State annually receives over $400 million in appropriated funds for buying and maintaining buildings abroad. It also has legislative authority to sell its real estate and use the proceeds to buy or improve other real estate and furnishings without further congressional approval. State’s Office of Foreign Buildings Operations (FBO) is responsible for establishing and overseeing policies and procedures for State’s real property, including approving the disposition of excess, underutilized, or uneconomical properties. These responsibilities are carried out in cooperation with the embassies. From 1990 to 1995, State made real estate sales totaling $133 million, including $48.8 million from the forced sale of property and property rights in Singapore because of road construction. If you exclude the Singapore transaction in 1991, sales averaged less than $4 million annually from 1990 to 1993. Real property sales increased to $16 million in 1994 and $53 million in 1995, but a significant amount of property has yet to be sold from FBO’s list of properties available for disposal. Both FBO’s October 1994 list and a second list submitted to the Office of Management and Budget in 1995 had about 100 properties listed for sale. Properties on the 1994 list were valued at $250 million. One year later, FBO added high-value properties in Manila, Singapore, Paris, and Bangkok to its list, bringing the total value of properties available for sale to $474 million. About one-third of the properties on the 1995 list were estimated to sell for $1 million or more and accounted for over 90 percent of the anticipated revenue. (See app. I for the list of properties.) In addition, State holds other property that it could potentially sell that was not on these lists. These properties are worth millions of dollars and include properties that have been retained at closed posts, including Zanzibar, Tanzania, and Alexandria, Egypt; properties that are vacant, unneeded, or unsuitable for the purposes for which they were acquired, including some in Dakar, Senegal, and Rabat, Morocco; and high-value properties that are oversized or not needed in Hamilton, Bermuda; Buenos Aires, Argentina; Prague, Czech Republic; and Budapest, Hungary. In addition, several of these unsold properties continue to incur high operation and maintenance costs. For example, in 1993, the embassy in Buenos Aires reported operating costs on the above property had doubled to almost $500,000 and major maintenance costs had risen to about $1 million. (See apps. II through IV for a detailed discussion of the above properties.) State has no systematic process to identify excess properties and to dispose of them. The Foreign Affairs Manual (6 FAM 782.1) requires each post to periodically identify and report on properties that are (1) excess to post requirements, (2) not being fully utilized, or (3) uneconomical to retain. However, embassies are not required to annually certify that they complied with 6 FAM 782.1. Further, FBO officials could provide no evidence embassies submitted excess property reports pursuant to this provision. As the single real property manager for nonmilitary U.S. government property overseas, FBO has authority to dispose of properties that become surplus, underutilized, or uneconomical (6 FAM 713.1) and to determine the use of sales proceeds (1 FAM 215). In practice, FBO does not normally proceed with a sale unless the embassy agrees, and it tries to reach agreements with the embassies on the sale of property and the use of sales proceeds. According to FBO officials, property, such as that on the October 1994 list, is identified for sale by the embassies, FBO officials, State’s Inspector General, and ad hoc requests to the embassies by FBO. However, embassies lack incentives to identify, report on, and sell excess or underutilized property unless they can use the proceeds for their own needs. Further, when embassies sell property, it creates additional work for them. FBO officials’ contend that the totality of such actions constitutes a system for identifying real estate that should be sold. We do not believe that these actions constitute an organized system for identifying these properties. Our review showed that embassies have held unneeded property for years without an intended purpose, and in some cases, they do not know why the property was ever bought. For example, a lot in Burma, purchased in 1948 for an unknown purpose, is being used to store shipping containers. In some cases, the embassies and FBO disagree on selling identified property. We found several cases where embassies and FBO have had protracted and costly disagreements regarding the use or sale of property and use of potential sales proceeds. In Brasilia, Brazil, the embassy and FBO had a standoff for over 2-1/2 years over whether (1) to sell vacant lots, which were bought in the early 1960s, and use the proceeds to renovate a 29-unit apartment building or (2) to sell an apartment building and other property and use the proceeds to build residences on the vacant lots. The embassy emphasized that the apartment building is in an extremely poor location. Also, according to FBO officials, the lots are located in the best parts of Brasilia, and there is a stigma attached to living in apartments in Brasilia. FBO indicated that it was cheaper to renovate the apartment building than to build private residences on the vacant lots. Further, legal restrictions prohibit the embassy from constructing apartments on the vacant land. During the time of this dispute, the embassy spent $580,000 annually to lease housing while the 29 apartments remained vacant. (See app. V.) An FBO policy specifies that unresolved disputes will be submitted to the Assistant Secretary for Administration for further review and discussion with senior State management. However, disputes sometimes drag on for years. Of the cases that we reviewed, the Assistant Secretary was involved only in the Brasilia housing dispute, and then only after the dispute had been ongoing for 2-1/2 years. We believe there should be a standard procedure whereby the embassies and FBO, at least annually, formally present their positions to another authority. This would help mitigate the conflicting interests of the State organizations involved and the difficulties they have sometimes in expeditiously reaching an agreement on the sale of property and the use of proceeds. It could also help alleviate the inherent reluctance to forward matters to a higher level for decision. FBO has not developed a procedure for routinely using sales proceeds to meet prioritized worldwide requirements. As an incentive for embassies to agree to a sale, FBO normally gives embassies that sell property first consideration when determining the use of sales proceeds. These uses are usually not justified in the annual congressional budget. FBO evaluates the legitimacy and economic soundness of each proposal, but it does not routinely weigh the proposal against the needs of other embassies. We did find a few cases where FBO worked with the embassies to identify uses for the proceeds, rather than redirect the proceeds to other countries with greater need. For example, after the consulate in Lyon, France, closed in June 1992, the consul residence was sold in April 1995 for $613,000. In May 1992, the embassy in Paris requested to use the sales proceeds. Initially, FBO indicated that the proceeds should be made available for use in other countries, but the embassy objected, and FBO has been working with the embassy since 1994 to identify ways to use the proceeds in-country. For any sales proceeds that will not be used in the country where the sale occurred, FBO’s policy is to use them to buy property in countries with high lease costs. According to FBO officials, they have developed a list of countries where leasehold costs are high, expected to rise, and offer optimum investment opportunities. Even though this appears to be a move in the right direction, FBO did not provide us with its plan for using proceeds to meet this objective. FBO officials maintain that they need the flexibility to use the proceeds for other purposes. In contrast to FBO’s case-by-case approach to the use of sales proceeds, FBO determines critical construction and maintenance needs at posts and establishes funding priorities for the use of appropriated funds. For example, all posts are evaluated against established criteria in preparation for the 5-year budget. Furthermore, embassies’ annual requests for maintenance funds for special projects are weighted and ranked against requests from all other posts, and those with the highest rankings are generally funded. FBO officials said they cannot use the same approach for sales proceeds because the sales process is uncertain and they need flexibility in using the funds. Our review showed that through fiscal year 1991, State estimated the potential sales proceeds and included them as offsets to its appropriation requests. According to FBO, it does not do this now because of the long time required for developing budget estimates, the volatile nature of overseas real estate markets, and the complexities of marketing high-value properties. Even though State has the authority to retain proceeds from real estate sales, and sales proceeds are uncertain, FBO and embassies are using proceeds for real property purposes not justified and funded through the regular appropriation process. This ad hoc process essentially creates an off-budget fund. According to FBO documents, of the $16.3 million in fiscal year 1994 sales, $6.3 million, or about 39 percent of the proceeds, were designated for use in the country where the sales occurred. About $2 million of the $6.3 million were to be used for replacement property and $4.3 million for other kinds of construction. Of the remaining 61 percent, 35 percent was made available for use in other countries, and 26 percent had no specific use designated.