22339) that significantly modified the current COLA 
survey methodology consistent with the settlement agreement in 
Caraballo, et al. v. United States, No. 1997-0027 (D.V.I.), August 17, 
2000. (Caraballo was a class-action lawsuit in which the plaintiffs 
contested the methodology OPM used to determine COLA rates.) Later in 
2002, OPM conducted COLA surveys in Puerto Rico, the U.S. Virgin 
Islands, and the Washington, DC, area, using the new methodology. OPM 
is publishing with these proposed regulations the complete ``2002 
Nonforeign Area Cost-of-Living Allowance Survey Report: Caribbean and 
Washington, DC, Areas.''
    While conducting the COLA surveys and analyzing the results, OPM 
became aware of technical errors in the newly implemented regulations. 
In addition, OPM received from the Survey Implementation Committee 
(SIC), the Technical Advisory Committee (TAC), and the St. Thomas/St. 
John COLA Advisory Committee recommendations for other technical 
changes. Collectively, the changes would (1) correct minor drafting 
errors; (2) provide consistent treatment of sale prices; (3) allow the 
use of non-housing price data collected on St. John, U.S. Virgin 
Islands; (4) correct and clarify the definition of COLA survey areas; 
and (5) allow a one-time prospective index adjustment for the Caribbean 
and Alaska areas concurrent with the effective date of any COLA rate 
changes resulting from the 2004 Pacific COLA surveys.

Minor Drafting Errors

    OPM proposes to correct minor drafting errors. One of these relates 
to how OPM sets the COLA rate for an area as a whole when OPM combines 
data from multiple survey areas within the COLA area. For COLA areas 
with multiple survey areas, OPM uses the number of Federal employees in 
each survey area as weights to combine the data from each of the survey 
areas. This process is described in paragraph (b) of section 591.216, 
title 5, Code of Federal Regulations, but the description is not 
technically correct. The current regulation states that, to combine 
survey data for COLA areas that have multiple survey areas, OPM 
computes weighted average indexes at the primary expenditure group 
(PEG), major expenditure group (MEG), and overall level. However, OPM 
actually computes weighted average indexes at the item, PEG, MEG, and/
or overall level, and OPM proposes to change 5 CFR 591.216(b) 
accordingly.
    Another technical error relates to how OPM uses expenditure 
weights, which are derived from the Bureau of Labor Statistics (BLS) 
Consumer Expenditure Survey (CES). In both the COLA area and in the 
Washington, DC, area, OPM computes a price index by dividing the 
average price in the COLA area by the average price in the DC area. OPM 
uses CES expenditure weights to combine the price indexes in a three-
step process. Section 591.222 of the COLA regulations describes that 
process, but the description of the third step is incorrect. The 
regulations state that OPM produces an overall price index for the 
survey area. Instead, OPM produces an overall index for the COLA area. 
OPM's proposed change to 5 CFR 591.222 will correct this.

Consistent Treatment of Sale Prices

    One of the changes OPM is proposing relates to the prices it 
collects in the survey. Section 591.213 of the regulations prescribes 
the prices OPM collects, which include sale prices. The survey of sale 
prices is a change from the way OPM priced items in previous surveys. 
OPM adopted the survey of sale prices pursuant to the Caraballo 
settlement.
    The regulation provides for certain exceptions in the collection of 
sale prices, including going-out-of-business prices and area-wide 
distress sale prices. The reason OPM does not collect these prices is 
because unlike most sale prices, which are recurring, going-out-of-
business prices and area-wide distress prices are one-time events. In 
the case of going-out-of-business prices, for example, if OPM conducted 
the survey earlier, the business would not be discounting its prices, 
and if OPM conducted the survey later, the business would not be 
surveyed because it would not be in business.
    During the 2002 COLA surveys, OPM encountered clearance prices on 
items that were being discontinued and/or were seasonal. OPM concluded 
these clearance prices were similar to going-out-of-business prices. If 
OPM had conducted the survey earlier, the item would not have been 
offered as a discontinued item, and if OPM had conducted the survey 
later, the item would not have been available.

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Furthermore, if OPM were to use clearance prices, it would be difficult 
or impossible to time the surveys to collect prices when the same items 
are in clearance in all areas.
    OPM consulted with the Survey Implementation Committee concerning 
this issue. The SIC was established under the Caraballo settlement and 
is composed of representatives of the parties in Caraballo. The SIC is 
advised by the Technical Advisory Committee, which was also established 
under the Caraballo settlement and is composed of three economists with 
expertise in living-cost comparisons. The TAC agreed that clearance 
prices were similar to going-out-of-business prices and that if 
clearance prices were used, survey timing would be compromised. 
Therefore, SIC and the TAC concurred with OPM that clearance prices 
should not be used, and OPM proposes to amend 5 CFR 591.213(b) to 
include clearance prices in the list of prices that OPM does not 
collect.

St. John Non-Housing Price Data

    OPM is proposing to amend the definition of the St. Thomas/St. 
John, U.S. Virgin Islands survey area to allow the survey of non-
housing price data on St. John. The St. Thomas/St. John COLA Advisory 
Committee (CAC) recommends the change. Current regulations provide that 
OPM only surveys housing data on St. John.
    As provided by 5 CFR 591.240, OPM established CACs in Puerto Rico 
and in the U.S. Virgin Islands prior to the 2002 survey. Each CAC is 
composed of agency and employee representatives from the survey area 
and representatives from OPM, and one of the principal functions of the 
CACs is to advise and assist OPM in planning COLA surveys. In planning 
the St. Thomas/St. John survey, the CAC for that area recommended that 
OPM survey selected establishments on the island of St. John and 
include that data with the St. Thomas data. OPM regulations provide for 
the survey of housing on St. John but not for the collection of non-
housing data. OPM agreed to conduct a test survey on St. John and 
collected data from the establishments that the CAC identified for the 
2002 survey. OPM used the St. John data on a test basis with the St. 
Thomas data by weighting each island's price data by the number of 
Federal employees stationed on the island. OPM found it was feasible to 
collect and use these data in the manner described and believes it is 
appropriate to continue to survey St. John in future surveys. 
Therefore, OPM is proposing to change the definition of the St. Thomas/
St. John survey area in 5 CFR 591.215(a) accordingly.

Other Survey Area Definitions

    OPM is proposing changes and clarification to other survey area 
definitions. During the 2002 survey, OPM discovered that some of the 
geographic definitions of the survey areas in 5 CFR 591.215(a) were 
incomplete. For example, the Washington, DC, area is defined as 
specific cities and counties, but consistent with OPM's practice in 
previous surveys, OPM surveys a few items in areas outside this 
geographic boundary. For example, OPM surveys the price of air travel 
from all three airports in the Washington, DC, area: Ronald Reagan 
Washington National Airport, Washington Dulles International Airport, 
and Baltimore/Washington International Airport (BWI). OPM also surveys 
the price of a 5-mile taxi ride originating at these airports. Both 
Dulles and BWI are outside the geographic boundary shown in section 
591.215(a). Nevertheless, these airports are commonly used by residents 
of the DC area for air travel.
    OPM reviewed all of the survey area definitions in consultation 
with the SIC and TAC and found that other area definitions were 
inaccurate or incomplete. Therefore, OPM proposes technical changes in 
the survey area boundary definitions in 5 CFR 591.215(a) to expand the 
definition of the DC area to allow the survey of selected items in 
additional geographic locations and to incorporate the recommendations 
of the SIC and TAC. OPM also proposes a related change in the 
definition of the Washington, DC, area in 5 CFR 591.201.

Adjustment To Reflect Augmented Housing Data

    OPM is proposing a change to allow OPM to make a one-time 
prospective adjustment in the COLA index based on additional housing 
data that OPM anticipates collecting by the end of next year's surveys. 
The SIC and the TAC recommend this change because shelter is the single 
most important COLA survey item in terms of its expenditure weight and 
because OPM is accumulating additional housing data and experience 
analyzing such data during the first survey cycle, i.e., the first 3 
years of COLA surveys under the new methodology that OPM adopted 
pursuant to the Caraballo settlement. OPM concurs with the SIC and TAC 
recommendation.
    Under the new methodology, OPM surveys the COLA areas once every 3 
years on a rotating basis but surveys the DC area, which is the base or 
reference area, every year. The TAC recommends that OPM pool the DC 
area rental data across years, updating previous years' rental data as 
appropriate, and thereby increasing the quantity of DC area data. 
Because shelter price comparisons that use this larger data base might 
be different from those that use each year's data separately, the TAC 
and the SIC recommend a one-time prospective COLA index adjustment 
based on housing data analyses.
    In addition, OPM is currently examining the feasibility of 
collecting additional rent and rental equivalence information in a cost 
effective manner for research purposes. Under the Caraballo settlement, 
the parties agreed to adopt a rental equivalence approach similar to 
the one BLS uses for the Consumer Price Index. Rental equivalence 
compares the shelter value (rental value) of owned homes rather than 
total owner costs because the latter are influenced by the investment 
value of the home (i.e., influenced by what homeowners hope to realize 
as a profit when they sell their homes). As a rule, living-cost surveys 
do not compare how consumers invest their money.
    Currently, OPM surveys rents and uses that as a surrogate for 
rental equivalence. The SIC and TAC recommend that OPM research and 
compare market rents and homeowner estimated rents for comparable 
dwellings. If the research proves feasible and the results are 
available, the TAC recommends that OPM consider using these results in 
the one-time adjustment as well. The proposed change to 5 CFR 591.224 
would allow such an adjustment.

Executive Order 12866, Regulatory Review

    This rule has been reviewed by the Office of Management and Budget 
in accordance with Executive Order 12866.

Regulatory Flexibility Act

    I certify that these regulations would not have a significant 
economic impact on a substantial number of small entities because they 
would affect only Federal agencies and employees.

List of Subjects in 5 CFR Part 591

    Government employees, Travel and transportation expenses, Wages.

Office of Personnel Management.
Kay Coles James,
Director.

    Accordingly, the Office of Personnel Management proposes to amend 
subpart B of 5 CFR Part 591 as follows:

[[Page 6022]]

PART 591--ALLOWANCES AND DIFFERENTIALS

Subpart B--Cost-of-Living Allowance and Post Differential--
Nonforeign Areas

    1. The authority citation for subpart B of 5 CFR part 591 continues 
to read as follows:

    Authority: 5 U.S.C. 5941; E.O. 10000, 3 CFR, 1943-1948 Comp., p. 
792; and E.O. 12510, 3 CFR, 1985 Comp., p. 338.

    2. In Sec. 591.201, revise the definition of ``Washington, DC, area 
or DC area'' to read as follows:


Sec. 591.201  Definitions.

    In this subpart--
* * * * *
    Washington, DC, area or DC area means the District of Columbia; 
Montgomery County, MD; Prince Georges County, MD; Arlington County, VA; 
Fairfax County, VA; Prince William County, VA; and the independent 
cities of Alexandria, Fairfax, Falls Church, Manassas, and Manassas 
Park, Virginia; and in the context of certain survey items, these 
jurisdictions and additional geographic locations beyond these 
jurisdictions.
    3. In Sec. 591.213, revise paragraph (b)(1) to read as follows:


Sec. 591.213  What prices does OPM collect?

* * * * *
    (b) * * *
    (1) OPM does not collect coupon prices, clearance prices, going-
out-of-business prices, or area-wide distress sale prices.
* * * * *
    4. In Sec. 591.215, revise paragraph (a) to read as follows:


Sec. 591.215  Where does OPM collect prices in the COLA and DC areas?

    (a) Survey areas. Each COLA area has one survey area, except Hawaii 
County, HI, and the U.S. Virgin Islands COLA areas. Hawaii County has 
two survey areas: the City of Hilo and the Kailua-Kona area. The U.S. 
Virgin Islands also has two survey areas: the Island of St. Croix and 
the Islands of St. Thomas and St. John. The Washington, DC, area has 
three survey areas: the District of Columbia, the Maryland suburbs of 
the District of Columbia, and the Virginia suburbs of the District of 
Columbia. OPM collects non-housing data throughout the survey area; and 
for selected items such as golf, snow skiing, and air travel, OPM 
collects non-housing data in additional geographic locations. OPM may 
collect housing data throughout the survey area or in specific housing 
data collection areas. The following table shows the survey areas:

                    Survey amd Data Collection Areas
------------------------------------------------------------------------
      COLA areas and reference areas                 Survey area
------------------------------------------------------------------------
Anchorage.................................  City of Anchorage.\1\
Fairbanks.................................  Fairbanks/North Pole
                                             area.\1\
Juneau....................................  Juneau/Mendenhall/Douglas
                                             area.\1\
Rest of Alaska............................  See paragraph (c) of this
                                             section.
Honolulu..................................  City and County of Honolulu.
Hawaii County.............................  City of Hilo, Kailua-Kona
                                             area.
Kauai.....................................  Kauai Island.
Maui......................................  Maui Island.
Guam & CNMI...............................  Guam.
Puerto Rico...............................  San Juan/Caguas area and
                                             eastern Puerto Rico.\2\
U.S. Virgin Islands.......................  St. Croix, St. Thomas/St.
                                             John area.\2\
Washington, DC--DC........................  District of Columbia.\1\
Washington, DC--MD........................  Montgomery County and Prince
                                             Georges County.\1\
Washington, DC--VA........................  Arlington County, Fairfax
                                             County, Prince William
                                             County, City of Alexandria,
                                             City of Fairfax, City of
                                             Falls Church, City of
                                             Manassas, and City of
                                             Manassas Park.\1\
------------------------------------------------------------------------
\1\ For selected items, such as golf, snow skiing, and air travel, these
  survey areas include additional geographic locations beyond these
  jurisdictions.
\2\ OPM collects housing data in St. John and eastern Puerto Rico. OPM
  may also collect non-housing data from selected outlets in St. John
  and combine such data with St. Thomas data as provided in Sec.
  591.216(b).

* * * * *
    5. In Sec. 591.216, revise paragraph (b) to read as follows:


Sec. 591.216  How does OPM combine survey data for the DC area and for 
COLA areas with multiple survey areas?

* * * * *
    (b) COLA areas with multiple survey areas. OPM computes weighted 
average indexes at the item, PEG, MEG, and/or overall level by using 
the corresponding indexes and Federal employment weights from each 
survey area within the COLA area.
    6. In Sec. 591.219, revise paragraph (b) to read as follows:


Sec. 591.219  How does OPM compute shelter price indexes?

* * * * *
    (b) OPM then uses these characteristics and rental prices and/or 
estimates in hedonic regressions (a type of multiple regression) to 
compute for each COLA survey area the price index for rental and/or 
rental equivalent units of comparable quality and size between the COLA 
survey area and the Washington, DC, area. Exception: OPM does not 
compute separate rental and/or rental equivalence price indexes for St. 
John or eastern Puerto Rico.
    7. In Sec. 591.222, revise paragraph (c) to read as follows:


Sec. 591.222  How does OPM use the expenditure weights to combine price 
indexes?

* * * * *
    (c) Step 3. OPM repeats the process described in Step 2 at each 
level of aggregation within the PEG to produce a price index for the 
PEG, at the PEG level to produce an index for the MEG, and at the MEG 
level to produce the overall price index for the COLA area.
    8. In Sec. 591.224, revise paragraph (b) and add paragraph (c) to 
read as follows:


Sec. 591.224  How does OPM adjust price indexes between surveys?

* * * * *
    (b) Paragraph (a) of this section applies beginning with the 
effective date of the results of the second survey conducted in Puerto 
Rico and the U.S. Virgin Islands under these regulations.
    (c) Based on additional housing data that may be collected before 
the second survey conducted in Puerto Rico and the U.S. Virgin Islands, 
OPM will adjust as warranted the price indexes and COLA rates for 
Puerto Rico, the U.S. Virgin Islands, and the COLA areas in the State 
of Alaska. OPM will implement any such adjustments on a one-time basis 
on the effective date of the results of the first surveys conducted in 
Hawaii and Guam/CNMI under these regulations, and subject to Sec. 
591.228. OPM will publish such adjustments as provided in Sec. 591.229.

[FR Doc. 04-2225 Filed 2-6-04; 8:45 am]
BILLING CODE 6325-39-P