Letter from the President to the Speaker of the House and the President of the Senate: Federal Pay Adjustments (12/1/00)
                              THE WHITE HOUSE

                       Office of the Press Secretary

For Immediate Release                            December 1, 2000

                      AND THE PRESIDENT OF THE SENATE

                                 November 30, 2000

Dear Mr. Speaker:   (Dear Mr. President:)

I am transmitting an alternative plan for Federal employee locality-based
comparability payments (locality pay) for 2001.

Federal employees are the key to effective Government performance.  During
the last 8 years, the number of Federal employees has declined while their
responsibilities have stayed the same or increased.  Nonetheless, recent
surveys show the American public believes it is now getting better quality
and more responsible service from our Federal employees.  We need to
provide them fair and equitable compensation to recognize their important
role, and to enable the Federal Government to continue to attract and
retain a high-quality workforce.

Under title 5, United States Code, most Federal civilian employees would
receive a two-part pay raise in January 2001:  (1) a 2.7 percent base
salary raise linked to the part of the Employment Cost Index (ECI) that
deals with changes in the wages and salaries of private industry workers;
and (2) a locality pay raise, based on the Bureau of Labor Statistics'
salary surveys of non-Federal employers in local pay areas, that would cost
about 12.3 percent of payroll.  Thus, on a cost-of-payroll basis, the total
Federal employee pay increase for most employees would be about 15 percent
in 2001.

For each part of the two-part pay increase, title 5 gives me the authority
to implement an alternative pay adjustment plan if I view the pay
adjustment that would otherwise take effect as inappropriate because of
"national emergency or serious economic conditions affecting the general
welfare."  Over the past three decades, Presidents have used this or
similar authority for most annual Federal pay raises.

In evaluating "an economic condition affecting the general welfare," the
law directs me to consider such economic measures as the Index of Leading
Economic Indicators, the Gross National Product, the unemployment rate, the
budget deficit, the Consumer Price Index, the Producer Price Index, the
Employment Cost Index, and the Implicit Price Deflator for Personal
Consumption Expenditures.

Earlier this year, I decided that I would implement -- effective in January
2001 -- the full 2.7 percent base salary adjustment.  As a result, it was
not necessary to transmit an alternative pay plan by the legal deadline
(August 31) for that portion of the pay raise.

In assessing the appropriate locality pay adjustment for 2001, I reviewed
the indicators cited above along with other major economic indicators.  As
noted above, the full locality pay increases, when combined with the 2.7
percent base salary increase, would produce a total Federal civilian
payroll increase of about 15 percent for most employees.  In fiscal year
(FY) 2001 alone, this increase would add $9.8 billion above the cost of the
3.7 percent increase I proposed in the fiscal 2001 Budget.

A 15 percent increase in Federal pay would mark a fundamental change of our
successful policy of fiscal discipline, and would invite serious economic
risks -- in terms of the workings of the Nation's labor markets; inflation;
the costs of maintaining Federal programs; and the impact of the Federal
budget on the economy as a whole.

First, an across-the-board 15 percent increase in Federal pay scales would
be disruptive to labor markets across the country.  This increase would be
three to four times the recent average annual changes in private-sector
compensation, built into the base of the pay structure not just for 2001,
but for subsequent years as well.  With job markets already tight and
private firms reporting great difficulties in attracting and retaining
skilled employees, this increase in Federal salaries could pull prospective
job seekers away from private employment opportunities.

Second, in the face of such a large Federal pay increase, private firms
would almost certainly react by increasing their own wage offers.  Thus,
beyond the labor-market disruption of such a Federal pay increase, there
would follow a serious risk of inflation; and that risk would far exceed
the direct effects of the Federal pay raise taken in isolation.  Pay rates
economy-wide have already enticed a record percentage of the adult
population into the labor force and paid employment.  There are few
unemployed or underemployed workers available for hire; if private firms
need additional labor, they must raise their wage offers to attract workers
from other firms.  Such bidding wars for labor -- which constitutes roughly
two-thirds of business costs in this economy -- have been at or near the
core of all inflationary outbursts in our recent history.  To date, intense
competitive pressures have prevented private firms from allowing
their wage offers to step out of line with productivity gains, and
inflationary pressures have remained contained.  However, a shock arising
outside of the competitive labor market itself -- such as an
administratively determined Federal pay increase -- could convince private
business managers that they must increase their offers beyond the current
norms.  In the past to reverse accelerating inflation, the Nation paid an
enormous toll through policies designed to slow the economy and reduce the
pressure on prices.  In numerous instances, the result was recession and
sharp increases in unemployment.  With labor markets as tight as they are
we should not undertake a policy likely to shock the labor market.

Third, Federal program managers are already under considerable pressure to
meet their budgets, while still providing quality service to the taxpayers.
Increasing the Federal employment costs at such an extraordinary rate would
render those budgets inadequate to provide the planned level of services.
Appropria-tions for the coming fiscal year have already been legislated for
much of the Federal Government, and all sides hope that spending bills for
the remaining agencies will pass in the very near future.  In particular,
agencies that have the greatest responsibility for person-to-person service
-- the Social Security Administration, the Internal Revenue Service, and
the Veterans Affairs healthcare programs, to name just three -- could not
be expected to bear double-digit pay increases without the most thorough
review and adjustment of their budgets.

Finally, despite the current budget surpluses, the Federal Government
continues to face substantial budgetary challenges.

When my Administration took office in January 1993, we faced the largest
budget deficit in the Nation's history -- over $290 billion in fiscal year
(FY) 1992.  By the projections of the Office of Management and Budget
(OMB), the Congressional Budget Office (CBO), and every other authority,
the deficit would only get bigger.  Furthermore, under both of these
projections, the public debt, and the interest burden from that debt, were
expected to be in a vicious upward cycle.

While we have pulled the budget back from this crisis, and in fact we have
enjoyed the first budget surpluses since l969, adverse budgetary forces are
just a few years away.  The Social Security system will come under
increasing pressure with the impending retirement of the large baby-boom
generation.  In addition, the aging of the population will increase costs
for Medicare and Medicaid.  If we become complacent because of the current
budget surplus and increase spending now, the surplus could well be gone
even before the baby-boom generation retires.

My Administration has put these budgetary challenges front and center.  A
15 percent Federal pay increase, built into the Government's cost base for
all succeeding years, would be a dangerous step away from budget
discipline.  The budgetary restraint that produced the current budget
surpluses must be maintained if we are to keep the budget sound into the
retirement years of the baby boom generation.

Therefore, I have determined that the total civilian raise of 3.7 percent
that I proposed in my 2001 Budget remains appropriate.  This raise matches
the 3.7 percent basic pay increase that I proposed for military members in
my 2001 Budget, and that was enacted in the FY 2001 Defense Authorization
Act.  Given the 2.7 percent base salary increase, the total increase of 3.7
percent allows an amount equal to 1.0 percent of payroll for increases in
locality payments.

Accordingly, I have determined that:

     Under the authority of section 5304a of title 5, United States Code,
     locality-based comparability payments in the amounts set forth on the
     attached table shall become effective on the first day of the first
     applicable pay period beginning on or after January 1, 2001.  When
     compared with the payments currently in effect, these comparability
     payments will increase the General Schedule payroll by about 1.0

Finally, the law requires that I include in this report an assessment of
how my decisions will affect the Government's ability to recruit and retain
well-qualified employees.  I do not believe this will have any material
impact on the quality of our workforce.  If the needs arise, the Government
can use many pay tools -- such as recruitment bonuses, retention
allowances, and special salary rates -- to maintain the high-quality
workforce that serves our Nation so very well.


                              WILLIAM J. CLINTON

                                 # # #

       Locality-Based Comparability Payments Under Alternative Plan

                                              Comparability Payment
          Pay Locality (1)                         Effective January 2001
          Atlanta    MSA                                  8.66%
          Boston CMSA                                   12.13%
          Chicago CMSA                             13.00%
          Cincinnati CMSA                               10.76%
          Cleveland CMSA                            9.17%
          Columbus MSA                               9.61%
          Dallas CMSA                                     9.71%
          Dayton     MSA                                  8.60%
          Denver     CMSA                               11.90%
          Detroit CMSA                                  13.14%
          Hartford MSA                                  12.65%
          Houston CMSA                             16.66%
          Huntsville MSA                             8.12%
          Indianapolis MSA                                7.89%
          Kansas City MSA                                 8.32%
          Los Angeles CMSA                              14.37%
          Miami CMSA                                    11.09%
          Milwaukee CMSA                             8.91%
          Minneapolis MSA                               10.30%
          New York CMSA                            13.62%
          Orlando MSA                                     7.71%
          Philadelphia CMSA                             10.80%
          Pittsburgh MSA                             8.54%
          Portland CMSA                            10.32%
          Richmond MSA                               8.60%
          Sacramento CMSA                               10.73%
          St. Louis MSA                                 8.00%
          San Diego MSA                            11.31%
          San Francisco CMSA                            16.98%
          Seattle   CMSA                                10.45%
          Washington CMSA                               10.23%
          Rest of United States                                7.68%

NOTE: MSA means Metropolitan Statistical Area and CMSA means Consolidated
     Metropolitan Statistical Area, both as defined by the Office of
     Management and Budget (OMB) in OMB Bulletin 99-04, June 30, 1999.

(1) Pay localities as defined in 5 CFR 531.603.

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