Lease Refinancing: Progress in Reducing Army's Equipment Leasing Costs

Published by the Government Accountability Office on 1990-03-13.

Below is a raw (and likely hideous) rendition of the original report. (PDF)


Progress in Reducing
Army’s Equipment
Leasing Costs


                ZJnited States
                General Accounting Office
G$O             Washington, D.C.20548

                Accounting and Financial
                Management Division


                March    13,    1990
                The Honorable John Conyers, Jr.
        ,       Chairman,  Committee on Government          Operations
                House of Representatives
                Dear Mr. Chairman:
                On February    20, 1990, your office     requested    information       on
                the progress    of the Army's equipment      lease refinancing
                mwrm       which was initiated     to reduce equipment       leasing
                costs.   We were also asked the status         of our efforts      to
                assess the potential     of expanding    this program throughout
                the Department    of Defense (DOD).      This report     presents     the
                results  of our February      23, 1990, briefing    to your
        /       Committee staff.
                RESULTS IN BRIEF
                DOD equipment      leasing   has declined    between 1985 and 1988 at
                least    in part because of an earlier        DOD program to buy out
                uneconomical     automated data equipment         leases.       The Army,
                which has over half of DOD's lease obligations,                  found that
                only a small portion       of the lease obligations           covered by
                its program may be viable         candidates    for pooling        and
                refinancing.       The Army is also pursuing         individual      lease
                renegotiations       as an option   to reduce leasing         costs.     Our
                analysis     to determine    whether lease refinancing           should be
                considered     as a cost-cutting      method for other DOD
                components is not yet complete.
                DOD leases a wide variety            of real and personal    property,
                including   buildings,      facilities,       and equipment.    Such
                leases include      several    cost components including        the
                interest  rate on the underlying            financing.    These interest
                rates are often higher         than what could be obtained         on the
                open market.
                A comparison   of fiscal   year 1985 and 1988 equipment    leasing
                activity   shows a reduction    in leases and leasing  costs over
                that 4-year period.      During 1985, DOD had 5,535 equipment

leases valued at about $868 million.          Since then, the
number of leases has declined       by 4,076, or about 74
percent.      Table 1 provides  more detailed     information on
equipment     leases reported  by the major DOD components
during   fiscal    year 1988.
Table 1:    Equipment Ieases by DODComponent for Fiscal Year 1988

                  Nixnber                                          Percent
   DOD              of                  Dollars                  of total
component         leases                obligated              obligations
                      645               $257,990                      50
                      384                122,605                      24
Air Fbrce             280                 88,853                      17
Army Corps of
   Engineers          103                 26,956                       5
  Agency               47                 18,215                       4
Total                                   $514,619                    100

According     to a report1        by the Department     of     Defense
Inspector     General,      DOD's buyout program for           uneconomical
automated data processing            equipment   leases      significantly
reduced equipment         leasing    costs.    The report       noted that
budget requests        for leasing      such equipment       declined
$627 million,     or 74 percent,         between fiscal        years 1984 and
Your office    requested that we provide     (1) information       on
the progress    of the Army's program to refinance        existing
equipment   leases and (2) the status     of our efforts       to
determine   whether this type of initiative      could be expanded
throughout    DOD.

1Summary Report on the Defense-wide   Audit of Acquisition                   of
 Automatic Data Processing  Equipment  (Report No. 89-038,
 Decemb& 2, 1988).

To ascertain       the status     of the Army's current         efforts  to
lower equipment        leasing    costs,    we interviewed      Army
officials      responsible     for developing        and implementing    the
master lease refinancing            program.       Because the Army
contracted      with Chase Manhattan Capital             Markets Corp. and
Bear, Stearns and Co., Inc.,             to implement      the lease
refinancing       program, we discussed          the results    of their
detailed     analyses     of individual       leases and other related
matters     with key officials         of those firms.        We did not
verify    the results      of their     work.
We determined        the extent    of equipment      leasing    for each DOD
component by extracting           data from the Defense Contract
Action     Data System, which is to contain             data on all DOD
contracts.        The most recent data at the time of our review
covered fiscal         year 1988.      These data show the amount of
equipment      leasing     for each DOD activity;         however, we have
not yet examined leasing           policy    or lease contract
provisions       for individual      leases or the extent to which
these leases may be eligible              for refinancing.
Army officials       are continuing        to seek opportunities          to
reduce equipment        leasing     costs.        During 1988, the Army
contracted      with the investment          firms mentioned        above to
determine     the feasibility         of pooling       and refinancing
existing    equipment       leases with third-party            investors.     This
concept of third-party           refinancing        as envisioned      by the
Army is discussed         in our report         issued to you in November
The Army's contractor    reviewed 2,203 equipment     leases and
lease modifications   recorded     in the DOD-wide data base3 and
valued at over $315 million      in annual lease obligations.

aLease Refinancing:  Observations on GSA',,@!Proposed                    Master
 Leasing and Army's Lease Proqrams (GAO/AFMD-90-7,
 November 24, 1989).
3The contractor  evaluated   Army leases from fiscal     year 1988
 and part of 1989.    Leases may include   numerous
 modifications.   We did not attempt    to determine    whether
 the 2,203 leases and lease modifications      included   all of
 the 645 Army leases in table    1.


It determined  that 2,039 of these contract        actions
($275 million)   were not eligible    for refinancing      for        one or
more of the reasons listed     below:
--   The lease had expired       or would   expire     within   6 months   of
     the review date.
--   The lease contract      was for maintenance,     service,    or a
     rate-controlled    activity    such as telephone     service   that
     did not involve    the leasing    of equipment.
--   The lease   had already     been bought    out.
--   The lease was a straight     rental lease and thus did not
     contain   an assignable  purchase option  that would be
     necessary   under the Army's lease refinance    program.
The contractor's     analyses    indicated    that the remaining        164
lease contract    actions    valued at $40 million,        or 13 percent
of the total,    may be refinanceable.          The contractor
classified    51 of these,    valued at $3.7 million,         as priority
leases for refinancing.         This determination      was made based
on a number of factors,       including    the type of equipment
involved   and its location.
In addition,     the contractor      identified     several   large leases
that were not recorded        in the DOD-wide lease data base.
The Army is currently       attempting       to renegotiate     these
leases.      Army officials     told us that they have already
renegotiated     one lease for telecommunication            equipment,
resulting     in a $1.3 million      annual savings.
Our analysis     regarding   whether other military            components
could pool and refinance       existing      leases to reduce lease
costs is in its initial       stages.       We have, however,
determined    that currently     the Army is the only military
activity   with a major lease refinancing              program.     As shown
in table   1, the Navy, the Air Force, and the Defense
Logistics    Agency reported     having 711 equipment           leases
totaling   almost $230 million        during    fiscal     year 1988.
These represent      about 45 percent       of DOD's equipment
We are continuing    our evaluation     of the Army's program to
reduce equipment   leasing   costs by refinancing     existing
leases through third-party      investors.    We will  also assess

the   potential    of expanding       this   program   to the   Navy and the
Air   Force.

As agreed with your office,         we did not obtain official
agency comments on a draft         of this report;    however, we did
discuss    these matters     with agency officials.      Also, unless
you publicly       announce its contents   earlier,    we plan no
further    distribution     of this report   until   30 days from the
date of this letter.         At that time,   we will   send copies to
the Director       of the Office   of Management and Budget, the
Secretary     of Defense, the Secretary     of the Army, and other
interested      parties.   We will   make copies available     to
others upon request.
Please contact     me at 275-9454 if you or your staff      have any
questions    concerning  this briefing    report.    Other major
contributors     to this report  are listed     in appendix I.
Sincerely     yours,

Systems       and Audit   Oversight

APPENDIX   I                                                       APPENDIX I


 rnst F. Stockel,  Assistant   Director,
             W. Mench, Assistant     Director
                                              (202)   697-0816

1 arold P. Santarelli,       Senior Accountant-in-Charge
  earline    Crosland,   Staff Accountant
6 iane    L. Williams,   Staff   Accountant
$ames F. Loschiavo,       Senior ADP Computer Specialist

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