Within the vast portfolio of government owned and leased assets, GSA plays the role of broker and property manager to many civilian agencies of the U.S. government. Although some agencies have independent authority related to real property, many rely on GSA for much of their real property needs. GSA’s federally-owned and leased assets include office and warehouse space and courthouses. GSA charges rent to federal tenant agencies occupying federally-owned and -leased space at rates that are approximately the same as commercial rates for comparable space and services. According to GSA’s most recent State of the Portfolio publication, 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 half—were leased. In this State of the Portfolio, GSA states that its overarching goal for its portfolio is to maximize the use of its government- owned inventory while reducing the GSA-managed real estate footprint overall. GSA must also follow federal requirements in implementing its leasing program. Federal management regulations specify that when seeking to acquire space for an agency, GSA is to first seek space in government-owned and government-leased buildings. If suitable government-controlled space is unavailable, GSA is to acquire space in an efficient and cost effective manner.Management is responsible for establishing the strategies and policies for GSA’s real property portfolio, while GSA’s 11 regional offices are GSA’s Office of Portfolio generally responsible for conducting day-to-day real property management activities, including leasing, in each of its regions. GSA is required by statute to provide a prospectus, or proposal, for real property leases above the prospectus threshold to House and Senate authorizing committees for their review and approval. The prospectus should include basic information about the space to be leased, including the location, an estimate of the maximum cost to the government of the space, and a statement of rent currently being paid by the government for federal agencies to be housed in the space. While these items are required by law to be in the prospectus, GSA is not prohibited from including other information in the lease prospectuses, and at various times has incorporated additional information. For example, prior to the mid 1990s, GSA routinely included an analysis that compared the long- term costs of leasing versus ownership. At times, GSA includes information on space utilization rates (i.e., the number of usable square feet per person). By statute, GSA is also required to provide authorizing committees a prospectus for each proposed capital project over the prospectus threshold, including both new construction and repair and alteration projects. Typically, prospectuses are drafted in the GSA regional offices and reviewed and approved by GSA’s Office of Portfolio Management. The prospectuses are then reviewed and approved by OMB prior to being provided to congressional authorizing committees— the Senate Committee on Environment and Public Works and the House Committee on Transportation and Infrastructure. GAO-03-122 and GAO-13-283. generally the least expensive ways to meet agencies’ long-term space needs, GSA relied heavily on operating leases to meet new long-term needs because it lacked funds to pursue ownership. Budget scorekeeping rules were established based on the Budget Enforcement Act of 1990. The purpose of these rules is to ensure that the House and Senate Budget Committees, the Congressional Budget Office, and OMB measure the effects of legislation consistently and meet specific legal requirements. They are also used by OMB for determining amounts to be recognized in the budget when an agency signs a contract or enters into a lease. Upfront funding is the best way to ensure recognition of commitments embodied in budgeting decisions and maintain government- wide fiscal control. Under these rules, for a construction or purchase project 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. Operating leases were intended for short-term needs, and thus, under the scorekeeping rules, only the amount needed to cover the first year’s lease payments plus cancellation costs needs to be recorded in the budget. For operating leases funded by GSA’s Federal Buildings Fund (which is self-insuring), only the budget authority needed to cover the annual payments is required to be scored. GSA does not have to include cancellation costs. Thus, an operating lease may potentially appear “cheaper” in the budget than a construction or purchase project, or a capital lease, even though it may cost more over time. 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 be preferred over less-costly alternatives such as major construction or renovation projects that must compete for full funding. A number of OMB-defined criteria must be met for a lease to be considered an operating lease. Among other things, the lease must “score” as an operating lease rather than a capital lease, meaning that 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. Because the scoring seeks to compare a present day fair market value to the value of minimum lease payments made over time, a discount rate must be used in calculating the total cost of the minimum lease payments over the lease term. GSA uses the discount rates determined annually by OMB, rates that vary depending on the length of time being considered in the calculation. For example, if the fair market value of an asset is $1 million, and the lease has a minimum annual lease payment of $100,000 with a term of 7 years, then the calculation of the total value of the minimum lease payments over the 7 years (applying OMB’s 2012 7-year discount rate of 0.7 percent) would be about $680,000. This total value of $680,000 is 68 percent of the fair market value of $1 million—which, at less than 90 percent, would result in the lease being scored as an operating lease. However, if the lease term was 20 years, the calculation of the total value of the minimum lease payments of $100,000 over the 20 years (applying OMB’s 2012 20-year discount rate of 1.7 percent) would be about $1.7 million. Since $1.7 million is more than 90 percent of $1 million, the score would exceed the 90 percent threshold and result in the lease being scored as a capital lease. If the project scores as a capital lease, the net present value of the total cost of the lease is recorded in the budget in the year the lease is entered into by the federal government. In the above examples, the 7-year operating lease with a minimum annual rent of $100,000 would result in $100,000 being scored against GSA’s budget authority for each of the next 7 years. For the capital lease, the net present value of the total lease costs (about $1.7 million) would be scored against GSA’s fiscal year budget authority in the year lease payments began. Over the years, we have reported on numerous examples of operating leases that GSA and the U.S. Postal Service entered into even though they were more costly over time than ownership. For example, in 2008, we found that in 10 GSA and U.S. Postal Service leases, decisions to lease space that would be more cost-effective to own were driven by the limited availability of capital for building ownership and other considerations, such as operational efficiency and security. We found that for four of the seven GSA leases GAO analyzed, leasing was more costly over time than construction—by an estimated $83.3 million over 30 years. At that time, we stated that while the administration had made progress in addressing long-standing real property problems, efforts to address the leasing challenge had been limited. Some alternative approaches had been discussed by various stakeholders, such as the President’s Commission to Study Capital Budgeting and us, including the approach of scoring operating leases the same as capital leases, which would make them comparable in the budget to direct federal ownership, but none had been implemented. In 2008, we recommended that OMB, in conjunction with other stakeholders, develop a strategy to reduce agencies’ reliance on leased space for long-term needs when ownership would be less costly. OMB generally agreed with our report and recommendation and stated that it would be useful to consider how to identify instances where operating leases are most likely to be to the government’s long-term financial detriment. While OMB did not develop the strategy we described, OMB staff said that they have emphasized in guidance issued over the past several years that agencies should reduce space needs, including for leased space, through increases in space efficiency. Presidential Memorandum—Disposing of Unneeded Federal Real Estate—Increasing Sale Proceeds, Cutting Operations Costs, and Improving Energy Efficiency, 75 Fed. Reg. 33987 (June 16, 2010). offset through consolidation, co-location, or disposal of space from the inventory of that agency. This policy became known as “freeze the footprint.” In March 2013, OMB issued a memorandum establishing implementation procedures for its “freeze the footprint” policy. This memorandum clarified that agencies were not to increase the total square footage of their domestic office and warehouse inventory compared to a fiscal year 2012 baseline. It also directed agencies to use various strategies to accomplish this goal, including consulting with GSA about how to use technology and space management to consolidate, increase occupancy rates in facilities, and eliminate lease arrangements that are not cost or space effective.