The Disinvestment in Federal Office Space

Published by the Government Accountability Office on 1990-03-20.

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

For Release       The Disinvestment      in Federal
on Delivery       Office   Space
Expected    at
10:00 a.m. EST
March 20, 1990

                  Statement  of
                  L. Nye Stevens,    Director
                  Government   Business    Operations     Issues
                  General Government     Division

                  Before   the
                  Subcommittee     on Water Resources,
                    Transportatibn        and Infrastructure
                  Committee     on Environment     and Public      Works
                  United   States   Senate

GAO/T-GGD-90-24                                                      GAO   Form   160 (12/‘87)
                              THE DISINVESTMENT IN
                              FEDERAL OFFICE SPACE

                           SUMMARYOF STATEMENTBY
                               L. NYE STEVENS
                        DIRECTOR, GOVERNMENTBUSINESS
                              OPERATIONS ISSUES

For   a variety     of reasons,      the federal    government has neglected,
for nearly 2 decades, the            need for capital       investment    in modern,
quality    working space for         its employees.        Needed repair and
modernization       projects  as     well as construction        have been
deferred.       This failure    to     invest sufficiently       in public
buildings     is beginning    to      impede the capability        of federal
agencies to carry out their              missions;-
Another major consequence is the steadily          rising    dependence on
costly    leased office    space.   More and more revenue that could be
used to finance      needed capital   investment   is being siphoned off
to meet spiraling       annual lease costs--$1.2     billion   today and
projected     to rise to $2 billion     in the mid-1990s.
GAO recently       issued a series of three reports              which emphasized
that billions        of dollars     could be saved if the qovernment owned
more of its office         buildings     rather than leased them. Based on
these reports        and its general management review of GSA, GAO has
identified     five principal        obstacles    to increased capital
 investment     in public buildings:         (1) GSA’s lack of a strateqic
concept of its role,          including     a long-term     strateqic      buildings
plan; (2) GSA's pervasive            management information           systems'
problems;     (3 1 the congressional         project    authorization       process
that forces both GSA and Congress to think on a transactional
project-by-project         basis;     (4) the inability      of the Federal
Buildings     Fund to finance long-term            capital    investment       needs:
and (5) an inherent          budget bias against increased             federal
ownership of space when compared to leasing.
-The $3 billion     construction program proposed by GSA and OMB for
 congressional    consideration  illustrates   the effect    of these
 obstacles.     Not only is the lease-purchase     financing   mechanism
 considerably    more expensive than direct    financing,    but Congress
 also has no assurance that the projects       meet the most critical
  long-term   needs.
 GAO makes several  recommendations for             a more foresighted,       cost-
 effective approach to meeting federal              space needs.
 Mr. Chairman             and Members of the Subcommittee:

 We   welcome         this       opportunity           to appear           before      you today          in
 connection           with       your oversight             of the General                 Services
 Administration's                   (GSA) public          buildings           program.          My testimony
 summarizes           a body of work that                   provides          grounds         for     serious
 concern      about          the     federal      government's              current         ability       to provide
 quality        office          space for        its     employees          at a reasonable                  cost.

 One of the           serious         consequences           of budget          deficits             has been to
 shortchange             the       investment          required      to efficiently                  maintain
 government           operations.              Pervasive         shortfalls           in funds         for
 financing         the basic            infrastructure              for     providing          government
 services        --      such as facilities,                 people,          and computers              --          .
 threatens            to compromise             the ability          of federal             agencies          to
 accomplish           their         missions.

 Public      buildings,              the    subject       of your hearing                  today,      provides
 one of the principal                      examples of disinvestment                        in the
 government's             infrastructure.                 For a variety               of    reasons,          the
. government,            for     nearly        2 decades,         has neglected               the need for
 capital        investment            in modern,          quality          working         space for          its
 employees.              Available          evidence        suggests          that     this         was short-
 sighted,        that          agencies’        mission      accomplishment                 as well          as
 employees'            morale        and productivity               can be adversely                  affected,
 and that        a major            infusion      of funds          will      now     be    required          to

compensate           for        this     neglect.            A classic                case in point                   is the
serious          deterioration                 of the nearly                  SO-year-old             Pentaqon            building
and the estimated                      $1 billion           that        will         be needed to bring                     it      up
to acceptable              standards.

A September              1989        joint      OMB/GSA study.of                      federal         building            needs
and financing              options            concluded            that        a cumulative                 Federal
 Buildings          Fund revenue                shortfall              of     $4 billion             (in     1989        dollars)
since       1975 resulted                in a backlog                  of     mqjor     repair             and
modernization                projects           in existing                 public      buildings                and a
 siqnificant          deferral               of new construction                       projects             to    meet      lonq-

term space needs.                       This      study      noted major                challenges                in
maintaining           over           1,600 government-owned                           buildings             because they
generally           need a major                system       overhaul                every      20 years,              and-more           .
than      half      of them are over 40 years                                 old.      Also,         many of them are
 monumental          in design                and historically                   significant.

 Another         consequence             of     shortchanging                  investment             in facilities                  is

 the     steadily          rising            dependence        on costly               leased         office           space.
 Since      1969,        for     example,          leased          office            space has qrown by 183
.percent,         and the            ratio      of leased              to owned office                     space has risen
 from 39 percent                 to 47 percent.                    Similarly,               the costs             of leased
 space have skyrocketed                         from $389 million                      in     1975         to $1.2 billion
 today      and are projected                     by GSA to                 reach $2 billion                 by       the mid-
 1990s      as    more         old     leases       expire         and are renewed at today's
 inflated          prices.             More and more revenues                          that      could           be    used to


     finance          needed capital            investments          are being       siphoned              off        to pay
     spiraling          lease      bills.

     Because          of deferred           capital      investment         in needed repairs                     and
     modernization              as well       as in new construction,                    we sense that
     agencies          are becoming            increasingly          dissatisfied          with        their           space.
     Also,        agencies       are placing           increasing        demands on GSA for
     different          and better           space as the nature                of office         work changes.
     More      and more tenant               agencies      and their           congressional               supporters
     are perceiving               their       space as well          as GSA's facilities                    manaqement
     program to be detrimental                        to their       mission      accomplishment                      and are
     attempting          to qo it           alone.       Out of frustration,               they        are chipping
     away at GSA's public                    buildings      authority.            The Pentagon                   is
     breaking          away from GSA, and the courts                        are making a serious                        bid
     to follow.

     At your          request,       Mr. Chairman,          and three           of your Senate
     colleagues,            we recently           issued    a series           of three      reports              on the
     effectiveness              of GSA's efforts              to improve the             ratio        of
     government-owned                to leased         space:

     -- In our first                report,      Public       Buildings         Service:          GSA's
            Projection           of Lease Costs            in the      1990s     (GAO/GGD-89-55,                      Apr.
            19,    19891,       we analyzed           GSA's projection            that      the cost              of
            leasing         space would increase                 from $900 million               in    1986           to $2
            billion       by     1995.        we found that          some      of the data            used to make

     the projection             was unreliable,              although         the model used to
     make the projections                  was basically          sound.

--   In our second             report,      Building         Purchases:          GSA's Program Is
     Successful         But Better          Policies         and Procedures             Are Needed
     (GAO/GGD-90-5,             Oct.      31, 19891,         we examined         GSA's building
     purchase         program.           Our major      message was that                although
     building         purchases          need to be better             managed, the program has
     proven         to be an economical              means f-or acquiring                office          space.
     While      GSA agreed         with     our findings,             conclusions,          and
     recommendations,              we should         point      out that        its     fiscal      year      1990
     and     1991     budgets      include        no new funds          for     building          purchases.

--   Finally,         in our third          and perhaps          most important              report        of the
     series,         Federal      Office     Space:          Increased         Ownership          Would
     Result         in Significant          Savings         (GAO/GGD-90-11,             Dec. 22, 19891,
     we concluded          that        GSA could       meet federal            office      space needs
     more economically                 through     ownership          rather     than      leasing         but
     recognized          several         impediments         to that      approach.              me made
     several         recommendations             to GSA as well           as Congress             that     were
     designed         to facilitate           increased         federal        ownership.

Also,      we have just           completed        a general          management review                  of GSA.
In our report,            General         Services      Administration:                 Sustained
Attention           Required      To Improve         Performance          (GAO/GGD-90-14,                 Nov. 6,
19891,       we concluded,             among other          things,     that      (1)    GSA needs to

 assume a greater                 central        management leadership,                     policy         guidance,
and oversight             role      in the public             buildings        area         but      (2)     GSA's
 management practices                     and systems would not allow                         it     to
 successfully            complete           such a role          change and thus                   improve     its
 performance.             We made a number of                    recommendations                   designed           to
 enable      GSA to assume a policy                       quidance        and oversight               role     more


 On the basis            of this          body of work,           we derived              what we believe
 are five        principal           obstacles           to effecztively            meeting          federal
 space needs.            These      obstacles            have serious         economic,              political,
 and/or      sociological                consequences.

 No lonq-term            strateqy

 First,      as emphasized                in our November            1989     general              management
 report,        GSA lacks          a strateqic            concept     of     its      public'        buildings
 role.       Because         of    its      historical        predilection                toward      operations,
. to the neglect           of its           central       management functions,                      GSA developed
 a practice         of    thinking           and planning           on a short-term,                  reactive,
 and transactional                 project-by-project                basis         that     persists          today.
 GSA still        lacks       a comprehensive                long-term        plan         that      promotes              more
 strategic        thinking           about       the proper         mix     of owned and leased
 buildings        and identifies                 and prioritizes             total         short          and lonq-

term federal               space needs as well                   as the most economical                   way of
meetinq       them.          This      compromises           GSA's credibility                  and prevents                 it
from fulfillinq                its      intended        central        management role.

GSA's lack           of a strategic              concept         of    its      role     also       hampers
congressional               oversight          and decision-making.                      Without       a capital
investment           strategy          that     identifies            total      short        and long-term
space needs,               relative       priorities,             and funding            requirements            as
well      as financing               alternatives,           Congress           cannot        (1)
systematically                and rationally.            identify             the most critical                or most
cost-beneficial                projects         to be constructed                  or renovated,               (2)
monitor       GSA's performance                  in meeting            overall         space needs, or                     (3)
anticipate           future          capital     investment            funding         requirements.

Accordingly,               our December 1989 report'on                          GSA's efforts             to           .
increase        federal          ownership           of space recommended,                      among other
things,       that         GSA prepare          annual       long-range            facility          plans      that
identify        total         space needs and the most economical                                   means of
meeting        them.          Since GSA has not yet done that                               and the       20    new
construction               projects        GSA is proposing                   to initiate           between      fiscal
years      1991      and 1993 did              not emanate from such a plan,                           Congress
cannot       effectively              judge whether              (1) the proposed                projects        meet
the highest             priority         needs and (2) the creative                           financing
techniques           GSA is          proposing        are worth          the added            costs.


GSA's lack       of a comprehensive                    capital            investment                 strategy      of its
own encourages              others        to substitute                their          own agendas.              For
example,      the     absence of a GSA strategy                                invited          OMB throughout             the
1980s to      impose a general                    policy     of owning only                         courthouses,
departmental          headquarters                buildings,            and some special                      purpose
space such as laboratories                         and to lease                 all         other     space -- a
policy      colored         by OMB's goal             of    reducing             the size             and role        of
government.           It     also        places     GSA.in         a    weak position                    to counter        the
tendency      of individual                Members of Congress                          to place          buildings        in
their      own states         or districts.                 The ‘lack of *a comprehensive.
investment          strategy          also     encourages              GSA’s          short-sighted             tendency
to allocate          projects            somewhat equally                 among its                 regions     for
internal      political              reasons.

Unreliable          information            systems

Secondly,      our general                management review                     and other             reports
pointed      out that          GSA has pervasive                    management information
systems      problems          which seriously                   restrict             its      ability        to manage
public      buildings             effectively.             Its      information                 systems
supporting       public            buildings        activities              do not produce                    accurate      or
timely      management information                     or        contain          all        needed data.
Consequently,              they     do not permit                forward         thinking             or informed
decision-making.                   For    example,         our general                  management report
pointed      out that             GSA senior         executives                were not getting                 the
financial       and program               information             they         needed to do strategic

planning,         assess       progress          toward      agency goals             and objectives,
analyze         and forecast           trends,      or exercise            executive        control          over
GSA's multifaceted                  businesses.            Without        reliable,        accurate,          and
timely         information,           GSA cannot          effectively          plan,     manage,        or
oversee         federal       space needs.

The prospectus              authorization           process

The congressional               prospectus     authorization                   pzocess        is a third
obstacle.           It     forces      both GSA and Congress                   to think        on a           -
prospectus-by-prospectus                     basis.          GSA is required             by law to
develop         and submit          to the Public            Works Committees              a prospectus
for     each     capital       investment          project       expected           to cost     over     $1.5
million.           Each prospectus               stands      on its       own and -does not mention                   -
other      competing          projects.           The Public          Works Committees,                           _
understandably,               consider       prospectuses               individually          without        data
on total         capital       investment          needs,       the      relative       priorities           of
competinq          projects,          or the availability                 of funding.           This
individual          transaction            focus    mitigates            strategic       thinking,           can
result         in irrational           spending       decisions,            and can open the door to
undue political               influence.          One of the principal                  arguments        OMB has
made over          the years          against      capital        investment           initiatives           is
what it         perceives        as a pervasive              tendency        for      Congress       to treat
them as a pork              barrel.
    Funding         shortfalls

    A     fourth     major        obstacle        to increased              capital          investment            is
     funding        shortfalls.              Although        the       Federal        Buildings            Fund was set
     up     to provide        revenues          for    capital           investment,           it    has largely
     failed        to do so.           Between 1975 and 1988, for                         example,            the Fund
    generated          an average            of only        $97 million              per year        (in      constant
     1988 dollars)            for     construction            and acquisition.                      The inadequacy
.                                                                                                                               l

     of this        funding         level      is apparent             when it        is compared to the
    estimated          $3 billion            in funding            required          to 4konstruct            the 20..
     buildings         GSA wants to initiate                       between       fiscal        years        1991        and
     1993.         One reason          for     the deficient               revenues          is that        OMB and
     Congress        have periodically                 restricted             the     rent     GSA charges                   tenant
     agencies.           Since       the Fund was established                         in 1975,         rent              .
     restrictions            have reduced             its     revenue'by             $4 billion            (in     1989        ..

     dollars).           This       is money that            could         have been used to finance
     capital        investment.

     The current          budget        process

     The final         and perhaps             most important                obstacle          is the       inherent
    'bias      against       capital          investment           built      into     the current               federal
     budget        process.          The budget             system         is inherently            biased         because
     of     the disadvantage                 ownership        investments             face     due to the need to
     recognize         and record             total     costs          over a relatively               short            period.
      In contrast,           other      costs,        such as leasing                 costs,        can be spread

out over a much longer                      period.         For    example,         the entire          costs            of
constructing              a building          are outlayed              during     the     few years          of
construction,              but     only     one year's           rent     has to be outlayed                  for        a

leased       building            even though         the government               is obligated          to
continue         making those              annual        payments over the entire                     period         of
the     leases.           As a result,             the    budget        process     places      ownership
projects         at a distinct              disadvantage           during         budget      deliberations.
These projects              must compete with                other        means for         acquiring             space,
such as leasing,                  which show up in the budget                       as much lower
initially         but commit the government                        'to significantly              higher           .lOng-
term costs.               Consequently,             GSA and Congress               have typically
selected         the leasing              option     which       is actually         more costly              over
the     long     term.

As    we reported           to you in December 1989, billions'of                                dollars             ..
could       be   saved      if     the     federal       government          owned office             space
rather       than        leased     it.       Our analyses              comparing        the costs           of
increased         government              ownership        to the alternative                 of continuing
to lease         equivalent           space showed that                  GSA could         realize
significant          savings         by increasing               the proportion             of federally-
owned space.

We found that              constructing             43 buildings           GSA identified              as
potential         new construction                  candidates           between     fiscal          years        1991

and 1995 would              save $12 billion                over 30 years            when compared to

leasing        equivalent             space--a              “present            value”      savings         of    about         $1.3

billion        in     1989        dollars.

Because of the Fund’s                         inability              to generate            sufficient              revenue
for      construction              and the        inherent                budgeting         bias        against       Capital
 investment,           GSA has been forced                           to increase            its     reliance          on
costly       leased          space.          Similarly,               GSA has turned                to costly
 alternative           financing             techniques               to finance            new construction.
 These techniques,                   a form of borrowing                          from the private                sector,

 allow     GSA to        supplement              limited             Fund..revenue%.

 The marginal           costs         of     these          techniques             are considerable.                      For
 example,       our      December             1989      report            showed that             the     “purchase-
 contract”          techniques               GSA used to finance                         the construction              of
                                                                                                                        s. 68
 buildings           in the early              1970s         ccyt,         in .1988 present                value      terms,
 $288 million            more than comparable                             treasury         financing.               For the        10
 new construction                   projects          that      we understand                 GSA is proposing                    to
 finance       through            lease-purchase,                    we estimate            that        the additional
 marginal           financing          costs         will      likely            be $463 million                 over a 30-
 year period           with         a present           value         of        $166 million.               (This     assumes
 that     GSA will           be     successful              in limiting              private            financing         costs
.to     75 basis        points         above the Treasury                         rate.)          While      lease-
 purchase           is preferable               to leasing,                it     is unquestionably                  more
 costly      than       financing             through          Fund revenues,                  direct
 appropriations,                  or U.S. Treasury                    loans.


Ideally,          Congress          should          eliminate          the current          bias       against
federal          ownership          of     office          space by restructuring                  the current
federal          budget      to include              a capital          component          as we have
recommended before.                        A capital          budget          would help       correct         the
budget      bias         and still          disclose          the entire          cost      of acquiring
assets.           The basic              idea would be to annualize                      the costs            of
capital          acquisitions              by spreading               the costs       in the       budget          over
the    useful        lives         of the asset..               The annual           amount would be shown
in the operating                   part     of the budget               as an operating                expense.
This      would put          capital          acquisition              costs     on a comparable               basis
with      annual         lease      costs.           A fuller          description          of this          concept           is
contained           in     our August           1989        report      Budqet       Issues:           Restructuring                -
the Federal              Budget-The           Capital         Cbmponent          (GAO/AFaD-89-52).                    -

However      ,    capital          budgeting           has to be considered                  as a long-range

solution          because          there      are conceptual                  and practical            questions           to
be resolved              before          such a system could                   be implemented.
Recognizing              this,      we recommended in our December 1989 report                                            on
federal          ownership          of office              space,      that     GSA take        a leadership
role       in demonstrating                  the benefits              of capital          budgeting          by
separating           its         Fund activities               into     the categories                of    operating
expenses          and capital              investment.                In response          to our
recommendation,                   GSA took          that     first      step      in its       1991        budget.

Regardless            of this              outcome,       it      is     imperative,          as     emphasized            in
our November 1989 general                               management report,                 that        GSA (1)
refocus        its        facilities               management role              from one of operatinq
public        buildings              to one of providing                     central       management
leadership,               policy          guidance,            and oversight,            and (2) improve                  the
quantity,            quality,             and reliability                 of its       supporting           management
information               systems            so that       it     can better           determine           the total
costs        to operate              individual           buildings           and project              future          leasing
requirements                 and associated                costs.           Only then         can GSA implement                      a
critically            needed strategic                     planning’process-and                      be held               .
accountable               for       its      results.           Once GSA institutionalizes                             such a
process,        a governmentwide                        capital          investment        strategy           can then be
developed            to      (1)     cost-effectively                    increase       the        ratio     of
government-owned                     space,         (2) safeguard              valuable        public         building                   _
assets,         (3) bring                 about     needed improvements                    in the quality                of. the
workplace,             and (4) provide                   a framework            to promote             better
congressional                   oversight           and decision-making.

As part        of      its         overall         operating            philosophy,         GSA will            need to
develop        more of a customer-oriented                                  focus      and forge            strong
partnerships                 with         tenant     agencies.              This    way,      GSA’s planning                   can
better        take        into        account        strategic             considerations,                 such as
workforce            location              and .emerging               technological          trends,           that     not
only      affect          office           space needs but agencies’                        mission
ef feet iveness                 as well.

GSA has made some progress                   toward        this    goal.          In response           to our
general      management and space ownership                        reports,          GSA      has recently
established          broad     goals      and objectives           for     its      Public      Buildings
Service      which     it     believes      will   provide         clear         direction,         a
framework      for     action,         and a guideline            for    operations.             we will
evaluate      the adequacy             of GSA’s new strategic                    planning       efforts        as
part   of our ongoing             general      management report                  follow-up.
                     .             2
That concludes              my prepared      statement,-          Mr. Chairman.                My         .-
colleagues      and I would              be pleased        to respond            to any questions.