Capital Financing: Alternative Approaches to Budgeting for Federal Real Property
Released: 2014-03-12T00:00:00

Letter

Background

Since 2003, we have identified managing federal real property, including effectively managing excess and underused property and an overreliance on leasing, as a high risk issue facing the federal government. In June 2010, the President directed agencies to achieve real property cost savings through a number of measures, including disposal of excess real property and reducing leasing through consolidations and increased space utilization. In 2011, the administration proposed legislation, known as the Civilian Property Realignment Act (commonly referred to as CPRA), and accompanying bills were introduced in both legislative chambers, which would identify opportunities to consolidate, reduce, and realign the federal footprint as well as expedite the disposal of properties by building off the military base realignment and closure (commonly referred to as BRAC) processes. In May 2012, OMB issued a memorandum directing agencies to not increase the size of their civilian real estate inventory, stating that increases in an agency’s total square footage of civilization property must be offset through consolidation, co- location, or disposal of space from the inventory of that agency, a policy that became known as “freeze the footprint.” As a result, acquisition has become more about consolidation and identifying opportunities to share space rather than acquiring new space.

Pursuant to the Government Performance and Results Modernization Act, OMB identified real property as a Federal Government priority goal. Agencies are currently working on 3-year Revised Real Property Cost Savings and Innovation Plans to maintain the fiscal year 2012 square footage baseline for federal office and warehouse inventory. Agencies have been encouraged to work collaboratively with other agencies and GSA to find opportunities for smarter space usage through co-locations and consolidations. We have previously reported that real property decisions draw considerable attention during congressional deliberations over federal appropriations. Stakeholders such as Congress, OMB, and the real property-holding agencies have an interest in how the federal government carries out its real property acquisition, management, and disposal practices.

Ideally, when an agency has a real property need, such as repairing or altering its headquarters building, it determines how to meet that need through internal prioritization and the capital planning process. As part of the capital funding process, shown in Figure 1, an agency prepares a business case analysis and considers how to fund the project, including whether to request upfront funding. If an agency chooses to request upfront funding from Congress, it submits a business case to Congress through the annual appropriations process. If Congress approves the project, it may authorize spending for the project by appropriating full upfront funding to the agency. Once an agency has obtained upfront funding, it can obligate funds to complete “useful assets” of the project. During implementation as well as at completion of the project, an agency may realize returns, such as proceeds from disposal. The completion of the project informs agency prioritization and ongoing planning for future real property projects.

Budget Scorekeeping

Budget scorekeeping rules are meant to recognize costs as funding decisions are being made. These rules were established to ensure that the scorekeepers—that is, the House and Senate Budget Committees, the CBO, and OMB—can measure the effects of legislation consistently and conclude that they meet specific legal requirements. These rules 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.

Scorekeeping in the Federal Budget What is scorekeeping?

Scorekeeping is the process of estimating the budgetary effects of pending legislation and comparing them to a baseline. The process allows Congress to compare the cost of proposed budgetary policy changes to existing law and to enforce spending and revenue levels agreed upon in the budget resolution.

Who are the scorekeepers?

Guidelines are established by the OMB, the CBO, and the Senate and House Budget Committees. Scorekeepers have an ongoing dialogue and may revise rules as required. Budget Committees and CBO apply the rules to estimate the costs associated with proposed legislation. OMB uses the rules to determine amounts to be recognized in the budget when an agency signs a contract or enters into a lease. The House and Senate Budget Committees make available monthly summary scorekeeping reports.

We have previously found that upfront funding is the best way to ensure recognition of commitments embodied in budgeting decisions and maintain government-wide fiscal control. As shown below, under scorekeeping rules, for a purchase or a capital lease the full cost of the project must be recorded in the budget in the year in which the budget authority is to be made available. In contrast, operating leases are intended for short-term needs, and under the scorekeeping rules, only the amount needed to cover the first year’s lease payments plus cancellation costs need to be recorded in the budget in that year.

Summary of Scorekeeping Guidelines for Purchases and Leases When an agency is granted the authority to enter into a contract for the purchase, lease- purchase, capital lease, or operating lease of an asset, budget authority and outlays may be scored as follows: Lease-purchases and Capital Leases: budget authority will be scored against the legislation in the year in which the budget authority is first made available in the amount of the estimated net present value of the government’s total estimated legal obligations over the life of the contract, except for imputed interest and identifiable operating expenses.

Operating leases: budget authority will be scored against the legislation in the year in which the budget authority is first made available in the amount necessary to cover the government’s legal obligation. The amount scored will include the estimated total payments expected to arise under the full term of the lease contract, or, if a cancellation clause is included in the lease, for the first fiscal year and the amount of cancellation costs.

Purchases: no special rules apply to scoring purchases of assets (whether the asset is existing or is to be manufactured or constructed). Budget authority is scored in the year in which the authority to purchase is first made available in the amount of the government's estimated legal obligations.

To distinguish lease purchases and capital leases from operating leases, the following criteria will be used for defining an operating lease:

Ownership of the asset remains with the lessor during the term of the lease and is not transferred to the government at or shortly after the end of the lease period.

The lease does not contain a bargain-price purchase option.

The lease term does not exceed 75 percent of the estimated economic lifetime of the asset.

The present value of the minimum lease payments over the life of the lease does not exceed 90 percent of the fair market value of the asset at the inception of the lease.

The asset is a general purpose asset rather than being for a special purpose of the government and is not built to unique specification for the government as lessee.

There is a private-sector market for the asset.

Using an operating lease—or successive operating leases—for a long- term space need may result in resource allocation decisions for which the budgeting process may not have considered the full financial commitment over the full length of time the space need exists. Consequently, costly operating leases may appear on paper to be preferable to less-costly alternatives such as major construction or renovation projects that must compete for full funding.

GSA’s Role

Within the vast portfolio of government owned and leased assets, GSA plays the role of broker and property manager to many federal civilian agencies, although some agencies—including USDA, VA, and Interior— have independent authority related to real property. GSA has a large portfolio of federally-owned and leased properties that it rents to its federal agency customers. As of fiscal year 2011, GSA had a total of 374.6 million rentable square feet in its inventory, of which 192.7 million— slightly more than half—were leased.

The Federal Buildings Fund (FBF), administered by GSA, is a fund established by the Public Buildings Act Amendments of 1972. The FBF is the primary source of funds for operating and capital costs associated with federal space. The FBF is funded primarily by income from rental charges assessed to tenant agencies occupying federally owned and GSA-managed and -leased space that approximate commercial rates for comparable space and services. Congress exercises control over the FBF through the appropriations process that sets annual limits on how much of the fund can be obligated for various activities. In addition, it periodically provides supplemental appropriations for the Fund. For example, the Fund received $5.6 billion as part of the American Recovery and Reinvestment Act of 2009. GSA may incur obligations and make expenditures from the FBF in five categories of activities: (1) rental of space, (2) repairs and alterations, (3) construction and acquisition of facilities, (4) building operations and maintenance, and (5) installment acquisition payments (funds debt incurred as the result of building acquisition and lease purchase arrangements). Revenue from the federally-owned facility inventory managed by GSA is the main source of the FBF’s operating income used to fund repair and alteration, new construction activities, and operations and maintenance. By statute, GSA is required to provide a prospectus for each proposed lease with a net annual rent above the prospectus threshold—$2.79 million in fiscal year 2013, which GSA’s Administrator is authorized to adjust annually—or capital project over that threshold, including acquisition, new construction, and repair and alteration projects. As shown in Figure 2, each prospectus is reviewed and approved by both OMB and Congressional authorizing committees.

GSA has not conducted 30-year present value analyses as part of its prospectus process since the mid-1990s, as advised by OMB. Such analyses help weigh the cost over time of leasing versus owning an asset to promote efficient resource allocation for the civilian agencies within GSA’s real property portfolio. In September 2013 we reported that the decision to halt this type of formal analysis for high-value leases has limited the transparency of the prospectus process. We recommended that lease prospectuses include a description of the length of time an agency estimates a need for a space, how long the agency has leased that particular space, and major investments necessary. For spaces for which an agency has a long-term projected need, we recommended that GSA include an appropriate form of cost-to-lease versus cost-to-own analysis. GSA concurred with this recommendation. Although at times leasing versus owning analyses found leasing to be a more cost effective option, it often concluded that ownership would be cheaper than leasing; however, in many cases where ownership was found to be the better option, GSA ultimately recommended leasing due to funding constraints.

Case Study Agency Officials Experienced Challenges Receiving Full Upfront Funding for Federal Real Property Projects

Officials at four selected agencies—GSA, USDA, VA, and Interior— experienced challenges receiving full upfront funding for federal real property projects through the annual appropriations process. For example, GSA officials told us that obtaining upfront funding through appropriations is difficult and thus presents a barrier to ownership, resulting in a reliance on leased space. USDA officials said that, given current fiscal pressures, they do not routinely request acquisition funds. Interior officials told us that the Department has had a moratorium on new construction since 2010 and that any upfront funding received through the annual appropriations process goes towards necessary renovations to existing property. Although VA requests and receives appropriations for some real property construction projects, it has a significant backlog of incomplete major construction projects that have not received funding. The Veteran’s Health Administration (VHA) requested $215 million for major construction funding in fiscal year 2014 and estimates that it would require $5.8 billion to address its current backlog.

Budget constraints have resulted in limited acquisitions at GSA, Interior, and USDA. For example, GSA’s sole acquisition between 2008 and 2012 resulted from exercising a purchase option on a preexisting lease. GSA renewed its lease at Columbia Plaza in Washington, D.C. for the Department of State (State) in 1992. As part of an agreement to invest $30.6 million in renovations to the building at that time, GSA was directed by congressional resolution to “attempt to include a purchase option in the lease contract.” GSA did not have the option to purchase the building in 1992 but it negotiated a purchase option as part of the terms of the 20- year lease. As the expiration of the lease neared, GSA concluded that a mission need for the building remained and that acquiring the building would be financially advantageous. Under the original contract, GSA could purchase the building for $100 million though the 2009 appraised value was $150 million. A 30-year present value analysis concluded that acquiring the building would result in an annual cost advantage of $12 million over continuing to lease and, in 2012, GSA exercised its purchase option. Because State was already occupying Columbia Plaza, GSA officials said that they mitigated a portion of the acquisition cost by avoiding certain costs typical to the construction process including acquiring land, phased funding for construction, paying for interim office space, and final relocation to the new space. However, purchase options may cost more over the life of a lease than buying a building upfront. Figure 3 shows that although the contract purchase price was $100 million, adding in the initial renovation costs and lease payments made over the 20-year term, in total the acquisition cost to the government was $258 million.

Limitations on obligations constrain funding for real property, especially for repairs, alterations, and new construction. The difference between receipts collected in the FBF and the amount authorized for annual obligations affected one of our case study agencies that rents property through GSA. Interior officials said that GSA has been unable to obtain FBF funding through the annual appropriations process to complete renovations in Interior’s federally-owned and GSA-managed headquarters building. As a result, Interior officials said that they have not been able to realize the savings they anticipated for a full renovation, such as energy savings. The FBF’s balance has increased significantly in recent years, growing from $56 million at the beginning of fiscal year 2007 to $4.7 billion at the end of fiscal year 2013. As we previously reported, the increased balance has primarily resulted from the growing difference between the resources deposited into the FBF and the level of funds GSA is authorized to spend. GSA officials noted that when Congress provides less obligational authority than requested, repairs, alterations, and new construction projects for GSA-managed buildings are most affected because available funds are first used to pay leasing, operations and maintenance, and debt costs. As a result, GSA’s obligations authority for repairs and alterations projects decreased from $855 million in 2005 to $280 million in 2012. GSA officials noted that when prioritizing requests for repair and alteration projects, they consider asset condition and performance; life safety and compliance with laws and regulations; customer considerations, including consolidation and reduction in space; financial viability, including lease cost avoidance; and improvements to utilization rates and recapturing vacant space.

With regard to the disposal of federal property, officials at USDA, which has authority to retain proceeds from sales and disposals, cited financial obstacles to these initiatives, such as little market demand. For example, USDA’s Forest Service was given authority in 2005 to retain proceeds from disposals; it typically uses these funds for critical maintenance work on its properties or to prepare other buildings for sale. Forest Service officials said that except for a few administrative buildings in affluent areas sold for a high return, the return on investment for disposals, often for structures on land Forest Service would like to retain, is minimal. In 2011, the Forest Service reported that it would cost $120 million to dispose of property with a salvage value of $5 million.

Non-financial barriers to disposal also exist, resulting in underused agency property. These obstacles include remote locations, necessary environmental cleanup, or limitations on the use of property. Historically significant properties are also challenges. For example, VA officials said that VA’s historical buildings often require significant cleanup and preparation prior to disposal, and the agency must often address significant stakeholder interests. In addition, VHA’s buildings are often on campuses or are medical facilities, limiting potential buyers or lessees to those with missions similar to VA. VHA currently has about 250 vacant buildings with no defined need, totaling more than 4 million square feet. Interior officials stated that the land Interior owns is primarily stewardship land for preservation, and thus Interior has few buildings or land to sell. Instead, excess buildings on stewardship lands are typically demolished. To facilitate the disposal of excess property, Interior includes funding for disposals as part of its planning process—it requires each bureau to set aside 3 percent of its property budget for disposals of excess property.

Officials at GSA and USDA noted that the authority to retain proceeds provides a key incentive to initiate disposal transactions. For example, officials at GSA, which provides disposal services across the federal government, stated that the vast majority of current disposal transactions are by agencies or components that have the authority to retain the proceeds from sales or disposals. They also said that agencies without this authority may have less incentive to dispose of underused property as they must take money from competing budget priorities to invest in readying a property for sale. USDA officials said that because resulting proceeds are remitted to the general fund of the U.S. Treasury as miscellaneous receipts, components without authority to retain proceeds have little incentive to request full upfront funding for disposal costs such as site cleanup, resource surveys, title and legal preparation, and auction fees.

Alternative Funding Mechanisms Helped Agencies Meet Their Real Property Needs, but Also Posed Challenges

Agencies Use a Variety of Funding Mechanisms to Meet Their Real Property Needs

Selected agencies have been authorized to use a variety of funding mechanisms as an alternative to full upfront funding to meet their real property needs. Funding mechanisms leverage both monetary resources, such as retained fees, and non-monetary resources, such as property exchanged in a land swap or space offered in an enhanced use lease (EUL). In some cases, the funding mechanism may function as a public- private partnership intended to further an agency’s mission by working with a partner to leverage resources. Some of these mechanisms allow the private sector to provide the project’s capital—at their cost of borrowing. The U.S. federal government’s cost of borrowing is lower than in the private sector. When the private sector provides the project capital, the federal government later repays these higher private sector borrowing costs (e.g., in the form of lease payments). In some cases, factors such as lower labor costs or fewer requirements could potentially help balance the higher cost of borrowing, making partner financing less expensive. Table 1 outlines selected funding mechanisms, considerations for each mechanism based on our past work, and examples of mechanisms used by the selected agencies. Appendix III identifies prior reports where we provide more information on alternative funding mechanisms.

Alternative funding mechanisms are not universally available to all agencies. Moreover, even within an agency, legal authorities may differ across agency components. For example, the Forest Service and ARS— both components of USDA—have different legal authorities to use alternative funding mechanisms. For example, the Forest Service has the authority to retain fees and ARS has the authority to enter into land swaps.

Instead of upfront funding, NPS uses retained recreation fees to fund high-priority projects linked to visitor need. NPS’s recreation fees, which are authorized by the Federal Land Recreation Enhancement Act, require that not less than 80 percent of retained recreation fees be spent at the site at which fees are collected while the remaining 20 percent is pooled to fund projects that are national priorities. This 20 percent of the retained recreation fees provides NPS additional flexibility. In 2011 Interior determined that it would request line item construction funds in fiscal year 2014, but later identified fiscal year 2012 funds from an alternative funding mechanism, retained recreation fees, for the Herring Cove and Nauset Light Beach facilities renovations in Massachusetts, negating the need to seek additional funding. Interior has internal processes for prioritizing projects for line item budget requests and for allocating the retained recreation fees to high-priority projects, which NPS officials reported allowed Interior to complete the renovations more quickly than would have otherwise been possible with full upfront funding.

In 1991, Congress authorized VA to enter into EULs. VA’s available legal authorities also framed its 2008 decision to enter into an EUL with a nonprofit organization in Dayton, Ohio. VHA’s partner in the EUL leveraged nonfederal funds to renovate a building and provide housing and services to homeless veterans. The Dayton, Ohio Veterans Affairs Medical Center had underused historic buildings. Officials reported that the buildings’ historic status made it difficult to dispose of or demolish the buildings. The Volunteers of America of Greater Ohio approached VA about entering into an EUL; they agreed to provide 50 beds of transitional housing and related services to homeless veterans in the property that VA wanted to take off its inventory in exchange for financial and nonfinancial considerations. VA determined that renovating the building with appropriated funds would result in the highest upfront costs to VA and would forgo the benefit of any private-sector funding or participation. VA accepted the Volunteers of America’s proposal and the Volunteers of America paid VA rent for the space and were responsible for renovating, operating, and maintaining the building as well as for providing housing and services to homeless veterans. By partnering with the Volunteers of America on this EUL, VA estimated that it has cumulatively achieved almost $2.8 million in cost avoidance and that the project has provided services valued at more than $2 million while costing the VA less than $500,000. Without the authority to enter into EULs or other alternative funding mechanisms, VA officials said that VA would not have been able to move forward with this project. VA’s EUL authority was amended in 2012. VA may no longer accept in-kind consideration for EULs and may only enter into an EUL for the provision of supportive housing.

Risk Sharing, Managing Stakeholder Relationships, and Other Factors Affect Project Outcomes

Projects with alternative funding mechanisms involve multiple forms of risk—both implicit and explicit—that must be shared between the agency and any partner or stakeholder. We have previously reported that project decisions should reflect both the likely risk and the organization’s tolerance for risk. Incorporating risk assessment and risk management practices into decisions can help ensure that the organization recognizes and is prepared to manage explicit risks (e.g., financial and physical) and implicit risks (e.g., reputational). For example, clearly defined lease terms helped VA manage financial risk associated with the Dayton, Ohio EUL when its partner sought to share costs for unexpected building repairs for the building leased. During renovation, asbestos was discovered in the building and VA’s partner sought a financial contribution from VA to help offset some of the cost of the cleanup. Because the contract clearly held the partner financially responsible for unexpected expenses, VA was not liable for the cleanup costs.

We have also previously reported that when working with a partner, it is important to actively manage the relationship. Formalizing collaborations between the partners, including documenting dispute resolution processes, can enable productive partner interactions. For example, VA stepped in to more actively engage its partner, the city of New Orleans, in a land swap to build a hospital after Hurricane Katrina. To monitor project timelines and goals, officials representing all partners—including VA’s Chief of Staff, the logistics manager and city counterparts—participated in a steering group. When it became apparent that the city of New Orleans was unable to meet its initial goal of having the property in construction- ready condition within 1 year as outlined in a memorandum of understanding (MOU), the group began to meet weekly. VA and the city of New Orleans amended the MOU to permit phased delivery of the construction ready site. Additionally, New Orleans VA Medical Center continued to have quarterly meetings with the community. Officials reported that early coordination contributed to increased efficiency and improved outcomes and helped the project overcome challenges such as managing to meet different federal and state fiscal years and funding cycles, as well as different federal, state, and local policies.

In addition to an agency’s ability to share risk and manage stakeholder relationships, the availability of an appropriate partner and the geographic location of the property may affect the use and success of an alternative funding mechanism. We have previously reported that partners should bring complementary resources, skills, and financial capacities to the relationship. Agency officials reported that the geographic location and the condition of a property can make it difficult to locate a willing buyer and expensive to dispose of the property. For example, according to Forest Service officials, many of the structures that may be disposed of are of little value and are on land Forest Service will retain, such as a cabin in the woods. Additionally, these facilities may be located in remote areas that are difficult and costly to access with the construction equipment necessary for demolition. As part of the auction process, Forest Service typically asks for bids at salvage value and requires that the structure be removed from the property at the buyer’s expense. However, because of the expense to the buyer of the building removal and any necessary environmental remediation, properties are usually sold for low prices. The Forest Service benefits from selling the property— even for a low value— because it is no longer financially responsible for costs such as maintenance, demolition, property removal, and environmental remediation. For example, ARS needed to acquire land or build an incinerator to dispose of excess manure. ARS does not have the legal authority to purchase land valued at more than $100 and the incinerator would have been significantly more expensive than this limit, prompting ARS to consider a land swap. Because of these legal, cost, and anticipated stakeholder challenges, ARS officials said that ARS held onto the land for about 10 years while seeking an appropriate partner with whom to exchange land. When ARS identified an appropriate partner, it completed a land swap with the city of Ames, Iowa. ARS officials reported that this outcome was more efficient and environmentally friendly than the alternative of building an expensive incinerator.

Alternative Budgetary Structures Have Potential to Help Congress and Agencies Recognize the Costs and Returns of Real Property Projects Upfront and Over Time

While different funding mechanisms have been used as an alternative to obtaining upfront funding for federal real property projects, changes to the budgetary structure itself—within the bounds of the unified budget that encompasses the full scope of federal programs and transactions—may also help agencies meet their real property needs. Alternative budgetary structures may be established to change budgetary incentives for agencies and therefore help Congress and agencies make more prudent long-term fiscal decisions. Such alternatives may include changing existing or introducing new account structures to fund real property projects. These alternatives could promote more complete consideration of the full costs of projects and associated returns over time as well as provide agencies with greater flexibility to manage their real property needs. This could be aided by agencies completing comprehensive business case analyses detailing project costs and returns in a process similar to GSA’s prospectus process. A business case analysis might include details about how the project aligns with an agency’s strategic plan, a needs assessment and gap identification, an alternatives evaluation, a life-cycle cost analysis, a schedule of project milestones and deliverables, and a cost-benefit analysis.

We explored options for changes within the current discretionary budget structure and options on the mandatory side of the budget by reviewing our past reports and discussing possible options with federal budget specialists and industry experts. We make no recommendations with respect to adopting these options. However, understanding the tradeoffs associated with different aspects of alternative budgetary structures can provide decision makers with more information and support decisions about funding federal real property projects.

Budgeting and Capital Planning Principles Offer a Framework for Considering Alternative Budgetary Structures

To assist congressional and agency-level decision makers in considering alternative budgetary structures, we identified two key budgeting and capital planning principles. An alternative budgetary structure should do two things: promote transparency and fiscal control with regard to the funding of federal real property projects; and provide agencies the flexibility to facilitate the acquisition, repair and alteration, and disposal of federal real property in support of federal missions.

The two principles are each further supported by elements that may help frame the consideration of alternative budgetary structures. As decision makers consider these budgetary structures, they must balance tradeoffs between the two principles to understand whether the options would allow for full upfront cost recognition, establish accountability mechanisms to track cost recovery and return on investment, and provide timely funding to promote an appropriately sized federal real property inventory. The principles may interact and conflict with each other and each alternative budgetary structure has benefits and challenges. Moreover, the weight that different decision makers might place on the principles will vary, depending on the desired level of involvement. Table 2 provides an overview of the principles.

Discretionary Budget Authority Options Could Provide a Straightforward Means of Dedicating Funding to Real Property Projects

Changes to the current discretionary structure for funding federal real property projects may provide a relatively straightforward means of dedicating funding to federal real property while creating room for additional agency flexibility. However, tradeoffs are inherent in budgeting and these changes may affect spending for other discretionary programs competing for mission critical resources.

Modify the FBF: The FBF is a discretionary fund that receives revenue through rental payments from agencies that lease buildings that GSA manages. GSA’s authority to access these funds is determined through the annual appropriations process. As previously described, resources deposited into the FBF have exceeded the amount that Congress has appropriated to GSA in recent years, resulting in a $4.7 billion difference between the full balance of the FBF and amounts made available for spending in fiscal year 2013. Congress provides authority to GSA to incur obligations and make expenditures from the FBF in five categories of activities, such as repairing and altering GSA-managed buildings and constructing new buildings. However, GSA officials said that because available funds must first be used to pay costs associated with other authorized activities, such as leasing privately owned space, operations and maintenance of GSA-managed buildings, and debt incurred from building acquisitions and lease purchase arrangements, repairs and alterations and new construction are the most affected. For example, GSA’s obligational authority for repairs and alterations projects decreased from $855 million in 2005 to $280 million in 2012. As a result, customer agencies are being charged for services that the GSA may be limited in its ability to provide in a timely manner. To meet agencies’ real property needs, the FBF could be modified in the following ways:

Make the full balance of the FBF available: Congress could make the full balance of the FBF available to GSA. GSA would then have resources to provide the full array of services for which it charges agencies, including repairs and alterations. In 2011, we reported that GSA’s overall obligational authority has trended downward in recent years, resulting in GSA reducing spending on repairs and alternations and new construction. GSA officials and OMB staff noted that such repairs have the potential to be more expensive if delayed. Making the full balance of the FBF available to GSA would increase funding for GSA to complete projects for agencies, but it would mean less congressional fiscal control and less funding for other mission critical needs. OMB staff noted that with access to all of its receipts, the FBF would be able to meet necessary recapitalization needs, such as major repairs and alterations.

Adjust the FBF pricing structure to exclude certain major renovations: To ensure that the GSA charges cover all services provided under agreements with tenant agencies, GSA could choose to exclude certain major renovations from agreed upon services. GSA could then reduce rents to cover only operations and ongoing maintenance costs of federally-owned buildings. Appropriations decisions to fund capital repairs with rent savings would be made by the agencies’ appropriations subcommittees. In effect, this would shift the locus of decision making from GSA’s appropriations subcommittee to the appropriations subcommittees of affected agencies. With the change in pricing structure, agencies would have the ability to decide whether to complete funded repairs and alterations in house or use contractors or shared service providers. However, because this option addresses GSA-managed buildings, there may not be an incentive for agencies to carry out this devolution of responsibility amid other priorities and it may be difficult for multi-agency tenant buildings to obtain funding for necessary renovations from their respective appropriations subcommittees. Nevertheless, an agency that uses a GSA-managed building as its headquarters, such as Interior, which has been unable to complete renovations through GSA, would gain some flexibility in completing repairs and alterations by requesting funding directly from its subcommittee. GSA officials noted that separating capital investment funding decisions from operations and maintenance funding decisions could make it difficult to manage the portfolio of government-owned and -leased assets in a strategic manner. They and OMB staff agreed that, without the shared funding aspect of the FBF, it was unlikely that agencies would have sufficient funds available to complete repairs and alterations, even if they were able to maintain the same level of appropriations.

Delay recognition of receipts until projects are ready for funding: To better match FBF receipts with expenses, the recording of receipts from agencies could be held in a temporary account until transferred to the FBF, temporarily recorded as a mandatory receipt until transferred to the FBF as a discretionary offsetting collection. The receipts would be recorded in the FBF account when funds are appropriated for each “useful asset” of a project. Receipts from agencies to the FBF would then be recorded as discretionary offsets in the fiscal year in which they are appropriated to GSA.

Carve out spending from the discretionary allocations: One approach to further invest in federal real property projects and meet governmentwide priorities could be to allocate resources at the full appropriations committee level, outside the competing priorities of the appropriations subcommittees. The appropriations subcommittees have jurisdiction over different agencies and are responsible for appropriating resources among their relevant agencies. Congress could agree to carve out of the full appropriations committee’s 302(a) allocation—the level of spending that the full appropriations committee is authorized to distribute—the amount for federal real property, effectively decreasing the cap for the subcommittees’ 302(b) allocations—the level of spending that the subcommittees are authorized to distribute to their respective agencies. This would free up funds for acquiring, disposing of, or repairing and altering space and provide a guaranteed funding level to real property; it would also protect it from competition with other programs that are more focused on spending for consumption activities. In the past, Congress has similarly chosen to allocate resources at the full committee level for certain programs. For example, in 1999 there were five discretionary categories with a separate spending limit “carved out”— violent crime reduction, defense, non-defense, highway, and mass transit. As a result of these carve outs, total spending determinations were made at the full committee level rather than at the subcommittee level.

Carving out of the full committee’s allocation spending for federal real property would also “crowd out” spending for all other discretionary programs that might represent a higher priority for the nation. For example, we have previously reported that if a guaranteed minimum funding level for a certain program is carved out of the full committee allocation, and total spending is not increased commensurately, then the remaining activities must compete for the reduced amount that is left. Alternatively, the total cap for the subcommittees’ allocation could be increased to dedicate funding to real property projects. The adjustment of the cap could be triggered by the approval of project proposals accompanied by business case analyses.

Related Questions on the Implementation of Discretionary Options: 1. If individual agencies and their respective appropriators and authorizers are responsible for making decisions regarding real property projects, would they have the real property expertise to initiate, implement, fund, authorize, and oversee real property acquisition, repairs/alteration and disposal? 2. If an appropriations carve out for federal real property is made at the full appropriations committee level:

How narrowly would those funds be defined? (Deferred maintenance, costs related to preparing properties for disposal)

How would a business case analysis be incorporated into obtaining access to carved-out funds?

How would the carve out be divided amongst appropriations subcommittees?

Might the creation of a Reserve Fund achieve the same purpose?

Mandatory Budget Authority Options Could Increase Agency Flexibility and Improve Cost-Benefit Recognition But Would Require a Different Means of Assuring Fiscal Control

Mandatory budget authority options, such as creating a revolving fund with borrowing authority (e.g., a capital acquisition fund) or a dedicated fund with permanent, indefinite budget authority, could enable the recognition of costs and returns associated with complex real property projects upfront and over time. However, these options would require establishing new account structures and may present different challenges compared to discretionary budget authority options. Existing account structures, such as the Tennessee Valley Authority fund, may provide some insight for policymakers in considering the structure of the revolving fund with borrowing authority or permanent, indefinite budget authority.

Borrowing authority and permanent, indefinite budget authority could be provided outside of the annual budget and appropriations cycle, allowing for a greater degree of agency flexibility when planning for and carrying out real property projects. Controls on access to funds in both scenarios could be based on comprehensive project proposals with a business case analysis completed by agencies and submitted to the fund manager, OMB and the Congress to ensure their agreement that the project warrants access to this type of funding. This analysis would describe, among other aspects, the nature of the project and potential savings or costs avoided. If the proposal was accepted, funding could be provided for each useful asset. For each useful asset, agencies might provide updated business case analyses, which could include reestimates of both costs and returns.

Mandatory budget authority options may also present opportunities to promote collaboration among agencies with different appropriators and authorizers as well as allow for better alignment of upfront costs with longer-term returns. These options could result in a centralized funding source available to all agencies, which could facilitate consolidation, sharing space, and partnering among agencies for other real property needs. Mandatory options could also be established to receive returns, such as proceeds from disposals, or enforce the recognition of non- monetary returns, such as cost avoidance or cost savings, through revised business case analyses provided by agencies as they complete useful assets of projects. Despite these benefits, mandatory budget authority options could result in a shift of the locus of decision making from appropriators to authorizers, and would create new management and oversight responsibilities for federal entities. In addition, under the pay-as-you-go (PAYGO) budgetary enforcement mechanism, mandatory budget authority options would require costs to be offset by an increase in mandatory receipts or a decrease in mandatory spending for other programs. Nonetheless, these options could result in cost savings and cost avoidance over the long term.

Create a capital acquisition fund (CAF): Congress could provide budget authority in the form of borrowing authority to a governmentwide capital acquisition fund (CAF) managed by a single agency, such as GSA.

In contrast to a department-level CAF, which we have previously reported on, a centralized governmentwide CAF could provide funding for real property projects for all agencies. The fund could complement the FBF by providing upfront funding for complex, multi-prospectus level projects or projects estimated to exceed a certain total cost threshold while the FBF could be used for relatively straightforward rental and maintenance expenses. The governmentwide CAF could be subject to a borrowing limit and provide upfront funding for the full cost of projects (or useful assets of projects). As depicted in Figure 4, a governmentwide CAF could be established to: 1. Use its authority to borrow from the Federal Financing Bank (FFB) to fund real property projects agreed upon by Congress, OMB and the CAF manager on a project-by-project basis for all agencies. 2. Use annual payments made by agencies to the CAF to repay the loan from the FFB. The annual payments—provided by agencies’ subcommittee appropriators—would be principal and interest amortized over the useful life of the asset, allowing the agency to spread the project cost over time. 3. Automatically receive other monetary returns associated with real property projects to be used for future real property projects or deficit reduction. During implementation as well as at completion of projects, agencies would inform the CAF (along with Congress and OMB) about all returns, including nonmonetary returns, such as cost avoidance or cost savings, via revised business case analyses.

Establish a dedicated fund with permanent, indefinite budget authority: Congress could pass legislation to establish a governmentwide, dedicated fund with permanent, indefinite budget authority instead of borrowing authority. Similar to the CAF, this fund could be managed by a single agency, such as GSA. As depicted in Figure 5, it could automatically receive sums as needed, eliminating the need for annual appropriation to acquire, dispose of, or repair and alter federal real property. The dedicated fund could be at least partially replenished as agencies return net proceeds, such as proceeds from the sale of a building. The fund could complement the FBF by providing upfront funding for complex, multi-prospectus level projects or projects estimated to exceed a certain total cost threshold while the FBF could be used for relatively straightforward rental and maintenance expenses. One concern with providing permanent, indefinite budget authority is that it could reduce agency incentives to provide credible cost estimates in their business case analyses; initial estimates might be artificially low if agencies are held harmless for additional costs that result from price changes.

Related Questions on the Implementation of Mandatory Options: 1. What would be the budget enforcement implications for providing permanent, indefinite budget authority and borrowing authority in the mandatory options? Given that federal budgeting rules require that increases in mandatory spending be offset by decreases in other mandatory spending (or an increase in mandatory receipts), where would the offset come from to meet this condition? 2. How narrowly would the use of the mandatory options be defined?

For example, would it be meant only for civilian federal real property needs? 3. Would the congressional locus of decision making regarding proposed projects reside with appropriators or authorizers? 4. How would the business case analysis process work? What criteria would be used to consider proposed projects for approval? 5. How would appropriators be involved in the business case analysis process? 6. What mechanisms could be used to ensure that returns are realized in future years? 7. What budget process changes would be needed to ensure that subcommittee appropriators would provide funding to agencies to make annual payments to the CAF to repay the FFB in future years?

Concluding Observations

A central goal of the budget process is to assist the Congress in allocating governmentwide resources efficiently. In the context of federal real property, recognizing costs up front when resource allocation decisions are made is one way to achieve this goal. Given that full upfront funding is an effective way to ensure recognition of commitments embodied in budgeting decisions, an examination of budgetary changes that could improve cost-benefit recognition provides an opportunity to help Congress achieve this goal. Our selected agencies have experienced challenges receiving full upfront funding for federal real property projects through the annual appropriations process and instead have used alternative funding mechanisms, such as public-private partnerships and operating leases to meet long-term needs.

In times of fiscal pressure, employing alternative funding mechanisms to carry out real property projects can appear attractive to agencies because it does not first require obtaining full upfront funding. However, there are inherent risks in using an alternative funding mechanism and many factors affect the outcome. For example, employing alternative funding mechanisms may result in funding federal real property investments without recognizing their true, full costs. This could mean that assets financed through alternative mechanisms may be selected over other equally worthy projects that are competing for full upfront funding. Moreover, with the administration’s emphasis on “freezing the footprint,” investment decisions that do not recognize costs upfront and returns over time may not result in an appropriate assessment of the size and cost of the federal real property inventory.

We have presented options for alternative budgetary structures that congressional decision makers may wish to consider. Alternative budgetary structures, such as modifying the Federal Buildings Fund (FBF) or establishing a mandatory dedicated fund, could help them recognize a project’s full upfront costs and returns over time. While these options could increase flexibility for agencies in addressing their real property needs, they could also result in less fiscal control for Congress. However, if accompanied by appropriate congressional oversight and rigorous financial management, these options may be useful in facilitating prudent real property investment within the current unified budget structure.

There is no single best option, and all options we explored would have considerable challenges that would need to be weighed against potential benefits. In addition, there are broader considerations associated with funding real property projects beyond the scope of this report. Both Congress and agencies have a role in effectively managing real property projects. The authorization or use of an alternative funding mechanism or an alternative budgetary structure requires consideration of tradeoffs to arrive at a deliberate choice that neither creates disincentives for agencies to seek upfront funding nor minimizes fiscal control required by Congress.

We provided a draft of this report for review and comment to the Secretaries of the Departments of Agriculture (USDA), Interior, and Veterans Affairs (VA), and to the Administrator of the General Services Administration (GSA). All agencies generally concurred with our findings. In his written response, the VA Chief of Staff discussed challenges with several of the potential alternative budgetary structures outlined in the report. As we say in our report, while we explored alternative budgetary structure options, each option has both benefits and challenges and we make no recommendations with respect to adopting any of these options. Further, our report states that any potential mandatory alternative budgetary structure to fund large projects would be used by agencies voluntarily, complementing upfront funding through the appropriations process and the Federal Buildings Fund. We further clarified this point in our report. In his written statement, GSA’s Administrator expanded upon the challenges that we report agencies experience in funding upfront costs that could lead to long-term savings. He also stated that some of the described alternative budgetary structures would be more effective than others. USDA, Interior, and VA provided technical comments, which we incorporated as appropriate. We also provided a copy of the report to the Office of Management and Budget, which provided technical comments that we incorporated as appropriate.

We are sending copies of this report to the Secretaries of Agriculture, Interior, and Veterans Affairs and to the Administrator of the General Services Administration. In addition, the report is available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report please contact me at (202) 512-6806 or irvings@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 key contributions to this report are listed in appendix IV.

Appendix I: Comments from the General Services Administration

Appendix II: Comments from the Department of Veterans Affairs

Appendix III: Selected Related GAO Work

Alternative Funding Mechanisms

GAO, Capital Financing: Partnerships and Energy Savings Performance Contracts Raise Budgeting and Monitoring Concerns, GAO-05-55 (Washington, D.C.: Dec. 16, 2004).

GAO, Budget Issues: Alternative Approaches to Finance Federal Capital, GAO-03-1011 (Washington, D.C.: Aug. 21, 2003).

GAO, Federal Buildings: Funding Repairs and Alterations Has Been a Challenge—Expanded Financing Tools Needed, GAO-01-452 (Washington, D.C.: Apr. 12, 2001).

GAO, Federal Real Property: GSA Should Clarify Savings Goals for the National Broker Program, GAO-14-14 (Washington, D.C.: Oct. 31, 2013).

GAO, Federal Real Property: Greater Transparency and Strategic Focus Needed for High-Value GSA Leases, GAO-13-744 (Washington, D.C.: Sept. 19, 2013).

GAO, Federal Real Property: Overreliance on Leasing Contributed to High-Risk Designation, GAO-11-879T (Washington, D.C.: Aug. 4, 2011).

GAO, Department of Energy: Status of Loan Programs, GAO-13-331R (Washington, D.C.: Mar. 15, 2013).

GAO, Military Bases: Opportunities Exist to Improve Future Base Realignment and Closure Rounds, GAO-13-149 (Washington, D.C.: Mar. 7, 2013).

GAO, Federal Real Property: Improved Cost Reporting Would Help Decision Makers Weigh the Benefits of Enhanced Use Leasing, GAO-13-14 (Washington, D.C.: Dec. 19, 2012).

GAO, Renewable Energy Project Financing: Improved Guidance and Information Sharing Needed for DOD Project-Level Officials, GAO-12-401 (Washington, D.C.: Apr. 4, 2012).

GAO, Excess Facilities: DOD Needs More Complete Information and a Strategy to Guide Its Future Disposal Efforts, GAO-11-814 (Washington, D.C.: Sept. 19, 2011).

GAO, Defense Infrastructure: The Enhanced Use Lease Program Requires Management Attention, GAO-11-574 (Washington, D.C.: June 30, 2011).

GAO, Military Housing: Installations Need to Share Information on Their Section 801 On-Base Housing Contracts, GAO-11-60 (Washington, D.C.: Oct. 28, 2010).

GAO, Defense Infrastructure: Army's Privatized Lodging Program Could Benefit from More Effective Planning, GAO-10-771 (Washington, D.C.: July 30, 2010).

GAO, Military Housing Privatization: DOD Faces New Challenges Due to Significant Growth at Some Installations and Recent Turmoil in the Financial Markets, GAO-09-352 (Washington, D.C.: May 15, 2009).

GAO, Federal Real Property: Progress Made in Reducing Unneeded Property, but VA Needs Better Information to Make Further Reductions, GAO-08-939 (Washington, D.C.: Sep. 10, 2008).

Partnering

GAO, Congressionally Chartered Organizations: Key Principles for Leveraging Nonfederal Resources, GAO-13-549 (Washington, D.C.: June 7, 2013).

GAO, Federal Real Property: Strategic Partnerships and Local Coordination Could Help Agencies Better Utilize Space, GAO-12-779 (Washington, D.C.: July 25, 2012 ).

Federal Real Property Reports

GAO, Federal Real Property: Improved Standards Needed to Ensure That Agencies’ Reported Cost Savings Are Reliable and Transparent, GAO-14-12 (Washington, D.C.: Oct. 29, 2013).

GAO, Federal Real Property: National Strategy and Better Data Needed to Improve Management of Excess and Underutilized Property, GAO-12-645 (Washington, D.C.: June 20, 2012).

GAO, Streamlining Government: Questions to Consider When Evaluating Proposals to Consolidate Physical Infrastructure and Management Functions, GAO-12-542 (Washington, D.C.: May 23, 2012).

GAO, Federal Real Property: Progress Made Toward Addressing Problems, but Underlying Obstacles Continue to Hamper Reform, GAO-07-349 (Washington, D.C.: Apr. 13, 2007).

GAO, Federal Real Property: Actions Needed to Address Long- standing and Complex Problems, GAO-04-119T (Washington, D.C.: Oct. 1, 2003).

Appendix IV: GAO Contacts and Staff Acknowledgements

GAO Contact

Staff Acknowledgements

In addition to the contact name above, Carol M. Henn, Assistant Director, Alexandra Edwards, Vida Awumey and Melissa King made major contributions to this report. Also contributing to this report were Virginia Chanley, Deirdre Duffy, Felicia Lopez, and Donna Miller. In addition, the following individuals provided programmatic expertise: Michael Armes, Keith Cunningham, Brian Lepore, David Sausville, and David J. Wise.