oversight

Military Base Closures: Observations on Legislative Proposal for No-Cost Transfer of Surplus Property

Published by the Government Accountability Office on 1999-07-01.

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

                          United States General Accounting Office

GAO                       Testimony
                          Before the Subcommittee on Military Installations and
                          Facilities, Committee on Armed Services, House of
                          Representatives


For Release on Delivery
Expected at
2:00 p.m., EDT
                          MILITARY BASE
Thursday,
July 1, 1999
                          CLOSURES

                          Observations on
                          Legislative Proposal
                          for No-Cost Transfer
                          of Surplus Property
                          Statement of David R. Warren, Director, Defense
                          Management Issues, National Security and International
                          Affairs Division




GAO/T-NSIAD-99-215
                      Mr. Chairman and Members of the Subcommittee:

                      We are pleased to be here today to discuss a proposal to amend the 1988
                      and 1990 base closure laws. The proposal would promote economic
                      redevelopment of affected communities by transferring property to them
                      without consideration. Under the proposed legislation, affected
                      communities receiving property under an economic development
                      conveyance (EDC) could receive that property at no cost if certain
                      conditions are met.1 Currently, EDCs are available at or below fair market
                      value and at no cost for rural communities. The proposal involves a
                      trade-off between recouping the value of surplus property and providing
                      communities opportunities to enhance economic recovery. The trend in
                      recent years regarding BRAC-related properties has been to move toward
                      the latter. Your office asked that we comment on (1) the likelihood that the
                      proposed legislation would expedite the property transfer process and
                      (2) the expected financial consequences to the Department of Defense
                      (DOD).

                      Before discussing our specific observations, we would like to summarize
                      our key points.



Results in Brief      The proposed legislation provides an opportunity to expedite the EDC
                      process. It would likely alleviate the frustration and administrative burden
                      communities and DOD experience in negotiating agreements. In some
                      instances, the elimination of lengthy negotiations over fair market value
                      issues might have expedited property transfers. However, it is not clear to
                      what extent the legislation would uniformly shorten the time frame for
                      property transfers. Our prior work also shows that other factors, such as
                      communities’ abilities to accept property transfers in a timely fashion and
                      environmental cleanup considerations, are the primary factors that
                      determine the pace of property transfers. The legislation would impact
                      23 pending or anticipated EDCs. However, the amendment would also
                      allow up to 26 existing EDCs to be renegotiated if certain conditions
                      are met.

                      DOD will lose revenue if the proposed amendment is enacted. DOD would
                      likely forgo revenue from the 23 EDCs that are either in the negotiating


                      1
                       An economic development conveyance is a method used to transfer surplus DOD property to
                      communities for the purpose of promoting economic development of the property.




              Leter   Page 1                                            GAO/T-NSIAD-99-215 Military Base Closures
                     stage or expected to be submitted on or after April 21, 1999. The extent of
                     lost revenue for these properties would not be known until final
                     agreements are reached. The proposed legislation would also allow the
                     Secretary of Defense to approve changes in prior agreements based on
                     determinations of changes in economic circumstances. DOD estimates
                     that it would lose about $218 million (net present value) between fiscal
                     year 2000 and 2043 if all agreements are renegotiated as no-cost
                     conveyances. Approximately $87 million, or 40 percent, of this revenue
                     would be lost between fiscal year 2000 and 2005, and the remaining
                     revenue would be lost between fiscal year 2006 and 2043. Finally, the
                     Department projects the legislation will avoid about $12 million in costs
                     that otherwise would be incurred in maintaining the closed bases prior
                     to transfer.



Background           Under special legislative authorities, DOD conducted four BRAC rounds
                     between 1988 and 1995 to reduce its infrastructure and free up funds for
                     future defense programs, such as weapons modernization. To fund the
                     closures and realignments, Congress established special BRAC accounts to
                     pay for numerous activities, such as relocating personnel and equipment,
                     constructing new facilities at receiving bases, and performing
                     environmental cleanup. According to DOD data, when all BRAC actions
                     from these rounds are completed by the end of fiscal year 2001, DOD will
                     have reduced its domestic military basing structure by about 20 percent,
                     generated net savings of about $14 billion, and created recurring annual
                     savings of about $5.7 billion. We have previously reported that these
                     numbers are only a rough approximation of savings rather than a precise
                     amount.2

                     While our prior work indicated that DOD was essentially on track in closing
                     and realigning facilities and expected to finish these actions by the end of
                     fiscal year 2001 as required, progress in transferring unneeded property to
                     other users has progressed at a much slower pace and will extend beyond
                     2001.3 Under federal law, once property is no longer needed by a federal
                     agency, the property is declared excess and is offered to other federal



                     2
                     Military Bases: Review of DOD’s 1998 Report on Base Realignment and Closure (GAO/NSIAD-99-17,
                     Nov. 13, 1998).
                     3
                       Military Bases: Status of Prior Base Realignment and Closure Rounds (GAO/NSIAD-99-36,
                     Dec. 11, 1998).




             Leter   Page 2                                             GAO/T-NSIAD-99-215 Military Base Closures
                                          agencies to satisfy their requirements. Figure 1 shows the process used to
                                          screen unneeded property under BRAC.



Figure 1: DOD’s Usual Procedures for Transferring Property


  Excess                               Surplus

    Other              Other              Public              Economic            Negotiated               Public
     Other               Other             Public              Economic            Negotiated               Public
   defense            federal            benefit             development         sale to states             sale
    defense             federal            benefit            development         sale to states             sale
  activities         agencies           transfers            conveyances            or local
   activities          agencies          transfers            conveyances            or local
                                                                                 governments
                                                                                  governments

                                          Source: GAO.


                                          Excess property that is not selected by federal agencies is declared surplus
                                          to the federal government. At that point, surplus property can be
                                          transferred to nonfederal activities by various transfer mechanisms noted
                                          above. Appendix I further highlights the types of public benefit transfers
                                          and other conveyance mechanisms that may be used to transfer surplus
                                          property.

                                          Although DOD data indicate that DOD will retain a substantial portion of
                                          the BRAC property or transfer it to other federal agencies, over 150,000
                                          acres are to be transferred to nonfederal entities. Our December 1998
                                          report on the status of prior BRAC rounds shows that about 75,000 acres of
                                          the planned nonfederal transfers were expected to occur through EDCs,
                                          and most of the remaining acreage through public benefit conveyances and
                                          sales. This contrasts with the early years of implementing the 1988-93
                                          BRAC rounds, when DOD expected to rely on market sales and projected
                                          much higher revenues from such sales than it is now experiencing. While
                                          DOD originally projected about $4.7 billion in revenue from the sale of
                                          surplus BRAC properties, expected sale revenues are recently projected to
                                          be about $122 million. Land sale revenues are separate from the EDC
                                          process. Additional revenues are realized through lease agreements
                                          and EDCs.

                                          The decrease in expected sales revenue is largely attributable to national
                                          policy changes reflected in legislation that in recent years has given
                                          increased emphasis on assisting the economic recovery of communities



                                          Page 3                                 GAO/T-NSIAD-99-215 Military Base Closures
                      that were losing bases. In 1993, for example, with the enactment of Public
                      Law 103-160, increased recognition was given to the perspective that
                      reduced employment caused by an installation closure could result in
                      economic hardship to surrounding communities and areas. One means for
                      mitigating such hardship was to expeditiously transfer installation property
                      to local redevelopment authorities at less than fair market value, if
                      necessary, for reuse and stabilization of employment. As a result,
                      communities were able to obtain such property through economic
                      development conveyances at below fair market value and in the case of
                      rural areas at no cost.

                      The proposed legislation we are discussing today would authorize the
                      Secretary of Defense to transfer property at no cost to local redevelopment
                      authorities, provided that the property be used for job creation purposes
                      and that any proceeds generated from the property be reinvested in
                      economic development of or related to the installation. The legislation
                      would cover all EDCs approved after April 21, 1999. In addition, it would
                      also give the Department the authority to modify EDCs approved prior to
                      April 21, 1999, if the Secretary of Defense determines that such a
                      modification is necessary as the result of a change in economic
                      circumstances. The legislation would not require the return of any
                      payments already made to the Department. It also would not change the
                      existing requirement to screen property for use by other federal agencies
                      and by eligible recipients of public benefit conveyances for such purposes
                      as parks, education, ports, and airports.



Likelihood of         The proposed legislation provides an opportunity to expedite the EDC
                      process. However, it is not clear to what extent the legislation would
Expediting the Base   uniformly shorten the time frame for property transfers.
Property Transfer
                      Service officials we interviewed generally stated that no-cost EDCs for job
Process               creation and economic development would eliminate often frustrating and
                      contentious property valuation negotiations and enhance DOD and
                      community relations. In some instances, no-cost transfers could expedite
                      decision-making leading to property transfers or lease agreements in
                      anticipation of transfers, but in other instances, they would not necessarily
                      result in faster transfers. It should be noted that use of no-cost EDCs does
                      not mean that title to the property is immediately transferred. Transfer
                      may initially occur under a lease agreement, pending completion of
                      required environmental remediation actions that could delay title transfer.




                      Page 4                                  GAO/T-NSIAD-99-215 Military Base Closures
                  According to service officials, the key determinants affecting the pace of
                  property transfers have been each community’s readiness and ability to
                  take control of the property and the time it takes DOD to perform
                  necessary environmental cleanup of contaminated sites. They told us that
                  the pace of property transfers is not driven primarily by the appraisal
                  process or time spent in value negotiations for which the legislation would
                  offer relief. The proposed legislation does not affect these issues because
                  no-cost conveyances are just as vulnerable to these problems as any other
                  conveyance. While the legislation might eliminate the time previously
                  required for appraisals and negotiations over fair market value, these
                  actions have generally overlapped other steps in the process.

                  Regarding future transfers, Army officials expressed concern that if prices
                  were not negotiated, the services’ leverage in other aspects of the
                  negotiations over property transfers could be reduced. For example, local
                  communities using zero as their starting baseline may seek to have the
                  services pay for demolition of unwanted buildings or for asbestos and lead
                  paint removal, which the services do not usually pay for but rather consider
                  as part of the discount from the property’s fair market value. Communities
                  have been eligible for federal grants and other funding to facilitate base
                  reuse planning and property transfer. We recently reported that such
                  funding totaled $1.1 billion through fiscal year 1997.

                  Further, prior negotiated agreements could be revisited under the
                  modification provision of the proposed legislation. Because most of DOD’s
                  nonrural EDCs from the prior four base closure rounds have already been
                  negotiated, a primary concern is how the legislation might affect these
                  agreements. If, for example, no-cost EDCs were granted across the board,
                  service officials expect that communities with prior negotiated costs would
                  seek relief on the basis of changed economic circumstances.



Financial         DOD will lose revenue if the proposed amendment is enacted. Under the
                  proposed legislation, the Department likely would forgo revenue from all
Consequences of   EDCs entered into on or after April 21, 1999. However, we could not
Adopting the      estimate the extent of lost revenue because negotiations over financial
                  terms for these conveyances have not been finalized. In addition, the
Amendment         legislation allows the Department to modify EDCs in effect before April 21,
                  1999; as a result, DOD could lose $218 million (net present value). On the
                  other hand, with the legislation, the Department projects it would avoid
                  about $12 million in costs that otherwise would be incurred in maintaining
                  the closed bases prior to transfer.



                  Page 5                                 GAO/T-NSIAD-99-215 Military Base Closures
The Department likely would lose revenue from 23 nonrural EDCs that are
currently pending or anticipated.4 Service officials stated that agreements
for 5 of the 23 locations are nearing completion and the estimated revenue
ranges from $350,000 to $70 million. However, service officials said the
payment terms for these agreements would not be final until they were
signed. Therefore, we could not determine when the Department would
expect to realize this revenue.

As previously noted, the proposed legislation would also give the
Department authority to modify nonrural EDCs approved before April 21,
1999, based on a Secretary of Defense determination that there has been a
change in economic circumstances. Until DOD develops criteria for
changed economic circumstances, it is difficult to know how many of the
26 communities will be eligible to renegotiate their existing EDCs.
However, some service officials expect that the majority of eligible
communities will want to renegotiate terms of their agreements to obtain
no-cost EDCs. If all 26 communities renegotiated no-cost EDCs, DOD
estimates it could lose about $218 million (net present value) in potential
revenue between fiscal year 2000 and 2043.5 Our analysis shows that
$131 million, or 60 percent, of these revenues would have been received
after fiscal year 2005.

BRAC land proceeds have historically been used to offset BRAC costs. We
estimate that the services would collect about $87 million (constant 1999
dollars) from the existing EDCs between fiscal year 2000 and 2005, which
would be available to offset projected environmental cleanup costs. The
remaining $131 million in projected revenues would be received between
fiscal year 2006 and 2043, when much of the environmental cleanup would
already be completed. If the legislation is enacted and the communities
renegotiate existing agreements as no cost EDCs, it would eliminate some
proceeds that could be used to offset future budget requirements. As
already noted, the amount of this potential offset depends on when the
revenues would have been realized.

DOD estimates that with the proposed legislation it would avoid about
$12 million in costs. Approximately $10 million, or 83 percent, of this


4
 There are 12 pending or anticipated no-cost rural EDCs that would not be affected by the proposed
legislation.
5
 DOD used a 5-percent discount rate as specified in Office of Management and Budget Circular A-94 to
calculate net present value.




Page 6                                              GAO/T-NSIAD-99-215 Military Base Closures
                  amount would result from the avoidance of costs for protection and
                  maintenance support through the earlier transfer of property. However, the
                  extent to which the legislation will expedite final property transfers is
                  not clear.

                  DOD believes that redirecting the focus of the property conveyance from
                  an adversarial real estate deal to an effort to facilitate job creation will also
                  reduce the Department’s EDC transaction costs. We note that if the
                  legislation is adopted, DOD might be in a position to reduce the amount of
                  resources it currently devotes to managing the EDC process.


                  As I said at the beginning of my statement, the legislative proposal involves
                  a trade-off between recouping the value of surplus property and providing
                  communities opportunities to enhance economic recovery. The trend in
                  recent years regarding BRAC-related properties has been to move toward
                  the latter.

                  Mr. Chairman, this concludes my prepared remarks. We would be pleased
                  to answer any questions that you or members of the Subcommittee may
                  have.



Contacts and      For questions regarding this testimony, please contact David Warren at
                  (202) 512-8412. Individuals making key contributions to this testimony
Acknowledgement   include Barry Holman, William Crocker, Michael Kennedy, and James
                  Reifsnyder.




                  Page 7                                    GAO/T-NSIAD-99-215 Military Base Closures
Appendix I

Surplus Federal Property Transfer Methods                            Appenx
                                                                          Idi




              Page 8         GAO/T-NSIAD-99-215 Military Base Closures
Appendix I
Surplus Federal Property Transfer Methods




Page 9                                      GAO/T-NSIAD-99-215 Military Base Closures
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Related GAO Products


                   Military Bases: Status of Prior Base Realignment and Closure Rounds
                   (GAO/NSIAD-99-36, Dec.11, 1998).                                           Letter

                   Military Bases: Review of DOD’s 1998 Report on Base Realignment and
                   Closure (GAO/NSIAD-99-7, Nov. 13, 1998).

                   Military Base Closures: Questions Concerning the Proposed Sale of
                   Housing at Mather Air Force Base (GAO/NSIAD-99-13, Oct. 8, 1998).

                   Military Bases: Lessons Learned From Prior Base Closure Rounds
                   (GAO/NSAID-97-151, July 25, 1997).

                   Military Bases: Update on the Status of Bases Closed in 1988, 1991, and
                   1993 (GAO/NSIAD-96-149, Aug. 6, 1996).

                   Military Bases: Environmental Impact at Closing Installations
                   (GAO/NSIAD-95-70, Feb. 23, 1995).

                   Military Bases: Transfer of Pease Air Force Base Slowed by Environmental
                   Concerns (GAO/NSIAD-93-111FS, Feb. 3, 1993).




(709430)   Leter   Page 12                                  GAO/T-NSIAD-99-215 Military Base Closures
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