Locality percentages are frozen at 2025 levels for 2026 under Executive Order 14368, which gave a 1.0 percent base increase and 0.0 percent to locality. But the payable percentage for senior GS-15 employees in Alaska and Hawaii still changed, because the EX-IV cap itself moved from $195,200 to $197,200. Frozen rate, moving ceiling.
I The problem the Act solved
Federal employees outside the contiguous 48 states received a cost-of-living allowance under 5 U.S.C. 5941, set against living costs relative to the Washington DC area, rather than the locality pay their mainland colleagues received.
COLA had one obvious advantage and one buried defect.
| Non-foreign COLA | Locality pay | |
|---|---|---|
| Federal income tax | Not taxed | Taxed |
| Part of basic pay | No | Yes |
| Counts toward high-3 | No | Yes |
| Raises agency TSP contributions | No | Yes |
| Take-home today | Higher | Lower |
| Annuity for life | Nothing | Higher |
The consequence was a structural inequity. Two employees at the same grade and step, one in Anchorage and one in Cleveland, would take home comparable pay for a career — and the one in Anchorage would retire on a materially smaller annuity, because none of the geographic adjustment had entered the high-3.
II What the 2009 Act did
Section 1911 of Public Law 111-84, the Non-Foreign Area Retirement Equity Assurance Act of 2009, phased locality pay into the non-foreign areas identified in 5 CFR 591.205.
The design was deliberately gradual. Locality pay was phased in over three years while COLA was phased down more slowly, so that employees were not left worse off in cash terms during the transition. Employees close to retirement could elect to have COLA count toward retirement during the phase-in period — a bridge for people who would not otherwise have accumulated enough locality-bearing service to benefit.
The structural outcome:
- Alaska and Hawaii became separate locality pay areas with their own pay tables.
- Other non-foreign areas — the territories — were folded into the Rest of U.S. locality pay area.
III The 2026 rates
| Area | 2026 locality rate | COLA on top? |
|---|---|---|
| Alaska | 32.36% | No |
| Hawaii | 22.21% | No |
| Territories — Puerto Rico, Guam, USVI, American Samoa | 17.06% (Rest of U.S.) | Yes |
Both state rates are unchanged from 2025, because EO 14368 set locality increases at 0.0 percent for 2026 while giving 1.0 percent to the base table. The full mechanics are in locality pay.
IV The cap that eats the top of the scale
The headline percentage is not what every employee receives. The Executive Schedule Level IV cap of $197,200 limits total locality-adjusted pay, and in Alaska it binds well before the top of GS-15.
| GS-15 step | Alaska — actual payable | Hawaii — actual payable |
|---|---|---|
| Steps 1–6 | 32.36% (full) | 22.21% (full) |
| Step 7 | 30.03% | 22.21% |
| Step 8 | 26.51% | 22.21% |
| Step 9 | 23.18% | 22.21% |
| Step 10 | 20.02% | 20.02% |
A GS-15 in Alaska moving from step 6 to step 10 gains base pay but sees the effective locality adjustment fall from 32.36 percent to 20.02 percent — because every additional dollar of base pay pushes further against a fixed ceiling. The steps still produce more money, but far less than the headline rate implies, and the marginal value of each one shrinks. Senior GS-15 employees in Alaska face the same cap-trap logic that affects San Francisco, described in the GS pay calculator.
V COLA vs Locality Comparison
The trade in numbers. Enter your figures to see what each system delivers today and what it delivers across a retirement.
Tax-Free Now, or Pensionable Later?
Estimates only. Simplified FERS accrual at 1% per year of service; your actual annuity depends on age, service and survivor elections.
VI The territories, still waiting
Puerto Rico, Guam, the U.S. Virgin Islands and American Samoa were folded into the Rest of U.S. locality area rather than given their own, and non-foreign COLA continues to be paid on top.
So a federal employee in San Juan receives 17.06 percent locality — which does count toward the high-3 — plus a tax-free COLA that does not. It is a hybrid, and it leaves territorial employees better off than they were before 2009 but still short of the treatment Alaska and Hawaii received.
There has been long-running discussion of transitioning Puerto Rico onto a locality footing similar to the Alaska and Hawaii path, and OPM has at times signalled openness. As of 2026 Congress has not authorized it. If you are planning a career in a territory, plan on the current structure and treat any transition as a possibility rather than an expectation.
VII Which is better for you
This is arithmetic, not preference, and the answer turns almost entirely on how far you are from retirement.
The same choice, two career stages
A GS-13 step 5 at $103,049 in a 22 percent bracket, comparing a 22.21 percent adjustment paid as tax-free COLA against the same rate paid as taxable locality.
Over a career: locality wins decisively. Carried into the high-3 and accrued across 30 years of service, that adjustment adds several thousand dollars a year to the annuity — drawn for the rest of a retirement. The cumulative pension gain runs to six figures.
The employee five years from retirement sees a much narrower gap, because there is little time left for the high-3 to compound. The employee twenty-five years out is not close to a genuine trade-off.
The 2009 Act let employees near retirement elect to have COLA count during the phase-in precisely because Congress recognised that the late-career case is different. The general rule still holds: the earlier you are, the more locality pay is worth.
VIII The playbook
| Situation | What to do |
|---|---|
| Working in Alaska or Hawaii | You are on locality pay. It counts toward your high-3 — check your LES shows it as basic pay. |
| Senior GS-15 in Alaska | The EX-IV cap cuts your payable rate from 32.36% to as low as 20.02%. Model steps before assuming. |
| Working in a territory | Expect both a Rest of U.S. locality component and a separate COLA line. |
| Offered a move to a territory | Part of the adjustment will not build a pension. Compare after-tax and after-annuity. |
| Early career | Pensionable pay is worth more than tax-free pay. The compounding is not close. |
| Within five years of retiring | The gap narrows sharply. Run your own numbers rather than following the general rule. |
| Comparing two duty stations | Ask which system applies at each. Three exist and they are not interchangeable. |
| LES looks wrong | Raise it in writing. A misclassified duty station affects your annuity, not just your paycheque. |
| Hearing about a Puerto Rico transition | Not authorized as of 2026. Plan on the current structure. |
| Any location | Check whether the adjustment is inside basic pay. That one fact decides everything else. |
Understanding your own geographic pay
- Find your geographic adjustment on your LES and identify which system it is.
- Confirm whether it is inside basic pay or paid as a separate allowance.
- If you are in a territory, expect to see both locality and COLA.
- If you are a senior GS-15 in Alaska or Hawaii, check your actual payable percentage against the full rate.
- Calculate what your adjustment adds to your high-3 over your remaining service.
- Compare that against the tax you would save under COLA.
- Weigh the two by years of service remaining, not by monthly take-home.
- Verify your recorded duty station matches where you actually work.
- Check whether agency TSP contributions are computed on the adjusted figure.
- Re-check the rates each January — the cap moves even when the percentage does not.
Frequently asked questions
A cost-of-living allowance paid under 5 U.S.C. 5941 to federal employees in non-foreign areas outside the contiguous 48 states, set by reference to living costs relative to the Washington DC area. It is not subject to federal income tax, which makes it look generous on a payslip. The catch is that it is not basic pay, so it does not enter the FERS high-3 average salary and builds no annuity at all. That single asymmetry is what drove the legislative change in 2009.
Because COLA is tax-free but worthless for retirement, while locality pay is taxable but counts toward the high-3. Employees in Alaska and Hawaii were retiring with materially smaller annuities than colleagues doing identical work in the contiguous states, purely because of how their geographic adjustment was classified. Section 1911 of Public Law 111-84, the Non-Foreign Area Retirement Equity Assurance Act of 2009, phased locality pay in over three years while phasing COLA down more slowly, and made Alaska and Hawaii separate locality pay areas with their own tables.
The full locality percentage is 32.36 percent for Alaska and 22.21 percent for Hawaii. Both are frozen at 2025 levels because Executive Order 14368 authorized a 1.0 percent base increase and a 0.0 percent locality increase for 2026. Note that the full percentage is not payable to every employee: the Executive Schedule Level IV cap of $197,200 reduces the actual payable percentage for senior GS-15 employees, and the affected steps differ between the two states.
It bites earlier than most people expect. In 2026 the full 32.36 percent Alaska rate is not payable at GS-15 steps 7 through 10: the actual percentages are 30.03 percent at step 7, 26.51 percent at step 8, 23.18 percent at step 9, and 20.02 percent at step 10. In Hawaii the full 22.21 percent is not payable at GS-15 step 10, where the actual figure is 20.02 percent. The effect is that senior GS-15 employees in both states receive a smaller proportional adjustment than the headline rate suggests, and additional step increases produce progressively less.
They are included in the Rest of U.S. locality pay area rather than having their own, which for 2026 means 17.06 percent. Non-foreign COLA continues to be paid in territories such as Puerto Rico, Guam, the U.S. Virgin Islands and American Samoa on top of that. There has been long-running discussion of moving Puerto Rico onto a locality footing similar to the Alaska and Hawaii path, and OPM has at times signalled openness to it, but as of 2026 Congress has not authorized the change.
It depends almost entirely on how far you are from retirement. Tax-free COLA delivers more spendable income today. Taxable locality pay delivers less today but enters your high-3 and therefore raises your annuity for the rest of your life. Early in a career the compounding pension effect usually wins by a wide margin; within a few years of retiring, where the high-3 window is nearly closed, the immediate cash matters relatively more. This is not a preference question — it is arithmetic, and the answer changes with your service date.
Agency automatic and matching contributions are computed on basic pay, and non-foreign COLA is not basic pay, so it does not increase them. Locality pay is basic pay and does. This is a second and frequently overlooked consequence of the distinction: the employee receiving COLA is losing not only annuity accrual but also the agency contributions that would have followed a higher basic pay figure, compounded across a career in the Thrift Savings Plan.
Whether your geographic adjustment appears as locality pay integrated into basic pay, or as a separate COLA line. That single distinction tells you whether the money is building a pension or not. If you are in a territory you should expect to see both a Rest of U.S. locality component and a separate COLA entry. If anything looks inconsistent with your duty station, raise it with your servicing HR office in writing, because a misclassified duty station affects your annuity as well as your paycheque.