Federal Real Property: NIH Has Improved Its Leasing Process, but Needs to Provide Congress with Information on Some Leases
Published: 2006-09-08T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The National Institutes of Health (NIH) is the nation's primary medical and behavioral research agency. NIH's need for leased space has more than doubled since 1996 to about 3.9 million square feet in 2005. In 1996, General Services Administration (GSA) delegated leasing authority to NIH that includes performing budget scoring and prospectus analysis. In light of NIH's increased use of leased space, GAO was asked to address two issues: (1) Is NIH complying with budget scorekeeping guidelines and Office of Management and Budget's (OMB) requirements for implementing the guidelines to determine if a lease should be classified as operating or capital and ensure that no violations of the Antideficiency Act occur because of improper budget scorekeeping? and (2) Is NIH complying with the congressional prospectus process for both leases and alterations to leased buildings? To address these issues we interviewed leasing and financial officials, reviewed laws and reviewed budget scoring and prospectus analysis of 59 leases.
section_title: What GAO Found
paragraphs: NIH has implemented a formal leasing process that, if carried out effectively, should comply with budget scorekeeping guidelines and OMB's requirements for classifying operating and capital leases. This process should ensure that no Antideficiency Act violations occur due to leasing. The agency's new leasing process addresses previous problems with inconsistent and informal implementation of the guidelines and requirements by properly identifying operating and capital leases and properly recording lease obligations for budget scoring purposes. In October 2005, the U. S. Department of Health and Human Services expressed the belief that the potential $565 million in unrecorded obligations from 50 active multiyear NIH leases were not Antideficiency Act violations. We agree that no Antideficiency Act violations exist because the GSA delegation of leasing authority included specific authority that directed NIH to obligate funds for multiyear leases, one year at a time, and that such actions were exempt from the Antideficiency Act. GSA is also modifying its guidance for delegated leasing authority, which would make it clear that agencies with delegated leasing authority can score operating leases in the same manner as GSA. The scoring process for capital leases would remain unchanged. As part of its leasing process, NIH has also established decision points for identifying any leases for which a prospectus should be submitted through GSA for congressional approval, under the Public Buildings Act of 1959, as amended. This process involves submitting leases and alterations to leased buildings for approval whose costs exceed a legislatively established threshold. In addition, NIH has designated the Office of Acquisitions, Office of Resource Facilities to review prospectus-level alterations to leased buildings to ensure that the contracting for alterations to leased buildings does not exceed the prospectus threshold for alterations to leased buildings. However, NIH has taken no action to address five prospectus-level leases that were not submitted to the appropriate congressional committees in past years. While there is no penalty provided in law for not submitting a prospectus, failure to do so hinders the ability of the appropriate congressional committees to fulfill their oversight responsibilities for all prospectus-level leases.

section_title: Letter
paragraphs: The National Institutes of Health (NIH), a part of the U.S. Department of  Health and Human Services (HHS), is the nation’s primary medical and  behavioral research agency. Composed of 27 institutes and centers, NIH  provides leadership and financial support to programs designed to protect  and improve the nation’s health by conducting research in such areas as  the causes, diagnosis, prevention, and cure of human diseases; the  biological effects of environmental contaminants; and the understanding  of mental, addictive, and physical disorders. At the end of September 2005,  the agency owned or leased more than 17 million square feet of space for  research, administration, and other needs. Since 1996, NIH’s leased space  has more than doubled—from about 1.4 million square feet in 1996 to  about 3.9 million square feet in 2005.
In September 1996, the General Services Administration (GSA) delegated  authority to HHS to issue leases for a term of up to 20 years and to  perform all functions related to leasing, such as obtaining space in  accordance with all applicable laws and regulations, budget scorekeeping  guidelines, and the Office of Management and Budget’s (OMB)  requirements for implementing the guidelines for leases. Simply put,  budget scorekeeping ensures that agencies comply with budgetary laws.  There are obligational requirements that are meant to ensure compliance  with fiscal statutes such as the Antideficiency Act. The budget  scorekeeping rules for leases are consistent with the obligational  requirements. Thus, failure to comply with budget scorekeeping guidelines  could cause an Antideficiency Act violation. In addition to transferring this  scorekeeping responsibility to HHS, GSA’s delegation provided that, for  each lease whose cost exceeds a legislatively established threshold, the  agency would work through GSA to secure an approved prospectus from  the appropriate congressional committees, under the Public Buildings Act  of 1959, as amended. In December 1996, HHS redelegated its authority to  its four lease-holding agencies, which included NIH. Currently, NIH has 59  active leases issued under its delegated leasing authority with a total value  of about $1.3 billion.
Because of NIH’s increased use of leased space, you asked us to review  certain parts of the agency’s leasing process. In response, we addressed  the following issues:  Is NIH complying with budget scorekeeping guidelines and OMB’s  requirements for implementing the guidelines to determine if a lease  should be classified as operating or capital and ensure that no violations  of the Antideficiency Act occur because of improper budget scorekeeping  of leases?
Is NIH complying with the congressional prospectus process for both  leases and alterations to leased buildings?
To address NIH’s compliance with budget scorekeeping guidelines and  OMB’s requirements, we reviewed (1) the laws and regulations relating to  leases; (2) budget scorekeeping guidelines and OMB’s implementing  requirements; (3) the Antideficiency Act; (4) NIH’s inventory of leased  properties, its revised budget scoring of the 58 leases under its delegated  authority in 2003, and its leasing guidance; and (5) HHS’s views on the  Antideficiency Act. In addition, we interviewed HHS’s Deputy Assistant  Secretary from the Office for Facilities Management and Policy; NIH’s  Director of the Office of Acquisitions; NIH’s Acting Chief of the Budget  Branch from the Office of Business and Systems Finance, who performed  the revised budget scoring; other relevant NIH leasing and financial  officials; and GSA officials. We also wrote to OMB concerning agencies  that are considered self-insuring under budget scoring guidelines.
To address NIH’s compliance with the congressional prospectus process,  we (1) reviewed the laws and regulations relating to leases; (2) GSA’s  prospectus guidance and delegation of authority to lease; (3) NIH’s  inventory of leased properties, its revised prospectus analysis of the 58  leases under its delegated authority in 2003, and its leasing guidance. In  addition, we interviewed HHS’s Deputy Assistant Secretary from the Office  for Facilities Management and Policy; NIH’s Director of the Office of  Acquisitions; NIH’s Acting Chief of the Budget Branch from the Office of  Business and Systems Finance, who performed the revised prospectus  analysis; other relevant NIH leasing and financial officials; and GSA  officials. GSA informed us that no alterations to leased buildings were  submitted for prospectus approval between fiscal years 1996 and 2005. For  the purposes of our review, the information we gathered was sufficiently  reliable. We conducted our work between July 2005 and August 2006 in  accordance with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: In 1996, GSA began a program called “Can’t Beat GSA Leasing” that  offered federal agencies the choice of (1) using GSA as their leasing agent,  (2) assuming responsibility for their own leasing, or (3) using a  combination of both options. The program was an outgrowth of GSA’s  commitment to streamline its leasing operations, respond to the  government’s changing needs, and address recommendations from client  agencies. GSA delegated leasing authority to HHS in September 1996, and  HHS redelegated this authority to NIH, one of its four lease-holding  agencies, in December 1996. GSA’s original delegation consisted of six  conditions, which included the requirements that federal agencies acquire  and utilize leased space in accordance with all applicable laws and  regulations and —prior to finalizing lease contracts and alterations to  leased buildings that exceed a legislatively established threshold—work  through GSA to secure an approved prospectus from the appropriate  congressional committees. Since 1997, NIH has elected to rely on GSA for  some of its leasing needs, but it has issued a majority of its leases on its  own.
section_title: NIH Has Improved Its Lease Scoring Process and Believes that Its Unrecorded Obligations for Operating Leases Do Not Violate the Antideficiency Act
paragraphs: In response to past problems identified in a 2003 internal review of its  leases, NIH developed a formal leasing process in 2003 that includes  decision points for budget scoring. The process was updated in 2005, and  if implemented effectively, it should ensure that NIH leasing complies with  OMB’s scorekeeping guidelines for classifying leases. This new process  should also ensure that no violations of the Antideficiency Act occur due  to improper scorekeeping.
The executive and legislative branches formulated the budget  scorekeeping rules in connection with the Budget Enforcement Act of  1990. The purpose of these rules is to ensure that scorekeepers adhere to  scorekeeping conventions and specific legal requirements when they  measure the effects of legislation. They are also used by OMB for  determining amounts to be recognized in the budget when an agency signs  a contract or enters into a lease. The rules are reviewed annually by the  scorekeepers and revised, as necessary, to achieve their purpose.  According to scorekeeping guidelines, a lease is classified as either  operating or capital, based on six criteria. If a lease meets all six criteria,  then it qualifies as an operating lease; otherwise, it must be treated as a  capital lease for purposes of budget scoring. For operating leases for  agencies other than GSA, budget authority is required for the estimated  total payment that is expected to arise under the full term of the contract  or, if the contract includes a cancellation clause, for an amount sufficient  to cover the lease payments for the first fiscal year plus an amount  sufficient to cover the costs associated with cancellation. For GSA  operating leases, only the budget authority needed to cover the annual  lease payment is required. For a capital lease, budget authority is  required for the net present value of the total cost of the lease and  property taxes (but not for imputed interest costs and identifiable annual  operating expenses).
In 2003, NIH’s Assistant Director for the Chief Financial Officer and  Central Services asked the Acting Director of the Office of Research  Facilities Development and Operations (ORFDO) to certify that all leases  were operating leases for the purposes of the annual NIH financial  statements, according to an NIH official. To address this request, the  ORFDO Acting Director conducted an internal risk assessment. This  resulted in a review of all NIH’s leases, which identified problems with  implementing budget scorekeeping guidelines and OMB requirements, as  well as identifying prospectus leases. More specifically, this review  identified eight leases that had been improperly classified as operating  leases instead of capital leases and potential unrecorded obligations from  50 active multiyear operating leases that totaled $565 million, as of  September 30, 2005. According to the Director of the Office of  Acquisitions, NIH’s lease scoring process had been inconsistent and  informal from 1996 to 2003, which may explain the improper lease  classifications and unrecorded obligations identified in the 2003 review.  Due to staff changes at the agency in past years, we were not able to  determine why the budget scoring process was inconsistent and informal  from 1996 to 2003.
In 2003, NIH attempted to address its problems in complying with  scorekeeping guidelines by developing the Leasing Management and  Oversight Program (LeMOP), a new multistep leasing process that  includes budget scoring. LeMOP is a means for NIH to exercise stronger  oversight in the leasing process than it had done previously. The process  consists of a business case that goes through the following five critical  decision points:  1.  Initial approval that there is a justifiable need,  2.  Approval of a general strategy on how the need will be met,  3.  Approval of a detailed strategy for meeting the need,  4.  Signing of the lease and obligation of the funds, and  5.  Documentation that the agency has reviewed the action and the space  requirement is being met.
As part of the third decision point, the Office of Business Systems and  Finance (OBSF) uses the budget scoring process for leases that it  developed during NIH’s 2003 review to conduct an independent test of the  planned lease contract against OMB’s budget scorekeeping requirements.  The test is based on estimates of the lease rate, the lease term, and other  factors. As part of the fourth decision point, OBSF tests the final lease  price against OMB scoring requirements to determine if the proposal  conforms to applicable rules for budget scoring. In effect, the process  establishes a specific requirement that ensures that NIH leases undergo  budget scoring.
In addition to implementing LeMOP, NIH corrected its improper  classification of the eight operating leases identified in the 2003 review.  Two of these leases were reclassified as capital leases, and the remaining  six were renegotiated by eliminating the option-to-renew clauses from the  lease so that they could properly qualify as operating leases. By deleting  the option-to-renew clauses, NIH reduced the terms of the leases, which  impacted budget scoring. This allowed the leases to meet the scoring  criteria for an operating lease—that the present value of the minimum  lease payments over the life of the lease not exceed 90 percent of the fair  market value of the asset at the beginning of the lease term. Leases  exceeding this 90 percent level are to be identified as capital leases.
As a final measure in response to the 2003 review, NIH sought HHS’s  advice on whether it had $565 million in unrecorded obligations that  violated the Antideficiency Act. The unrecorded obligations occurred  because NIH scored its operating leases without cancellation clauses  similar to GSA—that is, it scored only the budget authority that was  needed to cover the annual lease payment. This was done instead of  following scorekeeping guidance for an operating lease for agencies other  than GSA—that is, budget authority is required for the estimated total  payment expected to arise under the full term of the contract or, if the  contract includes a cancellation clause, for an amount sufficient to cover  the lease payments for the first year plus an amount sufficient to cover the  costs associated with the cancellation clause.
NIH asked HHS whether it thought that the $565 million in unrecorded  obligations was an Antideficiency Act violation. This act states that an  officer or employee of the United States is prohibited from making  expenditures or incurring obligations in advance of available  appropriations unless otherwise authorized by law. HHS stated that it did  not believe the potential $565 million in unrecorded obligations from  scoring operating leases to be Antideficiency Act violations.
We concluded that no Antideficiency Act violation exists. Under the  Federal Property and Administrative Services Act of 1949, as amended  (Property Act), GSA is authorized to enter into a lease agreement for a  term of up to 20 years to accommodate the federal government. In  addition, GSA is authorized under the Property Act to delegate to the head  of another federal agency most of its authorities, which includes leasing  authority. When GSA delegated its leasing authority to the Secretary of  HHS, who then redelegated this authority to NIH, the GSA leasing  delegation signed by the Administrator specifically stated, “I hereby  delegate authority to the heads of all federal agencies to perform all  functions related to the leasing of general purpose space for a term of up  to 20 years regardless of geographic location.”
GSA has specific statutory authority to obligate funds in advance of  available appropriations. This authority provides that, when entering into  multiyear leases, “the obligation of the amount for a lease is limited to the  current fiscal year for which payments are due without regard to the  Antideficiency Act.” Accordingly, GSA is directed by law to obligate  funds for multiyear leases one year at a time, and it is exempt from the  general prohibition in the Antideficiency Act against obligating the  government in advance of appropriations for GSA leases. Since GSA  delegated all of its leasing authorities through HHS to NIH, the provision in  the Property Act relating to the obligation of multiyear leases also applies  to NIH. This delegation authorizes NIH to enter into multiyear leases  without recording the entire amount of the lease in the first year.  Therefore, the fact that NIH entered into multiyear leases without having  an appropriation for the entire amount of each lease did not constitute a  violation of the Antideficiency Act.
GSA is drafting a modification to its guidance for delegated leasing  authority which, according to a GSA official, will clarify that agencies with  delegated leasing authority can score operating leases in the same manner  as GSA does. GSA and agencies with delegated leasing authority are  expected to continue to score capital leases according to OMB’s  requirements.
section_title: NIH Corrected Weaknesses in Implementation of Prospectus Guidance, but Some Past Prospectus-level Leases Remain Unreported
paragraphs: As part of its leasing process, NIH has established decision points for  identifying leases whose costs exceed a legislatively established threshold  and for which a prospectus should be submitted for congressional review  and approval prior to finalizing contracts. In addition, all alterations to  leased buildings are reviewed by an NIH leasing official. These changes  should ensure that NIH identifies leases that need to be submitted for  review. However, five prior leases that should have been submitted for  review still remain unreported.
The Public Buildings Act of 1959, as amended, provides for GSA to submit  a prospectus for review by the appropriate Senate and House authorizing  committees when the cost of a proposed construction, lease, or alteration  project exceeds the legislatively established dollar threshold for leases or  alterations to leased buildings, which is indexed and revised each year.  For an agency with delegated leasing authority, GSA, working in  consultation with the agency, prepares a prospectus for any lease  involving a net annual rental—excluding services and utilities—in excess  of the prospectus threshold. For alterations to leased buildings, the  prospectus threshold is one-half of the lease prospectus threshold. After  the prospectus is prepared, GSA submits it for approval to the appropriate  congressional committees.
To address previous problems with inconsistent and informal  implementation of prospectus guidance, NIH has incorporated into its  leasing process several decision points for identifying any leases for which  a congressionally approved prospectus should be submitted. As part of the  third decision point of LeMOP—approval of a detailed strategy for  meeting the need—OBSF will use the prospectus analysis formula, which  it developed during NIH’s 2003 review of all leases, to conduct an  independent test of the planned lease contract against the annual  prospectus threshold. NIH plans to have GSA issue any lease that exceeds  the prospectus limit, with NIH providing the appropriate information and  support. As part of the fourth decision point—signing of the lease and  obligation of the funds, OBSF will test the final lease price against  prospectus thresholds to determine if the proposal conforms to applicable  rules for the prospectus process. This prevents the agency from issuing a  prospectus-level lease without a congressionally approved prospectus,  even though the lease was initially identified as nonprospectus as part of  the third decision point.
Furthermore, according to NIH’s Office of Acquisitions, ORF, it is now  responsible for ensuring that the contracting for alterations to leased  buildings does not exceed that prospectus threshold. To prevent any delay  in the process, reviews of an alteration project in a leased building begin  as early as the concept stage to determine whether a prospectus is  required. The Office of Acquisitions also takes into account all other  approved alterations to the leased building for the given year to ensure  that the total cost of all alterations to that leased building does not exceed  the prospectus threshold.
As part of the 2003 review of all its leases, NIH identified five leases that  had not been sent to the appropriate congressional committees for  approval, under the Public Buildings Act of 1959, as amended. GSA is to  provide a lease prospectus to the appropriate congressional committees  for approval prior to signing a lease. This process involves agencies with  delegated leasing authority, which must identify prospectus level leases to  GSA for submission. According to the Director of the Office of  Acquisitions, NIH had not established a formal prospectus analysis for  leases or alterations to leased buildings from 1996 to 2003. As a result, NIH  did not notify GSA of the five prior prospectus-level leases that should  have been submitted to the committees. While there is no legal penalty for  not following the congressional prospectus process, failure to do so  hinders the ability of the appropriate congressional committees to fulfill  their oversight responsibilities for all prospectus-level leases. Although  these five leases have been in effect for several years, GSA officials told us  that it would still be appropriate for NIH to work with GSA to notify the  committees of their existence. The officials noted, for example, a past  instance where GSA reported, after the fact, a prospectus level lease that  was issued without approval of the appropriate committees. NIH officials  stated that they want to clear up any unresolved issues concerning their  prospectus and budget scoring problems.
section_title: Conclusions
paragraphs: NIH has taken actions to formalize its processes of lease scoring and  prospectus analysis by developing and implementing LeMOP, its new  leasing process. The specific decision points in this process should  address the problems NIH had with consistently complying with OMB’s  scorekeeping guidelines and the congressional prospectus process.  Because only one lease has been issued under the new process, it is too  early to assess the effectiveness of NIH’s implementation of LeMOP.
An issue remains with five prior leases that were not submitted to the  appropriate congressional committees for review under the Public  Buildings Act of 1959, as amended. Although these leases have been in  effect for several years, it is nonetheless important that information on  them be submitted to the appropriate committees in order to maintain  NIH’s accountability to Congress in this area and allow the committees to  exercise their oversight responsibilities. NIH has expressed its desire to  resolve any remaining issues concerning its prospectus and budget scoring  processes.
section_title: Recommendation for Executive Action
paragraphs: We are recommending that the Director of NIH, using GSA as the proper  channel, report to the appropriate congressional committees the five  previous NIH prospectus-level leases that did not follow the congressional  prospectus process.
section_title: Agency Comments
paragraphs: We provided a draft of this report to NIH, HHS and GSA for comment. In  response, HHS provided written comments for itself and NIH. HHS  concurred with our findings and recommendation and offered some  technical comments that we have incorporated in this report. HHS stated  that, as a matter of policy, it does not object to voluntarily complying with  the GSA prospectus requirements for the five leases dealt with in the draft  report. A letter from HHS commenting on our report is included as  appendix I. GSA informed us orally that they had no comments.
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If you have any questions about this report, please contact me at (202) 512- 2834 or goldsteinm@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix II.
section_title: Appendix I: Comments from the Department of Health and Human Services
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to those named above,  John Finedore, Tom Keightley, Susan  Michal-Smith, Chris Bonham and Tamera Dorland made key contributions  to this report.