City of Alexandria, Virginia

MEMORANDUM
DATE: APRIL 5, 2006

TO: THE HONORABLE MAYOR AND MEMBERS OF CITY COUNCIL

FROM: JAMES K. HARTMANN, CITY MANAGER

SUBJECT: BUDGET MEMO #34: COLA AND MERIT VS. INFLATION

____________________________________________________________________________
This memo responds to Council’s request for an update to the comparison of both merit (step)
and cost-of-living-adjustment (COLA) pay increases to inflation.

COLA’s provide protection against the diminishing value of salaries and benefits (to the extent
these benefits are linked to salaries) due to inflation. It is useful to compare the history of
COLA’s for Alexandria employees with those for other government employees in the area. The
chart below presents a cumulative compounded rate of growth in salaries due solely to COLA’s
since 1999. The final point at FY 2008 shows how much pay has grown due to COLA’s since
FY 1999. For example, the COLA’s paid to the Federal civilian employees in the Washington/
Baltimore area since 1999 have increased pay by 42%, the greatest increase since 1999 on a
cumulative basis. Local government COLA’s increased at a lower rate from 20% to 30%.
Alexandria is at the low end of this range.
45%

40%

35%

30%

25%

20%

15%

10%

5%

0%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Fiscal Year
Alexandria Arlington** Prince William
Montgomery Federal* Balt-Wash CPI-U*

* Federal Civil Service and Baltimore-Washington CPI-U reflect the previous CY (i.e. FY 2008 is compared
to CY2007)
** In FY 2004, Arlington County employees received a 1% COLA and a 1% reduction to their retirement
contribution. This was counted as a 2% COLA since employees effectively received a 2% higher salary.

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Maintaining our competitiveness is very important, and the COLA alone is not the only factor in
making annual employee salary adjustments.

The amount provided to any individual employee for step increases reflects the impact of
successful performance reviews from one year to the next, and represents the increased value of
that employee to the organization as the employee develops additional skills and abilities. This
type of pay increase is typical for local governments. A merit pay scale also represents the
promise of a predictable pay future, assuming successful performance. This provides long-term
predictability to employees that they will earn incrementally more each year, thereby achieving
what most persons envision a career with the same employer to entail. A graduated pay scale
also serves as an incentive for employees to stay with the same employer, which is critical to
retaining knowledgeable and skilled workers in a tight labor market.

The chart on the following page shows the annual compounded COLA/Merit and Inflation1 from
FY 1999 to FY 2008. Budgeted general City employee pay in aggregate for COLA and step
increases since 1999, when inflation is taken out of the picture, has seen an increase of 11.3%
over the last nine years, an average of 1.26% increase per year above the rate of inflation. When
the FY 2007 Market Rate Adjustment is taken into account, budgeted general City employee pay
has seen an increase of 14.2% over the last nine years, an average of 1.58% increase per year
above inflation. It should be noted that this is a budgeted “average” and not what each employee
received. In FY 2006, all sworn public safety employees received a 4% market rate adjustment
(MRA) to salary; a two grade increase; plus step transition, which resulted in an approximate
5.5% average adjustment increase for all sworn public safety employees. Thus the total increase
for public safety was 22.1% over the last nine years, an average of 2.46% increase per year
above inflation. Step increases range from 5% to 0% (at scale’s end).

1
U.S Bureau of Labor Statistics (CPI-U Washington-Baltimore Regional Area- All Items, November 1996=100).
CY’s 2000-2005 were actual average inflation rates. The inflation rate for CY 2006 is assumed to be 2.5%.

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 General Schedule Compounded COLA/MRA/Merit and Inflation
45%
43.5%
40% 40.6%

35%
30% 29.3%
25%
23.1%
20% 20.6%

15%
10%
5%
0%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Fiscal Year
Prior Year Inflation (CalYr) COLA (Compounded Annually)
Market Rate Adjustment Included COLA and Merit (Compounded)

The following chart reflects the Compounded COLA/MRA/Merit and Inflation for Sworn public
safety officers, which is different from general schedule employees due to the MRA discussed
above.

Sworn Public Safety Compounded COLA/MRA/Merit and Inflation

55%
50% 51.4%
45%
40% 40.6%
35%
29.9%
30% 29.3%
25%
20% 20.6%
15%
10%
5%
0%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Fiscal Year
Prior Year Inflation (CalYr) COLA (Compounded Annually)
Market Rate Adjustment Included COLA and Merit (Compounded)

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