Friday, July 1, 2011

GAO Looks Into the State Dept's Overseas Comparability Pay for Congress, Provides No Recommendations

The State Department Human Resources Bureau provided a flawed business case on OCP and retention.  It also failed to provide evidence on the extent to which comparability pay decreases attrition. Excerpts from the GAO report released on June 30:

The Federal Employees Pay Comparability Act (FEPCA) of 1990 established locality pay to achieve pay comparability between federal and nonfederal jobs within the United States.1 Because FEPCA established pay localities only for areas within the United States, federal employees permanently stationed overseas, including members of the Foreign Service, did not receive locality pay. As the Washington, D.C., locality rate grew to over 24 percent in 2010, the pay gap between federal employees who receive locality pay and those who do not widened considerably.

To close this gap, the fiscal year 2009 Supplemental Appropriations Act2 granted the Department of State (State) temporary authority to provide locality pay at the Washington, D.C., rate, also known as Overseas Comparability Pay, to Foreign Service personnel posted overseas.3 State is implementing this pay in three phases.4 Currently, Foreign Service personnel serving overseas receive 16.52 percent comparability pay, approximately twothirds of the Washington, D.C., locality rate. State had planned to implement the third and final phase of comparability pay, raising it to 24.22 percent, in August 2011. However, these plans have been delayed by the administration’s freeze on federal salaries and the passage of the Department of Defense and Full Year Continuing Appropriations Act for fiscal year 2011, which prohibited State from using funds to implement the final phase.5 In December 2010, the National Commission of Fiscal Responsibility and Reform identified comparability pay as a potential source of cost savings. Without a continuation of authority, State cannot continue to provide comparability pay with funds appropriated after fiscal year 2011.

State’s Rationale

State has offered several reasons for requesting overseas comparability pay: to establish equity in pay and retirement benefits between Foreign Service personnel stationed in Washington, D.C., and those assigned overseas; to recruit competitively for top candidates; and to retain current Foreign Service personnel (see slides 8-12). However, our analysis found mixed evidentiary support for State’s rationale.

§ Pay equity: According to State, comparability pay would eliminate an inequity between Foreign Service personnel serving in Washington, D.C., and those in overseas assignments. State has argued that the lack of comparability pay results in a cut in basic pay when officers move from Washington, D.C., to an overseas post, creating a disincentive for overseas service. The Washington, D.C., locality rate increased from 4.23 percent in 1994, when locality pay was first implemented, to a cumulative 24.22 percent of base pay in 2011 (see slide 9). However, as discussed later in this correspondence, Foreign Service personnel assigned to overseas posts are eligible for allowances and differentials that they do not receive in Washington, D.C. While these allowances and differentials are not intended to compensate for the lack of comparability pay, we found that they nevertheless result in higher compensation, on average, for overseas staff.

§ Retirement equity: State has noted that agency contributions to Foreign Service personnel retirement decrease when personnel move overseas from Washington, D.C. In general, retirement benefits for members of the Foreign Service comprise three components: Social Security, annuities, and the Thrift Savings Plan. Our analysis shows that without comparability pay, agency contributions to two of these components—Social Security and the Thrift Savings Plan—would be lower, because they are calculated as a percentage of base pay plus locality/comparability pay.9 Thus, future retirement benefits for Foreign Service personnel are lower without comparability pay. See slide 10 for more detail on comparability pay’s impact on retirement contributions.

§ Recruitment: According to State, the lack of comparability pay hinders its ability to compete for top candidates seeking overseas careers in the federal government. Specifically, according to State’s Under Secretary for Management, State’s primary competitor for candidates seeking overseas foreign affairs careers is the Central Intelligence Agency, which provides locality pay to its staff posted overseas. However, State has not provided any data or analysis to demonstrate that State’s recruitment has been negatively affected by a lack of comparability pay.

§ Retention: State’s 2009 business case for comparability pay estimated that providing comparability pay would save the department about $47 million by preventing increased attrition among midlevel Foreign Service personnel. While the business case highlights important issues, such as the cost of attrition and the potential negative effects of midlevel staffing gaps, it has several limitations. For example, State’s business case assumed an attrition rate for mid-level officers that is significantly higher than historical rates.10 In addition, its estimate of the cost to replace a midlevel officer includes items such as salary and post assignment travel that State would incur regardless of the officer’s tenure. Slide 12 discusses State’s business case in more detail.4

Foreign Service personnel from all foreign affairs agencies currently receive comparability pay while serving overseas. Civilians from other agencies on permanent change of station overseas, excluding the Central Intelligence Agency, generally do not (see slides 18-19).13 However, when civilian employees are posted overseas on temporary duty status (TDY), they generally receive the full locality pay of their home duty station. Of the agencies included in our review, the percentage of staff on overseas TDY status varies. For example, nearly 25 percent of Federal Bureau of Investigation employees stationed overseas were on TDY status in April/May 2011, compared with about 15 percent of Department of Homeland Security employees stationed overseas.

Concluding Observations

Prior GAO work has highlighted human capital challenges at State, such as staffing gaps at hardship posts, which put U.S. diplomatic readiness at risk. As State prepares for an expanded diplomatic footprint in Iraq while continuing to reposition staff to emerging powers such as China, these challenges may become more pronounced. In this context, Congress authorized State in 2009 to provide comparability pay in order to close a widening pay gap between overseas and Washington, D.C.-based positions. While the challenges State faces remain, today’s budget environment has caused Congress to take a fresh look for ways to economize. CBO has estimated that fully implementing comparability pay for State and other agencies would cost about $2 billion through 2015, and the National Commission of Fiscal Responsibility and Reform identified this pay as a potential source of cost savings.

Our assessment shows that the case for continuing to provide comparability pay to ForeignService personnel abroad has mixed evidentiary support. The gap in basic pay betweenfederal employees who receive locality/comparability pay and those who do not has widened considerably, leading to lower retirement contributions in the long term. However, our analysis shows that even without comparability pay, compensation for Foreign Service personnel overseas is still higher, on average, than it would be in Washington, D.C., when allowances and differentials are considered. Furthermore, State has no evidence to support its claim that the department would be unable to compete for talent without comparability pay. Nevertheless, despite flaws in State’s business case regarding retention, and the lack of evidence on the extent to which comparability pay decreases attrition, we acknowledge that any significant loss of Foreign Service personnel, especially at the midlevel, could be detrimental to diplomatic readiness.

As a result, in light of current budgetary constraints, it remains unclear whether State needsacross-the-board comparability pay to recruit and retain a highly qualified cadre of Foreign Service personnel.

We are not making any recommendations in this report.

Agency Comments

After reviewing a draft of this product, State officials said the department would not provide a formal response. However, State provided technical comments that have been incorporated as appropriate in this correspondence.

Read in full - GAO: Department of State Overseas Comparability Pay | June 30, 2011

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