A lawsuit by federal workers in Hawai'i and Alaska seeking to increase their pension benefits has been dismissed by a visiting federal judge, who ruled that the issue should be resolved by Congress.

The lawsuit stems from a pay system that treats federal workers in the two states differently than elsewhere.

The 40,000 federal employees here and in Alaska receive cost-of-living allowances that represent up to 25 percent of their base pay. About 16,630 federal workers and 2,900 U.S. Postal Service employees get the allowances in Hawai'i.

But the so-called COLA payments, while free from federal income taxes, are not taken into account when calculating the workers' pensions. And, according to a class-action lawsuit filed here in 2005, that results in substantially lower pension benefits for Hawai'i and Alaska retirees than what is collected by their Mainland counterparts.

The lawsuit challenged a system created by Congress in the 1990s that excluded federal employees in the two states from participating in "locality pay" salary hikes that are tied to prevailing wages in the private sectors where they work.

Unlike COLA, locality pay increases are subject to income taxes but are also used to compute higher pension benefits given to federal retirees.

Joyce Matsuo, a lead plaintiff in the lawsuit, estimated that her monthly federal pension would have been $400 more per month if she had received locality pay benefits just for the last three years of her 33-year career with the federal government, all of it in Hawai'i.

"I am now retired in one of the most expensive cities in the United States and yet I am forced to live on federal retirement benefits far lower than those of (Mainland) federal employees whose careers mirrored mine in every way," Matsuo said in the suit.

Federal Judge Philip Pro of Nevada ruled last week that he didn't understand why Congress decided in 1990 to exclude Hawai'i and Alaska from the locality pay system.

"The court is puzzled by the legislative anomaly that here operates to the life-long disadvantage of federal employees in the excluded states," Pro wrote in a decision issued Wednesday.

"That Congress may have discharged its legislative responsibilities imperfectly does not give this court fiat to rewrite the legislation to rectify the current disparity," Pro ruled.

"It suggests strongly instead that Congress should correct the incongruity made so evident by this case," the Nevada judge wrote.

The U.S. Office of Personnel Management has proposed an overhaul of the system to eliminate COLA payments for Hawai'i and Alaska federal workers and instead have them receive locality pay.

The proposal would gradually phase out COLA benefits and phase in locality pay over a seven-year period. It is now under study by a congressional workforce subcommittee chaired by Hawai'i Sen. Daniel K. Akaka.

Akaka spokesman Jon Yoshimura said Friday the senator had no comment on Pro's decision and continues to gather information and input on the salary restructuring proposal.

Margery Bronster, local attorney for the plaintiffs in the COLA lawsuit, had no comment on Pro's decision.

A Washington, D.C.-based law firm also involved in the suit, Woodley & McGillivary, said in a note posted on its Web site that it was "disappointed" by Pro's ruling and that it might be appealed.

"We have sixty days in which to appeal the decision to the Ninth Circuit," the firm said.

Although Pro expressed puzzlement about why Hawai'i and Alaska were excluded from the locality pay system, one 1991 document produced by the Office of Personnel Management in the case said unnamed congressional staff members "repeatedly asked for the assurance that the COLA program would not be touched as part of pay reform."

And in 1994, U.S. Sens. Daniel K. Inouye of Hawai'i and Ted Stevens of Alaska wrote a letter to then-OPM director James King that said, "We are absolutely convinced that the standard locality pay program as applied in the continental United States cannot be fairly applied in our two states, given their high cost of living, remoteness, isolation and other unique characteristics."

Although Inouye is a Democrat and Stevens a Republican, the two senators are close friends and have often acted in unison to promote issues of common interest to their constituencies.

Inouye spokeswoman Jennifer Goto Sabas last week referred questions about COLA and the federal lawsuit to Akaka, pointing out that he is acting as the Hawai'i congressional delegation's "point man" on the issue.

Reach Jim Dooley at jdooley@honoluluadvertiser.com.