Federal Real Property: Excess and Underutilized Property Is an Ongoing Problem
Published: 2006-02-06T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: At the start of each new Congress since 1999, we have issued a special series of reports entitled the Performance and Accountability Series: Major Management Challenges andProgram Rsks. In January 2003, GAO designated federal real property a high-risk area and issued an update in January 2005 on this area. GAO identified excess and underutilized property as one of the major reasons for the high-risk designation. This testimony discusses GAO's designation of federal real property as a high-risk area, focusing on excess and underutilized property and describes various efforts to address the problem and what more needs to be done.
section_title: What GAO Found
paragraphs: The conditions that led to GAO's January 2003 high-risk designation still exist. The government's vast and diverse portfolio of real property reflects an infrastructure based on the business model and technological environment of the 1950s. Many assets are no longer effectively aligned with, or responsive to, agencies' changing missions and are therefore no longer needed. GAO's high-risk reports, updated most recently in January 2005, highlighted problems with excess and underutilized property at several agencies, including the Departments of Defense and Veterans Affairs, the U.S. Postal Service, and the General Services Administration. Furthermore, many assets are in an alarming state of deterioration; agencies have estimated restoration and repair needs to be in the tens of billions of dollars. These problems have been exacerbated by underlying obstacles that include competing stakeholder interests in real property decisions, various legal and budget-related disincentives to businesslike outcomes, and the need for better capital planning by agencies. The administration has acknowledged the problems in this area; in February 2004, the President added the Federal Asset Management Initiative to the President's Management Agenda and signed an executive order on real property reform. These and other efforts at the agency level are positive steps. However, despite the progress that has been made, GAO still believes that current structures and processes may not be adequate to fully address the problems. The breadth and complexity of the issues involved and the long-standing nature of the problems and their underlying causes will likely continue to hamper agencies' efforts to realign their real property assets to their missions.

section_title: Letter
paragraphs: Thank you for the opportunity to testify today on our work related to  federal real property and, in particular, the problem with excess and  underutilized property. As you know, at the start of each new Congress  since 1999, we have issued a special series of reports entitled the  Performance and Accountability Series: Major Management Challenges  and Program Risks. In January 2003, we designated federal real property a  high-risk area as part of this series, and we issued an update on this area in  January 2005. We identified excess and underutilized property as one of  the major reasons for the high-risk designation. Other reasons included  deteriorated property, unreliable real property data, over-reliance on  costly leasing, and the challenges associated with protecting these assets  from terrorism. My testimony today will (1) discuss our designation of  federal real property as a high-risk area, focusing on excess and  underutilized property; and (2) describe various efforts to address the  problem and what more needs to be done. My testimony today will  highlight the following points:
The conditions that led to our January 2003 high-risk designation still  exist. Many of the assets in the government’s vast and diverse portfolio of  real property are not effectively aligned with, or responsive to, agencies’  changing missions and are therefore no longer needed. Furthermore, many  assets are in an alarming state of deterioration; agencies have estimated  restoration and repair needs to be in the tens of billions of dollars.  Additionally, a heavy reliance on costly leasing, instead of ownership, to  meet new needs is a pervasive and ongoing problem. These problems have  been exacerbated by underlying obstacles that include competing  stakeholder interests in real property decisions, various legal and budget- related disincentives to businesslike outcomes, and the need for better  capital planning by real property-holding agencies.
The administration has acknowledged the problems in this area; in  February 2004, the President added the Federal Asset Management  Initiative to the President’s Management Agenda and signed an executive  order on real property management reform. These and other efforts at the  agency level are positive steps. However, the breadth and complexity of  the issues involved and the long-standing nature of the problems and their  underlying causes will likely continue to hamper agencies’ efforts to  realign their real property assets to their missions. As a result, we continue  to believe that a comprehensive and integrated transformation strategy is  needed to address the aforementioned underlying obstacles. As an  example, the Office of Management and Budget (OMB) and other  stakeholders could look to the U.S. Postal Service (USPS) Transformation  Plan and related progress reports, which GAO has supported for guiding  postal reform.
subsections: section_title: The Federal Government Has Many Real Property Assets It Does Not Need
paragraphs: Over 30 federal agencies control hundreds of thousands of real property  assets—including both facilities and land—in the United States and  abroad. According to available data, the government owns or leases about  3.3 billion square feet of building floor area worldwide in roughly a half- million buildings. About 380 million square feet of this space is leased.  These assets are worth hundreds of billions of dollars. However, much of  this vast and valuable asset portfolio presents significant management  challenges and reflects an infrastructure based on the business model and  technological environment of the 1950s. Many assets are no longer  effectively aligned with, or responsive to, agencies’ changing missions and  are therefore no longer needed. Our high-risk reports, updated most  recently in January 2005, highlighted problems with excess and  underutilized property at several agencies, including the Departments of  Defense (DOD), Veterans Affairs (VA), Energy, and State; USPS; and the  General Services Administration (GSA). Furthermore, many assets are in  an alarming state of deterioration; agencies have estimated restoration,  repair, and maintenance needs to be in the tens of billions of dollars.  Compounding these problems are the lack of reliable governmentwide  data for strategic asset management, a heavy reliance on costly leasing  instead of ownership to meet new space needs, and the cost and challenge  of protecting these assets against potential terrorism.  Regarding the  federal government’s reliance on costly leasing, we testified on this issue  before this Subcommittee in October 2005.  Building ownership options  through construction or purchase and lease-purchase are generally less  costly than using operating leases to meet long-term space needs.   However, as GAO reported over the last decade, GSA relies heavily on  operating leases to meet new long-term space needs because it lacks funds  to pursue ownership.
The excess and underutilized property problem was, and continues to be,  a major reason the real property area remains high risk. In the last decade  alone, the federal government has reduced its workforce by several  hundred thousand personnel, and several federal agencies have had major  mission changes. With these personnel reductions and mission changes,  the need for existing space, including general-purpose office space, has  declined overall and necessitated the need for different kinds of space. At  the same time, technological advances have changed workplace needs,  and many of the older buildings are not configured to accommodate new  technologies. The advent of electronic government is starting to change  how the public interacts with the federal government. These changes will  have significant implications for the type and location of property needed  in the 21st century. Furthermore, changes in the overall domestic security  environment have presented an additional range of challenges to real  property management that must be addressed. For example, agencies are  employing such measures as searching vehicles that enter federal  facilities, restricting parking, and installing concrete barriers.
The experiences of several of the major real property-holding agencies  illustrate how mission changes have affected agencies’ real property  needs. For example, after the Cold War, DOD reduced its force structure  by 36 percent. Despite several rounds of base closures, DOD projected  that it still had considerably more property than it needed. The National  Defense Authorization Act for Fiscal Year 2002 gave DOD the authority for  another round of base realignments and military installation closures in  2005. The results of the 2005 BRAC process, which will be discussed in  more detail later, became final in November 2005.  For USPS, various  factors may significantly reduce its need for some of the real property it  holds. These factors include new technologies, additional delivery options,  and the opportunity for greater use of partnerships and retail co-location  arrangements. A July 2003 Presidential Commission report on USPS  stated, among other things, that USPS had vacant and underutilized  facilities that added little, if any, value to the modern-day delivery of the  nation’s mail. In April 2005, we reported that USPS faces future financial  challenges due to its declining First-Class Mail business and has excess  capacity in its current infrastructure that impedes efficiency gains. USPS  has stated that one way to increase efficiency is to realign its processing  and distribution infrastructure.
The former main post office building in Chicago, near the Sears Tower, is  an example of a vacant USPS-owned property (see fig.1). USPS is  currently incurring about $2 million in annual holding costs for this  property, which was replaced by a new facility and vacated in 1997.  Redevelopment of this property has taken several years because,  according to USPS, the real estate market was weak and the City of  Chicago and the developer have been unable to agree on terms. According  to USPS, the property buyer is currently in negotiations with the City of  Chicago regarding the property’s redevelopment and the granting of  certain tax exemptions from the City.
In the mid-1990s, VA began shifting its role from being a traditional  hospital-based provider of medical services to an integrated delivery  system that emphasizes a full continuum of care with a significant shift  from inpatient to outpatient services. Subsequently, VA has struggled to  reduce its large inventory of buildings, many of which are underutilized or  vacant. In August 2003, we reported that VA had 577 vacant and  underutilized properties. Figure 2 shows an example of a vacant VA-owned  property in Milwaukee, Wisconsin.
The L. Mendel Rivers Federal Building in Charleston, South Carolina is an  example of a vacant, highly visible federal building owned by GSA (see fig.  3). This property, which is contaminated with asbestos, has been  unoccupied since it sustained damage from Hurricane Floyd in 1999. In the  last 10 years, GSA has unsuccessfully explored various options for  disposal or reuse. Currently, GSA is planning, under existing authority, to  exchange this building with a property owned by the City that would suit  the federal government’s needs.
The magnitude of the problem with underutilized or excess federal  property puts the government at significant risk for wasting taxpayers’  money and missing opportunities to benefit taxpayers. First, underutilized  or excess property is costly to maintain. In our 2003 high-risk report, we  reported that DOD estimated that it was spending $3 billion to $4 billion  each year maintaining facilities that were not needed. It is likely that other  agencies that continue to hold excess or underutilized property are also  incurring significant costs for staff time spent managing the properties and  on maintenance, utilities, security, and other building needs. Second, in  addition to day-to-day operational costs, holding these properties is costly  for the government, because these buildings and land could be put to more  cost-beneficial uses, exchanged for other needed property, or sold to  generate revenue for the government. Continuing to hold property that is  unneeded does not present a positive image of the federal government in  local communities. Instead, it presents an image of waste and inefficiency  that erodes taxpayers’ confidence in government. Finally, it also can have  a negative impact on local economies if the property is occupying a  valuable location and is not used for other purposes, sold, or used in a  public-private partnership.
The excess and underutilized property problem, as well as the other  problems that led to our high-risk designation, has been exacerbated by a  number of factors that inhibit the government’s ability to efficiently  dispose of or reuse excess and underutilized property. These include  competing stakeholder interests in real property decisions, various legal  and budget-related disincentives to businesslike outcomes, and the need  for better capital planning by real property-holding agencies. More  specifically:    Competing Stakeholder Interess - In addition to Congress, OMB, and the  real property-holding agencies themselves, several other stakeholders  have an interest in how the federal government carries out its real  property acquisition, management, and disposal practices. These include  foreign and local governments; business interests in the communities  where the assets are located; private sector construction and leasing firms;  historic preservation organizations; various advocacy groups; and the  public in general, which often views the facilities as the physical face of  the federal government in local communities. As a result of competing  stakeholder interests, decisions about real property often do not reflect  the most cost-effective or efficient alternative that is in the interests of the  agency or the government as a whole, but instead reflect other priorities.
Legal and Budgetary Disincentives -The complex legal and budgetary  environment in which real property managers operate has a significant  impact on real property decisionmaking and often does not lead to  economically rational and businesslike outcomes. For example, GSA does  not have the authority to enter into public-private partnerships to  redevelop property. We have reported that public-private partnerships  might be a viable option for redeveloping obsolete federal property when  they provide the best economic value for the government, compared with  other options, such as federal financing through appropriations or sale of  the property. Furthermore, resource limitations, in general, often prevent  agencies from addressing real property needs from a strategic perspective.  When available funds for capital investment are limited, Congress must  weigh the need for new, modern facilities with the need for renovation,  maintenance, and disposal of existing facilities, the latter of which often  gets deferred. In disposing of excess property, agencies also need to  consider a range of laws intended to address other objectives—such as  historic preservation and environmental remediation.
Need for Improved Cap al Plannng - Over the years, we have reported  that prudent capital planning can help agencies to make the most of  limited resources, and failure to make timely and effective capital  acquisitions can result in increased long-term costs. GAO, Congress, and  OMB have identified the need to improve federal decisionmaking  regarding capital investment. Our Executive Guide, Programming Guide, and OMB’s revisions to Circular A-11 have attempted  to provide guidance to agencies for making capital investment decisions.  However, agencies are not required to use the guidance. Furthermore,  agencies have not always developed overall goals and strategies for  implementing capital investment decisions, nor has the federal  government generally planned or budgeted for capital assets over the long  term.
section_title: Various Efforts Initiated, but a Transformation Strategy Is Still Needed
paragraphs: ti GAO, Executive Guide: Leading Pracices in Capital Decison-making, GAO/AIMD-99-32  (Washington, D.C.: Dec. 1998). not been fully implemented and further actions—which will be discussed  later—are necessary to address the underlying obstacles to reform.
In addition to the administration’s efforts, the Consolidated  Appropriations Act for Fiscal Year 2005, Public Law 108-447, gave GSA the  authority to retain the net proceeds from the disposal of federal property  for fiscal year 2005 and to use such proceeds for GSA’s real property  capital needs. However, this provision was not included in the GSA  appropriation act for Fiscal Year 2006.  Also, the Veterans Health  Programs Improvement Act of 2004, Public Law 108-422, established a  capital asset fund and gave VA the authority to retain the proceeds from  the disposal of its real property for the use of certain capital asset needs  such as demolition, environmental clean-up, and major repairs. Overall,  agencies such as DOD, VA, and GSA have made progress in addressing  long-standing federal real property problems. For example:    VA has established a process called Capital Asset Realignment for  Enhanced Services (CARES) to address its aging and obsolete portfolio of  health care facilities. In March 2005, we reported that through CARES, VA  identified 136 locations for evaluation of alternative ways to align inpatient  services—99 facilities had potential duplication of services with another  nearby facility or low acute patient workload. VA made decisions to  realign inpatient health care services at 30 of these locations. For example,  it will close all inpatient services at 5 facilities. VA’s decisions on inpatient  alignment and plans for further study of its capital asset needs are tangible  steps in improving management of its capital assets and enhancing health  care. Accomplishing its goals, however, will depend on VA’s success in  completing its evaluations and implementing its CARES decisions to  ensure that resources now spent on unneeded capital assets are redirected  to health care.
In DOD’s support infrastructure management area, which we identified as  high-risk in 1997, DOD has made progress and expects to continue making  improvements. In May 2005, we testified that DOD implemented the  recommendations from the previous four Base Realignment and Closure  (BRAC)  rounds within the 6-year period mandated by law and work on a  5th, 2005 BRAC, was underway. DOD estimated that it had reduced its  domestic infrastructure by about 20 percent from the four prior rounds, as  measured by the estimated cost to replace the property; about 90 percent  of unneeded BRAC property is now available for reuse. DOD has realized  substantial net savings from those four rounds over time.  Recommendations approved by the 2005 BRAC round are expected to  further reduce DOD’s infrastructure but by a much smaller margin than  initially expected, although it expects to make a significant reduction in  leased space in implementing the BRAC recommendations. DOD also  expects to use BRAC to further transformation and related efforts, such as  restationing troops from overseas as well as joint basing among the  military services. The President concurred with and sent the 2005 BRAC  report to Congress in September 2005, and absent congressional action to  reject the recommendations within the 45 days provided by law, they  became final in November 2005. Planning is now underway to implement  those recommendations.
GSA has recognized in recent years that it has many buildings that are not  financially self-sustaining and/or for which there is not a substantial long- term federal purpose. To address this problem, GSA began its Portfolio  Restructuring in 2001. This effort seeks to eliminate non-performing or  obsolete properties from the GSA inventory. In January 2006, GSA told us  that since fiscal year 2002, it had identified 204 buildings as excess and  demolished 50 others. We have not evaluated this initiative.
Despite the progress that has been made, we still believe that current  structures and processes may not be adequate to fully address the federal  real property problems. The breadth and complexity of the issues involved  and the long-standing nature of the problems and their underlying causes  will likely continue to hamper agencies’ efforts to realign their real  property assets to their missions. This is of particular concern for civilian  agencies that do not have an independent decision-making apparatus like  BRAC. Given this, we concluded in our high-risk report and in our update  in January 2005, and still believe, that a comprehensive and integrated  transformation strategy for federal real property is needed. Such a strategy  could build upon the executive order by providing decisionmakers with a  road map of actions for addressing the underlying obstacles, assessing  progress governmentwide, and enhancing accountability for related  actions. Using input from agencies, the private sector, and other interested  groups, the strategy could comprehensively address these long-standing  problems with specific proposals on how best to  realign the federal infrastructure and dispose of unneeded property, taking  into account mission requirements, changes in technology, security needs,  costs, and how the government conducts business in the 21st century;   address the significant repair and restoration needs of the federal    ensure that reliable governmentwide and agency-specific real property  data—both financial and program related—are available for informed  decisionmaking; resolve the problem of heavy reliance on costly leasing; and   consider the impact that the threat of terrorism will have on real property  needs and challenges, including how to balance public access with safety.
To be effective in addressing these problems, it would be important for the  strategy to focus on the underlying obstacles by    minimizing the negative effects associated with competing stakeholder  interests in real property decisionmaking;   providing agencies with appropriate tools and incentives that will facilitate  businesslike decisions—for example, consideration should be given to  what financing options should be available; how disposal proceeds should  be handled; what process would permit comparisons between  rehabilitation/renovation and replacement and among construction,  purchase, lease-purchase, and operating lease; and how public-private  partnerships should be evaluated;   addressing federal human capital issues related to real property by  recognizing that real property conditions affect the productivity and  morale of employees and the federal government’s ability to attract and  retain high-performing individuals; improving real property capital planning in the federal government by  helping agencies to better integrate agency mission considerations into the  capital decision-making process, make businesslike decisions when  evaluating and selecting capital assets, evaluate and select capital assets  by using an investment approach, evaluate results on an ongoing basis,  and develop long-term capital plans; and    ensuring credible, rational, long-term budget planning for facility  sustainment, modernization, or recapitalization.
As an example, OMB and other stakeholders could look to the USPS  Strategic Transformation Plan and related progress reports, which GAO  has supported for guiding postal reform. Also, the transformation  strategy should reflect the lessons learned and leading practices of  organizations in the public and private sectors that have attempted to  reform their real property practices. Over the past decade, leading  organizations in both the public and private sectors have been recognizing  the impact that real property decisions have on their overall success.  Better management of real property assets in the current environment  calls for a significant departure from the traditional way of doing business.  Solutions should not only correct the long-standing problems we have  identified but also respond to and support agencies’ changing missions,  security concerns, and technological needs in the 21st century. If actions  resulting from the transformation strategy comprehensively address the  problems and are effectively implemented, agencies will be better  positioned to recover asset values, reduce operating costs, improve facility  conditions, enhance safety and security, recruit and retain employees, and  achieve mission effectiveness.
Solving the problems in this area will undeniably require a reconsideration  of funding priorities at a time when budget constraints will be pervasive.  Without effective incentives and tools; top management accountability,  leadership, and commitment; adequate funding; full transparency with  regard to the government’s real property activities; and an effective system  to measure results, long-standing real property problems will continue and  likely worsen. However, the overall risk to the government and taxpayers  could be substantially reduced if an effective transformation strategy is  developed and successfully implemented, reforms are made, and property- holding agencies effectively implement current and planned initiatives.  OMB has informed us that it has taken additional steps to address the  federal government’s problems in the real property area. Specifically, it  has developed an action plan for addressing these long-standing issues in  relation to the President’s Management Agenda and the executive order.  To assist OMB with its efforts, we have agreed to meet regularly to discuss  progress and have provided OMB with specific suggestions on the types of  actions and results that could be helpful in justifying the removal of real  property from the high-risk list.
Mr. Chairman, this concludes my prepared statement. I would be happy to  respond to any questions you or other Members of the Committee may  have at this time.
section_title: Scope and Methodology
paragraphs: We conducted our work for this testimony from October 2005 to January  2006 in accordance with generally accepted government auditing  standards. The work is based on our past reports on federal real property  and, specifically, excess and underutilized property issues.
section_title: Contacts and Acknowledgments
paragraphs: For further information on this testimony, please contact Mark L.  Goldstein on (202) 512-2834 or at GoldsteinM@gao.gov. Key contributions  to this testimony were made by Kieran McCarthy, Susan Michal-Smith, and  David Sausville.
This is a work of the U.S. government and is not subject to copyright protection in the  United States. It may be reproduced and distributed in its entirety without further  permission from GAO. However, because this work may contain copyrighted images or  other material, permission from the copyright holder may be necessary if you wish to  reproduce this material separately.