[Senate Hearing 109-613]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-613
 
          HOW DOES THE FEDERAL GOVERNMENT LEASE NEEDED SPACE?

=======================================================================

                                HEARING

                               before the

                FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT
                     INFORMATION, AND INTERNATIONAL
                         SECURITY SUBCOMMITTEE

                                 of the

                              COMMITTEE ON
                         HOMELAND SECURITY AND
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 6, 2005

                               __________


       Printed for the use of the Committee on Homeland Security
                        and Governmental Affairs



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        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

                   SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska                  JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
NORM COLEMAN, Minnesota              DANIEL K. AKAKA, Hawaii
TOM COBURN, Oklahoma                 THOMAS R. CARPER, Delaware
LINCOLN D. CHAFEE, Rhode Island      MARK DAYTON, Minnesota
ROBERT F. BENNETT, Utah              FRANK LAUTENBERG, New Jersey
PETE V. DOMENICI, New Mexico         MARK PRYOR, Arkansas
JOHN W. WARNER, Virginia

           Michael D. Bopp, Staff Director and Chief Counsel
   Joyce A. Rechtschaffen, Minority Staff Director and Chief Counsel
                  Trina Driessnack Tyrer, Chief Clerk


FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, AND INTERNATIONAL 
                         SECURITY SUBCOMMITTEE

                     TOM COBURN, Oklahoma, Chairman
TED STEVENS, Alaska                  THOMAS CARPER, Delaware
GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
LINCOLN D. CHAFEE, Rhode Island      DANIEL K. AKAKA, Hawaii
ROBERT F. BENNETT, Utah              MARK DAYTON, Minnesota
PETE V. DOMENICI, New Mexico         FRANK LAUTENBERG, New Jersey
JOHN W. WARNER, Virginia

                      Katy French, Staff Director
                 Sheila Murphy, Minority Staff Director
            John Kilvington, Minority Deputy Staff Director
                       Liz Scranton, Chief Clerk


                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Coburn...............................................     1

                               WITNESSES
                       Thursday, October 6, 2005

Robert L. Neary, Jr., Acting Chief Facilities Management Officer, 
  U.S. Department of Veterans Affairs............................     7
William H. Matthews, Assistant Commissioner, Office of Real 
  Property Asset Management, Public Buildings Service, U.S. 
  General Services Administration................................     9
Mark L. Goldstein, Director, Physical Infrastructure Issues, U.S. 
  Government Accountability Office...............................    12

                     Alphabetical List of Witnesses

Goldstein, Mark L.:
    Testimony....................................................    12
    Prepared statement...........................................    39
    Questions and responses for the Record.......................    49
Matthews, William H.:
    Testimony....................................................     9
    Prepared statement...........................................    31
Neary, Robert L., Jr.:
    Testimony....................................................     7
    Prepared statement...........................................    28

                                APPENDIX

Chart entitled ``Construction vs. Operating Leases,'' submitted 
  by Senator Coburn..............................................    27


          HOW DOES THE FEDERAL GOVERNMENT LEASE NEEDED SPACE?

                              ----------                              


                       THURSDAY, OCTOBER 6, 2005

                                       U.S. Senate,
            Subcommittee on Federal Financial Management,  
        Government Information, and International Security,
                            of the Committee on Homeland Security  
                                          and Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:30 p.m., in 
room 562, Dirksen Senate Office Building, Hon. Tom Coburn, 
Chairman of the Subcommittee, presiding.
    Present: Senators Coburn and Carper.

              OPENING STATEMENT OF SENATOR COBURN

    Senator Coburn. The Subcommittee hearing will come to 
order. Senator Carper has advised me he will be late, so we 
will begin without him to honor your time and our commitment to 
be on time.
    Our goal is to figure out how the lease operations and 
billing operations work in the Federal Government. To cover the 
Federal Government's current promised payouts, Americans will 
have to fork over more than 90 percent of their net worth. To 
pay the current debt of this country would work out to over 
$350,000 for each full-time worker. The political will to 
tackle the problem won't grow until we come clean with the 
Americans about the scope of the problem at every area in the 
Federal Government. That is what this hearing is about, 
increasing transparency about our obligations, our assets, our 
liabilities, and expenditures.
    A few weeks ago, we held a hearing on the financial 
mismanagement at the Securities and Exchange Commission. One of 
the findings was that the SEC was involved in an unnecessarily 
expensive leasing arrangement to acquire new buildings. I would 
note their leasehold improvements are financed at 9 percent. 
Once these buildings are built, the SEC won't even own them. 
What we find is the SEC is not the only agency that operates 
that way.
    What is more, last week, this Subcommittee learned that no 
one in the Federal Government keeps an inventory of what we buy 
and at what price. Today, we discovered that this data vacuum 
extends for inventory in real Federal property assets.
    Each year, $5.5 billion goes to pay rent on federally-used 
properties. We are renting space for facilities while at the 
same time we already have a vast portfolio of facilities that 
we are trying to get rid of. GAO estimates that more than 30 
Federal agencies control about $328 billion in real property 
assets worldwide. Many of these assets and structures are 
either not needed, not aligned with agencies' missions, or in 
an alarming state of deterioration. However, no comprehensive 
number of government-wide real property assets exists.
    Not only do we not know what we are renting, but we don't 
know what we own. I draw your attention to the poster over 
there, ``Construction vs. Operating Leases.'' \1\ The following 
five examples show that operating leases are almost always more 
costly than purchase, lease-purchase, or construction. In 1995, 
GAO reported that GSA had entered into 55 operating leases for 
long-term needs that were estimated to cost $700 million more 
than had we constructed them and owned them. In 1999, GAO 
reported for nine major operating lease acquisitions GSA had 
proposed, construction would have been the least costly option 
in eight cases and would have saved $126 million for the 
taxpayer. A lease-to-purchase option would have saved an 
estimated $107 million.
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    \1\ The chart entitled ``Construction vs. Operating Leases,'' 
submitted by Senator Coburn appears in the Appendix on page 27.
---------------------------------------------------------------------------
    The Patent and Trademark Office in Northern Virginia 
entered into an operating lease that was estimated to be $48 
million more than construction and $38 million more than lease-
purchase. The Department of Transportation headquarters reduced 
the term of a 20-year lease to a 15-year lease so that it could 
meet the definition of an operating lease. GSA's fiscal year 
1999 prospectus for constructing a new facility for this need 
showed the cost of construction was estimated to be $190 
million less than the operating lease. SEC used the same 
approach by reducing the terms of their lease from a 20-year 
lease to a 14-year lease in order to fit OMB's criteria for an 
operating lease.
    The Administration has acknowledged the problem, and for 
that, I commend them. OMB has begun to look at some, if not 
all, of the problems with property asset management. This is a 
critical first step to managing the government's real property 
portfolio, but OMB isn't specifically focused on the increasing 
use of costly leasing arrangements.
    The problem is serious and has long been ignored. GAO has 
been reporting for over 6 years that the government's reliance 
on costly leasing instead of ownership or lease-purchase poses 
liabilities in an unknown proportion on the American 
Government. GAO reports that agencies change lease terms in 
order to avoid higher up-front costs. Reliance on the lease 
changes creates huge liabilities on the Federal Government of 
an unknown amount.
    The Federal deficit figures do not reflect these 
liabilities, but budget scorekeeping rules, altered in 1990, 
are mainly to blame because they do not require most leases to 
be counted against an agency's annual appropriation. This 
encourages agencies to rent space to meet their needs because 
only a portion of the cash is needed up front.
    Congress is part of the problem. Rather than requiring 
agencies to plan and budget for their facilities needs, we 
refuse to let them cut in other areas to appropriately invest 
in construction projects that could save us money. We encourage 
the government to operate in some alternative universe rather 
than the way normal American families and business operate.
    When a renter in Oklahoma wants to buy his first home, he 
and his family scrimp and save until they have enough for a 
down payment. They understand that owning a house may be more 
difficult up front, but it is much better for their long-term 
financial health.
    Congress doesn't let agencies do the same when they need a 
new building. Congress is so beholden to special interests that 
we can't allow agencies to set priorities and cut program 
budgets in order to find money for down payments on new 
buildings.
    And what about when a home-owning family or business is 
growing and needs more space? They sell their existing facility 
and use the profit to invest in the bigger facility. What they 
don't do is keep their existing facility in perpetuity while 
arranging outrageous terms on short-term lease for the building 
they will never own.
    When Congress does so-called oversight on agency budgets, 
those hearings often amount to nothing more than agencies 
getting spanked for trying to cut spending in certain programs. 
After the hearing, appropriators just go add that spending 
right back in. What choice does an agency have but to engage in 
costly leasing schemes that look on paper like budgets are 
unaffected, but which gouge the taxpayer, our children, and our 
grandchildren over the long run?
    Today, I look forward to hearing about the way the Federal 
Government obtains needed space, the reason agencies have 
chosen certain options. I am also interested to hear what the 
long-term implications for the American taxpayer are under the 
current budget scoring rules. We will hear from key players in 
the leasing process, the U.S. Government Accountability Office, 
the Government Services Administration, and the Department of 
Veterans Affairs.
    I also would make the statement, and I do this--I am not 
picking on you all--because the notice of this hearing was 
quite some time ago. We got VA's testimony at 2:30 p.m. 
yesterday and 9 a.m., GSA's, and GAO was on time. So it tells 
us there is a problem. I recognize your testimony has to go 
through OMB, but we have talked with OMB about that.
    My first predilection was to cancel the hearing so we can 
enforce some discipline in terms of us being able to do our 
job. I chose not to do that, but I am sending the message to 
OMB, the next hearing we have where the testimonies are not 
here on time, we will cancel the hearing, but we will not tell 
you at which time we will cancel the hearing, so we will waste 
your time and our time, just like ours has been wasted by not 
having the appropriate material in front of us in a timely 
manner.
    With that said, let me smile and welcome each of you here. 
Let me thank you for your service to our country. Each of you 
provides and does a job that is needed. We understand that. 
What we want to do is have the information to how we can help 
you to do that job better. We want to create a climate where we 
lessen the costs in the long-term for the Federal Government, 
and we look forward to having your testimony and your thoughts 
along with that.
    [The prepared statement of Senator Coburn follows:]

    [GRAPHIC] [TIFF OMITTED] T4441.001
    
    [GRAPHIC] [TIFF OMITTED] T4441.002
    
    [GRAPHIC] [TIFF OMITTED] T4441.003
    
    Senator Coburn. As I said, Senator Carper will be here in 
about 15 minutes, so we will go on and start.
    Our first witness is Mark Goldstein. He is the Director of 
Physical Infrastructure Issues at the U.S. Government 
Accountability Office. He is responsible for the agency's 
reviews, audits, and investigations in Federal property, 
telecommunications, and special products.
    Bill Matthews is Assistant Commissioner of the Office of 
Real Property Asset Management at the U.S. General Service 
Administration. In that capacity, Mr. Matthews is responsible 
for asset management and the continuous financial improvement 
for a nationwide portfolio of over 1,500 federally-owned 
properties which generate almost $7.3 billion in revenue. He 
also is responsible for capital planning and investment 
portfolio strategy, policy and analysis, and disposal.
    And finally, Robert Neary is Acting Chief Facilities 
Management Officer of the Veterans Health Administration at the 
Department of Veterans Affairs. He is responsible for managing 
many of the Department of Veterans Affairs' capital asset 
programs, including major construction, minor construction, 
real property management, leasing, enhanced use leasing, 
architectural, engineering, and policy advice.
    Welcome, and I think we will start with you, Mr. Neary, and 
go down the row. You will have 5 minutes plus if you would like 
to do that. Your written statements will be made a part of the 
record. Feel free to take the time that you need.

 TESTIMONY OF ROBERT L. NEARY, JR.,\1\ ACTING CHIEF FACILITIES 
    MANAGEMENT OFFICER, U.S. DEPARTMENT OF VETERANS AFFAIRS

    Mr. Neary. Thank you, Mr. Chairman. Let me say I am pleased 
to be here this afternoon to present an overview of VA's 
leasing programs, and I will start by apologizing for our 
testimony being tardy. We will do everything we can not to let 
that happen again.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Neary appears in the Appendix on 
page 28.
---------------------------------------------------------------------------
    Senator Coburn. The Senators are late all the time, but 
that doesn't give us an excuse. If we waste your time, we 
should be chastised for it, and vice-versa. That is why we 
started this hearing on time, and we do things on time because 
your time is just as valuable or more valuable than my time.
    Mr. Neary. Thank you, sir. I appreciate that.
    Senator Coburn. Please continue.
    Mr. Neary. The Department of Veterans Affairs is the owner 
and operator of the largest real estate health care-related 
portfolio in the United States. VA also maintains facilities 
for our Veterns Benefits Administration (VBA), which handles 
veterans' benefits other than the health care program, and for 
most of the national cemeteries in the United States.
    We own and operate over 5,000 buildings, comprising 
approximately 144 million square feet, and about 7 percent or 
7.5 percent of that is acquired through lease. We use our 
leasing authority for multiple purposes, including space for 
community-based outpatient clinics, VBA regional offices, and 
space to support the Department's research and information 
technology missions, to name a few.
    The need for space is identified in the strategic planning 
processes of each of the administrations. The proposed 
acquisition of leased space exceeding the threshold levels 
established by Congress is evaluated as part of the 
Department's capital investment application process. Smaller 
amounts of space are approved at appropriate levels within the 
Department.
    We operate our leasing program under a delegation from the 
General Service Administration. We were initially granted a 
delegation in 1983 focusing on medically-related activities. 
That delegation expanded over time, through and including GSA's 
broader delegation in 1996 under the program known as ``Can't 
Beat GSA Leasing'' to lease general purpose office space for 
periods of up to 20 years.
    Federal agencies must adhere to all of the laws and 
regulations when acquiring and utilizing space, and therefore 
we follow the same rules, regulations, and laws as does GSA. We 
must first notify GSA of proposed actions to be sure that there 
is not available space in the Federal inventory that would meet 
our needs. VA also reports semi-annually to the GSA on our 
leasing delegation activity.
    We are mandated by Congress with certain authorization and 
appropriation requirements. If the annual cost of a rent of a 
lease is greater than $600,000, we are required to have an 
authorization from the Congress. In addition, we must notify 
the Congress of our intent to award a lease if it exceeds 
$300,000 or if the cost will exceed by 10 percent that which 
was authorized in law.
    Within the VA, the Secretary has delegated various 
authorities. My office is responsible for the majority of 
leasing actions that go on throughout the United States. If 
facility wishes to lease, needs to lease space, less than 
10,000 square feet and less than $300,000 in annual rent, they 
have the authority to do that. Above that, it is necessary for 
them to come to the Washington headquarters for approval, up to 
and including the involvement of the Congress if it is greater 
than $600,000.
    All of our leasing actions are negotiated procurements 
based on a methodology colloquially known as best value. We 
seek competition to the fullest extent possible when acquiring 
space and establish evaluation criteria specific to each 
procurement. Offers are evaluated for both technical 
qualifications and price and a contracting officer establishes 
a competitive range and negotiates with those in the range and 
makes a decision on the best value to the government.
    Under the budget scorekeeping rules, we evaluate the price 
in present value terms to determine if the lease needs to be 
scored for budget purposes or whether it can be considered an 
operating lease and paid in annual rent.
    Our Real Property Service has a small staff of 15 
individuals who manage the large leases from Washington and 
from our field office in Silver Spring, Maryland, and we 
conduct training for VA employees throughout the United States 
in conjunction with the VA's Office of Acquisition and Material 
Management to ensure that our leasing program is effective and 
provides quality execution.
    I want to close with a mention of our enhanced use leasing 
program. In addition to traditional leasing programs, VA also 
has been granted EU leasing authority. This unique asset 
management tool, managed jointed by the Office of Asset 
Enterprise Management and the Office of Facilities Management, 
is an innovative process to partner with the private sector to 
maximize return from under-utilized capital assets. Currently, 
VA can out-lease property to other parties for up to 75 years 
for fair consideration, and the fair consideration can be in 
the form of cash, services, space, or other in-kind 
consideration.
    The law was originally authorized in 1991 and recently 
modified and reauthorized until 2011. We have successfully 
developed projects giving veterans access preferences and 
discounts for the usage of assisted living, traditional 
transitional homeless housing, and homeless services facilities 
without the use of appropriated funds. The program results 
include significant cost savings compared to construction and 
leasing, substantial private investment in the Department's 
capital facilities and infrastructure, and new long-term 
sources of revenue.
    Mr. Chairman, that concludes my opening statement. I will 
be pleased to answer questions at the appropriate time.
    Senator Coburn. Thank you very much.
    Chairman Coburn. Would you like to do your opening 
statement, Senator Carper.
    Senator Carper. I don't have an opening statement that I 
want to give. I just want to say welcome to our witnesses. We 
are delighted that you are here and look forward to your 
testimony and the chance to ask you some questions.
    Thanks, Mr. Chairman.
    Senator Coburn. Thank you. Mr. Matthews, it is good to see 
you again.

 TESTIMONY OF WILLIAM H. MATTHEWS,\1\ ASSISTANT COMMISSIONER, 
  OFFICE OF REAL PROPERTY ASSET MANAGEMENT, PUBLIC BUILDINGS 
         SERVICE, U.S. GENERAL SERVICES ADMINISTRATION

    Mr. Matthews. Good to see you again, sir. Let me first 
start by also apologizing for the tardy submission of our 
testimony. We will endeavor not to let that happen to us again.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Matthews appears in the Appendix 
on page 31.
---------------------------------------------------------------------------
    Senator Coburn. Can I ask you a question about that? The 
delay is not you, correct?
    Mr. Matthews. I am certain we contributed to that delay.
    Senator Coburn. But most of the time, getting it cleared 
through OMB is the problem, is that right?
    Mr. Matthews. I would be reluctant to say it was solely the 
fault of OMB that we were late.
    Senator Coburn. All right.
    Senator Carper. I just thought that was a gracious 
response.
    Mr. Matthews. We were the ones called. It is our job to get 
it on time, and I apologize for the tardiness.
    My name is Bill Matthews. I am the Assistant Commissioner 
for the Office of Real Property Asset Management for the GSA 
and I am pleased to talk about and provide an overview of our 
leasing process.
    GSA is among the Nation's largest public real estate 
organizations, providing a work space for more than 1.1 million 
Federal workers in almost every Federal agency, the judiciary, 
and for some parts of Congress.
    We are a real estate services delivery organization. We 
support our customer agencies in their mission of service to 
the American people, and as such, it is our mission to provide 
a quality workplace for the Federal worker at a superior value.
    Our agency customers are required to use existing vacant 
federally-controlled space when that space is available and 
suitable to meet their mission requirements and in a location 
where their mission is appropriately carried out. When suitable 
Federal space is not available, we can lease space from the 
private sector.
    Approximately half of our customers' workforce is housed in 
over 1,500 buildings owned by the Federal Government and held 
in custody and control of GSA. The other half is located in 
over 7,300 buildings that we lease from the private sector in 
over 2,000 communities across the United States and its 
territories. These leased buildings together comprise over 167 
million square feet out of our total portfolio, which is in 
excess of 340 million square feet. Our annual rent bill for 
leases with private landlords is approximately $3.8 billion per 
year.
    We lease space in both large cities and small towns when 
leasing is the only practical answer to meeting Federal space 
needs. More than 50 percent of our leases by number are for 
increments of 10,000 feet or less. The size of a lease can 
range from literally a single room to an entire building or 
group of buildings.
    We lease all types of space for our diverse Federal 
clientele, primarily office space. Eighty-five percent of our 
portfolio is for commercial office space. But we also lease 
laboratories, warehouses, clinics, and border stations. We 
locate them according to the customer's mission requirements in 
urban, suburban, and rural areas in accordance with established 
Federal location and security polices.
    We execute many single-tenant leases, but also many multi-
tenant leases with agencies which are consolidated for 
economies of scale. Other GSA leases meet tenant leases for 
storefront locations in high public access. These are in 
contrast with other leases for customers who require limited 
access to and control of their buildings for security purposes.
    When the existing inventory of buildings in the local 
market cannot meet our customers' requirements and where 
Federal construction is not an option, we solicit the 
construction of a new building, which is built to meet our 
customers' specifications and leased by us on the customer's 
behalf. All of our lease assets are held in GSA's name and not 
passed forward to our customers.
    Our principal authority to lease real property for use by 
Federal agencies is derived from the former Federal Property 
and Administrative Services Act of 1949. That authority is now 
codified in Title 40 of the U.S. Code, Section 585, which 
authorizes GSA to enter into space leases on behalf of Federal 
agencies for terms up to 20 years.
    In terms of our tenants, we strive to keep leasing costs at 
or below market levels and have developed a comprehensive 
strategy to do so. We use standard industry benchmarks and 
market surveys to assure that we are getting the best value for 
our customers. We use published market sources to gain a better 
understanding of area markets. Our standard lease forms try to 
balance the interest of the government against the interest of 
private landlords to achieve a cost-effective contract term.
    Because lease often acquires large blocks of space to meet 
the needs of multiple Federal agencies, we are often able to 
leverage our market position to get more favorable rent rates 
and lease terms for the taxpayer. Also, the creditworthiness of 
the Federal Government can be used as an important 
consideration in obtaining more competitive rent rates.
    Additionally, this year, we have awarded a national broker 
contract. This effort consolidated our private leasing support 
services among four commercial real estate service firms. The 
award is the largest single contract of its type in the history 
of GSA's Public Buildings Service and will enable us to 
leverage the expertise of private sector brokerage firms and 
increase our capacity to achieve market value in the 
marketplace. It will also assist us in our efforts to 
standardize leasing practices nationwide and provide more 
support to our customers.
    Another important consideration in measuring the value of 
real estate that is leased is the cost of holding vacant leased 
space. The vacant leased space in our inventory is down to 1.3 
percent, which is a historic record low and a figure well below 
industry averages.
    Not surprisingly, the increased need for security in many 
agencies does have an effect on GSA's leasing process and on 
lease cost. The need for greater building setbacks, blast 
resistance, building access requirements, and restrictions on 
who can be co-located within our space all affect lease 
procurement and the cost of space we lease.
    Our leasing process is conducted within a framework of 
procedures that comply with a comprehensive list of laws and 
Executive Orders. These include the Competition in Contracting 
Act, the Small Business Act, energy, environmental, and 
historic preservation laws, and other Executive Orders.
    Leases with an annual cost that exceeds a specific dollar 
threshold, $2.41 million for fiscal year 2006, require explicit 
Congressional authorization. For this purpose, GSA submits 
prospectuses to the Senate Committee on Environment and Public 
Works and the House Committee on Transportation and 
Infrastructure for their approval.
    For most of our leasing activities, we follow a fairly 
standard process which starts with customer involvement in 
defining workplace requirements that is highly variable. Some 
customers have a very sophisticated, well-developed and 
repetitive set, and in other cases, they have to be developed 
from scratch and the agency requires a great deal of 
assistance.
    In determining those requirements, we conduct a series of 
meetings, and once our customer requirements are established, 
we document the amount and types of space and technical 
requirements in an interagency agreement called an occupancy 
agreement. At this stage, we review the availability of Federal 
space to meet the needs, and if none is available, we study the 
market against the customer requirements and develop and 
present various leased housing options. And finally, we 
redocument after that market survey with a progressive 
occupancy agreement that reflects the additional information we 
have.
    We try to maximize competition through advertising on the 
Federal Business Opportunities Web page to ensure increased 
exposure of our request for offers.
    Once initial bids are received, we generally conduct 
negotiations with all offerors to assure they understand the 
requirements and can better prepare their final proposals. We 
conduct multiple scoring analysis throughout this process, 
before we enter the market, and during negotiations. When final 
proposals are received, we evaluate them and make an award, 
usually on the basis of lowest price, but for more complex and 
longer-term requirements, we consider source selection 
procurements where a higher weighted qualitative proposal may 
prevail over a lower-rated, lower-priced proposal. In these 
cases, a determination has to be made and justified that the 
technical superiority justifies the cost differential.
    We give the successful offeror an adequate time to build 
out the space. We inspect and accept the space, assist our 
tenants in move-in, and then start the rent process.
    GSA's lease responsibilities do not stop as we hold the 
lease. We continue to service it with escalations and 
adjustments in lease administration activity throughout the 
life of the lease term. Typically, unless GSA has delegated 
operational responsibility, we will continue these activities 
throughout most of the 7,500 leases we service.
    Also, under a program called ``Can't Beat GSA Leasing,'' 
GSA delegated its leasing authority to other Federal agencies. 
It was our intention to end our monopoly provider status and 
enter into a provider of choice relationship with most of our 
Federal agencies and most of them have chosen to stay with us 
at this point.
    Mr. Chairman, this is the approach we use to identify and 
meet our customer agencies' mission requests for leased space. 
Meeting our customer requirements in an efficient and cost-
effective manner is our agency's highest priority. I thank you 
for the opportunity to testify before your Subcommittee and I 
will be happy to answer any questions you might have.
    Senator Coburn. Thank you very much, Mr. Matthews. Mr. 
Goldstein.

     TESTIMONY OF MARK L. GOLDSTEIN,\1\ DIRECTOR, PHYSICAL 
  INFRASTRUCTURE ISSUES, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Goldstein. Thank you, Mr. Chairman and Senator Carper. 
Thank you for the opportunity to testify today on our work 
related to Federal real property, and in particular, the 
government's reliance on space leased from the private sector.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Goldstein appears in the Appendix 
on page 39.
---------------------------------------------------------------------------
    As you know, at the start of each new Congress since 1999, 
we have issued a special series of reports entitled, 
``Performance and Accountability Series: Major Management 
Challenges and Program Risks.'' In January 2003, we designated 
Federal real property a high-risk area as part of this series 
and we issued an update on this area in January 2005.
    We identified the government's reliance on costly leased 
space as one of the major reasons for this high-risk 
designation. Other reasons included excess and deteriorated 
property, unreliable real property data, and the challenges 
associated with protecting those assets from terrorism. My 
testimony today will discuss our designation of Federal real 
property as a high-risk area and focus specifically on the 
government's reliance on costly leased space.
    According to available data, the Federal Government owns 
and leases about 3.3 billion square feet of building floor area 
worldwide in roughly a half-a-million buildings. About 380 
million square feet of this space is leased.
    My testimony today will highlight the following points. 
One, the conditions that led to our January 2003 high-risk 
designation still exist. Many of the assets in the government's 
vast and diverse portfolio of real property are not effectively 
aligned with or responsive to agencies' changing missions. 
Furthermore, many assets are in an alarming state of 
deterioration. Agencies have estimated restoration and repair 
needs to be in the tens of billions of dollars.
    Compounding these problems are the lack of reliable 
government-wide data for strategic asset management and the 
cost and challenge of protecting these assets against 
terrorism. Additionally, a heavy reliance on costly leasing 
instead of ownership to meet new space needs is a pervasive and 
ongoing problem.
    The Administration has acknowledged the problems in this 
area. In February 2004, the President added the Federal Asset 
Management Initiative to the President's Management Agenda and 
signed an Executive Order on real property management reform. 
These and other efforts are positive steps, but it is too early 
to judge whether the administration's focus on this area will 
have lasting impact.
    In addition, we continue to believe that a comprehensive 
and integrated transformation strategy is needed to address the 
problems and underlying obstacles to reform, which include 
competing stakeholder interests, various funding and budgetary 
disincentives, and the need for improved capital planning among 
agencies.
    Two, as a general rule, building ownership options through 
construction or purchase are the least-expensive ways to meet 
agencies' long-term and recurring requirements for space. 
Lease-purchases, under which payments are spread over time and 
ownership of the assets is eventually transferred to the 
government, are generally less costly than using ordinary 
operating leases to meet long-term space needs, but are more 
costly than other ownership options. However, over the last 
decade, we have reported that the General Service 
Administration, as the central leasing agent for most agencies, 
relies heavily on operating leases to meet new long-term needs 
because it lacks funds to pursue ownership.
    While we have no recent work in this area, in 1995, we 
reported that GSA had entered into 55 operating leases for 
long-term needs that were estimated to cost $700 million more 
than construction. In 1999, we reported that for nine major 
operating lease acquisitions GSA proposed, construction would 
have been the least-cost option in eight cases and would have 
saved an estimated $126 million. Lease-purchase would have 
saved an estimated $107 million compared with operating leases, 
but would have cost $19 million more than construction.
    A prime example of this problem was the Patent and 
Trademark Office's long-term requirements in Northern Virginia, 
where the cost of meeting this need with an operating lease was 
estimated to be $48 million more than construction and $38 
million more than lease-purchase. In August 2001, we also 
reported that GSA reduced the term of a proposed 20-year lease 
for the Department of Transportation headquarters building to 
15 years so that it could meet the definition of an operating 
lease. GSA's fiscal year 1999 prospectus for constructing a new 
facility for this need showed the cost of construction was 
estimated to be $190 million less than an operating lease.
    The Securities and Exchange Commission used a similar 
approach by reducing the terms of a proposed 20-year lease for 
its facility to 14 years.
    Although most of our work in this area has focused on GSA-
controlled space, other real property holding agencies with 
leasing authority, such as the Department of State and Veterans 
Affairs, also face the same obstacles to ownership. Operating 
leases have become an attractive option, in part because they 
generally look cheaper in any given year, even though they are 
generally most costly over time. Budget scorekeeping rules 
allow budget authority for some of these operating leases to be 
spread out over the term of the lease. In contrast, budget 
authority for ownership options, according to the scorekeeping 
rules, are recorded fully up-front in the budget to 
appropriately reflect the government's commitment.
    As a result, this situation has encouraged an over-reliance 
on operating leases for satisfying long-term space needs. 
Resolving this problem has been difficult. However, change is 
needed because the current practice of relying on costly 
leasing to meet long-term space needs results in excessive cost 
to taxpayers and does not reflect a sensible or economically 
rational approach to capital asset management.
    Mr. Chairman, this completes my prepared statement. I would 
be happy to respond to any questions that you or Members of the 
Subcommittee have. Thank you.
    Senator Coburn. Thank you very much. I thank all of you. 
Senator Carper, do you want to start?
    Senator Carper. Thanks, Mr. Chairman.
    Mr. Matthews, you just heard a litany there of, I guess, 
criticism and questions from Mr. Goldstein. Let me just ask you 
to take a minute or two and respond to some of them. Do you 
agree?
    Mr. Matthews. I always agree with GAO. [Laughter.]
    Senator Coburn. That could be dangerous. I don't.
    Mr. Matthews. The general observation that our leased 
inventory is growing is quite correct. In 1964, our leased 
inventory was under 50 million square feet, and as the 
government grew, it grew faster than our ability to fund new 
construction, and today you heard me testify that it was up to 
167 million square feet.
    Generally, I would agree with the observations that we have 
grown very dependent on operating leases. Over the last 40 
years, we have seen our leased inventory at GSA grow from under 
50 million to over 167 million square feet. During that same 
period of time, the amount of direct Federal construction, the 
amount of the owned inventory that GSA has under its custody 
control has remained fairly stable. There has not been a growth 
spurt. We have disposed of assets that no longer meet Federal 
needs or they are in the wrong locations, they are archaic 
designs that no longer fit the typical Federal user.
    The bottom line is that we have basically a lack of 
alternatives to leasing and we have some built-in incentives 
because of the scoring rules to write operating leases. There 
are also some arguments for leases.
    Senator Carper. Talk about the issue a little bit more, 
please.
    Mr. Matthews. About the advantages of leasing?
    Senator Carper. Yes. How are you incentivized to do that? 
You mentioned the word scoring.
    Mr. Matthews. Well, the very first point is one made by my 
colleague from GAO, that the first year costs of leasing are 
much lower than the first year costs of direct Federal 
construction by a very significant margin, and we have done 
every year a good deal of Federal construction. We have reached 
the point where we, for general purpose office space, the 
attractiveness of the commercial market is better.
    But I would also like to make a point that for many of our 
customers, leasing is a preferred option. There are rapidly 
changing organizational and program mandates that the Federal 
agencies are facing that cause them to want to stay in a 
somewhat fluid situation. There are changes in technology. Some 
of our larger customers are, and this is not for the very 
largest, but for the medium-sized leases, they are very 
sensitive to geographic location near the people for whom they 
are providing services.
    For example, the Social Security Administration likes to be 
in the middle--in fact, I think this is even embedded in their 
authorization--in the middle of the service area where the 
beneficiaries reside. IRS now tracks in a geographic basis 
where people are for whom they are providing services or are 
involved in enforcement actions. We feel these are very 
legitimate reasons to want to stay fluid because these things 
shift.
    As we study closely through Core Net and BOMA and other 
professional organizations, we see our colleagues in the 
private sector also have moved heavily toward--during this same 
4-year period, there has been an increased tendency in the 
private sector to enter into shorter-term leases to remain 
flexible, to adjust to changing market conditions, technology, 
service issues of the type I just described in the Federal 
sector.
    On the other hand, we have told GAO, and I think this 
remains our position, that for situations where we have a 
demonstrated long-term need, a large requirement, and large is 
somewhat subjective, but I would say 100,000 square feet or 
more, and in markets where we have other activities where we 
could backfill if we encountered vacant space, it does make all 
the sense in the world to own rather than lease if you have the 
resources.
    Senator Carper. Mr. Goldstein, we will come back to you and 
the point that Mr. Matthews raises about their movement toward 
long-term leases, operating leases, sort of mirrors what is 
going on in the private sector. I would just ask if you find 
that to be the case, and if so, say so, and if not, explain 
your difference.
    Mr. Goldstein. I think it probably does. We haven't done a 
lot of work to look at what is occurring in the private sector. 
I would agree with Mr. Matthews that there are certainly times 
when it behooves the Federal Government to be flexible in 
leasing depending on how the needs of the government are 
changing. In fact, it is also the case based on many of the 
reports that we have issued. That is, while we have talked 
about the fact that construction is frequently the better 
course for the taxpayer when it comes to the dollar, it is also 
the case that for leasing, there are always situations where it 
is going to make more sense. It may be in rural areas. It may 
be in certain kinds of space, certainly in temporary space when 
the government is refurbishing permanent space. So, there are 
certainly times where leasing makes sense.
    We don't say that in every instance, construction and 
purchase of a building are going to be cheaper. That is not the 
case. But overall, that clearly is where we would like to see 
GSA go.
    Senator Carper. Thanks. Mr. Chairman, thanks very much. 
Will we have time to ask some more questions, as well?
    Senator Coburn. Yes.
    Senator Carper. Good. Thank you.
    Senator Coburn. I want to go to Mr. Neary here first, and I 
will just kind of go down the line. You have delegation rights 
from GSA to do certain things. What is the total number of 
buildings that you all have? How many are owned, how many are 
leased, and how many are lease-purchased?
    Mr. Neary. We have about 5,300 buildings. I don't know the 
specific number that is leased. In terms of square footage, 
approximately 7.5 percent of the space is leased and the rest 
is owned. The bulk of that is in the health care system. The 
majority of office space that the Veterans Benefits 
Administration uses is acquired through GSA.
    Senator Coburn. Would you agree that most often, a lease-
purchase would be better for us than a lease?
    Mr. Neary. In terms of the economics, I think that probably 
would be correct.
    Senator Coburn. What percentage are lease-purchase in the 
VA?
    Mr. Neary. I don't believe we have any lease-purchases in 
the VA.
    Senator Coburn. So my question is, why not?
    Mr. Neary. I think, as Mr. Matthews said, in locating space 
and acquiring space to accomplish our mission, there are 
various options available to us. Probably no agency would say 
that we receive the amount of capital that we would like or 
that we feel that we need. Most of our leases are smaller 
leases and I think they are appropriate to be done as an 
operating lease. They are short-term requirements, or they are 
small spaces, rural areas, kind of things. We have a number of 
leases, large clinics, for example, that probably meet the 
characterization of Mr. Goldstein that you need to make a 
business choice. In some of those cases, we have obviously 
constructed a lot. We have a large construction program. But in 
some cases, we have chosen to lease.
    Senator Coburn. I am still having trouble with this lack of 
lease-purchase, because, first of all, we are the best payer in 
the country. We have the best credit rating, as Mr. Matthews 
testified. We lose--even in lease-purchase, what is the 
internal rate of return you all allow to the people you lease 
from? I mean, do you look at their internal rate of return to 
make a decision of whether or not this is a good lease?
    Mr. Neary. I don't know the answer to that. We could 
provide that to the Subcommittee.
    Senator Coburn. OK. I think that is really important, 
because being in the commercial real estate business to a very 
small degree myself, we make all our decisions based on what 
the internal rate of return is going to be. It would seem to me 
that there has not been enough emphasis on lease-purchase, 
because lease-purchase gets us around the budget rules to a 
certain extent, but a lease-purchase allows us to gain equity. 
And even though we might lose on some because of the smallness 
or the geographical location, if you look at commercial real 
estate appreciation as a whole in this country, there has been 
a significant increase in it in the last 10 years.
    The American taxpayer got no benefit out of that equity 
appreciation except for an increase in the lease rate as the 
property increased in value, if it is based on any type of 
internal rate of return. I would love for you all to tell us 
the criteria that you all use in terms of internal rate of 
return when you look at a lease and also to break it down.
    If you have no true lease-purchase, what is it in the 
budget accounting that Senator Carper and I can do to help you 
all with the budget scoring rules to make this a better deal 
for the American public? Off the top of your head, do you know 
what we need to do to help you in terms of budget scoring?
    Mr. Neary. I am probably not one who is in a position to 
really respond to that. I am not an economist or particularly 
knowledgeable about economics.
    Regarding lease-purchase, under the current budget scoring 
rules, if we were to enter into a lease-purchase agreement, 
that would be scored as a capital lease and that is the primary 
reason we have not done that.
    Senator Coburn. So the whole cost of that lease would be 
scored----
    Mr. Neary. Present value.
    Senator Coburn. So that is something we could change. So we 
end up losing equity gain by having the budget scoring rules 
that way, correct? This is an opportunity cost lost because we 
didn't go lease-purchase because we are going to score it as a 
capital cost for the total cost of the lease over the life of 
the lease, correct? Is that what you are saying?
    Mr. Neary. That is correct.
    Senator Coburn. So that is something that hinders you from 
making the best decision for the American taxpayer, is that 
right?
    Mr. Neary. Well, Senator----
    Senator Coburn. Under the budget scoring?
    Mr. Neary. I am here representing the Administration in 
some sense, I guess, and we in VA are required to follow the 
existing budget scoring rules.
    Senator Coburn. Oh, I understand that. The whole purpose of 
this hearing--there are two or three. One is to figure out what 
you are doing and how you are doing it. The other is if there 
are things that we can change to save the American taxpayer 
money, we need to be doing that, and when we handicap your 
ability to make the best equitable deal for the country, and it 
may not always be a capital purchase. It may be smarter for us 
to do a lease-purchase.
    But if you have a hand tied behind your back and you have 
lease versus purchase, most of the time, you are going to lease 
because of the way it is scored. So if it is a lease-purchase 
and it is scored just like a capitalization of a new building, 
then we are going to have problems ever getting you to the 
point to make good lease-purchase agreements. My medical 
building at home was a lease-purchase. It has been a great 
deal. As the building has appreciated, a portion of my rent has 
gone towards equity, and so I have gained in that equity.
    Bill, do you have any comments on that?
    Mr. Matthews. It is a difficult issue for us to talk about. 
It is hard to argue that we are not disadvantaged by not having 
more opportunities to take an equity position where, as I said, 
you have criteria for very long-term large requirements where 
the flexibility of leasing is not as important to you. I don't 
think the Budget Enforcement Act was written around my program 
area, so it is hard for me to understand fully what Congress' 
objectives and intents were there.
    Senator Coburn. I guess the thing I would like to get from 
you is a commitment to help us figure out what we can change in 
terms of the Budget Act that will make your job more likely to 
be successful in capturing equity growth and lowering overall 
cost and ending up with real assets, even though we may turn 
around and sell them. We all know that a lease, a 15-year lease 
which expires, all you got was the space to use, whereas if it 
is a lease-purchase agreement, you got the space and a portion 
of the equity. I know those aren't always going to be good, 
because you may not be able to negotiate the best deal to get 
us them.
    But I just would like a commitment from you to give this 
Subcommittee what you think needs to be changed in the Budget 
Act so we can make those--or at least we can argue for those 
changes when we come to the next Congress, or change the Budget 
Act, because I see a real loss. In reading GAO's report, $700 
million here, $129 million here.
    The SEC obviously would have done a whole lot better had 
they been doing the GSA Best Buy program than doing it on their 
own, based on the mistakes they made and the fact that they 
forgot to include leasehold improvements in their lease when 
they bought it. That tells you that not all agencies have the 
capability to do what you do.
    I would also say, I don't have any argument with how you 
all are running what you are running. What I want to do is get 
us more value, know what we have got, know what we need to get 
rid of, and use those assets to leverage other assets and to 
create a way for, if you have a building that is not out there 
and you can say, well, I can sell this building. We don't have 
a need for it. I can use that money to lease-purchase four 
other buildings the same size and offset the budget rules to be 
able to get there. What I am trying to do is help you save us 
money for our grandkids.
    So I would just like that commitment from you, if you will, 
or maybe the Administration won't let you do that, I don't 
know.
    Mr. Matthews. Well, as my colleague said, not being an 
attorney or an economist, it is difficult for us to fully 
respond to that. I think we are committed to looking for 
additional tools. GSA supported reform legislation that you may 
be aware of in previous years, asking for more leeway to do 
something closer to enhanced use leasing that involved 
redevelopment of underutilized Federal assets. We have some 
limited authorities in that respect and we are trying to find 
ways to use those to get closer to sharing an equity position 
and still remaining on the right side of the operating lease 
problem.
    I can commit to sharing our previous thoughts on reform 
legislation with the Subcommittee separately.
    Senator Coburn. OK. Good enough.
    Let me ask you the same question that I asked Mr. Neary. 
Total number of buildings, total number owned, total number 
leased, total number lease-purchased.
    Mr. Matthews. May we submit those separately?
    Senator Coburn. Do we know them?
    Mr. Matthews. Yes, we have very detailed records.
    Senator Coburn. And you can give us by numbers as well as 
by square footage?
    Mr. Matthews. Absolutely. Owned, leased, and square 
footage.
    Senator Coburn. And lease-purchased. We do have some lease-
purchases going on.
    Mr. Matthews. We have some transactions from prescoring 
years that might qualify as lease-purchases, but we haven't 
done any since about 1990, when that legislation went into 
effect.
    Senator Coburn. Let me ask you another question. Is the 
problem not having enhanced use leasing authority, or is the 
problem the budget scoring rules? Which is it?
    Mr. Matthews. I would be inclined to say the first. The 
principal problem is the Budget Enforcement Act requirement for 
scoring capital leases.
    Senator Coburn. So it is the scoring rules, it is not the 
enhanced leasing authority?
    Mr. Matthews. Having the additional tools would make it 
easier, as well.
    Senator Coburn. But if we changed the scoring rules, you 
would have an open door to make the best equity decision for 
the country, is that correct?
    Mr. Matthews. We would be in a better position than we are 
today.
    Senator Coburn. OK, then I will ask it another way. What 
would put you in the best position to make the best equity 
decision for the people of this country?
    Mr. Matthews. I believe if we could make those decisions 
without having to be concerned about scoring as a capital 
lease, we could come closer to getting the best equity 
position.
    Senator Coburn. OK. You said the same thing. I will go back 
to you, and I will come back and finish up.
    Senator Carper. Mr. Matthews, you mentioned, I believe, 
some earlier reform efforts that had been undertaken along 
these lines. I would just ask you to go back in time to sort of 
recall, if you will, the genesis of those efforts, what came of 
them, what was accomplished, what was left on the table.
    Mr. Matthews. Well, at this point, nothing has come of 
them. The principal provisions, GSA supported legislation that 
would have allowed all agencies to retain proceeds from the 
sale of underutilized property and would have allowed public-
private partnerships for the development of a kind of enhanced 
use lease on government property with underlying ownership 
remaining with the government. There were some other provisions 
that I can't recall at this point. I wasn't directly involved 
with that legislation. None of those moved beyond Committee 
that I am aware of.
    Senator Carper. When were those ideas proposed? Just 
roughly, was it the 1990s or the 1980s?
    Mr. Matthews. It was in the last Congress and the one 
before that, as well, I believe.
    Senator Carper. Do you know what the genesis was? Was it 
something that you all came up with yourselves, or was it 
proposed by others? Was it some of GAO's doing?
    Mr. Matthews. Part of the genesis was our move toward 
increased asset management. Most land-holding agencies are 
analyzing the existing inventory we have for the very reasons 
that you have mentioned in your opening remarks. We are looking 
for ways to realize some value from those assets or to dispose 
of them in the most expeditious way and perhaps use the equity 
for reinvestment in assets we retain, or to exchange them for 
something else that supports our program requirements. GSA is 
not the only agency that has a fairly passionate desire to try 
to be able to do that, egged on by our friends at GAO, who have 
documented some of the problems we have because we have not as 
rapidly dealt with underutilized and deteriorated assets as 
perhaps we should.
    Senator Carper. If you will, and this might be for you, Mr. 
Matthews, or it might be for one of our other witnesses, but 
just sort of walk us through the scoring under current law for 
operating leases, for lease-purchases, and also just for 
outright purchases.
    Mr. Matthews. I would prefer to submit something in writing 
on that, with your permission. I can review with you the six 
principal tests for scoring, and these are OMB's interpretation 
in OMB Circular A-11 of how to comply with the law.
    Ownership of the asset remains with the lessor during the 
term of the lease and is not transferred at or shortly after 
the end of the lease period. The lease does not contain a 
bargain price purchase option. The lease term does not exceed 
75 percent of the estimated economic lifetime of the asset. The 
present value of the minimum lease payments over the life of 
the lease does not exceed 90 percent of fair market value at 
the beginning of the lease term. The asset is a general purpose 
asset rather than a special, unique government asset. And there 
is a private sector market for the asset.
    These rules are intended to work together. If you trip one, 
that is the end of the discussion, and the one that is most 
often tripped in GSA's experience is the 90 percent of fair 
market value rule.
    Senator Carper. Again, maybe one last question for each of 
you. If you were in our shoes, if you were the junior Senator 
from Oklahoma or the junior Senator from Delaware and you were 
serving on this Subcommittee, what would you do about this? Mr. 
Goldstein, do you want to go first?
    Mr. Goldstein. I think there would be a couple of things, 
Senator. I was tempted--GAO has been writing about this issue--
this is a report from 1980. We have basically been saying the 
same thing for 25 years.
    Senator Carper. You are consistent.
    Mr. Goldstein. For better or worse, I suspect we are. It is 
a very complex issue. It is among the reasons that we put 
Federal property, the government's portfolio, on our high-risk 
list in 2003 and why it remains there today. It is a very 
complex issue. There are a number of issues that must be dealt 
with.
    We think there are a couple of things that really could be 
done. For example, we made a recommendation in 2003 in our 
high-risk report that there be a transformation strategy 
developed by the Administration, something that would bring 
together the variety of stakeholders that have a role in trying 
to figure out how to deal with these issues, and it is not just 
the leasing issue. It includes the issues we have talked about 
already, about dealing with vacant and underutilized property, 
dealing with having space that we can't fix. The Interior 
Department IG has said that Interior has a repair and 
meaintenance backlog of between $8 and $11 billion. It is 
dealing with, in today's world, the security needs that 
obviously government property has to have to ensure the safety 
of the people and the facilities, things like that.
    There really does need to be, in our opinion, a 
transformation strategy that would help get us to the next 
place that we have to be instead of having to write all these 
reports for all these years, frankly.
    We do think, additionally, that--and we have said this in a 
number of our reports--that it would be important to have a 
budget transparency or budget neutrality, if you will, for all 
of the various options, whether it is ownership or whether it 
is purchase, whether it is lease-purchase, capital lease, or an 
operating lease, so that folks like yourselves, so that 
Congress and other stakeholders can make better informed 
decisions where everything is recognized up front in the budget 
so you can determine across the board what is the best deal for 
the government and the taxpayer. And yes, obviously, there are 
other issues that would have to be dealt with, but at least you 
would be understanding the commitment that the government is 
going to make across the board and you would be able to 
confront it.
    The concern we have, obviously, is that there are things 
that would have to be fixed. The Budget Enforcement Act caps 
would have to be altered in some fashion. Additionally, you 
would have to understand, probably in much more detail and for 
a longer period of time, what the government's space needs are 
if you are going to actually use that approach. So we think 
that would be important.
    And then we would ask that there be a re-emphasis on 
eliminating vacant and underutilized space because one agency 
alone, the Department of Defense, for instance, has said that 
it costs between $3 and $4 billion annually for it to maintain 
space that it doesn't need. Well, that would have paid for 
quite a large amount of re-investment in the real property 
portfolio. So there are other ways. There are some ways that 
you could move this forward, I think.
    Senator Carper. All right, thanks.
    Mr. Matthews, just quickly, if you could respond. If you 
were in our shoes----
    Mr. Matthews. I might ask if the original intent of the 
Budget Enforcement Act was originally intended to apply to 
routine real estate leasing transactions. I have heard people 
through the year ask if that really was part of the intent to 
cover. We certainly in no way question the scoring rules. We 
have learned to live with them and make them work the best we 
can. The idea of budget neutrality would go a long way toward 
allowing us to make the most efficient business judgment and 
have it out there. I am not sure if that is going to change the 
government's ability to fund all the proposals that would 
legitimately be put forward as the best option.
    Senator Carper. OK. Mr. Neary, last word.
    Mr. Neary. In VA, we have recently completed a major study 
of our infrastructure and our health care programs across the 
United States, known as Capital Asset Realignment for Enhanced 
Services. It grew out of a report from GAO that recognizes that 
the nature of health care had changed considerably over the 
years and all of these large hospitals out there were no longer 
needed for that purpose. The Congress has been very supportive 
of our implementation of some of those recommendations to help 
us eliminate unused space. I would ask that you would continue 
to support that.
    In terms of the budget scorekeeping rules, from a purely--
executing a real estate program, as Mr. Matthews said, we want 
to have as many tools and as much flexibility available to us 
to make the best deals to, at the same time, accomplish our 
mission.
    Senator Carper. All right, thanks. Thanks to each of you.
    Senator Coburn. A couple of moments ago, I think Mr. 
Matthews said that anything above $2.41 million has to come 
back and get specific authorization. Is that right?
    Mr. Matthews. That is correct. That is the fiscal year 2006 
prospectus threshold.
    Senator Coburn. So on the SEC debacle, they got authority 
to do their own leases, which were far in excess of that. Did 
they have to come check with somebody?
    Mr. Matthews. I am sorry, I can't answer that question, 
sir.
    Senator Coburn. It went to, what, $60 million on the SEC 
leases? It was $60 or $70 million. Here is the thing I am 
trying to find out, is if you allow somebody to go away from 
GSA's Best Buy program--I am convinced GSA is the best buy. VA, 
you have done a good job, but you go back to them anyhow in 
terms of the guidelines. But if you allow them to go away, how 
do those limitations and requirements--or let them go 
independently--how do they apply to them? How did SEC get away 
with doing a lease that was far greater than this threshold 
with nobody in Congress knowing it was a mess until we 
discovered that it was a mess?
    Mr. Matthews. I can tell you that it is not our policy to 
delegate prospectus-level leases. I am not familiar with the 
timing of when that was done and whether it was done strictly 
on SEC's own authority, but it is not our policy to grant under 
our delegation program the authority to do prospectus-level----
    Senator Coburn. So you don't really know how SEC got that 
authority?
    Mr. Matthews. No, sir, I do not.
    Senator Coburn. Well, they didn't do it very well, so there 
is a star in your all's crown.
    You have a national broker contract right now. What does 
that cost?
    Mr. Matthews. It doesn't really cost anything. We don't pay 
them. They take a commission out of the transaction.
    Senator Coburn. OK, but we pay them, because that 
transaction fee is added back in to the cost of the lease. What 
is the average cost of that when we utilize these broker 
contracts?
    Mr. Matthews. I am sorry, we are only now deploying it. I 
couldn't tell you what the annual cost of those----
    Senator Coburn. That is an important thing for you to know, 
because if they are really going to supply you a service, and 
there is a charge for it, some of it may be borne by the 
property owner but we are certainly going to pay a cost of that 
commission, that broker fee, is to know what are you getting 
for that money. I mean, they are not doing it for free and the 
property owner isn't going to absorb all that, so we as 
taxpayers are paying a portion of that. I think it is real 
important for us to look at that.
    And my question to follow up, as you utilize them, because 
they are in regional areas and they are better--I guess the 
presumption is they know the local real estate markets better. 
They can help you execute better. How has that been cost saving 
inside GSA? Now you have got four national broker contracts out 
there. Their whole purpose is to help you be more efficient, 
get you to the right buildings at the right prices at the right 
time. What has it done to save work on the inside, because it 
obviously is an added cost. Is there a cost-benefit analysis 
looked at for, one, why you went that way, and two, do you have 
plans to do a cost-benefit analysis to see if it was the right 
decision?
    Mr. Matthews. There has been, but I am not prepared to 
speak to it.
    Senator Coburn. Well, you can send that to us.
    Mr. Matthews. Yes, sir.
    Senator Coburn. And are there plans to do a cost-benefit 
analysis to look at this at the end of the year to see if it 
has been beneficial?
    Mr. Matthews. I am sure there will be an intent to review 
the performance at the end of the first year.
    Mr. Goldstein. The GAO is currently doing a review for a 
House Committee on this topic.
    Senator Coburn. Wonderful. So our Subcommittee would 
certainly like to have a copy of that review?
    Mr. Goldstein. Yes, sir.
    Senator Coburn. Thank you. I would like one also, Mr. 
Goldstein. So you will know, we are planning a hearing in this 
Subcommittee on the buildings that need to be disposed of in 
this country and that will be coming up before the end of the 
year. So we will probably have you back as well as GSA as well 
as DOD as well as a whole lot of other people. That is going to 
happen.
    Mr. Goldstein. We would be happy to, sir.
    Senator Coburn. Let me ask you something, Mr. Goldstein. 
Does GAO look at internal rate of returns on leases that GSA 
has done?
    Mr. Goldstein. Not recently. We haven't done, in fact, much 
work in this area in probably 5, 6, or 7 years now. What we 
have tended to do when we have examined some of the kinds of 
issues that you have put up here, we have looked at the 
economic analyses and the prospectuses that have been done by 
GSA and made determinations based on that. We haven't 
necessarily looked at the internal rates.
    Senator Coburn. OK. In your testimony, Mr. Matthews, you 
talked about when you consider a proposal at a higher price, 
and I want you to have that authority. There is no question 
there are going to be times when the lowest bid isn't the best 
deal for you. I understand that. Can you tell us what 
guidelines you use to make those determinations? What are the 
policy guidelines that say, OK, we are in one of these 
situations where we think the lowest price is not the best deal 
for us. What are the guidelines that your people follow to make 
that decision?
    Mr. Matthews. Well, there is a whole web of Federal 
Acquisition Regulations that help with that, but for a source 
selection-type procurement, there would be a source selection 
plan at which GSA, with some input from the customer for whom 
we are acting, would identify those factors that are most 
important and they would bear--in some cases, they might be 
location-specific, like access to a Metro stop or other public 
transportation. They might have to do with additional 
efficiencies in operating costs. There is no standard answer. 
In some cases, security would be a big driver. Are we able to 
get the full set back or other security-enhancing features in a 
building within the competitive range.
    Senator Coburn. So there are guidelines, but what is the 
thing to protect us from not buying the higher-priced lease 
when it is really not needed? What is in there to protect us 
from influence peddling in the lease procurement, when somebody 
says, hey, I have got a deal here? In other words, how can 
somebody skirt right along the edge of those rules and still 
advantage themselves with GSA and not really have been 
qualified? What are the procedures that are there?
    Mr. Matthews. Generally, you have a contracting officer and 
a group of people who write the plan, develop criteria to apply 
to the different offers which have to be reduced in some detail 
in writing. It would be difficult for me to imagine, short of--
--
    Senator Coburn. So it is at a contractor level, I mean, a 
contracting officer level?
    Mr. Matthews. Yes. A contracting officer would oversee 
that. There would be a source selection committee with a 
chairman. They would have written the plan and developed 
criteria to apply before they ever saw the offers. They would 
have to evaluate each one in writing, technically and price. 
And then if they elected to go for other than the low price, 
they would have to write the justification and explain how, in 
their evaluation of the criteria, it was justified.
    Senator Coburn. So it is not a single individual decision. 
You have got a safeguard in there with backup?
    Mr. Matthews. Yes.
    Senator Coburn. So I think, and correct me if I am wrong, 
basically, what GSA is doing now is leasing buildings.
    Mr. Matthews. Yes. Those are the two overwhelmingly 
predominant tools we have available to us.
    Senator Coburn. Leasing or purchasing?
    Mr. Matthews. Leasing or direct Federal construction.
    Senator Coburn. Right.
    Mr. Matthews. Those are the two options.
    Senator Coburn. But that square footage, you said, hasn't 
significantly changed and the leasing square footage has, so 
basically what we have been doing the last few years is the 
vast majority of the space that we have been taking, we have 
been leasing?
    Mr. Matthews. Yes. Prior to the scoring rules, we were 
occasionally given access to the Federal Finance Bank, where we 
were able to do a form of purchase contract, where we were able 
to borrow the money to construct the building and then pay it 
back as if it were a lease over a period of time.
    Senator Coburn. Do you find it odd that the SEC would sign 
a lease for leasehold improvements at 9 percent cost for the 
leasehold improvements on top of the lease?
    Mr. Matthews. Without reviewing the whole offer, I would be 
reluctant to comment on that.
    Senator Coburn. OK. I take it from your testimony, you 
would be in favor of more public-private partnerships in terms 
of real estate transactions to help us leverage our dollars?
    Mr. Matthews. I would be in favor of having more options on 
the table for us other than----
    Senator Coburn. Of which one of those is that?
    The 2002 Defense authorization bill gave DOD the authority 
to do enhanced use leasing. That law also exempted DOD from 
having to report any of its leases. Has GAO studied this or 
found that to be problematic, Mr. Goldstein?
    Mr. Goldstein. I am not aware that we have studied this. We 
will get an answer for you for the record----
    Senator Coburn. OK.
    Mr. Goldstein [continuing]. To the extent to which we are 
able to determine if it has been problematic.
    Senator Coburn. What is the long-term commitment, Mr. 
Matthews, on the commitment to the national broker contracts 
that you have signed? What is the length of the term with 
those?
    Mr. Matthews. Excuse me just one second. I believe I have 
that answer here. A 5-year commitment with options for renewal.
    Senator Coburn. OK. Was an RFP put out for that, or----
    Mr. Matthews. Yes, it was.
    Senator Coburn. This went through the regular process and 
then you chose down based on what you thought would give us the 
best broad experience and exposure and regionalization?
    Mr. Matthews. Yes, sir, and we chose four. I don't know if 
I made that clear.
    Senator Coburn. Yes.
    Mr. Matthews. There were four large companies and they 
subcontract, so it is an extensive network of resources.
    Senator Coburn. Have you all been used at all during the 
response to Hurricanes Katrina and Rita in terms of leasing?
    Mr. Matthews. I am not aware that the broker contract has 
yet been used, although I heard that discussed just this week.
    Senator Coburn. All right. First of all, you guys have all 
been great. Thank you. There are several questions we have had 
for you.
    I want to change what needs to be changed so that you can 
do the best job for our grandkids. I came to Congress, again, 
reluctantly, because I want the same future for all of our 
grandkids that has been created as an opportunity for us. When 
we are spending maybe $1 billion or $2 billion more a year in 
leases when we could be having that same money go towards 
equity assets and equity appreciation, that is money we could 
use to pay for Katrina, that is money we could pay for raises 
for Federal employees, enhanced benefits. I mean, there are all 
sorts of things.
    So my commitment is sincere and I would love to have each 
of your help. How do we fix it to make it to where you can do 
your job in a better financial way that gets us a better 
return, smarter investments, and in the long run protects all 
of our security, our financial security? I am not worried about 
our international security from terrorism. The bigger threat we 
have is financial. We are on an absolutely unsustainable 
course, and if we can find a couple of billion here by 
reforming this--I have no lack of confidence in what you all 
do, but if we can give you the tools to allow you to save us 
the money, then we ought to be about doing that.
    If you don't want to talk as a member of the 
Administration, if you want to call me on my cell phone and 
say, here are some ideas for you, I am happy to take that, too. 
I understand the rules of procedure in terms of working in the 
Administration. But there have got to be ways we can do it 
better and I want to take the handcuffs off of you and let you 
do it.
    I appreciate your service. I appreciate you coming and I 
thank you for your testimony.
    The hearing is adjourned.
    [Whereupon, at 3:40 p.m., the Subcommittee was adjourned.]


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