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U.S. Department of State April 1999 Quarterly Report Indexes of Living Costs Abroad, Quarters Allowances, and Hardship Differentials (Technical Notes)

Technical Notes for April 1999 Part A - Living Quarters Allowances The U.S. Government provides civilian employees recruited in the United States for service in a foreign area with either free government-acquired housing or a living quarters allowance. The provision of free housing or a quarters allowance enables employees to carry out official duties properly, regardless of housing shortages and related adverse local conditions at some posts. It also represents the principal financial inducement to foreign service. Employees provided government quarters are not charged rent, and employees paid an allowance are reimbursed for rent and utility expenditures up to a maximum U.S. dollar amount. Employees are thereby saved normal housing costs. The quarters allowance paid each eligible employee is either the amount of actual housing costs or the allowance maximum, whichever is less. Housing costs may vary significantly for families of different income levels and family sizes. In order to cover equitably the housing costs of employees, maximum allowance rates are established for several employee grade levels and family sizes. The allowances are computed and paid in U.S. dollars. Living quarters allowances are established for over 20,000 Federal civilian employees at approximately 200 foreign posts. The annual quarters allowances published quarterly in Table 2 represent selected foreign posts where the number of employees renting private housing is sufficient to provide reliable information on foreign housing costs. Limitations and Use Living quarters allowance data are published as a general guide to housing (rent and utility) costs for Americans living abroad. It should be noted that housing costs can vary greatly within the same area due to variations in the types and quality of housing and its location and size. Private organizations do not generally reimburse their U.S. citizen employees for all foreign rent and utility costs. Such organizations may reimburse employees only for excessive housing costs relative to those of the United States. Foreign housing costs that exceed 15 to 20 percent of an employee's U.S. salary are often considered excessive by many private organizations. Privately employed U.S. citizen residents of a foreign country may be eligible for a Federal income tax exclusion or deduction from foreign earned income for excessive foreign housing costs. Tax information for U.S. citizens abroad is contained in Internal Revenue Service Publication 54. (The living quarters allowance paid to government civilian employees is not subject to Federal income tax by specific Tax Code provisions.) Housing Costs Covered The living quarters allowance rates are intended to substantially cover the typical employee's expenditures for rent, electricity, fuel, and water; taxes levied by the local government and required by law or custom to be paid by the tenant; insurance on the property or furnishings when required by local law to be paid by the lessee; and mandatory agent's fee required by law or custom to be paid to the landlord. The quarters allowance may also include the rental of necessary basic furniture and the rental of garage space for one car. Each of these rental expenses is limited to no more than 25 percent of the maximum allowance. All expenses must be within the maximum allowance established for the employee's grade level and family size. Employees who occupy a personally owned house or apartment abroad may be reimbursed for up to 10 percent of the original purchase price per year as "rent" plus actual expenses for land rent, and utilities. The total reimbursement to the employee cannot exceed the maximum allowance for which the employee is eligible. After 10 years, only land rent, and utilities expenses are reimbursed. Allowance Calculation The maximum quarters allowance amounts are established on the basis of expenditure reports (Section 960 - Living Quarters Allowance Worksheet) of U.S. Government civilian employees at the foreign post who have occupied their privately-leased quarters within the past 12 months. Each post is required to submit these reports annually and may make an interim submission whenever necessary. The information considered in establishing the maximum allowance rates includes the quarters expenditures of these employees. Changes in quarters costs since the last review, the amount of employee out-of-pocket expenditures; and the types and size of quarters occupied by employees. Atypical expenditures, such as for homeowners, shared quarters, old leases--with rental amounts significantly below those of current employees, or housing significantly exceeding standard space criteria-are omitted from the cost review. Otherwise, no specifications are made concerning the appropriate type of housing. The costs of all houses and apartments, furnished and unfurnished, varying in size and location, are combined in computing the maximum rates. For review purposes the expenditure reports are arranged into the three allowance groups, according to employee salary grade level. Housing costs converted into U.S. dollars at the prevailing exchange rate are then analyzed for each group. In reviewing allowance levels, both the arithmetic mean and median expenditures for employees with and without families in each employee group are computed and analyzed. Generally, maximum annual allowances are adjusted so that about three-fourths of the employees receiving the allowance and the majority of new arrivals in each quarters group are fully reimbursed for their housing costs. New arrivals are those employees occupying their residence within 6 months of the survey period. The resulting allowance rates are designed to cover at least 80 percent of the employees for all of their rent and utility expenses. At posts with only a few employees, average expenditures may not be meaningful, and other factors such as the experience of new arrivals and an analysis of the housing market may be more important in reviewing allowance levels. Living quarters allowance levels are generally increased only after (1) a review has shown that employees have entered into private rental contracts which, with utility costs, exceed the established allowance levels; and (2) analysis has shown that the type and size of quarters are appropriate for single persons and families of different sizes. Allowance Groups Allowance maximum rates are established for four groups covering specific salary grade levels in the various Federal civilian personnel systems. As of January 1999, the four groups refer to the following approximate salary ranges (excluding any overseas allowances and premiums): Group 1 $124,000 - $125,900 Group 2 $ 62,000 - $123,999 Group 3 $ 34,000 - $ 61,999 Group 4 Under $34,000 Salary group 1 includes only Ambassadors and Chiefs of Mission, who are almost always provided official government leased/owned residences. Consequently, allowance rates are not computed for this group but are prescribed at double the salary group 2 family level. The prescribed maximum allowance rates for salary group 1 are not published. Within each salary group except group 1, maximum allowances are computed for single persons and for 2-person families. The single-person allowance rate covers employees who have no family living with them. The family rate covers employees who have one family member living with them. For employees who have larger families at the post, the maximum annual allowances for families of 2 persons are increased by the following additional percentages:

Members of Family (including employee) Additional Percentage 3 - 4 10 percent 5 - 6 20 percent 7 or more 30 percent

In a few cases, employees may receive quarters allowances greater than the maximum for their particular quarters group. Among the employees included in salary group 2 are Deputy Chiefs of Diplomatic Missions and Principal Officers of Consular Establishments, who are required by their positions to obtain quarters suitable for official entertainment. When the group 2 maximum allowance does not cover the cost of housing required for representational events, these individuals may be reimbursed for costs up to 50 percent more than the allowance for two persons, when determined necessary by the Chief of Mission. In addition, employees in group 4, who have 15 years or more of government service, may be placed in salary group 3 at the discretion of the head of the Federal agency. This permits the discretionary use of the higher allowance rate for specific employees who rise in seniority and responsibility at a post abroad. The exchange rates used to calculate the allowances are reviewed regularly by the Office of Allowances. When significant changes occur, the allowance maximum rates are adjusted. Living Quarters Allowance Table reflects interim allowance adjustments as well as allowance revisions based on annual or interim housing expenditure reports. The foreign currency exchange rates used to calculate the allowances are published along with the allowance rates. Allowance levels are not adjusted for exchange rate changes. Instances where there is a significant change in currency and employees experience severe out-of-pocket expenses, interim housing expenditure reports can be submitted. Survey Locations Living quarters allowances are published for foreign posts where a sufficient number of employees rent private housing to provide adequate information on local housing costs. Foreign cities where all employees occupy government-provided housing or only a few employees rent private housing are not included in Table 2. The published allowances should not be used as indicators of housing costs for other cities in a country without appropriate caution, because housing costs can vary greatly from city to city within the same country according to the availability of adequate housing. Furthermore, because housing costs can differ significantly from the overall costs of other goods and services, the indexes of living costs abroad should not be used as indicators of housing costs for cities not published. For example, at some posts where the overall cost of living is well below the Washington D.C. level, housing costs may be relatively high because of severe shortages of adequate dwelling units. The Government Program The living quarters allowance program is administered for all Federal agencies through the Department of State Standardized Regulations (Government Civilians, Foreign Areas)(DSSR). Employee eligibility for the allowance is described in Section 031.1. The submission of required and voluntary housing reports is explained in Section 077.2. General regulations relating to the payment of the allowance are included in Section 130. The living quarters allowance rates established for all foreign posts are listed in Section 920, which is published every 4 weeks. The Standardized Regulations are available by subscription from the U.S. Government Printing Office. The indexes are also available on the internet at www.state.gov/perdiems/quarterly_reports/index.html. A sample copy of Section 920 may be requested from the Office of Allowances. Part B - Indexes of Living Costs Abroad Adjustment for Exchange Rate Changes Department of State indexes of living costs abroad are computed at the currency exchange rate in effect as of the date of survey or index computation. Salaries and cost-of-living allowances for Americans employed abroad are generally established in U.S. dollars. For this reason, periodic allowance revisions for currency fluctuations are usually necessary to provide employees with the same purchasing power until new survey results are available and published. New survey indexes will reflect inflation abroad and in Washington, D.C., as well as more current exchange rate data. Foreign currency exchange rates are reviewed regularly by the Office of Allowances. When the exchange rate for a country has changed enough to alter the government post allowance, the U.S. Government index is recomputed and the post allowance appropriately revised. The Department of State does not publish these interim U.S. Government indexes or any comparable local index adjustments. Current post allowance levels for Federal civilian employees are published in Section 920 of the Department of State Standardized Regulations (Government Civilians, Foreign Areas)(DSSR). All indexes in Table 1 are original survey indexes computed by the Office of Allowances on the basis of Retail Price Schedule submissions. The local index can be recomputed to approximate the effects of a new exchange rate by holding constant the 15 percentage points of the local index that represent consumer expenditures outside the foreign country of assignment. These items include some vacation expenses, automobile purchase, medical insurance, and household furnishings. The suggested recomputation method limits the exchange rate adjustment to those expenditures typically made in local currency. The following formula can be used to show approximately what the local index would have been at the original survey date had all prices been converted to U.S. dollars at the new exchange rate: Suggested Formula: New local index = 15 + (local index-15) x (local exchange rate) (new exchange rate) Example: The April 1998 local index for Paris is 144, at the exchange rate of Franc 5.97. The following calculations would be performed to recompute this index to Franc 5.45: New Paris Index =15 + (144-15) x 5.97 5.45 = 15 + (129 x 1.0954) = 15 + 141 at Franc 5.45 = 156   For posts in countries with very high rates of inflation, allowances may not warrant a reduction for currency exchange rate changes. However, a substantial devaluation may require some interim allowance adjustment until a new price survey is received and reviewed. The U.S. Government index cannot be recomputed using this simple formula because the government index generally reflects nonlocal currency purchases to a greater extent, and these costs must be held constant when adjusting for new exchange rates. The Office of Allowances recomputes the U.S. Government index by determining the exact proportion of total expenditures that are made in local currency and adjusting only that amount for the change in exchange rates. The resulting U.S. Government allowance levels are published in the Department of State Standardized Regulations (Government Civilians, Foreign Areas) (DSSR) every 4 weeks. A complete and accurate interim allowance revision would require an index adjustment for: (1) the new exchange rate; (2) the probable effect of the revaluation on prices of imported goods purchased locally by Americans and on American purchasing patterns; and (3) price changes at the foreign post relative to price changes in Washington, D.C., since the last survey. The full effects of a currency revaluation are not immediately apparent and may not be known for several months. Furthermore, correction for relative price changes since the previous survey date cannot be made easily. Using the relative trends in national Consumer Price Indexes can produce an interim adjusted index significantly at variance with new survey results because survey items, expenditure weights, and retail outlets sampled for the national Consumer Price Index are not usually comparable to those for the American living cost measures. Under these circumstances, there are no truly reliable interim indexes of living costs until the foreign post completes a new Retail Price Schedule and the Office of Allowances computes new indexes. The Payment of Cost-of-Living Allowances The U.S. Government pays a cost-of-living allowance to its American civilian employees at foreign locations where the post allowance index is 103 or above. The post allowance is calculated by applying the index to each employee's spendable income. Spendable income is defined by the Department of State as that portion of base salary available to an employee for the purchase of food, household operations, home furnishings and equipment (including telephone), apparel, transportation (including auto operations and purchase), health care, entertainment, personal care items, reading material, education, alcohol, tobacco, and miscellaneous goods and services. To avoid minor adjustments in allowance payments, post allowance indexes are grouped into ranges, and the percentages to be applied to spendable income are based on the approximate midpoints of each index range. The percents applied to spendable income used by the government are shown in Table A. The following example illustrates the necessary steps to determine a cost-of-living allowance for a family of three with an annual salary of $50,000, at a location with a local index of 158 (Washington, D.C. = 100): (1) Percent to be applied to spendable income is 60 percent (Table A). (2) Spendable income for a family of three at the $50,000 salary level is $24,600 (Table B). (3) Annual cost-of-living allowance is 60 percent times $24,600 = $14,760. Table A: Local Cost-of-Living Index and Percent Applied to Spendable Income To Determine Post Allowance

Local Index Percent applied to spendable income Local Index Percent applied to spendable income 103-107 5 166-175 70 108-112 10 176-185 80 113-117 15 186-195 90 118-122 20 196-205 100 123-127 25 206-215 110 128-132 30 216-225 120 133-137 35 226-235 130 138-145 42 236-245 140 146-155 50 246-255 150 156-165 60 256-265 160

 

The spendable income table used by the Department of State, as of October 6, 1991, is shown in Table B. This table was developed by the Department of State, using consumer expenditure data for all urban U.S. families from Bureau of Labor Statistics data for 1987-88, with detailed tabulations for income ranges up to $90,000 and above.

Table B.
Average Annual Spendable Income
By Salary and Family Size

 

Number of Persons in Family
Annual Base Salary	One	Two		Three	Four	Five	Six or More
$139,000 and over	$31,700	$35,600		$39,600	$41,600	$45,500	$47,500
132,000--138,900	31,600	35,500		39,500	41,500	45,400	47,400
125,000--131,999	31,400	35,300		39,200	41,200	45,100	47,000
118,000--124,999	31,000	34,800		38,700	40,600	44,500	46,400
112,000--117,999	30,600	34,400		38,200	40,100	43,900	45,800
106,000--111,999	30,000	33,800		37,500	39,400	43,100	45,000
100,000--105,999	29,400	33,100		36,800	38,600	42,300	44,200
95,000--99,999	28,800	32,400		36,000	37,800	41,400	43,200
90,000--94,999	28,200	31,700		35,200	37,000	40,500	42,200
85,000--89,999	27,400	30,900		34,300	36,000	39,400	41,200
80,000--84,999	26,600	30,000		33,300	35,000	38,300	40,000
75,000--79,999	25,800	29,000		32,200	33,800	37,000	38,600
71,000--74,999	25,000	28,100		31,200	32,800	35,900	37,400
67,000--70,999	24,200	27,200		30,200	31,700	34,700	36,200
63,000--66,999	23,400	26,300		29,200	30,700	33,600	35,000
59,000--62,999	22,500	25,300		28,100	29,500	32,300	33,700
55,000--58,999	21,500	24,200		26,900	28,200	30,900	32,300
51,000--54,999	20,600	23,100		25,700	27,000	29,600	30,800
48,000--50,999	19,700	22,100		24,600	25,800	28,300	29,500
45,000--47,999	19,000	21,300		23,700	24,900	27,300	28,400
42,000--44,999	18,200	20,400		22,700	23,800	26,100	27,200
39,000--41,999	17,400	19,500		21,700	22,800	25,000	26,000
36,000--38,999	16,500	18,500		20,600	21,600	23,700	24,700
33,000--35,999	15,600	17,600		19,500	20,500	22,400	23,400
30,000--32,999	14,700	16,600		18,400	19,300	21,200	22,100
28,000--29,999	13,900	15,700		17,400	18,300	20,000	20,900
26,000--27,999	13,400	15,000		16,700	17,500	19,200	20,000
24,000--25,999	12,700	14,300		15,900	16,700	18,300	19,100
22,000--23,999	12,100	13,600		15,100	15,900	17,400	18,100
20,000--21,999	11,400	12,800		14,200	14,900	16,300	17,000
18,000--19,999	10,700	12,100		13,400	14,100	15,400	16,100
16,000--17,999	10,100	11,300		12,600	13,200	14,500	15,100
14,000--15,999	9,400	10,500		11,700	12,300	13,500	14,000
Under 14,000	8,600	9,700		10,800	11,300	12,400	13,000

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