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Senior Defense Officials Discuss DOD Updates on Overseas Cost-of-Living Allowance Adjustment Process

SENIOR DEFENSE OFFICIAL: Thank you. Good afternoon, everyone. Appreciate your patience.

We wanted to make sure that we took the opportunity to speak with you all, to talk about the fact that the Department of Defense will be really seeing updates to the OCOLA adjustment process today. These adjustments are based on the National Defense Authorization Act for Fiscal Year 2023, and I wanted to provide you a little bit more detail on what that means. So just to make sure that we are leveling for everyone, what we mean when we talk about OCOLA is the Overseas Cost of Living Allowance. It an allowance that ensures our service members who are assigned to a permanent duty station outside the contiguous United States, or OCONUS, such as foreign countries, U.S. territories, Alaska and Hawaii maintain the same level of purchasing power as service members stationed in CONUS locations so within the contiguous United States.

So, what do we mean by that? What we're talking about within OCOLA is that we set rates that ensure that service members do not have less purchasing power overseas but not more either. And so, the way that works is that OCOLA pays a differential to service members in OCONUS locations for increase cost of buying the same non-housing goods and services such as groceries and clothing, either bought in CONUS. Based upon changes in the cost-of-living data and currency fluctuations, OCOLA rates usually increase or decrease over time, and we based OCOLA calculations on an assessment of three main data points. The first of the tri-annual living pattern survey and it measures where service members shop and the proportion that shopping that occurs either on a military installation, such as commissaries or exchanges or at local community outlets or even from online purchases.

The second part of the calculation is looking at an annual retail price schedule, and that measures the cost of a 150-item market basket of those non-housing goods and services. So again, things like groceries and clothing. And it looks at local differences in costs for utilities and housing that are accounted for separately through the housing allowance. So again, just want to make sure that folks understand that utilities and housing, those are things we look at separately under either BAH or OHA, what are we talking about here are things like goods and services such as groceries or clothing. And so again we take a look at both two different surveys, one we do every three years and one that we do annually at where service members are shopping.

And then we also look at foreign locations and currency fluctuations that effect the relative purchasing power of the foreign currency as compared to the U.S. dollar. And so, we take all of this information and that's what helps us to establish what the rates will be. There's about 230,000 service members that receive OCOLA to help offset overseas prices for those housing goods and services, and it's a non-taxable supplemental pay allowance. It's not a fixed amount as I mentioned and it does vary based on location, pay grade, years of service and number of dependents. So, there's a lot of factors that go into what each individual service member will receive. When we saw that OCOLA rates began to fall in 2022, to take care of service members and their families, the department acted to slow the rate of decreases and in December of '22 we implemented a 90 day pause on those decreases.

Service members stationed overseas did not sustain any decreases during that time, however we did continue to apply increases as appropriate. And then in December, Congress also acted, and they restricted the ability of the department to impose decreases to once every six months, and so that is what we've been looking at over the last several months is how do we actually implement the new requirements that were dictated by Congress in the Fiscal Year '23 in the NDAA, and that's what we're restarting this year is our approach under that new methodology. Since those decreases have been on hold since December or '22, we will not be restarting decreases as appropriate with the effective date of May 15th and then the second wave would come November 15th. Service members and those effected OCONUS locations would see their initial decreases in their June 1st, 2023, pay cuts. What does that mean?

It means that we're announcing the rate changes, they'll be effective on the 15th of May and then they would see initial decreases in their June 1st pay cut. It’s important to acknowledge that in January service members received a 4.6 percent increase in basic pay, as well as an approximately 11.2 percent increase in basic allowance for subsistence. And even those locations where OCOLA rates will start to decline, pay in 2023 is still higher than it was in 2022, so most service members will still have a higher take home pay even with OCOLA reductions than what they had in 2022. And Secretary Austin signed a memo taking care of our service members and family that also added additional actions to help service members and their families with unique challenges of military life and there's many different ways that we do that.

While we are announcing certain OCOLA reductions today, the department overall, with respect to the increases in pay that we saw in January as well as some of the other programs that we have. I do believe that our regular military compensation is strong and for service members that may be particularly struggling with many different programs to work with them and make sure that we understand and address their needs where possible. Now I'll take a pause and I'll turn to my colleague to see if there's anything else you'd like to add.

SENIOR DEFENSE OFFICIAL: So today the new overseas COLA process is being announced, will comply with the NDAA for F.Y. '23. As Senior Defense Official mentioned, we have the living pattern survey and the retail price schedule where we collect data on where members shop and what the prices are there, refer that as the data piece. We also deal with currency fluctuations. All of those pieces will continue under the new overseas COLA process just as they have in the past. When we see increases in the data or in the currency fluctuations, they will be implemented immediately. Decreases under the National Defense Authorization Act are limited to May 15th to November 15th as Senior Defense Official said with people seeing results in the June 1st and December 1st paychecks. We will be implementing decreases that are greater than two points due to changes in data, the living pattern survey and the retail price schedule.

Fifty percent on May 15th and the remaining 50 percent of that decrease due to data November 15th. For foreign currency fluctuations, when they happen, we will be implementing those in full on the May 15th and November 15th dates. We'll be notifying combatant command at least 30 days prior to implementing any of the data decreases, so that the members have -- they have the opportunity to get the message out and push out the opportunity to prepare. We'll be publishing this afternoon examples of what the new overseas COLA process will look like and permutations on when currencies go up and they go down and all of this will happen. So more will be coming here shortly. 

We're also announcing this afternoon the new appeal process, to the extent that when we conduct a living pattern survey and the retail price schedule, we see data decreases of 10 points or more, which is unusual. Eight points or fewer are fairly common, 10 points or more is significant. We will now be giving the combatant commands the opportunity within 45 days of the announcement to submit an appeal to request appeal of the case. They need to be submitting a business case that supplies sample data. In other words, why would new data collection now give us a different result than we received before, was there perhaps a price spike in these non-housing goods and services. Was there perhaps a major retail outlet, store company change that closed? That now is there a significant shift in how members shop or where they shop.

If it’s approved, we'll be authorizing new data collections, for them that will commence almost immediately, but I want to reiterate again what Senior Defense Official said that is with the new OCOLA process, the appeal process and the decreases that will be coming shortly. Even with that, members received the 4.6 percent basic pay increase in January, a 12.1 percent on average increase in basic allowance for housing and 11.2 percent increase the basic allowance for subsistence. And as a result, many of these members even with the overseas COLA decreases will still be better off in 2023 than they were in 2022.

SENIOR DEFENSE OFFICIAL: I think, you know, one of the natural questions to ask is during this time of, you know, economic fluctuations: how is it that OCOLA could possibly be going down? And again, remember that OCOLA is a relative pay, so it's relative to that kind market basket is good of what we would pay for those 150 items here in the United States. So OCOLA reductions were and are largely being driven by higher inflation rates here in the contiguous U.S., as compared to many of the OCONUS locations, as well as the strengthening of the U.S. dollar in many foreign currencies. And that is what really underpins why we see these rate reductions in some of these overseas locations is because of inflation and that strengthening of the U.S. dollar.

STAFF: Okay, and with that we'll open it for questions. 

Q: Thanks so much. What are some of the locations where OCOLA is going to be decreasing?

SENIOR DEFENSE OFFICIAL: Many of the locations that we will see initially will be in areas such as Hawaii and Guam, Japan, several locations in the INDOPACOM theater. Although we are seeing some fluctuations as well in other locations in Europe and Australia due to either the price surveys or due to currency and exchange rate changes. One of the reasons we see perhaps some more of these in the INDOPACOM region is because we had taken a pause initially in the fall when we started looking at some of the rate changes in that area. And while we evaluated that, we didn't lay into effect any additional decreases, at the time we were still implementing decreases in other areas such as Europe. But for example, Germany had already absorbed their decreases and so what we are seeing with more locations in INDOPACOM this time around is just, kind of, a natural next step to making sure that we're ensuring parody across all of the theaters in terms of the OCOLA adjustment between '22 and '23.

Q: Are there any locations where OCOLA is going up?

SENIOR DEFENSE OFFICIAL: That's an interesting question but let me reframe your question I think, and when we're announcing the decreases for May 15th, that's really because we've been holding the decreases and not implementing those. We've been taking care of our service members and their families and when the data has reflected increases or the currency fluctuations have reflected a need for increases, we've been increasing those all along. And we have not stopped and so that's why when we talk about May 15th, many of what we're doing right now are decreases but that's only because most of the increases have already been implemented and members have already been benefiting from that. There is one location -- looks like Singapore will probably go up slightly. but we have --

SENIOR DEFENSE OFFICIAL: Most of the increases have been occurring over the last several months and just been holding the decreases.


Q: Hi, thanks so much for doing this. I've got one quick question and that's just outside of the appeal process that commanders can undergo, is there any way for bases to push back against, you know, these -- these decreases in the cost-of-living allowance? And I guess, kind of, in tandem with that, does the new equations account for sporadic things say regarding utilities in Europe that we saw or things that happen suddenly?

SENIOR DEFENSE OFFICIAL: I think a couple of different points in there. So, one of the ways that service members actively contribute to the rate setting process is through participation in the surveys. So that's one of the ways that they are able to help inform where they're shopping, what they're buying, whether as Senior Defense Official noted, there's been a major change in the retail outlet that was a place that they were going, that for some reason changed. We saw some fluctuations \on the basis of that over COVID, and so that's one of the ways that they have to inform the rate setting process. The rate setting process itself has been relatively the same for a number of years. It's a strong methodology that's been reviewed from both an approach and the technical accuracy as standpoint several times. Although we are including another review of the methodology and the QRMC this year.

It's a very similar process to the way that, say the State Department or the Bureau of Labor does the same thing. So, it’s very consistent across the Federal government. Should service members have a view that the rates are somehow not in alignment with what they're seeing on day-to-day basis, they have the means by which they can provide feedback through their combatant commands. That information does come to us and that helps inform, you know, some of the back and forth. You mentioned utilities. I should emphasize that again, utilities and housing are a separate program line from OCOLA. OCOLA is focused on those non-housing costs such a groceries or entertainment and food and clothing.

Housing and utilities are a separate program line and we do have and have seen adjustments to those over the course of the last year and Senior Defense Official mentioned some of the significant increases we saw there. If we see all of a sudden, say a spike in utilities, say in Germany or another location we do have means in which to evaluate what caused that, whether it was a moment of time or whether it looks like it’s going to be continuous, and we have the ability to make adjustments.

SENIOR DEFENSE OFFICIAL: And in fact, we have made adjustment to utilities throughout many places in Europe and around the world, largely due to the activities in the increases that we've seen in Europe, utility cost due to what's going on in Ukraine. So, our team has been actively working with the combatant commands and with the country coordinators to collect new data and we have made a significant number of utility rate adjustments and members have already seeing those and have been seeing those in their paychecks.

Q: Can you explain why you all have been holding off on the decreases at this time?

SENIOR DEFENSE OFFICIAL: Sure. When we noticed the aberrational effects of the OCOLA decreases, in 2022. Largely because CONUS inflation was higher than OCONUS and because the U.S. dollar strengthened significantly over 2022 as compared to many foreign currencies. We were a bit concerned about the OCOLA decreases. So, the first step we did was we took an approach to mitigate the effects of the decreases, and we began limited the decreases based on data to no more than two points per month. We were still seeing continued angst over the decreases and on December 8th of 2022, Secretary Austin implemented a 90 day pause on OCOLA decreases that were a result of data, living pattern survey and retail price schedule to give us some breathing room to be able to go and understand what was happening and what should the department do and how should we react.

On the 23rd of December the Congress passed the National Defense Authorization Act for F.Y. '23 and Section 617 imposed further restrictions on our ability to reduce OCOLA rates and limited us to only reducing OCOLA one time, every six months. The announcement today is our implementation of Section 617 saying that there will be changes and the first set of reductions will be effective May 15th and appearing in the June 1st paycheck. Does that answer the question you're asking?

Q: Yes. Thank you.

SENIOR DEFENSE OFFICIAL: Yes, I just want to thank you all for taking the time to understand this. I know it can seem complicated and I'm really impressed by the quality of the questions that everyone has been asking today. We are making available certain information public. There's information we're providing senior leaders, as well as to all levels of the command chain to make sure that they're well prepared to answer questions from service members and you'll have access to many of those same materials. And you see in the materials one of the things that we do is just again emphasize what is OCOLA because we recognize that many folks just may not understand what the purpose of it is and really what goes into those calculations and what it's designed to pay for. Just like you all have asked questions today, can often be confused with things like housing or rent or utilities, we want to make sure that we clearly explain that is something that we deal with in other program lines.

You'll see within the products that we really emphasize that due to some of the additional pay increases that service members realized in the early part of this year, that in many cases service members still will have more take home pay, even with these OCOLA reductions than they did in 2022. And certainly, that will vary for each individual family, but we did provide an example for you all in one of the materials that you'll receive that just briefly goes through for our members stationed in Oahu, such as an E4 with three years of service and two dependents. In 2022, their monthly net income was about $5,775 and now with the realized reduction in May, they might see a slight decrease in that OCOLA but ultimately their monthly net income would still be greater than 2022 and they would see a net game of $488. And that's just something we want to emphasize is that while it's never easy to make adjustments downward, that certainly the department and Secretary Austin is very committed to making sure that we understand the challenges service members may be experiencing. We're focused on taking care of people, certainly we are seeing the vast majority of service members will receive still more take-home pay based upon those earlier increases in the year.

And then we continue to make sure that we look at each unique family situation, some may qualify for basic needs allowance. We have still the ability to look in-year as to whether there's appropriate BAH or overseas housing allowance adjustments that we need to make based upon data coming in. For those that may be experiencing financial strain due to a move, we have the increase and dislocation allowance for service members and pay grade E1 through E6 to offset some of those expenses for PCS moves.

And there's just many different things within, kind of, our menu of paying compensation that we have to support our service members and families should they be experiencing a challenge and certainly our counselors that are out there are in a position to be able to advise and support should service members be experiencing a challenge.

So, thank you very much. We appreciate your support today and please work with (inaudible) should you have any follow-on questions. Thank you so much. Take care.