The Department of Defense (DOD) spends about $8 billion annually to provide housing for families of active-duty military personnel. Seeking to provide military families with access to adequate, affordable housing, DOD either pays cash allowances for families to live in private sector housing or assigns families to government-owned or government-leased units. The housing benefit is a major component of the military’s compensation package. DOD Policy Manual 4165.63M states that private sector housing in the communities near military installations will be relied on as the primary source of family housing. About 569,000, or two-thirds, of the military families in the United States live in private housing. These families receive assistance in locating private housing from housing referral offices operated at each major installation and are paid housing allowances to help defray the cost of renting or purchasing housing in local communities. Housing allowances, which totaled about $4.3 billion in fiscal year 1997, cover about 80 percent of the typical family’s total housing costs, including utilities. The families pay the remaining portion of their housing costs out of pocket. The remaining 284,000, or one-third, of the military families in the United States live in government-owned or -leased housing. These families forfeit their housing allowances but pay no out-of-pocket costs for housing or utilities. In fiscal year 1997, DOD spent about $3 billion to operate and maintain government-owned and -leased family housing. In addition, about $976 million was authorized to construct and renovate government family housing units in fiscal year 1997. Unaccompanied and single enlisted personnel in lower paygrades normally are required by service policy to live in government-owned barracks when space is available. Single officers and single senior enlisted personnel usually can choose to live in civilian housing and receive housing allowances. According to DOD officials, the military services face three significant housing problems. First, in March 1998, a DOD official testified before the Congress that about 200,000 of the military-owned family housing units were old, had not been adequately maintained and modernized, and needed to be renovated or replaced. Using traditional military construction (Milcon) financing at current funding levels, DOD has estimated that over $20 billion and 30 to 40 years would be required to accomplish this task. Second, according to DOD estimates, about 15 percent of the military families living in private housing are considered unsuitably housed primarily because of the high cost of the housing in relation to their housing allowances. Third, DOD officials have stated that most of DOD’s 400,000 barracks spaces also are old, do not meet current suitability standards, and need major improvements estimated to cost about $9 billion using traditional funding methods. DOD has undertaken several initiatives to address these problems, including requests to the Congress for more housing construction funding and increased housing allowances to make privately owned housing more affordable to military members. The Congress approved DOD’s request for a new housing allowance program starting in January 1998. The new allowance program replaced the Basic Allowance for Quarters and Variable Housing Allowance with a single allowance designed to better match the allowance amount with the cost of housing in each geographic area. Under the new program, housing allowances will be determined on the basis of costs for suitable civilian housing in each geographic area and allowance increases will be tied to growth in housing costs. According to DOD, the new allowance program should result in higher allowances in expensive housing areas and could result in lower allowances in some low-cost housing areas. The higher allowances in some areas could result in increasing the quantity of housing that is considered affordable to military families. Under the old program, housing allowances often did not keep up with changes in housing costs and in many cases servicemembers paid higher out-of-pocket costs than originally intended. The new allowance program is being phased-in over a 6-year period because of budget considerations and the desire to keep any allowance reductions gradual. To improve its existing family housing and barracks inventory more economically and at a faster rate, DOD concluded that a new initiative was needed. The new initiative, known as the Military Housing Privatization Initiative, called for new authorities to allow and encourage private sector financing, ownership, operation, and maintenance of military housing. In May 1995, DOD requested the Congress to approve a variety of new authorities that, among other things, would allow DOD to (1) provide direct loans and loan guarantees to private entities to acquire or construct housing suitable for military use, (2) convey or lease existing property and facilities to private entities, and (3) pay differential rent amounts in addition to the rent payments made by military tenants. The new authorities would also allow DOD to make investments, both limited partnership interests and stock and bond ownership, to acquire or construct housing suitable for military use and permit developers to build military housing using room patterns and floor areas comparable to housing in the local communities. The authorities could be used individually or in combination. Appendix I contains a complete list and description of the authorities. The Congress approved the new authorities, and the initiative was signed into law on February 10, 1996. However, the Congress limited the new authorities to a 5-year test period to allow DOD to assess their usefulness and effectiveness in improving the military housing situation. Based on the results of the test, the Congress will consider whether the authorities should be made permanent. The basic premise behind the initiative is for the military to take advantage of the private sector’s investment capital and housing construction expertise. DOD has noted that the private sector has a huge pool of housing investment capital. By providing incentives, such as loan guarantees or co-investments of land or cash, the military can encourage the private sector to use private investment funds to build or renovate military housing. Use of private sector capital can reduce the government’s near-term outlays for housing revitalization by spreading costs, specifically increased amounts for housing allowances, over a longer term. DOD’s goal is to have the private sector to invest at least $3 in military housing development for each dollar that the government invests. By leveraging government funds by a minimum of 3 to 1, the military can stretch its available construction funds so that significantly more housing can be revitalized in comparison with traditional Milcon financing. DOD officials stated that, with leveraging, the housing problem could be solved with current funding levels in only 10 years. DOD also noted that privatization can reduce the average cost of military housing through the use of commercial specifications and standards and local building codes and practices. A DOD housing official stated that the military’s cost for a house built with Milcon funding—about $135,000, excluding land—is substantially higher than private industry averages, primarily due to government procurement practices and overly detailed specifications. Under Milcon financing, contractors normally are faced with specifications, standards, and housing sizes different from industry or local practices. As a result, some contractors do not compete for these jobs and those that do often raise their prices to cover the higher costs associated with the requirements. According to DOD, use of commercial building standards and practices can also reduce costs by increasing competition and by reducing developer risk because the homes are more marketable to nonmilitary families, if not used by servicemembers and their families. In September 1995, in anticipation of the enactment of the new authorities, DOD established the Housing Revitalization Support Office (HRSO) to facilitate implementation of the initiative. With a staff of 16 full-time personnel and support from consultants, HRSO is responsible for overseeing and assisting the services in using the new initiative. The individual services are responsible for nominating potential privatization projects; working with HRSO in reviewing projects and recommending which authorities should be used; preparing requests for proposals; and managing the contract competition, award, and implementation processes. Under the privatization initiative, the Office of Management and Budget (OMB) and DOD have agreed on guidance regarding the amount that should be recognized and recorded as an obligation of DOD at the time a privatization agreement is signed. The guidance refers to this process as scoring. In this report, we use the word “scoring” to refer to the application of this guidance to agreements made under the privatization initiative. Funding for the privatization initiative is accomplished through two funds established by the authorizing legislation—the DOD Family Housing Improvement Fund and the DOD Military Unaccompanied Housing Improvement Fund. The funds receive sums by direct appropriations and transfers from approved Milcon projects and from proceeds from the conveyance or lease of property or facilities. The two funds are used to implement the initiative, including the planning, execution, and administration of privatization agreements. The two funds must be managed separately and amounts in the two funds cannot be commingled. Table 1.1 shows the sources and uses of funds in the DOD Family Housing Improvement Fund for fiscal years 1996 and 1997. No appropriations were made to the fund for fiscal year 1998. In fiscal year 1997, $5 million was appropriated for the DOD Military Unaccompanied Housing Improvement Fund. About $100,000 from this fund was used to pay for an Air Force study on developing privatized unaccompanied housing projects. Because it represents a new approach to improving military housing, we reviewed the implementation of the Military Housing Privatization Initiative to (1) measure progress to date, (2) assess issues associated with privatizing military housing, and (3) determine whether the initiative is being integrated with other elements of DOD’s housing program. We performed work at HRSO and the DOD offices responsible for housing management and housing allowances. We also performed work at the Air Force, the Army, the Navy, and the Marine Corps headquarters offices responsible for implementing the initiative and at the OMB office responsible for reviewing privatization agreements. At each location, we interviewed responsible agency personnel and reviewed applicable policies, procedures, and documents. To measure implementation progress and assess issues associated with privatizing military housing, we reviewed DOD’s and the services’ implementation plans, compared the plans to progress made, and explored reasons for differences. We discussed potential barriers and concerns about the privatization initiative with DOD and service officials to obtain their views and to determine how they were dealing with the concerns. We also reviewed estimated cost savings from the initiative and examined the assumptions and estimates the services used in preparing life-cycle cost analyses for proposed privatization projects at Fort Carson, Colorado, and Lackland Air Force Base, Texas. In addition, we visited Navy privatization projects at Corpus Christi, Texas, and Everett, Washington, that were implemented under a previous initiative to test the use of limited partnerships to improve housing in the Navy. At each site, we toured the new housing units, reviewed occupancy statistics and rental costs, and discussed with local service officials their views of the initiative. To determine whether the new initiative is being integrated with other elements of DOD’s housing program, we reviewed DOD’s and the services’ housing policies, programs, initiatives, and plans. We also examined previous reports and studies related to military housing issues, reviewed DOD and service housing organization and management structures, and discussed the need for well-integrated housing plans with DOD, service, and OMB officials. We conducted our review between June 1997 and March 1998 in accordance with generally accepted government auditing standards. Initially optimistic about how quickly the new privatization authorities could solve the housing problem, DOD officials now recognize that implementation will be slower than expected. For a variety of reasons, final privatization agreements have not been signed for any proposed housing projects initiated since the authorities were signed into law in February 1996. DOD officials believe that progress may speed up after the first few projects are approved; however, each project is unique and will require individualized planning and negotiation. In 1997, DOD revised its initial goal for solving the DOD housing problem in 10 years by delaying the target 4 years, to fiscal year 2010. Other issues, such as potential savings from privatization, risks associated with long-term privatization agreements, and use of the authorities to improve barracks, are also of concern and will require continued monitoring and attention from DOD management. In May 1995, DOD first announced its proposal to use private sector financing and expertise to improve military housing. In a May 8, 1995, press release, DOD stated that the quality of military housing had declined for many years because of a lack of priority and because earlier attempts at solutions ran into regulatory or legislative roadblocks. However, with congressional approval of new authorities to acquire help from the private sector, DOD stated that its 30-year housing problem could be solved in 10 years. DOD officials repeated this claim in subsequent testimony before several congressional committees. Anticipating congressional approval of the initiative, the Secretary of Defense established a fiscal year 1996 goal to use the new authorities to execute projects affecting at least 2,000 family housing units and 2,000 barracks spaces. During congressional hearings in March 1996 and 1997, DOD officials stated that about 8 to 10 projects with up to 2,000 family housing units should be awarded within the next year and that the goal was to increase the number of units planned for construction and revitalization to 8,000 in fiscal year 1997 and to 16,000 units in fiscal year 1998. This planned ramp-up would have to actually occur and continue for DOD to solve its housing problem within the initial 10-year time frame, by fiscal year 2006. Although the initial goals were aggressive and DOD actively pursued implementation of the new initiative, progress has been slow. Since the authorizing legislation was signed in February 1996 through the end of February 1998, no new agreements were finalized to build or renovate military housing. In January 1998, DOD was actively considering more than a dozen projects for privatization and many others were in the early planning stages. However, only one, Lackland Air Force Base, apparently is close to contract signing, which is the beginning point for implementing housing improvements. Appendix II shows details of the projects being considered in January 1998. DOD officials often point to two Navy projects as the first examples of improvements under the initiative. The projects—404 new units at Corpus Christi, Texas, and 185 new units at Everett, Washington—were constructed off base on private property under limited partnership agreements between the Navy and private developers. However, the authority for these projects was not the legislation that established the initiative, but was legislation approved in October 1994. This legislation gave only the Navy authority to test the use of limited partnerships in order to meet the housing requirements of naval personnel and their dependents. Appendix III provides details on the Navy’s limited partnership agreements at Corpus Christi and Everett. The proposed Fort Carson privatization project illustrates the slow progress in implementing an agreement under the initiative. In October 1993, the Army requested $16.5 million in Milcon funds to replace 142 family housing units at Fort Carson in fiscal year 1995. The project was approved, but construction did not begin because the Army became interested in leveraging the funds through privatization to finance a much larger housing improvement effort at the installation. A HRSO team visited Fort Carson in December 1995, and after study and analysis, concluded in June 1996 that government housing at Fort Carson was a good candidate for privatization. The proposed privatization project—to construct 840 new family housing units, revitalize 1,824 existing units, and operate and maintain all of the units for a 50-year term—was approved in August 1996, and the request for proposal was issued in December 1996 for offers from the private sector to accomplish the requirements of the project. A contractor was selected in July 1997, and final negotiations began prior to contract award. On February 10, 1998, DOD notified the Congress of the Army’s intent to transfer Fort Carson’s 1995 Milcon appropriation into the DOD Family Housing Improvement Fund and to award the contract. However, in April 1998, as the result of litigation, the Army decided to cancel the proposed award, reexamine the acquisition process for the Fort Carson project, and study corrective action alternatives. Although DOD officials did not estimate when these steps will be completed or when the project will again be ready for contract award, DOD estimated an additional 4 to 5 years will be needed after the award to finish construction and revitalization of the housing itself. In July 1997, DOD revised its target date for solving its housing problem when it issued planning guidance for fiscal years 1999 through 2003. The guidance directed the military services to plan to revitalize, divest through privatization, or demolish inadequate family housing by or before fiscal year 2010, 4 years later than the original target. According to DOD officials, privatization implementation has been slower than expected primarily because the initiative represents a new way of doing business for both the military and the private sector. Initially, HRSO had to develop protocols for site visits and new tools and models to assess the financial feasibility of using the various authorities to help solve the housing problem at an installation. Then, as detailed work began on developing potential projects, many legal issues had to be addressed relating to the applicability of the Federal Acquisition Regulations and the Federal Property Regulations to the projects. Also, new financial and contractual issues had to be resolved such as establishing loan guarantee procedures to insure lenders against the risk of base closure, downsizing, and deployment; developing a process to provide direct loans to real estate developers; and creating documents for conveying existing DOD assets to developers. HRSO officials stated that the process has been slow to obtain concurrence on the details of the proposed Fort Carson and Lackland project agreements from lawyers representing the government, the developers, and the potential lenders. In addition, the officials noted that because the initiative has had high visibility both within and outside of DOD, much care and attention were devoted to ensuring that no mistakes were made as the initial agreements were developed. However, once the first one or two deals are completed, the officials believe that subsequent deals should proceed much faster. Another factor that slowed implementation was initial disagreement between DOD and OMB on how projects that used the various authorities should be scored. Discussions between the agencies continued for several months until a written agreement was adopted on June 25, 1997, which provided detailed scoring guidance applicable to the first 20 privatization projects. After these projects are completed, the agreement will be reviewed to determine whether any changes are needed. Privatization allows DOD to address its military housing problem more quickly by securing private sector financing of housing improvements. However, whether privatization also saves the government money in the long term, and if so, how much money are questions that have not been answered. Under traditional Milcon financing of military housing, the military pays the initial housing construction or renovation costs and then pays the annual costs to operate, maintain, and manage the units. The military does not pay monthly housing allowances since occupants of the units forfeit their allowances when living in government-owned housing. Under most proposed privatization projects, the military initially uses some funds to secure an agreement with a private developer and then pays monthly housing allowances to the servicemembers that occupy the housing, since the housing is not government-owned. The servicemembers use their housing allowances to pay rent to the developer. In addition, under most privatization options, the military continues to pay some housing management costs for servicemember referral services and for contract oversight. Thus, although the exact budgetary consequences from use of the various privatization authorities are not known, it appears that privatization largely results in a shift in funding from military housing construction, operations, and maintenance accounts to military personnel accounts to pay for additional housing allowances. Performing accurate cost comparisons between privatization and Milcon alternatives is difficult because the comparisons involve many variables and assumptions. However, one key issue in the comparisons is whether the housing under each alternative is the same. To illustrate, developers of projects under the initiative might use local building practices and standards to construct or revitalize housing that may be different in size and amenities from that constructed under Milcon building standards and specifications. For example, HRSO officials stated that privatized housing for married junior enlisted personnel based on local standards may result in garden-style apartments with no carports or garages. Normally, Milcon housing for married junior enlisted personnel results in larger townhouse type units with a carport or a garage. Because of such differences, a cost comparison between Milcon and privatization alternatives may not always result in an analysis of comparable housing. HRSO and service analyses of potential privatization projects have primarily focused on the financial feasibility of the deals. In other words, the analyses attempt to determine whether deals can be made that are attractive to developers while still meeting DOD’s leveraging goals. HRSO did not initially focus on comparing the long-term or life-cycle costs of a potential privatization project with the costs to perform the same project using traditional Milcon financing. Nevertheless, prior to finalizing a privatization agreement, the services perform a life-cycle analysis comparing project costs using both alternatives. HRSO, however, has not provided guidance for how these analyses should be completed, including what costs to consider and what assumptions to use. As a result, the services’ life-cycle analyses may not be prepared consistently and may use assumptions and estimates that do not result in reliable cost comparisons. HRSO officials stated that this is a concern and that they have tasked a consultant to develop a standard methodology for performing the analyses. Although milestones and a specific implementation date have not been established, HRSO officials stated that the services will be required to use the standardized methodology when it is completed and approved by HRSO. We reviewed the services’ life-cycle cost analyses for two proposed privatization projects at Fort Carson and Lackland Air Force Base to compare estimates of the government’s long-term costs for housing financed with Milcon funds and through the privatization initiative. The Fort Carson analysis, which was included in the February 10 congressional notification of DOD’s intent to enter into the Fort Carson agreement, estimated that over the 50-year term of the agreement privatization will cost about $197 million, or 24 percent, less than Milcon. The Lackland Air Force Base analysis, which might be revised before the contract is awarded, estimated that privatization will cost about $42 million, or 29 percent, less than Milcon. In our review, we made adjustments to the services’ analyses because some project costs had been excluded, some cost estimates were not based on actual budgeted amounts, and the 1998 OMB discount rate was not used to adjust for the time value of money. We made no adjustments for possible differences in the size or amenities of the housing resulting from each alternative. As shown in table 2.1, our review showed that although privatization was less costly for each project, the overall estimated cost savings to the government were considerably less than the services’ estimates—about $54 million less, or about 7 percent, at Fort Carson and $15 million less, or about 10 percent, at Lackland. Appendixes IV and V provide details on the assumptions used in DOD’s and our review of Fort Carson and Lackland life-cycle cost estimates. With no other cost comparisons to review at this time and with each future privatization agreement having unique circumstances and costs, it is difficult to draw conclusions on the extent of cost savings available from the privatization initiative. However, Army and Air Force officials have stated opinions that long-term savings to the government through the privatization initiative may be minimal. For example, an Army housing official stated that, although privatization can help solve the Army’s housing problems faster than Milcon, privatization does not significantly reduce the Army’s total costs because reduced family housing costs are offset by higher personnel costs, which are used to pay for additional housing allowances. Also, the Air Force completed a hypothetical analysis comparing life-cycle costs to revitalize 670 family housing units through privatization and Milcon. The analysis showed that there would be less than a $1-million difference between the two alternatives in total costs to the government over the life of the project. According to DOD officials, most of the potential privatization projects now under consideration call for long-term agreements between DOD and the developers. Many proposed deals are for 50 years with an option for another 25 years. HRSO officials stated that long-term agreements are needed to make the proposed projects financially feasible by providing a long-term cash flow to cover the developers’ investment costs for new construction and revitalization. To illustrate, the privatization proposal for Fort Carson calls for a whole-base deal in which the developer will revitalize existing units, construct new units, and operate and maintain all units for 50 years. Land related to the project will be leased to the developer. At the end of the 50-year term, providing that the government does not exercise an option to extend the agreement for another 25 years, the developer will be required to vacate the premises and may be required to remove the housing. The developer is expected to invest about $220 million to construct and revitalize the units and will recoup this cost, as well as the operating and maintenance costs, excluding utilities, from the rents paid by the occupants over the term of the agreement. Military families have first preference in renting the units and will pay rent equal to the members’ housing allowances. If military families do not rent the units, the units can be rented to civilians. DOD plans to provide a loan guarantee for funds that the developer borrows to construct and revitalize the units. However, the loan guarantee only covers the risks of base closure, deployment, and downsizing. In the event of a base closure default, the government could be obligated to pay off the loan and assume ownership of the project for disposal. Long-term privatization agreements present several concerns that require careful consideration. For example, before the military invests in a long-term housing project through a privatization agreement or traditional Milcon funding, the military should know with a high degree of certainty the installation’s future housing needs. To do this, the military must first determine whether the installation will be needed in the future; specifically, whether the installation is a likely candidate for closure during any future reductions in military infrastructure. If the installation is predicted to be needed, then the military must forecast (1) the installation’s future mission, military population, and family housing requirement; (2) future private housing availability and affordability in the local community; and (3) future military family housing preferences for on-base or off-base housing. According to several service officials, making accurate forecasts of these variables beyond a 3- to 5- year period cannot be assured. Yet, without long-term assurance that the privatized housing will be needed, risks increase that the service will not need all, or any, of the housing over the term of the agreement. Another concern associated with long-term privatization agreements is the potential for poor performance or nonperformance by the contractors. A major concern, particularly for on-base privatization projects, is whether contractors will perform housing repairs, maintenance, and improvements in accordance with the agreements. Although maintenance standards, modernization schedules, required escrow accounts, and other safeguards will be included in the agreements, enforcing the agreements could be difficult, time-consuming, and costly. In an April 1997 report on the privatization initiative, the Center for Naval Analyses discussed concerns with long-term agreements. The report noted that when rents are fixed at levels other than market rates, such as in the proposed Fort Carson and Lackland agreements where rent equals a member’s allowance, a contractor has little economic incentive to maintain the property. The contractor can increase profits by limiting maintenance and repairs and can cut costs by hiring less qualified managers and staff and using inferior supplies. In short, under fixed-rent arrangements, contractors may have an incentive to cut services in ways that, although difficult to predict, could erode the quality of life for servicemembers. The report also noted that long-term agreements contain disincentives that can occur late in the agreement. For example, the report stated that the long-term financial incentive for the developer during the last 20 years may be to disinvest so that the value of the physical assets foregone at the end of the term has been drained by use. Further, if the value of the units declines and military families do not rent the units, the potential exists for civilians to move on base, paying lower rents and creating an on-base slum. Privatization agreements provide for civilians renting the housing units if they are not rented by military families. Long-term agreements increase the potential that civilians will eventually live on base. For example, over a period of years, housing allowances could increase and more community housing could become available, making it more likely that military families would choose to live off base. In this circumstance, the contractor could rent vacancies to civilians. In some locations, installation commanders may welcome civilians living on base. However, in other locations, the civilians may not be welcomed. Marine Corps officials stated that most Marine installation commanders did not want civilians living on base because of security reasons and because of the tradition of having a military housing community available to members and their families. In addition to possible security concerns at some installations, the prospect of civilians living on base also raises some questions that have not been fully answered. For example, if civilians rented privatized housing units on base, would the government be required to pay education impact aid to the community for each civilian child, and would law enforcement responsibilities be more complicated because both local community and base police could be involved in matters related to on-base civilian tenants? According to DOD and service officials, there would be little financial advantage in using privatization to improve unaccompanied housing. The primary problem lies in the services’ mandatory assignment policies for single junior enlisted personnel and the budgetary scoring impact from mandatory assignments. The current policy in each service requires mandatory assignment of single junior enlisted members to the barracks, providing that space is available. According to DOD officials, most military leaders strongly support this policy because they believe that such assignment provides for military discipline and unit integrity. However, in accordance with the guidance established for recording obligations under the privatization initiative, mandatory assignment of military personnel to privatized housing constitutes an occupancy guarantee, which results in a government obligation to pay rental costs over the entire term of the agreement. Thus, when a privatization project includes an occupancy guarantee, DOD must set aside funds to cover the value of this guarantee up front. Because the funds required to cover the guarantee could approximate the amount of funds required under traditional military construction financing, funding for a privatized barracks project would not meet DOD’s goal to have the private sector to invest at least $3 for each dollar the government invests. This issue is not a problem in military family housing because mandatory assignments normally are not made. In most cases, married members in all paygrades can decline government-owned housing, if available, and decide where they want to live. Because installation commanders do not appear to be willing to change the current policy regarding barracks assignments, privatizing unaccompanied housing does not appear to be a financially viable alternative. An additional barrier to privatized barracks cited by DOD officials is a lack of funding to pay for increased housing allowances. If privatized, occupants would begin receiving housing allowances to pay rent. In family housing, there is a separate budget account for housing operations and maintenance that can provide a funding source to help pay for increased allowances. However, barracks operations and maintenance is not funded by a similar separate account. Instead, barracks operations and maintenance is funded from the overall base operating budget. According to service officials, this budget account often is underfunded and, therefore, does not have sufficient funds to help pay for increased housing allowances for unaccompanied personnel. DOD officials are aware of the issues discussed in this chapter. Since the beginning of the privatization initiative, DOD has attempted to speed implementation and address issues associated with potential savings from privatization, risks associated with long-term agreements, and using the authorities to improve barracks. However, the initiative does represent a new way of doing business, and DOD has been appropriately deliberate in its implementation. As implementation continues and progress is made, continued management attention can help ensure that benefits from the initiative are realized, potential risks are minimized, and program changes are adopted when needed. DOD has already recognized the need to standardize the methodology the services use in preparing life-cycle analyses comparing costs of privatization and Milcon alternatives. However, DOD needs to ensure that a standardized methodology is developed and implemented as quickly as possible. Without a standard methodology, DOD officials cannot be assured that the services’ estimates of cost differences between the two alternatives for proposed projects are consistent and reliable. We recommend that the Secretary of Defense expedite HRSO’s effort to develop a standardized methodology for comparing life-cycle costs of proposed privatization projects with military construction alternatives. This action should include establishing and monitoring milestones for the development and implementation of the methodology. In commenting on a draft of this report, DOD noted that the time it has taken to initiate the program was appropriate and necessary to resolve critical program issues that will ensure timely and effective implementation of all subsequent projects. DOD stated that proceeding more rapidly would have created major long-term problems for the program. We are not suggesting that DOD should have moved more quickly to implement this new program. As noted in our conclusion, the initiative does represent a new way of doing business, and many issues needed to be resolved. Our intent was simply to factually report on the program’s implementation. The fact remains that DOD established several goals for the program, which included having 16,000 units planned for construction by fiscal year 1998. To date, no units have been constructed or revitalized and it is unlikely that any units will be before the end of fiscal year 1998. Moreover, although DOD expects implementation to accelerate once it completes its first projects, we believe it is important to recognize that each proposed project will come with its own unique circumstances and that it may be unrealistic to assume that the program can be greatly accelerated. With respect to life-cycle cost comparisons of family housing construction under Milcon and privatization, DOD noted that although our life-cycle cost savings estimates under privatization for Fort Carson and Lackland Air Force Base are less than DOD’s estimates, the savings are still significant. DOD also stated that the type of economic analysis by which we made its estimates between the two alternatives tend to obscure an important underlying reality—that family housing military construction funding is not available at the levels estimated in the comparisons. We did not develop a unique cost analysis for these two projects but rather used the cost analysis developed by the military services. As we stated in our report, we made adjustments to the services analyses because some project costs had been excluded, some cost estimates were not based on actual budgeted amounts, and the 1998 OMB discount rate was not used to adjust for the time value of money. Also, the fact that DOD has required a life-cycle cost comparison for all proposed projects suggests that it, too, believes that life-cycle cost analyses are necessary to accurately evaluate housing alternatives. Without a standardized life-cycle cost methodology in place, privatization projects could be undertaken that are more costly than other alternatives. Our intent was simply to provide an independent life-cycle cost analysis as a check against the DOD estimates. Lastly, we agree that military construction funds would not likely be available at the same levels available under privatization since the privatization initiative seeks to leverage government funds by a minimum of three to one. DOD partially concurred with our recommendation regarding a standardized methodology for comparing life-cycle costs of proposed projects under both alternatives. DOD agreed that a consistent presentation of life-cycle cost comparisons is desirable and necessary and stated that it is developing such a standard methodology for application to all future projects. Our recommendation, however, was aimed at expediting this effort, and DOD did not provide specific information concerning a schedule for developing and implementing its standardized methodology. In view of the large number of projects that the services have proposed for privatization, we believe that adopting a standardized methodology as soon as possible is important. Use of a standardized methodology across service lines would provide a consistent way of comparing costs and permit more informed decisions about the relative merits of housing alternatives. The privatization initiative is only one of several tools, including housing allowances and traditional military construction, available to meet the housing needs of servicemembers and their families. To be most effective, the initiative needs to be integrated with the other tools and elements of an overall housing strategy. For example, to maximize the advantages from the initiative and minimize total housing costs, privatization needs to be part of a strategy that ensures (1) accurate determinations of housing needs and the ability of the local communities to meet these needs at each installation, (2) maximum use of private sector housing in accordance with DOD housing policy, and (3) coordinated decisions on the structure of housing allowances and housing construction. Although DOD and the services have tended to view and manage these elements separately, rather than as part of a well-integrated strategy, DOD has recently taken some steps to improve planning for eliminating inadequate family housing. However, to optimally address housing needs, additional steps can be taken to develop comprehensive plans that integrate all elements of DOD’s housing program. Foundational to an integrated housing plan is a process that accurately determines the services’ housing needs and the ability of the local communities to meet those needs at each installation. Accurate requirements analyses can help ensure that government housing, whether Milcon or privatized, is provided only at installations where the local communities cannot meet the military’s family housing needs, as specified by DOD policy. However, our prior work and the work of others have found significant, long-standing problems in the processes the services use to determine their housing requirements. For example, in our 1996 report on military family housing, we noted that DOD and the services relied on housing requirements analyses that (1) often underestimated the private sector’s ability to meet family housing needs and (2) used methodologies that tended to result in a self-perpetuating requirement for government housing. Our 1996 evaluation of the housing requirements analyses for 21 installations showed that methodology problems understated the ability of the private sector to meet military needs at 13 of the installations. The Congressional Budget Office, the Center for Naval Analyses, and others have reported similar problems with the services’ housing requirements determination processes. In our report, we recommended that DOD revise the housing requirements determination process by considering the results of an on-going DOD Inspector General’s review of the services’ requirements processes. In response to our recommendation, DOD stated that it would consider the results from the Inspector General’s review and would implement accepted recommendations. The Inspector General’s report was issued in October 1997. The report stated that “DOD and Congress do not have sufficient assurance that current family housing construction budget submissions address the actual family housing requirements of the Services in a consistent and valid manner.” The Inspector General recommended developing a DOD standard process and standard procedures to determine family housing requirements. In response, DOD officials stated that a working group, including representatives from each service, was convened in December 1997 to address the problems in the housing requirements determination process. However, milestones for the working group and for implementing improvements to the requirements process had not been developed at the time of our review in March 1998. Integrated housing plans founded on accurate requirements determinations can help ensure implementation of DOD’s policy of relying first on existing private sector housing to meet the military’s family housing needs. Implementation of this policy has been the most economical form of privatization. When servicemembers are paid housing allowances and families live in suitable private housing in local communities, the government’s cost for housing is minimized and the military is effectively out of the housing business. To illustrate, in our 1996 housing report, we compared the government’s costs to provide housing for a military family in government-owned and private sector family housing units in fiscal year 1995. The comparison showed that the government spent an average of $4,957 less for each family that lived in private sector housing. The difference resulted because a typical family living in private housing paid $2,016 of its housing costs out of pocket and the government paid $1,416 less in education impact aid because private housing is subject to local taxes. The remaining amount represented the estimated difference in the annual cost of a housing unit constructed, operated, and maintained by the military and a unit constructed, operated, and maintained by the private sector. There are other advantages to relying on private housing. In the current environment of constrained defense budgets and DOD’s requests for future rounds of base closures, the short-term flexibility offered by maximum use of private sector housing appears preferable to the long-term commitments required by Milcon and most privatization agreements. Existing private sector housing also can offer military members a greater selection of housing options to fit their needs instead of limiting them to what is available in military housing. The services have not always maximized use of existing private sector housing in accordance with the DOD policy. In our 1996 report, we stated that the communities surrounding many military installations could meet thousands of additional family housing needs. For example, the Army reported in 1996 that over 34,000 government family units at 59 Army installations were occupied but were considered surplus—meaning that the communities near these installations had affordable housing available that could meet these requirements. Similarly, the Air Force reported that over 4,000 government units at 13 Air Force installations were surplus. The Navy and the Marine Corps did not accumulate comparable housing information on their installations. We are not suggesting that the scope of any planned privatization project is not justified. A sufficient quantity of affordable private sector housing is not available at many U.S. military installations. We do believe, however, that long-range, integrated housing plans can provide the focus needed to ensure that maximum use is made of civilian housing before new investments are made in military housing. In particular, when local communities can meet additional military family housing requirements, this focus can ensure that government housing units are closed when the units reach the end of their economic life rather than renovated or replaced through Milcon or privatization. By ensuring that privatization authorities are used only where needed, the military’s risks are reduced and costs are minimized for incentives to private developers, education impact aid, on-base housing utilities, and police and fire support for on-base housing. Providing comprehensive housing referral services to servicemembers has proven to be an effective means of promoting greater use of existing private sector housing. Effective referral services that result in placing more military families in suitable private sector housing could reduce the need for new construction, whether it is accomplished through privatization or Milcon. DOD policies currently require each installation to assist servicemembers and their families in finding suitable private housing in the local communities. The Navy, however, has adopted a more aggressive, or enhanced, approach to housing referrals to help families find suitable housing. According to Navy officials, the Navy has pursued enhanced housing referral services since 1994. Under this approach, Navy housing officials work with local landlords and apartment managers to obtain preferences for military families such as reduced rental rates, waiving of some rental fees and deposits, and unit set-asides in which certain vacancies are offered to military families before they are offered to civilians. For example, Navy housing officials at Everett, Washington, stated that they had signed agreements with 39 housing complexes that had resulted in providing affordable housing for about 350 servicemembers and their families. This approach also includes welcome centers, which servicemembers can visit to obtain detailed information on area housing and receive personal assistance in securing suitable housing. DOD officials stated that the Navy’s approach has been successful and probably would be beneficial if adopted by the other services. However, the officials stated that there is no current initiative to implement enhanced referral programs in the other services. Long-range, integrated plans can emphasize the use of housing allowances as a key tool in addressing the military’s housing problem. Adequate housing allowances can help military members and their families secure suitable housing in the local communities, reducing the need for on-base housing. However, because use of allowances to address the services’ housing problems can directly affect the use of other tools, such as privatization and military construction, coordination is required to manage the impacts. This coordination has not always occurred. In some cases, DOD initiatives relating to housing allowances and to construction and management of military family housing have been viewed and managed separately rather than in combination to achieve a synergistic impact. One reason for this is that separate DOD organizations manage these two key components of the family housing program. Housing allowances are the responsibility of the Under Secretary of Defense for Personnel and Readiness and primarily are managed centrally at DOD headquarters by the organization responsible for all compensation issues, including basic pay and other types of allowances. Appropriations for housing allowances are included in the services’ military personnel accounts. Construction, management, and privatization of military housing are the responsibility of the Under Secretary of Defense for Acquisition and Technology. This organization establishes overall DOD housing policy and delegates primary housing management responsibility to the individual services, their major commands, and individual installations. This organization is responsible for most housing initiatives, including the Milcon program and the privatization initiative. Appropriations for the family housing program are included in the services’ military construction and family housing accounts. DOD officials stated that the two organizations work together and coordinate on matters relating to housing allowances. However, each organization is responsible for its own initiatives, and an overall strategy has not been developed to ensure optimum integration of all initiatives. For example, when a new housing allowance program was developed, there was little discussion between the two organizations on how the program would affect the privatization initiative, even though allowance changes could affect not only the affordability of existing private sector housing but also privatization agreements where rental rates are equal to the servicemembers’ housing allowances. The Congress approved DOD’s request for major changes to DOD’s housing allowance program starting in 1998. Allowances in the future will be based on average housing costs in each geographic area. As the new program is phased in over a 6-year period, DOD officials stated that allowances in high-cost areas are expected to increase and allowances in low-cost areas are expected to remain constant or decline. However, largely because of limited coordination between the DOD offices responsible for housing allowances and housing management, service officials told us that they were uncertain how the new allowance program would affect the privatization initiative, but they did voice some concerns. For example, some officials questioned how a contractor under a privatization agreement would respond if rents were based on housing allowances and the allowances declined. Conversely, if allowances increased significantly, rental payments to the contractor could increase significantly, creating the potential for windfall profits. Also, Marine Corps housing officials stated that if housing allowances increased, the need for on-base housing could decrease. For example, with larger allowances some occupants of privatized on-base housing might move to community housing, leaving on-base vacancies available to civilians. This view appears to be supported by a 1997 study on military housing issues by the RAND organization. The study stated that the primary reason military families choose on-base housing is economics. Many families, particularly in lower paygrades, believe that the value of the on-base housing exceeds the amount of allowance they forfeit to live there. RAND also found that few families would choose to live in on-base housing if their housing allowances would permit them to obtain suitable housing in the community without considerable out-of-pocket costs. In November 1997, DOD took an important step in its planning by directing the services for the first time to submit plans for eliminating inadequate family housing. The services were directed to submit plans by May 1, 1998, that identify by installation, housing revitalization requirements and the potential for privatization. Although this information could be an important first step in developing comprehensive housing plans, DOD did not provide written guidance for the services to use in determining revitalization requirements and privatization potential. Further, comprehensive plans that integrate not only privatization but also other elements of DOD’s housing program are needed. The DOD direction to the services did not require the plans to include steps to improve the requirements determination processes; maximize existing private sector housing; develop enhanced referral services; or coordinate use of allowances, military construction, and privatization options. On its own initiative, the Air Force appears to have recognized the need for comprehensive, integrated housing plans. Air Force officials stated that privatization alone will not solve the housing problem and that the ultimate solution lies within an integrated approach. With this in mind, in August 1997, the Air Force began working with consultants to develop a housing master plan for each Air Force installation. Air Force officials stated that the master plans will define the most effective housing investment strategy by integrating construction, operations and maintenance revitalization, privatization, and reliance on local community housing. The Air Force expects the first portion of the plans, potential for privatization, to be completed by May 1998 to comply with the DOD direction. The overall master plans are expected to be completed in December 1998. DOD needs to ensure that the services develop long-range, integrated housing plans that rely on and use all of the available tools; not in isolation, but in a coordinated, optimum manner. Such plans can provide the focus needed to ensure accurate housing requirements determinations, maximum use of suitable civilian housing, use of enhanced housing referral services, coordination of housing allowances changes, and appropriate use of privatization and Milcon alternatives. DOD has taken some initial steps to developing better planning. However, additional steps can be taken to ensure that the military’s housing problems are addressed in an optimum manner. Also, achieving a more integrated approach has been somewhat hampered by separate DOD organizations responsible for housing allowances and housing construction and management. Although there may be valid reasons for keeping these functions in separate offices, greater efforts are needed to ensure effective coordination on housing issues. We recommend that the Secretary of Defense expand the directive to the services concerning their plans for eliminating inadequate housing. Specifically, the Secretary should direct the services to prepare detailed, integrated housing plans that will (1) describe their plans for improving their housing requirements determination processes, (2) demonstrate how they will attempt to maximize their reliance on community housing in accordance with DOD’s stated policy, and (3) outline improvements in housing referral services. The plans should also include analyses of the estimated impact of the new housing allowance program on the availability of housing in local communities and show how housing allowances, traditional military construction, and the privatization initiative will be used in concert to meet DOD’s housing needs in the most economical manner. Each service plan should include estimated milestones for achieving the goals of the plan. We also recommend that the Secretary establish a mechanism to promote more effective coordination between the offices responsible for housing allowances and housing management. DOD partially concurred with our recommendations, stating that it is aware of the need to integrate effectively all the elements of its housing program. DOD said that the services already have begun making specific plans about whether privatization or military construction should be pursued at each installation. DOD also stated that development of standard procedures for determining housing requirements is the subject of a working group first convened in December 1997, which includes representatives from each service. However, DOD stated that the legislative authority for privatization expires in 2001, unless extended or made permanent. As a result, DOD stated its immediate focus is on demonstrating at several prototype sites how housing privatization can be an effective tool for addressing DOD’s housing problems. DOD stated that only after succeeding in this demonstration and in a demonstration of how other new elements of DOD’s housing program can succeed will its focus turn toward the imperative of better integrating these new tools with all the other aspects of its housing program. Although the steps DOD outlined are positive, we do not agree that DOD should wait until it can demonstrate successes in its privatization program before focusing on integrating the elements of its overall housing program. Better integration of housing elements is needed now to maximize the advantages of the initiative and ensure that housing is revitalized or constructed only at installations where the local communities cannot meet the military housing requirements. Also, we believe all the elements of our recommendation are important aspects of such integration. While DOD mentioned steps related to certain elements, it did not directly address those aimed at promoting maximum reliance on community housing. For example, DOD did not state whether it would encourage the services to improve their housing referral programs or analyze the impact of the new housing allowance program on available housing in the community before proceeding to revitalize or build new housing. We continue to believe that DOD should expand the directive to the services concerning development of installation housing plans to cover each element of our recommendation to help ensure maximum reliance on community housing. An expanded directive to the services in preparing their housing plans would help focus the services’ attention on how they can use the full range of tools available to them in concert to address their housing problems in the most economical way. Moreover, requiring the services to set milestones for achieving their housing goals would help DOD measure progress in improving military housing. DOD also agreed that coordination between the offices responsible for housing allowances and housing management is necessary and appropriate but stated existing coordination mechanisms are adequate and effective. We believe that improved coordination during development and implementation of the new allowance program could have increased understanding of how the new program will affect the privatization initiatives. As noted in our report, service officials were uncertain about the relationship of the two initiatives. Moreover, as we pointed out, the new program could result in making more local community housing affordable to military families, thus reducing the need for privatized housing in some locations. We continue to believe that the relationship between military housing and allowances is extremely close, improved coordination between the offices responsible for these issues can lead to a more integrated approach to housing, and new mechanisms are needed to help achieve this improved coordination.

Summary: GAO reviewed the Department of Defense's (DOD) Military Housing Privatization Initiative, focusing on DOD's efforts to: (1) measure progress to date; (2) assess issues associated with privatizing military housing; and (3) determine whether the new initiative is being integrated with other elements of DOD's housing programs. GAO noted that: (1) DOD considers privatization to be a powerful new tool to help address the military housing problem; (2) two years have passed since the new authorities were signed into law, yet no new agreements have been finalized to build or renovate military housing; (3) more than a dozen projects are being considered; however, only one project is close to contract signing; (4) according to DOD, progress has been slower than expected because the initiative represents a new way of doing business for both the military and the private sector; (5) many legal, financial, contractual, and budgetary scoring issues had to be resolved to the satisfaction of parties representing the government, developers, and private lenders; (6) although DOD expects implementation to speed up after the first few privatization deals are completed, it is difficult to predict how much the program can be accelerated given the unique circumstances of individual projects; (7) in addition to potential benefits, implementation of the privatization initiative raises several concerns; (8) one concern is whether privatization will result in significant cost savings; (9) to a large degree, privatization shifts funding from military housing construction, operations, and maintenance accounts to military personnel accounts to pay for increased housing allowances used to pay rent to developers of privatized housing; (10) GAO's review of the services' life-cycle cost analyses for two privatization projects disclosed that the difference in the cost of privatization and traditional military construction financing was considerably less than the services' estimates and relatively modest; (11) the privatization initiative has not been fully integrated with other elements of an overall housing strategy to meet DOD's housing needs in an optimum manner; (12) comprehensive housing referral services could lessen the need for government housing, yet only the Navy has aggressively pursued this option; (13) better coordination between the separate offices responsible for housing allowances and military housing construction and management could ensure that their decisions on housing matters are made in concert, rather than in isolation, with each other; and (14) comprehensive, better integrated plans could tie together the elements of DOD's housing program and help maximize the advantages of the privatization initiative while minimizing total housing costs.