COLA's mysteries unraveled ... some of them, anyway
Stars and Stripes December 16, 2006
KAISERSLAUTERN, Germany — The reason for giving U.S. troops stationed overseas a cost-of-living allowance is simple: It helps offset the high cost of living at expensive areas abroad.
But understanding how the allowance, known as COLA, is calculated is a mystery to most.
A drop in the allowance on Oct. 1 for most servicemembers in Europe despite a steady dollar baffled many Americans.
At the time, Steve Bridges, the director of finance operations for the Germany-based 266th Finance Command, attributed the decrease to an anticipated strengthening of the dollar to the euro. But members of the Per Diem, Travel and Transportation Allowance Committee — which sets allowances for the Defense Department — shot down that reason. Roy Sammarco, chief of the committee’s statistics branch, said the group does not set the allowance based on projections. The system is built, he added, to “keep any guessing out.”
He blamed the COLA decrease on the exchange rate.
At first glance, it didn’t make sense. How could the COLA go down when the dollar had remained steady for about four months against the euro?
In fact, after climbing to 78 cents on July 20 at military banking facilities, the dollar actually weakened. Then, on Nov. 23, the dollar plummeted to record lows against the euro, hitting the lowest level of the year on Dec. 6, when it reached 73 cents.
Yet, the troops didn’t get any extra money in their paycheck.
Maj. Brian Kehl, chief of the Accounting and Finance Operations Branch for the Ramstein-based U.S. Air Forces in Europe, said friends and neighbors often ask him why COLA hasn’t changed.
“I have yet to meet anybody that really understands the COLA process,” he said.
But even Kehl, who has a doctorate in economics from George Mason University, initially didn’t understand how the allowance could go down on Oct. 1. That’s why he contacted the committee to find out for himself.
“I was interested in what caused that happen,” he said.
Committee members travel to bases around the globe to explain to financial officials how the allowance is calculated. But when contacted for this story, they were initially reluctant to talk about how it works over the phone.
“You can say that it’s fair and you can explain it the best that you can, but it’s not going to be something that people are going to get immediately,” said Beatrice Bertucci, the committee’s chief of Overseas COLA. “It’s not easy to grasp. … We’ve been struggling with this for years.”
Here’s how it works:
Dollar amounts of individual COLA allowances vary according to a member’s rank, years in service and the number of dependents. Various factors, including surveys that establish buying patterns for servicemembers stationed at specific bases, go into how the allowance is calculated for certain areas, and the exchange rate is another one of those factors.
The committee uses a computer-driven algorithm to ensure that servicemembers maintain their purchasing power overseas while at the same time not underpaying or overpaying members over a period of time.
The system does this by comparing the rate offered at military banks to a rate set for the allowance. Instead of changing the allowance rate with the daily appreciating and depreciating exchange rate, the system accumulates the differences between the two rates. When the accumulation of that difference reaches a certain point, the system automatically sets a new allowance exchange rate.
The reason the COLA went down in October is because the system hit one of those points, Sammarco said.
But now, with the dollar near all-time lows against the euro, the COLA rate could be changing again — this time, putting more money in the troops’ pockets.
“One who has watched the currency closely can expect a change shortly,” Sammarco said.
Are you really losing money when the U.S. dollar gets weaker?
In the long run, troops really don’t lose money when the dollar rate fluctuates so wildly, officials with the Per Diem, Travel and Transportation Allowance Committee say.
Before the servicemembers’ cost-of-living allowance decreased on Oct. 1, the last time an adjustment was made was in May, when the COLA went up.
At the time, the allowance rate was set at 0.755.
Then, the dollar slowly but steadily started to rebound, hitting 0.7803 at military banks in July. That meant troops were “making money” because the allowance rate was 2.5 cents lower than the actual exchange rate.
Most people didn’t notice they were getting overpaid, said Beatrice Bertucci, the committee’s chief of Overseas COLA, and few people complain when that happens.
But by September, the accumulated difference between the allowance rate and the military bank rate — the equation used in setting the COLA — reached a threshold that forced the allowance committee to lower the COLA.
The allowance rate was readjusted to 0.775 on Oct. 1 to “buy back” that difference. The system automatically made another adjustment a month later, setting the rate at 0.783, according to information on the committee’s Web site.
What people need to understand, Bertucci said, is that there will be times when servicemembers are underpaid or are overpaid due to the rates.
For instance, when the dollar started to drop again in late November, that is when the troops started to “lose money.”
But, “over time, it balances out,” Bertucci said.
Maj. Brian Kehl, chief of the Accounting and Finance Operations Branch for the Ramstein-based U.S. Air Forces in Europe, agreed. He said you don’t have to be a math whiz to figure it out, but it’s not easy for most people to understand.
“I think it’s a very fair system,” he said. “It’s just more complicated to understand than the average person probably would really hope to have it be. But it is fair the way they have it set up.”
— Scott Schonauer