oversight

Federal Real Property: Actions Needed to Address Long-standing and Complex Problems

Published by the Government Accountability Office on 2003-10-01.

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

                              United States General Accounting Office

GAO                           Testimony
                              Before the Committee on Governmental
                              Affairs, United States Senate


 For Release on Delivery
 Expected at 9:30 a.m. EDT
 Wednesday, October 1, 2003
                              FEDERAL REAL
                              PROPERTY
                              Actions Needed to Address
                              Long-standing and Complex
                              Problems

                              Statement of David M. Walker
                              Comptroller General of the United States




GAO-04-119T 

                                               October 2003


                                               FEDERAL REAL PROPERTY

                                               Actions Needed to Address
Highlights of GAO-04-119T, a testimony         Long-standing and Complex Problems
before the Committee on Governmental
Affairs, United States Senate




The federal government faces long-             Government data show that over 30 agencies control hundreds of thousands
standing problems with excess and              of real property assets worldwide, including facilities and land, which are
underutilized real property,                   worth hundreds of billions of dollars. Unfortunately, much of this vast,
deteriorating facilities, unreliable           valuable portfolio reflects an infrastructure based on the business model and
real property data, and costly                 technological environment of the 1950s. Many of the assets are no longer
space. These problems have
multibillion-dollar cost implications
                                               effectively aligned with, or responsive to, agencies’ changing missions and
and can seriously jeopardize                   are therefore no longer needed. Further, many assets are in an alarming state
agencies’ missions. In addition,               of deterioration; agencies have estimated that restoration and repair needs
federal agencies face many                     are in the tens of billions of dollars. Compounding these problems are the
challenges securing real property              lack of reliable governmentwide data for strategic asset management, a
due to the threat of terrorism. This           heavy reliance on costly leasing instead of ownership to meet new space
testimony discusses long-standing,             needs, and the cost and challenge of protecting these assets against potential
complex problems in the federal                terrorism.
real property area and what actions
are needed to address them.                    Given the persistence of these problems and related obstacles, we
                                               designated federal real property as a new high-risk area in January 2003.
                                               Resolving these problems will require high-level attention and effective
This testimony discusses                       leadership by both Congress and the administration. Also, current structures
recommendations that GAO has                   and processes may not be adequate to address the problems. Thus, as we
previously made. There is a need               have reported, there is a need for a comprehensive, integrated
for a comprehensive and integrated             transformation strategy for real property that will focus on some of the
transformation strategy that could             underlying causes that contribute to these problems, such as competing
identify how to realign real                   stakeholder interests in real property decisions, various legal and budget-
property and dispose of unneeded               related disincentives to businesslike outcomes, inadequate capital planning,
assets; address repair and
                                               and the lack of governmentwide focus on real property issues. It is equally
restoration needs; develop reliable
data; reduce the reliance on costly            important that Congress and the administration work together to develop
leasing; and protect assets from               and enact needed reform legislation to give real property-holding agencies
terrorism.                                     incentives and tools they need to achieve better outcomes. This would also
                                               foster a more businesslike real property environment and provide for greater
An independent commission or                   accountability.
governmentwide task force may be
needed to develop this strategy,
and legislative actions are needed
to provide agencies with tools and
incentives to help them address the
problems. If resulting actions
address the problems, agencies will
be better able to recover asset
values, reduce operating costs,
improve facility conditions,
enhance security, and achieve
mission effectiveness.
www.gao.gov/cgi-bin/getrpt?GAO-04-119T.

To view the full product, click on the link
above. For more information, contact Bernard
Ungar at (202) 512-2834 or ungarb@gao.gov.
Madam Chairman and Members of the Committee:

We welcome the opportunity to testify on the executive and legislative
branch actions that are needed to address the long-standing and complex
problems that led to our designation of federal real property as a high-risk
area. As you know, at the start of each new Congress since 1999, we have
issued a special series of reports, entitled the Performance and
Accountability Series: Major Management Challenges and Program
Risks. In January 2003, we designated federal real property a high-risk
area as part of this series.1 My testimony is based on our January 2003
high-risk report; work we have done to update information on some of the
example properties from our January 2003 high-risk report; and other GAO
reports on real property issues, including public-private partnerships.2 My
testimony focuses on the problems with federal real property and what
needs to be done to address them.

Summary

Data from the General Services Administration (GSA) show that over 30
agencies control hundreds of thousands of real property assets worldwide,
including facilities and land. According to the U.S. government’s financial
statements for fiscal year 2002, these assets are worth hundreds of billions
of dollars. Unfortunately, much of this vast, valuable portfolio reflects an
infrastructure based on the business model and technological environment
of the 1950s. Many of the assets are no longer effectively aligned with, or
responsive to, agencies’ changing missions and are therefore no longer
needed. Further, many assets are in an alarming state of deterioration;
agencies estimate that restoration and repair needs are in the tens of
billions of dollars. Compounding these problems are the lack of reliable
governmentwide data for strategic asset management, a heavy reliance on


1
 U.S. General Accounting Office, High-Risk Series: Federal Real Property, GAO-03-122
(Washington, D.C.; Jan. 2003); the report on real property is a companion to GAO’s 2003
high-risk update, U.S. General Accounting Office, High-Risk Series: An Update,
GAO-03-119 (Washington, D.C.: Jan. 2003); these reports are intended to help the new
Congress focus its attention on the most important issues and challenges facing the federal
government.
2
 Under a public-private partnership, a contractual arrangement is formed between public
and private sector partners that can include a variety of activities that involve the private
sector in the development, financing, ownership, and operation of a public facility or
service. In the case of real property, the federal government typically would contribute the
property and a private sector entity contributes financial capital and borrowing ability to
redevelop or renovate the property.



Page 1                                                                         GAO-04-119T
                       costly leasing instead of ownership to meet new space needs, and the cost
                       and challenge of protecting these assets against potential terrorism.

                       Resolving these long-standing problems will require high-level attention
                       and effective leadership by both Congress and the administration. Also,
                       because of the breadth and complexity of the issues, the long-standing
                       nature of the problems, and the intense debate that will likely ensue,
                       current structures and processes may not be adequate to address the
                       problems. Thus, there is a need for a comprehensive, integrated
                       transformation strategy for real property and an independent commission
                       or governmentwide task force may be needed to develop the strategy. This
                       strategy should reflect lessons learned and leading practices of public and
                       private organizations. In addition to the strategy, it is critical that all key
                       stakeholders—Congress, the Office of Management and Budget (OMB),
                       and real property-holding agencies—continue to work diligently on efforts
                       already planned and under way that are intended to promote better real
                       property capital decisionmaking. These include assessing infrastructure
                       and human capital needs and examining viable funding options.

                       If actions resulting from the transformation strategy and other efforts
                       address the long-standing problems and are effectively implemented,
                       agencies will be better able to recover asset values, reduce operating
                       costs, improve facility conditions, enhance security and safety, recruit and
                       retain employees, and achieve mission effectiveness. Realigning the
                       government’s real property, taking into consideration the future federal
                       role and workplace needs, will be critical to improving the government’s
                       performance and ensuring accountability within expected resource limits.


                       The federal real property environment has many stakeholders and involves
The Federal Real       a vast and diverse portfolio of assets that are used for a wide variety of
Property Environment   missions. Real property is generally defined as facilities; land; and
                       anything constructed on, growing on, or attached to land. The U.S.
                       government’s fiscal year 2002 financial statements show an acquisition
                       cost of more than $335 billion for real property assets held by the federal
                       government on September 30, 2002.3 In terms of facilities, the latest


                       3
                        This value does not include stewardship assets, which are not reported on the
                       government’s balance sheet as of September 30, 2002. These assets include wilderness
                       areas, scenic river systems, monuments, and national defense assets. Also, real property
                       data contained in the financial statements of the U.S. government have been problematic.
                       As discussed in more detail later, we were unable to express an opinion on the U.S.
                       government’s consolidated financial statements for fiscal year 2002.


                       Page 2                                                                      GAO-04-119T
                      available governmentwide data from GSA indicated that as of September
                      30, 2002, the federal government owned and leased approximately 3.4
                      billion square feet of building floor area worldwide.4 The Department of
                      Defense (DOD), U.S. Postal Service (USPS), GSA, and the Department of
                      Veterans Affairs (VA) hold the majority of the owned facility space.

                      Federal real property managers operate in a complex and dynamic
                      environment. Numerous laws and regulations govern the acquisition,
                      management, and disposal of federal real property. The Federal Property
                      and Administrative Services Act of 1949, as amended (Property Act), and
                      the Public Buildings Act of 1959, as amended, are the laws that generally
                      apply to real property held by federal agencies; and GSA is responsible for
                      the acts’ implementation.5 Agencies are subject to these acts, unless they
                      are specifically exempted from them, and some agencies may also have
                      their own statutory authority related to real property. Agencies must also
                      comply with numerous other laws related to real property.


                      Despite significant changes in the size and mission needs of the federal
The Federal           government in recent years, the federal portfolio of real property assets in
Government Has        many ways still largely reflects the business model and technological
                      environment of the 1950s and faces serious security challenges. In the last
Many Assets it Does   decade alone, the federal government has reduced its workforce by
Not Need              several hundred thousand personnel, and several federal agencies have
                      had major mission changes. With these personnel reductions and mission
                      changes, the need for existing space, including general-purpose office
                      space, has declined overall and necessitated the need for different kinds of
                      space. At the same time, technological advances have changed workplace
                      needs, and many of the older buildings are not configured to
                      accommodate new technologies. The advent of electronic government is
                      starting to change how the public interacts with the federal government.
                      These changes will have significant implications for the type and location
                                                   st
                      of property needed in the 21 century. Furthermore, changes in the overall
                      domestic security environment have presented an additional range of
                      challenges to real property management that must be addressed.



                      4
                       U.S. General Services Administration, Federal Real Property Profile, as of September 30,
                      2002 (Washington, D.C.).
                      5
                       For the Property Act, see 40 U.S.C. § 101 et. seq.; the Property Act excludes certain types
                      of property, such as public domain assets and land reserved or dedicated for national forest
                      or national park purposes; for the Public Buildings Act, see 40 U.S.C. § 3301 et. seq.



                      Page 3                                                                       GAO-04-119T
One reason the government has many unneeded assets is that some of the
major real property-holding agencies have undergone significant mission
shifts that have affected their real property needs. For example, after the
Cold War, DOD’s force structure was reduced by 36 percent. Despite four
rounds of base closures, DOD projects that it still has considerably more
property than it needs. The National Defense Authorization Act for Fiscal
Year 2002,6 which became law in December 2001, gave DOD the authority
for another round of base realignments and military installation closures
in 2005. Various factors may significantly reduce the need for real property
held by USPS. These factors include new technologies, additional delivery
options, and the opportunity for greater use of partnerships and retail co­
location arrangements. A July 2003 Presidential Commission report on
USPS stated, among other things, that USPS had vacant and underutilized
facilities that had little, if any, value to the modern-day delivery of the
nation’s mail.7 According to testimony by the Co-Chair of the Commission,
rightsizing of the postal network would be crucial to USPS’s
                                       st
transformation into a modern, 21 century institution8.

In the mid-1990s, VA began shifting its role from being a traditional
hospital-based provider of medical services to an integrated delivery
system that emphasizes a full continuum of care with a significant shift
from inpatient to outpatient services. Subsequently, VA has struggled to
reduce its large inventory of buildings, many of which are underutilized or
vacant. Although the Department of Energy (DOE) is no longer producing
new nuclear weapons, it still maintains a facilities infrastructure largely
designed for this purpose.

The magnitude of the problem with underutilized or excess federal
property puts the government at significant risk for wasting taxpayers’
money and missed opportunities. First, underutilized or excess property is
costly to maintain. DOD estimates that it is spending $3 billion to $4 billion
each year maintaining facilities that are not needed. In July 1999, we
reported that vacant VA space was costing as much as $35 million to



6
P.L. 107-107, 115 Stat. 1012, 1342 (2001).
7
 President’s Commission on the United States Postal Service, Embracing the Future:
Making the Tough Choices to Preserve Universal Mail Service (Washington, D.C.: July 31,
2003).
8
 Statement of James A. Johnson, before the Senate Committee on Governmental Affairs,
U.S. Postal Service: What Can Be Done to Ensure Its Future Viability? (Washington, D.C.:
Sept. 17, 2003).



Page 4                                                                    GAO-04-119T
                         maintain each year.9 Costs associated with excess DOE facilities, primarily
                         for security and maintenance, exceed $70 million annually.10 It is likely that
                         other agencies that continue to hold excess or underutilized property are
                         also incurring significant costs for staff time spent managing the
                         properties and on maintenance, utilities, security, and other building
                         needs. Second, in addition to day-to-day operational costs, holding these
                         properties has opportunity costs for the government, because these
                         buildings and land could be put to more cost-beneficial uses, exchanged
                         for other needed property, or sold to generate revenue for the government.
                         Finally, continuing to hold property that is unneeded does not present a
                         positive image of the federal government in local communities. Instead, it
                         presents an image of waste and inefficiency that erodes taxpayers’
                         confidence in government. It also can have a negative impact on local
                         economies if the property is occupying a valuable location and is not used
                         for other purposes, sold, redeveloped, or used in a public-private
                         partnership.

                         Appendix I discusses some examples of vacant, highly visible properties
                         that are in the federal inventory— the former main VA hospital building at
                         the Milwaukee, Wisconsin, health facility campus; St. Elizabeths Hospital
                         in Washington, D.C.; and the former main post office building in
                         downtown Chicago, Illinois. These examples demonstrate the range of
                         challenges agencies face in disposing of unneeded property.


                         Restoration, repair, and maintenance backlogs in federal facilities are
The Federal Portfolio    significant and reflect the federal government’s ineffective stewardship
Is in an Alarming        over its valuable and historic portfolio of real property assets. The state of
                         deterioration is alarming because of the magnitude of the repair backlog—
State of Deterioration   current estimates show that tens of billions of dollars will be needed to
                         restore these assets and make them fully functional. This problem has
                         accelerated in recent years because much of the federal portfolio was
                         constructed over 50 years ago, and these assets are reaching the end of
                         their useful lives. As with the problems related to underutilized or excess
                         property, the challenges of addressing facility deterioration are also
                         prevalent at major real property-holding agencies. For example:


                         9
                         U.S. General Accounting Office, VA Health Care: Challenges Facing VA in Developing an
                         Asset Realignment Process, GAO/T-HEHS-99-173 (Washington, D.C.: July 22, 1999).
                         10
                          DOE Office of the Inspector General, Disposition of the Department’s Excess Facilities,
                         DOE/IG-0550 (Washington, D.C.: Apr. 3, 2002).



                         Page 5                                                                     GAO-04-119T
•	   Over the last decade, DOD reports that it has been faced with the major
     challenge of adequately maintaining its facilities to meet its mission
     requirements. Although DOD no longer reports data on backlog of repairs
     and maintenance, it reported in 2001 that the cost of bringing its facilities
     to a minimally acceptable condition was estimated at $62 billion; the cost
     of correcting all deficiencies was estimated at $164 billion.11

•	   The Department of the Interior (Interior) has a significant deferred
     maintenance backlog that the Interior Inspector General (IG) estimated in
     April 2002 to be as much as $8 billion to $11 billion. This backlog has
     affected numerous national treasures, such as Ellis Island, Yellowstone
     National Park, and Mount Rushmore, just to name a few.

•	   GSA has struggled over the years to meet the repair and alteration
     requirements identified at its buildings. In March 2000, we reported that
     GSA data showed that over half of GSA’s approximately 1,700 buildings
     needed repairs estimated to cost about $4 billion.12 More recently, in
     August 2002, we reported that this estimated backlog of identified repair
     and alteration needs was up to $5.7 billion.13

     Other agencies with repair backlogs that we highlighted in our high-risk
     report include the Department of State (State), DOE, the Smithsonian
     Institution, and USPS. Since issuing our high-risk report, we have updated
     our assessment of facility conditions at DOD and State.

•	   In February 2003, we reported that although the amount of money the
     active forces have spent on facility maintenance had increased recently,
     DOD and service officials said that these amounts had not been sufficient
     to halt the deterioration of facilities.14 Too little funding to adequately
     maintain facilities is also aggravated by DOD’s acknowledged retention of
     facilities in excess of its needs. Furthermore, the information that the


     11
      U.S. Department of Defense, Report to Congress: Identification of the Requirements to
     Reduce the Backlog of Maintenance and Repair of Defense Facilities (Washington, D.C.:
     Apr. 2001).
     12
      U.S. General Accounting Office, Federal Buildings: Billions Are Needed for Repairs and
     Alterations, GAO/GGD-00-98 (Washington, D.C.: Mar. 30, 2000).
     13
       U.S. General Accounting Office, Financial Condition of Federal Buildings Owned by the
     General Services Administration, GAO-02-854R (Washington, D.C.: Aug. 8, 2002).
     14
      U.S. General Accounting Office, Defense Infrastructure: Changes in Funding Priorities
     and Strategic Planning Needed to Improve the Condition of Military Facilities,
     GAO-03-274 (Washington, D.C.: Feb. 19, 2003).



     Page 6                                                                    GAO-04-119T
    services have on facility conditions is not consistent, making it difficult for
    Congress, DOD, and the services to direct funds to facilities where they
    are most needed and to accurately gauge facility conditions. And, although
    DOD has a strategic plan for facilities, it lacks comprehensive information
    on the specific actions, time frames, responsibilities, and funding needed
    to reach its goals. In May 2003, we also reported on a similar problem with
    National Guard and Reserve facilities.15

•   In March 2003, we reported that many of the primary office buildings at
    overseas embassies and consulates were in poor condition.16 In 2002, State
    estimated that its repair backlog was $736 million. In addition, the primary
    office buildings at more than half of the posts do not meet certain fire/life
    safety standards. State officials stated that maintenance costs would
    increase over time because of the age of many of the buildings, and
    overcrowding has become a problem at several posts.

    Our work over the years has shown that the deterioration problem leads to
    increased operational costs, has health and safety implications that are
    worrisome, and can compromise agency missions. In addition, we have
    reported that the ultimate cost of completing delayed repairs and
    alterations may escalate because of inflation and increases in the severity
    of the problems caused by the delays.17 As discussed above, the overall
    cost could also be affected by government realignment. That is, to the
    extent that unneeded property is also in need of repair, disposing of such
    property could reduce the repair backlog. Another negative effect, which
    is not readily apparent but nonetheless significant, is the effect that
    deteriorating facilities have on employee recruitment, retention, and
    productivity. This human capital element is troublesome because the
    government is often at a disadvantage in its ability to compete in the job
    market in terms of the salaries agencies are able to offer. Poor physical
    work environments exacerbate this problem and can have a negative
    impact on potential employees’ decisions to take federal positions.
    Furthermore, research has shown that quality work environments make


    15
     U.S. General Accounting Office, Defense Infrastructure: Changes in Funding Priorities
    and Management Processes Needed to Improve Condition and Reduce Costs of Guard
    and Reserve Facilities, GAO-03-516 (Washington, D.C.: May 15, 2003).
    16
      U.S. General Accounting Office, Overseas Presence: Conditions of Overseas Diplomatic
    Facilities, GAO-03-557T (Washington, D.C.: Mar. 20, 2003).
    17
     U.S. General Accounting Office, Federal Buildings: Funding Repairs and Alterations
    Has Been a Challenge—Expanded Financing Tools Needed, GAO-01-452 (Washington,
    D.C.: Apr. 12, 2001).



    Page 7                                                                   GAO-04-119T
                      employees more productive and improve morale. Finally, as with excess
                      or underutilized property, deteriorated property presents a negative image
                      of the federal government to the public. This is particularly true when
                      many of the assets the public uses and visits the most—such as national
                      parks and museums—are deteriorated and in generally poor condition.


                      Compounding the problems with excess and deteriorated property is the
Key Decisionmakers    lack of reliable and useful real property data that are needed for strategic
Lack Reliable and     decisionmaking. GSA’s worldwide inventory database and related reports
                      are the only central sources of descriptive data on the makeup of the real
Useful Data on Real   property inventory, such as property address, square footage, acquisition
Property Assets       date, and property type. However, in April 2002, we reported that the
                      worldwide inventory contained data that were unreliable and of limited
                      usefulness.18 GSA agreed with our findings and has revamped this database
                      and produced a new report on the federal inventory, as of September 30,
                      2002.19 We have not evaluated GSA’s revamped database and related
                      report.

                      In addition to problems with the worldwide inventory, real property data
                      contained in the financial statements of the U.S. government have been
                      problematic.20 In April 2003, we reported that—for the sixth consecutive
                      year—we were unable to express an opinion on the U.S. government’s
                      consolidated financial statements for fiscal year 2002.21 We have reported
                      that because the government lacked complete and reliable information to
                      support asset holdings—including real property—it could not
                      satisfactorily determine that all assets were included in the financial
                      statements, verify that certain reported assets actually existed, or
                      substantiate the amounts at which they were valued. Aside from the


                      18
                       U.S. General Accounting Office, Federal Real Property: Better Governmentwide Data
                      Needed for Strategic Decisionmaking, GAO-02-342 (Washington, D.C.: Apr. 16, 2002).
                      19
                       U.S. General Services Administration, Federal Real Property Profile as of September 30,
                      2002 (Washington, D.C.).
                      20
                        The Chief Financial Officers Act of 1990 (CFO Act), as expanded by the Government
                      Management Reform Act, required the annual preparation and audit of individual financial
                      statements for the federal government’s 24 major agencies. The Department of the
                      Treasury was also required to compile consolidated financial statements for the U.S.
                      government annually, which we audit.
                      21
                       U.S. General Accounting Office, Fiscal Year 2002 U.S. Government Financial
                      Statements: Sustained Leadership and Oversight Needed for Effective Implementation of
                      Financial Management Reform, GAO-03-572T (Washington, D.C.: Apr. 8, 2003).



                      Page 8                                                                     GAO-04-119T
                     problematic financial data, some of the major real property-holding
                     agencies—including DOD, State, GSA, and Interior—have faced challenges
                     in developing quality management data on their real property assets. The
                     problems at these agencies are discussed in more detail in our high-risk
                     report.


                     As a general rule, building ownership options through construction or
Reliance on Costly   purchase are the least expensive ways to meet agencies’ long-term and
Leasing              recurring requirements for space. Lease-purchases—under which
                     payments are spread out over time and ownership of the asset is
                     eventually transferred to the government— are generally more expensive
                     than purchase or construction but are generally less costly than using
                     ordinary operating leases to meet long-term space needs.22 However, over
                     the last decade, we have reported that GSA—as the central leasing agent
                     for most agencies—relies heavily on operating leases to meet new long-
                     term needs because it lacks funds to pursue ownership. In 1999, we
                     reported that for nine major operating lease acquisitions that GSA had
                     proposed, construction would have been the least-cost option in eight
                     cases and would have saved an estimated $126 million. Lease-purchase
                     would have saved an estimated $107 million, compared with operating
                     leases but would have cost $19 million more than construction.23 A prime
                     example of this problem was the Patent and Trademark Office’s long-term
                     requirements in northern Virginia, where the cost of meeting this need
                     with an operating lease was estimated to be $48 million more than
                     construction and $38 million more than lease-purchase. In August 2001, we
                     also reported that GSA reduced the term of a proposed 20-year lease for
                     the Department of Transportation headquarters building to 15 years so
                     that it could meet the definition of an operating lease. GSA’s fiscal year
                     1999 prospectus for constructing a new facility for this need showed the
                     cost of construction was estimated to be $190 million less than an
                     operating lease.

                     Operating leases have become an attractive option in part because they
                     generally look cheaper in any given year. Pursuant to the scoring rules



                     22
                       In an operating lease, the government makes periodic lease payments over the specified
                     length of the lease in exchange for the use of the property.
                     23
                      U.S. General Accounting Office, General Services Administration: Comparison of Space
                     Acquisition Alternatives—Leasing to Lease-Purchase and Leasing to Construction,
                     GAO/GGD-99-49R (Washington, D.C.: Mar. 12, 1999).



                     Page 9                                                                      GAO-04-119T
adopted as a result of the Budget Enforcement Act of 1990, the budget
authority to meet the government’s real property needs is to be scored—
meaning recorded in the budget—in an amount equal to the government’s
total legal commitment. For example, for lease-purchase arrangements,
the net present value of the government’s legal obligations over the life of
the lease contract is to be scored in the budget in the first year. For
construction or purchase, the budget authority for the estimated legal
obligation related to the construction costs or purchase price is to be
scored in the first year. However, for many of the government’s operating
leases—including GSA leases, which, according to GSA, account for over
70 percent of the government’s leasing expenditures and are self-insured
in the event of cancellation—only the budget authority to cover the
government’s commitment for an annual lease payment is required to be
scored in the budget.24 Given this, although operating leases are generally
more costly over time, compared with other options, they add much less to
a single year’s appropriation total than these other arrangements, making
an operating lease a more attractive option from an annual budget
perspective, particularly when funds for ownership are not available.
Although the policy requirement for full “up-front funding” permits
disclosure of the full costs to which the government is being committed,
the budget scorekeeping rules allow costly operating leases to “look
cheaper” in the short term and have encouraged an overreliance on them
for satisfying long-term space needs.

Decisionmakers have struggled with this matter since the scoring rules
were established and the tendency for agencies to choose operating leases
instead of ownership became apparent. We have suggested the alternative
of scoring all operating leases up-front on the basis of the underlying time
requirement for the space so that all options are treated equally.25 Although
this could be a viable alternative, there would be implementation
challenges if this were pursued, including the need to evaluate the validity
of agencies’ stated space requirements. Another option—which was
recommended by the President’s Commission to Study Capital Budgeting
in 1999 and discussed by GAO—would be to allow agencies to establish


24
  According to the scoring rules (OMB Circular A-11, app. B), in cases where the operating
lease does not have a cancellation clause or is not paid for with federal funds that are self-
insuring, budget authority to cover the total costs expected over the life of the lease is to be
scored in the first year of the lease.
25
 U.S. General Accounting Office, Supporting Congressional Oversight: Budgetary
Implications of Selected GAO Work for Fiscal Year 2003, GAO-02-576 (Washington, D.C.:
Apr. 26, 2002).



Page 10                                                                         GAO-04-119T
                      capital acquisition funds to pursue ownership where it is advantageous,
                      from an economic perspective. 26 To date, none of these options have been
                      implemented, and debate continues among decisionmakers about what
                      should be done. Finding a solution for this problem has been difficult;
                      however, change is needed because the current practice of relying on
                      costly leasing to meet long-term space needs results in excessive costs to
                      taxpayers and does not reflect a sensible or economically rational
                      approach to capital asset management.


                      Terrorism is a major threat to federally owned and leased real property
Security Against      assets, the civil servants and military personnel who work in them, and the
Terrorism Is an       public who visits them. This was evidenced by the 1995 Oklahoma City
                      bombing; the 1998 embassy bombings in Africa; the September 11, 2001,
Overarching Concern   attacks on the World Trade Center and Pentagon; and the anthrax attacks
                      in the fall of 2001. Since the Oklahoma City bombing, the federal
                      government has spent billions of dollars on security upgrades within the
                      country and overseas. A study of federal facilities done by the Justice
                      Department in 1995 resulted in minimum-security standards and an
                      evaluation of security conditions in the government’s facilities. In October
                      1995, the President signed Executive Order 12977, which established an
                      Interagency Security Committee (ISC) to enhance the quality and
                      effectiveness of security in nonmilitary federal facilities.

                      Since the attacks on the World Trade Center and the Pentagon, the focus
                      on security in federal buildings has been heightened considerably. Real
                      property-holding agencies are employing such measures as searching
                      vehicles that enter federal facilities, restricting parking, and installing
                      concrete barricades. As the government’s security efforts intensify, the
                      government will be faced with important questions regarding the level of
                      security needed to adequately protect federal facilities and how the
                      security community should proceed. Furthermore, the 1995 Justice study
                      placed an emphasis on increasing security where large numbers of
                      personnel are located. However, a risk-based approach—which GSA is
                      using for the federal buildings it controls—appears to be more desirable in
                      light of this new round of threats. In September 2001, we reported that
                      DOD uses a risk-based approach to reduce installation vulnerabilities, but
                      this approach was applied primarily to installations with 300 or more



                      26
                       U.S. General Accounting Office, Accrual Budgeting: Experiences of Other Nations and
                      Implications for the United States, GAO/AIMD-00-57 (Washington, D.C.: Feb. 18, 2000).



                      Page 11                                                                  GAO-04-119T
personnel assigned on a daily basis.27 We recommended that DOD improve
this approach by ensuring all critical military facilities receive a periodic
vulnerability assessment conducted by their higher headquarters
regardless of the number of personnel assigned. DOD concurred and
began taking action.

Since 1996, we have produced more than 60 reports and testimonies on the
federal government’s efforts to combat terrorism. Several of these reports
have recommended that the federal government use risk management as
an important element in developing a national strategy.28 We have also
reported extensively on the security problems and challenges at individual
real property-holding agencies. Our high-risk report identifies the
problems and challenges faced by State, DOD, Interior, GSA, USPS, and
ISC. More recently, we testified on security conditions of overseas
diplomatic facilities.29 We found that State has done much over the last 4
years to improve physical security at overseas posts by, for example,
constructing perimeter walls, anti-ram barriers, and access controls at
many facilities. However, even with these improvements, most office
facilities do not meet security standards. As a result, thousands of U.S.
government employees may be more vulnerable to terrorist attacks.
Furthermore, our work has shown that agency coordination is critical to
addressing security challenges. In our February 2003 report on threats to
selected agencies’ critical computer and physical infrastructures, selected
agencies identified challenges, including coordinating security efforts with
GSA. GSA may often be responsible for protecting facilities that house
these critical assets.30 We recommended that steps be taken to complete
the identification and analysis of their critical assets and their
dependencies, including setting milestones, developing plans to address
vulnerabilities, and monitoring progress.




27
 U.S. General Accounting Office, Combating Terrorism: Actions Needed to Improve DOD
Antiterrorism Program Implementation and Management, GAO-01-909 (Washington,
D.C.: Sept. 19, 2001).
28
  U.S. General Accounting Office, Homeland Security: A Risk Management Approach Can
Guide Preparedness Effort, GAO-02-208T (Washington, D.C.: Oct. 31, 2001).
29
 GAO-03-557T.
30
 U.S. General Accounting Office, Critical Infrastructure Protection: Challenges for
Selected Agencies and Industry Sectors, GAO-03-233 (Washington, D.C.: Feb. 28, 2003); the
agencies reviewed were the Departments of Health and Human Services, Energy, and
Commerce, and the Environmental Protection Agency.



Page 12                                                                    GAO-04-119T
In addition to the clear challenges agencies will continue to face in
securing real property assets, the security issue has an impact on the other
problems that we have discussed. To the extent that more funding will be
needed to increase security, funding availability for repair and restoration,
preparing excess property for disposal, and improving real property data
systems may be further constrained. Furthermore, real property managers
will have to dedicate significant staff time and other human capital
resources to security issues and thus may have less time to manage other
problems. Another broader effect is the impact that increased security will
have on the public’s access to government offices and other assets. Debate
arose in the months after September 11, 2001, and continues to this day on
the challenge of providing the proper balance between public access and
security.

In November 2002, legislation was enacted establishing the Department of
Homeland Security (DHS).31 The Federal Protective Service, which was
part of GSA and which was responsible for protecting federal agencies
under GSA’s jurisdiction, was among those agencies whose functions and
personnel were transferred to DHS. Accordingly, DHS became responsible
for protecting buildings, grounds, and property owned, occupied, or
secured by the federal government that are under GSA’s jurisdiction. In
addition, the act provided DHS with authority to protect the buildings,
grounds, and property of any other agency whose functions were
transferred to DHS under the act. In September 2002, we reported on the
implications that the creation of DHS would have on ISC. We concluded
that the need to address ISC’s lack of progress in fulfilling its
responsibilities should be taken into account in establishing this new
department.32




31
 P.L. 107-296; 116 Stat. 2135 (2002).
32
 U.S. General Accounting Office, Building Security: Interagency Security Committee Has
Had Limited Success in Fulfilling Its Responsibilities, GAO-02-1004 (Washington, D.C.:
Sept. 17, 2002).



Page 13                                                                 GAO-04-119T
                         Although the federal government faces significant, long-standing problems
Various Efforts          in the real property area, it is important to give Congress, OMB, GSA, and
Initiated, but Real      the major real property-holding agencies credit for proposing several
                         reform efforts and other initiatives in recent years. Legislative proposals in
Property Problems        the 108th Congress (H.R. 2548 and H.R. 257333) are aimed at enhancing real
Persist Due to Factors   property management. H.R. 2548 would provide GSA with enhanced asset
                         management tools, including the use of public-private partnerships for
that Require High-       itself and other landholding agencies. This bill also provides incentives for
Level Attention          better property management, such as allowing agencies to retain funds
                         generated from the property to pay expenses associated with the property
                         and fund other capital needs. In addition, the bill contains provisions
                         aimed at improving real property data, establishing senior real property
                         managers at agencies, developing asset management principles, and
                         identifying specific conditions under which GSA can enter into real
                         property partnerships with the private sector. H.R. 2573 would provide
                         GSA with the authority to enter into public-private partnerships for itself
                         and other landholding agencies. In July 2001, we reported that public-
                         private partnership authority could be an important management tool to
                         address problems in deteriorating federal buildings, but further study of
                         this tool was needed.34 Appendix II summarizes this report and discusses
                         two examples of public-private partnership opportunities. In August 2003,
                         we also reported on other methods agencies are using to finance federal
                         capital in addition to public-private partnerships, such as incremental
                         funding, real property swaps, and outleases.35 Another initiative in the
                         National Defense Authorization Act for fiscal year 2002 gave DOD the
                         authority for another round of base realignment and military installation
                         closures in 2005. DOD officials testified that these actions could result in
                         recurring annual net savings of about $3 billion.

                         Despite these and other initiatives agencies have undertaken and the
                         sincerity with which the federal real property community has embraced
                         the need for reform, the problems have persisted and have been
                         exacerbated by several factors that will require high-level attention from



                         33
                          The Federal Property Asset Management Reform Act of 2003 and the Public Private
                         Partnership Act of 2003, respectively.
                         34
                           U.S. General Accounting Office, Public-Private Partnerships: Pilot Program Needed to
                         Demonstrate the Actual Benefits of Using Partnerships, GAO-01-906 (Washington, D.C.:
                         July 25, 2001).
                         35
                          U.S. General Accounting Office, Budget Issues: Alternative Approaches to Finance
                         Federal Capital, GAO-03-1011 (Washington, D.C.: Aug. 21, 2003).



                         Page 14                                                                   GAO-04-119T
     Congress and the administration. These factors include competing
     stakeholder interests in real property decisions; various legal and budget-
     related disincentives to businesslike outcomes; the need for improved
     capital planning; and the lack of a strategic, governmentwide focus on
     federal real property issues. More specifically:

•	   Competing Stakeholder Interests - In addition to Congress, OMB, and the
     real property-holding agencies themselves, several other stakeholders also
     have an interest in how the federal government carries out its real
     property acquisition, management, and disposal practices. These include
     foreign and local governments; business interests in the communities
     where the assets are located; private sector construction and leasing firms;
     historic preservation organizations; various advocacy groups; and the
     public in general, which often views the facilities as the physical face of
     the federal government in local communities. As a result of competing
     stakeholder interests, decisions about real property often do not reflect
     the most cost-effective or efficient alternative that is in the interests of the
     agency or the government as a whole but instead reflect other priorities.

•	   Legal and Budgetary Disincentives - The complex legal and budgetary
     environment in which real property managers operate has a significant
     impact on real property decisionmaking and often does not lead to
     economically rational and businesslike outcomes. For example, we have
     reported that public-private partnerships might be a viable option for
     redeveloping obsolete federal property when they provide the best
     economic value for the government, compared with other options, such as
     federal financing through appropriations or sale of the property. However,
     most agencies are precluded from entering into such arrangements.36
     Resource limitations, in general, often prevent agencies from addressing
     real property needs from a strategic portfolio perspective. When available
     funds for capital investment are limited, Congress must weigh the need for
     new, modern facilities with the need for renovation, maintenance, and
     disposal of existing facilities, the latter of which often gets deferred. In the
     disposal area, a range of laws intended to address other objectives—such
     as laws related to historic preservation and environmental remediation—


     36
       When agencies have additional flexibilities, we have found that they can still face
     impediments. For example, VA is required to use the proceeds from disposal of property
     for nursing home construction and DOD has lacked personnel with sufficient experience to
     undertake complex real estate transactions. See U.S. General Accounting Office, VA Health
     Care: Improved Planning Needed for Management of Excess Real Property, GAO-03-326
     (Washington, D.C.: Jan. 29, 2003); U.S. General Accounting Office, Defense Infrastructure:
     Greater Management Emphasis Needed to Increase the Services’ Use of Expanded
     Leasing Authority, GAO-02-475 (Washington, D.C.: June 6, 2002).



     Page 15                                                                     GAO-04-119T
                            makes it challenging for agencies to dispose of unneeded property.

                       •	   Need for Improved Capital Planning - Over the years, we have reported
                            that prudent capital planning can help agencies to make the most of
                            limited resources, and failure to make timely and effective capital
                            acquisitions can result in increased long-term costs. GAO, Congress, and
                            OMB have identified the need to improve federal decisionmaking
                            regarding capital investment. Our Executive Guide,37 OMB’s Capital
                            Programming Guide, and its revisions to Circular A-11 have attempted to
                            provide guidance to agencies for making capital investment decisions.
                            However, agencies are not required to use the guidance. Furthermore,
                            agencies have not always developed overall goals and strategies for
                            implementing capital investment decisions, nor has the federal
                            government generally planned or budgeted for capital assets over the long
                            term.

                       •	   Lack of a Strategic, Governmentwide Focus on Real Property Issues -
                            Historically, there has not been a strategic, governmentwide focus on real
                            property issues among decisionmakers. Although some efforts in recent
                            years have attempted to address real property issues with some limited
                            success, the problems have persisted and will continue to grow in
                            magnitude unless they are adequately addressed from a governmentwide
                            standpoint. Resolving the long-standing problems will require high-level
                            attention and effective leadership by Congress and the administration and
                            a governmentwide, strategic focus on real property issues. A strategic
                            focus on real property would be rooted in having the appropriate
                            incentives in place; ensuring transparency in the government’s actions;
                            and fostering a higher level of accountability to stakeholders, including
                            taxpayers. Also, it is important that key stakeholders develop an effective
                            system to measure results. Having quality data would be critical to
                            evaluate the progress of various reforms as they evolve.


                            The magnitude of real property-related problems and the complexity of
A Transformation 
          the underlying factors that cause them to persist put the federal
Strategy Is Needed 
        government at significant risk in this area. Real property problems related
                            to unneeded property and the need for realignment, deteriorating
                            conditions, unreliable data, costly space, and security concerns have
                            multibillion-dollar cost implications and can seriously jeopardize mission



                            37
                             U.S. General Accounting Office, Executive Guide: Leading Practices in Capital
                            Decision-Making, GAO/AIMD-99-32 (Washington, D.C.: Dec. 1998).



                            Page 16                                                                  GAO-04-119T
     accomplishment. Because of the breadth and complexity of the issues
     involved, the long-standing nature of the problems, and the intense debate
     about potential solutions that will likely ensue, current structures and
     processes may not be adequate to address the problems. Given this, we
     concluded in our high-risk report that a comprehensive and integrated
     transformation strategy for federal real property is needed, and an
     independent commission or governmentwide task force may be needed to
     develop this strategy. Such a strategy, based on input from agencies, the
     private sector, and other interested groups, could comprehensively
     address these long-standing problems with specific proposals on how best
     to

•	   realign the federal infrastructure and dispose of unneeded property, taking
     into account mission requirements, changes in technology, security needs,
                                                                 st
     costs, and how the government conducts business in the 21 century;

•	   address the significant repair and restoration needs of the federal
     portfolio;

•	   ensure that reliable governmentwide and agency-specific real property
     data—both financial and program related—are available for informed
     decisionmaking;

•    resolve the problem of heavy reliance on costly leasing; and

•	   consider the impact that the threat of terrorism will have on real property
     needs and challenges, including how to balance public access with safety.

     To be effective in addressing these problems, it would be important for the
     strategy to focus on

•	   minimizing the negative effects associated with competing stakeholder
     interests in real property decisionmaking;

•	   providing agencies with appropriate tools and incentives that will facilitate
     businesslike decisions—for example, consideration should be given to
     what financing options should be available; how disposal proceeds should
     be handled; what process would permit comparisons between
     rehabilitation/renovation and replacement and among construction,
     purchase, lease-purchase, and operating lease; and how public-private
     partnerships should be evaluated;

•	   addressing federal human capital issues related to real property by
     recognizing that real property conditions affect the federal government’s


     Page 17                                                          GAO-04-119T
     ability to attract and retain high-performing individuals and the
     productivity and morale of employees;

•	   improving real property capital planning in the federal government by
     helping agencies to better integrate agency mission considerations into the
     capital decisionmaking process, make businesslike decisions when
     evaluating and selecting capital assets, evaluate and select capital assets
     by using an investment approach, evaluate results on an ongoing basis,
     and develop long-term capital plans; and

•	   ensuring credible, rational, long-term budget planning for facility
     sustainment, modernization, or recapitalization.

     The transformation strategy should also reflect the lessons learned and
     leading practices of organizations in the public and private sectors that
     have attempted to reform their real property practices. Over the past
     decade, leading organizations in both the public and private sectors have
     been recognizing the impact that real property decisions have on their
     overall success. Better managing real property assets in the current
     environment calls for a significant departure from the traditional way of
     doing business. Solutions should not only correct the long-standing
     problems we have identified but also be responsive to and supportive of
     agencies’ changing missions, security concerns, and technological needs in
           st
     the 21 century. If actions resulting from the transformation strategy
     comprehensively address the problems and are effectively implemented,
     agencies will be better positioned to recover asset values, reduce
     operating costs, improve facility conditions, enhance safety and security,
     recruit and retain employees, and achieve mission effectiveness.

     In addition to developing a transformation strategy, it is critical that all the
     key stakeholders in government—Congress, OMB, and real property-
     holding agencies—continue to work diligently on the efforts planned and
     already under way that are intended to promote better real property
     capital decisionmaking, such as enacting reform legislation, assessing
     infrastructure and human capital needs, and examining viable funding
     options. Congress and the administration could work together to develop
     and enact reform legislation to give real property-holding agencies the
     tools they need to achieve better outcomes, foster a more businesslike real
     property environment, and provide for greater accountability for real
     property stewardship. These tools could include, where appropriate, the
     ability to retain a portion of the proceeds from disposal and the use of
     public-private partnerships in cases where they represent the best
     economic value to the government. Congress and the administration could


     Page 18                                                             GAO-04-119T
                    also elevate the importance of real property in policy debates and
                    recognize the impact that real property decisions have on agencies’
                    missions. Solving the problems in this area will undeniably require a
                    reconsideration of funding priorities at a time when budget constraints
                    will be pervasive. However, experimenting with creative financing tools
                    where they provide the best economic value for the government and
                    allocating sufficient funding will likely result in long-term benefits.

                    Without effective incentives and tools; top management accountability,
                    leadership, and commitment; adequate funding; full transparency with
                    regard to the government’s real property activities; and an effective system
                    to measure results, long-standing real property problems will continue and
                    likely worsen. However, the overall risk to the government and taxpayers
                    could be substantially reduced if an effective transformation strategy is
                    developed and successfully implemented, reforms are made, and property-
                    holding agencies effectively implement current and planned initiatives.
                    Since our high-risk report was issued, OMB has informed us that it is
                    taking steps to address the federal government’s problems in the real
                    property area. Specifically, it has formed a team within OMB to determine
                    how to approach the resolution of these long-standing issues. To assist
                    OMB with its efforts, we have agreed to meet regularly to discuss progress
                    and have provided OMB with specific suggestions on the types of actions
                    and results that could be helpful in justifying the removal of real property
                    from the high-risk list.


                    Madam Chairman, this concludes my prepared statement. I would be
                    happy to respond to any questions you or other Members of the
                    Committee may have at this time.


                    For further information on this testimony, please contact Bernard L. Ungar
Contacts and 	      on (202) 512-2834 or at ungarb@gao.gov. Key contributions to this
Acknowledgments 	   testimony were made by Kevin Bailey, Christine Bonham, Casey Brown,
                    John Brummett, Maria Edelstein, Anne Kidd, Mark Little, Susan Michal-
                    Smith, David Sausville, and Gerald Stankosky.




                    Page 19                                                         GAO-04-119T
Appendix I: Examples of Vacant Federal
Property

                          Three examples of vacant, highly visible federal properties are the former
                          main Department of Veterans Affairs (VA) hospital building in Milwaukee,
                          Wisconsin; St. Elizabeths Hospital in Washington, D.C.; and the former
                          main post office building in downtown Chicago, Illinois.

Former Main VA Hospital   A VA-owned building at a health care facility campus in Milwaukee,
Building in Milwaukee,    Wisconsin is an example of a long-held vacant federal property. This
                          134,000 square foot building, which is shown in figure 1, has been vacant
Wisconsin                 for about 14 years. The building had been used as the campus’s main
                          hospital but was vacated in 1989 primarily because a new main hospital
                          was built on the campus. VA officials told us that in June 1999, a
                          consulting firm—Economic Research Associates—issued a study in which
                          it identified various options for VA to consider in trying to enhance the use
                          of various vacant and underutilized buildings on the Milwaukee campus,
                                                                         38
                          including the former main hospital building. On the basis of the study’s
                          results, VA officials have told us that a substantial investment of capital
                          would in all likelihood be needed to convert this building for alternate use.
                          For example, to convert the building for use as housing for the elderly, the
                          study estimated that about $8.4 million to $9.3 million would be needed.
                          VA officials also mentioned that various organizations, such as the
                          Salvation Army and the Knights of Columbus, expressed some interest in
                          leasing the building; but thus far, VA has not received any firm offers from
                          these organizations. VA officials told us that in fiscal year 2001, VA
                          incurred about $348,000 in maintenance costs for this building, which
                          included such expenses as utilities, pest management, and security. Also,
                          the officials said that VA currently has no alternate use or disposal plans
                          for this building. However, VA officials have told us that updated
                          information on the planned disposal of its vacant and underutilized
                          property would in all likelihood be available after the Secretary of
                          Veterans Affairs approves the results of the Capital Asset Realignment for
                          Enhanced Services process, expected after December 2003.




                          38
                           Economic Research Associates, Report for Enhanced-Use Options, Zablocki VA Medical
                          Center, Milwaukee, Wisconsin, Submitted to Department of Veterans Affairs, ERA
                          Project Number: 12460 (Apr. 1998; Re-Issue June 1999).


                          Page 20                                                               GAO-04-119T
Figure 1: The Former Main VA Hospital Building at the Milwaukee, Wisconsin, Health Facility Campus




                                        So urce: VA.




St. Elizabeths Hospital,                The west campus of St. Elizabeths, which has 61 mostly vacant buildings
Washington, D.C.                        containing about 1.2 million square feet of space on 182 acres, is held by
                                        the Department of Health and Human Services (HHS). During the Civil
                                        War, the hospital was used to house soldiers recuperating from
                                        amputations, and the property contains a civil war cemetery. In 1990, the
                                        property—which contains magnificent vistas of the rivers and the city—
                                        was designated a national historic landmark. This is the same designation
                                        given to the White House, the U.S. Capitol building, and other buildings
                                        that have historic significance. HHS has not needed the property for many
                                        years. In April 2001, we reported that the property had significantly
                                        deteriorated and had environmental and historic preservation issues that
                                        would need to be addressed in order for the property to be disposed of or
                                        transferred to another federal agency.39

                                        In the last year, the General Services Administration (GSA), the District of
                                        Columbia (the District), HHS, and various public interest groups have



                                        39
                                          U.S. General Accounting Office, St. Elizabeths Hospital: Real Property Issues Related to
                                        the West Campus, GAO-01-434 (Washington, D.C.: Apr. 16, 2001).




                                        Page 21                                                                      GAO-04-119T
been working to resolve the situation at St. Elizabeths. In May 2002, the
Urban Land Institute formed an advisory panel that reported on several
options for redeveloping the site.40 The panel recommended that the
federal government transfer the west campus to the District and that the
District should identify a master developer for the site. The panel further
recommended that the master developer consider redeveloping the site
into four campus areas without changing the character of the surrounding
neighborhoods and without displacing existing residents. The panel
recommended preserving the historic buildings through adaptive use and
sensitive addition of new buildings. In addition to the panel, an executive
steering committee and a working group, each consisting of
representatives from the District, HHS, GSA, and public interest groups,
have been established and HHS and GSA have proceeded with a number of
actions to prepare the property for disposal. These include preparing the
property for “mothballing,” which is work done to minimize further
deterioration of the property while the disposal process proceeds;
determining the extent of environmental remediation needed; and
conducting community outreach. Figure 2 shows the vacant, boarded-up
Center Building, which opened in 1855 and served as the main hospital
building.




40
 Urban Land Institute, An Advisory Services Panel Report: Saint. Elizabeths Campus,
Washington, D.C. (Washington, D.C.: May 2002).



Page 22                                                                  GAO-04-119T
                           Figure 2: The Vacant Center Building, St. Elizabeths Hospital, District of Columbia




                           Note: Photograph taken in January 2001.




Former Chicago Main Post   The former Chicago main post office building is a 2.5 million square foot
Office                     facility that was vacated when it was replaced with a new facility in 1997.
                           The U.S. Postal Service (USPS) is incurring about $2 million in annual
                           holding costs for the property. According to USPS, the property was listed
                           for sale and publicly offered. About five offers were received and the
                           property was placed under contract of sale for $17 million. According to
                           USPS, completion of the sale has been delayed due to the weakness of the
                           Chicago real estate market and the lack of an agreement between the


                           Page 23                                                                GAO-04-119T
developer and the city of Chicago that would abate real estate taxes on a
portion of the redevelopment cost for a number of years. According to
USPS, this has created a “chicken and egg” situation for the developer.
Potential tenants are unwilling to commit to the project unless they are
sure it will go ahead. The city appears unwilling to grant the tax abatement
until the users of the building are known. USPS is hopeful that the city will
begin to address the issue.

In addition to the holding costs USPS is incurring, a deteriorating façade
will add additional repairs costs to USPS’s annual budget. Furthermore,
deterioration of the system that funnels train exhaust up through eight
shafts to the roof of the building is a problem that will have to be
addressed. The estimated cost of repair is about $10 million and is a
condition of the sale. According to USPS, another factor, which bears on
the cost of redevelopment, is that the State Historic Preservation Office
wants to impose requirements on the redevelopment of the building.
Currently, according to USPS, these requirements will add millions of
dollars to the redevelopment costs, and the buyer and USPS are reviewing
them. USPS said that this project is challenging because of the large
amount of space that needs to be developed. According to USPS, a
breakthrough in current market conditions will have to be achieved,
together with an agreement with the city, before this project can move
forward. Figure 3 shows downtown Chicago with the vacant post office
building highlighted.




Page 24                                                          GAO-04-119T
Figure 3: The Former Main Post Office in Downtown Chicago, Illinois




                                        Page 25                       GAO-04-119T
Appendix II: Use of Public-Private
Partnerships to Redevelop Federal Property

              Under a public-private partnership, a contractual arrangement is formed
              between public and private sector partners that can include a variety of
              activities that involve the private sector in the development, financing,
              ownership, and operation of a public facility or service. In the case of real
              property, the federal government typically would contribute the property
              and a private sector entity contributes financial capital and borrowing
              ability to redevelop or renovate the property. Public-private partnerships
              can be a viable option for redeveloping obsolete federal property if they
              provide the best economic value for the government, compared with other
              options, such as federal financing through appropriations or sale of the
              property. However, most agencies are precluded from entering into such
              arrangements. The Department of Defense (DOD), Department of Veterans
              Affairs (VA), and U.S. Postal Service (USPS), however, have this authority.
                                                                     th
              Proposed real property reform legislation in the 108 Congress (H.R. 2548
                             41
              and H.R. 2573 ) is aimed at enhancing real property management. H.R.
              2548 would provide GSA with enhanced asset management tools,
              including the use of public-private partnerships for itself and other
              landholding agencies. This bill also provides incentives for better property
              management, such as allowing agencies to retain funds generated through
              the use of the management tools to pay expenses associated with the
              property and fund other capital needs. H.R. 2573 would provide GSA with
              the authority to enter into public-private partnerships for itself and other
              landholding agencies.

              Public-private partnerships need to be carefully evaluated to determine
              whether they offer the best economic value for the government, compared
              with other available options. In July 2001,42 we reported that 8 of 10 GSA
              properties were strong to moderate candidates for a partnership because
              there were potential benefits for both the private sector and the
              government. The potential internal rates of return (IRR)43 for the private
              partner ranged from 13.7 to 17.7 percent. It should be noted that we did
              not calculate the IRR for the government if the government had financed
              the entire project. This comparison would need to be made to determine
              which financing option offers the best economic value for the government.


              41
               The Federal Property Asset Management Reform Act of 2003 and the Public Private
              Partnership Act of 2003, respectively.
              42
               GAO-01-906.
              43
                IRR is the present value interest rate received for an investment consisting of payments
              and income that occur at regular periods; IRR measures the return, expressed as an
              interest rate, that an investor would earn on an investment.



              Page 26                                                                       GAO-04-119T
                              Furthermore, public-private partnerships will not necessarily work or be
                              the best option available to address the problems in all federal properties.
                              Two examples of properties that were strong candidates for a partnership
                              were the Internal Revenue Service (IRS) Service Center in Andover,
                              Massachusetts and an office building in Portland, Oregon that houses the
                              Immigration and Naturalization Service known as the 511 Building. Since
                              we profiled these properties in 2001, GSA officials said that they have been
                              unable to pursue public-private partnerships for these properties because
                              GSA continues to lack authority to enter into such arrangements. In
                              August 2003, we also reported on other methods agencies are using to
                              finance federal capital in addition to public-private partnerships, such as
                              incremental funding, real property swaps, and outleases.44

IRS Service Center,           The Andover Service Center was a strong candidate for a partnership in
Andover, Massachusetts        terms of strong federal demand, moderate private sector interest in
                              development, and strong nonfederal demand for use of the property. The
                              property is a 375,000 square foot, single-story, highly secured building on
                              37 acres that is in need of capital repairs. At the time of our review, IRS
                              was leasing about 336,000 square feet in additional space in the area. GSA
                              and IRS would like to consolidate IRS’s operations, and the property
                              would be desirable for the city of Andover and local developers to
                              develop. The redevelopment strategy involved a partnership to develop a
                              small office park consisting of six, 5-acre pads. Under this plan, the project
                              could progress as follows:

                         •	   Year 1: Build a new 4-story, 700,000 square foot IRS facility and parking
                              structure for current and expiring IRS leases; the complex would be at the
                              rear of the site to allow for security and a phased development of the rest
                              of the site.

                         •	   Year 2: IRS moves into the new facility and the old building is demolished;
                              the partnership constructs another 250,000 square foot federal office
                              building for non-IRS expiring leases.

                         •	   Years 3 and 4: Partnership constructs two more 250,000 square foot federal
                              office buildings for compatible agency and private sector occupancy.
                              The analysis of this strategy projected a 14.4 percent lifetime IRR for the
                              private partner and a 9.4 percent lifetime IRR for the government. Figure 4
                              is an aerial view of the IRS Service Center in Andover, Massachusetts.


                              44
                               U.S. General Accounting Office, Budget Issues: Alternative Approaches to Finance
                              Federal Capital, GAO-03-1011 (Washington, D.C.: Aug. 21, 2003).



                              Page 27                                                                  GAO-04-119T
                    Figure 4: IRS Service Center, Andover, Massachusetts




Portland, Oregon,   The 511 building was also a strong candidate for a partnership in terms of
511 Building        strong federal demand, strong private sector interest in development, and
                    moderate nonfederal demand for use of the property. The 511 building is
                    an historic, 6-floor building in a desirable location between downtown
                    Portland and the trendy “Pearl District” that housed offices of the
                    Immigration and Naturalization Service. The property includes a parking
                    lot that was sought by the city for a pedestrian mall. The redevelopment
                    strategy included renovating the existing historic office building to include
                    storage use in the basement and retail or restaurant on the first floor. In
                    addition, the strategy included acquiring an additional site for construction
                    of a 240,000 square foot, federal office building across the street. This
                    strategy projected a 15.7 percent lifetime IRR for the private partner and a
                    12.7 percent lifetime IRR for the government. Figure 5 shows the 511
                    building (building in center of the picture).




                    Page 28                                                         GAO-04-119T
           Figure 5: 511 Building, Portland, Oregon




           If the federal government were to completely finance the Andover and
           Portland projects, it would not have to share returns with a private sector
           partner. However, we did not determine what the returns would be in such
           a situation and how the returns would compare with the returns under a
           partnership arrangement.




(543050)


           Page 29                                                        GAO-04-119T
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