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[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]

  ASSESSING VA'S CAPITAL INVESTMENT OPTIONS TO PROVIDE VETERANS' CARE

=======================================================================

                                HEARING

                               before the

                     COMMITTEE ON VETERANS' AFFAIRS
                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                        THURSDAY, JUNE 27, 2013

                               __________

                           Serial No. 113-26

                               __________

       Printed for the use of the Committee on Veterans' Affairs

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                     COMMITTEE ON VETERANS' AFFAIRS

                     JEFF MILLER, Florida, Chairman

DOUG LAMBORN, Colorado               MICHAEL H. MICHAUD, Maine, Ranking
GUS M. BILIRAKIS, Florida            CORRINE BROWN, Florida
DAVID P. ROE, Tennessee              MARK TAKANO, California
BILL FLORES, Texas                   JULIA BROWNLEY, California
JEFF DENHAM, California              DINA TITUS, Nevada
JON RUNYAN, New Jersey               ANN KIRKPATRICK, Arizona
DAN BENISHEK, Michigan               RAUL RUIZ, California
TIM HUELSKAMP, Kansas                GLORIA NEGRETE MCLEOD, California
MARK E. AMODEI, Nevada               ANN M. KUSTER, New Hampshire
MIKE COFFMAN, Colorado               BETO O'ROURKE, Texas
BRAD R. WENSTRUP, Ohio               TIMOTHY J. WALZ, Minnesota
PAUL COOK, California
JACKIE WALORSKI, Indiana

            Helen W. Tolar, Staff Director and Chief Counsel

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Veterans' Affairs are also 
published in electronic form. The printed hearing record remains the 
official version. Because electronic submissions are used to prepare 
both printed and electronic versions of the hearing record, the process 
of converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.

                            C O N T E N T S

                               __________

                             June 27, 2013

                                                                   Page

Assessing VA's Capital Investment Options To Provide Veterans' 
  Care...........................................................     1

                           OPENING STATEMENTS

Hon. Flores, Acting Chairman, Full Committee.....................     1
Hon. Jeff Miller, Chairman, Full Committee, Prepared Statement 
  only...........................................................    39
Hon. Michael Michaud, Ranking Minority Member, Full Committee....     3
    Prepared Statement of Hon. Michaud...........................    40
Hon. Jackie Walorski, Prepared Statement only....................    41

                               WITNESSES

Robert A. Sunshine, Deputy Director, Congressional Budget Office.     4
    Prepared Statement of Mr. Sunshine...........................    41
Hon. Robert A. Petzel, M.D., Under Secretary for Health, Veterans 
  Health Administration, U.S. Department of Veterans Affairs.....    23
    Prepared Statement of Hon. Petzel............................    44
    Accompanied by:

      Philip Matkovsky, Assistant Deputy Under Secretary for 
          Health for Administrative Operations, Veterans Health 
          Administration, U.S. Department of Veterans Affairs

      Jim Sullivan, Director, Office of Asset Enterprise 
          Management, U.S. Department of Veterans Affairs

                        STATEMENT FOR THE RECORD

The American Legion..............................................    48

 
  ASSESSING VA'S CAPITAL INVESTMENT OPTIONS TO PROVIDE VETERANS' CARE

                        Thursday, June 27, 2013

                     U.S. House of Representatives,
                            Committee on Veterans' Affairs,
                                                   Washington, D.C.
    The Committee met, pursuant to notice, at 10:00 a.m., in 
Room 334, Cannon House Office Building, Hon. Jeff Miller 
[Chairman of the Committee] presiding.
    Present: Representatives Bilirakis, Roe, Flores, Runyan, 
Benishek, Huelskamp, Coffman, Walorski, Michaud, Brownley, 
Kirkpatrick, Negrete McLeod, O'Rourke, Walz.
    Also Present: Representatives Boustany, Neugebauer.

             OPENING STATEMENT OF HON. BILL FLORES

    Mr. Flores. The Committee will come to order.
    Chairman Miller has a scheduling conflict for the opening 
of this meeting and perhaps more of it than that, and he has 
asked me to step in and chair the meeting until such time as he 
gets here.
    By the way, for what it is worth, today is Chairman 
Miller's birthday, so when you see him, you might want to give 
a hardy congratulations on being 49 plus one or two.
    Before we begin, I would like to ask unanimous consent for 
our colleagues, Charles Boustany from Louisiana and Randy 
Neugebauer from Texas, to sit at the dais and participate in 
today's proceedings when they get here. Hearing no objection, 
so ordered.
    Good morning and welcome to today's Full Committee hearing, 
Assessing VA's Capital Investment Options to Provide Veterans' 
Care.
    As today is National Post-traumatic Stress Disorder 
Awareness Day, I would like to take a brief moment to address 
those veterans experiencing post-traumatic stress disorder who 
may be in attendance or listening.
    Hope and healing are possible and I encourage you and all 
of those suffering to reach out for help. You can call 1-800-
273-TALK. That's 1-800-273-8255 and press one for veterans.
    Now, turning our attention to what we are gathered here 
today to discuss--the potential for a new paradigm of care for 
our veterans through the Department of Veterans Affairs' (VA's) 
capital investment programs.
    As many of you know, when this Committee was considering 
legislation to authorize VA's major medical facility projects 
and leases last year, the Congressional Budget Office, or CBO 
as we call it, raised concerns about how to properly account 
for VA's lease authorizations.
    CBO after soliciting and receiving additional information 
from VA about the lease contracts determined that such leases 
should be classified as capital leases rather than as operating 
leases as CBO had done in the past.
    This new scoring criteria resulted in new challenges to our 
ability to authorize VA's leases as under CBO's new scoring 
construct they now constitute significant direct spending costs 
that must be offset under statutory PAYGO requirements and 
House and Senate budget rules.
    For the 27 pending leases, that means finding more than 
$2.3 billion in up-front savings from other government 
programs.
    This issue is not one of politics or party nor is it one 
that pits one body of Congress or one branch of government 
against another. Rather, this is an issue that all of us who 
are tasked with providing high-quality care and services for 
our veterans are facing together and it is one that will take 
our collective effort to resolve.
    VA has proposed 27 major medical facility leases, most of 
them for community-based outpatient clinics in the current 
budget. Of these, 21 are expansions or consolidations of 
existing lease facilities and six are new leases.
    Let me be clear. The needs of our veterans in those areas 
are going to be met, but how those needs will be met in light 
of CBO's reclassification of VA's lease authorization request 
is what we will discuss today.
    Information VA has circulated to Members of Congress about 
the status of the pending lease request includes a statement 
that says, I quote, ``Until last year, enactment of these 
leases has been a fairly routine annual exercise,'' unquote.
    I do not take that as a compliment and neither should the 
department. Expending our hard-working taxpayer dollars on 
authorizing costly capital investment projects should never be 
a matter of routine. Rather, it should be a responsibility that 
is taken seriously, evaluated carefully, and scrutinized 
constantly to ensure that the capital investments we are 
undertaking are expanding our veterans' access to care and not 
just expanding VA's bureaucratic reach.
    Last year, Chairman Miller committed to working closely 
with VA, CBO, and our colleagues in the Senate to find a way 
forward for VA's major medical facility lease program to 
provide high-quality care and services for our veterans. That 
commitment remains today for Chairman Miller as well as the 
rest of this Committee.
    However, we can no longer afford to invest our time arguing 
about the merits of CBO's scoring determinations. That does not 
get our veterans closer to the care they need which is the goal 
that we all share and that we must achieve.
    Absent a way forward to either adhere to CBO's ruling and 
pay for these leases or collectively decide to waive our budget 
rules, we must take a hard look outside the box to assess our 
options for developing these projects.
    Those options include new constructs for public-private 
partnerships, joint collaborations, and other avenues of care. 
That is what I look forward to discussing here today.
    I now yield to our Ranking Member, Mr. Michaud, for any 
opening statement he may have.

           OPENING STATEMENT OF HON. MICHAEL MICHAUD

    Mr. Michaud. Thank you very much, Mr. Chairman, for having 
this very important hearing today.
    Ensuring that the Department of Veterans Affairs has the 
proper infrastructure and facilities to provide safe, 
effective, quality health care to our veterans is a priority of 
mine and a priority of this Committee to make sure that that 
happens.
    Some of the ways in which VA provides this care is through 
construction programs, sharing agreements, collaboration, and 
other Federal agency and leasing authority. This is an 
important hearing and an important step in our ongoing 
discussion regarding how we can best meet these infrastructure 
and facility needs of the VA this year and in the years and 
decades to come.
    The VA has an ever-increasing backlog of construction 
requests. Along with this backlog, they are facing an 
environment of constrained Federal spending and uncertainty 
regarding where our veterans will live and how in the decades 
to follow will medicine be provided to our veterans.
    The VA has an inventory of many facilities that are over 50 
years old and that were built to provide medicine in a way that 
it was provided following World War II. We must ensure that the 
facilities we build today will meet the needs of the future and 
that we build or acquire them at a reasonable cost.
    One way VA meets its infrastructure needs today is through 
seeking authorization for major medical facility leases as 
required in statutes. In light of recent events regarding a 
change in the way that the Congressional Budget Office treats 
VA medical facility lease authority for scoring purposes, the 
time has come to look for an alternative solution. This hearing 
is an important step to begin that discussion.
    Last year, the CBO has determined that VA leases were 
similar to contracts for acquiring facilities and, thus, a form 
of third-party financing as compared to operating leases. CBO's 
decision decided that in the views that this third-party 
financing was equivalent to a government purchase of the asset 
and, therefore, the cost should be recorded up front as 
compared to spread out annually over the duration of the lease 
as in the practices of operating leases and how VA medical 
facilities' lease requirements were scored in the past.
    For 20 years, CBO has been scoring VA's facility leases as 
operating leases. However, in preparing the cost-estimate for 
the construction authorization for fiscal year 2012, CBO 
received additional information from VA that caused CBO to 
determine that facility leases were executed more like capital 
leases and, therefore, the cost of these leases should be 
recorded up front for budgetary purposes.
    This determination led to CBO's score of $1.2 billion in 
direct spending for the leases originally contained in the 
fiscal year 2012 construction bill. Because offsets could not 
be found for the lease, the leases were stripped out of that 
bill.
    For over a year now, we have been unable to come to a 
solution or put forth alternative ideas to solve this problem. 
In all honesty, it has been disappointing and I hope that this 
hearing will provide some open discussion from all parties 
involved.
    I would like to hear from our witnesses today whether there 
was a change in VA's policy regarding the types of leases it is 
undertaking. I want to hear from both panels on what they have 
done together to try to solve this issue.
    Is it a matter of disagreeing on definitions or terms or 
does it need a legislative fix to solve the problem? Has VA 
looked at alternative ways besides the major medical facility 
lease program as it is currently operating to provide services 
to our veterans? I have many more questions without answers.
    What I do know is if we do not find a way forward, over 
340,000 veterans, 340,000 veterans in 20 states could be 
negatively affected by this. That is simply unacceptable and we 
must find a way forward.
    In short, I would like to learn from our witnesses where we 
go from here not just in terms of VA's medical facility lease 
program but where do we go from here in terms of providing the 
infrastructure needed to provide a world-class health care 
system for our veterans this year and 20 years from now.
    So I look forward to hearing the witnesses today. And I 
want to thank all the panelists today as well.
    And I want to thank you, Mr. Chairman, and I yield back the 
balance of my time.

    [The prepared statement of Hon. Michaud appears in the 
Appendix]

    Mr. Flores. Thank you, Mr. Michaud.
    I would now like to welcome our first panel to the witness 
table. With us today from the CBO is Mr. Robert A. Sunshine, 
the Deputy Director of that organization.
    Sir, thank you for being here today. You may now proceed 
with your testimony. We have five minutes allotted for that.

                STATEMENT OF ROBERT A. SUNSHINE

    Mr. Sunshine. Thank you, Mr. Chairman.
    Mr. Chairman, Congress Michaud, Members of the Committee, 
thank you for inviting me here today to discuss the budgetary 
treatment of VA's leases of medical facilities.
    I should note that veterans' medical centers are important 
to our Nation and to our veterans and we are not questioning 
their value or their importance.
    What we address, what our job is to address, is how 
transactions are treated in the budget. And so that is what I 
will talk about today.
    So let me begin by describing CBO's role in the process. 
Our job is to provide the Congress with the best possible 
information about the nature and magnitude of the government's 
financial commitments that would result from any particular 
legislative proposal.
    CBO does not determine what kinds of purchases agencies can 
make or what kinds of leases they may enter into nor does CBO 
determine how agencies record those transactions in their 
budgets. That is up to the agencies and the Office of 
Management and Budget. Our job is to score legislation.
    How do we analyze proposed purchases or leases of property? 
CBO assesses the government's financial commitment by taking 
into account both the form and the substance of a transaction. 
We do that because over the years, we have encountered a number 
of transactions that were structured to appear one way but 
fundamentally were something very different.
    The most vivid example that I recall occurred several years 
ago when the air force wanted to replace the aging fleet of 
tanker aircraft that it uses to refuel other aircraft in the 
air. It presented a very complicated financial plan whereby 
Boeing would build the aircraft to the government's 
specifications and the air force would rent them for 20 years.
    CBO determined that under that plan, the air force was 
essentially buying the aircraft but in a way that it hoped 
would avoid the need for a large up-front appropriation to pay 
for them. That plan was also more expensive than a 
straightforward purchase would have been.
    That was an example of what we call third-party financing. 
That is, rather than using its resources to acquire a capital 
asset, the government structures a transaction so that a 
private entity borrows the money to build the asset and the 
government through a stream of future payments pays off most or 
all of that debt.
    My written statement describes other examples of such 
financing including energy savings performance contracts, 
enhanced use leases, lease-back ventures, and military housing 
privatization.
    Although projects that use third-party financing employ a 
variety of contractual arrangements and can result in the 
acquisition of many kinds of assets, they generally have 
several features in common. In most cases, the government 
initiates the project, selects the developer, and specifies the 
project's parameters.
    It has significant economic interest and retains 
substantial control, and it serves as the sole or primary 
source of capital backing the project's financing.
    By seeking to spread acquisition costs over many years, 
those transactions aim to achieve a budgetary treatment that is 
at odds with the established principles of Federal budgeting 
which require agencies to record the costs of government 
investments when they are made.
    Under that treatment, third-party arrangements may be 
subject to less scrutiny in the appropriation process and they 
may skew decisions about how to allocate budgetary resources by 
giving preferential treatment to investment projects on the 
basis of how they are financed rather than on their merits.
    Moreover, because private entities pay more to borrow than 
the government does, third-party financing is more expensive 
than straightforward government financing. Although VA 
classifies its leases of medical facilities as operating 
leases, most of them in CBO's judgment are akin to government 
purchases, facilities built specifically for VA's use, but 
instead of being financed by the Treasury, they rely on third-
party financing.
    These leases have many of the following key features that 
lead to that conclusion. They are designed and constructed at 
the government's request. The contractual agreements are long-
term and match the private partner's financing instrument for 
constructing the facility. The Federal Government commits to 
make fixed annual payments sufficient to service much or all of 
the debt incurred to construct the facility and payments from 
the Federal Government are the only or the primary source of 
income for facilities and are sufficient to retire most or all 
of the debt over the life of the lease.
    Entering into an operating lease is similar to renting an 
apartment. A renter can move out after a short period with no 
further commitment. But VA's built-to-lease contracts are 
similar to obtaining a mortgage to buy a house. The agency 
acquires an asset along with the liability to pay for, but then 
gives it back after it has paid for it.
    Because those transactions are essentially governmental 
purchases, CBO has determined that budget authority for most 
leases of VA medical facilities should be recorded up front 
when leases are initiated in amounts equal to the development 
and construction cost of the facilities. That is, the cost 
should be recorded when the acquisition occurs, when the 
government is actually buying a facility as is done for most 
other purchases that the government makes, not when the debt is 
repaid.
    Thank you again for the opportunity to explain our analysis 
and I would be happy to answer any questions you may have.

    [The prepared statement of Robert A. Sunshine appears in 
the Appendix]

    Mr. Flores. Thank you, Mr. Sunshine.
    I will now yield myself five minutes for questions.
    The first question is, what would need to change about how 
VA contracts for build-to-suit medical facility leases for CBO 
to consider them operating leases rather than capital leases?
    Mr. Sunshine. I think the key question is, is the facility 
being built for the government and largely paid for by the 
government. If the facility is being built for general such 
that the government is maybe committing for three years or five 
years and the builder may then have--the government may or may 
not renew it and the builder is at risk for who may occupy the 
building after that.
    I mean, that is just like if the government enters into a 
lease for an office, general office space for a few years. The 
government is not on the hook for that space.
    And I think the key question is, is the space being built 
for the government and is the government essentially paying for 
it by the commitment that it makes up front. If it is not 
paying for it by the commitment that it makes up front, then 
that is, I think, a different situation.
    The question is, can you get someone to build it when the 
government is only on the hook for three years or five years or 
something like that.
    Mr. Flores. As I understand it, CBO's scoring of VA's 20-
year leases, is based on the assumption that these lease 
agreements will extinguish the full debt of the third-party 
developer or builder during the lease term of the clinic. But 
some developers have said that that is not necessarily the 
case.
    Now, in such a situation, if CBO were provided with 
information that the debt is not retired in full by the VA 
lease payments on that development project, would this affect 
how CBO scores that arrangement?
    Mr. Sunshine. I think the question is not whether the debt 
is a hundred percent or 99 percent. The question is, is the 
government paying for most or all of the building. And we have 
not defined some specific cut-off point. If the government is 
paying for 30 percent of the building, I think that is very 
different from when the government is paying for 90 or a 
hundred percent of the building.
    Mr. Flores. Okay. Please respond to the statement that came 
from the Office of Management and Budget that they put in a 
letter to Senator Mary Landrieu that says, and I quote, ``In 
contrast to CBO, OMB does not score the legislative 
authorization of leases with a PAYGO budgetary cost. Instead, 
OMB's view is an authorization bill is like any other 
authorization that must be funded through separate legislation 
before the agency can use the leasing authority. In the cases 
of leases for VA medical facilities, the funding will be 
provided in annual appropriations bills,'' unquote.
    Mr. Sunshine. I think the problem that has been created 
that you are facing is that the law requires congressional 
approval of leases that involve payments of more than a million 
dollars a year. The authorization of those leases creates the 
authority for the agency to enter into them.
    And the way they are being treated, they actually enter 
into them without sufficient appropriations to cover them. They 
do not have 20 years worth of appropriations. They do not have 
the appropriations to cover, that is the problem, they do not 
have the appropriations to cover the cost of the facility which 
is why we are scoring the legislation approving the leases as 
creating contract authority, giving them the authority to 
making that financial commitment which is actually not being 
charged against appropriations because they do not have 
sufficient appropriations to do it.
    Mr. Flores. I have got one final question in my allotted 
time. VA major medical facility community-based outpatient 
clinics' leases can fall into several categories, one being a 
contracted CBOC where the space and the staff are not VA 
personnel.
    Does the CBO's current scoring impact these existing 
privatized CBOCs or VA's ability to use service arrangements 
for future privatized facilities? Can you explain that?
    Mr. Sunshine. I think if I understand correctly, the agency 
has the authority now to enter into service contracts and they 
are doing some of that. And, in fact, if there is no 
legislation required for them to do that, then we are not 
involved because our job is to estimate the impact of 
legislation.
    And if they have the authority to do it without 
legislation, then there is no role for us to play. And if there 
were legislation needed, we would have to look at that and 
think about what consequences that would have. But I think a 
service contract is very different from a building of a 
building.
    Mr. Flores. Okay. Thank you.
    I now yield Mr. Michaud five minutes for his questions.
    Mr. Michaud. Thank you very much, Mr. Chairman.
    Thank you very much, Mr. Sunshine, for being here this 
morning.
    For budgetary scoring purposes, how would CBO treat a 
mixed-use facility such as when VHA and VBA collocate in the 
same building?
    Mr. Sunshine. Mixed use like multiple government agencies?
    Mr. Michaud. Yes.
    Mr. Sunshine. I do not think that would make any 
difference. As long it is all the government, I think that is 
what we would look at.
    Mr. Michaud. So you would not treat that differently?
    Mr. Sunshine. No.
    Mr. Michaud. Okay. I would like to follow-up also on the 
same letter that the Chairman mentioned from Senator Landrieu 
and Representative Boustany that was sent to the congressional 
services.
    CRS said that if Congress effectively leaves it to the 
Office of Management and Budget to determine the cost of the 
legislation and OMB determines that the legislation does not 
increase direct spending, then no budgetary effects would be 
recorded on the PAYGO score card.
    Is that accurate?
    Mr. Sunshine. Well, there are multiple rules that you are 
grappling with. One is the statutory PAYGO score card and OMB 
determines unless directed otherwise by the Congress what goes 
on that score card.
    There are also congressional PAYGO rules that in general, 
the budget committees rely on us for the scoring. So, yes, the 
statutory PAYGO would be dependent on how OMB scores things. 
Congressional budget enforcement generally relies on CBO's 
estimates.
    Mr. Michaud. So that statement is accurate then?
    Mr. Sunshine. Yes, I believe. Yes.
    Mr. Michaud. Okay. You know, after 20 years of scoring VA 
major medical facility leases as operating leases, can you 
explain the difference in what you looked at during preparation 
for the scoring for the fiscal year 2012 construction facility 
lease as opposed to prior years? What was the difference?
    Mr. Sunshine. I looked at an estimate that we wrote, I 
think in 2004 and 2005, and we said, well, we are assuming 
these are operating leases, but we are not quite sure what they 
are like. I mean, agencies do not send us their leases. They do 
not ask us to approve them or review them.
    So in the course of doing the bill in 2012, we actually 
started learning things that we did not know before. And we 
learned and we actually have seen copies of lease agreements 
and some of the contracts that have been entered into.
    So we learned a lot that we did not know. And, I mean, we 
should have known it earlier and we should have informed the 
Congress earlier about the nature of these transactions, but we 
did not. And we got much more information last year and that 
caused us to rethink how we should treat these in our 
estimates.
    Mr. Michaud. You said much more information you got last 
year. What is that much more information?
    Mr. Sunshine. Well, we got information mostly from VA about 
the nature of the leases and we actually have some of the 
specific lease contracts and some of the agreements with 
builders and some of the actual documents that are involved in 
these transactions.
    Mr. Michaud. Okay.
    Mr. Sunshine. And we had not seen those before because that 
is not a routine kind of thing that we would ordinarily have.
    Mr. Michaud. Can you explain the difference between special 
purpose improvements and special purpose assets?
    Mr. Sunshine. No. I am sorry.
    Mr. Michaud. And so you do not know where those definitions 
come from and----
    Mr. Sunshine. No. Those terms are not terms that I am 
familiar with.
    Mr. Michaud. Do the Department of Veterans Affairs and the 
CBO, when you said you got more information which determined 
why you made the different decision that you did.
    Have you worked with the VHA or the department to try to 
work out the differences in the leases, language so that it 
would not have to be scored up front?
    Mr. Sunshine. I think we have gotten information from the 
department as to how the leases work. They may have asked our 
staff questions about how they could change them, but I do not 
know that for sure.
    Mr. Michaud. So it could be the reason why you are doing it 
differently this time around is because your agency saw more 
information and the definitions--you are interpreting a little 
bit differently because you saw that information?
    Mr. Sunshine. Yes. We got a lot more information last year 
than we had previously had about how many of these leases are 
structured. And we had not known that before.
    Mr. Michaud. Thank you, Mr. Chairman.
    Mr. Flores. The gentleman's time has expired.
    Mr. Benishek, you are recognized for five minutes.
    Mr. Benishek. Thank you, Mr. Chairman.
    People enter into leases for a lot of different reasons and 
I do not understand how you can just say that a lease is the 
same as a purchase. I mean, I do not understand that. It is not 
the same as a purchase.
    I mean, people conduct leases all the time that they end up 
paying for the construction of the building. Otherwise, the 
building would never get built. That happens in the private 
sector, you know, all the time, you know, a build-to-suit 
situation. So I just do not understand why that you would treat 
this as a purchase.
    Can you explain that to me and maybe make it easier for me 
to understand?
    Mr. Sunshine. Yeah. I mean, I guess our view is----
    Mr. Benishek. You do not end up with the property at the 
end, so it is not a purchase. You keep calling it a purchase, 
this is essentially a purchase, but it is not a purchase. It is 
a lease. There is a difference.
    Mr. Sunshine. But essentially the government is specifying 
where it wants the building, what kind of building it wants, 
and it is paying for most or all of it by entering into a long-
term commitment. And we view that as fundamentally equivalent 
to a purchase. It is not structured like a purchase. It does 
not look like a purchase. And, again, I mean, we could wind up 
with----
    Mr. Benishek. Is that a----
    Mr. Sunshine. --it at the end or not wind up with it at the 
end. But from our perspective, it is almost the same thing as 
the government building the building itself except we are 
paying someone else to do it and someone else is borrowing the 
money and we are paying it off over time.
    Mr. Benishek. Let me ask----
    Mr. Sunshine. I mean, if we were only paying for 20 percent 
or 30 percent or leasing it for five years, I think that would 
be a whole different thing as opposed to a really long-term 
lease where we are basically paying for most or all of the cost 
of building the building.
    Mr. Benishek. Well, your argument to me does not hold any 
water at all. Okay. I mean, it just does not make sense to me. 
I can understand your argument of saying there is not 
appropriations for the 20 years of lease. Okay. That argument I 
can accept.
    But the fact that you just seem to be able to have the 
authority to call it a purchase when it is not, I do not see 
how you give that any authority.
    When the Federal Government leases a building, does that 
property owner pay local taxes?
    Mr. Sunshine. I assume so.
    Mr. Benishek. Does the government pay local taxes when they 
own the building?
    Mr. Sunshine. I do not think so.
    Mr. Benishek. That is what my thoughts are as well. You 
know, so taking property off the local tax role is a 
significant issue, I think, in many small communities where 
these CBOCs are because I have got them in my communities. And, 
you know, they are offset with Federal land and there are 
communities that do not pay any taxes to support their schools 
and that.
    And the other thing is that when the government builds 
something, I do not know that they manage it the same as 
somebody else building something and then leasing it to the 
government. I think that the overall cost of the lease is 
actually much less than the overall cost of the purchase.
    Have you done any actual comparisons of similar things in 
your analysis?
    Mr. Sunshine. Our staff thinks that the additional cost 
both in terms of financing and various fees that are associated 
with these private sector kinds of transactions are greater, in 
cases noticeably greater----
    Mr. Benishek. But construction management----
    Mr. Sunshine. --than if----
    Mr. Benishek. --of the Federal Government----
    Mr. Sunshine. --the government just went and built it. Now, 
the government does not always build things so well.
    Mr. Benishek. That is my impression is that the Federal 
Government construction costs are, you know, head and shoulders 
above private sector construction costs. And it would be my 
thought that a lease is overall much cheaper for the government 
and provides a local tax base for the local community as well.
    And, you know, it seems to me that you have an argument 
here that argues the opposite way without any evidence of that.
    Mr. Sunshine. I mean, our concern is making sure that the 
nature of the government's commitment is accurately reflected 
in the budget and whether the government should be leasing 
things or buying things is a choice that the Congress and the 
agencies should make based on their best analysis of the 
details that we cannot get into.
    Mr. Benishek. Right. But, I mean, I understand that 
argument.
    Mr. Sunshine. Our objective is just to try to capture in 
the budget numbers the nature of the government's commitment.
    Mr. Benishek. Right. Well, that portion that you said, the 
money is not appropriated for the 20 years, I mean, that is a 
valid argument. But if the money is appropriated, for example, 
to hire you, the money to keep you on staff for the next ten 
years is not appropriated at this time, you know, that is not a 
good argument to me.
    Thank you.
    Mr. Flores. The gentleman's time is expired.
    Mr. O'Rourke, you are recognized for five minutes.
    Mr. O'Rourke. Thank you, Mr. Chair.
    I find the decision that the CBO has made frustrating and 
inconvenient, especially for the constituents I represent. We 
have nearly 80,000 veterans. We are not served by a full-
service medical facility which means many of them have to 
travel ten hours round trip to Albuquerque, New Mexico to 
receive treatment. And the decision that CBO has made narrows 
our options.
    But having said that, it is hard for me to argue with the 
logic behind the conclusion that you have reached. I can 
understand that. And I think that we have to be honest with 
ourselves about the purchases and obligations that we make. We 
have to be honest with the taxpayer and we have to be 
consistent in the rulings and how we score these things for all 
agencies and departments.
    And so my first question is, and you hit on this in your 
opening statement, is this how we score every facility lease or 
purchase across every department and agency in the Federal 
Government, DoD, HHS, et cetera, et cetera?
    Mr. Sunshine. Well, for the most part, agencies do not need 
legislative authorization to enter into leases which is, I 
think, an unusual factor that relates to VA. But in terms of 
how things are recorded in the budget, the answer is yes.
    The circular A-11 that governs, OMB's circular A-11 that 
governs how these kinds of things are treated in the budget 
specifies that the cost of capital leases and, in fact, the 
cost of operating leases that are multi-year are supposed to be 
charged up front in the budget in the year that the commitment 
was made.
    So when we build dams or roads or prisons or space shuttles 
or aircraft carriers, yes, the funding is required up front in 
order to pay for them.
    Mr. O'Rourke. And you said for the most part, other 
agencies and departments do not require legislation for these 
kind of capital investments, these facility investments.
    Except for the most part, what are those agencies or 
departments that have----
    Mr. Sunshine. I am not sure. I mean, I am not sure. I do 
not know if anyone knows. I am not sure there is any other 
situation where we are involved in assessing legislation that 
authorizes leases. There may be, but I am not aware of it. It 
is pretty unusual.
    Mr. O'Rourke. Okay. And then to ask another scenario based 
on this decision, if there is a third party, say a private 
hospital or another public entity hospital at some other level 
of government that has space and leases that space to the 
Federal Government and that space was not constructed with the 
specific intent of providing that space for the VA, that would 
be treated as an operating lease under this logic and----
    Mr. Sunshine. It sounds to me if it were for a few years 
and the space already exists, yes.
    Mr. O'Rourke. And is there a time limit? What if the lease 
is for 20 years to use the example that we have been using 
today?
    Mr. Sunshine. There are limits on the length of leases that 
agencies can enter into. I think for the most part, I think 
operating leases are not supposed to be more than five years. I 
am not a complete expert on all these rules. But I think if 
they were for three years or five years or something like that, 
that would be generally considered an operating lease.
    Mr. O'Rourke. And I saw you looking back to your staff to 
see if there were other comparable agencies or departments or 
scenarios like the one that we are talking about with the VA.
    I would like to follow-up with you and your office and 
explore different scenarios based on this ruling, assuming it 
stands, to find out how we get the job done for El Paso and 
communities like ours that desperately need these facilities 
and need to be creative and innovative in how they finance and 
construct them.
    And with our options now being limited, it really means 
that we have got to be creative and fully understand how these 
kinds of rulings are applied across all Federal departments or 
agencies. So look forward to your responsiveness to those 
questions as they come forward.
    Mr. Sunshine. We would be delighted to work with the 
Committee to try and figure out ways to address the issue.
    Mr. O'Rourke. Thank you.
    Thank you, Mr. Chair.
    Mr. Flores. The gentleman yields back.
    Mr. Huelskamp, you are recognized for five minutes.
    Mr. Huelskamp. Thank you, Mr. Chairman.
    Mr. Sunshine, just a couple questions. You do make 
reference to the requirement of specific authorization for 
leases in excess of $1 million.
    Any of these that we have been provided by the Committee, 
do they exceed that million dollars per year lease ceiling?
    Mr. Sunshine. The leases that are being proposed, I believe 
at least many of them do.
    Mr. Huelskamp. Many of them do?
    Mr. Sunshine. Yeah, many of them do.
    Mr. Huelskamp. Okay. And curious as well, do you have that, 
and I am sure the department does, do you have information on 
the cost per square foot on these leases? Do you all see that?
    Mr. Sunshine. I do not have that. I am sure the department 
can give you that.
    Mr. Huelskamp. All right. And more specifically, I do 
understand, as my colleague has indicated, you know, the issues 
here, I think, as far as accounting and the budget and 
requirements for transparency and obligations.
    And what is the solution here? What would you recommend 
Congress do as a solution here?
    Mr. Sunshine. CBO is not supposed to make recommendations. 
But, I mean, the options are limited. I mean, one way is, okay, 
we fund these things the way we fund other construction in the 
government. We provide however much money we need to build 
whatever it is that we want. And we make the tradeoffs between 
those costs and other costs in the budget.
    You know, we have the caps on discretionary funding and the 
Congress has to make the tradeoffs between different things. 
And so one option is, all right, these are important, we will 
have to provide funding for them and we will have to have less 
funding for something else. That is one solution.
    Another solution is I think the service contract idea which 
I have seen may be an option that works. And I think that may, 
in fact, not even require legislation. And if there are ways to 
enter into actual real short-term operating leases, that is 
another way to approach it.
    Mr. Huelskamp. So aside from your thoughts that perhaps 
this approach for the department was more expensive than other 
alternatives, simply approving them in a similar manner that we 
do in most other departments would solve the problem for the 
CBO?
    Mr. Sunshine. Well, yeah. I mean, the reason that there is 
an issue is simply because these are being funded and arranged 
in ways that are different than the way other construction 
projects are generally done.
    In general, the government goes out and builds things or 
buys things and it pays for them. And the appropriation 
committees provide the money to do that.
    This is a different kind of arrangement and the way it has 
been working is the appropriators actually have not been 
providing the money up front to do it.
    Mr. Huelskamp. And if I understood your comments earlier, 
this is unusual in terms of other agencies across the Federal 
Government?
    Mr. Sunshine. Yeah. I mean, in our written statement, we 
noted that there are a number of other occasions where we have 
encountered proposals for third-party financing, but it is not 
widespread.
    Mr. Huelskamp. Uh-huh. Are there other agencies you would 
say that you know of that are using this as well or is this the 
only one that is significant?
    Mr. Sunshine. I do not know that we are aware of that there 
are lots of other things like this around.
    Mr. Huelskamp. Okay. All right. Thank you.
    I yield back, Mr. Chairman.
    Mr. Flores. The gentleman yields back.
    Ms. Negrete McLeod, you are recognized for five minutes. No 
questions? Okay.
    Mr. Bilirakis, I believe you are next. You are recognized 
for five minutes.
    Mr. Bilirakis. Thank you, Mr. Chairman. I appreciate it.
    And thank you, Mr. Sunshine, for coming and testifying and 
I appreciate the CBO's explanation of the recent changes 
regarding VA leases.
    Could you address, I know this was touched upon, but it is 
worth asking again, could you address why CBO has decided now 
to change the way they score the VA leases? What was the 
catalyst for this reexamination?
    Mr. Sunshine. The catalyst was when we were working on the 
authorizing legislation last year and we asked perhaps more 
than we had asked before about the details of what kinds of 
leases the VA was entering into.
    And it has been doing these kinds of leases for a long 
time, but we actually learned, I think for the first time last 
year, and got much more detail information than we had had 
previously as to the nature of the leases. And we have actual 
copies of some of them and other background information about 
them. We got it last year when we were working on the 
authorization bill.
    So we have not changed our theory as to how these things 
should be scored, but we learned enough about them to learn 
that they are different than what we had--they had always been 
called operating leases and, okay, there are ways one treats 
operating leases. And it was only last year that we realized 
that they really did not fall in that category.
    Mr. Bilirakis. Okay. Thank you.
    Mr. Chairman, I plan to ask more questions in the second 
round. Thank you.
    Mr. Flores. For the second panel?
    Mr. Bilirakis. Second panel.
    Mr. Flores. Okay. The gentleman yields back.
    Ms. Brownley, you are recognized for five minutes.
    Ms. Brownley. Thank you, Mr. Chair.
    And thank you, Mr. Sunshine. I think we were all hoping 
that you could bring a little bit more sunshine to the problem 
here, but appreciate your testimony.
    And I am just curious within the CBO how a decision like 
this is made. Is it your decision? Is it a group of experts 
that get together to evaluate this? Who is the final decision-
maker?
    Mr. Sunshine. The final decision-maker at CBO is always the 
director. But the way we do it is we have a staff of very 
talented analysts and we have unit chiefs and we have a general 
counsel. And on difficult, complicated questions, we would 
probably gather four or five or six people together and 
exchange emails, have a meeting, and discuss exactly what the 
appropriate approach was.
    So there were numerous people involved in making this 
judgment.
    Ms. Brownley. So that is what you described is what 
happened when this bill, you said last year's bill was the 
catalyst----
    Mr. Sunshine. Uh-huh.
    Ms. Brownley. --to all of this? That is what happened?
    Mr. Sunshine. And a number of those very smart people are 
here this morning.
    Ms. Brownley. Okay. And so you had also mentioned that, you 
know, it is not CBO's role to make recommendations toward 
solutions, strictly, you know, doing what is right from an 
accounting perspective.
    So if you are analyzing all of this and looking at it 
deeply, you also mentioned that you have learned a lot from 
these leases. You have looked at other agencies and their 
leases. So you have gathered all of this information but not 
necessarily in a position of recommending solutions.
    Who would we go to to recommend solutions? Clearly, you 
know, the end result of all of this is not a good one because 
we desperately need the facilities and we have great demand to 
provide the health needs for our returning veterans.
    And so where would we go to get recommendations on this? We 
know that we cannot have the facilities, but the end goal here 
is to have the facilities.
    Mr. Sunshine. I would imagine that VA has some interesting 
ideas as to how to approach it. The folks at OMB may have some 
thoughts. And we are happy to work with the Committee and 
explore, if people come up with some ideas that perhaps we have 
not thought of, to explore what kind of legislation would be 
necessary and how we would score such legislation. We would be 
happy to work with you on that.
    Ms. Brownley. So in your opinion, is legislation really the 
only option here in terms of fixing the problem?
    Mr. Sunshine. I do not know that that is necessarily true.
    Ms. Brownley. Okay.
    Mr. Sunshine. As I said, we have heard mention of the 
service contract concept. And as I understand it, I do not have 
great expertise in this, my understanding is that the 
department may not need legislation to do those kinds of 
things. And if so, then we are really not involved. There is 
nothing for us to do or say about it.
    Ms. Brownley. Thank you.
    I yield back.
    Mr. Benishek. Will the gentleman yield for a moment? Would 
you yield me a minute?
    Another question came to mind. What exactly was the new 
information that you got that made you determine that you had 
to change the way you did the lease? I mean, didn't you know 
that it was a 20-year lease before?
    Mr. Sunshine. No.
    Mr. Benishek. Oh, you did not know that?
    Mr. Sunshine. No.
    Mr. Benishek. But that had been going on for----
    Mr. Sunshine. I mean, it is not our role to delve deeply 
into the intricacies of how agencies operate and what they do. 
It is not----
    Mr. Benishek. Well, I----
    Mr. Sunshine. And we probably should have known that 
sooner, but we did not.
    Mr. Benishek. Was that the only piece of information then?
    Mr. Sunshine. Well, I think we learned not only about the 
length of the leases but the nature, the detailed nature of the 
transactions and how the financing----
    Mr. Benishek. What was the nature of the transaction that 
you learned that made it----
    Mr. Sunshine. Pardon me?
    Mr. Benishek. What was the difference besides the term of 
the lease, what was the other detailed information----
    Mr. Sunshine. We got clear information about what the 
government's payments, what kind of payments the government was 
making, how much they were, when they had to be made.
    Mr. Benishek. You never looked before as to how much the 
payments were? I mean, I am just trying to find out what 
exactly that the new information is.
    Mr. Sunshine. I mean, if a bill says an agency is 
authorized to enter into operating leases for whatever, unless 
we learn something else, there is nothing much, and it is 
subject to appropriations, then from our perspective----
    Mr. Benishek. Well, the only thing that I----
    Mr. Sunshine. --all that is fine. So what we learned was--
--
    Mr. Benishek. Let me just stop you there.
    Mr. Sunshine. --that they were not really operating leases.
    Mr. Benishek. The only thing I got from this----
    Mr. Flores. The gentleman's time has expired.
    And in fairness to the CBO, they were scoring the VA cost 
of the VA leases based on the information that was given to 
them at the time. When they were given more information, I 
think they made a decision based on more fulsome information.
    And I think that is the correct characterization of this. I 
do not think there was any intent to try to hurt VA by the CBO 
scoring decision. I just think they had better information.
    With that, Ms. Brownley, did you want any more of your time 
back?
    Ms. Brownley. No. I yield back.
    Mr. Flores. Okay. Because he took all of it, I just wanted 
to make sure.
    All right. I now recognize the gentle lady from Indiana, 
Ms. Walorski, for five minutes.
    Mrs. Walorski. Thank you, Mr. Chair.
    I just have a follow-up question to my colleague's 
questions. So on this additional information, is this 
information that, you said you discovered, was this information 
that the VA just happened to drop and bring to you or was this 
information that you made additional inquiries and the CBO----
    Mr. Sunshine. Yeah, I think we made some inquiries, and I 
do not know, I think we probably inquired more than perhaps we 
had or maybe somebody said something to us when we were talking 
to them that prompted more questions and we asked more 
questions----
    Mrs. Walorski. Sure.
    Mr. Sunshine. --and got more information. They were very 
helpful to us in giving us information and----
    Mrs. Walorski. I guess my other question would be, in the 
process of the inquiries, was there any reason given from the 
VA why that information was never divulged to the CBO before?
    Mr. Sunshine. I mean, we are not an investigatory agency.
    Mrs. Walorski. Yeah.
    Mr. Sunshine. So, I mean, they were under no obligation to 
ship over to us copies of their leases. I do not know whether 
we had asked for them previously and had not gotten them. I 
have not gone back in the history to determine what happened in 
previous years.
    Mrs. Walorski. Sure. I appreciate it. Thank you.
    I yield back my time, Mr. Chairman.
    Mr. Flores. The gentle lady yields back her time.
    Ms. Kirkpatrick, you are recognized for five minutes.
    Mrs. Kirkpatrick. Thank you, Mr. Chairman.
    Mr. Sunshine, in my private law practice over the years, I 
would review government leases with cities, towns, counties, 
state government. And because they were subject to 
appropriations, it was well known that if the appropriations 
were not there, the lease would terminate. And there was a 
clause there that said that actually in the lease agreement or 
the contract because they were subject to appropriations.
    Now that you have looked at these leases and contracts, do 
they have something similar?
    Mr. Sunshine. Maybe I will ask someone. Anyone know the 
answer? Do they have a contingency in the event that 
appropriations are not available?
    Mr. Newman. There is a fixed payment required. It comes 
from a lump sum appropriation. So unless there was no 
appropriation for VA medical facilities, there would be 
appropriations available. It would be difficult to get out of 
that fixed obligation lease even with that clause because of 
the lump sum nature of the appropriation.
    Mrs. Kirkpatrick. Suppose the appropriation is not there, 
then what you are saying is that obligation continues to 
accrue?
    Mr. Newman. Well, then I believe that would be taken----
    Mrs. Kirkpatrick. I am sorry. Would you step to the 
microphone so we can make this part of the record. And let me 
just explain. The principle behind this----
    Mr. Sunshine. This is David Newman.
    Mrs. Kirkpatrick. Hi, David. Thank you for being here.
    But the principle behind this is that you cannot obligate 
taxpayer dollars beyond the appropriate appropriation. So I 
would like to know. Suppose the appropriation is not made, do 
taxpayer dollars continue to accrue on an obligation that is no 
longer legal?
    Mr. Newman. I believe it would. If the obligation has been 
incurred and if a discretionary appropriation is not provided, 
it would have to come from somewhere.
    If the facility had been built and the government had 
committed to making the payment and it was liquidating that 
from a discretionary appropriation, but the discretionary 
appropriation was not provided, then the cost of paying that 
would have to come from somewhere else.
    I think that that would only happen in this case if there 
were----
    Mrs. Kirkpatrick. Well, I am sorry to disagree with you 
because taxpayer dollars are involved here. And it seems to me 
that you cannot--this principle that you can obligate taxpayer 
dollars for the long term when you have nothing in return is 
just simply not legal.
    I mean, can you tell me why that is legal? I mean, why 
would I pay for Tim Walz's house for 30 years when I have no 
opportunity to use it?
    Mr. Sunshine. I mean, that is one of our concerns about the 
way the transactions are currently being treated in that there 
is not the money provided in appropriations up front to cover 
the costs. But the government is committed to making those 
payments and has signed contracts that requires it to make 
those payments.
    Mrs. Kirkpatrick. Well, then your theory is that the 
government is guaranteeing the developer that they are going to 
be able to pay for their development?
    Mr. Sunshine. Yes.
    Mrs. Kirkpatrick. Can you tell me of any other governmental 
entity that does that, where the government acts as the loan 
guarantee for the development?
    Mr. Sunshine. Well, again, I think that may well be in 
cases where the government is paying to build----
    Mrs. Kirkpatrick. Purchasing. Let's not mix apples and 
oranges here. You know, leases, we are talking about leases 
where the government at the end of the lease does not own the 
property.
    Can you tell me of any other governmental agency that 
enters into leases or contracts like that where they are 
obligating taxpayer dollars for something that they are never 
going to own?
    Mr. Sunshine. I do not know. We have not explored all the 
government's leasing practices. The GSA, the General Services 
Administration has the authority by law to enter into, I think, 
20-year leases without having the money up front.
    Mrs. Kirkpatrick. I understand that. I understand that. 
Here is the difference though. With the other governmental 
contracts I have looked at, there is a clause so that everybody 
understands that these are subject to appropriations, to the 
appropriation budgetary process. And if that does not happen, 
they can be terminated.
    And I want to know if that clause is in these leases.
    Mr. Sunshine. Have you seen that clause in the leases?
    Mr. Newman. No. I have seen a requirement to make a series 
of fixed payments whether the agency occupies the facility or 
not.
    Mrs. Kirkpatrick. Well, would you do this for me. Go back 
and look at those and maybe we can do a follow-up.
    Mr. Sunshine. I mean, the folks from VA who are obviously 
more intimately familiar with the details of leases can 
probably answer that question as well. But we would be happy to 
look into that more.
    Mrs. Kirkpatrick. Well, I just want to tell you I thank you 
for being here. I would like some more investigation into this 
because I find it very troubling that your policy would commit 
taxpayer dollars before they are actually appropriated.
    And with that, I yield back. Thank you, Mr. Chairman.
    Mr. Flores. Thank you, Ms. Kirkpatrick.
    For the sake of order, I would recommend that you ask that 
question of the VA, the question you just asked.
    Mr. Neugebauer, you are recognized for five minutes.
    Mr. Neugebauer represents Texas Tech University. He and I 
are working on a joint project that is directly affected by 
this matter.
    Mr. Neugebauer. Well, thank you, Mr. Chairman.
    And on behalf of the veterans all across the country and 
particularly the veterans in the 19th district, this is a very 
important hearing and I am very proud that you had that. And I 
appreciate you allowing me to participate in this.
    Good morning, Mr. Sunshine. How are you?
    Just a question. Mr. Sunshine, did you major in accounting?
    Mr. Sunshine. No.
    Mr. Neugebauer. Okay. I was looking at your resume and I 
did not see that anywhere. So you were not an accounting major?
    Mr. Sunshine. Oh, no. No. I was math and economics. And I 
did go to Harvard Business School for all that.
    Mr. Neugebauer. Yeah. Okay. So are you familiar with GAAP 
accounting?
    Mr. Sunshine. A bit.
    Mr. Neugebauer. Huh?
    Mr. Sunshine. A bit.
    Mr. Neugebauer. A bit?
    Mr. Sunshine. Yeah.
    Mr. Neugebauer. So am I.
    Mr. Sunshine. I am not an expert on accounting.
    Mr. Neugebauer. Yeah.
    Mr. Sunshine. I am supposed to be an expert on government 
budgeting hopefully.
    Mr. Neugebauer. Yeah. But you are making a fairly important 
determination here of what is a purchase and what is a lease, 
aren't you?
    Mr. Sunshine. Yes.
    Mr. Neugebauer. And so do you think you are following 
generally accepted accounting principles on that?
    Mr. Sunshine. I think we are following the principles that 
apply to the----
    Mr. Neugebauer. No, I did not ask----
    Mr. Sunshine. --Federal budgeting.
    Mr. Neugebauer. Yeah. No. Well----
    Mr. Sunshine. But I cannot, no, but I cannot answer the 
generally accounting----
    Mr. Neugebauer. Okay. So you do not know whether you are or 
not?
    Mr. Sunshine. No.
    Mr. Neugebauer. Do you think baseline budgeting is a good 
thing?
    Mr. Sunshine. I am not sure what you mean by baseline 
budgeting. Could you----
    Mr. Neugebauer. Well, it is the budgeting we use here.
    Mr. Sunshine. I mean, I think we do ten-year projections of 
what we think the budget would look like if current laws 
remained in place. I think that is a useful--and we actually do 
longer-term projections. I think those are useful to get a 
sense of what the budgetary situation is.
    Mr. Neugebauer. So some of these proposals that are out 
there are facilities that had a 20-year lease and now they are 
either being rolled over or they are going over to a new 
facility.
    Are you aware of that?
    Mr. Sunshine. Yes.
    Mr. Neugebauer. Yeah. So the question is, are we netting 
then that liability because basically if you go back and treat 
those leases the way they were--if you took that principle and 
gone back and applied them to those leases, so basically there 
is a netting here of what the new liability is based on what 
the previous liability was, are you taking that into account?
    Mr. Sunshine. Well, I think the objective of the budget is 
to take into account new obligations of the government when it 
enters into them.
    Mr. Neugebauer. Yeah. But remember that there is an 
obligation rolling off and so the question is, when you are 
looking at this, are you netting that out?
    Mr. Sunshine. Well, I think, for example, that----
    Mr. Neugebauer. You know, I am not asking you what you 
think. Are you netting it out?
    Mr. Sunshine. I am not sure there is a netting that needs 
to be done.
    Mr. Neugebauer. Well, if you are going to treat----
    Mr. Sunshine. I mean, if a facility was built, the 
government leased it for 20 years, made all its payments and 
now is extending the lease for three years or five years or 
something like that, then the only question is, what is the new 
government obligation that it is entering into and is that just 
an operating lease or is that something else.
    Mr. Neugebauer. So is a 19-year lease a capital lease?
    Mr. Sunshine. It could be.
    Mr. Neugebauer. Is an 18?
    Mr. Sunshine. It could be. We do not have a magic formula 
for that. We----
    Mr. Neugebauer. You have some formula.
    Mr. Sunshine. We try to look at the underlying substance of 
the transactions.
    Mr. Neugebauer. Yeah.
    Mr. Sunshine. You know, I think----
    Mr. Neugebauer. So here is another question. So if I have a 
five-year lease with three options for five years, is that a 
purchase lease or is that an operating lease?
    Mr. Sunshine. Well, I think if the five-year lease does not 
involve payment for most of the cost of the building say in the 
first five years, then it is probably an operating lease.
    Mr. Neugebauer. So if you have a five-year with three five-
year options, that would be an operating lease under the way 
you treat that?
    Mr. Sunshine. I think that would probably be true.
    Mr. Neugebauer. Yeah. So what about if they had a ten-year 
with one ten-year option?
    Mr. Sunshine. I am sorry. Two-year with----
    Mr. Neugebauer. No. A ten-year and then another ten-year 
option if the----
    Mr. Sunshine. I think it would not be wise for me to try to 
delineate very specific numbers and combinations because there 
are infinite numbers of combinations. And we would be happy to 
look at, you know, specific kinds of proposals.
    But as I said, we do not have a specific formula that says 
X number of years with X number of options is an operating 
lease and Y number of years is essentially a purchase. We try 
to look at the substance and the nature of the transactions and 
the nature of the government's financial commitment.
    Mr. Neugebauer. The IRS does not treat a 20-year lease as a 
purchase.
    Mr. Sunshine. Pardon me?
    Mr. Neugebauer. The IRS does not treat a 20-year lease as a 
purchase. So I think the concern here with all of us is there 
is a huge inconsistency here. And, unfortunately, the people 
that are going to pay the ultimate price here are the veterans 
of this country which to me is a great injustice.
    Thank you, Mr. Chair.
    Mr. Flores. Thank you. The gentleman's time is expired.
    Mr. Walz, you are recognized for five minutes.
    Mr. Walz. Thank you, Mr. Chairman. Thanks for holding this 
hearing.
    I think my colleagues are highlighting what I see to be a 
pattern of happening.
    You mentioned there is a lot of smart people at CBO. I will 
not deny that. Were any of them elected by the people? Anyone 
at CBO elected by the people?
    Mr. Sunshine. Not a one.
    Mr. Walz. Anyone have statutory authority to write law?
    Mr. Sunshine. Not a one.
    Mr. Walz. Anyone have statutory authority to interpret law?
    Mr. Sunshine. Statutory----
    Mr. Walz. To interpret laws?
    Mr. Sunshine. Well, we interpret law all the time in terms 
of estimating budgetary things, but----
    Mr. Walz. And that has----
    Mr. Sunshine. --we are not courts.
    Mr. Walz. You are not the courts. All right. The reason I 
ask this is I am going to ramble a little story here.
    On your Web site, it says analysts write quick turnaround 
cost estimates for legislation that is headed to the floor for 
a vote.
    Mr. Denham and I have a piece of legislation, H.R. 975, 
that we have been working on for years, for years. The 
Committee has requested a score on the bill. We have requested 
a score on the bill. We requested it again because we knew the 
NDA was coming up. I went out and built a coalition amongst 
democrats and republicans. It is supported by most major 
veteran service organizations.
    It is to correct a wrong of 31,000 veterans who were 
discharged, some like Liz Loris who had three rapes against 
her, was discharged from the military with a personality 
disorder. We are trying to correct that wrong.
    And the speaker allowed us to come up there. I went up to 
the Rules Committee and it was thrown out. You know why it was 
thrown out? Can you make a guess, Mr. Sunshine?
    Mr. Sunshine. You are probably going to tell me because it 
did not have a CBO cost estimate.
    Mr. Walz. That is correct. It did not have a score. Not 
only did it not have a score, someone made the interpretation, 
someone who is not elected, and I do not know their name, and I 
went to Chadron State, not Harvard, but I know that they made a 
determination that did not allow that thing to be heard because 
they said there will be a cost associated. Every other expert 
said there would not be in this. So it was nixed from coming to 
the floor.
    Now, my question is, I certainly value the work that CBO 
does. It is important for us to get this right. But it appeared 
to me like an arbitrary decision was made with no evidence of 
why it was made, who made it, or what it was being determined 
on, crushed a bill that had its one opportunity to go forward. 
Thousands of veterans who are not only denied their rights, 
they were denied the right to be heard.
    It is not your determination whether the law was good, bad, 
or indifferent. But because of that decision, the hands of the 
majority were tied because they said there would be a cost 
associated. I still do not know what that cost will be. No one 
has given it to me. Apparently I can only see that it was not 
prioritized on there.
    So now we hear it with the leases. I have got a CBOC I have 
been waiting four years for in Albert Lea, Minnesota. The city 
council down there just appropriated $50,000 of tax dollars, 
hard-earned tax dollars to try and speed this process up.
    And now what I am going to go back and tell them is I am 
not sure. Somebody who knows more than us made this decision.
    So how would you respond?
    And I have got to be honest with you. I try, and I have 
said in here for years, try and be as fair as possible. This 
fire that is lit under me is a bonfire now of the arbitrariness 
of this decision. And I see it starting to seep into others.
    Assure me that that is not the case. Tell me how H.R. 975 
was not heard. Can you tell me that?
    Mr. Sunshine. Yeah, I am not familiar with the details of 
the specific bill. I know that, for example, when bills are 
being considered or amendments are being considered by the 
Rules Committee, we often get calls and----
    Mr. Walz. This is a stand-alone bill I requested months 
ago.
    Mr. Sunshine. Okay. I mean, we do not have the resources or 
the staff to cost out every single bill. What we do is we take 
guidance from Committee Chairmen and Ranking Members and give 
priority to those requests.
    So I do not know what happened with----
    Mr. Walz. Both of them are co-sponsored.
    Mr. Sunshine. But I would be happy to look into it some 
more and be happy to explain to you exactly what our analysis 
was and what we concluded.
    Mr. Walz. What are our recourse? What is my recourse to go 
back to say how this could be fixed? I do not understand how 
someone, I do not know, sitting in office, I do not know where 
it is at can trump the will of 650,000 southern Minnesotans, 
thousands of veterans, veteran service organizations, the 
Chairman, the Ranking Member. How can that happen?
    Mr. Sunshine. I mean, our job is to tell you and your 
colleagues what we think the budgetary impact of legislation 
is. We do the best we can. We get as much information as we 
can. We often do not have much time to do it and we make those 
judgments.
    If you think we made a bad judgment, then we ought to talk 
some more about it. You or your staff, you can call Doug or 
myself, Doug Elmendorf or myself, or your staff can call. And 
let's go over. Let's----
    Mr. Walz. I tried that, but I know now if I come and I make 
a stink about it, someone gets me. That is wrong. That is 
wrong.
    And I do not know what this lease situation is. I do not 
know how this decision was made. I still have set here and 
listened for an hour. I have no clue. And I listened to Mr. 
Neugebauer's questions. I did not think I got an answer there 
how that was being done.
    And I am just at a loss and I think it is really 
unfortunate because I do believe in the work you do. It is 
important. But I think we have got a problem of trust that is 
building. I would say not building. It is festering.
    You have done something amazing here. You have united 
republicans and democrats.
    So I yield back.
    Mr. Flores. The gentleman's time is expired.
    Mr. Sunshine, thank you for your testimony today. You are 
now excused.
    Mr. Sunshine. Thank you.
    Mr. Flores. I would now like to invite our second and final 
panel to the witness table. Joining us today from the VA is the 
Honorable Dr. Robert A. Petzel, Under Secretary for Health.
    Dr. Petzel is accompanied by Mr. Philip Matkovsky, 
Assistant Deputy Under Secretary for Health and Administrative 
Operations, and Mr. Jim Sullivan, Director of the Office of 
Enterprise Management.
    I thank all of you for being here this morning.
    And you may proceed with your testimony after you get 
seated.
    Our primary witness will be back in a moment.
    Dr. Petzel, thank you and your team for joining us today. 
You are now recognized for five minutes.

  STATEMENT OF ROBERT A. PETZEL, UNDER SECRETARY FOR HEALTH, 
  VETERANS HEALTH ADMINISTRATION, U.S. DEPARTMENT OF VETERANS 
  AFFAIRS, ACCOMPANIED BY PHILIP MATKOVSKY, ASSISTANT DEPUTY 
   UNDER SECRETARY FOR HEALTH FOR ADMINISTRATIVE OPERATIONS, 
  VETERANS HEALTH ADMINISTRATION, U.S. DEPARTMENT OF VETERANS 
  AFFAIRS; JIM SULLIVAN, DIRECTOR, OFFICE OF ASSET ENTERPRISE 
        MANAGEMENT, U.S. DEPARTMENT OF VETERANS AFFAIRS

    Dr. Petzel. Good morning, Mr. Chairman, Ranking Member 
Michaud, and Members of the Committee.
    Thank you for the opportunity to provide information about 
VA's major medical facility and lease program that supports 
VA's mission to provide quality and accessible health care to 
America's veterans.
    I am accompanied today by Mr. Philip Matkovsky, Assistant 
Deputy Under Secretary for Administrative Operations, and Mr. 
James Sullivan, Director of the Office of Asset Enterprise 
Management.
    At VA, we must anticipate and meet the needs of current and 
newly-returning Veterans. We have many entry points for VHA 
health care and they include 152 medical centers, 821 
community-based outpatient clinics, 300 Vet centers, and 70 
mobile Vet vans.
    In response to increased demand, VA has enhanced its 
capacity to deliver needed care so that veterans can more 
readily access their care.
    We acknowledge a growing list of facility replacement and 
modernization projects. However, our greatest immediate concern 
is the unexpected development last September on the proposed 
``capital leases'' budgetary scoring for all future VA major 
medical leases. This threatens to disrupt one of our most 
important and fundamental tools to deploy medical care for 
veterans.
    The goal of VA's capital asset and leasing programs is to 
ensure that there are safe, secure, state-of-the-art facilities 
to provide benefits and services to our Nation's Veterans.
    VA owns and leases real property in hundreds of communities 
across the U.S. and overseas. VA has developed and continues to 
look for sound capital asset management strategies, to assist 
in maximizing the value of its portfolio.
    Beginning with the fiscal year 2012 budget, VA introduced 
the SCIP, process to prioritize all capital investments based 
on identified mission needs. The SCIP process is a requirement-
based planning and gathering tool which is used by the 
Department to address the most critical needs first. VA has a 
complete picture of need and a prioritized list of future 
capital investments.
    In addition to construction, the leasing of medical 
facilities is essential to providing Veterans with accessible 
health care services. Leasing provides VA the flexibility to 
respond to demographic shifts, changing service demands, and 
improvements in technology to support projected outpatient 
workload increases and the addition of services.
    As you are aware, the Congressional Budget Office is now 
recommending a change in the scoring of VA's major medical 
facility lease authorizations. This change precludes VA from 
procuring 27 medical facility leases serving more than 340,000 
Veterans in 20 states in fiscal year 2013 and 2014 and it 
jeopardizes all future 600 leases that VA presently has.
    If this situation persists, it will negatively affect 
Veterans. Without a resolution, six existing clinics may have 
to close, 14 will have to be constrained to already 
overpopulated facilities, and long-planned and budgeted 
expansions will not move forward.
    There will be increased travel and increased wait times for 
veterans and especially those people who live in rural areas 
where access to health care is limited at best.
    VA continues to look for ways to enhance collaborations 
with DoD and other Federal agencies. VA/DoD partnerships 
deliver benefits and services to Veterans, Servicemembers, 
military retirees, and other beneficiaries across the country.
    VA and DoD have direct sharing agreements between VA 
medical centers and military treatment facilities for a range 
of services. In fiscal year 2012, there were 230 direct sharing 
agreements between 61 medical centers and 105 DoD medical 
treatment facilities.
    Mr. Chairman, we appreciate the opportunity to address 
these important issues. VA must ensure that Veterans and other 
eligible beneficiaries receive timely, accessible, veteran-
centric, high-quality medical care.
    While we have a portfolio of health care delivery options, 
one key option is leasing. If the major medical facility 
leasing issues are not expeditiously resolved, I fear it will 
have a significant negative impact on VA's primary health care, 
mental health care, and specialty services for Veterans.
    We need your support in resolving this challenge as we 
continue to care for America's Veterans. VA is committed to 
providing the high-quality care that our Veterans have earned 
and deserved. And my colleagues and I are pleased to respond to 
any questions you may have.

    [The prepared statement of Robert A. Petzel appears in the 
Appendix]

    Mr. Flores. Thank you, Dr. Petzel.
    I now yield myself five minutes for questions.
    In your written testimony, you state that, quote, ``Our 
greatest immediate concern is how applying capital lease 
budgetary scoring to all proposed VA major medical facility 
leases threatens to potentially disrupt our ability to deploy 
state-of-the-art medical care for Veterans,'' unquote.
    It has been almost a year since this issue came to light 
and in that intervening time, what proactive steps has the VA 
taken to pursue work-arounds or alternatives that will ensure 
that the department is able to meet the care needs of our 
veterans?
    Dr. Petzel. Thank you, Mr. Chairman.
    First and foremost, is the best solution to this problem is 
to find a way to continue the leasing program without having to 
appropriate the full 20 years of cost of the lease in the year 
of approval. That is unquestionably the solution we seek and 
that we wish to work with you in order to obtain.
    We have looked at contracting. We have looked at fee basis 
which are the two obvious possibilities. And if time permits, I 
can elaborate on the difficulties that we see with those.
    But primarily they are out of network care. They are care 
outside of the VA network. And they are care that in our 
experience has been uniformly more expensive than doing the 
care within the VA.
    And third is that it is often difficult to find people that 
are willing to contract for that kind of extensive care.
    So the best solution from our perspective is to work with 
Congress to find a way to deal directly with the leasing issue. 
The other alternatives such as contracting, fee basis, sharing 
with DoD and with other government agencies all, we think, fall 
short of that initial solution.
    Mr. Flores. One of the areas that is going to be impacted 
the most, and this is what VA has argued in the past, is that 
rural areas will be most impacted by CBO's scoring methodology.
    What is the role of a fee-based care for rural areas? I 
think I heard you argue a little bit both ways on that 
particular point. What is the real downside to fee-based care 
in a rural area?
    Dr. Petzel. I would argue that there is not necessarily a 
downside issue in rural areas for fee-basis care. Fee-basis 
care, the intent of that legislation is to provide for periodic 
care. Fee-basis care is not viewed and was not intended to be 
something that is used to provide for the full spectrum, 
primary care, specialty care, et cetera.
    It is supposed to be a stop gap when you cannot get the 
services that you need, particularly specialty care. We use it 
and we do use it in rural areas. If someone needs a cardiology 
consult and they live in a small town in Montana, we will 
contract on a fee-basis with a cardiologist in that community 
if it is available so that somebody does not have to travel 300 
miles to Billings.
    So we do use it and it is very effective in the rural 
areas. Many of these clinics, however, are not just in rural 
areas. They are serving large numbers of people and it would be 
impractical to use fee-basis care in that----
    Mr. Flores. Continuing on the question of fee-based care 
for a minute, is the VA, excluding the centers of excellence 
where the VA is really good--I mean, for PTSD, TBI, crush 
injuries, things like that--has VA ever done a full cost study 
of comparing if we treat a Veteran in a fee-for-service basis 
through a third-party provider on one hand versus the fully-
loaded cost of the care in a VA facility including the cost of 
the overhead, the facility, the capital costs and so forth? 
Have you ever done a full comparison to see which provides 
better care for the Veteran and also provides the most 
effective arrangement for the taxpayers?
    Dr. Petzel. Mr. Chairman, with each one of these community-
based outpatient clinic proposals, we require a business case 
be developed to look at all of the options which would include 
contracting, which would include building a VA owned and 
operated clinic, and which would include leasing as well.
    So we do, yes, with every one of these clinics look at the 
options from the point of view of what is the best business 
case.
    Mr. Flores. My time is almost expired. I am going to yield 
to Mr. Michaud for five minutes.
    Mr. Michaud. Thank you very much, Mr. Chairman.
    Before I ask my question, is there anyone from CBO still 
left in the audience?
    [No response.]
    Mr. Michaud. I think it shows how much interest they really 
have in this issue.
    Thank you, Dr. Petzel, for coming here and the panel.
    My first question would be, would it be a viable 
alternative solution to adopting GSA's approach to leases and 
create a program similar to the Federal building fund where 
income derived from agency rental assessments would provide for 
a more predictable source of revenue for new construction and 
capital improvements?
    Dr. Petzel. I am going to turn to Mr. Sullivan to comment 
directly on the GSA process which I am not as familiar with as 
he is. Thank you.
    Mr. Sullivan. Thank you for the question.
    We believe that there is the potential and it is an option 
that that should and could be explored. To date, we have not, 
but we know their leasing program does not have the same issues 
that we have here in terms of congressional authorization.
    So that would be something, I think, that could be explored 
as a potential option or solution that we could learn something 
from and maybe use a portion of that as we try and find a way 
to deal with this.
    Mr. Michaud. Thank you.
    And during your discussions with CBO, have they offered any 
type of solutions as far as what you can do differently with 
your leases that would make it palpable so you do not have to 
have that money all up front?
    Dr. Petzel. Basically no, sir. They have not offered a 
particular solution. They have told us what the rules are or 
what their recommendations are. Remember their opinions are 
advisory. They are advice. They do not carry the force of law 
or rule.
    And they have just presented us with this is the way we are 
going to score this. This is what our view is of how this 
should be looked at from a financial point of view. We have 
gotten no help particularly in other alternatives.
    Mr. Michaud. We heard this morning from CBO they are saying 
because they looked at the leases, you know, more in depth and 
that is why they made their determination.
    Has VA instituted a policy change in how you execute the 
major medical facility leases in the past five years or has it 
pretty much been consistent, just that they are looking at it 
differently?
    Dr. Petzel. Congressman Michaud, we have operated under the 
same set of rules for 21 years. These leases have been scored 
for the past 21 years by CBO. They have been approved by 
Congress for the last 21 years with the same set of rules that 
we have now. There has been no change.
    Mr. Michaud. Are you aware of any other Federal agencies 
that is in a similar situation that the department is in where 
the CBO is not treating them the same as they are the 
Department of Veterans Administration and, if so----
    Dr. Petzel. I am going to turn that question over to Mr. 
Sullivan. But my knowledge is, no, there is no one else.
    Mr. Sullivan. My understanding is there is not any other 
agency in town that has to go through this type of 
authorization process. So there would not be a role for CBO in 
any of those other agencies. And I think CBO alluded to that 
earlier this morning that VA was the only one they were aware 
of as well.
    Mr. Michaud. If a resolution cannot be agreed upon, what 
contingency plan has the Department of Veterans Administration 
looked at to ensure that Veterans' health care is not adversely 
impacted by the change in the scoring policy of the leases?
    Dr. Petzel. Well, first of all, let me say, Congressman 
Michaud, that I believe that working with OMB, working with 
Congress that we will find a solution. If that contingency 
should not be met, as mentioned earlier, the things that we 
have looked at are, number one, maintaining services as they 
are now. There are many of these leases that could be renewed 
without having to be scored as a capital lease or at least some 
of them.
    We would look to see if it was a viable alternative to 
contract. And I want to just go through what the difficulties 
are with contracting for care.
    It is out-of-plan care, so they are not in our system. They 
are not subjected to and involved in the same kinds of high-
quality care that we are. They do not have the same quality 
assurance programs that we do, although we can compel some of 
that in the contract. And they are not in the business of 
taking care of veterans which does indeed make a difference, 
particularly when it comes to mental health, such things as 
PTSD and depression.
    Mr. Michaud. Okay. Thank you very much.
    Good luck with working with the CBO. The fact that no one 
stayed to hear what this panel was going to present really is 
troubling to me because it shows that, quite frankly, my 
opinion, that they do not care and they are off doing their 
other things.
    So with that, Mr. Chairman, I have no further questions.
    Mr. Flores. The gentleman's time is expired.
    Mr. Benishek, you are recognized for five minutes.
    Mr. Benishek. Thank you, Mr. Chairman.
    Well, Dr. Petzel, I know that you are very disappointed 
over all this action here with the CBO. And I was amazed by the 
testimony as well, even Mr. Neugebauer's question about what is 
the rule then. It seemed to me it is sort of arbitrary because 
he could not come up with an actual rule.
    So it is going to be very difficult to create a lease that 
would meet their rules since they could not give you an example 
of what rule would do it. So I can really understand the 
difficulty in going forward.
    Is there a worst case scenario about this? I mean, and 
would it be different--just answer that question. What is the 
worst case scenario here?
    Dr. Petzel. Let me just make a comment first, Dr. Benishek, 
harking back to your questions with the CBO.
    I share your chagrin and amazement at the fact that this is 
considered to be a purchase. This is something that we just 
have not been able to get our hands around because we do not 
own any of these clinics. We run through the entire leases in 
many instances and we do not own anything when we get finished.
    Mr. Benishek. Right.
    Dr. Petzel. We are not buying a clinic.
    Mr. Benishek. Well, no. I was amazed by his testimony 
defining a lease as a purchase where I do not see that is in 
the CBO's realm of decision-making.
    Dr. Petzel. The worst case, it really has to be described, 
I think, almost clinic by clinic. There are some clinics that 
will close and that means that that care is going to have to go 
back either to other clinics or into the medical center or we 
will have to purchase the care in the community.
    There are other clinics who will continue to operate, but 
they are not going to be expanded. They are oversubscribed as 
it is and the space is much inadequate. And those clinics will 
have to continue to function with what they have.
    Mr. Benishek. You do have some outside providers providing 
like CBOC clinic----
    Dr. Petzel. We do. About 20 percent of our community-based 
outpatient clinics are what we call contract. They are almost 
all in small communities.
    My experience when I was the network director in 
Minneapolis, we had three small contract community-based 
outpatient clinics where it was not practical for us. There is 
one patient panel. So we need one primary care provider and the 
support people.
    And when we staff that, we run the risk of somebody leaving 
and not being able to provide the care. When we contract for 
that, the contractor's obligation is to provide us with an 
individual.
    So, yes. Again, they are mostly small, but 20 percent of 
our clinics are contract.
    Mr. Benishek. Would a contract require up-front 
appropriations----
    Dr. Petzel. No.
    Mr. Benishek. --other than a lease?
    Dr. Petzel. No, sir.
    Mr. Benishek. I mean, that is the question I come up with.
    Dr. Petzel. They would not require up-front appropriations. 
The difficulty with contract in situations other than these 
small clinics is cost, is finding enough competition in the 
community so that we can get a good price. When you are dealing 
with only one provider as an example in the community, you are 
really at their mercy in terms of how much it would cost.
    So in these large areas, and Congressman Bilirakis's clinic 
is an example of a pretty populous area where we are trying to 
consolidate a group of CBOCs, a contract would not be 
practical, we think, in that particular circumstance. But in 
some of them, it would be.
    Mr. Benishek. Well, I am just trying to think of ways to 
deal with this issue and I am not sure how it is going to be 
dealt with at the congressional side.
    Do you have any other ideas of a way to get around this 
apparent, other than reforming the Congressional Budget Office 
which----
    Dr. Petzel. Well, I think that working with OMB and with 
the Congress, there may be a way of re-looking at the whole 
leasing structure legislatively. I think the best possibility 
for the longer term lies in doing that, to look at how do we 
want to, as a government, how do we want to approach this 
process so that it is safeguarded but it is doable. I think 
that is the long-term solution, sir.
    Mr. Benishek. Thank you.
    I yield back.
    Mr. Flores. The gentleman yields back.
    Mr. O'Rourke, you are recognized for five minutes.
    Mr. O'Rourke. Thank you, Mr. Chair.
    And I just want to echo the Ranking Member's frustration 
with the fact that CBO did not remain to hear your testimony 
and to listen to our questions as we try to find out how we are 
going to do the best we can possibly under these circumstances 
or possibly change these circumstances to serve those veterans 
in our communities.
    It does not build good will. It does not build trust. It 
does not build greater understanding and it does not help us 
form the basis for a positive resolution to this problem.
    With that being said, I want to understand more from your 
perspective the legitimacy of this ruling or illegitimacy of 
this ruling that the CBO has made. And I am still trying to get 
to an apples-to-apples comparison.
    When the DoD builds a facility or HHS or IRS or Social 
Security, from what you and the CBO have said, they do not 
require legislation to do that and that is the key difference 
between the VA and these other departments and agencies?
    Dr. Petzel. They do not require congressional 
authorization.
    Mr. O'Rourke. Congressional authorization.
    Dr. Petzel. That is what I understand to be the key 
difference.
    Mr. O'Rourke. And----
    Mr. Flores. And can you turn your mike on.
    Mr. Sullivan. Congressman, there is not an individual 
authorization of individual leases.
    Mr. O'Rourke. Okay. And why is that unique to the VA? Why 
does that situation exist?
    Dr. Petzel. Mr. Matkovsky.
    Mr. Matkovsky. It is in our statute. It is in Title 38, 
Section 8104. It explicitly calls out our requirement for 
leases above a certain threshold. It used to be $300,000. Then 
it was raised to $600,000. It was recently raised to a million. 
But for those leases, that subset, we require explicit 
congressional authorization.
    Mr. O'Rourke. And what was the intent behind that unique 
requirement for the VA?
    Mr. Matkovsky. I do not know. It has been around for 
decades.
    Mr. Sullivan. Right. The requirement prior to that was a 
Committee resolution by this Committee that would authorize the 
leases just at the Committee level and there was no statutory 
authorization. I think back in 1991, that was changed to have a 
specific statutory authorization. And I cannot comment on the 
rationale for that at the time.
    Mr. O'Rourke. I wonder following this hearing if you could 
help us find the legislative intent behind that and what they 
were hoping to achieve, again unique as compared to other 
departments and agencies.
    And, again, to hopefully use our specific case in El Paso 
to illustrate the larger issue. You heard me say earlier the 
population of veterans that we are trying to serve through a 
clinic today that is collocated with a DoD facility at Fort 
Bliss which ultimately means that many veterans, far too many 
have to travel far too many hours to get care at a full-service 
VA facility in Albuquerque, New Mexico.
    And so we are urgently exploring options to build a full-
service acute care facility in the El Paso region to serve 
those 80,000 plus veterans.
    With this ruling or with the terms as you understand them 
today, I would like to know what our options are. You know, we 
have a brand new DoD facility being built, a full-service, 
active-duty facility being built at Fort Bliss East which will 
vacate the existing active-duty hospital. And then we also have 
an opportunity with a state university to collocate.
    So in those three scenarios, does this ruling prohibit the 
VA from moving forward with a full-service veterans' hospital 
in that region? And obviously your answer would apply to all 
other regions that face those same options.
    Dr. Petzel. I am familiar, Congressman, with the 
discussions and plans about El Paso. It does not involve any 
leasing. And what we are discussing here should not have any 
impact on what is going on in El Paso.
    Mr. O'Rourke. So even in that third scenario of partnering 
with a state university, if we enter into an agreement, if you, 
if the VA enters into an agreement with the state university to 
build to suit a facility that will serve Veterans, it seems 
like we get into some of this scoring quandary and I want to 
know how that may be different than other scenarios that have 
been raised today.
    Dr. Petzel. It might. The difference often is that the land 
would be donated and that may or may not involve leasing it. I 
think we would have to look very carefully and specifically at 
that. And I was not familiar with that particular scenario.
    But in terms of our general approach to El Paso, as I 
understand it now, it should not.
    Mr. O'Rourke. Great. I look forward to resolving this issue 
with you. Thanks.
    Thank you, Mr. Chair.
    Mr. Flores. The gentleman yields back.
    Mr. Bilirakis, you are recognized for five minutes.
    Mr. Bilirakis. Thank you, Mr. Chairman. I appreciate it.
    Thank you, Dr. Petzel, for your testimony.
    I also express a lot of frustration that CBO is not here. 
That means they are not serious about the issue. We need to do 
everything we can for our true American heroes. I am very 
disappointed that they are not here.
    The challenges that have been laid out so far are very 
troubling, Doctor, especially with regards to the 27 leases 
that are currently pending. I know that my colleagues and I 
will continue to work, this is a top priority for us, to find a 
solution in order to ensure that our veterans continue to 
receive the high-quality care that they are currently receiving 
and they certainly deserve.
    As you know, the VA recently approved a plan in my 
district, you referred to it, Doctor, that would take five 
existing clinics and consolidate them into one large facility 
which would be wonderful. This would allow them to better meet 
the growing needs of my Veterans' community with its diverse 
health status. My intention is to do everything I can to allow 
this building to go forward.
    We have talked about this, Doctor, and I have also talked 
to the director at Haley and things are looking really good 
that we can renegotiate and extend for the future, but we must 
stay on this.
    Now I would like to focus on the five existing leases. 
Could you please elaborate on the VA's option for maintaining 
the CBOCs in my district and then others too? Can you speak to 
that? We seem to be in pretty good shape, but what about the 
others, and do you have the legal authority without 
congressional authorization to extend the existing leases?
    Dr. Petzel. Congressman Bilirakis, I will briefly answer 
that and then I am going to turn to Mr. Matkovsky or Mr. 
Sullivan for the details.
    But some of these leases can be extended. Most of them 
cannot. And so, again, as I was saying earlier in an answer----
    Mr. Bilirakis. Excuse me. Why can they not be extended?
    Dr. Petzel. If the extension of them required 
authorization, et cetera, we would have difficulty doing it.
    But, Mr. Matkovsky.
    Mr. Matkovsky. Congressman Bilirakis, I do not know the 
exact number of leases in your district. But in VISN 8 in 
Florida, there are 122 leases that are below the $300,000 
annual rent amount. All of those can be, you know, renewed, 
extended, competed, recompeted, et cetera, because they are not 
above the authorization threshold. It is those that are above 
the authorization threshold.
    So for New Port Richey, the consolidation would not be able 
to move forward and you would still have the disparate leases 
that exist today. It is not optimal. Referrals require somebody 
to get in their car and drive far away. Those smaller leases, 
though, would still continue.
    Mr. Bilirakis. Yes. Yeah, that is what I understand. The 
five existing leases should be fine. But we have got to get 
this done.
    As you said, Doctor, the contracting is not an option in my 
area and most areas. So thank you very much and I look forward 
to working with you. We have got to get it done and I know it 
is a priority of this Committee.
    Thank you, and I yield back.
    Mr. Flores. The gentleman yields back.
    Ms. Negrete McLeod, did you have any questions?
    Ms. Negrete McLeod. I think my only question is, this 
hearing, so we can find a solution, is this what we are here 
for?
    Mr. Flores. Hopefully. So the gentle lady yields back.
    Dr. Roe, you are recognized for five minutes.
    Mr. Roe. I thank the Chairman for yielding.
    And a couple things. Dr. Petzel knows this. But one of the 
ways we solved the lease problem in Sevierville, Tennessee was 
you have a one dollar a year lease. That was pretty cheap. Even 
I can afford that. So if we got more of those, it would not be 
an issue.
    I would like to know how we get around and fix this, why 
the VA, and I suspect it happened, and Mr. O'Rourke's question 
was very good about how this came to pass. There may have been 
some leases that were not good that the VA had in the past and 
the Committee--I do not know. We will find out what that is and 
why it was done that way.
    But the VA has to be able to do these leases to carry on 
its mission. I mean, you cannot do it, in other words, you just 
heard how disruptive it is for patient care, so we have to fix 
this. It is not an option.
    And I agree with the Ranking Member to have the people who 
score this to not even be here is shameful to hear the concerns 
that we have.
    One of the questions, and back to what the Chairman was 
speaking to when I first came in, was when you look at the cost 
of care that is contracted out and what he was asking, I think, 
was if you look at, let's say, an orthopedic procedure at a VA, 
we never seem to look at all the cost of the hospital, the 
nurses, all of that. Is it cheaper, I think he was asking, and 
correct me if I am wrong.
    Would it be cheaper in some cases to have someone just 
perform that service outside the VA? Would that be less 
expensive? And certainly I know you do that and we are probably 
doing that at home right now because our orthopedics is backed 
up so far that Veterans are having to wait an inordinate amount 
of time.
    Is it cheaper if you amortize everything just to say, okay, 
we will just pay this much because you are being able now to 
with the new ACOs and so forth to get some really good bundled 
prices on what it would cost you to have a hip replacement, 
let's say, or a knee replacement?
    Dr. Petzel. Dr. Roe, thank you. That is an excellent 
question.
    The studies that I am most familiar with were done 
comparing Medicare costs to VA costs, sort of specific 
procedure by specific procedure. And in those instances, they 
did amortize the VA's buildings, et cetera, in the same fashion 
that a private sector hospital or clinic might be doing that.
    And what they found, and that would have been probably the 
least costly way to do it in the private sector, was about an 
18-percent reduction in cost in the VA. So it was cheaper.
    And the comparisons that you point out are very difficult. 
It is just very hard to get everybody to agree, yes, this 
methodology compares apples and apples.
    Our experience is that when we go out and contract for care 
that the cost is higher than when we provide it. But there are 
circumstances where it is important for us to do that.
    If we only need to have five or six orthopedic procedures a 
year, hip replacements, we do not want an orthopedic surgeon in 
the facility that we are paying for that is not kept as busy as 
they need to be. And we would buy that service on the outside 
even though procedure by procedure, it might be more expensive. 
That is a cost-effective thing to do.
    On the other hand, if we have enough business to keep an 
orthopedic surgeon appropriately busy, we probably can do those 
things in a less costly way.
    Mr. Roe. I think there are a lot of new opportunities out 
there that, new models that are being created now with just 
being forced, with the way the Affordable Care Act is paying, 
reimbursing, that there would be some opportunities out there. 
Maybe not right now, but I think in the future.
    I know that there are plenty of places now that are 
bundling everything. And it is the hospital, the doctor, the 
whole shebang and you write one check and that is what the cost 
is going to be. I think the VA could look at that.
    Dr. Petzel. We will. Absolutely, sir, we will.
    Mr. Roe. And before my time runs out, what exactly, Dr. 
Petzel, would you say that we need, as a Committee we need to 
do, to help rectify that because it cannot go forward the way 
it is?
    Dr. Petzel. I think that we need to get together with you, 
with OMB perhaps, and figure out whether there is a fix 
legislatively that would give you the oversight that you need 
of the clinic process, yet allow us to continue doing business 
as we have.
    The idea of having to provide for 20 years of funding in 
the year that there is approval----
    Mr. Roe. Makes no sense.
    Dr. Petzel. --is not viable.
    Mr. Roe. Well, I mean, I looked at a lease. We leased our 
office space. My Lord, if I had to put up 20, I could not have 
done it. I mean, I could not have run a clinic. So no business 
in the world does that.
    Dr. Petzel. So we need to find a solution that I think 
allows us to continue with the appropriate amount of money in 
the year of approval, an appropriation without having to come 
up with the 20 years because the resources are not there.
    Mr. Roe. Mr. Chairman, I yield back. And I think that hits 
the nail on the head right there.
    Mr. Flores. Thank you, Dr. Roe, for yielding back the rest 
of your time.
    Just for clarification, I did not say the cheapest care. I 
said the best care at the most fairest price for Veterans, the 
fairest price for the taxpayer.
    Ms. Brownley, you are recognized for five minutes.
    Ms. Brownley. Thank you, Mr. Chair.
    And thank you, Dr. Petzel.
    And I was curious to know that if you are, you know, 
leasing a clinic and you have to later sort of recalibrate 
based on demands and, you know, you might need more clinics in 
one area and less in another just given where the demand is, 
what happens when you walk away from a clinic like that? I 
mean, you lease it to build it and if you walked away from it, 
then what happens?
    Dr. Petzel. Thank you, Congresswoman.
    Mr. Sullivan, I think, can address that directly.
    Mr. Sullivan. Sure, we can address that. Our leases at the 
end of the lease term, we do not own it. We walk away. And I 
know that has been a concern. In recent history, we looked. CBO 
raised this issue saying, you know, when you walk away, no one 
can use it.
    We did a little research, granted not exhaustive, and 
looked at three places where, in fact, VA walked away. And 
those facilities have been repurposed. One of them in Las Vegas 
for 160,000 square feet is now the home corporate office for 
Cox Communications, a cable company.
    We also did one in Evansville, Indiana where we moved into 
a new clinic. The old one was there, about 30,000 square feet. 
A nonprofit social service organization uses it now as their 
headquarters.
    Lufkin, Texas, same thing. That one was purchased and used 
by a private medical practice and used it as an office 
building.
    So in many cases, there is life after VA for these 
facilities and I think that is somewhat common in leasing, not 
in every case, but in many cases.
    Ms. Brownley. So is it the VA's responsibility then when 
you decide that that facility is one that you no longer need, 
is it your responsibility then to find a user for that facility 
and negotiate that process or----
    Mr. Sullivan. No. That is one of the positives of leasing. 
Once we are finished with it, we can move on to a new clinic 
that could be updated for workload and for technology changes. 
And that old clinic then becomes the private entity who owned 
it's responsibility to do whatever he or she may want with.
    So we do not have that obligation to have to take that on. 
And that is one of the beauties of leasing. It allows us--I 
think Dr. Petzel said earlier our key word for leasing is 
flexibility. In leasing, we are allowed to walk away at the 
end. We are allowed to shift them.
    If veterans' services are needed in a slightly different 
area, we can move to the next lease or we can expand or 
contract leases if the veteran demand changes. So that 
flexibility, we think, is absolutely critical in our asset 
management approach and in our approach to providing the most 
up-to-date services for veterans in the right place.
    Ms. Brownley. Thank you.
    And, Dr. Petzel, I was wondering if you could just 
elaborate a little bit more on, you know, the fact that these 
11 facilities were not created last year and the other 
prioritized facilities that you have from your SCIP list is not 
getting done.
    And can you just elaborate a little bit more on what, you 
know, what the impact is on our Veterans who, because we are 
not getting these facilities at this particular moment, can you 
just tell us what that really means?
    Dr. Petzel. Well, Congresswoman, I can speak to it broadly. 
It really is a very specific clinic-by-clinic kind of 
operation. But----
    Ms. Brownley. I know. My line of vision is blocked. Sorry.
    Dr. Petzel. Generically, number one, it is access, that the 
Veterans just will not have the same kind of access to both 
primary care and specialty care that they had before.
    Two, that means travel time. That means that they are going 
to have to travel greater distance. Our standard is 30 minutes' 
drive time to primary care. And in 2009, that was 75 percent of 
our patients had 30-minute access. Now 85 percent of our 
patients have 30-minute drive time access. That is going to 
deteriorate. No question about it.
    The impact perhaps of these 27 is not going to be huge, but 
as this process snowballs, it will have a significant impact on 
access and will have a significant impact, we think, on wait 
times because we are going to have to put these patients into 
already overcrowded other venues.
    Ms. Brownley. Thank you.
    I know in my district in talking to the Veterans, travel 
time is a major issue. I am not quite sure how you evaluate 30-
minute travel time because in my district, travel time, it 
might be ten miles, but it could be two hours worth of travel 
time. So it is typically a, you know, very early to late in the 
evening through heavy traffic is a full day for a Veteran just 
to have maybe a 30-minute appointment.
    Dr. Petzel. Well, Congresswoman, that is a very good point 
because this is not an issue just in rural America. This is an 
issue in urban America.
    Traveling across a metropolitan area like Minneapolis where 
I am familiar, from the northwest corner of Minneapolis down to 
the southeast corner where the hospital is, people that are 85 
years old do not want to take that drive. They are intimidated, 
in fact, by the urban traffic.
    So you are absolutely right. It is not just distance.
    Mr. Flores. The gentle lady's time is expired.
    Mr. Neugebauer, you are recognized for five minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    Dr. Petzel, it is certainly good to see you again. And I 
want to thank you for including the Lubbock community-based 
outpatient clinic in your fiscal year 2014 submission.
    As you know, the lease is about to expire on the existing 
facility there and business fortunately and unfortunately is 
growing. And I think the projection is that in that area that 
there will be a 50-percent increase over the next 20 years.
    You know, one of the things that you and I have discussed 
in the past is, you know, some of the pluses and minuses of 
collocating with a major medical school. Just, you know, to get 
your thoughts on why that is a positive.
    Dr. Petzel. Thank you, Congressman.
    And I do recollect the discussions we had. I appreciate 
that.
    A number of things. One is that it allows for the 
participation of the VA and the teaching programs of the 
university and we believe that clinical care is enhanced when 
you have students that are being taught when you are doing 
research in and around that facility.
    Number two is the access to specialty care. You have a 
university hospital or a university affiliated hospital right 
there proximate to the VA clinic and being able to purchase on 
fee-basis or contract the things that you cannot provide in 
that clinic are much easier under the circumstances of an 
affiliation.
    It is a very positive thing for us. It is one of the 
ingredients that is responsible for the VA having evolved into 
this excellent health care system.
    Mr. Neugebauer. And one of the other things that is making 
sure that you all have the flexibility of doing some leasing 
and some shared space and joint use because one of the things 
that is going to be important when we move forward is we have 
got all these baby boomers, we have got all these Veterans, is 
controlling the cost for health care, providing that.
    And so, you know, I think Texas Tech proposal, for example. 
They are bringing some other participants, the county hospital 
and, you know, looking at ways to share and co-utilize some of 
the facilities there.
    Isn't that really the way for the future and something that 
you need the flexibility to work out and negotiate on behalf of 
Veterans?
    Dr. Petzel. Yes, Congressman, we do need the flexibility to 
do that. And in circumstances like we have in Lubbock, it is 
close to an ideal circumstance and situation. We do not have 
that everywhere, but where we do we need the flexibility to be 
able to take advantage of it, yes.
    Mr. Neugebauer. And I think that the CBOC concept, I mean, 
one of the things we know is that we deliver health care much 
differently than we did even 10 years ago or 20 years ago. And 
things that we used to have to go to the hospital for today we 
can do in many of the cases on an outpatient basis.
    And I have a congressional district that has almost 30,000 
square miles and we have a lot of Veterans. And these 
community-based clinics are extremely important to those 
Veterans that utilize those. Otherwise, as you say, have to 
drive long distances.
    And it is not just the fact that they have to drive long 
distances. It is they are longer distances away from their 
support system, the people that are going to take care of them 
after they have had a procedure or some care in that CBOC. So I 
think that is an important part of that.
    I know that this joint use and sharing concept is something 
that Texas Tech is working extremely hard on. And one of the 
things we hope that we will be able to do here is, one, is to 
be able to lower the cost of the VA being able to have an 
access to a much larger infrastructure than it would have if it 
was just on a stand-alone basis.
    And I look forward to working with the Chairman on ways 
that we can kind of jump over this little hurdle here because 
one of the things that I think almost de facto if we cannot 
work through this, you are going to be basically getting into 
the fee business of outsourcing a lot of the care that we have 
been doing in these clinics.
    And, as you say, in some cases, maybe that is not 
necessarily in the Veterans' best interest and it may not be in 
the taxpayers' best interest. And so I will look forward to 
working with you and the Chairman on this very important issue.
    Mr. Flores. Will the gentleman yield the remainder of his 
time to me?
    Mr. Neugebauer. I would.
    Mr. Flores. Thank you, Mr. Neugebauer.
    Dr. Petzel, one of the things I was going to ask you if you 
would look at the Lubbock facility and see what legislative 
adjustments would need to be made in order for facility to be 
approved or so that we could go forward with it, if you will 
let us know supplementally.
    We are going to give you a bunch of questions following 
this hearing and we would ask for you to include that among 
those things to answer.
    Dr. Petzel. We will do that, Mr. Chairman.
    Mr. Flores. Now I will yield to Mr. Walz for five minutes.
    Mr. Walz. Thank you again. Thanks to the Chairman and 
Ranking Member.
    I would just make a friendly suggestion. Perhaps we could 
invite CBO back for an extended time to talk to us again. I am 
just baffled in the last 50 minutes that someone is not 
watching TV and someone scurrying over here. But it reinforces 
my opinion, I think.
    Dr. Petzel, thank you. As always, thanks for being here.
    And I, too, am a fan like many of my colleagues, especially 
from rural areas, the CBOC concept is working. And, again, I 
think there is a mature attitude here that it is not an all or 
nothing, that in some cases contracts work well, in others they 
do not.
    And in my district, I have one that is a VA run facility 
and another that Sterling Medical is doing and they are 
providing excellent care. And I am appreciative of that.
    Two specific questions on here. Since I have been in 
Congress, the southern Minnesota/northern Iowa clinic was going 
to be approved next week. That has been six years that next 
week, it was going to be approved.
    Is this whole process interfering with the completion of 
that contract and the completion of that clinic for rural 
veterans in southern Minnesota/northern Iowa?
    Dr. Petzel. Thank you for the question, Congressman Walz.
    As near as I can tell, no. It is on the approved list for 
2013, as I understand it, already. And I think it is slated to 
be open sometime in 2013 or early 2014. So it should not.
    Mr. Walz. All right. I am excited about that. I do not 
often get to quote President Reagan, trust but verify. We will 
see this one.
    Dr. Petzel. And I am going to do that, sir.
    Mr. Walz. Open that thing. It is a good one.
    But my other question is this, and I am hearing from my 
folks back home, Secretary Shellito, Commissioner Shellito, and 
others. Is this problem forcing you to reprogram?
    And I bring this up specifically on an issue that is very 
near and dear to my heart, the stand-downs. And you guys have 
been fabulous partners in communities on stand-downs. This 
year, out of the blue, Minneapolis VA is no longer supporting 
stand-downs and that created a gap.
    Our question is, and there is a lot of hurt feelings over 
this as you might imagine and these are long-term partnerships 
for good causes, is it your interpretation, Dr. Petzel, that 
reprogramming because of some of these decisions on leases is 
starting to have an effect there?
    Dr. Petzel. No, sir. There has been no discussion about 
reprogramming in relationship to this lease issue. And I am 
chagrin to hear that Minneapolis is not supporting stand-downs. 
We will look into that.
    Mr. Walz. I appreciate that.
    And, again, I thank you, Chairman. This is a very timely 
hearing and I think we are starting to get at the heart of some 
of the problems.
    Mr. Flores. The gentleman yields back.
    Dr. Petzel, thank you, Mr. Matkovsky, thank you, Mr. 
Sullivan, thank you for joining us today. You are now excused.
    I ask unanimous consent that all Members have five 
legislative days to revise and extend their remarks and include 
extraneous material. Without objection, so ordered.
    I would like to once again thank all of our witnesses and 
audience members for joining us at today's conversation.
    This hearing is now adjourned.

    [Whereupon, at 11:55 a.m., the Committee was adjourned.]

                            A P P E N D I X

                              ----------                              

            Prepared Statement of Hon. Jeff Miller, Chairman
    Good morning, and welcome to today's Full Committee hearing, 
``Assessing VA's Capital Investment Options To Provide Veterans' 
Care.''
    As today is National Post-Traumatic Stress Disorder Awareness Day, 
I would like to take a brief moment to address those veterans 
experiencing post-traumatic stress who may be in attendance or 
listening.
    Hope and healing are possible, and I encourage you and all those 
suffering to reach out for help.
    You can call 1-800-273-talk (8255) and press one for veterans.
    Now, turning our attention to what we are gathered here today to 
discuss--the potential for a new paradigm of care for our veterans 
through the Department of Veterans Affairs (VA's) Capital Investment 
Programs.
    As many of you know, when this Committee was considering 
legislation to authorize VA's major medical facility projects and 
leases last year, the Congressional Budget Office (C-BO) raised 
concerns about how to properly account for VA's lease authorizations.
    C-b-o, after soliciting and receiving additional information from 
VA about the lease contracts, determined that such leases should be 
classified as ``capital leases'' rather than ``operating leases,'' as 
c-b-o had done in the past.
    This new scoring criteria has resulted in new challenges to our 
ability to authorize VA's leases as, under CBO's new scoring construct, 
they now constitute significant direct spending costs that must be 
offset under statutory paygo requirements and house and senate budget 
rules.
    For the twenty-seven pending leases that means finding more than 
two point three billion dollars in up-front savings from other 
government programs.
    This issue is not one of politics or party nor is it not one that 
pits one body of Congress or one branch of government against another.
    Rather, this is an issue that all of us who are tasked with 
providing high-quality care and services for our veterans are facing 
together.
    And, it is one that will take our collective effort to resolve.
    VA has proposed twenty-seven major medical facility leases--most of 
them for community-based outpatient clinics--in the current budget.
    Of these, twenty-one are expansions or consolidations of existing 
leased facilities and six are new leases.
    Let me be clear--the needs of our veterans in those areas are going 
to be met, but how those needs will be met in light of CBO's 
reclassification of VA's lease authorization requests is what we will 
discuss today.
    Information VA has circulated to Members of Congress about the 
status of the pending lease requests includes a statement that, ``until 
last year, enactment of these leases has been a fairly routine annual 
exercise.''
    I do not take that as a compliment and neither should the 
department.
    Expending our hard-working taxpayers' dollars on authorizing costly 
capital investment projects should never be a matter of routine.
    Rather, it should be a responsibility that is taken seriously, 
evaluated carefully, and scrutinized constantly to ensure that the 
capital investments we are undertaking are expanding our veterans' 
access to care and not just expanding VA's bureaucratic reach.
    Last year, I committed to working closely with VA, C B-O, and our 
colleagues in the Senate to find a way forward for VA's major medical 
facility lease program to provide high-quality care and services for 
our veterans.
    That commitment remains today.
    However, we can no longer afford to invest our time arguing about 
the merits of C centsO's scoring determinations.
    That does not get our veterans closer to the care they need, which 
is the goal we all share and must achieve.
    Absent a way forward to either adhere to C B-O's ruling and pay for 
these leases or collectively decide to waive our budget rules, we must 
take a hard look outside the box to assess our options for developing 
these projects.
    Those options include new constructs for public private 
partnerships, joint collaborations, and other avenues of care.
    That is what I look forward to discussing here today.

                                 
  Prepared Statement of Hon. Michael Michaud, Ranking Minority Member
    Thank you all for coming today.
    I want to thank the Chairman for holding this hearing. Ensuring the 
Department of Veterans Affairs has the proper infrastructure and 
facilities to provide safe, effective, quality health care to veterans 
is a priority of mine and of this Committee.
    Some of the ways in which VA provides this care is through the 
construction program, sharing agreements, collaborations with other 
Federal agencies, and leasing authority.
    This is an important hearing, and an important step in our ongoing 
discussion regarding how we can best meet these infrastructure and 
facilities needs of the VA this year, and in the years and decades to 
come.
    The VA has an ever-increasing backlog of construction requests. 
Along with this backlog we are facing an environment of constrained 
Federal spending, and uncertainty regarding where our veterans will 
live, and how, in the decades to follow, medicine will be provided. The 
VA has an inventory of many facilities that are over 50 years old, that 
were built to provide medicine the way it was provided following World 
War II. We must ensure that the facilities we build today will meet the 
needs of the future, and that we build or acquire them for a reasonable 
cost.
    One way VA meets its infrastructure needs today is through seeking 
authorization for major medical facility leases as required in statute. 
In light of recent events regarding a change in the way the 
Congressional Budget Office treats VA major medical facility lease 
authorizations for scoring purposes, the time has come to look for 
alternative solutions. This hearing is an important step to begin that 
discussion.
    Last year, the CBO made a determination that VA leases were 
``similar to contracts for acquiring facilities and thus a form of 
third-party financing'' as compared to operating leases. CBO decided 
that, in its view, this third-party financing was ``equivalent to a 
government purchase of the asset'' and therefore the cost should be 
recorded up front, as compared to spread out annually over the duration 
of the lease, as is the practice for operating leases, and how VA major 
medical facility lease requests were scored in the past.
    For 20 years CBO had been scoring VA's facility leases as operating 
leases, however, in preparing the cost estimate for the construction 
authorization for Fiscal Year 2012, CBO received additional information 
from VA that caused CBO to determine that the facility leases were 
executed more like capital leases and therefore the cost of the leases 
should be recorded upfront for budgetary purposes.
    This determination led to a CBO score of $1.2 billion in direct 
spending for the leases originally contained in the FY2012 construction 
bill. Because offsets could not be found the leases were stripped from 
the bill.
    For over a year now we have been unable to come to a solution or 
put forth alternative ideas on this issue. In all honesty, it has been 
disappointing and I hope that this hearing provides some open 
discussion from all parties involved.
    I would like to hear from our witnesses whether there was a change 
in VA policy regarding the types of leases it undertakes. I want to 
hear from both panels on what they have done together to try and solve 
this issue. Is it a matter of disagreeing on definitions or terms or 
does this need a legislative fix? Has VA looked at alternative ways 
besides the major medical facility lease program as it is currently 
operating to provide services to veterans?
    I have many more questions than I have answers. What I do know is 
that if we don't find a way forward, over 340,000 veterans in 20 States 
could be negatively affected by this and that is simply unacceptable. 
We must find a way ahead.
    In short, I would like to learn from our witnesses where we go from 
here. Not just in terms of the VA's major medical facility lease 
program, but where do we go from here in terms of providing the 
infrastructure needed to provide world-class health care to our 
veterans this year, and 20 years from now. I look forward to the 
testimony of our panelists.

                                 
               Prepared Statement of Hon. Jackie Walorski
    Mr. Chairman and Ranking Member, it's an honor to serve on this 
Committee.
    I thank you for holding this hearing on such an important issue for 
our veterans and the future of veteran health care.
    The Department of Veterans Affairs (VA) has worked to improve 
access to veteran specific medical care through community-based 
outpatient clinics (CBOC). Indiana's Second Congressional District is 
fortunate and proud to have one of the approximately 821 CBOCS which 
currently exist throughout the country. \1\ The facility in South Bend 
provides many of the 53,000 \2\ veterans back in the district with 
primary and mental health services they have earned.
---------------------------------------------------------------------------
    \1\ Department of Veterans Affairs, National Center for Veterans 
Analysis and Statistics, ``Department of Veterans Affairs Statistics at 
a Glance,'' Updated 4 February 2013. http://www.va.gov/vetdata/docs/
Quickfacts/Winter--13--sharepoint.pdf.
    \2\ There are an estimated 53,318 veterans in IN-02. This data was 
compiled on 09/30/2012, based on the district lines from the 112th 
Congress. http://www.va.gov/vetdata/Veteran--Population.asp.
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    The Congressional Budget Office's recent change in classification 
for major medical facility leases has significantly impacted the 
expansion and improvement of CBOCs throughout the country. I have seen 
how critical the services CBOCs provide for veterans are. 
Unfortunately, a dire need has arisen to re-examine the funding of 
construction for veteran facilities, such as CBOCs, throughout the 
country.
    I know I share the sentiment of this Committee in its commitment to 
provide veterans with quality and advanced medical care. In discussing 
how to best address this issue, it is most important to keep veteran 
access to care at the forefront of any potential solution.
    I look forward to working with my colleagues and our panelists to 
establish a plan of action for the Department of Veterans Affairs which 
will continue to improve veteran access to appropriate care.
    Thank you.

                                 
                Prepared Statement of Robert A. Sunshine
    Mr. Chairman, Congressman Michaud, and Members of the Committee, 
thank you for inviting me here to -discuss the Congressional Budget 
Office's (CBO's) -budgetary treatment of leases of medical facilities 
by the Department of Veterans Affairs (VA).
    The main points of my testimony are as follows:
    u  In estimating the budgetary impact of a proposed financial 
transaction, CBO assesses the nature and extent of the government's 
financial commitment, taking into account not just the form, but also 
the substance of the transaction.
    u  Although VA classifies its leases of medical facilities as 
operating leases, most of them, in CBO's judgment, are akin to 
government purchases of facilities built specifically for VA's use--but 
instead of being financed by the U.S. Treasury, they rely on third-
party financing (that is, funds raised by a nonfederal entity), which 
is generally more expensive. \1\ For VA leases, the cost premium is 
even greater because, when the department vacates the facility at the 
end of the lease term, it loses the residual value of a building that 
it has fully or mostly paid for.
---------------------------------------------------------------------------
    \1\ Third-party financing is a type of arrangement wherein a non-
federal entity borrows money in private capital markets to finance a 
facility or other asset that is built at the behest of and for use by a 
federal agency. For more information on the budgetary treatment of 
third-party financing, see Congressional Budget Office, Third-Party 
Financing of Federal Projects (June 2005), www.cbo.gov/publication/
16554.
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    u  Because those transactions are essentially governmental 
purchases, the full costs of acquiring the facilities should be 
recorded in the budget when VA enters into the lease--as is done for 
other purchases that the government makes--rather than spread out over 
the duration of the lease.

    I will discuss why CBO reached those conclusions and how CBO's 
treatment of proposed VA leases is comparable to the approach it has 
applied in other, similar cases.
VA's Leases of Major Medical Facilities
    Under current law, VA must receive specific legislative 
authorization to lease medical facilities with average annual rental 
payments in excess of $1 million. VA classifies those arrangements as 
operating leases (an agreement to use a property for a limited amount 
of time in exchange for periodic payments) and records the obligations 
on an annual basis in an amount equal to the lease payments due in that 
year. \2\
---------------------------------------------------------------------------
    \2\ For further information on the budgetary treatment of operating 
leases, see the Office of Management and Budget, Preparation, 
Submission, and Execution of the Budget, Circular A-11, (August 2012), 
Appendix B, www.whitehouse.gov/omb/circulars--a11--current--year--a11--
toc.
---------------------------------------------------------------------------
    Before 2012, CBO followed that treatment in estimating the cost of 
legislation that would authorize those leases on the assumption that 
all of the leases were short-term contracts for the use of existing 
facilities or renewals of leases on facilities currently used by VA.
    However, while preparing a cost estimate for the introduced version 
of H.R. 6375, the VA Major Construction Authorization and Expiring 
Authorities Extension Act of 2012, CBO received additional information 
from VA regarding the department's practices in contracting and 
executing most of the existing leases. On the basis of that 
information, CBO concluded that most of VA's leases of major medical 
facilities are not operating leases, but instead are a form of third-
party financing because they have many of the following key features:

    u  The facilities are designed and constructed to the unique 
specifications of the federal government;
    u  The facilities are constructed at the request of the federal 
government;
    u  The leases on the newly constructed facilities are long term--
usually 20 years;
    u  Typically, payments from the federal government are the only or 
the primary source of income for the facilities;
    u  The term of the contractual agreements coincides with the term 
of the private partner's financing instrument for developing and 
constructing the facility (that is, a facility financed with a 20-year 
bond will have a 20-year lease term);
    u  The federal government commits to make fixed annual payments 
that are sufficient to service the debt incurred to develop and 
construct the facility, regardless of whether the agency continues to 
occupy the facility during the guaranteed term of the lease; and
    u  The fixed payments over the life of the lease are sufficient to 
retire the debt for the facility.

    Whereas entering into an operating lease is similar to renting an 
apartment--a renter can move out after a short period with no further 
commitment--VA's build-to-lease contracts are similar to obtaining a 
mortgage to buy a house; through the agreement, the agency acquires an 
asset along with a corresponding liability to pay for the asset over 
time.
    Like arrangements involving third-party funding for other federal 
facilities, VA's leases for medical facilities are more expensive than 
traditional acquisition methods because the third party borrows funds 
at interest rates higher than Treasury rates. In the case of VA's 
leases, the cost premium is even greater because, when the agency 
vacates the facility at the end of the lease term, it loses the 
residual value of a building that it has fully or mostly paid for.
Third-Party Financing of Federal Projects
    Proposals to enter into arrangements involving third-party 
financing are not unique to veterans' medical -centers. Other agencies 
have structured third-party transactions to try to justify recording 
investment costs in the federal budget over the life of a project 
instead of in full when the investment is made--as would be the case 
with up-front appropriations for acquisition and construction projects. 
However, such budgetary treatment is at odds with established 
principles of federal budgeting, which require agencies to record the 
costs of government -investments when they are made.
Examples of Third-Party Financing
    Over the past 10 years, CBO has evaluated many projects involving 
third-party financing, and it has -consistently estimated up-front 
budgetary effects of -legislation that would authorize those projects. 
Some examples of other uses of third-party financing are energy savings 
performance contracts (ESPCs), enhanced-use leases, lease-leaseback 
ventures, and military housing privatization projects.

    Energy Savings Performance Contracts (ESPCs). Federal agencies 
enter ESPCs to acquire energy-efficient equipment--such as new windows, 
lights, and heating, ventilation, and air conditioning systems--while 
paying for the equipment over time. Because the government does not pay 
for the equipment at the time it is acquired, the contractor borrows 
money from a nonfederal lender to finance the acquisition and 
installation of the equipment. When the government signs the ESPC, it 
commits to paying for the full cost of the equipment as well as the 
interest costs on the contractor's borrowing for the project. \3\
---------------------------------------------------------------------------
    \3\ See the discussion on energy savings performance contracts in 
Congressional Budget Office, cost estimate for S.1321, the Energy 
Savings Act of 2007 (June 11, 2007), www.cbo.gov/publication/18735.
---------------------------------------------------------------------------
    Enhanced-Use Leases. Various federal agencies are allowed to lease 
out underutilized property to a non-federal entity in exchange for cash 
or in-kind compensation. In some instances, agencies have employed that 
authority to enter into enhanced-use leases to obtain third-party 
financing for the acquisition, construction, rehabilitation, operation, 
and maintenance of real property used by the agencies. Those agencies 
use a variety of agreements and contracts to assure the nonfederal 
partner that it will be able to recover its capital costs for the 
facilities over time through payments from the federal government. \4\
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    \4\ See the discussion on enhanced-use leases and build-to-lease 
military housing in Congressional Budget Office, cost estimate for S. 
1042, the National Defense Authorization Act for Fiscal Year 2006 (June 
2, 2005), www.cbo.gov/publication/16561.
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    Lease-Leaseback Ventures. A few agencies such as the Tennessee 
Valley Authority can lease out new or existing facilities to a 
nonfederal entity in exchange for an up-front payment. The agency then 
leases those same facilities back from the lessee for the life of the 
asset--which can extend 30 years or more--at prices set to cover the 
lessee's debt. Such arrangements allow agencies to raise financing 
while avoiding statutory limits on their direct borrowing. \5\
---------------------------------------------------------------------------
    \5\ See the discussion on lease-lease backs in Congressional -
Budget Office, cost estimate for H.R. 2548, the Federal Property Asset 
Management Reform Act of 2003 (November 18, 2003), www.cbo.gov/
publication/15048.
---------------------------------------------------------------------------
    Military Housing Privatization. The Department of Defense can enter 
into partnerships, provide direct loans and loan guarantees, enter into 
long-term leases, and use other financial arrangements to renovate, 
build, and operate military housing in concert with residential housing 
developers. The capital costs for the housing are repaid over time on a 
monthly basis through housing allowances provided to service members. 
\6\
---------------------------------------------------------------------------
    \6\ See the discussion on military housing privatization in -
Congressional Budget Office, cost estimate for H.R. 4879, the Military 
Housing Improvement Act of 2004 (July 30, 2004), www.cbo.gov/
publication/15869.
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Features of Projects That Use Third-Party Financing
    Although projects that use third-party financing employ a variety 
of contractual arrangements and result in the acquisition of a broad 
range of assets, they generally have several features in common. In 
most cases, the -government:

    u  Initiates the project, selects the developer, and specifies the 
project's parameters;
    u  Has significant economic interests as owner, beneficiary, or 
lessor;
    u  Retains substantial control over the project's assets, business 
operations, and management; and
    u  Serves as the sole or primary source of capital backing the 
project's financing.

    As a general rule, the conditions that make projects viable for 
investors are usually some of the same features suggesting that the 
projects should be classified as governmental activities. To secure 
private financing, agencies must demonstrate the government's long-term 
economic interest in the asset or service. Likewise, many of the -
contractual conditions that agencies seek in order to -protect the 
government's interests in a project give the government ultimate 
control over the activity.
    Third-party financing arrangements have a number of other 
consequences. Relying on third-party financing generally increases 
costs to the government. Each intermediary charges a fee for its 
services, which together can add at least 2 percent--and in some cases 
more than 50 percent--to the costs of a project. \7\ Interest rates on 
projects' debt usually exceed interest rates on Treasury bonds by 
anywhere from 1 to 3 percentage points, depending on the terms 
negotiated by the parties.
---------------------------------------------------------------------------
    \7\ Government Accountability Office, Capital Financing: 
Partnerships and Energy Savings Performance Contracts Raise Budgeting 
and Monitoring Concerns, GAO-05-55 (December 2004), www.gao.gov/
products/GAO-05-55.
---------------------------------------------------------------------------
    In addition, if agencies do not initially record the full cost of 
governmental activities, the budget understates the size of the federal 
government and its obligations at the time when those obligations are 
made. Third-party arrangements may also skew decisions about how to 
allocate budgetary resources by giving preferential treatment to 
investment projects on the basis of their method of financing rather 
than their relative merits.
    Such arrangements also reduce an agency's flexibility when managing 
its budget. The agreements entail a stream of mandatory payments that 
cannot be avoided. When faced with budgetary pressure, such as 
emergency expenses or the reductions in budget authority that arise 
from sequestration, for example, reductions must come from other 
programs or activities.
    Finally, third-party financing allows agencies to raise -capital in 
private markets without the full scrutiny of the Congressional 
appropriation process.
Budgetary Treatment of Third-Party Financing
    The way in which an activity should appear in the federal budget 
depends on the nature of the activity, not its method of financing. 
Under the principles that govern federal budgeting, budgetary treatment 
should be based on whether the activity is governmental (that is, 
initiated, controlled, and funded largely by the government for 
governmental purposes) or is an initiative of the private sector 
(driven by market forces independent of the government). An investment 
that is essentially governmental should be shown in the budget whether 
it is financed directly by the U.S. Treasury or indirectly by a third 
party that is borrowing on behalf of the government.
    To properly measure the scope of the federal sector, the budget 
should record obligations and expenditures for projects financed by 
third parties the same way that it records costs for other federal 
programs. Thus, amounts obligated and expended by intermediaries on 
behalf of the government should be recorded in the budget when they 
occur. Such treatment provides the most accurate and timely measure of 
the magnitude of the government's financial commitment and the net 
costs of projects to taxpayers. It also discourages the use of costly 
third-party financing mechanisms and ensures that various types of 
acquisitions by federal agencies receive equivalent -budgetary 
treatment.
Budgetary Treatment of VA's Leases
    In estimating the budget impact of authorizing legislation for VA, 
CBO treats leases for existing medical facilities under short-term 
contracts as operating leases, showing costs on an annual basis. 
However, on the basis of VA's practices over a number of years, CBO 
concludes that the majority of the leases proposed in 2013 would not 
qualify as operating leases. Most of those arrangements are long-term 
contracts for the development and construction of new facilities that 
are built for VA to its unique -specifications.
    Therefore, CBO has determined that budget authority for leases of 
VA medical facilities should be recorded up front when the leases are 
initiated, in amounts equal to the development and construction costs 
of the medical facilities; that is, the cost should be recorded when 
the acquisition occurs, not when the debt is repaid. Because VA records 
a smaller amount (based on annual lease costs), CBO treats legislative 
authorization for such leases as contract authority--a type of budget 
authority that allows an agency to enter into a contract and incur an 
obligation in advance of appropriations.
    Those conclusions reflect CBO's best objective judgment as to the 
appropriate budgetary treatment of VA's planned transactions, formed on 
the basis of the general principles that apply to federal budgeting and 
precedents established over a number of years. Ultimately, in such 
cases, the Office of Management and Budget and the affected executive 
branch agencies determine how transactions are recorded in the federal 
budget once legislation is enacted.
    I would be happy to answer any questions you may have on this 
topic.

    Ann Futrell, Sarah Jennings, and David Newman contributed to this 
testimony, with guidance from Theresa Gullo. John Skeen edited the 
document, and Jeanine Rees prepared it for publication. The testimony 
is available on CBO's website (www.cbo.gov).

                                 
              Prepared Statement of Robert A. Petzel, M.D.
    Good morning, Chairman Miller, Ranking Member Michaud, and Members 
of the Committee. Thank you for the opportunity to discuss the 
Department of Veterans Affairs' (VA) Major Medical Facility and Lease 
Program that supports VA's mission to provide quality and accessible 
health care for Veterans. I am accompanied today by Mr. Phillip 
Matkovsky, Assistant Deputy Under Secretary for Health for 
Administrative Operations; and Mr. Jim Sullivan, Director, Office of 
Asset Enterprise Management.
    In my testimony, I will discuss the Veterans Health 
Administration's (VHA) model of health care delivery to ensure Veteran-
centric care. This model is an integrated approach that includes direct 
care in VHA owned and leased facilities, non-VA care, and 
collaborations with the Department of Defense (DoD). I will also 
discuss the central role that capital planning has played and will 
continue to play in delivering the best care possible for Veterans, 
with the fullest access to care possible. Finally, I will address the 
current challenges we all acknowledge in balancing resources with 
needs, along with our recent challenge on major medical leases.
I. DELIVERING CARE TO VETERANS
    At VA, we must anticipate and meet the needs of current and newly 
returning Veterans. We have many entry points for VHA health care: 152 
medical centers, 821 community-based outpatient clinics (CBOC), 300 Vet 
Centers and 70 mobile Vet Centers that provide readjustment counseling, 
the Veterans Crisis Line, college and university campuses and other 
outreach efforts. In response to increased demand, VA has enhanced its 
capacity to deliver needed health services and to improve its system of 
care, so that Veterans can more readily access services. We acknowledge 
the disconnect between available capital resources and the number of 
facility replacement and modernization projects identified in our Long 
Range Capital Plan. However, our greatest immediate concern is how 
applying ``capital lease'' budgetary scoring to all proposed VA major 
medical facility leases threatens to potentially disrupt our ability to 
deploy state-of-the-art medical care for Veterans. Though VA is faced 
with ongoing challenges, we want the Committee and all Veterans to 
understand we are committed to ensuring our Veterans receive the 
quality health care they have earned by serving their country.
    VHA has been transforming its health care delivery system for two 
decades, moving from an inpatient, hospital-based system to an 
outpatient, ambulatory care model. By doing so, VA has brought our 
commitment to serving timely and efficient health care services 
significantly closer to Veterans. The ability of Veterans to access 
health care at the right time and at the right place is at the heart of 
keeping our promise to America's Veterans. VA's capital and leasing 
programs are one tool by which VA has achieved this transformation.
    VA provides health care to Veterans in facilities that are 
constructed and owned, and leased by VHA. Leased facilities, for 
example CBOCs, are located in Veterans' communities, allowing VA to 
meet access and capacity goals in locales across the country, including 
rural settings.
    VA also provides health care to Veterans indirectly, through 
individual authorizations or through contracts with community health 
care providers, under the Non-VA Medical Care Program. Delivering 
health care services through the Non-VA Medical Care Program may be 
used when specific services cannot be provided in a VA-owned or leased 
facility in a timely manner, or because such VA services are not 
available. This option is limited to the general availability of those 
services in the community.
    This mix of in-house and external care provides Veterans a full 
continuum of health care services, covered under our medical benefits 
package, when and where it is needed.
II. CAPITAL INVESTMENT
    The goal of VA's capital asset and leasing programs is to ensure 
that there are safe, secure, and state-of-the-art facilities to provide 
benefits and services to our Nation's Veterans. VA owns and leases real 
property in hundreds of communities across the U.S. and overseas. 
Currently, VA owns and leases more than 170 million square feet in 
7,786 buildings.
    VA strives to maintain the optimal mix of investments needed to 
achieve strategic goals and ensure a high level of performance for our 
assets, while minimizing risk and maximizing cost effectiveness. VA has 
developed and continues to look for sound capital asset management 
strategies, to assist in maximizing the value of its portfolio, by 
disposing of or reusing underutilized properties.
    VA has continued to innovate its capital asset management planning, 
including the development of a highly structured, data-driven 
methodology, by which to assess proposed major construction projects. 
Beginning with the fiscal year (FY) 2012 budget formulation process, VA 
introduced the Strategic Capital Investment Process (SCIP), to 
prioritize all capital investments across the Department based on 
identified mission needs. The SCIP process is a requirement-based 
planning tool, which informs the Department's resource allocation 
process, to address the most critical needs first.
    SCIP involves a systematic evaluation and prioritization of all 
proposed capital investments, based upon identified performance gaps 
(e.g., safety, security, workload-driven capacity shortage, right-
sizing). These gaps reflect where enhancement of current infrastructure 
or services is necessary to meet strategic goals for access and 
timeliness based on current and future Veteran demographic projections, 
or when VA may have underutilized or excess capacity. Only those 
capital investment projects that have scored well in addressing 
identified performance gaps are proposed for funding in VA's budget. As 
a result of the SCIP process, VA has a total picture of all possible 
capital investments that would support Departmental goals, as well as a 
prioritized integrated list of capital investments.
    All projects are considered in light of VA's aging infrastructure. 
On average, VA-owned assets are more than 60 years old. The SCIP 
process directly addresses the challenges posed by an aging 
infrastructure with a range of solutions, including reuse or 
repurposing of underutilized assets.
    In light of the fiscal outlook for our Nation, and what has always 
been our duty to be good stewards on behalf of taxpayers, we must more 
carefully than ever consider VA's footprint and our real property 
portfolio. Innovative approaches to deliver services to Veterans and 
better manage our portfolio are welcomed. The Department supports the 
Administration's proposed Civilian Property Realignment Act (CPRA), to 
add to VA's ``tool-kit'' for reducing unneeded assets. If enacted by 
Congress, this process would give VA more flexibility to dispose of 
unneeded property, and improve the management of its inventory.
    In addition to CPRA, the Department proposed legislation that would 
authorize VA to plan, design, construct, or lease joint VA/Federal use 
medical facilities, and amend VA's Enhanced-Use Lease (EUL) statute. 
The proposed legislation would further VA's ability to collaborate with 
other Federal agencies, and would authorize VA to plan, design, 
construct, or lease joint VA/Federal use medical facilities. And 
relative to accomplishing such joint projects, the proposed legislation 
would allow the transfer of funds between Federal agencies--for use in 
the planning, design, and/or construction of joint medical facilities.
    The current version of VA's EUL authority precludes the 
Department's ability to enter into a wide range of agreements that 
could benefit Veterans and help address VA's physical infrastructure 
needs. VA's proposed amendments to its EUL authority would enable 
leasing of its unneeded and vacant properties for purposes beyond the 
development and operation of ``supportive housing,'' as defined in 38 
U.S.C. Sec.  8161(3) of the United States Code.
    The Administration's CPRA proposal, in combination with granting VA 
broader EUL authority, will help VA continue to reduce operations and 
maintenance costs for its most challenging assets, and would offer 
alternative approaches to manage VA's real property portfolio.
III. MEDICAL LEASES
    In addition to construction, the leasing of medical facilities is 
essential to providing Veterans with access to health care services. 
Leasing provides VA the flexibility to serve our Nation's Veterans, 
with both the space and services located closer and more conveniently 
to where Veterans live. It also allows VA to respond to demographic 
shifts, changing service demands, and technological improvements to 
support projected outpatient workload increases. Finally, leasing 
enables VA to vacate clinical space if doing so is prudent in order to 
continue to provide state-of-the-art healthcare in safer, more modern 
facilities. Since 2008, VA has opened 180 leased medical facilities, 50 
of which required Congressional authorization as ``major facilities'', 
due to anticipated annual rent payments exceeding one million dollars. 
VA currently leases approximately 21.5 million square feet in support 
of its health care system.
    As you are aware, the Congressional Budget Office's (CBO) technical 
cost analysis scored VA's proposed 2013 and 2014 major medical facility 
lease authorizations as ``capital leases,'' requiring the Department to 
budget upfront for the full cost of the lease,. This score precludes VA 
from procuring all of the requested 27 major medical facility leases 
serving more than 340,000 Veterans in 20 States. The Department is very 
concerned about the potential negative effects on Veterans utilizing VA 
health care. If the Department is unable to pursue these planned 
projects, six existing clinics may have to close, 14 will have 
constrained services to already over-populated facilities, and long-
planned expansions to address Veterans' health care needs will not move 
forward. Increased travel and wait times are likely to occur for 
Veterans, especially those located in rural areas, where access to care 
is limited.
    Mr. Chairman, we appreciate your continued work to resolve this 
situation. Please be assured you have a partner in VA, to make all 
efforts to minimize or avoid disrupting or degrading Veterans' access 
to health care.
V. FEDERAL AND LOCAL COLLABORATIONS
    In fulfilling VA's model of quality and available care, we strive 
to coordinate with community providers to address gaps, and create an 
improved patient-centric network of care focused on wellness-based 
outcomes. Pursuant to President Obama's Executive Order 13625, 
``Improve Access to Mental Health Services for Veterans, Service 
Members, and Military Families,'' VA is working closely with the 
Department of Health and Human Services (HHS), to establish pilot 
projects with community-based providers. These providers include 
community mental health clinics, community health centers, substance 
abuse treatment facilities, and rural health clinics. The effectiveness 
of community-based providers in helping to meet the mental health needs 
of Veterans in a timely way is being evaluated. Both the Health 
Resources and Services Administration (HRSA) and the Substance Abuse 
and Mental Health Services Administration (SAMHSA) of HHS, provided 
contacts for potential community partners. Pilot projects are varied 
and may include provisions for inpatient, residential, and outpatient 
mental health and substance abuse services. Some sites include 
capabilities for telemental health, staff sharing, and space 
utilization arrangements, to enable VA providers to provide services 
directly in communities that are distant from a VA facility. The pilot 
project sites were established based upon community providers' 
available capacities, and wait times, community treatment methodologies 
available, Veteran acceptance of external care, location of care with 
respect to the Veteran population, and mental health needs in specific 
areas.
    In addition, VA collaborates with HHS-funded Federally Qualified 
Health Centers and community mental health clinics across the country. 
These community partnerships were developed locally as a means to 
provide mental health services to Veterans in areas where direct access 
to VA health care is limited by geography or workload.
    The VA has partnered with HHS's Administration for Community Living 
to develop a Veteran Directed Home and Community-Based services 
program. The program is available through 45 VAMC's that partner with 
99 Aging and Disability Resource Centers (ADRC)/area agencies on aging/
centers for independent living in 24 states and the District of 
Columbia. Veterans enrolled in the program receive a flexible service 
budget that they use to purchase the home and community-based services 
they need to thrive in the community. In collaboration with an ADRC 
options counselor, the Veteran develops a person-centered plan that 
includes the services they need at the times they need them. The 
Veteran hires and directs the staff that provides the services and with 
the support of a fiscal management services organization pays their 
staff for services rendered. The options counselor and the fiscal 
management services organization are part of the No-Wrong-Door Aging 
and Disability Resource Center (NWD/ADRC) that the VHA, Administration 
for Community Living and the Centers for Medicare & Medicaid Services 
are working together with eight states to develop. The eight states are 
Connecticut, Maryland, Massachusetts, New Hampshire, Oregon, Vermont, 
Washington, and Wisconsin. The NWD/ADRC will provide person-centered 
streamlined access to long-term services and supports for all 
populations that are at greatest risk of institutionalization and/or 
spend down to Medicaid.
VI. VA/DOD COLLABORATION
    VA continues to look for ways to enhance our existing collaborative 
relationship with DoD and other Federal agencies. VA and DoD 
established the Construction Planning Committee (CPC), which reports 
directly to VA/DoD Joint Executive Committee (JEC), to improve VA's 
existing collaborative relationship with DoD and other Federal 
agencies, particularly for joint capital asset planning. CPC developed 
a common approach for capital asset planning, to identify and share 
data information between the Departments at the field level for 
population, workload, purchased care, access, and space, to aid in 
identifying potential collaborative opportunities.
    VA will continue to assist DoD in identifying opportunities and 
coordinating the needs and requirements of both Departments and other 
Federal agencies, in order to increase collaborative capital 
initiatives. As mentioned earlier in the testimony, the FY 2014 budget 
request includes legislation that would further enable VA and DoD to 
share medical facilities, in order to better serve Servicemembers, 
Veterans, and taxpayers. The proposal would allow VA to transfer and/or 
receive funds (major and minor construction) to/from another Federal 
agency, for use in the planning, design, and/or construction of joint 
medical facilities.
    VA/DoD partnerships deliver benefits and services to Veterans, 
Servicemembers, military retirees, and beneficiaries, through an 
enhanced VA and DoD partnership. VA and DoD have direct sharing 
agreements between VA medical centers (VAMC)/Veterans Integrated 
Service Networks, and Military Treatment Facilities (MTF), for a range 
of services. In FY 2012, there were 230 direct sharing agreements 
between 61 VAMCs and 105 DoD MTFs. Of these facilities, 59 VAMCs 
provided health care services for DoD beneficiaries and 38 DoD medical 
facilities provided health care services for Veterans. VA purchased 
from DoD $94.02 million for services rendered and DoD reimbursed VA 
$96.9 million for services delivered.
    There are also several national Memorandums of Agreement (MOA) and 
Memorandums of Understanding between VA and DoD in place, which allows 
VA to further collaborate in providing care to Veterans and their 
families.

    u  Polytrauma Rehabilitation Centers: Spinal Cord Injury/Traumatic 
Brain Injury/Blind Rehabilitation for Active Duty Service Members
    u  National TRICARE Pharmacy MOA
    u  Integrated Disability Evaluation System (IDES) in concert with 
Disability Office
    u  National MOA Active Duty Dental Program with United Concordia 
(where capacity permits)
    u  MOA for Provision of Mental Health Providers to Army

    VA and DoD have several Joint Ventures that enhance the cost-
effective use of Federal healthcare resources, maximize the shared use 
of resources, and benefit both VA and DoD beneficiaries. There are ten 
Joint Venture locations:

    u  Charleston, SC (Naval Health Clinic (NH)/Joint Base Charleston/
Naval Hospital and Beaufort/Charleston VAMC)
    u  Key West, FL (NH Jacksonville/ Miami VAHCS CBOC)
    u  Gulf Coast FL (Keesler AFB & VA Gulf Coast HCS)
    u  El Paso, TX (Wm Beaumont AMC/ El Paso VAHCS)
    u  Las Vegas, NV (Nellis AFB/ VA Southern Nevada HCS)
    u  Fairfield, CA (David Grant Medical Ctr/ N. California VAHCS)
    u  Albuquerque, NM (Kirkland AFB/ New Mexico VAHCS)
    u  Honolulu, HI (Tripler AMC/ VA Pacific Island HCS)
    u  Anchorage, AK (Elmendorf AFB/ Alaska VAHCS)
    u  James A. Lovell Federal Health Care Center (North Chicago)

VII. CONCLUSION
    Mr. Chairman, we appreciate the opportunity to address these 
important subjects and continue pursuing solutions and ways ahead for 
our Nation's Veterans. VA must ensure Veterans and other eligible 
beneficiaries receive timely, accessible Veteran-centric high-quality 
health care. We welcome discussion of that central priority, our 
comprehensive care model, and the topics I have discussed in my 
testimony; notably, VA's capital planning process, VA's collaborations 
with DoD and other Federal agencies, and community providers. But if I 
may respectfully stress, if the major medical facility leasing issues 
are not expeditiously resolved, I fear it will have a significantly 
negative impact on VA's health care services for Veterans. We 
appreciate your support and encouragement in identifying and resolving 
challenges as we continue caring for Veterans. VA is committed to 
providing the highest quality of care, which our Veterans have earned 
and deserve. My colleagues and I are prepared to respond to any 
questions you may have.

                                 
                       Statements For The Record

                          THE AMERICAN LEGION
    The American Legion - Testimony for the Record, Assessing VA's 
Capital Investment Options to Provide Veterans' Care, Committee on 
Veteran' Affairs U.S. House of Representatives, June 27th, 2013

    Over the last 20 years, The Department of Veteran Affairs (VA) has 
utilized its medical leasing authority at 38 USC 8103 & 8104, in 
conjunction with the General Services Administration Acquisition 
Regulation (GSAR) and Federal Acquisition Regulation (FAR) to lease 
nearly 600 Community Based Outreach Centers (CBOCs). The wisdom, and 
need for these centers is not in question or dispute.
    The average facility goes through a comprehensive competitive 
procurement process, whereby VA stipulates its unique needs in 
solicitations, offering contractors the chance to submit competitive 
proposals in an attempt to receive the lease award to provide 
underlying medical space so VA can serve Veterans in a convenient, 
accessible manner, with expertise that VA is required to provide. And, 
VA's major leases are negotiated based on fair market appraisals, where 
VA is not tied to lessor's underlying debt/loan obligations. Simply put 
- the VA enters into a leasing contract for these properties at 
competitive rates, similar to any other equal commercial property. The 
advantage to VA in the case of these leases is that they get to have a 
facility which is custom tailored to our veterans' needs, in space that 
VA can vacate at the end of the lease term, and the lessors can then 
repurpose the space for other desired non-VA uses.
    Commercial property leasing is a common in the United States, and 
long-term leases are an industry standard. Some of the reasons that 
leasing property might make more sense that owning property include:

      Flexibility - As population demographics change, the 
lessee has the freedom to relocate to an area where they can best meet 
the needs of their client/customer/patients.
      Cost - Leasing a facility minimizes the financial burden 
placed on the organization, and the cost of occupancy can be stretched 
over the course of 10, 15, or even as much as 20 years.
      Risk - Construction cost overruns are more than common in 
the construction industry - in fact, they are almost a guarantee. Lease 
contracts help insulate the lessee from unexpected costs, due for 
example, to unforeseen issues, poor planning, loss-leader bidding, or 
underbidding. Underbidding is a common problem in the competitive 
construction process, as bidders seek to win large contracts by 
underbidding their competition, and then attempt to recover some of 
those lost revenues by adding on charges later that weren't 
specifically named in the original bid, but are essential to the 
successful completion of the project. In the industry, these are 
referred to as modifications, or ``mods'' for short.

    In 2005, The Congressional Budget Office (CBO) published an 
Economic and Budget Issue Brief titled ``Third-party Financing of 
Federal Projects''. It is this brief that CBO now uses as the basis for 
their opinion to score VA's future CBOCs upfront, by claiming that the 
total expenditure of a long-term lease be charged against the federal 
budget in the first year of the contract--as if the federal government 
were to purchase the property and the supporting land outright. In 
addition, CBO states that a subsequent lease of 20 years (if VA remains 
in that same leased space) would not be scored fully upfront, but would 
instead be scored only for the years worth of financial commitment the 
government would need to draw from the treasury, year-by-year--
stretching the impact over the life of the lease, instead of in the 
first year as in the case of a new lease. According to CBO ``We would 
treat renewal of the lease after the construction note is paid off as a 
straight lease. There would be no direct spending'' \1\.
---------------------------------------------------------------------------
    \1\ Email between CBO and TAL dated June 11, 2013 at 3:59PM.
---------------------------------------------------------------------------
    According to the report, ``if agencies do not initially record the 
full cost of governmental activities, the budget understates the size 
of the federal government and its obligations at the time when those 
obligations are made'' \2\. Froma a pragmatic business perspective, The 
American Legion fails to see the difference between an initial lease, 
and a subsequent lease of equal time, and what logic dictates that the 
impact to the federal budget be considered differently in each 
scenario.
---------------------------------------------------------------------------
    \2\ Congressional Budget Office report, Economic and Budget Issue 
brief, Third-party Financing of Federal Projects June 1, 2005.
---------------------------------------------------------------------------
    The 2005 CBO brief assumes that long term leases that are built-to-
suit sufficiently satisfy the financed debt that the contractor 
invested in the project, and therefore the contract should be viewed a 
being more costly to taxpayers ``In many instances of third-party 
financing, a project is created as a stand-alone entity, sustained by 
the cash flows generated by its assets'' \3\. Based on our 
understanding of the brief, CBO disagrees with this business model, and 
leaves us, the reader, with the impression that the contractor, 
financier, and landlord are all somehow unjustly enriched, and that the 
government will ultimately pay more for these types of contracts than 
they would have, had they either purchased the property outright, or 
leased an existing property through a commercial leasing agent. Based 
on The American Legions evaluation of this program, we find no evidence 
to support this claim.
---------------------------------------------------------------------------
    \3\ ibid.
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    CBO further warns that the government could be liable for the total 
cost of a lease, even in the case of an early termination. In the 20 
year history of the CBOC leasing program, The American Legion 
understands that there has only been one case where a major lease was 
prematurely terminated, and that the government did not suffer total-
cost liability as a result of that early termination.
    The American Legion recognizes that The Congressional Budget Office 
is in place to provide policy cost estimates through assumptions and 
methodologies, and that the opinion of the analyst is not politically 
motivated. We also recognize that the recommendations of CBO are 
provided to congress for inclusion in the overall evaluation process, 
and are specifically not intended as binding recommendations. As such, 
The American Legion calls on Congress to consider the government's cost 
to own, operate, and maintain facilities after their economic life has 
outlived its competitive usefulness. Healthcare treatment has advanced 
more in the past 20-years than any other time in our history, and it 
will advance at the same rate, or faster, over the next 20-years. The 
American Legion is concerned that VA will be saddled with an inventory 
of antiquated facilities, leaving veterans with substandard care, 
reduced access to quality care facilities, and outdated technology. The 
lease model provides VA with an exit strategy for inefficient 
facilities. If they own the properties, the exit strategy is less clear 
and possibly more expensive.
    While The American Legion accepts that the analyst's opinion is not 
politically motivated, we question the whether the opinion, in this 
case, is based in sound and reasonable business best practices. As an 
example, CBO states ``Third-party transactions are generally structured 
in such a way as to try to justify recording investment costs in the 
federal budget over the life of a project instead of in full when the 
investment is made--as would be the case with normal appropriations. 
Treating investment costs as an annual operating expense may make it 
easier to get projects funded by eliminating the need for substantial 
up-front appropriations. However, such budgetary treatment is at odds 
with established principles of federal budgeting, which require 
agencies to record the costs of government investments when they are 
made.'' Accounting for obligations is different than accounting for 
investments. The leases discussed here are not burdens placed on the 
federal treasury in a single year, rather a series of investments 
committed to over the course of a long term contract. The American 
Legion disagrees with CBO's opinion that first term leases place a 
disproportionate obligation on the budget in the first year, as opposed 
to subsequent leases, and is able to find no statistical or empirical 
data to support this CBO claim.
    At the time the CBO report was written, VA's CBOC lease program was 
still fairly new. CBO used only colloquial data to support their 
assumptions, which in-turn supported their conclusions. After 20 years 
of facility leasing, The American Legion can find no accusations of 
overspending based on the CBOC facilities leasing program, nor has CBO 
offered any evidence that the CBOC leasing program has cost the 
American taxpayer a dime more than should have been spent.
    The American Legion firmly believes that the opposite is true; that 
the CBOC leasing program is less expensive than purchasing, and as an 
added advantage, VA's budget is not overextended--which allows them the 
freedom to open 10 to 20 times the amount of clinics to serve veterans 
than they would be able to, if they had made the decision to purchase 
the same facilities.
    If Congress does not marginalize the opinion of The Congressional 
Budget Office in the case of CBO scoring these leases, then the cost of 
serving our disabled veterans in the affected communities will be 
exponentially increased - because each veteran will then be relegated 
to contract services - which the American Legion believes to be far 
less cost effective than leasing and operating VA's own facility. The 
American Legion also joins with the rest of the Veteran Service 
Organization community when we recognize that the best place for 
veterans to receive VA covered health care, is at the VA.
    Congress enjoys the services of several federally funded offices; 
the Congressional Budget Office is but one. Another well respected 
federal office that provides constructive nonpartisan evaluation and 
cost estimates based on legislative projections is the Congressional 
Research Service (CRS) and The Office of Management and Budget (OMB). 
Contrary to the CBO opinion, CRS and OMB both believe ``Based on the 
information VA provided, OMB assumes these leases will be operating 
leases provided they are structured consistent with the requirements 
contained in OMB circular A-11.'' \4\ In closing, VA is acting 
responsibly under its major lease authority, the GSAR and FAR, and in 
the best interest of veterans. With regard to this program, the 
American Legion finds that VA is acting in good faith, and is being 
responsible stewards of the taxpayer's money. Therefore, in accordance 
with The American Legion Resolution Number 24 dated May 8-9, 2013 which 
states;

    \4\ Email between Rep Boustany's office and TAL dated 15 may 2013 
at 5:57PM containing an email response from The Congressional research 
Office, and an excerpt from a response from OMB.

    WHEREAS, In the mid-1990s, Dr. Kenneth Kizer, former Department of 
Veterans Affairs (VA) Under Secretary for Health, revolutionized the 
delivery of health care to our nation's veterans by opening local 
community based outpatient clinics (CBOCs) to provide outpatient 
---------------------------------------------------------------------------
medical care to veterans; and

    WHEREAS, CBOCs transformed VA into a health care-based system that 
became more geographically accessible to veterans; and

    WHEREAS, Since the mid-1990s, the VA has turned to outpatient 
clinics as a way to bring health care closer to where veterans live, 
with 827 clinics to supplement the care provided at 152 medical 
centers; and

    WHERAS, In FY 2012, H.R. 2646 authorized the VA sufficient 
appropriations to continue to fund and operate leased facility projects 
that support our veterans all across the country; and

    WHEREAS, The Congressional Budget Office (CBO) abruptly changed its 
scoring methodology of interpreting leases as operational to capital 
leases after decades of precedence; and

    WHEREAS, In September of 2012, the authorizations for 15 Veterans 
Health Administration facility leases were eliminated from a 
construction bill due to the scoring change initiated by the CBO; and

    WHEREAS, Approximately 27 leases are impacted for FY 2013 and FY 
2014 (see Attachment A) as well as a number of future leases that are 
set to expire; and

    WHEREAS, Based on the scoring change, funding for these leases must 
be accounted for up-front; and

    WHEREAS, VA would see a detrimental impact on its budget and 
medical care program without the leases; and

    WHEREAS, This technical book-keeping ruling prevents Congress from 
enacting important authorizations to renew and establish new leases; 
and

    WHEREAS, If no action is taken to resolve the issue, veterans will 
ultimately suffer increased delays and diminished access to needed 
medical care and services; inefficiencies in their continuum of care, 
and veterans' care will negatively be impacted by increased costs of 
duplication of services and contracted care; now, therefore, be it

    RESOLVED, By the National Executive Committee of The American 
Legion in regular meeting assembled in Indianapolis, Indiana, on May 8-
9, 2013, That The American Legion request that Congress provide an 
annual or permanent exemption for the Department of Veterans Affairs 
(VA) leases from the Congressional Budget Office's scoring process, so 
as to give flexibility to VA to meet the health care needs of veterans.

    Any questions concerning this testimony can be directed to The 
American Legion Legislative Director, Mr. Louis J. Celli Jr., The 
American Legion 1601 K Street NW Washington, D.C. 20006, by calling 
(202) 861-2700, or by email [email protected].

                                 
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