oversight

General Services Administration: Actions Taken to Correct Rent Expense Estimation Weaknesses

Published by the Government Accountability Office on 1999-08-19.

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

                 United States General Accounting Office

GAO              Report to Congressional Requester




August 1999
                 GENERAL SERVICES
                 ADMINISTRATION
                 Actions Taken to
                 Correct Rent Expense
                 Estimation
                 Weaknesses




GAO/GGD-99-123
GAO                United States
                   General Accounting Office
                   Washington, D.C. 20548

                   General Government Division



                   B-282846

                   August 19, 1999

                   The Honorable Bob Franks, Chairman
                   Subcommittee on Economic Development,
                    Public Buildings, Hazardous Materials
                    and Pipeline Transportation
                   Committee on Transportation and Infrastructure
                   House of Representatives

                   Dear Mr. Chairman:

                   This report responds to the Subcommittee’s request for a review of the
                   General Services Administration’s (GSA) system for estimating the rental
                   expenses of the Federal Buildings Fund (FBF). The Subcommittee was
                   concerned about how GSA estimated the funding needs for the rental-of-
                   space account within FBF. On August 8, 1997, and again on January 9,
                   1998, the Subcommittee received requests from GSA to allow it to
                   reprogram a combined total of $324 million in New Obligational Authority
                   (NOA) from other FBF accounts into the rental-of-space account to cover
                   its underestimation of the expenses to be paid out of this account in fiscal
                   years 1997 and 1998. In its requests, GSA attributed the need for the
                   reprogramming actions to forecasting problems relating to lease
                   expansions, lease cancellations, rent increases for existing leases, and the
                   annualization of the fiscal year 1997 reprogramming.

                   At the time we started work on this request in August 1998, GSA’s Public
                   Buildings Service (PBS) was changing its rent expenditure tracking and
                   estimating process and developing a new computer program, known as
                   Galaxy, to facilitate this process. As agreed with the Subcommittee, the
                   objectives of our review were to determine whether (1) the new Galaxy
                   program included the elements needed for tracking actual rental
                   expenditures and forecasting future rental-of-space funding requirements,
                   and (2) the additional actions PBS was taking to improve its budget
                   process addressed the causes of its underestimation of the rental-of-space
                   account.

                   Galaxy has seven basic components that appear capable of providing the
Results in Brief   data elements needed to track the actual expenditures made from the
                   rental-of-space account and thus aid in forecasting the funding required for
                   the rental-of-space account for budget purposes. PBS has recognized that
                   the success of the Galaxy program depends on the accuracy and
                   maintenance of the data entered into Galaxy. Consequently, it has
                   emphasized this issue in its training manual for Galaxy. This manual states


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             that all active leases and projects loaded into Galaxy “must be validated.”
             The manual lists five steps that the analyst must follow to validate the
                                                   1
             information. Rent account analysts that we interviewed emphasized the
             need to maintain good communications among (1) themselves, who
             maintain Galaxy; (2) the realty specialists, who maintain PBS’ System for
                                                                  2
             Tracking and Administering Real Property (STAR), the system from which
             the data in Galaxy were downloaded, and (3) customer agencies, that
             provide information on their space needs. We agree that GSA and its
             customer agencies need to have good communications to ensure that GSA
             knows about any potential changes in inventory that a customer agency
             may plan in a given fiscal year, so that those changes are reflected in GSA’s
             budget submission.

             PBS has taken steps to improve (1) how it calculates the rental-of-space
             estimate, such as using local market rental increases instead of national
             averages in calculating the rent increase estimates, and (2) the budgeting
             process in general, by establishing the Office of Financial and Information
             Systems (FIS) to, among other things, oversee budget formulation,
             including estimating the rental-of-space account funding requirements. We
             believe that the actions PBS has identified to improve its budgeting
             process, if effectively implemented, address the causes it identified for its
             underestimation of the rental-of-space account.

             Funds from the rental-of-space account in FBF pay for all leased space in
Background   GSA’s inventory. During fiscal years 1997 and 1998, GSA received
             appropriations of about $4.6 billion in NOA for this account, about $2.3
             billion in each fiscal year. GSA submitted two requests, totaling $324
             million in NOA, to reprogram funds from other FBF accounts into the
             rental-of-space account. On August 8, 1997, GSA requested approval to
             reprogram $110 million of the fiscal year 1997 appropriated funds, and on
             January 9, 1998, it requested approval to reprogram another $214 million of
             fiscal year 1998 appropriated funds. Both requests were approved. The
             amounts requested equaled about 4.7 percent of the amount initially
             requested by GSA in its budget requests for the rental-of-space account for
             fiscal year 1997, and 9.4 percent of the amount requested for fiscal year
             1998.

             1
              We have used rent account analyst as a generic term for the budget analysts and program analysts
             who assist in maintaining the Galaxy program.
             2
              STAR is a new information system that became operational in January 1998. GSA currently uses
             STAR for project administration, space management, and client billing. We are currently reviewing
             STAR to determine what user problems may exist and what steps PBS is taking to ensure accurate,
             reliable, and consistent data in it.




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In its August 8, 1997, reprogramming request for fiscal year 1997, GSA
attributed the need for the reprogramming to three causes. First, it had
estimated that the overall average rents would increase by 2 percent, but
actual rent increases ranged from 3 to 5 percent. This resulted in the cost
to the account being underestimated by about $30.9 million. Second, on
the basis of regional expectations, GSA had overestimated the amounts
that would be saved through lease cancellations by about $74.1 million.
Third, GSA had not been able to absorb a $5.1 million congressional
reduction in appropriations requested for rental-of-space expenditures in
                 3
fiscal year 1997. According to a GSA official, the agency could not absorb
this cut because GSA was already short of NOA in this account. GSA
alerted its oversight committees in its reprogramming request letter that
these problems would also affect the rental-of-space account in fiscal year
1998.

In its January 9, 1998, reprogramming request for fiscal year 1998, GSA
attributed the need for the reprogramming to four causes. First, GSA
needed $143.6 million to cover the $110 million underestimation in fiscal
year 1997 and to annualize this error for fiscal year 1998. Second, as in
fiscal year 1997, GSA had estimated the overall average rental rate increase
at 2 percent, but actual increases ranged from 3 to 5 percent. This resulted
in the cost to the account being underestimated by about $22.5 million.
Third, as in fiscal year 1997, it had overestimated savings from lease
cancellations, this time by about $41.8 million. Finally, on the basis of
what regional staff believed was going to happen, GSA had underestimated
the need for expansion space. This resulted in a need for an additional
$6.1 million.

The process of formulating the budget is to begin no later than the spring
of each year, about 9 months before it is transmitted to Congress and 18
months before the beginning of the fiscal year in which the budget
becomes effective. During the first 6 months of this period (from about
April through September), PBS compiles information on the various
budget elements, including the rental-of-space account; reviews the
information for reasonableness and accuracy; and prepares its budget
estimates. During the next 3 months (October through December) these
estimates are to be submitted as a portion of GSA’s budget request to the
Office of Management and Budget (OMB) for review. OMB reviews the
budget request and passes it back to GSA with any changes, and GSA may
appeal OMB ‘s changes before the budget is finalized. Early the following
year (between the first Monday in January and the first Monday in
3
    The three figures total $110.1 million for fiscal year 1997 after rounding.




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                     February), the budget is to be submitted to Congress for its review and
                     appropriation of funds.

                     Because of the timing of the budget process, when GSA realizes that an
                     estimation error has been included in its budget request for that fiscal year
                     (in fiscal year 1997 in this case), the error usually cannot be corrected in a
                     future budget estimate until the second fiscal year after the error occurred
                     (in this case, fiscal year 1999).

                     To accomplish our objectives, we observed the Galaxy program in
Scope and            operation, reviewed training materials on its operation, reviewed
Methodology          documentation on the reprogramming requests, and interviewed PBS
                     officials and budget and/or program analysts responsible for maintaining
                     Galaxy in 10 of GSA’s 11 regions. We discussed with the PBS Deputy
                     Controller what elements were needed to track and forecast rent
                     expenditures. We checked to see that the elements discussed were
                     included in the Galaxy program. We did not verify the accuracy of the data
                     in Galaxy, but we did obtain information from PBS on how it planned to
                     ensure that the data would be accurate, reliable, and consistent. We also
                     did not contact customer agencies to verify the extent to which they were
                     being contacted by GSA regarding their future space needs.

                     We did our work in Washington, D.C., between August 1998 and May 1999
                     in accordance with generally accepted government auditing standards. We
                     requested comments on a draft of this report from the Administrator of
                     GSA. GSA’s comments are discussed at the end of this letter.

                     GSA has taken corrective actions to specifically improve its tracking of the
Galaxy–GSA’s Major   rental-of-space account and to improve its budget estimating for this
Effort to Improve    account. The major step taken to improve both the tracking and
Tracking and         estimating of the rental-of-space account was GSA’s development of the
                     Galaxy program to be the primary tool to manage the rental-of-space
Estimating in Its    account for fiscal year 1999 and to help manage project expenditures for
Rental-of-Space      fiscal year 2001. The reason Galaxy was developed was to provide a
Account              means to have all the regions use a consistent format, the same set of
                     tools, and the same assumptions to monitor, reconcile, and estimate future
                     expenditures from the rental-of-space account. Rent account analysts
                     responsible for the rental-of-space account had not had a financial
                     management tool for tracking and analyzing the account since September
                     1997. The previous automated system was discontinued when STAR was
                     being put on-line. Rent account analysts had been using manual
                     spreadsheets to monitor the account since that time.




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                             The Galaxy program software was developed under an existing support
                             services contract, at no additional cost to GSA except for some travel to a
                             region, as an interim program until a module could be developed for STAR.
                             Current plans are to enhance Galaxy so that it will interface with STAR. A
                             statement of work to accomplish this objective is currently being
                             developed.

                             To implement Galaxy, GSA provided each region with training on its use
                             and a copy of the software already loaded with the region’s data for active
                             lease contracts and active lease projects as of October 1, 1998. Galaxy has
                             seven basic components, which include the elements PBS has identified as
                             needed for tracking actual expenditures and estimating the funding
                             requirements for future expenditures from the rental-of-space account.
                             These components are described in table 1.

Table 1: Galaxy Components
                             Component title         Component description
                             Base leases             Provides an inventory of all active lease contracts for space
                                                     leased by GSA. This database includes lease number,
                                                     building address, base square feet, and rental cost per square
                                                     foot.
                             Reimbursable work       Tracks agreements, using RWA number, between GSA and an
                             authorizations (RWA)    agency to have GSA provide specific services that are beyond
                                                     the standard level covered by the rental agreement.
                             Intra-budget activity   Tracks transfers of funds, using the IBAA number, from the
                             authorizations (IBAA)   rental-of-space account, Budget Activity 53, to the field office
                                                     for each lease when the government is paying utilities and/or
                                                     services not included in the lease.
                             Lump sum (debits) and   Tracks debits or credits to lessors other than recurring monthly
                             withholds (credits)     rent, such as tax claims, damage claims, and lessor default.
                             Operating cost          Tracks any increases or decreases in annual rental that are not
                             escalations/consumer    the result of changes to the base leased square footage, such
                             price index (CPI)       as a scheduled increase in cost per square foot agreed to in
                                                     the lease.
                             Allowances and monthly/ Tracks amounts provided to each GSA region for its rental-of-
                             quarterly reports       space account and the plans for expending them.
                             Projects                Tracks agencies’ requests for such things as new space and/or
                                                     expansions to and deletions from existing space.
                             Source: GSA documents and officials.


                             The program can also generate various reports on both leases and
                             projects, such as base rent by month, RWAs by lease number, IBAAs by
                             lease number, lump sums by lease, operating cost escalation/CPI by lease,
                             NOA by base lease, and estimate of rent increases tied to projects.

                             Rent account analysts are responsible for ensuring that Galaxy’s data are
                             accurate, reliable, and consistent. The training manual states that all
                             active leases and projects loaded in Galaxy “must be validated.” The



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                                 manual lists five steps that the analyst must follow to validate the
                                 information. Table 2 lists these steps.

Table 2: Data Validation Steps
                                 Step Activity
                                 1    Reconcile Galaxy base leases to National Electronic Accounting and Reporting
                                                       a
                                      System (NEAR). Any discrepancies must be resolved and accounted for properly.
                                      NEAR, STAR, and Galaxy must reflect the same data at the start of the fiscal year.
                                 2    Review all lease projects in Galaxy to see whether they upload from STAR, there is
                                      a project for every expiring lease, and all projects are up-to-date and make sense.
                                 3    Enter estimated average CPI increase for each lease in order to activate the CPI
                                      projections.
                                 4    Enter all Lump Sums, IBAA’s, or RWA’s. These data should be identified through
                                      STAR, budget call data, and interviews with realty specialists.
                                 5    Ensure that the analyst keeps the database up-to-date throughout the fiscal year.
                                 a
                                 NEAR is GSA's financial accounting system.
                                 Source: GSA document.


                                 Also, other guidance in the manual indicates that Galaxy must be
                                 reconciled to NEAR on a monthly basis to ensure that accurate obligations
                                 are stated in NEAR. Further, the manual states that the effectiveness of
                                 any system is contingent upon the information it is supplied. Therefore,
                                 each region is responsible for ensuring the accuracy of the data input into
                                 Galaxy. Without accurate data, a credible status report for the rental-of-
                                 space account cannot be produced.

                                 Further, the regional rent account analysts we interviewed all agreed that
                                 communications between themselves and the realty specialists will be key
                                 in maintaining the accuracy of Galaxy. The analysts believed that
                                 communications would be of particular importance in estimating the rent
                                 account for a future budget year because, in order to estimate future
                                 expenditures, they rely not only on information about active leases, but
                                 also on information on projects in process. Project information is
                                 dependent upon the realty specialists’ communications with the customer
                                 agencies. The analysts we interviewed all believed that, with proper
                                 communications, Galaxy should help avoid past problems and improve the
                                 estimating process. We were told that all GSA regions are to create a
                                 branch that will have as one of its responsibilities the initiating and
                                 inputting of all project data into STAR. This process should help ensure
                                 that the projects are entered into STAR. In May 1999, at least one region
                                 had already begun interviewing applicants for positions in the new branch.

                                 We agree that good communication between the analysts maintaining
                                 Galaxy and the realty specialists maintaining STAR is critical to the
                                 accuracy of the data in Galaxy. To project the rent expenditure account, it



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                                          is particularly important to obtain data on lease projects, which reflect
                                          potential changes in the inventory. This information is not as readily
                                          available as data on existing leases, but must be obtained from customer
                                          agencies. Further, we agree that good communication between GSA and
                                          its customer agencies is essential to improving the accuracy of the rental-
                                          of-space estimate. However, this may not be easily accomplished, even
                                          with good communications, given that for budget purposes GSA needs to
                                          estimate changes in space requirements approximately 18 months in
                                          advance. In his testimony on April 24, 1997, the PBS Commissioner
                                          testified that, when he asked federal agency facility managers in a
                                          quarterly meeting whether they could identify the space reductions from
                                          downsizing a year in advance, they all said that they could not. This shows
                                          how difficult it may be for GSA to get accurate information on changes in
                                          the inventory.

                                          In addition to implementing Galaxy, GSA has taken other steps to address
Improvements to Other                     its underestimation that led to a total of $324 million in reprogramming
Problem Areas in PBS’                     requests for fiscal years 1997 and 1998. Table 3 lists the areas with budget
Rental-of-Space                           estimation problems in the rental-of-space account as well as the NOA
                                          needed by fiscal year.
Forecasting Process
Table 3: Areas Underestimated in the
Rental-of-Space Account, by Fiscal Year   Dollars in millions
                                          Problem area                                            FY 1997              FY 1998
                                          Underestimating rent increases                            $30.9                $22.5
                                          Overestimating lease cancellations                         74.1                  41.8
                                          Congressional reduction for lease expenditures              5.1                   0.0
                                          Annualization of fiscal year 1997 shortage                   0.0               143.6
                                          Underestimating expansions                                  0.0                   6.1
                                                                                                           a
                                          Total                                                    $110.0               $214.0
                                          a
                                          Does not total due to rounding.
                                          Source: GSA documents.


                                          In addition to implementing Galaxy, GSA has taken several other steps to
                                          specifically address the problem areas listed in table 3. First, a GSA
                                          official told us that GSA regions would use local market rental rate
                                          increases to determine the region’s estimated rental rate increase for a
                                          budget year. In fiscal years 1997 and 1998, GSA used national averages to
                                          determine rental rate increases. Further, according to an official, GSA will
                                          try to improve its estimation of lease cancellations by comparing the
                                          amount of a region’s projected cancellations with the historical trends for
                                          that region. If the projected cancellations for a region appear to deviate
                                          from the historical trends, the divergence will be reviewed to see whether
                                          there is a justification for it. If there is not, GSA will rely on the historical
                                          trend data. In fiscal years 1997 and 1998, the budget estimates that



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                      B-282846




                      overestimated the savings from lease cancellations relied on the figures
                      provided by the regions. Finally, with regard to expansion space,
                      according to a GSA official, no specific action other than the use of Galaxy
                      is being taken. The variance in this area only amounted to 0.03 percent
                      and that only in fiscal year 1998.

                      Also, PBS officials told us that four controls have been established to
                      improve the rental-of-space account estimate of future expenditures. Each
                      region (1) will be required to develop a financial plan to be used to track
                      the rental-of-space account on a quarterly basis, (2) will be required to
                      provide an explanation for a variance of plus or minus 0.5 percent between
                      actual obligations and the established targets, (3) will have a set limit of
                      NOA for existing leases and annualizations of leases, and (4) will have a
                                                                      4
                      “cannot exceed limit” for indefinite authority.

                      Further, as we stated in our March 1998 testimony on overestimation of
                      rental revenue projections, GSA issued an order in July of 1997
                      establishing FIS, with one of its responsibilities being the budget
                                          5
                      estimating process. It also hired a chief financial officer to oversee FIS. If
                      implemented as designed, both actions should, in our opinion, improve
                      PBS’ financial management of FBF.

                      Galaxy appears to have elements needed to track PBS’ rental-of-space
Conclusions           account and aid in more accurately estimating this account for future
                      budgets. To the extent that PBS effectively implements the steps it has
                      taken to maintain accurate data and good communications within GSA and
                      with its customer agencies, has improved its estimation and budgetary
                      process, and has corrected the problems it identified as causing its
                      underestimation of the rental-of-space account, it should be able to
                      produce better estimates of this account in the future.

                      On July 16, 1999, the PBS Deputy Controller provided oral comments on a
Agency Comments and   draft of this report. He said that GSA generally agreed with the draft
Our Evaluation        report and pointed out that PBS had established a requirement that the
                      regions explain variances of plus or minus 0.5 percent between actual
                      obligations and established targets. We modified our report to reflect this
                      requirement.


                      4
                       PBS defines indefinite authority as the funding for unplanned expansions whereby the net new
                      increase in revenue is sufficient to cover all associated costs of the lease action.
                      5
                       General Services Administration: Overestimation of Federal Buildings Fund Rental Revenue
                      Projections (GAO/T-GGD-98-69, Mar. 5, 1998).




                      Page 8                                           GAO/GGD-99-123 PBS’ Rent Estimating System
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We are sending copies of this report to Representative Robert E. Wise,
Ranking Democratic Member of your Subcommittee; Senator Ben
Nighthorse Campbell, Chairman, and Senator Byron L. Dorgan, Ranking
Minority Member, Senate Subcommittee on Treasury and General
Government, Committee on Appropriations; Senator George V. Voinovich,
Chairman, and Senator Max S. Baucus, Ranking Minority Member, Senate
Subcommittee on Transportation and Infrastructure, Committee on
Environment and Public Works; Representative Jim Kolbe, Chairman, and
Representative Steny Hoyer, Ranking Minority Member, House
Subcommittee on Treasury, Postal Service, and General Government,
Committee on Appropriations; the Honorable David J. Barram,
Administrator, GSA; and to others upon request.

If you have any questions regarding this report, please call me or Ron King
at (202) 512-8387. The key contributor to this assignment was Tom
Keightley.

Sincerely yours,




Bernard L. Ungar
Director, Government Business
  Operations Issues




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