Federal Real Property: Actions Needed to Address Long-standing and Complex Problems
Published: 2003-10-01T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The federal government faces longstanding problems with excess and underutilized real property, deteriorating facilities, unreliable real property data, and costly space. These problems have multibillion-dollar cost implications and can seriously jeopardize agencies' missions. In addition, federal agencies face many challenges securing real property due to the threat of terrorism. This testimony discusses long-standing, complex problems in the federal real property area and what actions are needed to address them.
section_title: What GAO Found
paragraphs: Government data show that over 30 agencies control hundreds of thousands of real property assets worldwide, including facilities and land, which are worth hundreds of billions of dollars. Unfortunately, much of this vast, valuable portfolio reflects an infrastructure based on the business model and technological environment of the 1950s. Many of the assets are no longer effectively aligned with, or responsive to, agencies' changing missions and are therefore no longer needed. Further, many assets are in an alarming state of deterioration; agencies have estimated that restoration and repair needs are 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. Given the persistence of these problems and related obstacles, we designated federal real property as a new high-risk area in January 2003. Resolving these problems will require high-level attention and effective leadership by both Congress and the administration. Also, current structures and processes may not be adequate to address the problems. Thus, as we have reported, there is a need for a comprehensive, integrated transformation strategy for real property that will focus on some of the underlying causes that contribute to these problems, such as competing stakeholder interests in real property decisions, various legal and budget-related disincentives to businesslike outcomes, inadequate capital planning, and the lack of governmentwide focus on real property issues. It is equally important that Congress and the administration work together to develop and enact needed reform legislation to give real property-holding agencies incentives and tools they need to achieve better outcomes. This would also foster a more businesslike real property environment and provide for greater accountability.

section_title: Letter
paragraphs: We welcome the opportunity to testify on the executive and legislative  branch actions that are needed to address the long-standing and complex  problems that led to our designation of federal real property as a high-risk  area. 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. My testimony is based on our January 2003  high-risk report; work we have done to update information on some of the  example properties from our January 2003 high-risk report; and other GAO  reports on real property issues, including public-private partnerships. My  testimony focuses on the problems with federal real property and what  needs to be done to address them.
Data from the General Services Administration (GSA) show that over 30  agencies control hundreds of thousands of real property assets worldwide,  including facilities and land. According to the U.S. government’s financial  statements for fiscal year 2002, these assets are worth hundreds of billions  of dollars. Unfortunately, much of this vast, valuable portfolio reflects an  infrastructure based on the business model and technological environment  of the 1950s. Many of the assets are no longer effectively aligned with, or  responsive to, agencies’ changing missions and are therefore no longer  needed. Further, many assets are in an alarming state of deterioration;  agencies estimate that restoration and repair needs are 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.
Resolving these long-standing problems will require high-level attention  and effective leadership by both Congress and the administration. Also,  because of the breadth and complexity of the issues, the long-standing  nature of the problems, and the intense debate that will likely ensue,  current structures and processes may not be adequate to address the  problems. Thus, there is a need for a comprehensive, integrated  transformation strategy for real property and an independent commission  or governmentwide task force may be needed to develop the strategy. This  strategy should reflect lessons learned and leading practices of public and  private organizations. In addition to the strategy, it is critical that all key  stakeholders—Congress, the Office of Management and Budget (OMB),  and real property-holding agencies—continue to work diligently on efforts  already planned and under way that are intended to promote better real  property capital decisionmaking.  These include assessing infrastructure  and human capital needs and examining viable funding options.
If actions resulting from the transformation strategy and other efforts  address the long-standing problems and are effectively implemented,  agencies will be better able to recover asset values, reduce operating  costs, improve facility conditions, enhance security and safety, recruit and  retain employees, and achieve mission effectiveness.  Realigning the  government’s real property, taking into consideration the future federal  role and workplace needs, will be critical to improving the government’s  performance and ensuring accountability within expected resource limits.
subsections: section_title: The Federal Real Property Environment
paragraphs: The federal real property environment has many stakeholders and involves  a vast and diverse portfolio of assets that are used for a wide variety of  missions. Real property is generally defined as facilities; land; and  anything constructed on, growing on, or attached to land. The U.S.  government’s fiscal year 2002 financial statements show an acquisition  cost of more than $335 billion for real property assets held by the federal  government on September 30, 2002. In terms of facilities, the latest  available governmentwide data from GSA indicated that as of September  30, 2002, the federal government owned and leased approximately 3.4  billion square feet of building floor area worldwide. The Department of  Defense (DOD), U.S. Postal Service (USPS), GSA, and the Department of  Veterans Affairs (VA) hold the majority of the owned facility space.
Federal real property managers operate in a complex and dynamic  environment. Numerous laws and regulations govern the acquisition,  management, and disposal of federal real property. The Federal Property  and Administrative Services Act of 1949, as amended (Property Act), and  the Public Buildings Act of 1959, as amended, are the laws that generally  apply to real property held by federal agencies; and GSA is responsible for  the acts’ implementation. Agencies are subject to these acts, unless they  are specifically exempted from them, and some agencies may also have  their own statutory authority related to real property. Agencies must also  comply with numerous other laws related to real property.
section_title: The Federal Government Has Many Assets it Does Not Need
paragraphs: Despite significant changes in the size and mission needs of the federal  government in recent years, the federal portfolio of real property assets in  many ways still largely reflects the business model and technological  environment of the 1950s and faces serious security challenges. 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.
One reason the government has many unneeded assets is that some of the  major real property-holding agencies have undergone significant mission  shifts that have affected their real property needs. For example, after the  Cold War, DOD’s force structure was reduced by 36 percent. Despite four  rounds of base closures, DOD projects that it still has considerably more  property than it needs. The National Defense Authorization Act for Fiscal  Year 2002, which became law in December 2001, gave DOD the authority  for another round of base realignments and military installation closures  in 2005. Various factors may significantly reduce the need for real property  held by USPS.  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 had little, if any, value to the modern-day delivery of the  nation’s mail. According to testimony by the Co-Chair of the Commission,  rightsizing of the postal network would be crucial to USPS’s  transformation into a modern, 21st century institution.
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. Although the Department of Energy (DOE) is no longer producing  new nuclear weapons, it still maintains a facilities infrastructure largely  designed for this purpose.
The magnitude of the problem with underutilized or excess federal  property puts the government at significant risk for wasting taxpayers’  money and missed opportunities. First, underutilized or excess property is  costly to maintain. DOD estimates that it is spending $3 billion to $4 billion  each year maintaining facilities that are not needed. In July 1999, we  reported that vacant VA space was costing as much as $35 million to  maintain each year. Costs associated with excess DOE facilities, primarily  for security and maintenance, exceed $70 million annually. 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 has opportunity costs 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.  Finally, 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. 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, redeveloped, or used in a public-private  partnership.
Appendix I discusses some examples of vacant, highly visible properties  that are in the federal inventory— the former main VA hospital building at  the Milwaukee, Wisconsin, health facility campus; St. Elizabeths Hospital  in Washington, D.C.; and the former main post office building in  downtown Chicago, Illinois. These examples demonstrate the range of  challenges agencies face in disposing of unneeded property.
section_title: The Federal Portfolio Is in an Alarming State of Deterioration
paragraphs: Restoration, repair, and maintenance backlogs in federal facilities are  significant and reflect the federal government’s ineffective stewardship  over its valuable and historic portfolio of real property assets. The state of  deterioration is alarming because of the magnitude of the repair backlog—  current estimates show that tens of billions of dollars will be needed to  restore these assets and make them fully functional. This problem has  accelerated in recent years because much of the federal portfolio was  constructed over 50 years ago, and these assets are reaching the end of  their useful lives. As with the problems related to underutilized or excess  property, the challenges of addressing facility deterioration are also  prevalent at major real property-holding agencies. For example:
Over the last decade, DOD reports that it has been faced with the major  challenge of adequately maintaining its facilities to meet its mission  requirements. Although DOD no longer reports data on backlog of repairs  and maintenance, it reported in 2001 that the cost of bringing its facilities  to a minimally acceptable condition was estimated at $62 billion; the cost  of correcting all deficiencies was estimated at $164 billion.
The Department of the Interior (Interior) has a significant deferred  maintenance backlog that the Interior Inspector General (IG) estimated in  April 2002 to be as much as $8 billion to $11 billion. This backlog has  affected numerous national treasures, such as Ellis Island, Yellowstone  National Park, and Mount Rushmore, just to name a few.
GSA has struggled over the years to meet the repair and alteration  requirements identified at its buildings. In March 2000, we reported that  GSA data showed that over half of GSA’s approximately 1,700 buildings  needed repairs estimated to cost about $4 billion. More recently, in  August 2002, we reported that this estimated backlog of identified repair  and alteration needs was up to $5.7 billion.
Other agencies with repair backlogs that we highlighted in our high-risk  report include the Department of State (State), DOE, the Smithsonian  Institution, and USPS. Since issuing our high-risk report, we have updated  our assessment of facility conditions at DOD and State.
In February 2003, we reported that although the amount of money the  active forces have spent on facility maintenance had increased recently,  DOD and service officials said that these amounts had not been sufficient  to halt the deterioration of facilities. Too little funding to adequately  maintain facilities is also aggravated by DOD’s acknowledged retention of  facilities in excess of its needs. Furthermore, the information that the  services have on facility conditions is not consistent, making it difficult for  Congress, DOD, and the services to direct funds to facilities where they  are most needed and to accurately gauge facility conditions. And, although  DOD has a strategic plan for facilities, it lacks comprehensive information  on the specific actions, time frames, responsibilities, and funding needed  to reach its goals. In May 2003, we also reported on a similar problem with  National Guard and Reserve facilities.
In March 2003, we reported that many of the primary office buildings at  overseas embassies and consulates were in poor condition. In 2002, State  estimated that its repair backlog was $736 million. In addition, the primary  office buildings at more than half of the posts do not meet certain fire/life  safety standards. State officials stated that maintenance costs would  increase over time because of the age of many of the buildings, and  overcrowding has become a problem at several posts.
Our work over the years has shown that the deterioration problem leads to  increased operational costs, has health and safety implications that are  worrisome, and can compromise agency missions. In addition, we have  reported that the ultimate cost of completing delayed repairs and  alterations may escalate because of inflation and increases in the severity  of the problems caused by the delays. As discussed above, the overall  cost could also be affected by government realignment. That is, to the  extent that unneeded property is also in need of repair, disposing of such  property could reduce the repair backlog. Another negative effect, which  is not readily apparent but nonetheless significant, is the effect that  deteriorating facilities have on employee recruitment, retention, and  productivity. This human capital element is troublesome because the  government is often at a disadvantage in its ability to compete in the job  market in terms of the salaries agencies are able to offer. Poor physical  work environments exacerbate this problem and can have a negative  impact on potential employees’ decisions to take federal positions.  Furthermore, research has shown that quality work environments make  employees more productive and improve morale. Finally, as with excess  or underutilized property, deteriorated property presents a negative image  of the federal government to the public. This is particularly true when  many of the assets the public uses and visits the most—such as national  parks and museums—are deteriorated and in generally poor condition.
section_title: Key Decisionmakers Lack Reliable and Useful Data on Real Property Assets
paragraphs: Compounding the problems with excess and deteriorated property is the  lack of reliable and useful real property data that are needed for strategic  decisionmaking. GSA’s worldwide inventory database and related reports  are the only central sources of descriptive data on the makeup of the real  property inventory, such as property address, square footage, acquisition  date, and property type. However, in April 2002, we reported that the  worldwide inventory contained data that were unreliable and of limited  usefulness. GSA agreed with our findings and has revamped this database  and produced a new report on the federal inventory, as of September 30,  2002. We have not evaluated GSA’s revamped database and related  report.
In addition to problems with the worldwide inventory, real property data  contained in the financial statements of the U.S. government have been  problematic. In April 2003, we reported that—for the sixth consecutive  year—we were unable to express an opinion on the U.S. government’s  consolidated financial statements for fiscal year 2002. We have reported  that because the government lacked complete and reliable information to  support asset holdings—including real property—it could not  satisfactorily determine that all assets were included in the financial  statements, verify that certain reported assets actually existed, or  substantiate the amounts at which they were valued. Aside from the  problematic financial data, some of the major real property-holding  agencies—including DOD, State, GSA, and Interior—have faced challenges  in developing quality management data on their real property assets. The  problems at these agencies are discussed in more detail in our high-risk  report.
section_title: Reliance on Costly Leasing
paragraphs: As a general rule, building ownership options through construction or  purchase are the least expensive ways to meet agencies’ long-term and  recurring requirements for space. Lease-purchases—under which  payments are spread out over time and ownership of the asset is  eventually transferred to the government— are generally more expensive  than purchase or construction but are generally less costly than using  ordinary operating leases to meet long-term space needs. However, over  the last decade, we have reported that GSA—as the central leasing agent  for most agencies—relies heavily on operating leases to meet new long- term needs because it lacks funds to pursue ownership. In 1999, we  reported that for nine major operating lease acquisitions that GSA had  proposed, construction would have been the least-cost option in eight  cases and would have saved an estimated $126 million. Lease-purchase  would have saved an estimated $107 million, compared with operating  leases but would have cost $19 million more than construction. A prime  example of this problem was the Patent and Trademark Office’s long-term  requirements in northern Virginia, where the cost of meeting this need  with an operating lease was estimated to be $48 million more than  construction and $38 million more than lease-purchase. In August 2001, we  also reported that GSA reduced the term of a proposed 20-year lease for  the Department of Transportation headquarters building to 15 years so  that it could meet the definition of an operating lease. GSA’s fiscal year  1999 prospectus for constructing a new facility for this need showed the  cost of construction was estimated to be $190 million less than an  operating lease.
Operating leases have become an attractive option in part because they  generally look cheaper in any given year. Pursuant to the scoring rules  adopted as a result of the Budget Enforcement Act of 1990, the budget  authority to meet the government’s real property needs is to be scored—  meaning recorded in the budget—in an amount equal to the government’s  total legal commitment. For example, for lease-purchase arrangements,  the net present value of the government’s legal obligations over the life of  the lease contract is to be scored in the budget in the first year. For  construction or purchase, the budget authority for the estimated legal  obligation related to the construction costs or purchase price is to be  scored in the first year. However, for many of the government’s operating  leases—including GSA leases, which, according to GSA, account for over  70 percent of the government’s leasing expenditures and are self-insured  in the event of cancellation—only the budget authority to cover the  government’s commitment for an annual lease payment is required to be  scored in the budget. Given this, although operating leases are generally  more costly over time, compared with other options, they add much less to  a single year’s appropriation total than these other arrangements, making  an operating lease a more attractive option from an annual budget  perspective, particularly when funds for ownership are not available.  Although the policy requirement for full “up-front funding” permits  disclosure of the full costs to which the government is being committed,  the budget scorekeeping rules allow costly operating leases to “look  cheaper” in the short term and have encouraged an overreliance on them  for satisfying long-term space needs.
Decisionmakers have struggled with this matter since the scoring rules  were established and the tendency for agencies to choose operating leases  instead of ownership became apparent. We have suggested the alternative  of scoring all operating leases up-front on the basis of the underlying time  requirement for the space so that all options are treated equally. Although  this could be a viable alternative, there would be implementation  challenges if this were pursued, including the need to evaluate the validity  of agencies’ stated space requirements. Another option—which was  recommended by the President’s Commission to Study Capital Budgeting  in 1999 and discussed by GAO—would be to allow agencies to establish  capital acquisition funds to pursue ownership where it is advantageous,  from an economic perspective. To date, none of these options have been  implemented, and debate continues among decisionmakers about what  should be done. Finding a solution for this problem has been difficult;  however, change is needed because the current practice of relying on  costly leasing to meet long-term space needs results in excessive costs to  taxpayers and does not reflect a sensible or economically rational  approach to capital asset management.
section_title: Security Against Terrorism Is an Overarching Concern
paragraphs: Terrorism is a major threat to federally owned and leased real property  assets, the civil servants and military personnel who work in them, and the  public who visits them. This was evidenced by the 1995 Oklahoma City  bombing; the 1998 embassy bombings in Africa; the September 11, 2001,  attacks on the World Trade Center and Pentagon; and the anthrax attacks  in the fall of 2001. Since the Oklahoma City bombing, the federal  government has spent billions of dollars on security upgrades within the  country and overseas. A study of federal facilities done by the Justice  Department in 1995 resulted in minimum-security standards and an  evaluation of security conditions in the government’s facilities. In October  1995, the President signed Executive Order 12977, which established an  Interagency Security Committee (ISC) to enhance the quality and  effectiveness of security in nonmilitary federal facilities.
Since the attacks on the World Trade Center and the Pentagon, the focus  on security in federal buildings has been heightened considerably. Real  property-holding agencies are employing such measures as searching  vehicles that enter federal facilities, restricting parking, and installing  concrete barricades. As the government’s security efforts intensify, the  government will be faced with important questions regarding the level of  security needed to adequately protect federal facilities and how the  security community should proceed. Furthermore, the 1995 Justice study  placed an emphasis on increasing security where large numbers of  personnel are located. However, a risk-based approach—which GSA is  using for the federal buildings it controls—appears to be more desirable in  light of this new round of threats. In September 2001, we reported that  DOD uses a risk-based approach to reduce installation vulnerabilities, but  this approach was applied primarily to installations with 300 or more  personnel assigned on a daily basis. We recommended that DOD improve  this approach by ensuring all critical military facilities receive a periodic  vulnerability assessment conducted by their higher headquarters  regardless of the number of personnel assigned. DOD concurred and  began taking action.
Since 1996, we have produced more than 60 reports and testimonies on the  federal government’s efforts to combat terrorism. Several of these reports  have recommended that the federal government use risk management as  an important element in developing a national strategy. We have also  reported extensively on the security problems and challenges at individual  real property-holding agencies. Our high-risk report identifies the  problems and challenges faced by State, DOD, Interior, GSA, USPS, and  ISC. More recently, we testified on security conditions of overseas  diplomatic facilities. We found that State has done much over the last 4  years to improve physical security at overseas posts by, for example,  constructing perimeter walls, anti-ram barriers, and access controls at  many facilities. However, even with these improvements, most office  facilities do not meet security standards. As a result, thousands of U.S.  government employees may be more vulnerable to terrorist attacks.  Furthermore, our work has shown that agency coordination is critical to  addressing security challenges. In our February 2003 report on threats to  selected agencies’ critical computer and physical infrastructures, selected  agencies identified challenges, including coordinating security efforts with  GSA. GSA may often be responsible for protecting facilities that house  these critical assets. We recommended that steps be taken to complete  the identification and analysis of their critical assets and their  dependencies, including setting milestones, developing plans to address  vulnerabilities, and monitoring progress.
In addition to the clear challenges agencies will continue to face in  securing real property assets, the security issue has an impact on the other  problems that we have discussed. To the extent that more funding will be  needed to increase security, funding availability for repair and restoration,  preparing excess property for disposal, and improving real property data  systems may be further constrained. Furthermore, real property managers  will have to dedicate significant staff time and other human capital  resources to security issues and thus may have less time to manage other  problems. Another broader effect is the impact that increased security will  have on the public’s access to government offices and other assets. Debate  arose in the months after September 11, 2001, and continues to this day on  the challenge of providing the proper balance between public access and  security.
In November 2002, legislation was enacted establishing the Department of  Homeland Security (DHS). The Federal Protective Service, which was  part of GSA and which was responsible for protecting federal agencies  under GSA’s jurisdiction, was among those agencies whose functions and  personnel were transferred to DHS. Accordingly, DHS became responsible  for protecting buildings, grounds, and property owned, occupied, or  secured by the federal government that are under GSA’s jurisdiction. In  addition, the act provided DHS with authority to protect the buildings,  grounds, and property of any other agency whose functions were  transferred to DHS under the act. In September 2002, we reported on the  implications that the creation of DHS would have on ISC. We concluded  that the need to address ISC’s lack of progress in fulfilling its  responsibilities should be taken into account in establishing this new  department.
section_title: Various Efforts Initiated, but Real Property Problems Persist Due to Factors that Require High- Level Attention
paragraphs: Although the federal government faces significant, long-standing problems  in the real property area, it is important to give Congress, OMB, GSA, and  the major real property-holding agencies credit for proposing several  reform efforts and other initiatives in recent years. Legislative proposals in  the 108th Congress (H.R. 2548 and H.R. 2573) are aimed at enhancing real  property management.  H.R. 2548 would provide GSA with enhanced asset  management tools, including the use of public-private partnerships for  itself and other landholding agencies. This bill also provides incentives for  better property management, such as allowing agencies to retain funds  generated from the property to pay expenses associated with the property  and fund other capital needs. In addition, the bill contains provisions  aimed at improving real property data, establishing senior real property  managers at agencies, developing asset management principles, and  identifying specific conditions under which GSA can enter into real  property partnerships with the private sector. H.R. 2573 would provide  GSA with the authority to enter into public-private partnerships for itself  and other landholding agencies. In July 2001, we reported that public- private partnership authority could be an important management tool to  address problems in deteriorating federal buildings, but further study of  this tool was needed. Appendix II summarizes this report and discusses  two examples of public-private partnership opportunities. In August 2003,  we also reported on other methods agencies are using to finance federal  capital in addition to public-private partnerships, such as incremental  funding, real property swaps, and outleases. Another initiative in the  National Defense Authorization Act for fiscal year 2002 gave DOD the  authority for another round of base realignment and military installation  closures in 2005. DOD officials testified that these actions could result in  recurring annual net savings of about $3 billion.
Despite these and other initiatives agencies have undertaken and the  sincerity with which the federal real property community has embraced  the need for reform, the problems have persisted and have been  exacerbated by several factors that will require high-level attention from  Congress and the administration. These factors include competing  stakeholder interests in real property decisions; various legal and budget- related disincentives to businesslike outcomes; the need for improved  capital planning; and the lack of a strategic, governmentwide focus on  federal real property issues. More specifically:
Competing Stakeholder Interests - In addition to Congress, OMB, and the  real property-holding agencies themselves, several other stakeholders also  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, 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. However,  most agencies are precluded from entering into such arrangements.Resource limitations, in general, often prevent agencies from addressing  real property needs from a strategic portfolio 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 the  disposal area, a range of laws intended to address other objectives—such  as laws related to historic preservation and environmental remediation—  makes it challenging for agencies to dispose of unneeded property.
Need for Improved Capital Planning - 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, OMB’s Capital  Programming Guide, and its 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.
Lack of a Strategic, Governmentwide Focus on Real Property Issues - Historically, there has not been a strategic, governmentwide focus on real  property issues among decisionmakers. Although some efforts in recent  years have attempted to address real property issues with some limited  success, the problems have persisted and will continue to grow in  magnitude unless they are adequately addressed from a governmentwide  standpoint. Resolving the long-standing problems will require high-level  attention and effective leadership by Congress and the administration and  a governmentwide, strategic focus on real property issues. A strategic  focus on real property would be rooted in having the appropriate  incentives in place; ensuring transparency in the government’s actions;  and fostering a higher level of accountability to stakeholders, including  taxpayers. Also, it is important that key stakeholders develop an effective  system to measure results. Having quality data would be critical to  evaluate the progress of various reforms as they evolve.
section_title: A Transformation Strategy Is Needed
paragraphs: The magnitude of real property-related problems and the complexity of  the underlying factors that cause them to persist put the federal government at significant risk in this area. Real property problems related  to unneeded property and the need for realignment, deteriorating  conditions, unreliable data, costly space, and security concerns have  multibillion-dollar cost implications and can seriously jeopardize mission  accomplishment. Because of the breadth and complexity of the issues  involved, the long-standing nature of the problems, and the intense debate  about potential solutions that will likely ensue, current structures and  processes may not be adequate to address the problems. Given this, we  concluded in our high-risk report that a comprehensive and integrated  transformation strategy for federal real property is needed, and an  independent commission or governmentwide task force may be needed to  develop this strategy. Such a strategy, based on input from agencies, the  private sector, and other interested groups, 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 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 federal government’s  ability to attract and retain high-performing individuals and the  productivity and morale of employees;  improving real property capital planning in the federal government by  helping agencies to better integrate agency mission considerations into the  capital decisionmaking 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.
The transformation strategy should also 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 managing 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 be responsive to and supportive of  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.
In addition to developing a transformation strategy, it is critical that all the  key stakeholders in government—Congress, OMB, and real property- holding agencies—continue to work diligently on the efforts planned and  already under way that are intended to promote better real property  capital decisionmaking, such as enacting reform legislation, assessing  infrastructure and human capital needs, and examining viable funding  options. Congress and the administration could work together to develop  and enact reform legislation to give real property-holding agencies the  tools they need to achieve better outcomes, foster a more businesslike real  property environment, and provide for greater accountability for real  property stewardship. These tools could include, where appropriate, the  ability to retain a portion of the proceeds from disposal and the use of  public-private partnerships in cases where they represent the best  economic value to the government. Congress and the administration could  also elevate the importance of real property in policy debates and  recognize the impact that real property decisions have on agencies’  missions. Solving the problems in this area will undeniably require a  reconsideration of funding priorities at a time when budget constraints  will be pervasive. However, experimenting with creative financing tools  where they provide the best economic value for the government and  allocating sufficient funding will likely result in long-term benefits.
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.  Since our high-risk report was issued, OMB has informed us that it is  taking steps to address the federal government’s problems in the real  property area. Specifically, it has formed a team within OMB to determine  how to approach the resolution of these long-standing issues. 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.
Madam 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: Contacts and Acknowledgments
paragraphs: For further information on this testimony, please contact Bernard L. Ungar  on (202) 512-2834 or at ungarb@gao.gov. Key contributions to this  testimony were made by Kevin Bailey, Christine Bonham, Casey Brown,  John Brummett, Maria Edelstein, Anne Kidd, Mark Little, Susan Michal- Smith, David Sausville, and Gerald Stankosky.
section_title: Appendix I: Examples of Vacant Federal Property
paragraphs: Three examples of vacant, highly visible federal properties are the former  main Department of Veterans Affairs (VA) hospital building in Milwaukee,  Wisconsin; St. Elizabeths Hospital in Washington, D.C.; and the former  main post office building in downtown Chicago, Illinois.
subsections: section_title: Former Main VA Hospital Building in Milwaukee, Wisconsin
paragraphs: A VA-owned building at a health care facility campus in Milwaukee,  Wisconsin is an example of a long-held vacant federal property. This  134,000 square foot building, which is shown in figure 1, has been vacant  for about 14 years. The building had been used as the campus’s main  hospital but was vacated in 1989 primarily because a new main hospital  was built on the campus. VA officials told us that in June 1999, a  consulting firm—Economic Research Associates—issued a study in which  it identified various options for VA to consider in trying to enhance the use  of various vacant and underutilized buildings on the Milwaukee campus,  including the former main hospital building. On the basis of the study’s  results, VA officials have told us that a substantial investment of capital  would in all likelihood be needed to convert this building for alternate use.  For example, to convert the building for use as housing for the elderly, the  study estimated that about $8.4 million to $9.3 million would be needed.  VA officials also mentioned that various organizations, such as the  Salvation Army and the Knights of Columbus, expressed some interest in  leasing the building; but thus far, VA has not received any firm offers from  these organizations. VA officials told us that in fiscal year 2001, VA  incurred about $348,000 in maintenance costs for this building, which  included such expenses as utilities, pest management, and security. Also,  the officials said that VA currently has no alternate use or disposal plans  for this building.  However, VA officials have told us that updated  information on the planned disposal of its vacant and underutilized  property would in all likelihood be available after the Secretary of  Veterans Affairs approves the results of the Capital Asset Realignment for  Enhanced Services process, expected after December 2003.
section_title: St. Elizabeths Hospital, Washington, D.C.
paragraphs: The west campus of St. Elizabeths, which has 61 mostly vacant buildings  containing about 1.2 million square feet of space on 182 acres, is held by  the Department of Health and Human Services (HHS). During the Civil  War, the hospital was used to house soldiers recuperating from  amputations, and the property contains a civil war cemetery. In 1990, the  property—which contains magnificent vistas of the rivers and the city—  was designated a national historic landmark. This is the same designation  given to the White House, the U.S. Capitol building, and other buildings  that have historic significance. HHS has not needed the property for many  years. In April 2001, we reported that the property had significantly  deteriorated and had environmental and historic preservation issues that  would need to be addressed in order for the property to be disposed of or  transferred to another federal agency.
In the last year, the General Services Administration (GSA), the District of  Columbia (the District), HHS, and various public interest groups have  been working to resolve the situation at St. Elizabeths. In May 2002, the  Urban Land Institute formed an advisory panel that reported on several  options for redeveloping the site. The panel recommended that the  federal government transfer the west campus to the District and that the  District should identify a master developer for the site. The panel further  recommended that the master developer consider redeveloping the site  into four campus areas without changing the character of the surrounding  neighborhoods and without displacing existing residents. The panel  recommended preserving the historic buildings through adaptive use and  sensitive addition of new buildings. In addition to the panel, an executive  steering committee and a working group, each consisting of  representatives from the District, HHS, GSA, and public interest groups,  have been established and HHS and GSA have proceeded with a number of  actions to prepare the property for disposal. These include preparing the  property for “mothballing,” which is work done to minimize further  deterioration of the property while the disposal process proceeds;  determining the extent of environmental remediation needed; and  conducting community outreach. Figure 2 shows the vacant, boarded-up  Center Building, which opened in 1855 and served as the main hospital  building.
section_title: Former Chicago Main Post Office
paragraphs: The former Chicago main post office building is a 2.5 million square foot  facility that was vacated when it was replaced with a new facility in 1997.  The U.S. Postal Service (USPS) is incurring about $2 million in annual  holding costs for the property. According to USPS, the property was listed  for sale and publicly offered. About five offers were received and the  property was placed under contract of sale for $17 million. According to  USPS, completion of the sale has been delayed due to the weakness of the  Chicago real estate market and the lack of an agreement between the  developer and the city of Chicago that would abate real estate taxes on a  portion of the redevelopment cost for a number of years. According to  USPS, this has created a “chicken and egg” situation for the developer.  Potential tenants are unwilling to commit to the project unless they are  sure it will go ahead. The city appears unwilling to grant the tax abatement  until the users of the building are known. USPS is hopeful that the city will  begin to address the issue.
In addition to the holding costs USPS is incurring, a deteriorating façade  will add additional repairs costs to USPS’s annual budget. Furthermore,  deterioration of the system that funnels train exhaust up through eight  shafts to the roof of the building is a problem that will have to be  addressed. The estimated cost of repair is about $10 million and is a  condition of the sale. According to USPS, another factor, which bears on  the cost of redevelopment, is that the State Historic Preservation Office  wants to impose requirements on the redevelopment of the building.  Currently, according to USPS, these requirements will add millions of  dollars to the redevelopment costs, and the buyer and USPS are reviewing  them. USPS said that this project is challenging because of the large  amount of space that needs to be developed. According to USPS, a  breakthrough in current market conditions will have to be achieved,  together with an agreement with the city, before this project can move  forward. Figure 3 shows downtown Chicago with the vacant post office  building highlighted.
section_title: Appendix II: Use of Public-Private Partnerships to Redevelop Federal Property
paragraphs: Under a public-private partnership, a contractual arrangement is formed  between public and private sector partners that can include a variety of  activities that involve the private sector in the development, financing,  ownership, and operation of a public facility or service. In the case of real  property, the federal government typically would contribute the property  and a private sector entity contributes financial capital and borrowing  ability to redevelop or renovate the property. Public-private partnerships  can be a viable option for redeveloping obsolete federal property if they  provide the best economic value for the government, compared with other  options, such as federal financing through appropriations or sale of the  property. However, most agencies are precluded from entering into such  arrangements. The Department of Defense (DOD), Department of Veterans  Affairs (VA), and U.S. Postal Service (USPS), however, have this authority.  Proposed real property reform legislation in the 108th Congress (H.R. 2548  and H.R. 2573) is aimed at enhancing real property management. H.R.  2548 would provide GSA with enhanced asset management tools,  including the use of public-private partnerships for itself and other  landholding agencies. This bill also provides incentives for better property  management, such as allowing agencies to retain funds generated through  the use of the management tools to pay expenses associated with the  property and fund other capital needs. H.R. 2573 would provide GSA with  the authority to enter into public-private partnerships for itself and other  landholding agencies.
Public-private partnerships need to be carefully evaluated to determine  whether they offer the best economic value for the government, compared  with other available options. In July 2001, we reported that 8 of 10 GSA  properties were strong to moderate candidates for a partnership because  there were potential benefits for both the private sector and the  government. The potential internal rates of return (IRR) for the private  partner ranged from 13.7 to 17.7 percent. It should be noted that we did  not calculate the IRR for the government if the government had financed  the entire project. This comparison would need to be made to determine  which financing option offers the best economic value for the government.
Furthermore, public-private partnerships will not necessarily work or be  the best option available to address the problems in all federal properties.  Two examples of properties that were strong candidates for a partnership  were the Internal Revenue Service (IRS) Service Center in Andover,  Massachusetts and an office building in Portland, Oregon that houses the  Immigration and Naturalization Service known as the 511 Building. Since  we profiled these properties in 2001, GSA officials said that they have been  unable to pursue public-private partnerships for these properties because  GSA continues to lack authority to enter into such arrangements. In  August 2003, we also reported on other methods agencies are using to  finance federal capital in addition to public-private partnerships, such as  incremental funding, real property swaps, and outleases.
subsections: section_title: IRS Service Center, Andover, Massachusetts
paragraphs: The Andover Service Center was a strong candidate for a partnership in  terms of strong federal demand, moderate private sector interest in  development, and strong nonfederal demand for use of the property. The  property is a 375,000 square foot, single-story, highly secured building on  37 acres that is in need of capital repairs. At the time of our review, IRS  was leasing about 336,000 square feet in additional space in the area. GSA  and IRS would like to consolidate IRS’s operations, and the property  would be desirable for the city of Andover and local developers to  develop. The redevelopment strategy involved a partnership to develop a  small office park consisting of six, 5-acre pads. Under this plan, the project  could progress as follows:
Year 1: Build a new 4-story, 700,000 square foot IRS facility and parking  structure for current and expiring IRS leases; the complex would be at the  rear of the site to allow for security and a phased development of the rest  of the site.
Year 2: IRS moves into the new facility and the old building is demolished;  the partnership constructs another 250,000 square foot federal office  building for non-IRS expiring leases.
Years 3 and 4: Partnership constructs two more 250,000 square foot federal  office buildings for compatible agency and private sector occupancy.  The analysis of this strategy projected a 14.4 percent lifetime IRR for the  private partner and a 9.4 percent lifetime IRR for the government. Figure 4  is an aerial view of the IRS Service Center in Andover, Massachusetts.
section_title: Portland, Oregon, 511 Building
paragraphs: The 511 building was also a strong candidate for a partnership in terms of  strong federal demand, strong private sector interest in development, and  moderate nonfederal demand for use of the property. The 511 building is  an historic, 6-floor building in a desirable location between downtown  Portland and the trendy “Pearl District” that housed offices of the  Immigration and Naturalization Service. The property includes a parking  lot that was sought by the city for a pedestrian mall. The redevelopment  strategy included renovating the existing historic office building to include  storage use in the basement and retail or restaurant on the first floor. In  addition, the strategy included acquiring an additional site for construction  of a 240,000 square foot, federal office building across the street. This  strategy projected a 15.7 percent lifetime IRR for the private partner and a  12.7 percent lifetime IRR for the government. Figure 5 shows the 511  building (building in center of the picture).
If the federal government were to completely finance the Andover and  Portland projects, it would not have to share returns with a private sector  partner. However, we did not determine what the returns would be in such  a situation and how the returns would compare with the returns under a  partnership arrangement.
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