of grade for all positions at that level. The departments and agencies would determine in the grade below 15, and consequently the rate that would be paid in those jobs.

Mr. GROSS. But going above $20,000?

Mr. MACY. Well, regardless of the rate, they would determine the grade, and that in turn would indicate the rate. Mr. GROSS. Who would gain?

Mr. MACY. The employing agency or Congress.

Mr. GROSS. Yes. So Congress would, in fact, lose control, would it not, except for the allocation of supergrade positions?

Mr. MACY. It would not be any different from positions elsewhere in the United States, except that we would have a higher range of roughly 25 percent similar to the allowance that is paid at the present time.

Mr. GROSS. In two or three places in your statement, Mr. Macy, you refer to pay increases in the future. Are you here today advocating more pay increases in the future or

Mr. MACY. I do not believe that is the purpose of the hearing. Mr. GROSS. I know, but

Mr. MACY. I have advocated one that is still pending, yes.

Mr. GROSS. Yes, I know.

Mr. UDALL. I would hope you might persuade my friend to support this one that is pending now.

Mr. MACY. I am sure that he will.

Mr. GROSS. Especially a nice bite for Members of Congress.

Mr. MACY. Yes, sir. I think that is a very commendable portion of the bill.

Mr. GROSS. Well, we could argue about that.

On page 9, twice you refer to-in one place you say that, “* * * in some years, at least, they will be offset by pay increases"; and again you say, on the same page, "*** the next salary increase enacted ***" I just wondered if this was to be the cure-all in the future for discrepancies and differentials. We just enact another pay bill. You do not mean that, I am sure.

Mr. MACY. If we look at this historically, we will see that since World War II, there has been a pay increase authorized by Congress every 2 or 3 years.

Mr. GROSS. Yes.

Mr. MACY. Under the Salary Reform Act, there is a provision that there be an annual review of salaries and, although this in no sense commits the President or the Congress to enacting a change on an annual basis, there will be, under the workings of this principle, an annual consideration of the salary picture.

Mr. GROSS. I will tell you; if you think the cost of living is going to go up and up and up in this country

Mr. MACY. No, I do not. I think it has been quite stable for quite a number of years.

Mr. GROSS. But we have had salary increases, have we not?

Mr. MACY. Yes, but the salary increases are not related to the cost of living. They would be related in the future to comparable salaries for like positions in the private economy. And in the private economy the salaries have moved upward on an annual average of between 2 and 3 percent.

Mr. GROSS. Yes. So that in the future, if the cost of living keeps going up as it has, the arguments are made here that they have to have salary increases in order to keep up with them, both in private industry and in the Government. So there is a direct relationship, is there not?

Mr. MACY. I think you would find that most of the increases in private enterprise are not reflections of increases in cost of living but are reflections of greater productivity and of upward movement of salary levels in the economy generally.

Mr. GROSS. Well, in some substantial industries we have escalator clauses in union contracts that take them up.

Mr. MACY. That is only true in the automobile industry.

Mr. GROSS. That is a big one.

Mr. Macy. And both parties would like to eliminate them, I am

sure.

Mr. GROSS. I do not see any sign that the cost of living is going to go down until the lid comes off-blows the ceiling off.

Mr. MACY. There has been a remarkable stabilization in the last

4 years.

Mr. GROSS. Well, I will not argue that.

Thank you, Mr. Chairman.

Mr. UDALL. Mr. Macy, I have just two quick ones, and then we will move on here. We have a number of witnesses to cover.

You indicated that, if this legislation were passed, adjustments would be made in Alaska under the section 504 authority.

Mr. MACY. Yes, sir.

Mr. UDALL. Now, would these be made on an occupational basis, a city basis, an area basis? And I ask you this because I am told that in Juneau the cost of living may be 130 percent above the United States and in Anchorage 140 percent, and in some other area may be 120 percent. Would this be a flat rate, or have you reached a determination on that?

Mr. MACY. Our preliminary determination-and I think clearly you should have our views on this-is that, based upon the salary survey, there appears to be relatively little difference in salaries paid by private enterprise at the various points within Alaska; that it would be our thinking that if this bill were enacted and if we had the authority, that what we would do would be to establish a new salary line for all statutory positions in Alaska based upon the percentage difference between the Alaska private industry rates and the nationwide private industry rates that we are using for the rest of the service. It is esti mated that, based upon the salary figures in your bill, this will be approximately 27 percent above those rates.

Mr. UDALL. I see.

Mr. MACY. This is based upon the survey conducted by the Bureau of Labor Statistics last year.

Mr. UDALL. One final question. And our next witness is one of these Treasury watchdogs from the Bureau of the Budget who may have a better answer than you do.

But I was a little disappointed that my friend from Iowa did not. ask this question.

If this bill before us were enacted, would you contemplate that the hard-pressed taxpayers of this country would save money or it would cost more money?

Mr. MACY. We would definitely save money, because we would immediately eliminate the payment of this allowance to all of those newly hired or transferred to these areas, and we would be gradually phasing out the payment of the allowance to those presently on the rolls.

Mr. UDALL. Would you care to pluck a figure out of the air; either a range of figures or an estimate that might be applicable?

Mr. MACY. You will recall I indicated that the present rates were costing about $11 million in Alaska. It would be anticipated that there would be no saving there, that the rates would be about the same, $10.4 million in Hawaii, and over a period of time that difference would be totally eliminated. Just how much would be saved the first year and in successive years I have not computed.

The same thing would be true of the $3.4 million in Puerto Rico. Mr. GROSS. Would the gentleman yield?

Mr. UDALL. Yes.

Mr. MACY. So that clearly this would constitute, Mr. Chairman, a savings in payroll dollars to the taxpayer.

Mr. GROSS. Will the gentleman yield for one observation?

In response to the chairman's remark that I had not asked the question of how much money this would save, I thought that that was implicit in your statement. And, moreover, I am beginning to hear rumors and rumbles around here that the administration is backing down to some extent upon the total expenditure in the pending pay bill. And I assume that the distinguished Chairman of the Civil Service Commission has probably had a hand in revising some of the figures in the pending pay bill, changing the effective date of it, or— this is a report or rumor-which would result in some alleged economy in the pay bill. So, coming here today, I just assumed that the gentleman was here on an economy measure.

Mr. MACY. Yes, sir.

Mr. GROSS. So I did not ask the question.

Mr. MACY. It is a great privilege to appear before you on such a question, sir.

Mr. UDALL. I want everyone to know that this subcommittee never operates on the basis of rumor. We operate only on the basis of fact. And we thank you for coming.

Mr. MACY. Thank you, Mr. Chairman. I appreciate it.

Mr. UDALL. Our next witness is Mr. Phillip S. Hughes, who is Assistant Director for Legislative Reference of the Bureau of the Budget, accompanied by Mr. David McAfee, management analyst.

STATEMENT OF PHILIP S. HUGHES, ASSISTANT DIRECTOR FOR LEGISLATIVE REFERENCE, BUREAU OF THE BUDGET; ACCOMPANIED BY DAVID MCAFEE, MANAGEMENT ANALYST

Mr. HUGHES. Thank you, Mr. Chairman.

Mr. UDALL. I understand that you have a prepared statement, Mr. Hughes.

Mr. HUGHES. I have, Mr. Chairman. It is relatively brief. But brief though it is, I think it is somewhat repetitive of Mr. Macy's presentation, and I think he told our story very effectively. And I would suggest, if you are agreeable, that the statement be placed in the record, and I will try and highlight a few points.

Mr. UDALL. You have warmed my heart. I was afraid to suggest that, and I am delighted that you did.

I do have some out-of-town witnesses whom I had hoped to get to this morning. And you may proceed to highlight it, and we will ask any questions we have.

Mr. HUGHES. All right, sir.

(The full text of the prepared statement of Mr. Hughes follows:)

STATEMENT OF PHILIP S. HUGHES, ASSISTANT DIRECTOR FOR LEGISLATIVE
REFERENCE, BUREAU OF THE BUDGET

Mr. Chairman and members of the committee, I appreciate this opportunity to testify on behalf of the Bureau of the Budget in support of H.R. 7401, a bill "To terminate cost-of-living allowances for statutory-salaried Federal civilian employees in nonforeign areas, and for other purposes.'

It is the purpose of this bill to determine the compensation of Federal whitecollar employees in Alaska, Hawaii, Puerto Rico, and the Virgin Islands on the same basis as the compensation of Federal employees in all other parts of the United States is determined. Specifically, the bill would:

(1) Repeal section 207 of the Independent Offices Appropriation Act of 1949 which provides authority for the payment of cost-of-living allowances to Federal employees in nonforeign areas.

(2) Provide for the gradual reduction of allowances, over a period not to exceed 6 years, in order that the loss of income may be offset, either completely or to a large extent, by general salary increases.

(3) Authorize the payment of higher rates, where warranted, under section 504 of the Salary Reform Act of 1962.

(4) Provide for the issuance of regulations to govern the adjustment of an employee's pay when he is promoted, transferred, or reassigned to or from a position for which increased rates are authorized under section 504. The practice of paying salary differentials to Federal employees stationed outside of the continental United States originated as a recruitment device to induce mainland people to accept oversea assignments. Prior to 1948, authority to pay additional compensation was based upon section 2 of the Brookhart Act of July 3, 1930. Since this authority was permissive, different agencies authorized various amounts of additional pay-some authorized none. In some cases the differentials were paid to all employees, while in others they applied only to employees recruited in the continental United States.

The Independent Offices Appropriation Act of 1949 (section 207) was designed to insure uniformity in determining and applying these differentials. The amount of additional pay was related to a comparison of living costs in the District of Columbia and the area for which the differential applied. The original "cost-of-living allowances" were set at 25 percent of basic salary (the maximum) in Alaska, Hawaii, Puerto Rico, and the Virgin Islands. They applied to all employees whether they were recruited locally or in the continental United States.

Since 1948, there have been significant changes in the areas to which these cost-of-living allowances apply. Alaska and Hawaii have become States and Puerto Rico, a self-governing Commonwealth. Economic development, especially in Hawaii and Puerto Rico, has resulted in the growth of trained labor forces so that the need for mainland recruitment has been reduced to a minimum. Adequate staffing of Federal agencies in these areas now depends largely upon the ability of those agencies to compete with local industry for the available labor supply-just as it does in any of the 48 mainland States.

Another pertinent development has been the enactment of the Federal Salary Reform Act of 1962. This legislation established comparability with private enterprise rates for the same levels of work as the appropriate criterion for Federal salary levels. Private enterprise salary levels, of course, take into account such factors as living costs so it is no longer appropriate to consider them separately. The Salary Reform Act also provided for the establishment of higher rates of pay where private enterprise salaries are so substantially above Federal statutory rates as to significantly handicap the Government in recruiting and retaining well-qualified personnel. This new flexibility makes it possible to adjust Federal rates on a geographic as well as an occupational basis wherever conditions warrant such action.

Present allowances and their costs are shown in the following table:

These allowances now amount to more than $25 million a year. Since the percentages are applied to basic pay rates, the dollar value rises each time the basic schedule rates are increased.

In the opinion of the Bureau of the Budget, the pay principles and flexibilities for salary adjustment established by the Federal Salary Reform Act, together with the economic changes that have occurred in the areas in question, make it inappropriate to continue the payment of cost-of-living allowances to employees in these areas.

We wish to emphasize that, with the exception of Alaska, most employees are now recruited locally. Where salaries higher than scheduled rates are needed to meet local competition, the Salary Reform Act now makes it possible, when conditions warrant, to establish special rates for nonforeign offshore areas as well as for any area on the mainland. In these circumstances, we believe the continuation of these allowances in the future constitutes an unjustifiable expenditure of taxpayer dollars.

In order to ascertain how private enterprise rates in any of the areas where allowance would be eliminated compare with mainland rates, the Bureau of the Budget and the Civil Service Commission requested the Bureau of Labor Statisties to undertake salary surveys in Alaska, Hawaii, and Puerto Rico. These surveys were conducted in the spring of 1963 using the same techniques as those used for the National Survey of Professional, Administrative, Technical, and Clerical Pay upon which national salary schedules are based. The results of these special surveys are now available. Comparing the results with mainland rates for the same period (1963), we find that private enterprise rates in Alaska are approximately 25 percent higher. In Hawaii private enterprise rates are about 95 percent of mainland rates, and in Puerto Rico only 73 percent of mainland rates. Thus, survey results clearly indicate that under the comparability principle higher rates would be justified only in Alaska.

The administration recognizes that the immediate elimination of cost-of-living allowances in Hawaii, Puerto Rico, and the Virgin Islands would work a hardship on Federal employees in these areas since it would mean a cut in take-home pay. It is proposed, therefore, that the allowances be reduced gradually over the next 6 years reductions in allowances being keyed to general pay increases over the same period. In this way there would be few, if any, actual cuts in take-home pay. Affected employees would continue to be eligible for within-grade increases and promotions so that they could still look forward in salary advancement even during the period while the allowances were being phased out.

With respect to Alaska, the cost-of-living allowance would be eliminated immediately and replaced with special rate ranges under section 504. At the present time, section 504 limits advanced salary ranges to the seventh rate of the regular schedules. This would restrict the higher rate range to about 20 percent. Since survey results suggest the need for rates higher than 20 percent, the bill would exempt Alaska from this statutory limitation and make possible adjustments more in line with comparability.

The bill would also authorize the President to have issued (by the Civil Service Commission) regulations to adjust salary rates for employees transferred or promoted to or from grades and locations where special rate ranges have been established.

For the reasons stated, the Bureau of the Budget favors this bill and urges its enactment before there is another general adjustment of statutory salary schedules.