[Federal Register Volume 73, Number 104 (Thursday, May 29, 2008)]
[Rules and Regulations]
[Pages 30727-30734]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-12020]



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  Federal Register / Vol. 73, No. 104 / Thursday, May 29, 2008 / Rules 
and Regulations  

[[Page 30727]]



OFFICE OF PERSONNEL MANAGEMENT

5 CFR Part 591

RIN 3206-AL28


Nonforeign Area Cost-of-Living Allowance Rates; Puerto Rico and 
Hawaii County, HI

AGENCY: Office of Personnel Management.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Office of Personnel Management (OPM) is changing the cost-
of-living allowance (COLA) rates received by certain white-collar 
Federal and U.S. Postal Service employees in Puerto Rico and Hawaii 
County, HI. The changes are the result of interim adjustments OPM 
calculated based on relative Consumer Price Index differences between 
the cost-of-living allowance areas and the Washington, DC, area. OPM is 
also making an additional one-time adjustment to the Puerto Rico COLA 
rate based on the impact of the new sales tax in Puerto Rico. This 
regulation increases the COLA rate for Puerto Rico to 13 percent and 
the COLA rate for Hawaii County, HI, to 18 percent.

DATES: Effective date: June 30, 2008.
    Implementation date: First day of the first pay period beginning on 
or after June 30, 2008.

FOR FURTHER INFORMATION CONTACT:  J. Stanley Austin, (202) 606-2838; 
fax: (202) 606-4264; or e-mail: [email protected].

SUPPLEMENTARY INFORMATION: Section 5941 of title 5, United States Code, 
authorizes Federal agencies to pay cost-of-living allowances (COLAs) to 
white-collar Federal and U.S. Postal Service employees stationed in 
Alaska, Hawaii, Guam and the Northern Mariana Islands, Puerto Rico, and 
the U.S. Virgin Islands (USVI). Executive Order 10000, as amended, 
delegates to the Office of Personnel Management (OPM) the authority to 
administer nonforeign area COLAs and prescribes certain operational 
features of the program. OPM conducts living-cost surveys in each 
allowance area and in the Washington, DC, area to determine whether, 
and to what degree, COLA area living costs are higher than those in the 
DC area.
    As required by section 591.223 of title 5, Code of Federal 
Regulations, OPM conducts COLA surveys in the Alaska, Pacific, and 
Caribbean areas on a 3-year rotating basis, and in the Washington, DC, 
area on an annual basis. OPM sets the COLA rate for each area based on 
the results of these surveys. For areas not surveyed during a 
particular year, OPM computes interim adjustments to COLA rates based 
on the relative change in the Consumer Price Index (CPI) for the COLA 
area compared with the Washington, DC, area. (See 5 CFR 591.224-
591.226.)
    OPM adopted the COLA survey methodology pursuant to the stipulation 
for settlement 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 prior methodology OPM used to 
determine COLA rates. In the Caraballo settlement, the parties agreed 
that if the Government adopted and maintained certain changes in the 
COLA program, the plaintiffs would be barred from bringing suit over 
these issues. The stipulation for settlement is available on OPM's Web 
site at http://www.opm.gov/oca/cola/settlement.asp.
    Before the settlement, the parties entered into a memorandum of 
understanding under which they engaged in a cooperative process to 
study living-cost and compensation issues. The research was exhaustive 
and covered essentially all aspects of the COLA program. A summary of 
that research is available at http://www.opm.gov/oca/cola/research.asp.
    Exhibit A of the Caraballo settlement agreement lists 26 ``Safe 
Harbor Principles'' that outline the changes to which the parties 
agreed. These principles formed the basis for a new COLA methodology, 
which OPM incorporated into its regulations. In developing these 
regulations, OPM consulted with the Survey Implementation Committee, 
which was established under the Caraballo settlement and is composed of 
representatives of the parties in Caraballo. The Survey Implementation 
Committee in turn consulted with the Technical Advisory Committee, 
which was also established under the Caraballo settlement and is 
composed of three economists with expertise in living-cost comparisons. 
OPM published proposed regulations incorporating the new methodology in 
the Federal Register for notice and comment on November 9, 2001, at 66 
FR 56741, and a final rule on May 3, 2002, at 67 FR 22339. The Survey 
Implementation Committee and the Technical Advisory Committee worked 
closely with OPM in preparing for and implementing the 2002, 2003, and 
2004 COLA surveys.
    On September 12, 2007, at 72 FR 52169, OPM published a Federal 
Register notice conveying the results of the 2006 interim adjustments 
for the Pacific and Caribbean COLA areas. We did not compute interim 
adjustments for the Alaska COLA areas because we surveyed Alaska in 
2006. The interim adjustments indicated that, except for Hawaii County 
and Puerto Rico, the COLA rates for the Pacific and Caribbean COLA 
areas were set at the appropriate levels. For Hawaii County, the 
adjustments indicated an increase in the COLA rate from 17 percent to 
18 percent. For Puerto Rico, the adjustments indicated an increase in 
the COLA rate from 10.5 percent to 11 percent.
    On September 6, 2007, at 72 FR 51200, OPM proposed to further 
increase the Puerto Rico COLA rate to 13 percent to account for the 
impact on prices of the new Puerto Rico sales tax. This increase 
supersedes the 1 percent reduction previously proposed by OPM on 
October 27, 2006, at 71 FR 63176, which was based on the 2005 Caribbean 
survey results.

Discussion of Comments

    We address comments received in response to the 2007 proposed rule 
on the rate increases in Puerto Rico and Hawaii County, HI, in this 
section. We also received comments in response to the 2006 proposed 
rule to reduce the COLA rate in Puerto Rico. Although the rate 
reduction will not be implemented, we also respond to these comments in 
this section.

[[Page 30728]]

2007 Proposed Rate Increases

Rising Living Costs

    We received 253 comments in response to the 2007 proposed rate 
increases in Puerto Rico and Hawaii County, HI. Most of the commenters 
in Puerto Rico said they support the proposed increase in the Puerto 
Rico COLA rate; however, many commenters believed the increase should 
be higher than proposed. A number of commenters cited a rise in the 
Consumer Price Index produced by the Puerto Rico Department of Labor 
and Human Resources and other indicators as a basis for a higher COLA 
rate.
    As required by section 5941 of title 5, U.S. Code, we compare 
living costs in the COLA areas with living costs in the Washington, DC, 
area to determine COLA rates. We survey the prices of over 240 items to 
use in the cost comparisons. The comparisons result in indexes that 
reflect how COLA area prices measure against DC area prices over a 
given period of time. The comparisons result in indexes that do not 
necessarily correspond to rising (or falling) prices in the COLA areas. 
For instance, if living costs in a COLA area rise, but living costs in 
the DC area rise more sharply, the COLA rate for the area would 
decrease. Conversely, if COLA area living costs decrease, but DC area 
living costs decrease more sharply, the COLA rate for the area would 
increase.
    This regulation increases the COLA rate in Puerto Rico from 10.5 
percent to 13 percent based partially on the relative change in the 
2006 CPI for Puerto Rico compared with the Washington, DC, area and 
partially to account for the new sales tax implemented after the 2005 
survey. While this change provides a 2.5 percent increase in the COLA 
rate for Federal employees in Puerto Rico, the actual change from the 
2005 survey index of 103.32 (3 percent) to the adjusted index of 112.94 
(13 percent) correlates to an effective increase of 10 percent. (The 3-
percent COLA rate indicated by the 2005 surveys was to be implemented 
in annual 1-percentage-point reductions.)
    We used the CPI produced by the Puerto Rico Department of Labor and 
Human Resources for the 2006 interim adjustment for Puerto Rico. The 
Puerto Rico Department of Labor and Human Resources has since revised 
its methodology for producing the CPI. This change in producing the CPI 
does not affect the COLA index used for the Puerto Rico rate increase 
implemented in this regulation, but likely will affect future Puerto 
Rico interim adjustment comparisons.
    A number of commenters noted that certain costs have increased 
since OPM conducted the survey. They cited the cost of gasoline, 
housing, utilities, airline tickets, grocery items, medical needs, 
automobile expenses, various fees and taxes, and other items. Several 
commenters believed we should survey more frequently. We recognize that 
prices for various items will increase in the COLA areas and/or the DC 
area between surveys. We collect prices in each survey area every 3 
years on a rotating basis according to a schedule agreed upon by the 
parties in the Caraballo settlement. As noted previously, we adjust 
area price indexes in non-survey years based on the relative change in 
the CPI for the COLA area compared with the CPI for the Washington, DC, 
area.
    One commenter said OPM should survey the cost of water, gas, 
electricity, and telephone utilities. We survey each of these items. We 
published a list of the items we surveyed in the Caribbean and DC areas 
in appendix 3 of the 2005 Caribbean Survey Report at 71 FR 63197.

Puerto Rico Sales Tax

    Several commenters believed OPM did not fully account for coverage 
of the new Commonwealth and municipio sales tax, particularly with 
grocery items. We proposed a one-time adjustment to the Puerto Rico 
COLA index based on the sales tax, which had not yet been captured by 
the COLA surveys or reflected in the CPI adjustments. We obtained 
information on the applicability of the sales tax from the Puerto Rico 
Department of the Treasury (Hacienda). Using this information, we 
applied the sales tax to covered survey items to determine an aggregate 
indicator of the impact of the tax on the Puerto Rico COLA index. The 
index increased by 1.9 points, translating to a COLA rate increase of 2 
percent. We did not attempt to account for variations in tax coverage 
by municipio as these variations would likely have an inconsequential 
effect on the index. Similarly, we did not account for price reductions 
for survey items no longer subject to the general excise tax because 
the effect would also likely be inconsequential. In the future, the 
sales tax will be added to the prices we survey and will be reflected 
in the Puerto Rico CPI used for the interim adjustments.
    One association advocated making the Puerto Rico increase 
retroactive to November 5, 2007, the effective date of the new sales 
tax. Paragraph (d) of section 553 of title 5, U.S. Code, requires that 
regulations be issued with an effective date at least 30 days after 
publication. The Caraballo settlement agreement requires that we 
publish rate changes pursuant to section 553.

Recruitment and Retention

    One commenter said the current economy in Puerto Rico is likely 
causing recruitment and retention problems. OPM is concerned about the 
Government's ability to recruit and retain a well-qualified workforce 
and notes that the Government has several pay authorities that are 
available to address recruitment and retention problems. Among these 
are special salary rates and recruitment, retention, and relocation 
incentives. OPM's Web site at http://www.opm.gov/oca/pay/index.asp 
provides information on pay authorities to assist in agency recruitment 
and retention efforts.

Locality Pay

    Several commenters noted their opposition to an Administration 
legislative proposal that would transition employees in the COLA areas 
to locality pay over a 7-year period. The commenters said a change to 
locality pay would lead to a decrease in net salaries in Puerto Rico 
because locality pay is subject to income tax. The proposed legislation 
would reduce COLAs by 85 percent of the added locality pay amount to 
help offset (by 15 percent) the tax liability of locality pay, but 
would not relieve employees of their total tax responsibility. Unlike 
with COLAs, all Federal employees, whether in the COLA areas or the 48 
contiguous States and Washington, DC, must pay income tax on locality 
pay. Under the proposed legislation, a change to locality pay would 
also eliminate future COLA rate reductions and increases, confer 
retirement credit where the COLA did not, and provide higher pay 
potential not restricted by the 25-percent cap that applies to COLA 
rates.

Taxes

    A number of commenters noted that the Puerto Rico income tax is 
higher than the Federal income tax paid by employees in other areas. By 
law, we must compare living costs in the COLA areas with living costs 
in the Washington, DC, area to determine the COLA rates for the areas. 
In the DC area, employees pay Federal income tax, State income tax 
(Virginia and Maryland), city income tax (DC), local income tax 
(Maryland counties), and personal property tax (Virginia counties). 
Employees in all areas have varying tax obligations depending on 
income, dependents, deductions, and other factors. Because of the 
complexity

[[Page 30729]]

involved, we do not attempt to determine the aggregate income tax 
liability for employees in the COLA areas and the DC area for 
comparison purposes. The extent to which the total tax burden may be 
higher in a COLA area than in the DC area is covered by the adjustment 
factor we add to the price index for each COLA area pursuant to the 
Caraballo settlement agreement.

Rate Variations

    A number of commenters said Hawaii and the U.S. Virgin Islands have 
a similar economic situation to Puerto Rico, but have higher COLA 
rates. One commenter thought that costs in Puerto Rico justified the 
same 25 percent COLA received by employees in Alaska and Hawaii. Two 
commenters said that prices are higher in Puerto Rico because items 
must be imported. There are innumerable economic influences that affect 
prices in an area, including poverty rate, housing vacancy rate, 
availability of goods and services, competition, and importation costs. 
We survey using the same methodology and essentially the same 
marketbasket in all areas. We survey the final cost to the consumer of 
items and services in each area. The final cost includes any overhead, 
transportation and shipping costs, taxes, competition, and other price 
influences. Additionally, we survey catalog prices for a number of 
items and include in the price the costs for shipping, sales tax, and 
excise tax, which are often higher in the COLA areas relative to the 
Washington, DC, area.
    We use this data to compare living costs in the COLA areas with 
living costs in the DC area. The surveys and subsequent interim 
adjustments have indicated a 25-percent COLA rate for the U.S. Virgin 
Islands and 3 of the 4 allowance areas in Hawaii, but a 10-percent rate 
for Anchorage, AK, a 19-percent rate for Fairbanks, AK, and a 20-
percent rate for Juneau, AK. The Anchorage COLA index is below the 
index for Puerto Rico. Actual COLA rates are currently higher in Alaska 
because the Caraballo settlement established rates based on historical 
levels in the areas. The COLA rates in Alaska remain higher than 
indicated by OPM's surveys because we may reduce rates by no more than 
1 percent in a 12-month period. We have published at 73 FR 772 a 
proposed second rate reduction, from 24 to 23 percent, for Anchorage, 
Fairbanks, and Juneau.
    One commenter described how his living costs increased on moving to 
Puerto Rico from Texas. As noted earlier, section 5941 of title 5, U.S. 
Code, requires that we compare living costs in Puerto Rico with living 
costs in the Washington, DC, area to set the Puerto Rico COLA rate. We 
do not conduct cost-of-living surveys in other areas of the continental 
United States.

Housing Costs

    Two commenters noted the high cost of housing in safe neighborhoods 
and high mortgage rates in Puerto Rico. As stipulated by the Caraballo 
settlement, we use rental equivalence to determine shelter costs in the 
COLA areas. We discuss the rental survey, including neighborhood 
selection, later in this section.

Hawaii County

    Two commenters said there should be separate COLA rates for the 
east (Hilo) and west (Kona) sides of the island of Hawaii because 
prices in these areas are not equal. There are communities in each of 
the nonforeign COLA areas (and in the DC area) that are more expensive 
than other communities within the same COLA area. It is not feasible or 
practical to segment each of these communities, many of which share 
numerous economic characteristics, into independent survey areas with 
separate COLA rates. For this reason, we do not plan to split Hawaii 
County into two separate COLA areas. However, we remain open to a 
mutual recommendation on this issue from the COLA Advisory Committees 
in Hilo and Kona.

2006 Proposed Reduction

    We received 204 comments in response to the 2006 proposed reduction 
in the Puerto Rico COLA rate published at 71 FR 63176. Although the 
increase implemented by these regulations supersedes the 2006 proposed 
reduction, we respond to the comments we received in the discussion 
that follows.

Increasing Costs

    Many of the commenters said OPM should not reduce COLA rates 
because Puerto Rico living costs were increasing. As noted previously, 
section 5941 of title 5, U.S. Code, requires that we measure costs in 
the COLA areas against costs in the Washington, DC, area to determine 
COLA rates. We increase the COLA rate if the difference in living costs 
between the COLA area and the DC area increases and reduce the rate if 
the difference in living costs between the COLA area and the DC area 
decreases. As provided by 5 CFR 591.228(c), we reduce COLA rates by no 
more than 1 percentage point in a 12-month period.
    A number of commenters referred to publications or other surveys 
showing high or rising costs in Puerto Rico, indicating the COLA rate 
should be set higher. We measure costs using the methodology stipulated 
in the Caraballo settlement and cannot comment on the methodology used 
by other publications and surveys. We conduct on-site surveys in each 
survey area and collect more than 4,600 prices on over 240 items 
representing typical consumer purchases. We collect prices at over 900 
outlets, including grocery, hardware, electronics, and department 
stores, as well as automobile dealers, doctors, dentists, insurance 
companies, and many other providers of goods and services. We collect 
these prices in both the COLA and DC areas to use in the price 
comparisons that determine each area's COLA rate.
    Numerous commenters noted that certain costs increased after OPM 
conducted the 2005 survey and that the survey data were outdated. They 
cited the cost of gasoline, housing, utilities, grocery items, medical 
needs, various fees and taxes, and other items. Many commenters 
requested that OPM survey again. As noted previously, we recognize that 
prices for items may increase in the COLA areas and/or the DC area 
between surveys. We collect prices in each survey area every 3 years on 
a rotating basis according to a schedule agreed upon by the parties in 
the Caraballo settlement. As stipulated in the settlement, we adjust 
COLA rates annually between surveys based on the relative change in the 
CPI for the COLA area as compared with the Washington, DC, area. We 
discuss this adjustment in the notice on the 2006 interim adjustments 
published at 72 FR 52169. These adjustments are designed to account for 
price fluctuations between surveys. The 2006 interim adjustment 
calculation raised the Puerto Rico index, making the proposed COLA rate 
reduction no longer necessary.

New Sales Tax

    We received a number of comments on the new sales tax in Puerto 
Rico. As we discussed previously, we are implementing an adjustment to 
account for the impact of the sales tax as part of the rate increase to 
13 percent.

Rate Change Delay

    One agency commented on the delay in implementing COLA rate 
adjustments. As set out in the Caraballo settlement, we survey each 
COLA area on a triennial basis and make interim adjustments based on 
CPI changes in the years between surveys. We also may make adjustments 
based on special

[[Page 30730]]

circumstances, such as with the Puerto Rico sales tax adjustment. While 
we make efforts to implement COLA rate adjustments in a timely fashion, 
we must follow the rulemaking procedures mandated by the Administrative 
Procedure Act (section 553 of title 5, U.S. Code) and various other 
statutory and regulatory requirements before implementing any rate 
change. These requirements largely determine the interval for making a 
rate change effective.

Comparison With DC

    The same agency also commented on the use of Washington, DC, as the 
basis for COLA living-cost comparisons. While the agency conceded that 
this requirement is in statute (section 5941 of title 5, U.S. Code), it 
observed that the DC area has become more expensive over time, 
resulting in less variance between the DC and COLA areas. Because the 
requirement to use Washington, DC, as the basis for comparison is 
mandated in the statute that authorizes COLAs, we do not have authority 
to address this issue by regulation.

COLA/Locality Pay

    The agency also raised the issue of replacing the nonforeign area 
COLA with locality pay. The Federal Employees Pay Comparability Act of 
1990 authorizes locality pay only for Federal employees in the 
contiguous 48 States and Washington, DC. We do not have authority to 
address this issue by regulation. However, as noted earlier in this 
section, the Administration has submitted proposed legislation for 
consideration by Congress that would convert employees from COLAs to 
locality pay over time.

Recruitment, Relocation, and Retention Incentives

    The agency noted that reductions in COLA rates may require greater 
use of discretionary authorities, such as recruitment, relocation, and 
retention incentives. As noted previously, OPM's Web site at 
www.opm.gov/oca/pay/index.asp provides information on pay authorities 
to assist in agency recruitment and retention efforts.

Employee Involvement

    One commenter believed OPM did not conduct the survey in Puerto 
Rico with local Federal employees. The commenter indicated that OPM 
should have surveyed a sample of Puerto Rico Federal employees. We 
conduct on-site price surveys of a marketbasket of goods and services 
representing typical consumer purchases as prescribed by the Caraballo 
settlement. Observers from the Puerto Rico COLA Advisory Committee, 
which is composed of current Federal employees who live in Puerto Rico, 
accompanied the OPM data collectors during the non-rental price survey. 
Before the 2005 Caribbean survey, we established a COLA Advisory 
Committee in each of the survey areas. As described in 5 CFR 591.243, 
each Committee is composed of approximately 12 agency and employee 
representatives from the survey area and two representatives from OPM. 
We held 3-day meetings with the COLA Advisory Committees in each area 
to be surveyed to plan the COLA surveys. During the 2005 survey, the 
Committee members assisted OPM staff in collecting non-rental data, and 
after the survey the Committee members had the opportunity to review 
all of the survey results, including the results of the rental survey. 
Although COLA Advisory Committee members helped plan the rental survey 
and had the opportunity to review the rental survey results in detail, 
Committee members did not participate in the rental data collection as 
observers.

Rental Surveys

    One local union in Puerto Rico offered extensive comments on the 
Puerto Rico rental survey. The union disputed the overall veracity, 
reliability, and adequacy of the rental data collected in Puerto Rico. 
The union claimed OPM knowingly and willfully harmed Puerto Rico 
employees through the fashion in which it collected, evaluated, 
analyzed, and utilized the rental data in Puerto Rico. The union and 
many other commenters asserted that OPM's actions did not conform to 
the Caraballo settlement or Safe Harbor Principles 5 (regarding quality 
and quantity comparisons), 18 (regarding the hedonic housing model and 
rental equivalence), and 22A (regarding survey plans and methodology).
    As noted previously, the Caraballo settlement prescribed the 
methodology we use to conduct COLA surveys and set COLA rates. The 
settlement stipulates that OPM use a rental equivalence approach to 
estimate shelter costs and a hedonic regression approach to compare 
housing of similar quality. The Technical Advisory Committee economists 
worked with OPM and the Survey Implementation Committee to develop 
methodologies for the rental equivalence and hedonic regression 
processes. The settlement agreement did not require OPM to use a 
particular method to collect rental data; however, OPM provided its 
draft rental data collection specifications and procedures to the 
Survey Implementation Committee and Technical Advisory Committee for 
review and comment.
    We contracted for the services of a company with an outstanding 
depth of experience in rental data collection to survey rental 
properties in the COLA areas for the 2004 through 2007 surveys. The 
contractor collected the data in essentially the same manner in all 
areas. Using parameters defined by OPM, the contractor collected rental 
data on-site in Puerto Rico from March 13 through May 5, 2005. 
Following its survey of the Caribbean areas, the contractor surveyed 
the Washington, DC, area. The contractor delivered the rental survey 
data to OPM in June 2005. We manually reviewed the rental data and 
performed various computer-based quality assurance checks on the rental 
database. We believe the 2005 rental survey was in full conformance 
with the settlement agreement and was stringently conducted under the 
rental equivalence and hedonic regression methodology mutually 
developed by the Survey Implementation Committee, Technical Advisory 
Committee, and OPM.
    The union further maintained the rental data did not accurately 
reflect the areas or types of housing units where Federal employees 
live. The union said that only a small percentage of the rental 
observations in Puerto Rico were in areas where the median income level 
equals or exceeds the local average Federal salary. The union also said 
OPM and the Technical Advisory Committee invented new categories of 
housing units, ``apartments in home'' and ``other,'' almost exclusively 
for Puerto Rico. The union said these two categories of housing units 
were substandard and not representative of where Federal employees 
live.
    We used data from the 2000 census that show the number of Federal 
employees and the number of housing units by municipio to determine 
which locations to survey and how many samples the rental survey 
contractor should attempt to collect in each location. We allocated 
more samples to locations that have a large number of Federal employees 
and a large number of housing units and fewer samples to locations that 
have a small number of Federal employees and housing units. If the 
location had no Federal employees, we excluded the location from the 
survey.
    We held a 3-day meeting with the Puerto Rico COLA Advisory 
Committee on January 18-20, 2005, to plan the 2005 Puerto Rico rental 
and non-rental surveys. At the meeting, we shared with the Committee a 
map that showed the

[[Page 30731]]

rental survey locations and the requested number of samples from each 
location. At the Committee's request, we agreed to further refine the 
survey locations using zip codes where practical. We did this for the 
San Juan, Carolina, and Bayamon municipios.
    We also collect information that reflects the quality of 
neighborhoods and use additional information from the Bureau of the 
Census to introduce supplementary variables to the hedonic regressions 
that indicate neighborhood quality. To do this, we identify the census 
tract in which each rental observation is found and then add variables, 
such as median income, percent of school-age persons, and percent of 
people in the area with B.A. degrees or higher, to the hedonic 
regressions. Those variables that prove to be statistically significant 
and increase the precision of the rent index are used in the final 
hedonic regression equation.
    In the 2005 hedonic regression analysis, we tested whether median 
income or median income paired with median income squared should be 
included in the equation. We found that median income was not a 
statistically significant variable at the 99.9 confidence level and 
dropped it from the hedonic regression.
    The variable ``Type of Unit'' has eight subcategories: (1) Detached 
house, (2) duplex, (3) triplex, (4) townhouse/row house, (5) in-home 
apartment, (6) walk-up apartment, (7) high rise apartment, and (8) 
other. An ``in-home apartment'' is usually in a structure one to three 
stories tall with generally four or five units within the structure. 
Sometimes the original structure is a large, older home that has been 
converted to apartments. In other cases, the original structure may 
have been a triplex or quadplex. These units were found only in Puerto 
Rico and the U.S. Virgin Islands--none were found in the DC area. We 
tested the effect of dropping all in-home apartments in Puerto Rico in 
the final hedonic regression equation. The net result was a slight 
increase in the Puerto Rico rent index from 63.49 to 63.95, which had 
an inconsequential effect on the final survey living-cost index.
    Units classified as ``Other'' are apartments in larger buildings 
that are not duplexes, triplexes, high rise apartments, typical walk-up 
apartment complexes, or in-home apartments. These were found mainly in 
Puerto Rico. In consultation with the Technical Advisory Committee, we 
collapsed ``Type of Unit'' into three subcategories: (1) Apartments of 
any kind, (2) townhouse/row house/duplex/triplex, and (3) detached 
house. ``Collapsing'' means combining two or more variables or 
subcategories within a variable. We generally do this when the variable 
or subcategory parameter estimates are similar and doing so improves 
the accuracy of the survey area parameter estimates. We assigned units 
classified as ``in-home apartment'' and ``other'' to the ``apartments 
of any kind'' subcategory. We then used hedonic regressions to compare 
the COLA area rents with DC area rents, while holding quality and 
quantity constant.
    The union claimed OPM did not exercise any supervision over the 
contractor's data collection and accepted all data submitted by the 
contractor. We engaged a number of controls on the rental data 
furnished by the contractor. We established the specifications and 
locations for the rental survey in the contract and provided that 
payment would be made only for properties meeting the specifications. 
We required progress reports, shortfall reports, and other 
documentation during the course of the rental survey. As noted 
previously, we performed quality assurance checks on the data delivered 
by the contractor, including manually comparing property data against 
the property photograph(s) and sketch. We mapped the properties using 
longitude and latitude coordinates to verify geographic locations. 
Additionally, we provided the rental data to Puerto Rico agency and 
union representatives on the Puerto Rico COLA Advisory Committee for 
evaluation and comment.

Disparate Treatment

    The union stated that OPM treated Puerto Rico COLA employees in a 
disparate fashion because of national origin and without regard to 
unique linguistic and cultural differences. The union cited 
misspellings in the rental data as evidence that the data collectors 
encountered a serious language barrier.
    OPM and the rental contractor respect linguistic and cultural 
differences in Puerto Rico. Both OPM and the contractor assigned 
Spanish-speaking data collectors, some of whom were former residents of 
Puerto Rico, to the price and rental surveys. In addition, OPM arranged 
for observers from the Puerto Rico COLA Advisory Committee, which is 
composed of current Federal employees who live in Puerto Rico, to 
accompany the data collectors surveying non-rental prices. The rental 
data contained some misspellings in business names and street 
addresses, but the overall rental data were high-quality and fulfilled 
the COLA survey specifications for rental prices in Puerto Rico. 
Misspellings in names and addresses did not affect the rental prices 
used to determine the rent index.
    We conduct COLA surveys the same in all areas using the methodology 
prescribed by the Caraballo settlement. The rental survey contractor 
similarly does not vary its approach for collecting rental data in the 
COLA areas. To the extent cultural differences in Puerto Rico affect 
prices, the survey accounts for such differences. Additionally, we add 
7 points to the Puerto Rico COLA index to account for other costs that 
may be influenced in part by local or cultural differences. For the 
rental surveys, we note that cultural differences likely explain 
variations in advertising methods (e.g., more rent-by-owner signs in 
Puerto Rico) and the quantities of certain housing types (such as in-
home apartments) between Puerto Rico and the DC area. We discuss these 
variations elsewhere in this section.
    The union said that OPM made significant changes to the Alaska and 
Pacific rental surveys based on the union's comments, but did not 
employ the changes in the 2005 Caribbean rental survey. We made 
refinements in the hedonic regression analysis, including adding 
listing source and self identification refusal as variables based on 
the union's comments, but applied all changes uniformly to the 2005, 
2006, and 2007 surveys. We also initiated trial observation of the 
rental survey in the 2006 Alaska survey based on the union's comments; 
however, as we note in the discussion that follows, we plan to extend 
the trial period through the 2008 Caribbean survey.

Rental Survey Observers

    The union believed OPM should have allowed observers from the 
Puerto Rico COLA Advisory Committee to accompany the contractor on the 
2005 rental surveys in Puerto Rico. We permitted observers from the 
COLA Advisory Committees to accompany OPM data collectors conducting 
the non-rental price surveys beginning with the 2002 Caribbean surveys, 
but did not similarly arrange for observers to accompany the contractor 
conducting the rental surveys. The union originally requested that we 
permit observers for the 2005 rental surveys during a pre-survey 
meeting of the Puerto Rico COLA Advisory Committee on January 18, 2005. 
At that time, the contract for the rental surveys did not provide for 
observers. We determined there was not sufficient time to consider and 
resolve various issues (e.g., higher contract costs, logistical 
problems, and possible conflict of interest), establish ground rules 
for observers, and issue a contract

[[Page 30732]]

modification before the scheduled 2005 rental data collection. Although 
we could not provide for rental survey observers in 2005, we did 
arrange for the contractor to meet with the Puerto Rico COLA Advisory 
Committee and answer questions regarding the data collection process.
    Following the 2005 rental surveys, we negotiated with the 
contractor to permit rental survey observers on a trial basis. We have 
extended the trial observation period through the 2008 Caribbean 
surveys so that all COLA area committees will have an opportunity to 
observe, but not otherwise participate in, the rental data collection 
process.
    Rental survey observations enable COLA Advisory Committee members 
to see how the contractor collects rental data in the field. To 
maintain survey integrity, we instruct the observers not to attempt to 
advise, direct, or influence the data collectors. Committee members 
have an opportunity to participate in setting the rental survey 
parameters in the pre-survey meeting. Regardless of whether committee 
members observe the collection, we provide the collected rental data to 
the committee for review and comment.
    The union said that OPM did not provide the Puerto Rico COLA 
Advisory Committee truthful and/or accurate information regarding the 
rental contractor's work hours. OPM had noted the contractor's late 
work hours as one of the impediments to permitting Committee members to 
observe the rental survey. The union said that because the photographs 
of the rental units were taken during daylight hours, the contractor 
could not have worked evenings and/or nights. We would not have found 
photographs taken in the dark acceptable, so are not surprised that the 
contractor arranged to photograph the units in the daylight. We note 
that dawn to dusk in Puerto Rico is approximately 6 a.m. to 7 p.m. in 
April. We have since negotiated to permit Committee members to observe 
the rental survey during normal work hours.

Manual Data Review

    The union said OPM's difficulties in providing the Puerto Rico COLA 
Advisory Committee with a printed copy of the rental data meant OPM 
could not have conducted a manual review, because this would have 
required a printed copy. We received a printed copy of the rental data 
from the rental survey contractor and used this for our manual review. 
We did not provide the contractor copy to the Puerto Rico COLA Advisory 
Committee, but instead elected to print a new copy from our electronic 
database. We did this because the contractor's copy did not reflect the 
changes we made following our manual and automated reviews; the 
pictures and sketches on the copy we produced were larger, which we 
believed made it easier to see details; copying the contractor's two-
sided forms on a copier was less reliable than printing from the rental 
database; and we added census tract information to the rental database, 
which was not on the contractor's copy. We encountered initial 
difficulties in printing the copy from our database, but we resolved 
the problem and were able to provide a copy to the COLA Advisory 
Committee.

Data Quality

    The union stated that OPM did not follow the established protocol 
for developing a reliable hedonic regression model. The union said OPM 
should have reviewed the rental data, verified the accuracy of the 
data, eliminated unverifiable data, and determined that the remaining 
data were not sufficient to support a reliable hedonic model. The union 
further said OPM and the Technical Advisory Committee knowingly ran 
statistical programs over the deficient data and that OPM and the 
Technical Advisory Committee should have known that the rental data 
were not of comparable quality and therefore not fit to support a 
reliable hedonic regression model. The union said a process must be 
developed whereby an adequate sample of accurate, verifiable, and 
comparable rental data is utilized before any hedonic regression to 
adjust for quality differences is made.
    The current process provides ample accurate, verifiable, and 
comparable rental data to determine rental equivalence. In the 2005 
Caribbean survey, the sample consisted of over 400 rental observations 
in Puerto Rico and over 900 observations in the Washington, DC, area. 
To assure the data were accurate, we conducted various automated and 
manual reviews as described earlier in this section. To enable data to 
be verified, we obtained housing unit addresses, geographic 
coordinates, and photographs, which we reviewed and provided to the 
Puerto Rico COLA Advisory Committee. To assure comparability, we 
employed hedonic regression analysis as described in the 2005 Caribbean 
survey report at 71 FR 63184. The Technical Advisory Committee 
economists developed the hedonic regression model in consultation with 
OPM and the Survey Implementation Committee in accordance with the 
Caraballo settlement and Safe Harbor Principle 18.

Data Verification

    The union said OPM knew most of the data were not verifiable 
because names and addresses of information sources were not provided. 
Approximately 17 percent of the 2005 rental observations in Puerto Rico 
were from sources who refused to provide self-identifying information, 
and no observations in the DC area were from such sources. COLA rental 
surveys are voluntary; therefore, OPM cannot require the source to 
provide self-identifying information. In reviewing the rental data, we 
found no indication that the information was misrepresented or 
collected in an unacceptable manner. The contractor provided the 
address, geographic coordinates (longitude and latitude), and a 
photograph for each unit, among other information. We believe this 
information is sufficient for verification.
    We also analyzed whether source refusals to provide self-
identifying information had a statistically significant influence on 
rental rates in Puerto Rico. We added self-identification refusal as a 
variable in the hedonic regression analysis. The hypothesis was that 
properties belonging to or managed by individuals who refused to 
provide self-identifying information would rent for less than 
equivalent properties where the source provided self-identifying 
information. We found that self-identification refusal was not a 
statistically significant variable. This means that whether or not the 
source provided self-identifying information did not appear to have an 
influence on rental rates. Therefore, we see no reason to exclude 
observations where self-identifying information is withheld.
    The union said the data also were not verifiable because a high 
percentage of the Puerto Rico rental samples were obtained by ``drive-
by'' observations and supplemented later from the contractor's non-
local headquarters office. A ``drive-by'' property is one that is 
advertised by a sign posted on the property. The contractor collects 
information from five types of sources: local newspaper/publication, 
Internet, agent/broker, drive-by/sign posted, and other. The contractor 
collected data from all types except ``other'' in both Puerto Rico and 
the DC area, but the distribution of observations by listing source 
type varied by area.
    The contractor often finds properties with ``For Rent'' signs while 
driving through rental survey neighborhoods. If the property appears to 
meet contract specifications, the contractor takes photographs of the 
unit, records

[[Page 30733]]

measurable and visual observations, and notes the telephone number and 
other contact information provided on the ``For Rent'' sign. The 
contact can be a private individual, but in the DC area, the ``For 
Rent'' signs often provide the name of a property management company. 
The contractor then calls the point of contact, either locally or from 
its non-local headquarters, and obtains the rest of the required 
information about the rental unit. We do not require the contractor to 
document these calls separately because the provided survey data fully 
documents the information collected.
    To determine whether listing source influenced rental rates, we 
added listing source as a variable in the hedonic regression analysis. 
We found that the variable was statistically significant, but that it 
raised the standard error of the survey area parameter estimates. 
Therefore, we did not use listing source as a variable in the final 
hedonic regression equation.

Addressing Union Concerns

    The union stated it consistently notified OPM of its concerns with 
the rental survey and data collection, but OPM did not make a serious 
attempt to acknowledge, recognize, and address the many valid issues 
the union raised. We received several letters from the union regarding 
rental survey issues in response to two proposed COLA rate reductions 
in Puerto Rico. We replied to each of the union's concerns in detailed 
letters and also addressed its concerns in final regulations published 
in the Federal Register on August 2, 2006 (71 FR 43897). We again 
address the union's concerns in this discussion.

Rental Survey Support

    The union criticized OPM for consistently supporting the 
contractor's work with respect to the 2005 rental survey. We support 
the 2005 COLA rental and non-rental surveys because the surveys were 
conducted in accordance with the methodology prescribed by the 
Caraballo settlement and developed in full collaboration with the 
Survey Implementation Committee and the Technical Advisory Committee 
economists. The contractor supplied rental data that fulfilled the 
contract specifications set by OPM for acquiring sufficient data to 
determine rental equivalency under the settlement methodology.

Substitutions

    The union claimed OPM accepted endless substitutions of housing 
units in Puerto Rico from the contractor, allowing the introduction of 
bias to the housing sample. This is not correct. The contract 
prescribed the order in which the contractor would attempt to collect 
the data and specified the steps the contractor would take if it were 
unable to collect the requested number of observations within a class 
in a listed location. The contract allowed the contractor to do this 
without our direct supervision or involvement so that the rental survey 
could be conducted within a relatively short timeframe and because we 
did not have superior knowledge about what was available for rent in 
the local rental market. Although we were not involved in the 
substitution process, we received required reports that showed how the 
contractor allocated the shortfalls. The following is a brief 
description of how the contract addressed substitutions.
    We determined the Puerto Rico sample size mainly based on the 
number of observations a contractor could reasonably be expected to 
collect within the survey time period. Next, we used information from 
the 2000 Census to distribute the samples in Puerto Rico by zip code 
among the locations where Federal employees live. We used the same 
approach in the DC area and in the U.S. Virgin Islands.
    Within each location, we asked the contractor to collect 
information on the following six classes of housing: Class A--four 
bedroom, single family unit not to exceed 3200 square feet; Class B--
three bedroom, single family unit not to exceed 2600 square feet; Class 
C--two bedroom, single family unit not to exceed 2200 square feet; 
Class D--three bedroom apartment unit not to exceed 2000 square feet; 
Class E--two bedroom apartment unit not to exceed 1800 square feet; 
Class F--one bedroom apartment unit not to exceed 1400 square feet. In 
most cases, we distributed the location target sample among the class 
on an equal basis, although sometimes we varied the class distribution 
based on the projected distribution within the location.
    In designing the rental specifications, we recognized it was 
unlikely that a contractor would be able to find observations that 
exactly corresponded to the target distribution in the contract. 
Therefore, we established a process in the contract that enables the 
contractor to adjust the distribution throughout the survey by 
successively redistributing the shortfall according to a series of 
rules. The shortfall was the difference between the target amount and 
what was actually found.
    At the lowest level, the contract distribution specified the target 
amount for a housing class within a location in a survey area. If the 
contractor could not find that amount, the contractor allocated the 
shortfall to the next most similar housing class within the location. 
For example, if we asked the contractor to collect six Class A 
observations in a location but the contractor could only find four, the 
contractor assigned the shortfall to the next most similar housing 
class within that location, and repeated the process. By the time the 
contractor had completed surveying the location, if it still had a 
shortfall, the contract required the contractor to allocate that 
shortfall among the observations in the next location. For example, if 
the target amount for a particular location was 36 but the contractor 
could only collect 30, the contract required the contractor to 
distribute the shortfall among the housing classes in the next 
location.
    In the last step, if the contractor was unable to collect the 
number of samples requested for the survey area, the contractor was 
required to distribute the shortfall to the next survey area listed in 
the contract. In the case of the 2005 survey, the contractor obtained 
445 of the requested maximum 480 samples in Puerto Rico, so it 
redistributed 35 samples to the Washington, DC, area.

Hedonic Regressions

    The union also claimed the hedonic regressions performed by OPM and 
the Technical Advisory Committee to arrive at the 2005 housing index 
for Puerto Rico were inaccurate and invalid. The methodology we used to 
produce the rent indexes was an objective, multi-step process by which 
we eliminated variables that were not statistically significant. As 
required by Safe Harbor Principle 18 of the Caraballo settlement, we 
use hedonic regressions to analyze the rental data. We do not use a 
``matched-model'' approach; i.e., we do not compare the price of a 
1,000 square foot, 3-bedroom apartment in a COLA area with the same 
size 3-bedroom apartment in the DC area. Hedonic regressions are a type 
of multiple regression, which is a commonly used mathematical process 
that describes how one or more things--the independent variables--
affect something else--the dependent variable. The regression results 
show the influence, on average, of each independent variable on the 
dependent variable while holding all of the other independent variables 
constant.
    We use the logarithm of rent as the dependent variable. This is a 
commonly used approach and was recommended by the Technical Advisory 
Committee economists. The independent variables we use are various 
rental unit characteristics. Variables may be

[[Page 30734]]

continuous--like square footage, number of bedrooms, or number of 
bathrooms--or class variables, like external condition (good, fair, 
etc.), availability of air conditioning (yes, no), or the particular 
COLA survey area in which the rental unit is located. The resulting 
hedonic regression allows OPM to hold rental unit characteristics 
constant between the COLA area and the Washington, DC, area while 
comparing rents. In other words, we use hedonic regressions to compare 
rents for non-identical but comparable rental units by holding quality 
and quantity constant, to the extent practical. It is not practical to 
survey every characteristic of a rental unit. For example, we do not 
collect information on floor coverings, size and types of windows, 
color of bathroom fixtures, and size of closets. Instead, working with 
the Survey Implementation Committee, Technical Advisory Committee, and 
COLA Advisory Committees, we identified over 80 characteristics that 
seem likely to have an influence on rental prices. Similarly, it is not 
desirable from a statistical standpoint to use all 80-plus 
characteristics in the hedonic regressions. Therefore, OPM and the 
Technical Advisory Committee, in consultation with the Survey 
Implementation Committee, developed objective procedures to determine 
which rental unit characteristics to include in the regression 
equation.

Home Purchase Costs

    One commenter believed OPM should survey home purchase costs 
instead of rental value. Under the Caraballo settlement, the parties 
agreed to adopt a rental equivalence approach similar to the one the 
Bureau of Labor Statistics 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., 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.

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 this regulation will not have a significant economic 
impact on a substantial number of small entities because the regulation 
will 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.
Linda M. Springer,
Director.

0
Accordingly, OPM amends subpart B of 5 CFR part 591 as follows:

PART 591--ALLOWANCES AND DIFFERENTIALS

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

0
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.

0
2. Revise appendix A of subpart B to read as follows:

Appendix A to Subpart B of Part 591--Places and Rates at Which 
Allowances Are Paid

    This appendix lists the places approved for a cost-of-living 
allowance and shows the authorized allowance rate for each area. The 
allowance rate shown is paid as a percentage of an employee's rate 
of basic pay. The rates are subject to change based on the results 
of future surveys.

------------------------------------------------------------------------
                                                              Allowance
                    Geographic coverage                          rate
                                                              (percent)
------------------------------------------------------------------------
State of Alaska:
    City of Anchorage and 80-kilometer (50-mile) radius by            24
     road..................................................
    City of Fairbanks and 80-kilometer (50-mile) radius by            24
     road..................................................
    City of Juneau and 80-kilometer (50-mile) radius by               24
     road..................................................
    Rest of the State......................................           25
State of Hawaii:
    City and County of Honolulu............................           25
    Hawaii County, Hawaii..................................           18
    County of Kauai........................................           25
    County of Maui and County of Kalawao...................           25
Territory of Guam and Commonwealth of the Northern Mariana            25
 Islands...................................................
Commonwealth of Puerto Rico................................           13
U.S. Virgin Islands........................................           25
------------------------------------------------------------------------

[FR Doc. E8-12020 Filed 5-28-08; 8:45 am]
BILLING CODE 6325-39-P