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24–441 PDF 2006

S. Hrg. 109–613

HOW DOES THE FEDERAL GOVERNMENT LEASE

NEEDED SPACE?

HEARING

BEFORE THE

FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT 

INFORMATION, AND INTERNATIONAL 

SECURITY SUBCOMMITTEE

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

OCTOBER 6, 2005

Printed for the use of the Committee on Homeland Security 

and Governmental Affairs

(

(II)

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

SUSAN M. COLLINS, Maine, Chairman 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

NORM COLEMAN, Minnesota 

TOM COBURN, Oklahoma 

LINCOLN D. CHAFEE, Rhode Island 

ROBERT F. BENNETT, Utah 

PETE V. DOMENICI, New Mexico 

JOHN W. WARNER, Virginia 

JOSEPH I. LIEBERMAN, Connecticut 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK DAYTON, Minnesota 

FRANK LAUTENBERG, New Jersey 

MARK PRYOR, Arkansas

MICHAEL D. BOPP, Staff Director and Chief Counsel 

JOYCE A. RECHTSCHAFFEN, Minority Staff Director and Chief Counsel 

TRINA DRIESSNACK TYRER, Chief Clerk 

FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, AND 

INTERNATIONAL SECURITY SUBCOMMITTEE 

TOM COBURN, Oklahoma, Chairman 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

LINCOLN D. CHAFEE, Rhode Island 

ROBERT F. BENNETT, Utah 

PETE V. DOMENICI, New Mexico 

JOHN W. WARNER, Virginia 

THOMAS CARPER, Delaware 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

MARK DAYTON, Minnesota 

FRANK LAUTENBERG, New Jersey

KATY FRENCH, Staff Director 

SHEILA MURPHY, Minority Staff Director 

JOHN KILVINGTON, Minority Deputy Staff Director 

LIZ SCRANTON, Chief Clerk 

(III)

C O N T E N T S 

Opening statements: Page 

Senator Coburn ................................................................................................. 1

WITNESSES 

THURSDAY, OCTOBER 6, 2005

Robert L. Neary, Jr., Acting Chief Facilities Management Officer, U.S. Department of Veterans Affairs .............................................................................. 7

William H. Matthews, Assistant Commissioner, Office of Real Property Asset 

Management, Public Buildings Service, U.S. General Services Administration ........................................................................................................................ 9

Mark L. Goldstein, Director, Physical Infrastructure Issues, U.S. Government 

Accountability Office ............................................................................................ 12

ALPHABETICAL LIST OF WITNESSES

Goldstein, Mark L.: 

Testimony .......................................................................................................... 12

Prepared statement .......................................................................................... 39

Questions and responses for the Record ......................................................... 49

Matthews, William H.: 

Testimony .......................................................................................................... 9

Prepared statement .......................................................................................... 31

Neary, Robert L., Jr.: 

Testimony .......................................................................................................... 7

Prepared statement .......................................................................................... 28

APPENDIX 

Chart entitled ‘‘Construction vs. Operating Leases,’’ submitted by Senator 

Coburn ................................................................................................................... 27

(1)

HOW DOES THE FEDERAL GOVERNMENT 

LEASE NEEDED SPACE? 

THURSDAY, OCTOBER 6, 2005

U.S. SENATE, SUBCOMMITTEE ON FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, AND INTERNATIONAL SECURITY, OF THE COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS, Washington, DC. 

The Subcommittee met, pursuant to notice, at 2:30 p.m., in room 

562, Dirksen Senate Office Building, Hon. Tom Coburn, Chairman 

of the Subcommittee, presiding. 

Present: Senators Coburn and Carper. 

OPENING STATEMENT OF SENATOR COBURN 

Senator COBURN. The Subcommittee hearing will come to order. 

Senator Carper has advised me he will be late, so we will begin 

without him to honor your time and our commitment to be on time. 

Our goal is to figure out how the lease operations and billing operations work in the Federal Government. To cover the Federal 

Government’s current promised payouts, Americans will have to 

fork over more than 90 percent of their net worth. To pay the current debt of this country would work out to over $350,000 for each 

full-time worker. The political will to tackle the problem won’t grow 

until we come clean with the Americans about the scope of the 

problem at every area in the Federal Government. That is what 

this hearing is about, increasing transparency about our obligations, our assets, our liabilities, and expenditures. 

A few weeks ago, we held a hearing on the financial mismanagement at the Securities and Exchange Commission. One of the findings was that the SEC was involved in an unnecessarily expensive 

leasing arrangement to acquire new buildings. I would note their 

leasehold improvements are financed at 9 percent. Once these 

buildings are built, the SEC won’t even own them. What we find 

is the SEC is not the only agency that operates that way. 

What is more, last week, this Subcommittee learned that no one 

in the Federal Government keeps an inventory of what we buy and 

at what price. Today, we discovered that this data vacuum extends 

for inventory in real Federal property assets. 

Each year, $5.5 billion goes to pay rent on federally-used properties. We are renting space for facilities while at the same time 

we already have a vast portfolio of facilities that we are trying to 

get rid of. GAO estimates that more than 30 Federal agencies control about $328 billion in real property assets worldwide. Many of 

2

1The chart entitled ‘‘Construction vs. Operating Leases,’’ submitted by Senator Coburn appears in the Appendix on page 27. 

these assets and structures are either not needed, not aligned with 

agencies’ missions, or in an alarming state of deterioration. However, no comprehensive number of government-wide real property 

assets exists. 

Not only do we not know what we are renting, but we don’t know 

what we own. I draw your attention to the poster over there, ‘‘Construction vs. Operating Leases.’’ 1 The following five examples show 

that operating leases are almost always more costly than purchase, 

lease-purchase, or construction. In 1995, GAO reported that GSA 

had entered into 55 operating leases for long-term needs that were 

estimated to cost $700 million more than had we constructed them 

and owned them. In 1999, GAO reported for nine major operating 

lease acquisitions GSA had proposed, construction would have been 

the least costly option in eight cases and would have saved $126 

million for the taxpayer. A lease-to-purchase option would have 

saved an estimated $107 million. 

The Patent and Trademark Office in Northern Virginia entered 

into an operating lease that was estimated to be $48 million more 

than construction and $38 million more than lease-purchase. The 

Department of Transportation headquarters reduced the term of a 

20-year lease to a 15-year lease so that it could meet the definition 

of an operating lease. GSA’s fiscal year 1999 prospectus for constructing a new facility for this need showed the cost of construction was estimated to be $190 million less than the operating lease. 

SEC used the same approach by reducing the terms of their lease 

from a 20-year lease to a 14-year lease in order to fit OMB’s criteria for an operating lease. 

The Administration has acknowledged the problem, and for that, 

I commend them. OMB has begun to look at some, if not all, of the 

problems with property asset management. This is a critical first 

step to managing the government’s real property portfolio, but 

OMB isn’t specifically focused on the increasing use of costly leasing arrangements. 

The problem is serious and has long been ignored. GAO has been 

reporting for over 6 years that the government’s reliance on costly 

leasing instead of ownership or lease-purchase poses liabilities in 

an unknown proportion on the American Government. GAO reports 

that agencies change lease terms in order to avoid higher up-front 

costs. Reliance on the lease changes creates huge liabilities on the 

Federal Government of an unknown amount. 

The Federal deficit figures do not reflect these liabilities, but 

budget scorekeeping rules, altered in 1990, are mainly to blame because they do not require most leases to be counted against an 

agency’s annual appropriation. This encourages agencies to rent 

space to meet their needs because only a portion of the cash is 

needed up front. 

Congress is part of the problem. Rather than requiring agencies 

to plan and budget for their facilities needs, we refuse to let them 

cut in other areas to appropriately invest in construction projects 

that could save us money. We encourage the government to operate 

3

in some alternative universe rather than the way normal American 

families and business operate. 

When a renter in Oklahoma wants to buy his first home, he and 

his family scrimp and save until they have enough for a down payment. They understand that owning a house may be more difficult 

up front, but it is much better for their long-term financial health. 

Congress doesn’t let agencies do the same when they need a new 

building. Congress is so beholden to special interests that we can’t 

allow agencies to set priorities and cut program budgets in order 

to find money for down payments on new buildings. 

And what about when a home-owning family or business is growing and needs more space? They sell their existing facility and use 

the profit to invest in the bigger facility. What they don’t do is keep 

their existing facility in perpetuity while arranging outrageous 

terms on short-term lease for the building they will never own. 

When Congress does so-called oversight on agency budgets, those 

hearings often amount to nothing more than agencies getting 

spanked for trying to cut spending in certain programs. After the 

hearing, appropriators just go add that spending right back in. 

What choice does an agency have but to engage in costly leasing 

schemes that look on paper like budgets are unaffected, but which 

gouge the taxpayer, our children, and our grandchildren over the 

long run? 

Today, I look forward to hearing about the way the Federal Government obtains needed space, the reason agencies have chosen 

certain options. I am also interested to hear what the long-term implications for the American taxpayer are under the current budget 

scoring rules. We will hear from key players in the leasing process, 

the U.S. Government Accountability Office, the Government Services Administration, and the Department of Veterans Affairs. 

I also would make the statement, and I do this—I am not picking 

on you all—because the notice of this hearing was quite some time 

ago. We got VA’s testimony at 2:30 p.m. yesterday and 9 a.m., 

GSA’s, and GAO was on time. So it tells us there is a problem. I 

recognize your testimony has to go through OMB, but we have 

talked with OMB about that. 

My first predilection was to cancel the hearing so we can enforce 

some discipline in terms of us being able to do our job. I chose not 

to do that, but I am sending the message to OMB, the next hearing 

we have where the testimonies are not here on time, we will cancel 

the hearing, but we will not tell you at which time we will cancel 

the hearing, so we will waste your time and our time, just like ours 

has been wasted by not having the appropriate material in front 

of us in a timely manner. 

With that said, let me smile and welcome each of you here. Let 

me thank you for your service to our country. Each of you provides 

and does a job that is needed. We understand that. What we want 

to do is have the information to how we can help you to do that 

job better. We want to create a climate where we lessen the costs 

in the long-term for the Federal Government, and we look forward 

to having your testimony and your thoughts along with that. 

[The prepared statement of Senator Coburn follows:]

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1The prepared statement of Mr. Neary appears in the Appendix on page 28. 

Senator COBURN. As I said, Senator Carper will be here in about 

15 minutes, so we will go on and start. 

Our first witness is Mark Goldstein. He is the Director of Physical Infrastructure Issues at the U.S. Government Accountability 

Office. He is responsible for the agency’s reviews, audits, and investigations in Federal property, telecommunications, and special 

products. 

Bill Matthews is Assistant Commissioner of the Office of Real 

Property Asset Management at the U.S. General Service Administration. In that capacity, Mr. Matthews is responsible for asset 

management and the continuous financial improvement for a nationwide portfolio of over 1,500 federally-owned properties which 

generate almost $7.3 billion in revenue. He also is responsible for 

capital planning and investment portfolio strategy, policy and analysis, and disposal. 

And finally, Robert Neary is Acting Chief Facilities Management 

Officer of the Veterans Health Administration at the Department 

of Veterans Affairs. He is responsible for managing many of the 

Department of Veterans Affairs’ capital asset programs, including 

major construction, minor construction, real property management, 

leasing, enhanced use leasing, architectural, engineering, and policy advice. 

Welcome, and I think we will start with you, Mr. Neary, and go 

down the row. You will have 5 minutes plus if you would like to 

do that. Your written statements will be made a part of the record. 

Feel free to take the time that you need. 

TESTIMONY OF ROBERT L. NEARY, JR.,1 ACTING CHIEF FACILITIES MANAGEMENT OFFICER, U.S. DEPARTMENT OF 

VETERANS AFFAIRS 

Mr. NEARY. Thank you, Mr. Chairman. Let me say I am pleased 

to be here this afternoon to present an overview of VA’s leasing 

programs, and I will start by apologizing for our testimony being 

tardy. We will do everything we can not to let that happen again. 

Senator COBURN. The Senators are late all the time, but that 

doesn’t give us an excuse. If we waste your time, we should be 

chastised for it, and vice-versa. That is why we started this hearing 

on time, and we do things on time because your time is just as valuable or more valuable than my time. 

Mr. NEARY. Thank you, sir. I appreciate that. 

Senator COBURN. Please continue. 

Mr. NEARY. The Department of Veterans Affairs is the owner and 

operator of the largest real estate health care-related portfolio in 

the United States. VA also maintains facilities for our Veterns Benefits Administration (VBA), which handles veterans’ benefits other 

than the health care program, and for most of the national cemeteries in the United States. 

We own and operate over 5,000 buildings, comprising approximately 144 million square feet, and about 7 percent or 7.5 percent 

of that is acquired through lease. We use our leasing authority for 

multiple purposes, including space for community-based outpatient 

8

clinics, VBA regional offices, and space to support the Department’s 

research and information technology missions, to name a few. 

The need for space is identified in the strategic planning processes of each of the administrations. The proposed acquisition of 

leased space exceeding the threshold levels established by Congress 

is evaluated as part of the Department’s capital investment application process. Smaller amounts of space are approved at appropriate levels within the Department. 

We operate our leasing program under a delegation from the 

General Service Administration. We were initially granted a delegation in 1983 focusing on medically-related activities. That delegation expanded over time, through and including GSA’s broader delegation in 1996 under the program known as ‘‘Can’t Beat GSA 

Leasing’’ to lease general purpose office space for periods of up to 

20 years. 

Federal agencies must adhere to all of the laws and regulations 

when acquiring and utilizing space, and therefore we follow the 

same rules, regulations, and laws as does GSA. We must first notify GSA of proposed actions to be sure that there is not available 

space in the Federal inventory that would meet our needs. VA also 

reports semi-annually to the GSA on our leasing delegation activity. 

We are mandated by Congress with certain authorization and appropriation requirements. If the annual cost of a rent of a lease is 

greater than $600,000, we are required to have an authorization 

from the Congress. In addition, we must notify the Congress of our 

intent to award a lease if it exceeds $300,000 or if the cost will exceed by 10 percent that which was authorized in law. 

Within the VA, the Secretary has delegated various authorities. 

My office is responsible for the majority of leasing actions that go 

on throughout the United States. If facility wishes to lease, needs 

to lease space, less than 10,000 square feet and less than $300,000 

in annual rent, they have the authority to do that. Above that, it 

is necessary for them to come to the Washington headquarters for 

approval, up to and including the involvement of the Congress if 

it is greater than $600,000. 

All of our leasing actions are negotiated procurements based on 

a methodology colloquially known as best value. We seek competition to the fullest extent possible when acquiring space and establish evaluation criteria specific to each procurement. Offers are 

evaluated for both technical qualifications and price and a contracting officer establishes a competitive range and negotiates with 

those in the range and makes a decision on the best value to the 

government. 

Under the budget scorekeeping rules, we evaluate the price in 

present value terms to determine if the lease needs to be scored for 

budget purposes or whether it can be considered an operating lease 

and paid in annual rent. 

Our Real Property Service has a small staff of 15 individuals who 

manage the large leases from Washington and from our field office 

in Silver Spring, Maryland, and we conduct training for VA employees throughout the United States in conjunction with the VA’s 

Office of Acquisition and Material Management to ensure that our 

leasing program is effective and provides quality execution. 

9

1The prepared statement of Mr. Matthews appears in the Appendix on page 31. 

I want to close with a mention of our enhanced use leasing program. In addition to traditional leasing programs, VA also has been 

granted EU leasing authority. This unique asset management tool, 

managed jointed by the Office of Asset Enterprise Management 

and the Office of Facilities Management, is an innovative process 

to partner with the private sector to maximize return from underutilized capital assets. Currently, VA can out-lease property to 

other parties for up to 75 years for fair consideration, and the fair 

consideration can be in the form of cash, services, space, or other 

in-kind consideration. 

The law was originally authorized in 1991 and recently modified 

and reauthorized until 2011. We have successfully developed 

projects giving veterans access preferences and discounts for the 

usage of assisted living, traditional transitional homeless housing, 

and homeless services facilities without the use of appropriated 

funds. The program results include significant cost savings compared to construction and leasing, substantial private investment 

in the Department’s capital facilities and infrastructure, and new 

long-term sources of revenue. 

Mr. Chairman, that concludes my opening statement. I will be 

pleased to answer questions at the appropriate time. 

Senator COBURN. Thank you very much. 

Chairman COBURN. Would you like to do your opening statement, 

Senator Carper. 

Senator CARPER. I don’t have an opening statement that I want 

to give. I just want to say welcome to our witnesses. We are delighted that you are here and look forward to your testimony and 

the chance to ask you some questions. 

Thanks, Mr. Chairman. 

Senator COBURN. Thank you. Mr. Matthews, it is good to see you 

again. 

TESTIMONY OF WILLIAM H. MATTHEWS,1 ASSISTANT COMMISSIONER, OFFICE OF REAL PROPERTY ASSET MANAGEMENT, 

PUBLIC BUILDINGS SERVICE, U.S. GENERAL SERVICES ADMINISTRATION 

Mr. MATTHEWS. Good to see you again, sir. Let me first start by 

also apologizing for the tardy submission of our testimony. We will 

endeavor not to let that happen to us again. 

Senator COBURN. Can I ask you a question about that? The delay 

is not you, correct? 

Mr. MATTHEWS. I am certain we contributed to that delay. 

Senator COBURN. But most of the time, getting it cleared through 

OMB is the problem, is that right? 

Mr. MATTHEWS. I would be reluctant to say it was solely the 

fault of OMB that we were late. 

Senator COBURN. All right. 

Senator CARPER. I just thought that was a gracious response. 

Mr. MATTHEWS. We were the ones called. It is our job to get it 

on time, and I apologize for the tardiness. 

My name is Bill Matthews. I am the Assistant Commissioner for 

the Office of Real Property Asset Management for the GSA and I 

10

am pleased to talk about and provide an overview of our leasing 

process. 

GSA is among the Nation’s largest public real estate organizations, providing a work space for more than 1.1 million Federal 

workers in almost every Federal agency, the judiciary, and for 

some parts of Congress. 

We are a real estate services delivery organization. We support 

our customer agencies in their mission of service to the American 

people, and as such, it is our mission to provide a quality workplace for the Federal worker at a superior value. 

Our agency customers are required to use existing vacant federally-controlled space when that space is available and suitable to 

meet their mission requirements and in a location where their mission is appropriately carried out. When suitable Federal space is 

not available, we can lease space from the private sector. 

Approximately half of our customers’ workforce is housed in over 

1,500 buildings owned by the Federal Government and held in custody and control of GSA. The other half is located in over 7,300 

buildings that we lease from the private sector in over 2,000 communities across the United States and its territories. These leased 

buildings together comprise over 167 million square feet out of our 

total portfolio, which is in excess of 340 million square feet. Our 

annual rent bill for leases with private landlords is approximately 

$3.8 billion per year. 

We lease space in both large cities and small towns when leasing 

is the only practical answer to meeting Federal space needs. More 

than 50 percent of our leases by number are for increments of 

10,000 feet or less. The size of a lease can range from literally a 

single room to an entire building or group of buildings. 

We lease all types of space for our diverse Federal clientele, primarily office space. Eighty-five percent of our portfolio is for commercial office space. But we also lease laboratories, warehouses, 

clinics, and border stations. We locate them according to the customer’s mission requirements in urban, suburban, and rural areas 

in accordance with established Federal location and security polices. 

We execute many single-tenant leases, but also many multi-tenant leases with agencies which are consolidated for economies of 

scale. Other GSA leases meet tenant leases for storefront locations 

in high public access. These are in contrast with other leases for 

customers who require limited access to and control of their buildings for security purposes. 

When the existing inventory of buildings in the local market cannot meet our customers’ requirements and where Federal construction is not an option, we solicit the construction of a new building, 

which is built to meet our customers’ specifications and leased by 

us on the customer’s behalf. All of our lease assets are held in 

GSA’s name and not passed forward to our customers. 

Our principal authority to lease real property for use by Federal 

agencies is derived from the former Federal Property and Administrative Services Act of 1949. That authority is now codified in Title 

40 of the U.S. Code, Section 585, which authorizes GSA to enter 

into space leases on behalf of Federal agencies for terms up to 20 

years. 

11

In terms of our tenants, we strive to keep leasing costs at or 

below market levels and have developed a comprehensive strategy 

to do so. We use standard industry benchmarks and market surveys to assure that we are getting the best value for our customers. 

We use published market sources to gain a better understanding 

of area markets. Our standard lease forms try to balance the interest of the government against the interest of private landlords to 

achieve a cost-effective contract term. 

Because lease often acquires large blocks of space to meet the 

needs of multiple Federal agencies, we are often able to leverage 

our market position to get more favorable rent rates and lease 

terms for the taxpayer. Also, the creditworthiness of the Federal 

Government can be used as an important consideration in obtaining more competitive rent rates. 

Additionally, this year, we have awarded a national broker contract. This effort consolidated our private leasing support services 

among four commercial real estate service firms. The award is the 

largest single contract of its type in the history of GSA’s Public 

Buildings Service and will enable us to leverage the expertise of 

private sector brokerage firms and increase our capacity to achieve 

market value in the marketplace. It will also assist us in our efforts to standardize leasing practices nationwide and provide more 

support to our customers. 

Another important consideration in measuring the value of real 

estate that is leased is the cost of holding vacant leased space. The 

vacant leased space in our inventory is down to 1.3 percent, which 

is a historic record low and a figure well below industry averages. 

Not surprisingly, the increased need for security in many agencies does have an effect on GSA’s leasing process and on lease cost. 

The need for greater building setbacks, blast resistance, building 

access requirements, and restrictions on who can be co-located 

within our space all affect lease procurement and the cost of space 

we lease. 

Our leasing process is conducted within a framework of procedures that comply with a comprehensive list of laws and Executive 

Orders. These include the Competition in Contracting Act, the 

Small Business Act, energy, environmental, and historic preservation laws, and other Executive Orders. 

Leases with an annual cost that exceeds a specific dollar threshold, $2.41 million for fiscal year 2006, require explicit Congressional authorization. For this purpose, GSA submits prospectuses 

to the Senate Committee on Environment and Public Works and 

the House Committee on Transportation and Infrastructure for 

their approval. 

For most of our leasing activities, we follow a fairly standard 

process which starts with customer involvement in defining workplace requirements that is highly variable. Some customers have a 

very sophisticated, well-developed and repetitive set, and in other 

cases, they have to be developed from scratch and the agency requires a great deal of assistance. 

In determining those requirements, we conduct a series of meetings, and once our customer requirements are established, we document the amount and types of space and technical requirements in 

an interagency agreement called an occupancy agreement. At this 

12

1The prepared statement of Mr. Goldstein appears in the Appendix on page 39. 

stage, we review the availability of Federal space to meet the 

needs, and if none is available, we study the market against the 

customer requirements and develop and present various leased 

housing options. And finally, we redocument after that market survey with a progressive occupancy agreement that reflects the additional information we have. 

We try to maximize competition through advertising on the Federal Business Opportunities Web page to ensure increased exposure of our request for offers. 

Once initial bids are received, we generally conduct negotiations 

with all offerors to assure they understand the requirements and 

can better prepare their final proposals. We conduct multiple scoring analysis throughout this process, before we enter the market, 

and during negotiations. When final proposals are received, we 

evaluate them and make an award, usually on the basis of lowest 

price, but for more complex and longer-term requirements, we consider source selection procurements where a higher weighted qualitative proposal may prevail over a lower-rated, lower-priced proposal. In these cases, a determination has to be made and justified 

that the technical superiority justifies the cost differential. 

We give the successful offeror an adequate time to build out the 

space. We inspect and accept the space, assist our tenants in movein, and then start the rent process. 

GSA’s lease responsibilities do not stop as we hold the lease. We 

continue to service it with escalations and adjustments in lease administration activity throughout the life of the lease term. Typically, unless GSA has delegated operational responsibility, we will 

continue these activities throughout most of the 7,500 leases we 

service. 

Also, under a program called ‘‘Can’t Beat GSA Leasing,’’ GSA 

delegated its leasing authority to other Federal agencies. It was our 

intention to end our monopoly provider status and enter into a provider of choice relationship with most of our Federal agencies and 

most of them have chosen to stay with us at this point. 

Mr. Chairman, this is the approach we use to identify and meet 

our customer agencies’ mission requests for leased space. Meeting 

our customer requirements in an efficient and cost-effective manner is our agency’s highest priority. I thank you for the opportunity 

to testify before your Subcommittee and I will be happy to answer 

any questions you might have. 

Senator COBURN. Thank you very much, Mr. Matthews. Mr. 

Goldstein. 

TESTIMONY OF MARK L. GOLDSTEIN,1 DIRECTOR, PHYSICAL 

INFRASTRUCTURE ISSUES, U.S. GOVERNMENT ACCOUNTABILITY OFFICE 

Mr. GOLDSTEIN. Thank you, Mr. Chairman and Senator Carper. 

Thank you for the opportunity to testify today on our work related 

to Federal real property, and in particular, the government’s reliance on space leased from the private sector. 

As you know, at the start of each new Congress since 1999, we 

have issued a special series of reports entitled, ‘‘Performance and 

13

Accountability Series: Major Management Challenges and Program 

Risks.’’ In January 2003, we designated Federal real property a 

high-risk area as part of this series and we issued an update on 

this area in January 2005. 

We identified the government’s reliance on costly leased space as 

one of the major reasons for this high-risk designation. Other reasons included excess and deteriorated property, unreliable real 

property data, and the challenges associated with protecting those 

assets from terrorism. My testimony today will discuss our designation of Federal real property as a high-risk area and focus specifically on the government’s reliance on costly leased space. 

According to available data, the Federal Government owns and 

leases about 3.3 billion square feet of building floor area worldwide 

in roughly a half-a-million buildings. About 380 million square feet 

of this space is leased. 

My testimony today will highlight the following points. One, the 

conditions that led to our January 2003 high-risk designation still 

exist. Many of the assets in the government’s vast and diverse portfolio of real property are not effectively aligned with or responsive 

to agencies’ changing missions. Furthermore, many assets are in an 

alarming state of deterioration. Agencies have estimated restoration and repair needs to be in the tens of billions of dollars. 

Compounding these problems are the lack of reliable government-wide data for strategic asset management and the cost and 

challenge of protecting these assets against terrorism. Additionally, 

a heavy reliance on costly leasing instead of ownership to meet new 

space needs is a pervasive and ongoing problem. 

The Administration has acknowledged the problems in this area. 

In February 2004, the President added the Federal Asset Management Initiative to the President’s Management Agenda and signed 

an Executive Order on real property management reform. These 

and other efforts are positive steps, but it is too early to judge 

whether the administration’s focus on this area will have lasting 

impact. 

In addition, we continue to believe that a comprehensive and integrated transformation strategy is needed to address the problems 

and underlying obstacles to reform, which include competing stakeholder interests, various funding and budgetary disincentives, and 

the need for improved capital planning among agencies. 

Two, as a general rule, building ownership options through construction or purchase are the least-expensive ways to meet agencies’ long-term and recurring requirements for space. Lease-purchases, under which payments are spread over time and ownership 

of the assets is eventually transferred to the government, are generally less costly than using ordinary operating leases to meet longterm space needs, but are more costly than other ownership options. However, over the last decade, we have reported that the 

General Service Administration, as the central leasing agent for 

most agencies, relies heavily on operating leases to meet new longterm needs because it lacks funds to pursue ownership. 

While we have no recent work in this area, in 1995, we reported 

that GSA had entered into 55 operating leases for long-term needs 

that were estimated to cost $700 million more than construction. 

In 1999, we reported that for nine major operating lease acquisiVerDate 0ct 09 2002 12:06 Oct 17, 2006 Jkt 024441 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 C:\DOCS\24441.TXT SAFFAIRS PsN: PAT
14

tions GSA proposed, construction would have been the least-cost 

option in eight cases and would have saved an estimated $126 million. Lease-purchase would have saved an estimated $107 million 

compared with operating leases, but would have cost $19 million 

more than construction. 

A prime example of this problem was the Patent and Trademark 

Office’s long-term requirements in Northern Virginia, where the 

cost of meeting this need with an operating lease was estimated to 

be $48 million more than construction and $38 million more than 

lease-purchase. In August 2001, we also reported that GSA reduced 

the term of a proposed 20-year lease for the Department of Transportation headquarters building to 15 years so that it could meet 

the definition of an operating lease. GSA’s fiscal year 1999 prospectus for constructing a new facility for this need showed the cost 

of construction was estimated to be $190 million less than an operating lease. 

The Securities and Exchange Commission used a similar approach by reducing the terms of a proposed 20-year lease for its facility to 14 years. 

Although most of our work in this area has focused on GSA-controlled space, other real property holding agencies with leasing authority, such as the Department of State and Veterans Affairs, also 

face the same obstacles to ownership. Operating leases have become an attractive option, in part because they generally look 

cheaper in any given year, even though they are generally most 

costly over time. Budget scorekeeping rules allow budget authority 

for some of these operating leases to be spread out over the term 

of the lease. In contrast, budget authority for ownership options, 

according to the scorekeeping rules, are recorded fully up-front in 

the budget to appropriately reflect the government’s commitment. 

As a result, this situation has encouraged an over-reliance on operating leases for satisfying long-term space needs. Resolving this 

problem has been difficult. However, change is needed because the 

current practice of relying on costly leasing to meet long-term space 

needs results in excessive cost to taxpayers and does not reflect a 

sensible or economically rational approach to capital asset management. 

Mr. Chairman, this completes my prepared statement. I would be 

happy to respond to any questions that you or Members of the Subcommittee have. Thank you. 

Senator COBURN. Thank you very much. I thank all of you. Senator Carper, do you want to start? 

Senator CARPER. Thanks, Mr. Chairman. 

Mr. Matthews, you just heard a litany there of, I guess, criticism 

and questions from Mr. Goldstein. Let me just ask you to take a 

minute or two and respond to some of them. Do you agree? 

Mr. MATTHEWS. I always agree with GAO. [Laughter.] 

Senator COBURN. That could be dangerous. I don’t. 

Mr. MATTHEWS. The general observation that our leased inventory is growing is quite correct. In 1964, our leased inventory was 

under 50 million square feet, and as the government grew, it grew 

faster than our ability to fund new construction, and today you 

heard me testify that it was up to 167 million square feet. 

15

Generally, I would agree with the observations that we have 

grown very dependent on operating leases. Over the last 40 years, 

we have seen our leased inventory at GSA grow from under 50 million to over 167 million square feet. During that same period of 

time, the amount of direct Federal construction, the amount of the 

owned inventory that GSA has under its custody control has remained fairly stable. There has not been a growth spurt. We have 

disposed of assets that no longer meet Federal needs or they are 

in the wrong locations, they are archaic designs that no longer fit 

the typical Federal user. 

The bottom line is that we have basically a lack of alternatives 

to leasing and we have some built-in incentives because of the scoring rules to write operating leases. There are also some arguments 

for leases. 

Senator CARPER. Talk about the issue a little bit more, please. 

Mr. MATTHEWS. About the advantages of leasing? 

Senator CARPER. Yes. How are you incentivized to do that? You 

mentioned the word scoring. 

Mr. MATTHEWS. Well, the very first point is one made by my colleague from GAO, that the first year costs of leasing are much 

lower than the first year costs of direct Federal construction by a 

very significant margin, and we have done every year a good deal 

of Federal construction. We have reached the point where we, for 

general purpose office space, the attractiveness of the commercial 

market is better. 

But I would also like to make a point that for many of our customers, leasing is a preferred option. There are rapidly changing 

organizational and program mandates that the Federal agencies 

are facing that cause them to want to stay in a somewhat fluid situation. There are changes in technology. Some of our larger customers are, and this is not for the very largest, but for the mediumsized leases, they are very sensitive to geographic location near the 

people for whom they are providing services. 

For example, the Social Security Administration likes to be in 

the middle—in fact, I think this is even embedded in their authorization—in the middle of the service area where the beneficiaries 

reside. IRS now tracks in a geographic basis where people are for 

whom they are providing services or are involved in enforcement 

actions. We feel these are very legitimate reasons to want to stay 

fluid because these things shift. 

As we study closely through Core Net and BOMA and other professional organizations, we see our colleagues in the private sector 

also have moved heavily toward—during this same 4-year period, 

there has been an increased tendency in the private sector to enter 

into shorter-term leases to remain flexible, to adjust to changing 

market conditions, technology, service issues of the type I just described in the Federal sector. 

On the other hand, we have told GAO, and I think this remains 

our position, that for situations where we have a demonstrated 

long-term need, a large requirement, and large is somewhat subjective, but I would say 100,000 square feet or more, and in markets 

where we have other activities where we could backfill if we encountered vacant space, it does make all the sense in the world to 

own rather than lease if you have the resources. 

16

Senator CARPER. Mr. Goldstein, we will come back to you and the 

point that Mr. Matthews raises about their movement toward longterm leases, operating leases, sort of mirrors what is going on in 

the private sector. I would just ask if you find that to be the case, 

and if so, say so, and if not, explain your difference. 

Mr. GOLDSTEIN. I think it probably does. We haven’t done a lot 

of work to look at what is occurring in the private sector. I would 

agree with Mr. Matthews that there are certainly times when it behooves the Federal Government to be flexible in leasing depending 

on how the needs of the government are changing. In fact, it is also 

the case based on many of the reports that we have issued. That 

is, while we have talked about the fact that construction is frequently the better course for the taxpayer when it comes to the dollar, it is also the case that for leasing, there are always situations 

where it is going to make more sense. It may be in rural areas. It 

may be in certain kinds of space, certainly in temporary space 

when the government is refurbishing permanent space. So, there 

are certainly times where leasing makes sense. 

We don’t say that in every instance, construction and purchase 

of a building are going to be cheaper. That is not the case. But 

overall, that clearly is where we would like to see GSA go. 

Senator CARPER. Thanks. Mr. Chairman, thanks very much. Will 

we have time to ask some more questions, as well? 

Senator COBURN. Yes. 

Senator CARPER. Good. Thank you. 

Senator COBURN. I want to go to Mr. Neary here first, and I will 

just kind of go down the line. You have delegation rights from GSA 

to do certain things. What is the total number of buildings that you 

all have? How many are owned, how many are leased, and how 

many are lease-purchased? 

Mr. NEARY. We have about 5,300 buildings. I don’t know the specific number that is leased. In terms of square footage, approximately 7.5 percent of the space is leased and the rest is owned. The 

bulk of that is in the health care system. The majority of office 

space that the Veterans Benefits Administration uses is acquired 

through GSA. 

Senator COBURN. Would you agree that most often, a lease-purchase would be better for us than a lease? 

Mr. NEARY. In terms of the economics, I think that probably 

would be correct. 

Senator COBURN. What percentage are lease-purchase in the VA? 

Mr. NEARY. I don’t believe we have any lease-purchases in the 

VA. 

Senator COBURN. So my question is, why not? 

Mr. NEARY. I think, as Mr. Matthews said, in locating space and 

acquiring space to accomplish our mission, there are various options available to us. Probably no agency would say that we receive 

the amount of capital that we would like or that we feel that we 

need. Most of our leases are smaller leases and I think they are 

appropriate to be done as an operating lease. They are short-term 

requirements, or they are small spaces, rural areas, kind of things. 

We have a number of leases, large clinics, for example, that probably meet the characterization of Mr. Goldstein that you need to 

make a business choice. In some of those cases, we have obviously 

17

constructed a lot. We have a large construction program. But in 

some cases, we have chosen to lease. 

Senator COBURN. I am still having trouble with this lack of leasepurchase, because, first of all, we are the best payer in the country. 

We have the best credit rating, as Mr. Matthews testified. We 

lose—even in lease-purchase, what is the internal rate of return 

you all allow to the people you lease from? I mean, do you look at 

their internal rate of return to make a decision of whether or not 

this is a good lease? 

Mr. NEARY. I don’t know the answer to that. We could provide 

that to the Subcommittee. 

Senator COBURN. OK. I think that is really important, because 

being in the commercial real estate business to a very small degree 

myself, we make all our decisions based on what the internal rate 

of return is going to be. It would seem to me that there has not 

been enough emphasis on lease-purchase, because lease-purchase 

gets us around the budget rules to a certain extent, but a leasepurchase allows us to gain equity. And even though we might lose 

on some because of the smallness or the geographical location, if 

you look at commercial real estate appreciation as a whole in this 

country, there has been a significant increase in it in the last 10 

years. 

The American taxpayer got no benefit out of that equity appreciation except for an increase in the lease rate as the property increased in value, if it is based on any type of internal rate of return. I would love for you all to tell us the criteria that you all use 

in terms of internal rate of return when you look at a lease and 

also to break it down. 

If you have no true lease-purchase, what is it in the budget accounting that Senator Carper and I can do to help you all with the 

budget scoring rules to make this a better deal for the American 

public? Off the top of your head, do you know what we need to do 

to help you in terms of budget scoring? 

Mr. NEARY. I am probably not one who is in a position to really 

respond to that. I am not an economist or particularly knowledgeable about economics. 

Regarding lease-purchase, under the current budget scoring 

rules, if we were to enter into a lease-purchase agreement, that 

would be scored as a capital lease and that is the primary reason 

we have not done that. 

Senator COBURN. So the whole cost of that lease would be 

scored——

Mr. NEARY. Present value. 

Senator COBURN. So that is something we could change. So we 

end up losing equity gain by having the budget scoring rules that 

way, correct? This is an opportunity cost lost because we didn’t go 

lease-purchase because we are going to score it as a capital cost for 

the total cost of the lease over the life of the lease, correct? Is that 

what you are saying? 

Mr. NEARY. That is correct. 

Senator COBURN. So that is something that hinders you from 

making the best decision for the American taxpayer, is that right? 

Mr. NEARY. Well, Senator——

Senator COBURN. Under the budget scoring? 

18

Mr. NEARY. I am here representing the Administration in some 

sense, I guess, and we in VA are required to follow the existing 

budget scoring rules. 

Senator COBURN. Oh, I understand that. The whole purpose of 

this hearing—there are two or three. One is to figure out what you 

are doing and how you are doing it. The other is if there are things 

that we can change to save the American taxpayer money, we need 

to be doing that, and when we handicap your ability to make the 

best equitable deal for the country, and it may not always be a capital purchase. It may be smarter for us to do a lease-purchase. 

But if you have a hand tied behind your back and you have lease 

versus purchase, most of the time, you are going to lease because 

of the way it is scored. So if it is a lease-purchase and it is scored 

just like a capitalization of a new building, then we are going to 

have problems ever getting you to the point to make good leasepurchase agreements. My medical building at home was a leasepurchase. It has been a great deal. As the building has appreciated, 

a portion of my rent has gone towards equity, and so I have gained 

in that equity. 

Bill, do you have any comments on that? 

Mr. MATTHEWS. It is a difficult issue for us to talk about. It is 

hard to argue that we are not disadvantaged by not having more 

opportunities to take an equity position where, as I said, you have 

criteria for very long-term large requirements where the flexibility 

of leasing is not as important to you. I don’t think the Budget Enforcement Act was written around my program area, so it is hard 

for me to understand fully what Congress’ objectives and intents 

were there. 

Senator COBURN. I guess the thing I would like to get from you 

is a commitment to help us figure out what we can change in terms 

of the Budget Act that will make your job more likely to be successful in capturing equity growth and lowering overall cost and ending 

up with real assets, even though we may turn around and sell 

them. We all know that a lease, a 15-year lease which expires, all 

you got was the space to use, whereas if it is a lease-purchase 

agreement, you got the space and a portion of the equity. I know 

those aren’t always going to be good, because you may not be able 

to negotiate the best deal to get us them. 

But I just would like a commitment from you to give this Subcommittee what you think needs to be changed in the Budget Act 

so we can make those—or at least we can argue for those changes 

when we come to the next Congress, or change the Budget Act, because I see a real loss. In reading GAO’s report, $700 million here, 

$129 million here. 

The SEC obviously would have done a whole lot better had they 

been doing the GSA Best Buy program than doing it on their own, 

based on the mistakes they made and the fact that they forgot to 

include leasehold improvements in their lease when they bought it. 

That tells you that not all agencies have the capability to do what 

you do. 

I would also say, I don’t have any argument with how you all are 

running what you are running. What I want to do is get us more 

value, know what we have got, know what we need to get rid of, 

and use those assets to leverage other assets and to create a way 

19

for, if you have a building that is not out there and you can say, 

well, I can sell this building. We don’t have a need for it. I can use 

that money to lease-purchase four other buildings the same size 

and offset the budget rules to be able to get there. What I am trying to do is help you save us money for our grandkids. 

So I would just like that commitment from you, if you will, or 

maybe the Administration won’t let you do that, I don’t know. 

Mr. MATTHEWS. Well, as my colleague said, not being an attorney 

or an economist, it is difficult for us to fully respond to that. I think 

we are committed to looking for additional tools. GSA supported reform legislation that you may be aware of in previous years, asking 

for more leeway to do something closer to enhanced use leasing 

that involved redevelopment of underutilized Federal assets. We 

have some limited authorities in that respect and we are trying to 

find ways to use those to get closer to sharing an equity position 

and still remaining on the right side of the operating lease problem. 

I can commit to sharing our previous thoughts on reform legislation with the Subcommittee separately. 

Senator COBURN. OK. Good enough. 

Let me ask you the same question that I asked Mr. Neary. Total 

number of buildings, total number owned, total number leased, 

total number lease-purchased. 

Mr. MATTHEWS. May we submit those separately? 

Senator COBURN. Do we know them? 

Mr. MATTHEWS. Yes, we have very detailed records. 

Senator COBURN. And you can give us by numbers as well as by 

square footage? 

Mr. MATTHEWS. Absolutely. Owned, leased, and square footage. 

Senator COBURN. And lease-purchased. We do have some leasepurchases going on. 

Mr. MATTHEWS. We have some transactions from prescoring 

years that might qualify as lease-purchases, but we haven’t done 

any since about 1990, when that legislation went into effect. 

Senator COBURN. Let me ask you another question. Is the problem not having enhanced use leasing authority, or is the problem 

the budget scoring rules? Which is it? 

Mr. MATTHEWS. I would be inclined to say the first. The principal 

problem is the Budget Enforcement Act requirement for scoring 

capital leases. 

Senator COBURN. So it is the scoring rules, it is not the enhanced 

leasing authority? 

Mr. MATTHEWS. Having the additional tools would make it easier, as well. 

Senator COBURN. But if we changed the scoring rules, you would 

have an open door to make the best equity decision for the country, 

is that correct? 

Mr. MATTHEWS. We would be in a better position than we are 

today. 

Senator COBURN. OK, then I will ask it another way. What 

would put you in the best position to make the best equity decision 

for the people of this country? 

20

Mr. MATTHEWS. I believe if we could make those decisions without having to be concerned about scoring as a capital lease, we 

could come closer to getting the best equity position. 

Senator COBURN. OK. You said the same thing. I will go back to 

you, and I will come back and finish up. 

Senator CARPER. Mr. Matthews, you mentioned, I believe, some 

earlier reform efforts that had been undertaken along these lines. 

I would just ask you to go back in time to sort of recall, if you will, 

the genesis of those efforts, what came of them, what was accomplished, what was left on the table. 

Mr. MATTHEWS. Well, at this point, nothing has come of them. 

The principal provisions, GSA supported legislation that would 

have allowed all agencies to retain proceeds from the sale of underutilized property and would have allowed public-private partnerships for the development of a kind of enhanced use lease on government property with underlying ownership remaining with the 

government. There were some other provisions that I can’t recall 

at this point. I wasn’t directly involved with that legislation. None 

of those moved beyond Committee that I am aware of. 

Senator CARPER. When were those ideas proposed? Just roughly, 

was it the 1990s or the 1980s? 

Mr. MATTHEWS. It was in the last Congress and the one before 

that, as well, I believe. 

Senator CARPER. Do you know what the genesis was? Was it 

something that you all came up with yourselves, or was it proposed 

by others? Was it some of GAO’s doing? 

Mr. MATTHEWS. Part of the genesis was our move toward increased asset management. Most land-holding agencies are analyzing the existing inventory we have for the very reasons that you 

have mentioned in your opening remarks. We are looking for ways 

to realize some value from those assets or to dispose of them in the 

most expeditious way and perhaps use the equity for reinvestment 

in assets we retain, or to exchange them for something else that 

supports our program requirements. GSA is not the only agency 

that has a fairly passionate desire to try to be able to do that, 

egged on by our friends at GAO, who have documented some of the 

problems we have because we have not as rapidly dealt with underutilized and deteriorated assets as perhaps we should. 

Senator CARPER. If you will, and this might be for you, Mr. Matthews, or it might be for one of our other witnesses, but just sort 

of walk us through the scoring under current law for operating 

leases, for lease-purchases, and also just for outright purchases. 

Mr. MATTHEWS. I would prefer to submit something in writing on 

that, with your permission. I can review with you the six principal 

tests for scoring, and these are OMB’s interpretation in OMB Circular A–11 of how to comply with the law. 

Ownership of the asset remains with the lessor during the term 

of the lease and is not transferred at or shortly after the end of the 

lease period. The lease does not contain a bargain price purchase 

option. The lease term does not exceed 75 percent of the estimated 

economic lifetime of the asset. The present value of the minimum 

lease payments over the life of the lease does not exceed 90 percent 

of fair market value at the beginning of the lease term. The asset 

21

is a general purpose asset rather than a special, unique government asset. And there is a private sector market for the asset. 

These rules are intended to work together. If you trip one, that 

is the end of the discussion, and the one that is most often tripped 

in GSA’s experience is the 90 percent of fair market value rule. 

Senator CARPER. Again, maybe one last question for each of you. 

If you were in our shoes, if you were the junior Senator from Oklahoma or the junior Senator from Delaware and you were serving 

on this Subcommittee, what would you do about this? Mr. Goldstein, do you want to go first? 

Mr. GOLDSTEIN. I think there would be a couple of things, Senator. I was tempted—GAO has been writing about this issue—this 

is a report from 1980. We have basically been saying the same 

thing for 25 years. 

Senator CARPER. You are consistent. 

Mr. GOLDSTEIN. For better or worse, I suspect we are. It is a very 

complex issue. It is among the reasons that we put Federal property, the government’s portfolio, on our high-risk list in 2003 and 

why it remains there today. It is a very complex issue. There are 

a number of issues that must be dealt with. 

We think there are a couple of things that really could be done. 

For example, we made a recommendation in 2003 in our high-risk 

report that there be a transformation strategy developed by the Administration, something that would bring together the variety of 

stakeholders that have a role in trying to figure out how to deal 

with these issues, and it is not just the leasing issue. It includes 

the issues we have talked about already, about dealing with vacant 

and underutilized property, dealing with having space that we 

can’t fix. The Interior Department IG has said that Interior has a 

repair and meaintenance backlog of between $8 and $11 billion. It 

is dealing with, in today’s world, the security needs that obviously 

government property has to have to ensure the safety of the people 

and the facilities, things like that. 

There really does need to be, in our opinion, a transformation 

strategy that would help get us to the next place that we have to 

be instead of having to write all these reports for all these years, 

frankly. 

We do think, additionally, that—and we have said this in a number of our reports—that it would be important to have a budget 

transparency or budget neutrality, if you will, for all of the various 

options, whether it is ownership or whether it is purchase, whether 

it is lease-purchase, capital lease, or an operating lease, so that 

folks like yourselves, so that Congress and other stakeholders can 

make better informed decisions where everything is recognized up 

front in the budget so you can determine across the board what is 

the best deal for the government and the taxpayer. And yes, obviously, there are other issues that would have to be dealt with, but 

at least you would be understanding the commitment that the government is going to make across the board and you would be able 

to confront it. 

The concern we have, obviously, is that there are things that 

would have to be fixed. The Budget Enforcement Act caps would 

have to be altered in some fashion. Additionally, you would have 

to understand, probably in much more detail and for a longer peVerDate 0ct 09 2002 12:06 Oct 17, 2006 Jkt 024441 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 C:\DOCS\24441.TXT SAFFAIRS PsN: PAT
22

riod of time, what the government’s space needs are if you are 

going to actually use that approach. So we think that would be important. 

And then we would ask that there be a re-emphasis on eliminating vacant and underutilized space because one agency alone, 

the Department of Defense, for instance, has said that it costs between $3 and $4 billion annually for it to maintain space that it 

doesn’t need. Well, that would have paid for quite a large amount 

of re-investment in the real property portfolio. So there are other 

ways. There are some ways that you could move this forward, I 

think. 

Senator CARPER. All right, thanks. 

Mr. Matthews, just quickly, if you could respond. If you were in 

our shoes——

Mr. MATTHEWS. I might ask if the original intent of the Budget 

Enforcement Act was originally intended to apply to routine real 

estate leasing transactions. I have heard people through the year 

ask if that really was part of the intent to cover. We certainly in 

no way question the scoring rules. We have learned to live with 

them and make them work the best we can. The idea of budget 

neutrality would go a long way toward allowing us to make the 

most efficient business judgment and have it out there. I am not 

sure if that is going to change the government’s ability to fund all 

the proposals that would legitimately be put forward as the best 

option. 

Senator CARPER. OK. Mr. Neary, last word. 

Mr. NEARY. In VA, we have recently completed a major study of 

our infrastructure and our health care programs across the United 

States, known as Capital Asset Realignment for Enhanced Services. It grew out of a report from GAO that recognizes that the nature of health care had changed considerably over the years and all 

of these large hospitals out there were no longer needed for that 

purpose. The Congress has been very supportive of our implementation of some of those recommendations to help us eliminate unused space. I would ask that you would continue to support that. 

In terms of the budget scorekeeping rules, from a purely—executing a real estate program, as Mr. Matthews said, we want to 

have as many tools and as much flexibility available to us to make 

the best deals to, at the same time, accomplish our mission. 

Senator CARPER. All right, thanks. Thanks to each of you. 

Senator COBURN. A couple of moments ago, I think Mr. Matthews said that anything above $2.41 million has to come back and 

get specific authorization. Is that right? 

Mr. MATTHEWS. That is correct. That is the fiscal year 2006 prospectus threshold. 

Senator COBURN. So on the SEC debacle, they got authority to 

do their own leases, which were far in excess of that. Did they have 

to come check with somebody? 

Mr. MATTHEWS. I am sorry, I can’t answer that question, sir. 

Senator COBURN. It went to, what, $60 million on the SEC 

leases? It was $60 or $70 million. Here is the thing I am trying to 

find out, is if you allow somebody to go away from GSA’s Best Buy 

program—I am convinced GSA is the best buy. VA, you have done 

a good job, but you go back to them anyhow in terms of the guideVerDate 0ct 09 2002 12:06 Oct 17, 2006 Jkt 024441 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 C:\DOCS\24441.TXT SAFFAIRS PsN: PAT
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lines. But if you allow them to go away, how do those limitations 

and requirements—or let them go independently—how do they 

apply to them? How did SEC get away with doing a lease that was 

far greater than this threshold with nobody in Congress knowing 

it was a mess until we discovered that it was a mess? 

Mr. MATTHEWS. I can tell you that it is not our policy to delegate 

prospectus-level leases. I am not familiar with the timing of when 

that was done and whether it was done strictly on SEC’s own authority, but it is not our policy to grant under our delegation program the authority to do prospectus-level——

Senator COBURN. So you don’t really know how SEC got that authority? 

Mr. MATTHEWS. No, sir, I do not. 

Senator COBURN. Well, they didn’t do it very well, so there is a 

star in your all’s crown. 

You have a national broker contract right now. What does that 

cost? 

Mr. MATTHEWS. It doesn’t really cost anything. We don’t pay 

them. They take a commission out of the transaction. 

Senator COBURN. OK, but we pay them, because that transaction 

fee is added back in to the cost of the lease. What is the average 

cost of that when we utilize these broker contracts? 

Mr. MATTHEWS. I am sorry, we are only now deploying it. I 

couldn’t tell you what the annual cost of those——

Senator COBURN. That is an important thing for you to know, because if they are really going to supply you a service, and there is 

a charge for it, some of it may be borne by the property owner but 

we are certainly going to pay a cost of that commission, that broker 

fee, is to know what are you getting for that money. I mean, they 

are not doing it for free and the property owner isn’t going to absorb all that, so we as taxpayers are paying a portion of that. I 

think it is real important for us to look at that. 

And my question to follow up, as you utilize them, because they 

are in regional areas and they are better—I guess the presumption 

is they know the local real estate markets better. They can help 

you execute better. How has that been cost saving inside GSA? 

Now you have got four national broker contracts out there. Their 

whole purpose is to help you be more efficient, get you to the right 

buildings at the right prices at the right time. What has it done 

to save work on the inside, because it obviously is an added cost. 

Is there a cost-benefit analysis looked at for, one, why you went 

that way, and two, do you have plans to do a cost-benefit analysis 

to see if it was the right decision? 

Mr. MATTHEWS. There has been, but I am not prepared to speak 

to it. 

Senator COBURN. Well, you can send that to us. 

Mr. MATTHEWS. Yes, sir. 

Senator COBURN. And are there plans to do a cost-benefit analysis to look at this at the end of the year to see if it has been beneficial? 

Mr. MATTHEWS. I am sure there will be an intent to review the 

performance at the end of the first year. 

Mr. GOLDSTEIN. The GAO is currently doing a review for a House 

Committee on this topic. 

24

Senator COBURN. Wonderful. So our Subcommittee would certainly like to have a copy of that review? 

Mr. GOLDSTEIN. Yes, sir. 

Senator COBURN. Thank you. I would like one also, Mr. Goldstein. So you will know, we are planning a hearing in this Subcommittee on the buildings that need to be disposed of in this country and that will be coming up before the end of the year. So we 

will probably have you back as well as GSA as well as DOD as well 

as a whole lot of other people. That is going to happen. 

Mr. GOLDSTEIN. We would be happy to, sir. 

Senator COBURN. Let me ask you something, Mr. Goldstein. Does 

GAO look at internal rate of returns on leases that GSA has done? 

Mr. GOLDSTEIN. Not recently. We haven’t done, in fact, much 

work in this area in probably 5, 6, or 7 years now. What we have 

tended to do when we have examined some of the kinds of issues 

that you have put up here, we have looked at the economic analyses and the prospectuses that have been done by GSA and made 

determinations based on that. We haven’t necessarily looked at the 

internal rates. 

Senator COBURN. OK. In your testimony, Mr. Matthews, you 

talked about when you consider a proposal at a higher price, and 

I want you to have that authority. There is no question there are 

going to be times when the lowest bid isn’t the best deal for you. 

I understand that. Can you tell us what guidelines you use to make 

those determinations? What are the policy guidelines that say, OK, 

we are in one of these situations where we think the lowest price 

is not the best deal for us. What are the guidelines that your people follow to make that decision? 

Mr. MATTHEWS. Well, there is a whole web of Federal Acquisition 

Regulations that help with that, but for a source selection-type procurement, there would be a source selection plan at which GSA, 

with some input from the customer for whom we are acting, would 

identify those factors that are most important and they would 

bear—in some cases, they might be location-specific, like access to 

a Metro stop or other public transportation. They might have to do 

with additional efficiencies in operating costs. There is no standard 

answer. In some cases, security would be a big driver. Are we able 

to get the full set back or other security-enhancing features in a 

building within the competitive range. 

Senator COBURN. So there are guidelines, but what is the thing 

to protect us from not buying the higher-priced lease when it is 

really not needed? What is in there to protect us from influence 

peddling in the lease procurement, when somebody says, hey, I 

have got a deal here? In other words, how can somebody skirt right 

along the edge of those rules and still advantage themselves with 

GSA and not really have been qualified? What are the procedures 

that are there? 

Mr. MATTHEWS. Generally, you have a contracting officer and a 

group of people who write the plan, develop criteria to apply to the 

different offers which have to be reduced in some detail in writing. 

It would be difficult for me to imagine, short of——

Senator COBURN. So it is at a contractor level, I mean, a contracting officer level? 

25

Mr. MATTHEWS. Yes. A contracting officer would oversee that. 

There would be a source selection committee with a chairman. 

They would have written the plan and developed criteria to apply 

before they ever saw the offers. They would have to evaluate each 

one in writing, technically and price. And then if they elected to go 

for other than the low price, they would have to write the justification and explain how, in their evaluation of the criteria, it was justified. 

Senator COBURN. So it is not a single individual decision. You 

have got a safeguard in there with backup? 

Mr. MATTHEWS. Yes. 

Senator COBURN. So I think, and correct me if I am wrong, basically, what GSA is doing now is leasing buildings. 

Mr. MATTHEWS. Yes. Those are the two overwhelmingly predominant tools we have available to us. 

Senator COBURN. Leasing or purchasing? 

Mr. MATTHEWS. Leasing or direct Federal construction. 

Senator COBURN. Right. 

Mr. MATTHEWS. Those are the two options. 

Senator COBURN. But that square footage, you said, hasn’t significantly changed and the leasing square footage has, so basically 

what we have been doing the last few years is the vast majority 

of the space that we have been taking, we have been leasing? 

Mr. MATTHEWS. Yes. Prior to the scoring rules, we were occasionally given access to the Federal Finance Bank, where we were able 

to do a form of purchase contract, where we were able to borrow 

the money to construct the building and then pay it back as if it 

were a lease over a period of time. 

Senator COBURN. Do you find it odd that the SEC would sign a 

lease for leasehold improvements at 9 percent cost for the leasehold 

improvements on top of the lease? 

Mr. MATTHEWS. Without reviewing the whole offer, I would be 

reluctant to comment on that. 

Senator COBURN. OK. I take it from your testimony, you would 

be in favor of more public-private partnerships in terms of real estate transactions to help us leverage our dollars? 

Mr. MATTHEWS. I would be in favor of having more options on 

the table for us other than——

Senator COBURN. Of which one of those is that? 

The 2002 Defense authorization bill gave DOD the authority to 

do enhanced use leasing. That law also exempted DOD from having 

to report any of its leases. Has GAO studied this or found that to 

be problematic, Mr. Goldstein? 

Mr. GOLDSTEIN. I am not aware that we have studied this. We 

will get an answer for you for the record——

Senator COBURN. OK. 

Mr. GOLDSTEIN [continuing]. To the extent to which we are able 

to determine if it has been problematic. 

Senator COBURN. What is the long-term commitment, Mr. Matthews, on the commitment to the national broker contracts that 

you have signed? What is the length of the term with those? 

Mr. MATTHEWS. Excuse me just one second. I believe I have that 

answer here. A 5-year commitment with options for renewal. 

Senator COBURN. OK. Was an RFP put out for that, or——

26

Mr. MATTHEWS. Yes, it was. 

Senator COBURN. This went through the regular process and 

then you chose down based on what you thought would give us the 

best broad experience and exposure and regionalization? 

Mr. MATTHEWS. Yes, sir, and we chose four. I don’t know if I 

made that clear. 

Senator COBURN. Yes. 

Mr. MATTHEWS. There were four large companies and they subcontract, so it is an extensive network of resources. 

Senator COBURN. Have you all been used at all during the response to Hurricanes Katrina and Rita in terms of leasing? 

Mr. MATTHEWS. I am not aware that the broker contract has yet 

been used, although I heard that discussed just this week. 

Senator COBURN. All right. First of all, you guys have all been 

great. Thank you. There are several questions we have had for you. 

I want to change what needs to be changed so that you can do 

the best job for our grandkids. I came to Congress, again, reluctantly, because I want the same future for all of our grandkids that 

has been created as an opportunity for us. When we are spending 

maybe $1 billion or $2 billion more a year in leases when we could 

be having that same money go towards equity assets and equity 

appreciation, that is money we could use to pay for Katrina, that 

is money we could pay for raises for Federal employees, enhanced 

benefits. I mean, there are all sorts of things. 

So my commitment is sincere and I would love to have each of 

your help. How do we fix it to make it to where you can do your 

job in a better financial way that gets us a better return, smarter 

investments, and in the long run protects all of our security, our 

financial security? I am not worried about our international security from terrorism. The bigger threat we have is financial. We are 

on an absolutely unsustainable course, and if we can find a couple 

of billion here by reforming this—I have no lack of confidence in 

what you all do, but if we can give you the tools to allow you to 

save us the money, then we ought to be about doing that. 

If you don’t want to talk as a member of the Administration, if 

you want to call me on my cell phone and say, here are some ideas 

for you, I am happy to take that, too. I understand the rules of procedure in terms of working in the Administration. But there have 

got to be ways we can do it better and I want to take the handcuffs 

off of you and let you do it. 

I appreciate your service. I appreciate you coming and I thank 

you for your testimony. 

The hearing is adjourned. 

[Whereupon, at 3:40 p.m., the Subcommittee was adjourned.] 

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