Proposals for a New Foreign Service Compensation System in the 110th Congress

Proposals for a New Foreign Service
th
Compensation System in the 110 Congress
Updated September 24, 2008
Kennon H. Nakamura
Analyst in Foreign Affairs
Foreign Affairs, Defense, and Trade Division

Proposals for a New Foreign Service Compensation
System in the 110^th Congress
Summary
Proponents of revisions in the Foreign Service compensation system point out
that as increasing numbers of Foreign Service personnel are going to posts of
increased hardship and danger, Foreign Service personnel serving abroad receive
20.89% less than their colleagues who are posted in Washington, D.C. due to the loss
of locality pay when serving abroad. These proponents of revision maintain that this
difference negatively impacts morale and assignment considerations, and eventually
retention also. Both the 109^th and 110^th Congresses have considered proposals to
eliminate this pay difference.
The American Foreign Service Association (AFSA) has been working for
several years with congressional supporters to change the compensation system.
Since FY2007, the George W. Bush Administration has requested funds to create a
new performance-based compensation system for the Foreign Service and eliminate
the pay differential. For FY2009, the Administration requested $34.7 million for the
first stage of a transition to pay equity. The Senate Appropriations Committee
provided sufficient funding to meet the Administration’s request in its appropriations
bill, S. 3288, reported on July 18, 2008.
The “Foreign Service Overseas Pay Equity Act of 2008,” H.R. 3202, as
amended, would eliminate the pay differences over three years. This bill was referred
to both the House Committee on Foreign Affairs (HCFA) and the House Committee
on Oversight and Government Reform (HOGR). HCFA reported the bill on July 16,
2008. An identical bill was introduced in the Senate, S. 3426, on August 1, 2008, and
was referred to the Senate Committee on Foreign Relations (SFRC). The SFRC
reported the bill, without amendments, on September 23, 2008.
The major difference between the Administration’s proposal and the current
legislation is that the Administration, while proposing to eliminate the pay difference
over two years, also seeks to develop a new performance-based worldwide
compensation system for the Foreign Service. H.R. 3202 and S. 3426 would
eliminate the pay differences over three years without reference to developing a new
performance-based system. AFSA states that the Foreign Service personnel system
is already performance-based, and the pay adjustment proposals eliminate an
unintended inequity. Others with concerns about the legislation, however, state this
is basically a pay increase for the Foreign Service and question whether increases are
needed because of the benefits and allowances Foreign Service personnel generally
receive when posted abroad. This report discusses (1) the legislative background
leading to a proposal to change the compensation system, (2) the current Foreign
Service personnel system and why the Foreign Service views it as already
performance-based, (3) an examination of why the Foreign Service and the
Administration are both requesting that Congress change the compensation system,
(4) an examination of H.R. 3202 and S. 3426, the “Foreign Service Overseas Pay
Equity Act of 2008,” and (5) some issues that Congress might be asked to consider.
This report may be updated.

Contents
Most Recent Legislative Developments ................................1
Introduction ......................................................1
Legislative Background in the 109^th and 110^th Congresses..............2
Foreign Service Personnel System.................................3
Background ..............................................3
Ranks and Functions.......................................4
Promotion System.........................................4
Impact of Locality Pay Law on Overseas Federal Service...............5
Why Change the Compensation System? ...............................6
Foreign Service Perspective: To Eliminate a Major Pay Difference
Affecting the Majority of the Foreign Service....................6
Administration Perspective: To Correct the Pay Difference and Move
Another Element of the Federal Service to a Full
Pay-for-Performance Personnel System.........................7
Foreign Service Overseas Pay Equity Act of 2008 — Summary of H.R. 3202,
as amended, and S. 3426........................................8
Foreign Service Overseas Pay Equity Act of 2008.....................8
Sec. 1. Short Title.........................................8
Sec. 2. Overseas Comparability Pay Adjustment..................8
Sec. 3. Death Gratuity......................................9
Cost of Implementation........................................10
Issues for Congress...............................................11
Is this a pay raise?............................................11
Is locality pay justified since foreign service already receive many
benefits while serving overseas?.............................12
Since the Foreign Service receives free housing when serving abroad and
they often own a home in the United States which they can rent and
build equity, should they also get a locality pay equivalent?........12
Should Civil Service employees who are detailed to an embassy be
provided a death gratuity equal to that for Foreign
Service personnel?........................................13

Proposals for a New Foreign Service
th
Compensation System in the 110
Congress
Most Recent Legislative Developments
The “Foreign Service Overseas Pay Equity Act of 2008,” H.R. 3202, as
amended, would eliminate, over three years, the pay difference between those
Foreign Service personnel serving in Washington, D.C. and those serving abroad
who are not eligible for a locality pay adjustment. This bill was referred to both the
House Committee on Foreign Affairs (HCFA) and the House Committee on
Oversight and Government Reform (HOGR). On July 16, 2008, HCFA favorably
reported the bill by voice vote. On August 1, 2008, an identical companion bill was
introduced in the Senate, S. 3426, and referred to the Senate Committee on Foreign
Relations (SFRC). On September 23, SFRC considered and reported S. 3426,
without amendments.
On July 16, 2008, the Senate Committee on Appropriations reported its FY2009
Department of State, Foreign Operations and Related Programs appropriations bill,
S. 3288. In its bill, the Senate Appropriations Committee met the Administration’s
request for funding needed to eliminate the existing 20.89% pay differential over two
years.
Introduction
At a time when 55% of U.S. Foreign Service personnel are serving at a hardship
and/or danger post, the 110^th Congress, in its closing days, may choose whether and
how to address an issue that both the Department of State and the Foreign Service
consider to be a high priority personnel issue — the elimination of a 20.89% pay
difference between service in the Washington, D.C. and service abroad for the vast
majority of the members of the Foreign Service below the Senior Foreign Service
level. The pay difference is the result of federal locality pay laws not covering the
salary of federal employees posted abroad. While opponents question the need for a
change in the compensation system because of the other allowances and benefits that
Foreign Service often get when serving abroad, proponents for the elimination of the
pay difference contend that the disparity has negative implications on the morale of
the Foreign Service, considerations about overseas assignments, and possibly
eventually on retention. Both the Department of State and the American Foreign
Service Association (AFSA), the professional association and the recognized

bargaining agent for the Foreign Service, said the elimination of this pay disparity is
very important to them.¹
Legislative Background in the 109^th and 110^th Congresses
During the 109^th Congress, Republican and Democratic leadership of both the
House Committee on International Relations and the Senate Committee on Foreign
Relations worked to resolve this pay differential issue by developing a proposal
called the Foreign Service Compensation Reform. The Administration had agreed to
the creation of a new Foreign Service pay compensation system if it were
performance-based. This proposal — developed through negotiations among the
House and Senate committees, the Administration, and AFSA — would have (1)
placed the Foreign Service compensation system on a pay-for-performance (PFP)
basis with pay adjustments made only on the basis of performance and not longevity,
and (2) eliminated the current pay difference by creating a new worldwide pay
structure at the Washington, D.C., salary level over two years.² However, reportedly
due to concerns among the House floor managers as to whether there was sufficient
support for passage,³ this proposal was not included in the final version of H.R. 6060,
the Department of State Authorities Act of 2006, which was originally intended to
carry the Foreign Service Compensation Reform proposal and a few other provisions.
H.R. 6060 was passed by the House and Senate, and enacted as P.L. 109-472.
For the 110^th Congress, the Administration, in its FY2009 budget request, urged
the enactment of legislation creating a new performance-based compensation system
for the Foreign Service along the lines of the 109^th Congress PFP compromise, and
requested the appropriation of $35.9 million to implement the first of two phases of
the new compensation system. On July 16, 2008, the Senate Appropriations
Committee reported its FY2009 State Department/Foreign Operations and related
programs appropriations legislation, S. 3288. This bill provided sufficient funding
levels to meet the Administration’s request.
On the same day, the House Committee on Foreign Affairs (HCFA) favorably
reported the “Foreign Service Overseas Pay Equity Act of 2008,” H.R. 3202, as
amended, which, without providing for a performance-based pay system, would
eliminate the pay disparity over three years. This bill, which was introduced by
Representative Chris Smith and has 29 cosponsors, was referred to both HCFA and

¹ Steve Kashkett, AFSA State Department Vice President, “AFSA Opinion Poll Results
Highlight Disturbing Trends,” AFSA News, Foreign Service Journal, January 2008, pp. 57-
61. Of the nearly 11,600 active duty, State Department Foreign Service Officers and
Specialists, 4,300 members of the Foreign Service responded to a recent AFSA poll and
indicated that 70 percent of the respondents attached “high importance” to correcting the
disparity, and 21 percent gave it “medium importance.”
² For an explanation of the details of the negotiations and the compromise reached in
developing the Foreign Service Compensation Reform proposal, see CRS Report RL33721,
The Foreign Service and a new Worldwide Compensation System, by Kennon H. Nakamura.
³ Harry K. Thomas, Director General of the Foreign Service, Wither Efforts to Close the Pay
Gap?, Unclassified State Department cable State-16887, Department of State, December

2007.

HOGR. On August 1, 2008, Senator John Kerry, with five cosponsors, introduced an
identical companion bill, S. 3426, which was referred to the SFRC. On September

23, 2008, the SFRC considered and reported S. 3426 without amendments.

Foreign Service Personnel System⁴
The Foreign Service personnel system, like the Civil Service system, has salary
ranges associated with various ranks, and within those ranges there are “step
increases” in salary that a person can receive over time, even without a promotion.
While the Administration is seeking changes to the personnel system to make it
performance-based, Foreign Service personnel believe that its personnel system is
already a performance-based system. Members of the Foreign Service point to
elements of their personnel system, such as annual promotion reviews by independent
promotion panels instead of by one’s supervisor, an “up-or-out” system with specific
time limits for promotions, and a mandatory five percent low ranking requirement
that can lead to separation from the Service that, they believe, makes it performance-
based. Former AFSA President, Ambassador J. Anthony Holmes, said, “The reality
is that the present FS personnel system, with its rank-in-person, not in-job, annual
evaluations, and competitive up-or-out system is inherently PFP already.”⁵
Background. The Foreign Service personnel system, which is separate and
quite different from the Civil Service system, was created under the authorities
provided by the Foreign Service Act of 1980 (P.L. 96-465; 22 U.S.C. 3901 et seq.).
In 2008, there are currently about 11,500 State Department Foreign Service Officers
and Specialists,⁶ with two-thirds of them serving abroad at over 260 posts and

⁴ The discussion of the Foreign Service personnel system is basically a discussion of the
State Department’s system, because most of the Foreign Service personnel are from the
State Department. All Foreign Service personnel are covered under the Foreign Service Act
of 1980 (P.L. 96-465; 22 U.S.C. 3901 et seq.) Sec. 203 of the act, “Compatibility Among
Agencies Utilizing the Foreign Service Act Personnel System,” states that agencies utilizing
the personnel system established by the Act shall administer their personnel system, to the
extent practicable, in a manner that will assure maximum compatibility among the agencies.
⁵ J. Anthony Holmes (Amb.), “President’s Views: The Pay-for-Performance/OCP [Overseas
Comparability Pay] Trade-Off: Poisoned Chalice or Win-Win,” Foreign Service Journal,
April 2006, p. 5.
⁶ At the Department of State, there are approximately 11,500 Foreign Service Officers and
Specialists. Of these, approximately 6,600 are Foreign Service Generalist Officers, and
about 4,900 are Foreign Service Specialists. Foreign Service Specialists provide a wide
range of serves from medical support to computer and communications service at U.S. posts
and missions abroad. There are approximately another 1,500 Foreign Service personnel
serving in Washington, D.C. and abroad from foreign affairs agencies other than the State
Department — Foreign Service Officers and Specialists in the United States Agency for
International Development (USAID), Foreign Commercial Service (FCS) Officers at the
Department of Commerce, Foreign Agricultural Service (FAS) Officers with the Department
of Agriculture, and those with the Broadcasting Board of Governors. Because these Foreign
Service personnel from other foreign affairs agencies are also affected by the limitations of
Locality Pay adjustments, they too experience the pay difference between service in
Washington, D.C. and service abroad. Legislation that would adjust this situation are aimed
(continued...)

missions at any one time. The remaining third is generally posted in Washington,
D.C. Typically, members of the Foreign Service spend two-thirds of their careers
abroad, serving at each post for one to three years before being assigned elsewhere
in the world. Currently, about 55% of Foreign Service personnel are serving in posts
designated as hardship and/or danger posts. Members of the Foreign Service cannot
spend more than six years at a time serving in domestic assignments. The Director
General of the Foreign Service, on a case-by-case basis, may provide a waiver of up
to two years if a member of the Service seeks to extend his or her stay in the
continental United States beyond six years.
Ranks and Functions. Foreign Service personnel carry their rank-in-person
as opposed to rank-in-position as the Civil Service generally does. Thus a member
of the Foreign Service can advance in rank on the merits of his or her performance,
while a member of the Civil Service often can only advance beyond the rank
designated for a position by successfully competing for an open position at a higher
rank. Grades or ranks within the Foreign Service are divided into two major
categories: the Senior Foreign Service (SFS), of which there are about 600
individuals, and the regular Service which is comprised of about 10,500 Officers and
Specialists. The SFS is divided into five pay categories and, like the Civil Service
Senior Executive Service (SES), requires a presidential appointment into the senior
service. The regular Foreign Service is divided into nine ranks or grades with the 01
level the highest. Most Foreign Service Officers enter the Foreign Service at the 05
or 06 levels while some Specialists may enter at lower grades. Generally entering
Officers serve for four to five years before being tenured and fully commissioned as
Foreign Service Officers, usually at the 04 rank. Generalist Foreign Service Officers
are assigned to one of five cones upon entry into the Foreign Service — Political,
Economic, Public Diplomacy, Management, and Consular. However, during their
career, they will do assignments outside of their cone.
Promotion System. The personnel system for the Foreign Service is basically
an “up-or-out” system that reviews the members of the Foreign Service annually for
promotion unless they have been promoted within the previous year. Promotion
panels, each usually consisting of four or five higher grade officers and a public
panelist, are formed each year to consider the members of the Foreign Service at
ranks of 04 and above for promotion. Those Foreign Service personnel below the 04
rank, who are neither tenured nor commissioned, receive Administrative Promotions
at the discretion of the Director General. Promotion panels are generally organized
to compare individuals in the same rank and cone. For instance, one promotion panel
reviewed 02 political officers and management officers — 160 Management and 240
Political Officers.⁷ Criteria or precepts for promotion are negotiated between the
Department and the American Foreign Service Association (AFSA), currently the
recognized bargaining agent for the Foreign Service.

⁶ (...continued)
at amending the Foreign Service Act of 1980, and so would eliminate the pay difference for
them also.
⁷ David T. Jones and Stephen T. Smith, “Preparing for Promotion Panel Season,” Foreign
Service Journal, May 2004, pp. 61-64.

Promotion panels begin by reviewing the Employee Evaluation Report files,
which can go back five years or to the previous promotion. In most cases, there are
fewer available open positions than there are individuals determined to be
promotable by the panel. The panel then rank orders those promotable to fill the slots
accordingly. After making its promotion decisions, the panel makes its
recommendations to the Secretary of State who reviews and forwards them to the
Senate. The Senate has the responsibility of approving the promotion lists developed
by the promotion panels and recommended by the Secretary of State. Promotion
panels are also required to “low-rank” five percent of those reviewed for promotion.
The panel then recommends to the Secretary of State whether those individuals
should be referred to the Performance Standards Review Board for possible
separation from the Service or should be provided a letter for the individual’s file,
instructing the individual to take career counseling.⁸
The personnel system has a promotion-required Time-in-Class (TIC) limitation
of no more than 10 to 15 years at one grade without a promotion for FS-01 through
04 depending upon the grade, and a seven years limitation at each senior rank for
members of the SFS. There is also a Time-in-Service (TIS) limitation of 27 years for
appointments to the Senior Foreign Service. If a person exceeds these TIC and TIS
limitations, the individual is separated from the Foreign Service.⁹ Because of this
system, most members of the Foreign Service leave the Service in their mid-50s at
an 01 or 02 rank after a full and distinguished career.
Impact of Locality Pay Law on Overseas Federal Service
The Federal Pay Comparability Act of 1990 excludes federal employees posted
outside the continental United States from receiving locality pay adjustments.¹⁰
Locality pay is designed to create pay comparability between federal employees and
non-federal workers doing the same levels of work within a specific geographic
locality in the continental United States.¹¹ There is no basis for comparison of
Foreign Service personnel posted abroad to non-federal workers in the United States.
As a result, Foreign Service personnel, who spend about two-thirds of their careers
posted abroad, receive less salary when they are posted abroad and less of a career
total than their Civil Service counterparts who spend a career in the United States.

⁸ See Sec. 231(b), “Expedited Separation Out,” of the Foreign Relations Authorization Act,

1998 and 1999, (P.L. 105-277; 112 Stat. 2681-826).

⁹ See TIC and TIS Rules, 3 FAM 6213.3-3 through 6213.3-5; 6213.4 and 6213.5, Foreign
Affairs Manual, Department of State.
¹⁰ 5 U.S.C. 5304(c)(4)(B), Locality-based Comparability Pay states: “Comparability
payments shall not be payable for service performed in any position which may not, under
subsection (f)(1)(A), be included within a pay locality.” 5 U.S.C. 5304(f)(1)(A) excludes
any position area outside the continental United States as a pay locality.
¹¹ 5 U.S.C. 5304(d)(1)(A) Locality-based Comparability Pay states: “compares the rates of
pay under the General Schedule...with the rates of pay generally paid to non-federal workers
for the same levels of work within each pay locality, as determined on the basis of
appropriate surveys that shall be conducted by the Bureau of Labor Statistics.”

Each year since 1990, the difference has increased every year, and by 2008, an
individual’s salary was 20.89% higher if he/she served in Washington, D.C., as
opposed to serving abroad. Proponents of revision to the Foreign Service system
indicated that the gap impacts negatively on morale and the assignments system by
providing disincentives for overseas tours. They assert that the intent of pay
adjustments such as the hardship and danger pay differentials are nullified when
locality pay is not counted. They point out that if a person were to go to a 15%
hardship post from a Washington, D.C. assignment, he/she would experience a

5.89% decrease in salary.

Why Change the Compensation System?
Both the Administration and the Foreign Service seek to remove the pay
difference issue, but they are also motivated by different considerations.
Foreign Service Perspective: To Eliminate a Major Pay
Difference Affecting the Majority of the Foreign Service
According to a 2008 AFSA survey, the top legislative issue for members of the
Foreign Service is the elimination of the pay disparity that exists between service
abroad and service in Washington, D.C., which is where most Foreign Service
personnel are domestically assigned.¹² From the perspective of many in the Foreign
Service, it is a matter of equity and of a recognition of their work as they serve
abroad often in difficult and dangerous conditions.
In 2005, as members of the Senior Foreign Service were reaching retirement,
statistics showed they were trying to serve in assignments in the continental United
States instead of serving abroad and suffering the loss of pay which could affect their
retirement savings. Thus, in 2005, the pay difference was eliminated for those in the
Senior Foreign Service. The compensation system for the Senior Foreign Service
changed to a formalized pay-for-performance system with adjustments to salary
based solely on performance, and the pay levels were brought to the Washington,
D.C. salary level regardless of where they were posted.¹³
Supporters of changing the pay system to cover the entire Foreign Service and
the Administration both argue that the pay disparity “created an increasing pay
disincentive to overseas service,.” as it did for the Senior Foreign Service prior to

2005.¹⁴ Further, even among the Foreign Service serving at the same post, only mid-

and junior-ranked personnel would suffer the pay gap while those in the Senior
Foreign Service and those detailed to an embassy would not because the pay
difference exists for only those Foreign Service personnel posted abroad who are at
the rank of 01 and below..

¹² Steve Kashkett, “AFSA Opinion Poll Results,” op cit.
¹³ Sec. 402(a), “Salaries of Senior Foreign Service members,” of P.L. 96-465, the Foreign
Service Act of 1980 (22 U.S.C. 3962(a)).
¹⁴ Budget in Brief, Fiscal Year 2009, Department of State, February 2008, p. 26.

A 2006 Government Accountability Office (GAO) study discussing obstacles
to attracting mid-level officers to hardship posts also noted the impact of the pay
difference as a deterrent to bidding for hardship assignments:
...[O]fficers and State personnel we interviewed both at hardship posts and in
Washington, D.C. consistently cited the lack of locality pay as a deterrent to
bidding at hardship positions. In 2002, we reported that the differences in the
statutes governing domestic locality pay and differential pay for overseas service
had created a gap in compensation penalizing overseas employees. This gap
grows every year, as domestic locality pay rates increase, creating an ever-
increasing financial disincentive for overseas employees to bid on hardship posts.
After accounting for domestic locality pay for Washington, D.C., a 25 percent
hardship post differential is eroded to approximately 8 percent. As estimated in
our 2002 report, differential pay incentives for the 15 percent differential
hardship posts are now less than the locality pay for Washington, D.C., which is
currently 17 percent and can be expected to soon surpass the 20 percent¹⁵
differential hardship posts.
Administration Perspective: To Correct the Pay Difference
and Move Another Element of the Federal Service to a Full
Pay-for-Performance Personnel System
The George W. Bush Administration, in its FY2009 budget, requested $35.9
million for the Department of State to fund the first step of transition to a
performance-based system and a global rate of pay for Foreign Service personnel at
grades of 01 and below. The Administration seeks to have these changes made in a^th
manner agreed upon during the 109 Congress, the “Foreign Service Compensation
Reform” proposal.¹⁶ The Administration has made such funding requests since
FY2007 “to eliminate longevity-based pay increases and institute a strictly pay-for-
performance system similar to that instituted for the Senior Foreign Service in P.L.¹⁷
108-447.” The proposal would equalize the proposed global rate with equivalent
salary levels in Washington, D.C., which includes locality pay.
Over the past few years, the Bush Administration contended that the current GS
pay framework is a “failure.” It maintained that the “one size fits all” approach of the
GS pay schedule can mask dramatic disparities in the market value of different¹⁸
federal jobs, and uses on-the-job longevity as a substitute for performance. The
Administration had once proposed repealing the current GS Schedule by 2010, and
replacing it with “a system of occupational pay groups, pay bands within those

¹⁵ U.S. Government Accountability Office, Department of State: Staffing and Foreign
Language Shortfalls Persist Despite Initiatives to Address Gaps, GAO-06-894, August

2006, p. 22.

¹⁶ See CRS Report RL33721, The Foreign Service and a new Worldwide Compensation
System, op cit..
¹⁷ Department of State’s Budget in Brief, Fiscal Year 2009, op cit.
¹⁸ David McGlinche, “Bush administration developing government wide personnel reform
bill,” GovExec.com, National Journal Group, July 7, 2005.

groups and pay for performance across the federal government. The new system
would be a pay-for-performance system.”¹⁹
At the request of the Administration, Congress developed new structures for
civilians working for the Departments of Defense (DOD)²⁰ and Homeland Security
(DHS).²¹ These personnel systems were challenged in the courts by federal employee
unions, and now the changes are currently being made in only parts of the DOD.
Thus, while agreeing that the Foreign Service pay difference should be
eliminated, the Administration continues to urge that these changes should be made
in the context of a pay-for-performance basis that would replace the current
longevity-based system.²² Because of the changes in the Congress following the 2006
elections, the drive to move the Civil Service System and the Foreign Service System
to being performance-based as envisioned by the Administration, did not achieve
majority support in the Congress.
Foreign Service Overseas Pay Equity Act of 2008 —
Summary of H.R. 3202, as amended, and S. 3426
Foreign Service Overseas Pay Equity Act of 2008. Both H.R.
3202, as amended in the House Foreign Affairs Committee, and S. 3426 are identical
in language.
Sec. 1. Short Title. “Foreign Service Overseas Pay Equity Act of 2008.”
Sec. 2. Overseas Comparability Pay Adjustment. This section adjusts
the Foreign Service salary level for ranks of 01 and below who are serving abroad,
but not in a non-foreign area,²³ to be comparable to the Washington, D.C. salary level
with locality pay. The new salary level with locality pay would be treated in the same
manner in terms of taxes and retirement and other benefits as if the individual were
serving in Washington, D.C. To reach the full Washington, D.C. salary level with
locality pay, the section provides that it shall be accomplished over three years with
a one-third increase in each of those three years. Once the overseas salary level is
comparable to the Washington, D.C. level with locality pay, the section states that the
salary levels shall remain comparable.

¹⁹ Ibid.
²⁰ See Title XI, “Civilian Personnel Matters — Subtitle A: Department of Defense National
Security Personnel System” in P.L. 108-136, the National Defense Authorization Act for
Fiscal Year 2004.
²¹ See Title VIII Subtitle E, “Human Resources Management,” in P.L. 107-296, Homeland
Security Act of 2002.
²² Testimony of Ambassador Harry K. Thomas, Director General of the Foreign Service,
Hearing on Human Capital Issues at the Department of State, Before the Senate
Subcommittee on Oversight of Government Management, the Federal Workforce, and the
District of Columbia, July 16, 2008, p. 5.
²³ See 5 U.S.C. 5941 regarding non-foreign areas.

Through the Foreign Relations Authorization Act, Fiscal Year 2003, Congress
established a system of computing the annuity of Foreign Service personnel serving
abroad to be as if he/she were serving in Washington, D.C. This system, commonly
referred to as “Virtual Locality Pay,” was developed so that the individual would not
be negatively affected in the annuity computation because of a lower salary that did
not include locality pay. However, because the individual serving overseas would
have the those years computed as if he/she were serving in Washington, that
individual’s contribution to the Foreign Service retirement system also would have
to be at a level as if the individual were serving in Washington.²⁴
The Conforming Amendments of Section 2 make adjustments to the Foreign
Service retirement systems by eliminating the “Virtual Locality Pay” system. When
the Foreign Service overseas salary level reached the Washington, D.C. level with
locality pay, the “Virtual Locality Pay” system would not be required.
The “Virtual Locality Pay”system was instituted because, as the locality pay
disparity became larger, it created an incentive for Foreign Service personnel
approaching retirement to seek assignment to Washington, D.C. as opposed to going
abroad. As a person approached retirement, the lower salary levels received because
of the pay disparity for service abroad, would negatively affect annuity computations
at a time when a person would want to have the highest salary levels possible. For the
Foreign Service, these levels would be achieved by serving in Washington, D.C. An
examination of assignment bids among those approaching retirement at that time
showed that this was in fact happening. The Conference Report accompanying the
legislation explains:
Foreign Service Officers serving overseas do not receive locality pay. Thus, as
they near retirement, they have a significant financial incentive to seek
assignment to Washington, D.C. This often deprives overseas posts of the more
experienced officers. Under this section, an officer, while serving overseas, will
have his or her annuity calculated as if he or she were actually receiving locality²⁵
pay.
Sec. 3. Death Gratuity. The Foreign Service Act of 1980 currently authorizes
the Secretary of State to provide, at the Secretary’s discretion, a death gratuity to the
survivors of any Foreign Service employee who dies as a result of injuries sustained
in the performance of the employee’s duty abroad. The amount of the death gratuity
is equal to the employee’s annual salary at the time of death. This section amends the
current death gratuity provision in two ways:
^!The death gratuity is increased for Foreign Service employees who
die as a result of injuries sustained in the performance of his/her duty

²⁴ See Sec. 322, “Computation of Foreign Service Retirement Annuities as if Washington,
D.C. Locality-Based Comparability Payments were made to Overseas-Stationed Foreign
Service Members,” Foreign Relations Authorization Act, Fiscal Year 2003 (P.L. 107-228;

116 Stat. 1383-1385).

²⁵ See Sec. 322, House Conference Report 107-671 accompanying H.R. 1646, Foreign
Relations Authorization Act, Fiscal Year 2003 (P.L. 107-228).

from the equivalent of one year’s salary to the salary of a level II of
the Executive Schedule.²⁶
^!A death gratuity is authorized for employees compensated under
local compensation plans. The amount of the death gratuity for the
individual is equal to the greater of one year’s salary at the time of
death, or one year’s salary at the highest step of the highest grade on
the local compensation plan that the employee was under at the time
of death.²⁷
Cost of Implementation
On September 17, 2008, the Congressional Budget Office (CBO) issued a cost
estimate for the Foreign Service Overseas Pay Equity Act of 2008, H.R. 3202/S.
3426.²⁸ The Administration, in its February 2008 budget, requested funds to
eliminate the pay disparity in two steps, instead of three as proposed by H.R. 3202
and S. 3426. The Administration estimates that it would cost about $35.9 million in
the first year and $152.9 million (Budget Authority [BA]) to fully eliminate the pay
difference.²⁹
The CBO estimates that the direct cost of adjusting the pay difference as
proposed by H.R. 3202/S. 3426 would be $148 million in BA or $126 million in
Outlays (O).³⁰ Because the adjustment would be accomplished over three years, the
estimated cost for FY2009 would be $49 million (BA) or $42 million (O), which is
one-third of the estimated total cost.³¹
The CBO also estimated that the increase in the salary of Foreign Service
personnel posted abroad would also “lead to an increase in other benefits paid to

²⁶ At the time of this writing, the salary level for Executive Schedule II is $172,200.
²⁷ This provision, for the first time, authorizes giving a death gratuity to locally hired
employees working at a U.S. post or mission abroad. When the U.S. Embassy in Nairobi,
Kenya, was bombed in 1998, more than 220 people were killed. Among those killed were
12 American U.S. government employees and family members, and 32 Kenyan national
employees of the U.S. government. This type of provision would have authorized giving the
survivors of the Kenyan national employees a death gratuity as the American U.S.
government employees received.
²⁸ U.S. Congressional Budget Office, H.R. 3202, Foreign Service Overseas Pay Equity Act
of 2008, September 17, 2008
²⁹ Department of State, Budget in Brief, op cit.
³⁰ In a September 23, 2008, telephone conversation with Ms. Sunita D’Monte, the Budget
Analyst who prepared the CBO cost estimate regarding H.R. 3202, Ms. D’Monte said that
CBO estimates are in Budget Outlay (O) terms and that Outlays are approximately 85
percent of Budget Authority (BA). In its legislation, Congress provides the Budget
Authority for an agency to expend or obligate funds for a specific program. Budget Outlays,
however, are the actual amounts expended or anticipated to be expended for a specific
program within a set time period such as a fiscal year.
³¹ U.S. Congress Budget Office, op cit., p. 2.

FSOs, such as life insurance, health insurance, hardship pay, and danger pay.” CBO
estimates that in FY2009, this would come to a total cost of $84 million (BA) or $72
million (O). Over a five-year period form FY2009 to FY2013, the total cost of both
the salary adjustment and the increase in other benefits paid would be $1.4 billion
(BA) or $1.3 billion (O).³²
The CBO also estimated that the Section 3 Death Gratuities provision would,
based on historical data, be paid less than five times a year. This would be $588,235
BA or $500,000 (O) in a year, or a total of $1 million (O) over five years.³³
Issues for Congress
For the past several years, both the Bush Administration and the members of the
Foreign Service, through AFSA, have sought to change the compensation system of
the regular non-Senior Foreign Service personnel to eliminate the pay disparity
between service abroad and service in Washington, D.C. Some members,
congressional staff, and others engaged in this discussion also are aware that Foreign
Service personnel serving abroad often get allowances and benefits for being abroad.
For example, if a member of the Foreign Service were to serve in Mexico City,
Mexico, the person would receive a Hardship Differential of 15% of base salary; 20%
Cost of Living Allowance (20% of an amount determined by a Mexico City
“shopping basket”); an annual Education Allowance for each child; and a Quarters
Allowance to cover rent and utilities (the amount for the allowance is based upon the
grade of the Foreign Service member). These allowances and benefits can change³⁴
from post-to-post even within the same country. Further, if the member of the
Foreign Service, for personal reasons, goes to the post by him/herself, the family will
receive a Separate Maintenance Allowance. These economic questions as well as the
questions of equity, recognition of the work of the Foreign Service, impact upon the
morale, assignments process, and possibly retention are often weighed against each
other as members and their staff consider this issue.
Is this a pay raise?
Many view this proposed compensation system as a “pay raise” for the Foreign
Service and ask why salaries should be increased when Foreign Service personnel
already receive so many benefits.
Supporters for the change state that this is not a pay raise, but rather a correction
of 14 years of unintended inequity that is growing every year in the overseas
compensation for the Foreign Service. They argue that ending this pay difference

³² Ibid., pp. 2-3.
³³ Ibid., p. 3. CBO estimates a one year total in death gratuities of $500,000 and a five year
total from FY2009-FY2013 of $1 million. These number could suggest a higher five year
total than the $1 million in the report.
³⁴ See the Office of Allowances website, Department of State, Washington, D.C.
[ h t t p : //aoprals.state.gov/ Web920/location_action . a s p ? M e n u H i d e = 1 & C ountryCode=1059].

would help validate the work the Foreign Service does, including the significant
efforts and sacrifices that they and their families make in service to the United
S t at es.³⁵
Is locality pay justified since foreign service already receive
many benefits while serving overseas?
In many posts abroad, Foreign Service personnel receive a post/hardship
differential of 5 — 35% of base pay, a cost-of-living allowance, an education
allowance for their children, and a housing allowance. These can add significantly
to the base salary level. Providing locality pay for those serving abroad would
increase the compensation levels. The lack of locality pay is no longer a matter of
retirement benefits because the virtual locality pay for retirement computation in
current law already takes care of the impact on an annuity. Those who question the
need for this change argue that the Foreign Service is already well taken care of when
they serve abroad.
Those who support eliminating the pay differential contend that the allowances
exist to address specific costs and hardships unique to working for long years
overseas:
Danger pay compensates for the extreme risks of living in a country wracked by
war, terrorism, political violence or endemic lawlessness. Education allowances
make it possible for Foreign Service members to cover their children’s education
when no viable public schools are available. Cost-of-living allowances help
defray the cost of food and other daily needs of life in countries where those
things are vastly more expensive than in the United States. These were never
meant to obviate the need for the basic locality pay adjustment that all other³⁶
federal employees get.
Since the Foreign Service receives free housing when
serving abroad and they often own a home in the United
States which they can rent and build equity, should they also
get a locality pay equivalent?
Because one of the biggest benefits that members of the Foreign Service receive
is free housing when posted abroad, many believe that this should compensate for
any loss derived from the lack of locality pay. These critics point out that if Foreign
Service personnel own a home in the United States, they would be able to rent it out
while they are gone, and build equity while the government takes care of their living
quarters for free. They ask if the locality pay adjustment is really necessary.

³⁵ The American Foreign Service Association, Creating Pay Equity: Q & A Discussion
Piece, 2008.
³⁶ Steve Kashkett, AFSA State Department Vice President, “Overseas Pay Disparity:
Debunking the Myths,” Foreign Service Journal, May 2008, p. 51.

Supporters of the change in the Foreign Service compensation systemexplain
that while the housing abroad is free, members of the Foreign Service are not reaping
a financial windfall even when they own a home in the United States. These
supporters explain: “Most of our members own a home in the U.S. on which they
have to pay a mortgage, upkeep, insurance and property taxes — and renting it out
(often impossible) rarely covers all of these expenses and is itself a costly
proposition.”³⁷
These supporters for eliminating the pay difference also point out that there are
often hidden costs to serving overseas that do offset any gain from free housing.
Among these is the fact that it is often impossible for the spouse to get employment
and a salary equivalent to what could be earned in the United States. Also there are
numerous out-of-pocket costs for being overseas. These include travel not covered
by authorized visitation basis from distant economically developing nations. This
type of travel may include attending the funeral of a family member, going to a
family member’s wedding, or graduation, or seeing a family member who is suffering
from a life-threatening illness.³⁸
Should Civil Service employees who are detailed to an
embassy be provided a death gratuity equal to that for
Foreign Service personnel?
Critics of the current death gratuity provisions believe the official status of a
U.S. government employee working at an embassy should not matter in terms of a
death gratuity. The Civil Service employee detailed to an embassy and the Foreign
Service member posted to the embassy should both receive the same death gratuity,
particularly if either or both died in a similar manner such as the bombing of an
embassy. They were both serving the United States.
Supporters of the Foreign Service personnel-only death gratuity provision in the
legislation state that there is a difference between the Civil Service employee and the
Foreign Service member who dies while detailed at an embassy. For the Civil Service
employee, it was a matter of choice. For the Foreign Service Officer, service abroad
is a condition of employment. Foreign Service personnel are expected to be
“Worldwide Available,” and expected to spend the larger proportion of their career
abroad — that is why there are limits on the number of years a member of the
Foreign Service can stay continuously in the United States, and why generally a
member of the Service spends about two-thirds of his/her career abroad. They point
out that when a member of the Foreign Service dies abroad, after a long career
outside the United States, the family often does not have the same support structure
to help them when they return to the United States as they would have had if they had
lived continuously in a community. The death gratuity is intended to help the family
transition into a new life.

³⁷ Ibid.
³⁸ Ibid.