United States General Accounting Office

GAO Testimony

Before the Subcommittee on Public Buildings and

Economic Development, Committee on Transportation

and Infrastructure House of Representatives

For Release

on Delivery

Expected at

9:00 a.m. EST

Thursday, March 5, 1998

GENERAL SERVICES

ADMINISTRATION

Overestimation of Federal

Buildings Fund Rental

Revenue Projections

Statement of Bernard L. Ungar, Director

Government Business Operations Issues

General Government Division

GAO/T-GGD-98-69

Statement 

General Services Administration:

Overestimation of Federal Buildings Fund

Rental Revenue Projections

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to address issues you raised about the

General Services Administration’s (GSA) overestimation of its rental

revenue projections for the Federal Buildings Fund (FBF) in fiscal years

1996, 1997, and 1998, and the actions it is taking to improve its future

revenue projections. You asked us to verify, to the extent practical, the

amounts GSA has attributed to the individual reasons for the $847 million

overestimation that it identified in January 1997 and determine whether

GSA’s corrective actions appear to us to address these reasons. (See app.

I.) Also, in response to your request, we identify in this statement

weaknesses that we and others found in the rental revenue estimation

process used by GSA, as well as the actions it has planned or which are

already under way to address them.

To verify the amount of the revenue overestimation that GSA attributed to

each of the reasons it identified, we examined documents GSA had

developed that explained the amount of overestimation as well as supplied

supporting details, such as a listing of buildings associated with a

particular problem, and we discussed each reason with GSA program

officials and staff. To develop an understanding of the rental revenue

estimation process used by GSA, we (1) discussed with GSA program

officials and staff the basic steps involved in the process used for fiscal

years 1996 through 1999, and (2) reviewed studies of the process done by

an internal GSA review team, two consulting firms, and GSA’s Inspector

General. To determine the actions taken or planned by GSA, we

interviewed relevant GSA officials and staff, reviewed documentation

associated with the actions, and observed the operation of a new

management information system GSA is developing to, among other

things, help it estimate rental revenues.

Briefly, we found that GSA had documentation supporting the dollar

amounts it attributed to six of the seven reasons it reported for the

overestimation of rental revenue. In addition, we and others identified

several weaknesses in GSA’s rental revenue estimation process. GSA was

aware of these problems and has taken corrective actions which we

believe, if effectively implemented, should help improve future rental

revenue estimates. Further, GSA recently reported that the actual budget

impact of its rental revenue overestimation to be $634.4 million for fiscal

years 1996 and 1997, and reduced its fiscal year 1998 anticipated

overestimation substantially.

Page 1 GAO/T-GGD-98-69
Statement 

General Services Administration:

Overestimation of Federal Buildings Fund

Rental Revenue Projections

Background Before proceeding further, Mr. Chairman, I would like to briefly explain

the operation of FBF, which is administered by GSA’s Public Buildings

Service (PBS). In 1975 , FBF replaced appropriations to GSA as the

primary means of financing the operating and capital costs associated with

federal space owned or managed by GSA. PBS charges federal agencies

rent, the receipts of which are deposited in FBF. Congress exercises

control over FBF through the annual appropriations process that sets

annual limits on how much of the fund can be expended for various

activities. In addition, Congress may appropriate additional amounts for

FBF.

The specific activities the fund is used for include space acquisition and

the operation, maintenance, repair of, and improvements to,

government-owned and -leased buildings managed by GSA. FBF rent

revenues have grown from about $2.5 billion in fiscal year 1987 to about

$4.8 billion in fiscal year 1997.

Each year, as part of the budget process, PBS calculates a revenue

estimate that includes an estimate of rental revenue. Under the federal

budget process, PBS’ initial rental income estimate for a given fiscal year

is made 18 months in advance. For example, PBS’ initial rental income

estimate for fiscal year 1997 was made in the spring of 1995, using rental

revenue estimates for fiscal years 1995 and 1996 as a starting point. At that

time, however, PBS did not yet have actual rental income data for all of

fiscal year 1995, which had not yet ended, and it also did not have actual

rental income data for fiscal year 1996, which had not yet begun.

Accordingly, as a starting point, PBS updated and adjusted previous

estimates it had made for fiscal years 1995 and 1996 based on the most

recent information it had at the time, and it made assumptions about

events it believed would affect rental revenues in fiscal year 1997.

Updated information PBS compiled for fiscal years 1995 and 1996 included

expected (1) annualized changes in space inventories for fiscal year 1995,

(2) changes in the inflation rate, and (3) changes in building delegations

under which agencies pay their own building operating costs and are

refunded from FBF for the operating cost portion of their rent payments.

PBS obtained this information from GSA’s regions and various other

sources. PBS’ assumptions included such factors as using a uniform

national average for the number of months new space would be occupied

as well as the rental rate.

Page 2 GAO/T-GGD-98-69
Statement 

General Services Administration:

Overestimation of Federal Buildings Fund

Rental Revenue Projections

Accuracy of PBS’

Rental Revenue

Estimates

As you can see, Mr. Chairman, forecasting rental revenues is a complex

process carried out 18 months in advance that must be made with

incomplete information for the 2 years preceding the year being estimated

and is based on assumptions about future events. Given these

circumstances, it would be reasonable to expect some differences

between actual and estimated rental revenues.

In this regard, PBS’ historical trends of estimated revenue versus actual

revenue show actual rent revenue (1) exceeded estimated rental revenues

for each year from fiscal year 1987 through fiscal year 1993—except for

fiscal year 1992, when actual rental revenues were less than estimated

rental revenues by 1.6 percent—and (2) differed from the estimate by less

than 2 percent for each year during this period, except for fiscal year 1990,

when actual revenue exceeded the estimate by 2.8 percent. However, for

each of fiscal years 1994 through 1997, PBS’ data showed that annual

actual rental revenues were less than estimated rental revenues, ranging

from an overestimate of about $110.7 million, or 2.4 percent, in fiscal year

1995, to an overestimate of about $422.1 million, or 8.2 percent, in fiscal

year 1996. (See app. II.) For fiscal years 1994 and 1995, PBS overestimated

rental revenues by a combined total of $308.1 million, that according to the

PBS’ Chief Financial Officer, was absorbed by reducing planned

expenditures and using carryover balances without the need for

congressional action. In addition, PBS reported a combined overestimate

of $773.5 million for fiscal years 1996 and 1997, which PBS dealt with as I

will explain in a moment. It is important to note that the fiscal year 1996

and 1997 overestimation from the historical analysis does not match the

amount reported to Congress in January 1997 because the revenue

estimates were made at different times.

In January 1997, PBS expected the total overestimation for fiscal years

1996 and 1997 to be $847 million. Subsequently, in July of 1997, PBS

increased the anticipated overestimation for fiscal year 1997 by

$86.8 million and reported an anticipated overestimation for fiscal year

1998 of about $109.2 million. This brought the total anticipated

overestimation for fiscal years 1996 through 1998 to about $1.04 billion.

PBS took two actions to deal with the $1.04 billion anticipated

overestimation. First, PBS refrained from using about $680.5 million in the

spending authority provided by Congress in fiscal year 1997. Most of this

spending authority was for new construction projects that PBS expected

to be delayed for other reasons. Congress restored this spending authority

in the fiscal year 1998 FBF appropriation. Second, PBS reduced operating

Page 3 GAO/T-GGD-98-69
Statement 

General Services Administration:

Overestimation of Federal Buildings Fund

Rental Revenue Projections

expenses in fiscal years 1997 and 1998 by deferring planned expenditures

until later years to offset the remaining $359.5 million. However, after it

had closed its fiscal year 1997 books, PBS reported the actual budget

impact of its overestimation to be $634.4 million for fiscal years 1996 and

1997, and reduced its fiscal year 1998 overestimation to $28.3 million.

Weaknesses in PBS’

Revenue Forecasting

Process

As indicated, in January 1997, GSA informed Congress that it expected its

total overestimate of rental revenue for fiscal years 1996 and 1997 to be

$847 million. As shown in appendix I, PBS identified seven reasons for the

overestimation and linked specific dollar amounts of the overestimate to

each reason. For example, PBS attributed $209 million of the $847 million

overestimate to rental reductions in fiscal year 1995 in 18 metropolitan

areas that had not been factored into its original estimates. PBS provided

documentation supporting the amount of the overestimation for six of the

seven reasons. PBS could not provide data showing how the

amount—$86 million—attributed to the remaining reason (i.e., that the

original fiscal year 1995 rent revenue estimate was generally higher than

actual fiscal year 1995 revenues) was developed. Although we examined

the documentation PBS provided, we did not trace all the data compiled

by PBS to explain its overestimation back to the original source

documents.

In July 1997, PBS reported increased overestimates of rental revenue for

fiscal years 1997 and 1998 totalling $196 million, which, if accurate, would

have brought the total overestimation for fiscal years 1996 through 1998 to

over $1 billion. However, PBS did not identify the causes of the increased

overestimation, and in January 1998, PBS identified the actual fiscal year

1997 budget impact of the overestimate for fiscal year 1997 to be only

about $14.1 million and the estimated budget impact of the revised fiscal

year 1998 overestimation to be about $28.3 million, for a combined total of

$42.4 million.

During the course of our work, we determined that weaknesses in PBS’

estimation process contributed to the rental income overestimation. For

example, while PBS reported that rent reductions in 18 metropolitan areas

were not factored into the original estimates, PBS did not report why the

18 areas were omitted. Through discussions with PBS staff and review of

studies done by (1) the firms of Ernst and Young and Arthur

Andersen—consultants hired by GSA, (2) the GSA Inspector General, and

(3) the Rent Revenue Forecasting GO Team—an internal GSA review team

established to look at PBS’ rental revenue estimation process—we

Page 4 GAO/T-GGD-98-69
Statement 

General Services Administration:

Overestimation of Federal Buildings Fund

Rental Revenue Projections

identified several weaknesses in the process for estimating rental

revenues. These weaknesses included the following:

• Lack of documented policy and procedures for the rental revenue

estimation process: In attempting to determine how the rental estimates

were made for fiscal years 1996 and 1997 and the initial estimate for 1998,

we found limited documentation on how the calculations were made but

no documented policy, procedural steps, or guidance on the process. We

had to determine the procedures and steps followed in calculating the

rental revenue estimates through our discussions with PBS officials and

staff. The staff who made the basic calculations for the rental estimates for

fiscal years 1996 through 1998 told us they were asked to perform this

work on a part-time basis because staff who had previously done the

calculations had left GSA or moved on to other positions due to

downsizing, reorganization, and attrition. The PBS staff members said they

had no documented policies, procedures, or guidelines to follow and had

learned from other PBS staff how to make the calculations. Without a

documented process, however, there is less assurance that, for example,

all necessary steps and information, such as consideration of rental

reductions from all metropolitan areas, are factored into the estimation

process or that the process is carried out consistently from year to year.

Both GSA consultants, the GSA Inspector General, and the agency’s GO

team all found similar problems when they reviewed the process.

• Unclear lines of responsibility and accountability for revenue estimates

below the level of the PBS Commissioner: Although we were able to

identify PBS staff members who made the basic revenue estimate

calculations, their responsibilities were not documented, nor were the

responsibilities of other PBS offices and staff involved in the process. This

created a lack of control over the process for estimating rental revenues.

For example, one of the seven reasons for the overestimation PBS

identified was an error (described by PBS as a technical error) in which

$66 million was added in two different places instead of one. In our

opinion, an effective review process would have caught this error, but it

was not clear who in PBS was responsible for reviewing and approving

calculations. A May 1997 report by the internal GSA Rent Revenue

Forecasting GO team also pointed out that, while many different persons

and offices provided critical input for preparing estimates, there was no

clear identification of responsibility or accountability for the revenue

estimates within PBS except for the PBS Commissioner.

• Lack of supporting documentation necessary to verify forecast

information and assumptions: In its May 1997 report, the internal GSA GO

team noted that it had to rely on the memories of, and anecdotal

Page 5 GAO/T-GGD-98-69
Statement 

General Services Administration:

Overestimation of Federal Buildings Fund

Rental Revenue Projections

information provided by, GSA employees to reconstruct the reasons for

deficiencies in the rental revenue estimates. To illustrate, one of the seven

reasons for the overestimation identified by PBS was a change in

assumptions about costs that was made in 1995 relative to the fiscal year

1997 rent revenue estimate. For example, one assumption changed was the

estimated time that increased government-owned space would be

occupied in a fiscal year. The time was changed from 6 months to 9

months, which resulted in an increase in the overestimation of rental

revenue. However, PBS staff said that they could not recall who had

authorized the change in the assumptions. Subsequently, PBS officials

advised us that responsibility for the change in the assumptions was borne

by the then PBS Commissioner. We could not locate any documentation

explaining why the change was made. GSA’s Inspector General also noted

that PBS lacked documentation for the assumptions made and

methodology used to increase the revenue gap expected for fiscal year

1997.

• Use of national averages, rather than project-specific data, to forecast

occupancy schedules and rental rates: For fiscal years 1996 and 1997, PBS

reported that its use of national averages (which caused estimates of

government-owned space increases to be too high) accounted for

$142 million of the $847 million overestimation. For example, PBS

assumed that it would receive rent for all space coming on line, for 9

months of the year, at the national average per square foot rental rate. In

using national averages, PBS relied on less accurate data for estimating

than if it had used project-specific data. In addition, in its calculations, the

national average rental rate for government-owned space was changed

from $40 to $44 per square foot without supporting documentation

explaining the reason for the change.

Additional problems with PBS’ rental revenue estimation process have

also been identified. For example, in July 1997, Arthur Andersen reported

that PBS lacked documentation for its budget methodology, including

FBF, and had problems with its information and analysis systems as well

as its pricing policies and practices.

GSA’s Efforts to

Improve Its Revenue

Projection Process

GSA is aware of the identified weaknesses in its revenue estimation

process and has corrective actions to improve this process either already

under way or planned. These corrective actions include the following:

• Documentation is to be required for all decisions, assumptions, and steps

involved in the rental revenue estimation process. According to a PBS

Page 6 GAO/T-GGD-98-69
Statement 

General Services Administration:

Overestimation of Federal Buildings Fund

Rental Revenue Projections

official, PBS will issue a directive on documenting the rental estimating

process by April 1998. In our review of PBS’ fiscal year 1999 rental revenue

estimate, we found that documentation had been prepared on the

decisions, assumptions, and steps involved in the process.

• Office of Financial and Information Systems (FIS), with overall

responsibility for the rental revenue forecasting process, was established:

In July 1997, GSA issued an order establishing FIS with one of its

responsibilities being to forecast rental revenue and monitor revenue

status monthly to determine whether predictions of inventory changes,

other technical assumptions, and income collected are occurring as

anticipated. Within FIS, there is a Rent Team, with six people (two

additional positions are authorized, but not yet filled) responsible for

executing these duties. In the past, forecasting revenue was treated as a

part-time task, and monitoring was done quarterly. In addition, in April

1997, PBS hired a Chief Financial Officer to oversee FIS. Also, each of

GSA’s regions was directed to appoint a revenue manager to be

responsible for this issue. According to a PBS official, as of February 20,

1998, 10 of the 11 regions have done so.

• Project-specific data is to be used in occupancy schedules and rental rates

instead of national averages: In July 1996, PBS instructed each of its

regions to submit monthly data on the changes expected in occupancy and

rental rates for each property in its inventory. This would include known

changes caused by government downsizing. However, PBS cautions that

general estimates on downsizing that are not project-specific are too

speculative to be used in making rental revenue forecasts. PBS intends to

use project-specific data, whenever possible, to provide a more realistic

fact-based estimate on which to base future rental revenues.

• New information system is being implemented to manage, track, and

access data, with plans for a revenue forecasting module to be added to

the system: By January 1998, PBS had installed its new information

system, called the System for Tracking and Administering Real Property

(STAR), in all its regions. PBS expects STAR to generate a more accurate

inventory and greater integration of financial and operational data.

According to PBS officials, they plan to develop a rental revenue forecast

module for STAR. They expect this module to be completed by the spring

of 1999 and to be used to develop the revenue projections for the fiscal

year 2001 budget.

It appears that the actions PBS has under way and planned to improve its

rental revenue estimation process address the weaknesses that we and

others have identified. If effectively implemented, these actions should

help improve future revenue estimates. However, as PBS points out, and

Page 7 GAO/T-GGD-98-69
Statement 

General Services Administration:

Overestimation of Federal Buildings Fund

Rental Revenue Projections

we agree, since its rental revenue estimate is a forecast, it is unlikely to

produce an estimate that is identical to actual rental revenue. While some

variance is to be expected in any estimating process, variances that go

beyond a certain level can be indicative of problems that need to be

addressed.

In this regard, we noted that PBS has not established an acceptable margin

of error against which it can measure the success of its estimation

process. Having such a benchmark, we believe, would put PBS in a better

position to identify variances that need to be investigated so that it can

explore and fix the causes of excessive variances, improve its estimation

process, and determine its effectiveness over time.

Recommendation We recommend that the Commissioner, PBS, establish an acceptable

margin of error for its rental revenue estimates, as well as a process for

exploring and resolving causes of variances outside the margin adopted.

Mr. Chairman, that concludes my prepared statement. I will be happy to

answer any questions the Subcommittee may have.

Page 8 GAO/T-GGD-98-69
Page 9 GAO/T-GGD-98-69
Appendix I 

PBS Reasons for the Overestimation of

Revenue for Fiscal Years 1996-1998

Dollars in millions

Reason for overestimation Amount

Less leased expansion space was delivered than was expected, and at

later dates than expected.

$232

Fiscal year 1995 rental reductions in 18 metropolitan areas were not

factored into the original estimates.

209

Estimates of the effect of government-owned-space increases were too

high.

142

The fiscal year 1995 rental revenue estimate was generally higher than

actual fiscal year 1995 revenues. Because of the timing of the budget,

these high estimates were used as the basis for fiscal years 1996 and

1997 projections.

86

Assumptions concerning the costs of leased and government space were

changed to make them less conservative.

82

A technical error was made in calculating the effect of indefinite authority

in the rental of space.

66

Rental revenue decreases from buildings, or portions of buildings,

becoming unoccupied were not factored into the original estimate.

30

Subtotal $847

In July 1997, GSA increased its estimate of the fiscal year 1997

overestimation but did not identify the causes.

87

In July 1997, GSA identified an overestimation for fiscal year 1998 but did

not identify the causes.

109

Total $1,043

Note: PBS’ $847 million overestimate was reported to Congress in January 1997 and

subsequently revised downward. PBS’ July 1997 overestimates were also subsequently revised

downward.

Source: GSA.

Page 10 GAO/T-GGD-98-69
Appendix II 

FBF Estimated and Actual Rental Income

for Fiscal Years 1987-1998

Revenues

Dollars in millions

Fiscal year Estimated Actual

Percent actual

is of estimated

1987 $2,442.7 $2,471.7 101.2%

1988 2,921.9 2,969.1 101.6

1989 3,039.8 3,074.2 101.1

1990 3,188.2 3,278.6 102.8

1991 3,490.5 3,493.1 100.1

1992 4,001.1 3,939.0 98.4

1993 4,429.2 4,432.0 100.1

1994 4,831.2 4,633.8 95.9

1995 4,600.1 4,489.4 97.6

1996 5,117.0 4,694.9 91.8

1997 5,155.1 4,803.7 93.2

1998 4,846.1 N/A N/A

Note 1: Rental income does not include reimbursables, outleasing, and miscellaneous income;

therefore, these numbers are less than rental revenue in GSA’s financial statements. This

historical analysis does not match revenue overestimation reported to Congress in January 1997

because the revenue estimates were made at different times.

Note 2: N/A = Not available.

Source: GSA.

(240291) Page 11 GAO/T-GGD-98-69
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