Federal Courthouses: Rent Increases Due to New Space and Growing Energy and Security Costs Require Better Tracking and Management
Published: 2006-06-22T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The judiciary pays over $900 million in rent annually to GSA for court-related space, representing a growing proportion of the judiciary's budget. The judiciary's rent payments are deposited into GSA's Federal Buildings Fund (FBF), a revolving fund used to finance GSA's real property services, including the construction and repair of federal facilities under GSA control. In December 2004, the judiciary requested a $483 million dollar permanent, annual rent exemption which GSA denied, saying that it undermined the intent of FBF and that GSA was unlikely to obtain appropriations to replace lost FBF income. GAO reviewed (1) recent trends in the judiciary's rent and space occupied and (2) challenges that the judiciary faces in managing its rent costs.
section_title: What GAO Found
paragraphs: The federal judiciary's rental obligations to GSA for courthouses have increased from $780 million to $990 million or 27 percent from fiscal years 2000 through 2005, after controlling for inflation--primarily due to a simultaneous net increase in space from 33.6 million to 39.8 million rentable square feet, a 19 percent increase nationwide. Much of the net increase in space was the result of new courthouses that the judiciary has taken occupancy of since 2000. According to the Administrative Office of the U.S. Courts (AOUSC), the judiciary's workload has grown substantially and the number of court staff has doubled since 1985. Shell rent (the building with basic infrastructure) increased proportionately with square footage growth, but operational (utilities and general maintenance) and security costs grew disproportionately higher than square footage due to external factors, such as increasing energy costs and security requirements. Neither GSA nor the judiciary had routinely and comprehensively analyzed the factors causing rent increases, making it more difficult for the judiciary to manage increases. The federal judiciary faces several challenges to managing its rental obligations, including costly new construction requirements, a lack of incentives for efficient space use, and a lack of space allocation criteria for appeals and senior judges. First, building enhancements, such as three separate circulation patterns for judges, prisoners, and the public, and structural and architectural elements make courthouses among the most expensive federal facilities to construct in GSA's inventory, often leading to higher rent payments. Second, the judiciary has begun a rent validation effort intended to monitor GSA rent charges, but it does not address the lack of incentives for efficient space management at the circuit and district levels. An example of the inefficiencies that may result is in the Eastern District of Virginia, where the judiciary paid about $272,000 in 2005 to rent space for an appeals judge in McLean, Virginia, in addition to paying for space designated for that judge in a nearby federal courthouse that the judiciary later used for alternative purposes. Finally, the lack of criteria for assigning courtrooms for appeals and senior judges can contribute to inefficiencies in the amount of space provided, which can result in higher rent payments.

section_title: Letter
paragraphs: Thank you for the opportunity to testify before you today on our work  related to federal courthouse rents. Since the early 1990s, the General  Services Administration (GSA) and the federal judiciary have undertaken  a multibillion dollar courthouse construction initiative to address what the  judiciary has identified as growing needs. According to the Administrative  Office of the U.S. Courts (AOUSC), the judiciary’s workload has grown  substantially and the number of court staff has doubled since 1985. The  judiciary pays over $900 million in rent annually to GSA to occupy court- related space, and this amount represents a growing proportion of the  judiciary’s budget. The rent payments, which by law approximate  commercial rates, are deposited into GSA’s Federal Buildings Fund (FBF).  With slightly over 20 percent of its budget allocated for rent payments, in  December 2004, the judiciary requested a $483 million permanent, annual  exemption from rent payments to GSA so that according to judiciary  officials, the judiciary would not have to cut personnel to pay the rent. In  denying the judiciary’s requested rent exemption, GSA noted that FBF was  designed to encourage efficient space utilization by making agencies  accountable for the space they occupy, and that it is unlikely GSA could  obtain direct appropriations to replace lost FBF income. In June 2005, we  testified that federal agencies’ rent payments provided a relatively stable,  predictable source of revenue for FBF, but that this revenue has not been  sufficient to finance both growing capital investment needs and the cost of  leased space. In fact there have been several direct appropriations to FBF  to cover this funding gap. We also found that previous rent exemptions,  such as the one requested by the judiciary, hampered GSA’s ability to  generate sufficient revenue for needed capital investment. You asked us to  review the judiciary’s courthouse rent costs.
Today my testimony will discuss (1) recent trends in the judiciary’s rent  payments and square footage occupied; and (2) challenges that the  judiciary faces in managing its rent costs. My statement is based on our  report that will also be released today. In summary, we found the  following:    About two-thirds of the judiciary’s $210 million rent increase from fiscal  years 2000 through 2005 is attributable to a 19 percent increase in net  square footage. The remaining increase is attributable to  disproportionately high increases in security and operating costs. We also  found that neither the judiciary nor GSA had routinely and  comprehensively analyzed the factors influencing the rent increases. In the  report released with this testimony, we recommended that the judiciary  begin tracking and analyzing rent trends in order to improve its  understanding and ability to manage its rent costs. The judiciary agreed  that tracking trends is necessary, but said that the specific types of data  we recommended would not be particularly useful for program planning,  management, or budgeting purposes.
The judiciary faces several challenges to managing its rent costs including  costly architectural and structural requirements for modern courthouses, a  lack of incentives for efficient space use, and a lack of space allocation  criteria for appeals and senior district judges. AOUSC also identified  several challenges in addition to the ones we identified, including  statutorily designated places of holding court, the benefits to GSA and the  Federal Buildings Fund of backfilling courthouses with other courts, and  inconsistencies in the funding stream for courthouse construction  projects. In our report released with this testimony, we recommended that  the judiciary establish incentives to encourage local decision makers to  use space efficiently and improve its space allocation criteria in a number  of ways. The judiciary disagreed that additional space allocation criteria  are needed for appeals courts and senior judges, and said that it has  already started updating its space allocation criteria related to  technological advancements and plans to consider other changes in the  future.
subsections: section_title: Background
paragraphs: Federal agencies, including the judiciary, that operate in facilities under  the control and custody of GSA are required to pay rent for the space they  occupy. Rent payments, which by law must approximate commercial  rates, are deposited into the FBF, which is a revolving fund that GSA uses  to provide a range of real property services, including maintenance,  repairs, and alterations, to space occupied by federal agencies. GSA,  through FBF, encourages federal agencies to be accountable for the space  they use by requiring them to budget and pay for their own space  requirements. A committee report accompanying the enactment of FBF  noted that because each agency would have to budget for its space needs,  doing so would promote more efficient and economical use of space by  government agencies. The judiciary’s rent payments represent roughly 15  percent of all rent payments made into FBF, making it one of the two  largest contributors.
On the basis of a rent pricing policy introduced in the late 1990s, the rent  GSA charges is composed principally of shell rent, operating expenses,  tenant improvements, and security costs. These components account for  over 96 percent of the judiciary’s rent bill payments in fiscal year 2005.
The shell rent represents the cost of using the structure, base building  systems, concrete floor, and basic wall and ceiling finishes and is the  largest rent component, representing 60 percent of the judiciary’s annual  rent bill payments in fiscal year 2005. For most government-owned  properties, shell rent does not represent the actual costs, but is based  instead on comparable private sector commercial rents in the local  commercial market.
Tenant improvements reflect customizing space for that tenant and can  include private offices, special type spaces, floor covering, doors, and  wood finishes. The tenant is responsible for deciding how to finish the  space beyond some basic minimum standards and thus has control over  much of the cost. GSA officials have said that the judiciary has the highest  costs for tenant improvements in its inventory because of the level of  finishes needed in federal courthouses. Unlike the other rent components,  tenant improvement costs are removed from the rent bill once the tenant  has completely paid for them.
Operating costs—which cover cleaning; general maintenance; and heating,  air conditioning, and other utilities—are set as part of the market appraisal  for the shell rent in owned space. But unlike the shell rent, operating costs  are adjusted annually for inflation in between appraisals.
Until fiscal year 2005, the judiciary paid Federal Protective Service (FPS)  security costs to GSA as part of its rent payment. Starting in fiscal year  2005, however, the judiciary began paying these security costs directly to  the Department of Homeland Security (DHS) after FPS was transferred to  that department. However, since FPS security costs still exist, and they  were an important part of rent for all of the other years we analyzed, we  included these costs as if they were still part of annual rent bill payments  for fiscal year 2005.
Rent is also composed of several other components, including fees for  parking, building joint use, antennas, and GSA’s Public Buildings Service.  These other components comprised about 4 percent of the judiciary’s  entire rent bill in fiscal year 2005.
The Judicial Conference of the United States (Judicial Conference) is the  judiciary’s principal policy making body. The Judicial Conference works in  coordination with AOUSC, which is responsible for administering the  federal judiciary’s budget as well as performing other programmatic and  administrative functions, such as paying the judiciary’s rent bill from its  annual appropriations from Congress. Each circuit has a judicial council,  which is composed of federal judges in that circuit, and the council has the  authority to determine the need for all space accommodation within its  circuit. As such, the district, bankruptcy, and appeals courts occupy space  in courthouses or lease space in other federal or private office buildings.  The district courts are the trial courts of the federal court system, housing  both district and magistrate judges. They occupy the most space within the  federal judiciary. The district courts have jurisdiction to hear nearly all  categories of federal cases, including both civil and criminal matters. The  federal judiciary has exclusive jurisdiction over bankruptcy cases, which  are overseen by bankruptcy judges. The court of appeals from each circuit  hears appeals from the district courts located within its boundaries, as  well as appeals from decisions of federal administrative agencies. Figure 1  illustrates the rentable square feet distribution within the federal judiciary.
section_title: Increases in Square Footage and Operating and Security Costs have Driven Increases in the Judiciary’s Rent Bill from Fiscal Years 2000 through 2005
paragraphs: The federal judiciary’s rental obligations for federally owned and leased  space have steadily risen from $780 million to $990 million, or 27 percent  from fiscal years 2000 through 2005, after controlling for inflation using the  Gross Domestic Product price index. During this period, the judiciary had  a net increase in the amount of space it occupies, from 33.6 million to 39.8  million rentable square feet, which is a 19 percent increase nationwide.  About two-thirds of the rent increase is attributable to this increase in  square footage. Among the components of rent, shell (the building with  basic infrastructure) grew proportionately with the amount of net space  added—about 19 percent. However, increases in operating costs (driven  by increases in energy costs) and security costs grew disproportionately  higher than the percentage of net space added, thus contributing to the  overall increase in rent (see figure 2). The costs of tenant improvements  (finishes such as carpeting) increased at a slower rate than the amount of  net space added. AOUSC disagreed with our methods for attributing costs  to the judiciary’s net growth in square footage. We continue to believe that  our methods are sound.
Square footage and total rent growth occurred in all years, circuits, and  courts (see figure 3). The judiciary’s rent increases have outpaced those of  other agencies located in GSA space, largely because the federal  judiciary’s square footage is growing faster than that of other agencies.  However, the rate of operating cost growth was similar to that  experienced by other agencies.
Much of the judiciary’s recent growth in net square footage was caused by  the construction of new courthouses. New courthouses represent about  8.8 million rentable square feet of new space that the judiciary has taken  occupancy of since fiscal year 1998 (a larger timeframe than our rent trend  data). According to judiciary officials, much of the judiciary’s growth and  accompanying space-related needs have been the result of elevating  workloads, such as increases experienced in civil case filings. The  judiciary’s courthouse construction effort may continue. Before it imposed  a moratorium in 2005, postponing new courthouse construction projects  for two years, the judiciary indicated that it had 35 additional courthouse  construction projects planned for fiscal years 2005 through 2009,  estimated to cost billions of dollars. According to AOUSC, these projects  will be subject to the judiciary’s new asset management planning process  that will consider renovation and other ways to limit new construction. As  of May 2006, no final decisions had been made.
We found that neither the judiciary nor GSA had routinely and  comprehensively analyzed the factors influencing the rent increases. This  information could help the judiciary better understand the reasons behind  its rent increases, make more informed space allocation decisions in the  future, and identify errors in GSA’s billing. Furthermore, the lack of a full  understanding of the reasons for increases in the judiciary rent, in our  view, contributed to growing hostility between the judiciary and GSA.  Conversely, GSA’s lack of full understanding of the reasons for the rent  increases left it unable to justify them to the judiciary and other  stakeholders, such as Congress.
section_title: Judiciary Faces a Number of Challenges but Could Take Actions to Better Manage Its Future Rent Payments
paragraphs: The federal judiciary faces several challenges to managing its rent costs  including costly new construction requirements, a lack of incentives for  efficient space use, and a lack of space allocation criteria for appeals and  senior district judges. First, modern courthouses require structural and  architectural elements that make them among the most costly types of  federal space to construct. Chief among these elements are the three  separate circulation patterns for judges, prisoners, and the public that the  U.S. Marshals Service requires for security (see figure 4). These  construction costs necessitate rental rates under GSA’s pricing policy that  are more expensive than the highest-quality office space in some markets,  including Denver, Colorado; Phoenix, Arizona; and Seattle, Washington.  This necessitates GSA using an approach for calculating rent charges that  is based on the costs to construct the building—known as return on  investment pricing—instead of an appraisal. The judiciary’s policy of  providing one courtroom per district judge sets the number of courtrooms  needed in new federal courthouses and adds space requirements,  consequently increasing rent payments.
The judiciary has initiated a rent validation effort, but it does not address  the lack of incentives for efficient space use at the circuit and district  levels. Because rent is paid centrally by AOUSC, circuits and districts have  few incentives to efficiently manage their space. An example of the  inefficiencies that may result is in the Eastern District of Virginia, where  the judiciary paid about $272,000 in 2005 to rent 4,600 square feet of office  space for an appeals judge in McLean, Virginia, in addition to paying for  4,300 square feet of chamber space originally designated for that judge in  the Albert V. Bryan U.S. Courthouse in nearby Alexandria, Virginia.  According to AOUSC, the judiciary has subsequently pursued alternative  uses for this chamber space.
During site visits, we observed multiple instances of unused or unassigned  courtrooms, chambers, and support spaces. Although planning and  building for future needs may limit alternative uses of space until it is  occupied, some of this underutilization is the result of outdated criteria,  which stipulated the existence of support areas, such as libraries, that in  some cases are now rarely used. In most cases, this was because judicial  officers are increasingly turning to electronic sources and research and  keeping the limited number of books they need in their chambers.  However, since the Design Guide provides space for law libraries, the  districts we visited all had them (see figure 5).
Assigning space to appeals courts and senior district judges poses  challenges due to a lack of criteria, which can lead to variation and  inefficiencies and, thus, higher rent. Although the appeals court is required  by law to hold court in specific locations, the statute does not indicate  how much space it should occupy. For example, the judiciary plans to  increase the space the appeals courts occupy by taking over former  district courthouses in Richmond, Virginia, and Seattle, Washington, for  appeals court use, even though the appeals courts conduct court there  once a month or less. Circuit and district officials said that national  criteria for managing the space allocated to the appeals courts and senior  district judges could help limit the space assigned to them. In commenting  on the report associated with this testimony, AOUSC also identified  several challenges in addition to the ones we identified that we  subsequently incorporated into the report but did not evaluate. These  included statutorily designated places of holding court, the benefits to  GSA and the Federal Buildings Fund in backfilling courthouses with other  courts, and inconsistencies in the funding stream for courthouse  construction projects.
section_title: Recommendations
paragraphs: We made the following five recommendations to the judiciary in our report  associated with this testimony in order to help the federal judiciary better  understand and manage rent costs:  1.  Work with GSA to track rent and square footage trend data on an  annual basis for the following factors:  rent component (shell rent, operations, tenant improvements, and  other costs) and security (paid to the Department of Homeland  Security); judicial function (district, appeals, and bankruptcy); rentable square footage; and   geographic location (circuit and district levels).
This data will allow the judiciary to create a better national understanding  of the effect that local space management decisions have on rent and to  identify any mistakes in GSA data.  2.  Work with the Judicial Conference of the United States to improve the  way it manages its space and associated rent costs.
A.  Create incentives for districts/circuits to manage space more  efficiently. These incentives could take several forms, such as a  pilot project that that charges rent to circuits and/or districts to  encourage more efficient space usage.
B.  Revise the Design Guide to establish criteria for the number of  appeals courtrooms and chambers and the space allocated for  senior district judges and make additional improvements to space  allocation standards related to technological advancements (e.g.,  libraries, court reporter space, and staff efficiency due to  technology) and decrease requirements where appropriate.
section_title: Agency Comments
paragraphs: We provided a draft of the report that is being released today to GSA and  AOUSC for official review and comment and received written comments  from both. GSA agreed with the thrust of the report and concurred with  our recommendations, but expressed one concern. GSA felt it was more  aware of the reasons for rent increases than our draft portrayed. In  commenting on the report associated with this testimony, AOUSC said  that it does not believe tracking the data recommended by GAO would be  useful—we disagree with this assessment. AOUSC also said it is already  implementing incentives and updating its criteria, however the actions it  identified do not fully address our recommendations. For a more thorough  discussion of the agency comments, see the report associated with this  testimony.
section_title: Scope and Methodology
paragraphs: We conducted our work from May 2005 to May 2006 in accordance with  generally accepted government auditing standards. During our work, we  analyzed nationwide judiciary rent data generated from GSA’s billing data,  reviewed laws and the regulation related to FBF and GSA’s rent pricing  process and policies, and reviewed the U.S. Courts Design Guide and  other judiciary rent planning documents. Additionally, we conducted site  visits at federal courthouses in the following districts: Arizona, Eastern  Virginia, Maryland, Nebraska, Rhode Island, and Western Washington. We  selected Arizona, Nebraska, Rhode Island, and Western Washington  because they were in districts that experienced large overall rent increases  from fiscal years 2000 through 2005 and were geographically dispersed.  We also visited Maryland and Eastern Virginia court facilities while we  were designing this audit and included them in the review because they  contained a new courthouse, a renovated courthouse, and a courthouse  that was targeted for replacement. The findings from these courthouse  visits can not be generalized to the population of federal courthouses  nationwide. We interviewed district, magistrate, and bankruptcy judges;  officials from the AOUSC, which is the judiciary’s administrative agency;  clerks, circuit executives, and other representatives from U.S. circuit and  district courts with authority over space and facilities; GSA officials in  headquarters and the regions; and other real property management  experts. We determined that the rent data were sufficiently reliable for the  purposes of our review.
Mr. Chairman and members of the Subcommittee, this concludes my  prepared statement, I would be pleased to respond to any questions that  you or the other Members of the Subcommittee may have.
section_title: GAO Contacts and Staff Acknowledgements
paragraphs: For further information about this testimony, please contact me at (202)  512-2834 or goldsteinm@gao.gov. Keith Cunningham, Randy DeLeon, Bess  Eisenstadt, Brandon Haller, Grant Mallie, Susan Michal-Smith, Joshua  Ormond, Elizabeth Repko, David Sausville, and Gary Stofko made key  contributions to this statement.
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