Comparison of Defense Department's Methods for Providing Military Family Housing

Published by the Government Accountability Office on 1990-04-20.

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

                  United states General Accounting OfSlce / f//            7 3

For Release          Comparison of Defense Department's Methods
on Delivery
                     for Providing Military Family Housing
Expected at
9:30 a.m. EST
April 20, 1990

                     Statement of
                     Henry Hinton, Associate Director
                     National Security and International       Affairs      Division

                     Before the
                     Sug;;k:;tee   on Readiness,   Sustainability,         and

                     Committee on Armed Services
                     United States Senate

GAO/T-WAD-90-30                                                          GAO Form 160 (12187)
Mr. Chairman and Members of the Subcommittee:

I am pleased         to be here today to discuss                   our views on the
Department         of Defense's         (DOD) methods of providing                military         family
housing     in the United         States        through        housing    allowances       and
construction         programs.

DOD's long-term         construction            programs        include     (1) the use of
military     construction         funds to build               housing    on or near bases,
(2) the build-to-lease                 program,    commonly known as the "section                        801
program,"      whereby DOD leases               a newly constructed             housing      project
from a private         developer         for    up to 20 years,           and (3) the rental
guarantee      program,        commonly known as the "section                    802 program,"
whereby DOD can guarantee                 a private        developer        97-percent       occupancy
for   up to 25 years.            Currently,        there        are no section         802 projects.

On the basis         of our work in this               area,     I will     provide     our view= Gil
the preferred         method of funding            military        family     housing,       our
estimate     of the costs         of section           801 build-to-lease             projects
already     approved      by the Congress,               our analysis        of DOD's budget
requests     for     funding     for     section       801 projects,         and status          of the
802 program.

In summary, we believe             that        housing     allowances,        which assist
serv\ce     members in obtaining                housing        in the private         market,      are
the preferred               approach      to providing           military            family      housing.           In
the current            environment         of a shrinking              defense         budget,          potential
base closings,               and force         reductions,        the short-term                 flexibility
offered       by housing          allowances         is preferable                  to the long-term
commitments            involved        in construction.                We are also              concerned        about
the adequacy of DOD's justifications                              for         long-term         construction

Since      1985, the Congress                  has approved           contracts          for     8,823 section
801 build-to-lease                housing        units.         We estimate            that      the total          cost
for      the 20-year          lives     of the leases            may be more'than                  $2.3 billion.
We believe           that     these     801 projects            may    not be always cheaper than
military           construction         because private               developers'              financing        costs
will      likely      be higher         than the government's                       borrowing          costs.
Finally,           we found that          between fiscal              years         1987 and 1990, the
services           had requested          about $32 million                   for    section       801 projects
that      were not built              or occupied         as planned.                Of this       amount, the
fiscal       year 1990 budget              includes           about $10 million                 that     is not


DOD's long-standing                   policy     is to rely           first         on local      private
markets       in communities              near military           installations                 as sources          of
family      housing.           DOD provides          housing          allowances          to service            members
to a$sist           them in obtaining             housing        in the private                 market.         These

allowances        are designed            to cover most, but not all,                      of the housing
costs.       There are two types                  of housing          allowances       provided          in the
United      States:       the Basic        Allowance           for    Quarters      is a grade-
specific       allowance          that    is the same throughout                  the country;            the
Variable       Housing Allowance              is a supplement               intended       to equalize
cost-of-housing            differences            among geographical              areas.
Approximately           two-thirds         of the service              members in the United
States      receive       housing        allowances.

We see four           major advantages             to the government              in using        housing
allowances.            First,      housing        allowances          increase     or decrease            in
response       to the growth             or decline           of military        installations            and
personnel       levels.           Conversely,        the long-term            commitments              required
by construction            programs        cannot         be withdrawn        when needs decline.

Second, military                members pay some out-of-pocket                     costs     when they
receive      housing       allowances,            while       under 801 projects            and military
construction           housing      programs,        the government              provides        for     all        the
members' basic            housing        costs.      Housing allowances,                therefore,              tend
to be less       expensive          to the government.

Third,      private       housing        contractors           have flexibility            in designing
local      community housing              and may be able to pay their                      workers            lower
wages than the government                    is required             to pay in       military
construction          programs.           According           to DOD officials,            builders            of
mili.$ary-owned           or controlled            housing       must meet military               design

specifications          and Davis-Bacon             federal        wage standards,             which tend
to increase        housing       costs.

Fourth,      housing      allowances        allow       military      members a greater
selection        of housing       options      to fit       their     families'          needs instead
of limiting        them to what is offered                  in military             housing.

We are aware that             DOD is studying            the administration               of housing
allowances        as part       of a comprehensive             examination             of housing
compensation          issues.      At the request             of the Senate Committee on
Appropriations,          GAO is reviewing               DOD's effort           as part      of our review
of current       and planned         DOD housing          compensation              programs.


To the extent          that     the existing         private        market      cannot      provide
family      housing     for     service     members, the services                     may request
military      construction         funds to build             housing        on or near military
installations.           Since fiscal          year 1985, more than 16,000 military
family      housing     units     have been authorized                for      construction         in the
United      States.

As an alternative             to the services'            building          their      own housing,        the
Military      Construction         Authorization            Act of 1984 authorized                  DOD to
consider      build-to-lease          (section          801) and rental-guarantee                   (section
8021, projects.          These are pilot            programs that              will     expire    unless

the Congress takes              action      to renew them.                 The 801 program will
expire      in 1991, and the 802 will                     expire      in 1990.

Although       construction          programs      involve          inflexible        long-term
commitments,          they do have certain                 advantages.           For example,             in
situations          in which local          housing        markets         cannot meet the services'
housing      demand, such as in remote areas,                          construction            programs may
be the only         way to provide            housing.          However, we believe               that,         even
in these       situations,         DOD should         first        investigate        the use of
alternatives          that     involve      shorter        term commitments,             such as mobile
homes as was done at Fort                   Ord, California.

When housing          provided      through      construction               is appropriate,          it
ensures      that    military       members' housing                will     meet DOD standards
regarding       the amount and quality                    of living         space allowed         by rank.
Because the military               controls      this         type of housing,           it     can make
certain      that     DOD's standards           are met.            Meeting      the standards             is
less     certain      under the allowance                 program,         which lets         members
select     their      own housing          in the private             market.

Another      advantage         to construction             programs         is that     they enhance
the availability              of military       members because such housing                        is
located      at or near installations.                        This availability               is in keeping
with     the military's           policy      of placing           priority-status             personnel         in
on-base      housing         to minimize       commuting time in emergencies.

Despite      these      advantages,               the services            need to properly          justify
their      needs for      housing              construction         projects         before     making the
expensive          long-term       commitment they require.                          We recently         found
that      the Army had not adequately                         justified        its    need for     a section
801 project          at Fort       Campbell,              Kentucky.         The Army based its                     recent
request      for     a 300-unit               801 project       on inaccurate           data and a faulty

In determining           its      need, the Army inadequately                         estimated         its
housing      requirements           and the number of available                         private         rental
units.       When we corrected                    these     inaccuracies,            the Army could                 not
justify      additional          family          housing       construction           based upon its                    own
model.      Furthermore,           the Army might               still       have reached an erroneous
conclusion          regarding           its     need for       new construction               even if         it        had
correctly      calculated               its     housing       requirements           and the number of
available      rental          units.           This    is because the model it                  uses to
determine      the need for                   military-owned            or controlled          housing             is
methodologically               flawed.           The Army's model does not include                                 any
mechanism to equate the quantity                             of housing         demanded with            the
quantity      of housing           supplied.              As a result,          the Army's housing
model may indicate               a need for             additional         housing      when there                 is

As a result          of our findings,                  the Chairman of the Subcommittee                                 on
Military      Construction,                   Senate Committee on Appropriations,                             deferred
action      on the Fort          Campbell           project       until      the Army corrects                     the
errors     in its         housing           data.          The Subcommittee                  also decided          not to
approve      any new Army section                          801 projects              until     the deficiencies              we
found in the Army's model are corrected.                                             We are reviewing              the
Army's     efforts           to correct                the deficiencies               in its      model.


In section           801 projects,                 DOD leases           a newly constructed                 housing
project      for      up to 20 years                     from a private              developer.       To be
approved,       801 projects                    must      be shown by economic analysis                        to cost
at least       5 percent                less,      in present           value        terms,     than comparable
military       construction                 housing         over a 20-year               period.      Since the
program's          inception             in fiscal          year 1984, the Congress has
authorized           19,500 section                    801 family        housing         units.      During         this
period,      the services                 entered          into       25 section         801 contracts             for     the
construction           and leasing                 of 8,823 of these                  authorized      units.
Fourteen       of these                801 projects,              totaling          4,513 units,      are completed
and occupied           under lease.

Estimated       Cost of the Section                         801 Projects              Under Contract

The shelter           rent       paid to the owners of these                             8,823 authorized
housing      units        will          exceed $1.7 billion                   for     the 20-year          lives     of the
leases.        Shelter           rent       covers        the cost           of construction,          site
preparation,           taxes,            and insurance.                 Shelter        rent     does not include
maiqtenance          or      utility            costs.

DOD will        be liable         for        most of the 25 section                 801 projects'          costs
in future           years,     as none of the 20-year                     leases     have been in effect
for       more than 4 years,                 and 11 had not started                 as of February          1990.
The shelter           rent,     when all             25 project       leases       are in effect,          will
amount to about $86 million                           per year.

In addition           to shelter             rent,     DOD will       also pay the maintenance                    and
utility       costs         on these         25 projects.            Information       on which to base
estimates           of these     costs         is not available             on many of the projects.
However, on projects                   for     which the information                 is available,
maintenance           and utility             costs     average       27 percent       of total         project
costs.        Using this         percentage             as a base, we estimate              that        total      801
costs       (including         shelter         rent,      maintenance,         and utilities)            may be
about $2.3 billion               for     the 20-year             lives     of the leases.           In present
value      terms,      using     a discount              rate    of 8.7 percent          (the   current
yield       on long-term         Treasury             securities),        the cost       would be about
$1.1 billion.                These estimates              do not include            any increases         to
account       for     escalation             in the costs         of maintenance,          utilities,
taxes,       and insurance;             nor do they             include     any overhead        costs
associated           with     the planning             and administration             of the projects.

Section      801 Project          Costs May Not Always Be Cheaper Than Military
Construction          Projects

For eight       of the 25 section               801 project         locations          under contract,
military      construction           projects       were approved            within      a short        period
of time      before      or after       the section            801 projects         were approved.
For example,          in fiscal        year 1989, 108 military                  construction             units
were authorized,           and 300 section                  801 units     were placed        under
contract      at Fort      Bliss,       Texas.          In the same year,             the Navy
authorized       150 military           construction            units     and contracted           for     202
section      801 units       in New York City.                  Building      both types          of
projects      at the same time               and in the same location                   raises     questions
about the decision               process      for   determining           whether       to use military
construction          or section        801 projects.

GAO, in past          reports,       has expressed             concern     over the economic
analysis      used to show that               801 projects          are cheaper than military
construction.            Our principal           concern        is that      private      developers'
borrowing       costs     will      likely      be higher        than the government's
borrowing       costs.       As a result,           section        801 projects          should        be more
expensive       than comparable              military         construction       unless      their        costs
can be reduced.

Budgets Overstate                  Funding Needed For Section                    801 Projects

The services           use operations             and maintenance               funds to pay the costs
of their          section     801 projects.               Each year,           the services             include       a
breakout          of their         801 projects        in their         budget        submissions            for
operations          and maintenance              funding.        The breakouts                include        new
projects          they plan to implement                during         the year as well                 as the
costs      of previously             implemented          projects.

In examining           past budget            requests,       we found that                 the services            had
included          amounts for         some section          801 projects              that      had been
canceled          or delayed         beyond the budget year.                     These delayed               or
canceled          projects         amounted to about $9.9 million                           in fiscal        year
1990.       In reviewing             prior     year budgets,            we found that,             between
fiscal      years      1987 and 1989, the services                       had requested             about $22
million      for      17 section            801 projects       that      were not built                 or
occupied          during     the budget         year involved.                 For example,             in fiscal
year 1987, the Army submitted                         a budget         request        for     $1.5 million            to
cover      rent     and other         costs     for    300 units         of a proposed             801 housing
project      in Hawaii         that         was never built.             This project,             which has
also      appeared         in the Army's          budget      requests          for    fiscal      years           1988,
1989, and 1990, has still                      not been built.                 The total         amount of
funds      requested         for     this     one project        for     all     4 fiscal         years
amounted to $3.8 million.

According      to a DOD official,              the information                    shown in the annual
budget   submissions
          .          for section 801 projects are nonbinding
estimates that are usually out of date by the time the budqet                                                 is
submitted.        This official             said that             the House and Senate Committees
on Armed Services          and on Appropriations,                          which must be notified                  of
both the request          for     proposal          and the award winner                    before     an 801
project      can be undertaken,              are kept up to date by a periodic
listing      showing all        801 projects           that         are under contract,                in the
request-for-proposal              stage,      or under consideration.                         This     listing
is usually      not in agreement              with the services'                    budget     submissions
and does not include              cost      information.

Under this      approach,         differences          exist          between the number of 801
projects      appearinq     in the services'                      budgets     submissions            and the
actual     number of projects               on which expenditures                    are being made.
The end result          is that     the Congress does not know with                              certainty
how much is being          spent on 801 projects                          in any one year or the
extent     to which funds earmarked                   for         801 projects        in budget
submissions      are being         spent      for    other          family        housing     purposes.

Appendix      I shows detailed              information             on the fiscal            year 1990
budget     regarding      funding        requests           for     rental        payments and other
related     occupancy      costs      for     projects             that    will     not be built         or
completed      during     the year.           Therefore,             the funding            requested      for
these projects          is not required.


Section       802 rental-guarantee               projects       are housing            projects         for
which DOD quarantees             a 970percent            occupancy       for     up to 25 years when
the developer        agrees to give              priority      consideration                 to renting        to
service       members.      To be approved,              an 802 project               must     be shown by
economic analysis           to cost       less      than a similar           military
construction        project.         Also,    the project            must be affordable                  to the
service       members who will         occupy it.             DOD has not defined                  what
"affordable"        means because no section                   802 projects             have been built.
However, according             to DOD officials,              "affordable"             housing         would
probably       be defined       as housing          whose costs        do not exceed a
reasonable       amount of out-of-pocket                    costs    beyond the housing

According       to DOD officials,            there       were several          reasons          that     802
projects       have not been attractive                  to contractors.                For example,
government-guaranteed             rents      were based on housing                     allowances,            which
were below market           rates.        Another        reason cited          was that
legislation       required       DOD to cancel              the contract         if     it     determined
that     maintenance      was not being performed                    properly.               This meant that
the contractor         could     lose his guarantee                 over a maintenance                  dispute.
The legislation          has been recently               revised      to eliminate              this
possibility       and to allow         utilities            to be paid       from appropriated
funds.        DOD hopes that         these    changes in the legislation                         will

generate    more contractor      interest        in the 802 program.     DOD is
currently    considering      an 802 project.

This concludes     my prepared     statement,        Mr. Chairman.     I will   be
happy to respond to any questions                you or the other    Members of the
Subcommittee     may have.

APPENDIX I                                                          APPENDIX I

Table 1.1:         Funds for       801 Projects        Not Required      in Fiscal      Year 1990
Dollars         in Thousands
                                   Units shown         Appro-
                                   as occupied         priation              Current
Location                           in 1990             request               status

      Ft. Benning                    150            $583           Project      deleted.
      Ft. Bragg                      200              756          Project      being considered.
      Ft. Devens                     100              570          Project      being considered.
      Ft. Dix                        100              555          Project      deleted.
      Ft. Wainwright"                350           3,503           Project      deleted.
      Oahu Consolidated              200           1,133           Project      being considered.
        Total    Army                             $7,100
      29 Palms                       100           1,000           Contract      terminated.
        Total    Navy                             $1,000
Air     Force
      Whiteman                       100           1,330           Project deleted.
      Hurlburt                        50             167           Contract being solicited.
      March                          100              276          Project deleted.
        Total    Air    Force                     $1,773
        Total    all    services                  $9,873

aThe amount of the appropriated                   request         is a net amount of two
projects at Ft. Wainwright.