Federal Real Property: NIH Has Improved Its Leasing Process, but Needs to Provide Congress with Information on Some Leases
Released: 2006-10-10T00:00:00

Letter

Background

In 1996, GSA began a program called “Can’t Beat GSA Leasing” that offered federal agencies the choice of (1) using GSA as their leasing agent, (2) assuming responsibility for their own leasing, or (3) using a combination of both options. The program was an outgrowth of GSA’s commitment to streamline its leasing operations, respond to the government’s changing needs, and address recommendations from client agencies. GSA delegated leasing authority to HHS in September 1996, and HHS redelegated this authority to NIH, one of its four lease-holding agencies, in December 1996. GSA’s original delegation consisted of six conditions, which included the requirements that federal agencies acquire and utilize leased space in accordance with all applicable laws and regulations and —prior to finalizing lease contracts and alterations to leased buildings that exceed a legislatively established threshold—work through GSA to secure an approved prospectus from the appropriate congressional committees. Since 1997, NIH has elected to rely on GSA for some of its leasing needs, but it has issued a majority of its leases on its own.

NIH Has Improved Its Lease Scoring Process and Believes that Its Unrecorded Obligations for Operating Leases Do Not Violate the Antideficiency Act

In response to past problems identified in a 2003 internal review of its leases, NIH developed a formal leasing process in 2003 that includes decision points for budget scoring. The process was updated in 2005, and if implemented effectively, it should ensure that NIH leasing complies with OMB’s scorekeeping guidelines for classifying leases. This new process should also ensure that no violations of the Antideficiency Act occur due to improper scorekeeping.

The executive and legislative branches formulated the budget scorekeeping rules in connection with the Budget Enforcement Act of 1990. The purpose of these rules is to ensure that scorekeepers adhere to scorekeeping conventions and specific legal requirements when they measure the effects of legislation. They are also used by OMB for determining amounts to be recognized in the budget when an agency signs a contract or enters into a lease. The rules are reviewed annually by the scorekeepers and revised, as necessary, to achieve their purpose. According to scorekeeping guidelines, a lease is classified as either operating or capital, based on six criteria. If a lease meets all six criteria, then it qualifies as an operating lease; otherwise, it must be treated as a capital lease for purposes of budget scoring. For operating leases for agencies other than GSA, budget authority is required for the estimated total payment that is expected to arise under the full term of the contract or, if the contract includes a cancellation clause, for an amount sufficient to cover the lease payments for the first fiscal year plus an amount sufficient to cover the costs associated with cancellation. For GSA operating leases, only the budget authority needed to cover the annual lease payment is required. For a capital lease, budget authority is required for the net present value of the total cost of the lease and property taxes (but not for imputed interest costs and identifiable annual operating expenses).

In 2003, NIH’s Assistant Director for the Chief Financial Officer and Central Services asked the Acting Director of the Office of Research Facilities Development and Operations (ORFDO) to certify that all leases were operating leases for the purposes of the annual NIH financial statements, according to an NIH official. To address this request, the ORFDO Acting Director conducted an internal risk assessment. This resulted in a review of all NIH’s leases, which identified problems with implementing budget scorekeeping guidelines and OMB requirements, as well as identifying prospectus leases. More specifically, this review identified eight leases that had been improperly classified as operating leases instead of capital leases and potential unrecorded obligations from 50 active multiyear operating leases that totaled $565 million, as of September 30, 2005. According to the Director of the Office of Acquisitions, NIH’s lease scoring process had been inconsistent and informal from 1996 to 2003, which may explain the improper lease classifications and unrecorded obligations identified in the 2003 review. Due to staff changes at the agency in past years, we were not able to determine why the budget scoring process was inconsistent and informal from 1996 to 2003.

In 2003, NIH attempted to address its problems in complying with scorekeeping guidelines by developing the Leasing Management and Oversight Program (LeMOP), a new multistep leasing process that includes budget scoring. LeMOP is a means for NIH to exercise stronger oversight in the leasing process than it had done previously. The process consists of a business case that goes through the following five critical decision points: 1. Initial approval that there is a justifiable need, 2. Approval of a general strategy on how the need will be met, 3. Approval of a detailed strategy for meeting the need, 4. Signing of the lease and obligation of the funds, and 5. Documentation that the agency has reviewed the action and the space requirement is being met.

As part of the third decision point, the Office of Business Systems and Finance (OBSF) uses the budget scoring process for leases that it developed during NIH’s 2003 review to conduct an independent test of the planned lease contract against OMB’s budget scorekeeping requirements. The test is based on estimates of the lease rate, the lease term, and other factors. As part of the fourth decision point, OBSF tests the final lease price against OMB scoring requirements to determine if the proposal conforms to applicable rules for budget scoring. In effect, the process establishes a specific requirement that ensures that NIH leases undergo budget scoring.

In addition to implementing LeMOP, NIH corrected its improper classification of the eight operating leases identified in the 2003 review. Two of these leases were reclassified as capital leases, and the remaining six were renegotiated by eliminating the option-to-renew clauses from the lease so that they could properly qualify as operating leases. By deleting the option-to-renew clauses, NIH reduced the terms of the leases, which impacted budget scoring. This allowed the leases to meet the scoring criteria for an operating lease—that the present value of the minimum lease payments over the life of the lease not exceed 90 percent of the fair market value of the asset at the beginning of the lease term. Leases exceeding this 90 percent level are to be identified as capital leases.

As a final measure in response to the 2003 review, NIH sought HHS’s advice on whether it had $565 million in unrecorded obligations that violated the Antideficiency Act. The unrecorded obligations occurred because NIH scored its operating leases without cancellation clauses similar to GSA—that is, it scored only the budget authority that was needed to cover the annual lease payment. This was done instead of following scorekeeping guidance for an operating lease for agencies other than GSA—that is, budget authority is required for the estimated total payment expected to arise under the full term of the contract or, if the contract includes a cancellation clause, for an amount sufficient to cover the lease payments for the first year plus an amount sufficient to cover the costs associated with the cancellation clause.

NIH asked HHS whether it thought that the $565 million in unrecorded obligations was an Antideficiency Act violation. This act states that an officer or employee of the United States is prohibited from making expenditures or incurring obligations in advance of available appropriations unless otherwise authorized by law. HHS stated that it did not believe the potential $565 million in unrecorded obligations from scoring operating leases to be Antideficiency Act violations.

We concluded that no Antideficiency Act violation exists. Under the Federal Property and Administrative Services Act of 1949, as amended (Property Act), GSA is authorized to enter into a lease agreement for a term of up to 20 years to accommodate the federal government. In addition, GSA is authorized under the Property Act to delegate to the head of another federal agency most of its authorities, which includes leasing authority. When GSA delegated its leasing authority to the Secretary of HHS, who then redelegated this authority to NIH, the GSA leasing delegation signed by the Administrator specifically stated, “I hereby delegate authority to the heads of all federal agencies to perform all functions related to the leasing of general purpose space for a term of up to 20 years regardless of geographic location.”

GSA has specific statutory authority to obligate funds in advance of available appropriations. This authority provides that, when entering into multiyear leases, “the obligation of the amount for a lease is limited to the current fiscal year for which payments are due without regard to the Antideficiency Act.” Accordingly, GSA is directed by law to obligate funds for multiyear leases one year at a time, and it is exempt from the general prohibition in the Antideficiency Act against obligating the government in advance of appropriations for GSA leases. Since GSA delegated all of its leasing authorities through HHS to NIH, the provision in the Property Act relating to the obligation of multiyear leases also applies to NIH. This delegation authorizes NIH to enter into multiyear leases without recording the entire amount of the lease in the first year. Therefore, the fact that NIH entered into multiyear leases without having an appropriation for the entire amount of each lease did not constitute a violation of the Antideficiency Act.

GSA is drafting a modification to its guidance for delegated leasing authority which, according to a GSA official, will clarify that agencies with delegated leasing authority can score operating leases in the same manner as GSA does. GSA and agencies with delegated leasing authority are expected to continue to score capital leases according to OMB’s requirements.

NIH Corrected Weaknesses in Implementation of Prospectus Guidance, but Some Past Prospectus-level Leases Remain Unreported

As part of its leasing process, NIH has established decision points for identifying leases whose costs exceed a legislatively established threshold and for which a prospectus should be submitted for congressional review and approval prior to finalizing contracts. In addition, all alterations to leased buildings are reviewed by an NIH leasing official. These changes should ensure that NIH identifies leases that need to be submitted for review. However, five prior leases that should have been submitted for review still remain unreported.

The Public Buildings Act of 1959, as amended, provides for GSA to submit a prospectus for review by the appropriate Senate and House authorizing committees when the cost of a proposed construction, lease, or alteration project exceeds the legislatively established dollar threshold for leases or alterations to leased buildings, which is indexed and revised each year. For an agency with delegated leasing authority, GSA, working in consultation with the agency, prepares a prospectus for any lease involving a net annual rental—excluding services and utilities—in excess of the prospectus threshold. For alterations to leased buildings, the prospectus threshold is one-half of the lease prospectus threshold. After the prospectus is prepared, GSA submits it for approval to the appropriate congressional committees.

To address previous problems with inconsistent and informal implementation of prospectus guidance, NIH has incorporated into its leasing process several decision points for identifying any leases for which a congressionally approved prospectus should be submitted. As part of the third decision point of LeMOP—approval of a detailed strategy for meeting the need—OBSF will use the prospectus analysis formula, which it developed during NIH’s 2003 review of all leases, to conduct an independent test of the planned lease contract against the annual prospectus threshold. NIH plans to have GSA issue any lease that exceeds the prospectus limit, with NIH providing the appropriate information and support. As part of the fourth decision point—signing of the lease and obligation of the funds, OBSF will test the final lease price against prospectus thresholds to determine if the proposal conforms to applicable rules for the prospectus process. This prevents the agency from issuing a prospectus-level lease without a congressionally approved prospectus, even though the lease was initially identified as nonprospectus as part of the third decision point.

Furthermore, according to NIH’s Office of Acquisitions, ORF, it is now responsible for ensuring that the contracting for alterations to leased buildings does not exceed that prospectus threshold. To prevent any delay in the process, reviews of an alteration project in a leased building begin as early as the concept stage to determine whether a prospectus is required. The Office of Acquisitions also takes into account all other approved alterations to the leased building for the given year to ensure that the total cost of all alterations to that leased building does not exceed the prospectus threshold.

As part of the 2003 review of all its leases, NIH identified five leases that had not been sent to the appropriate congressional committees for approval, under the Public Buildings Act of 1959, as amended. GSA is to provide a lease prospectus to the appropriate congressional committees for approval prior to signing a lease. This process involves agencies with delegated leasing authority, which must identify prospectus level leases to GSA for submission. According to the Director of the Office of Acquisitions, NIH had not established a formal prospectus analysis for leases or alterations to leased buildings from 1996 to 2003. As a result, NIH did not notify GSA of the five prior prospectus-level leases that should have been submitted to the committees. While there is no legal penalty for not following the congressional prospectus process, failure to do so hinders the ability of the appropriate congressional committees to fulfill their oversight responsibilities for all prospectus-level leases. Although these five leases have been in effect for several years, GSA officials told us that it would still be appropriate for NIH to work with GSA to notify the committees of their existence. The officials noted, for example, a past instance where GSA reported, after the fact, a prospectus level lease that was issued without approval of the appropriate committees. NIH officials stated that they want to clear up any unresolved issues concerning their prospectus and budget scoring problems.

Conclusions

NIH has taken actions to formalize its processes of lease scoring and prospectus analysis by developing and implementing LeMOP, its new leasing process. The specific decision points in this process should address the problems NIH had with consistently complying with OMB’s scorekeeping guidelines and the congressional prospectus process. Because only one lease has been issued under the new process, it is too early to assess the effectiveness of NIH’s implementation of LeMOP.

An issue remains with five prior leases that were not submitted to the appropriate congressional committees for review under the Public Buildings Act of 1959, as amended. Although these leases have been in effect for several years, it is nonetheless important that information on them be submitted to the appropriate committees in order to maintain NIH’s accountability to Congress in this area and allow the committees to exercise their oversight responsibilities. NIH has expressed its desire to resolve any remaining issues concerning its prospectus and budget scoring processes.

Recommendation for Executive Action

We are recommending that the Director of NIH, using GSA as the proper channel, report to the appropriate congressional committees the five previous NIH prospectus-level leases that did not follow the congressional prospectus process.

Agency Comments

We provided a draft of this report to NIH, HHS and GSA for comment. In response, HHS provided written comments for itself and NIH. HHS concurred with our findings and recommendation and offered some technical comments that we have incorporated in this report. HHS stated that, as a matter of policy, it does not object to voluntarily complying with the GSA prospectus requirements for the five leases dealt with in the draft report. A letter from HHS commenting on our report is included as appendix I. GSA informed us orally that they had no comments.

As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies of this report to the appropriate congressional committees, the Director of the National Institutes of Health, the Secretary of Health and Human Services, the Administrator of the General Services Administration and the Director of the Office of Management and Budget. We will make copies available to others upon request. In addition, this report will be available at no cost on the GAO Web site at http://www.gao.gov.

If you have any questions about this report, please contact me at (202) 512- 2834 or goldsteinm@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix II.

Appendix I: Comments from the Department of Health and Human Services

Appendix II: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to those named above, John Finedore, Tom Keightley, Susan Michal-Smith, Chris Bonham and Tamera Dorland made key contributions to this report.