Pay Raise Trails Private Sector

This should be a good week for people who work for the federal government, though not as good as some might have wished. The annual base pay raise for most federal employees kicks in, increasing the median white-collar government salary in the region to $86,791.

That's not shabby. But this year's increase -- 2.64 percent in the Washington-Baltimore region -- is one of the smallest annual raises in recent years, and the raise doesn't go far in an area where the cost of living runs about 30 percent higher than the rest of the nation.

"There is no doubt that the federal government is being a little stingy this year," said Tim Priest, executive director of the Greater Washington Initiative, the economic development marketing affiliate of the Greater Washington Board of Trade. "If they continue with these meager pay increases, more and more people will shift to the private sector."

Colleen M. Kelley, president of the National Treasury Employees Union, called the 2007 raise "very disappointing." The union represents white-collar professionals at the Internal Revenue Service, Securities and Exchange Commission, Federal Deposit Insurance Corp. and several other agencies.

"This time of year especially, as employees are considering career options and deciding whether they want to stay for the long term or the short term, they build that pay raise into their decision-making," Kelley said. She fears "more and more will decide that they are going to look elsewhere."

Federal pay raises, which are negotiated by the White House and Congress as part of the government's budget, shore up the region's economy every year.

The federal employee payroll was about $19.8 billion in the Washington-Baltimore region last year, about $76 million per work day. (The payroll includes base salary, locality adjustments and special pay for certain occupations, but not the cost of benefits.)

There are about 334,000 civil service employees (not counting the military, the intelligence agencies and the U.S. Postal Service) in the region. In addition to salaries, the government also makes pension payments to about 265,000 civil service retirees in the District, Maryland, Virginia and West Virginia. An additional 77,500 people in this region receive survivor benefits.

As the government takes on more complex responsibilities and increasingly relies on technology to deliver services, federal salaries are a crucial component in the competition for highly skilled workers. Government officials predict a surge in retirements in the next few years as baby boomers depart, and are concerned that agencies will not get their share of top-notch recruits in a region with low unemployment and strong job growth.

To some extent, Washington area federal employees are more fortunate than civil service workers elsewhere. The federal pay formula this year gives a larger increase to employees in areas where federal pay is the most behind private-sector salaries. As a result, most civil service employees will receive a 1.81 percent pay raise, the minimum this year.

Locally and nationally, it appears that the federal pay raise will end up below market rates.

A recent survey by Watson Wyatt Worldwide found that most corporations plan to increase salaries, not counting promotions and market adjustments, by an average 3.6 percent, said Laura Sejen, global practice director for the consulting firm, which specializes in personnel and financial management.

Many employers are reporting increased difficulty in attracting top performers and people with special skills, and that suggests the government should pay close attention to workforce retention, Sejen said.

"Pay is important. When pay is not competitive, employees are more inclined to look," she said. Pay is especially important to employees under 30 and was the most highly rated reason for leaving a company, the Watson Wyatt survey found.

Still, Sejen said, "we don't need to ring alarm bells because of one year of below-market increases" in the federal government.

Pay is but one factor in compensation packages, and the government's relatively generous health-care and retirement benefits will keep many employees from leaving, she said. Survey data also show that employees value "work-life balance" and are more likely to stay with organizations, such as the government, that offer flexible work arrangements.

"These are important contributors to an employee's decision to stay or leave," Sejen said.

But a federal pay raise below market rates carries some risk. "What the government is doing wouldn't drive employees out of the region, but might drive them out of the government," Priest said.

Stephen Barr's e-mail address isbarrs@washpost.com.