Defense officials are considering doing away with Basic Allowance for Housing in favor of a new “locality allowance,” according to several officials familiar with the plan.
Unlike BAH, which is linked to average rental housing costs in various areas, the new allowance would be linked to the cost of living in the areas where individual troops are assigned.
The concept under discussion in the Pentagon also would eliminate Basic Allowance for Subsistence, offering troops a combined tax-free stipend on top of basic pay that would vary by paygrade and location, officials said.
Preliminary proposals also suggest scrapping the “with-dependents” rates under the current BAH program, moving instead to a simpler, flatter benefit that makes no distinction between single troops and those with families, officials said.
The locality allowance concept is gaining traction at a time when top Pentagon officials have been blunt about their desire to carve long-term savings from the $20 billion spent annually to cover the off-base housing costs of about 1 million service members.
The proposal remains in its early phases, too early to spell out in detail what the impact might be for individual troops or for the Pentagon’s budget at large. Moreover, experts say, saving money may not be the primary motivation for changing the current allowance system.
“Yes, you could save money, but a more important question is: Is there an arguably more sensible way to set these allowances that truly reflects the cost of living? Could we do it better?” said Beth Asch, a military personnel expert with the Rand Corp. think tank who recently completed a study on locality allowance that was commissioned by the Pentagon.
“The devil is going to be in the details of how it is done,” Asch said. “The impact on pay would depend on how it was implemented.”
Thinking long term
Officially, the Pentagon will not even acknowledge the locality allowance proposal. Lt. Cmdr. Nate Christensen, a spokesman, stressed that there are no immediate plans to change policy and noted that any substantial change will require congressional approval.
“The department is not drawing up a proposal to eliminate BAH and replace it with a ‘locality allowance,’ ” Christensen said. “Furthermore, BAH is grounded in law, and the department would need new legislation to change how we set/pay BAH.”
Nevertheless, the concept appears to have some high-level support inside the Pentagon. It was outlined in a confidential recommendation that the Defense Department drew up last year for the Military Compensation and Retirement Modernization Commission, which is conducting a broad study of military pay and benefits.
The Pentagon’s underlying recommendations to the commission were not released publicly, but several officials familiar with those recommendations spoke to Military Times on condition of anonymity.
In addition, Pentagon personnel officials sought to flesh out the details of how a locality allowance might work in practice. Last year, shortly after the budget cuts known as sequestration became law, military officials ordered the study from Rand, technically known as a “proof of concept.”
It concluded that a locality allowance is a viable alternative to the current BAH and BAS system, Asch said, adding that the study will soon be released publicly.
Since sequestration took hold last year, top military officials repeatedly have said that the BAH program is a target for budget cuts. They plan to propose potential changes next month along with DoD’s fiscal 2015 budget request.
Officials said other changes under consideration include leaving the current BAH program in place while asking service members to pay some portion of their housing costs out of pocket, as they did until the late 1990s.
Winners and losers
At this point, it’s too early to declare who may win or lose if DoD pushes forward with a locality allowance.
But an early assessment suggests that such an allowance would benefit officers, in part because their BAS is comparatively low under the current program, so eliminating that would harm them less.
Moreover, senior officers may be slightly more likely to be assigned to high-cost-of-living areas and thus benefit from a locality allowance, Asch said.
As a result, such an allowance could affect retention, if only slightly, the Rand study concluded.
“We found that, for enlisted, there would be some small negative retention effect, and for officers, there may be some positive effect,” Asch said.
Those effects would have no impact on the military’s ability to meet mission requirements, she noted.
If the retention issue grew into a concern for military leaders, they could use special pays and incentive pays to help reshape the force, Asch said.
To ease the impact on individual troops, DoD could seek to adopt an allowance that does not save money initially but would result in slower growth and some savings in the future, said Todd Harrison, a budget expert with the Center for Strategic and Budgetary Assessments, a Washington think tank.
“You could combine these into one single thing called a locality pay and do it in a way that is budget neutral,” Harrison said. “What they may be thinking is ... combine them, and that’ll grow in the future at a slower rate. That would save you money.”
One advantage of a locality allowance would be simplification of the military compensation system, Harrison said.
“Right now, it is just too complicated for someone to figure out how much they are really being paid,” Harrison said.
Many troops feel underpaid because they often focus on their basic pay and fail to consider all of their allowances as part of their pay package.
Replacing both BAH and BAS with a single allowance would make it “easier for folks to understand, and easier for folks to make comparisons with other opportunities that they might have,” Harrison said.
Yet defining the cost of living might be a challenge in practice. One former DoD official who is familiar with the locality allowance concept said pinpointing housing costs is relatively easy, but defining cost of living may prove contentious.
For example, should troops with spouses expect to be compensated for assignment to remote areas where their spouses are less likely to find work? Should DoD seek to save money by curtailing locality allowance in highly desirable places such as Hawaii, which many troops will request regardless of the locality allowance?
Also unknown is whether dual-military couples assigned to the same location would each receive a full allowance, or if one would get a partial allowance. Under BAH, dual-military couples without dependents usually each receive the full BAH rate for their respective paygrade. For dual-military couples with dependents, the higher-ranking member draws BAH at the with-dependents rate and the lower-ranking member receives it at the without-dependents rate.
Another potential challenge: what to do for the several hundred thousand troops who live in barracks and other military housing. Rand highlighted that as a key issue and suggested one option is to provide those troops with a partial locality allowance, Asch said.
Privatized housing questions
A big potential stumbling block for overhauling BAH is the possible impact on privatized housing. Since the 1990s, DoD has signed contracts to turn over thousands of on-base housing units to private companies that promise to remodel, repair and maintain those homes in exchange for receiving a steady stream of service members’ BAH payments.
Those companies depend on BAH payments as their primary source of revenue, and any substantial reduction could result in fewer renovations, fewer amenities or longer wait times for maintenance.
In some areas where BAH rates have fallen in recent years due to plummeting housing prices, those companies have reduced some services, claiming that making their own debt payments would be impossible otherwise.
A total of more than 200,000 homes have been privatized, according to DoD.
“Various long-term policies to address possible BAH decreases remain under discussion,” according to a DoD report on privatized housing sent to Congress almost a year ago.
The current BAH program that pays for 100 percent of rental housing expenses — based on local market data — dates to 2005 and is a high-water mark for housing allowance fluctuations that date back decades.
In the 1980s, the payment known as Basic Allowance for Quarters, or BAQ, was intended to cover about 65 percent of total average rental costs. In the 1990s, the out-of-pocket threshold drifted upward to about 80 percent.
And at the turn of the millennium, amid concerns about retention and lagging military compensation, Congress passed a law creating the modern BAH system. Over the next five years, average payments rose, in theory, to cover 100 percent of average rental housing costs for all troops in all locations.
The federal government offers a “locality pay” to civilian employees, a percentage added to basic pay. The amount is linked to a job’s location, ranging from 28 percent in New York City to 14 percent in most rural regions.
That concept is not a model for discussions about a military locality allowance. For one thing, the civilian model is calculated on the variance in local wages, while the military’s proposal would be based on cost of living.
Also, civilian locality pay is taxable, while the discussions of a military locality pay stipulate that it would be tax-free, as BAH and BAS are now.
And while civilian locality pay is defined as a percentage of base pay, Rand suggested the Pentagon ultimately could draw up specific dollar figures for each paygrade and location.
Military housing allowances can make up a far higher percentage of a service member’s total compensation than civilian locality pay does for federal employees.
For example, BAH for junior enlisted troops can amount to 30 percent to 50 percent of total monthly pay, compared to officers whose housing allowance may make up about 15 percent to 30 percent of their pay.
Harrison cautioned against taking too much money from housing allowance coffers because that cash flow is highly valued by most troops. Harrison and CSBA conducted an independent survey of troops and found that they value cash today far more than deferred or in-kind benefits, such as commissaries or a promise of future health coverage after retirement.
“Cutting cash compensation is what is going to hurt the most — that is what’s going to make troops the least happy,” Harrison said. “Cash compensation, to include basic pay and allowances, would be the last thing I’d cut, because it’s giving [DoD and taxpayers] the best value for every dollar spent.”