[Senate Hearing 112-319]
[From the U.S. Government Publishing Office]
S. Hrg. 112-319
FEDERAL LEASED PROPERTY:
ARE FEDERAL AGENCIES GETTING A BAD DEAL?
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HEARING
before the
FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT
INFORMATION, FEDERAL SERVICES, AND
INTERNATIONAL SECURITY SUBCOMMITTEE
of the
COMMITTEE ON
HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
AUGUST 4, 2011
__________
Available via the World Wide Web: http://www.fdsys.gov
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COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan SUSAN M. COLLINS, Maine
DANIEL K. AKAKA, Hawaii TOM COBURN, Oklahoma
THOMAS R. CARPER, Delaware SCOTT P. BROWN, Massachusetts
MARK L. PRYOR, Arkansas JOHN McCAIN, Arizona
MARY L. LANDRIEU, Louisiana RON JOHNSON, Wisconsin
CLAIRE McCASKILL, Missouri ROB PORTMAN, Ohio
JON TESTER, Montana RAND PAUL, Kentucky
MARK BEGICH, Alaska JERRY MORAN, Kansas
Michael L. Alexander, Staff Director
Nicholas A. Rossi, Minority Staff Director
Trina Driessnack Tyrer, Chief Clerk
Joyce Ward, Publications Clerk and GPO Detailee
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SUBCOMMITTEE ON FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION,
FEDERAL SERVICES, AND INTERNATIONAL SECURITY
THOMAS R. CARPER, Delaware, Chairman
CARL LEVIN, Michigan SCOTT P. BROWN, Massachusetts
DANIEL K. AKAKA, Hawaii TOM COBURN, Oklahoma
MARK L. PRYOR, Arkansas JOHN McCAIN, Arizona
CLAIRE McCASKILL, Missouri RON JOHNSON, Wisconsin
MARK BEGICH, Alaska ROB PORTMAN, Ohio
John Kilvington, Staff Director
William Wright, Minority Staff Director
Deirdre G. Armstrong, Chief Clerk
C O N T E N T S
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Opening statements:
Page
Senator Carper............................................... 1
Senator Brown................................................ 5
Prepared statements:
Senator Carper............................................... 39
Senator Brown................................................ 41
WITNESSES
THURSDAY, AUGUST 4, 2011
David Foley, Deputy Commissioner, Public Buildings Service, U.S.
General Services Administration................................ 7
James M. Sullivan, Director, Office of Asset Enterprise
Management, U.S. Office of Veterans' Affairs................... 9
Hon. David Kotz, Inspector General, U.S. Securities and Exchange
Commission..................................................... 11
Jeff Heslop, Chief Operating Officer, U.S. Securities and
Exchange Commission............................................ 13
David J. Wise, Director, Physical Infrastructure Issues, U.S.
Government Accountability Office............................... 14
Alphabetical List of Witnesses
Foley, David:
Testimony.................................................... 7
Prepared statement........................................... 43
Heslop, Jeff:
Testimony.................................................... 13
Prepared statement........................................... 79
Kotz, Hon. David:
Testimony.................................................... 11
Prepared statement........................................... 55
Sullivan, James M.:
Testimony.................................................... 9
Prepared statement........................................... 50
Wise, David J.:
Testimony.................................................... 14
Prepared statement........................................... 87
APPENDIX
Appendix 1 referenced by Mr. Wise................................ 97
FEDERAL LEASED PROPERTY: ARE FEDERAL AGENCIES GETTING A BAD DEAL?
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THURSDAY, AUGUST 4, 2011
U.S. Senate,
Subcommittee on Federal Financial Management,
Government Information, Federal Services,
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 342, Dirksen Senate Office Building, Hon. Thomas R.
Carper, Chairman of the Subcommittee, presiding.
Present: Senators Carper and Brown
OPENING STATEMENT OF SENATOR CARPER
Senator Carper. Good afternoon everyone. On behalf of
Senator Brown and myself, welcome to today's hearing. I was
just saying to Senator Brown that we may be the only hearing in
the Senate today. I do not know, but the others are dropping
like flies.
But if you see the two of us, you know we are serious about
saving some money and we are for our country. We are glad that
our witnesses can be here today and our guests as well. Today
we are going to examine the challenges that our Federal
Government faces managing its real property and in particular,
its reliance on spaces leased from the private sector to
satisfy long-term real estate needs.
I just addressed a group over in the House side a little
while ago, Scott, and they come from the accounting industry,
auditing industry, and actually do a whole lot of work as a
firm to support the Government Accountability Office's (GAO's)
efforts with respect high-risk list, high risk for using a lot
of money, taxpayer money. But we have had a number of hearings
here in the past about real estate, high risk, and we have
literally thousands of pieces of property sitting around us.
There are a thousand pieces of property that the Federal
Government owns and we pay utilities for, maintenance for,
security for that we are going to get rid of. We do not use
them.
And we also find out that there is something else that we
are spending a lot of money for and that is--GAO has been
riding us for a couple of years, and that is we have a lot of
agencies that lease space for years, in some cases for decades,
and we save a lot of money. They save a lot of money if instead
of leasing we actually buy this stuff.
And there are still a lot of instances where it actually
makes a lot of sense to lease, like the Department of Census
Office. Every 10 years you do a census. It does not make sense
to buy all those pieces of property they are going to use once
every 10 years.
But that is a little bit of background here. There is a
general consensus that our Federal Government has to get smart
about the ways we manage our buildings and land. Presidents in
both parties now have made doing so a top management priority
and with concerns over the implication of our deficit and
national debt mounting, eliminating waste, achieving cost
savings in this area remains a top priority for us and I hope
for the rest of our colleagues in the House and the Senate and
the Administration.
Between 2001 and 2009, we ran up as much debt as we did in
the first 208 years of our Nation's history. Last year we ran
up what may be the largest budget deficit in our Nation's
history. Most of us here in Washington are united in our desire
to find a solution to our Nation's fiscal problems. We are
still facing an ocean of red ink as far as the eye can see,
even after enactment earlier this week of the spending cuts
included in the legislation to raise our country's debt
ceiling.
A wide variety of ideas have been put forward on how to
reduce our budget deficit and begin whittling down our debt.
Last fall, the majority of the bipartisan deficit commission
appointed by President Obama, co-chaired by Alan Simpson,
former Republican Senator from Wyoming, and by Erskine Bowles,
former chief of staff to then President Bill Clinton, they
provided us, along with their colleagues on the Deficit
Commission, a roadmap to reduce cumulative Federal deficits
over the next decade by some $4 trillion, and at the same time
getting a reform of our title programs, tax reform. Pretty
comprehensive, bipartisan comprehensive and would actually not
be just a deal. It would actually have been a solution to the
challenges that we face.
Their work is reinforced by the Gang of Six, three
Democrats, three Republicans, and unfortunately, in my view the
President initially followed their lead too late, as it turned
out, and the leaders of the House and Senate, Democrat and
Republican, did not follow it at all and that is a sad thing, I
think, for this country.
As a result, we settled this week for a bill that reins in
discretionary spending, but does little to tackle our long-term
financial challenges. In short, it was a deal, not a solution,
and not a very good deal as far as I am concerned. It only
addresses the symptoms of our Nation's fiscal ailments,
specifically the debt ceiling, but failed to cure our serious
disease of debt and deficits. And unfortunately, we largely put
off until tomorrow what we ought have been doing right now.
And as Senator Brown has heard me say probably more times
than he wants to remember now, but I said a lot, and my staff
certainly feels that way, but I am going to keep saying it for
as long as I am around here, a lot of Americans believe that
those of us here in Washington are not capable of making or
taking the difficult steps that are necessary to put our
country back on the right fiscal track. And given what has
happened in recent weeks, it is easy to see why they feel that
way.
They do not think we can do the hard work that we are hired
to do, that is, to effectively manage the tax dollars that they
entrust us with. They look at the spending, the tax decisions
we have made in recent years and also the poor management
across government and question whether the culture here is
broken. They question whether we are capable of making the kind
of tough decisions that American families make with their own
budgets.
And I do not blame folks for being skeptical, especially in
light of the debate we have seen in recent months and the deal
that we arrived at in recent days. Now more than ever we need
to establish a different kind of culture here in Washington.
When it comes to spending we need to move from what I have
described here many times as the culture of spendthrift to a
culture of thrift. This shift must involve looking in every
nook and cranny of the Federal Government and asking this
question about all kinds of programs, domestic programs,
discretionary programs, entitlement programs, how do we get a
better result for less money, or how do we get a better result
for the same amount of money?
When it comes to property management, it is clear to me and
others that we can get better results and we can save money.
Federal property management has been on the Government
Accountability Office's high-risk list since January 2003, in
part due to significant amounts of underutilized and excess
property. This problem is coupled with the fact that Federal
agencies depend on costly--too often depend on costly leased
space to meet new space requirements, although building
ownership has proven to be more cost effective over time, not
always, but often times.
The most recent comprehensive data available shows that
Federal agencies apparently possess more than 45,000
underutilized buildings, totaling more than 340 million square
feet in space. These buildings cost nearly $1.7 billion
annually to secure and to maintain. Fixing that problem does
not balance the budget, but it is a great step in the right
direction.
But in addition to the past 20 years, GAO has been telling
us that we have been too reliant on leasing. Since 2008, the
General Services Administration (GSA) has leased more property
than it owns. In fiscal years (FY) 2011, the agency will spend
over $5 billion to house Federal employees in 184 million
square feet of private office space. In addition, while GSA
serves as the central leasing agent for the Federal Government
and is responsible for managing and obtaining space for
agencies, many agencies have obtained their own leasing
authority and in doing so, have chosen not to take advantage of
GSA's expertise in Federal real estate.
Given that many of these agencies lack experience in
performing lease procurements, they often bind the government
into costly, long-term lease obligations that result in
millions of dollars in additional cost to the Federal
Government, actually tens of millions and maybe even hundreds
of millions of extra dollars in cost.
For example, the U.S. Securities and Exchange Commission
(SEC) is--we know this one all too well--but is an agency that
has been granted independent leasing authority, along with some
other agencies. In July 2010, the Commission entered into a
sole source lease for 900,000 square feet of space at a
privately owned building called Constitution Center in
Washington. That lease would have cost taxpayers some $556
million over 10 years.
Although the SEC has held independent leasing authority for
more than 20 years, the Commission's inspector general has
found that the agency still lacks adequate policies and
procedures for managing its leasing actions. The fact, this was
the second time within the past 5 years in which the SEC was
involved in an unnecessarily expensive leasing arrangement.
Unfortunately, this is not the only agency that operates
this way. Similarly, in 2006, the Federal Bureau of
Investigation (FBI) executed a 30-year operating lease to house
employees in its Chicago field office that cost an estimated
$40 million more than construction over a 30-year period.
Fortunately, both Congress and the Obama Administration are
united in their commitment to address these issues. The
President's latest budget included a recommendation to form a
Civilian Property Realignment Board (CPRA) to review the
government's property portfolio and dispose of those deemed
excess in an expedited manner.
I think, if I am not mistaken, Senator Brown may have
actually introduced legislation to codify that proposal. This
is a proposal that my colleagues and I on the Homeland Security
and Government Affairs Committee (HSGAC) had an opportunity to
examine on our June 9th real property hearing. And while the
proposal, folks, is primarily on assisting agencies in the
disposal of excess and underutilized buildings, it does provide
for opportunities to consolidate or co-locate operations, which
could ultimately help to reduce the government's leasing
portfolio.
I have concerns about the cost and effectiveness of the
President's approach, but I look forward to taking what works
in his proposal and Senator Brown's legislation, along with
other ideas, and introducing a bill in the fall that will help
right-size the government's portfolio in a way that is
advantageous for Federal agencies, for community stakeholders
and the clientele served by those agencies.
Clearly, the momentum is building to address a widely
recognized problem, yet in all of our zeal to save, we must be
intelligent in our approach. Rome, I am told, was not built in
a day. The Federal Government's bloated property portfolio
cannot be un-built in a day. We have an opportunity though to
do this right and change the way the Federal Government manages
its hundreds of billions of dollars worth of assets.
That said, the agency should not be waiting for a civilian
Base Realignment and Closure (BRAC) to solve their problems, or
at least begin to solve their property management problems now.
In an era of shrinking budgets and scare resources, it is
critical that agencies come up with an innovative property
management tool that will identify opportunities to right-size
our real estate portfolio to reduce costs and achieve savings
by eliminating unneeded assets and expensive long-term space.
Before I turn it over to Senator Brown, let me just say,
every now and then, and I am sure Scott has noticed this as
well, we misalign incentives. We misalign incentives in the
Federal Government. We incentivize the wrong kind of behavior
and then we get the wrong kind of results. And what we do
within the Federal Government, we incentivize a lot of Federal
agencies to lease. The incentives are to lease.
With the way that we call, if you ever really want to buy a
building or something like that upfront, even if that makes
sense long term, we incentivize them with the way that we score
that expenditure in the first year, as opposed to leasing,
which could be scored for 10, 20, 30 years or even more.
And one of the things I hope comes out of this hearing
today are some good discussion on how we change those
incentives, get them properly aligned so that we not only meet
the space needs of our agencies, but we meet the fiscal
constraints of our country.
So I look forward to this hearing, from our witnesses--we
both do--as you share with us your thoughts on how to transform
our asset portfolio in a way that generates significant and
lasting savings to the public. And with that, I am happy to
turn it over to Senator Scott Brown of Massachusetts.
STATEMENT OF SENATOR BROWN
Senator Brown. Thank you, Mr. Chairman. Thank you to our
witnesses. I would venture to guess we are the only hearing in
D.C. right now. It is interesting listening to you, Mr.
Chairman, I want to thank you for holding this important
hearing. Through a lot of our efforts, your efforts, we have
been able to help put the spotlight on some of the programs
that just are not doing it right.
It is funny. Half a billion dollars for leased office
space, it just blows my mind how we get in these situations.
People wonder where the money is going. Well, it is very clear
where it is going. It is going some places very poorly chosen,
whether it is leased spaces, programs, whether it be military
programs that are not working, are obsolete. We are just
wasting money all over the place, and in the middle of a
financial emergency, I find that very, very disturbing.
That is why I was proud to put party politics aside and
work with the President and Congressman Denham on the Civilian
Property Realignment Act (CPRA). The bipartisan legislation
that you referenced will bring private sector discipline to the
management of Federal real estate. It will empower an
independent commission to break through the longstanding
barriers created by red tape and politics to facilitate the
efficient disposal and realignment of unneeded Federal
property.
This bipartisan approach will address a problem GAO has
designated as a high-risk area and would achieve savings of
approximately $15 billion, and that is real money when we are
trying to make some very real and tough decisions in the next
couple of years.
It is funny, time and time again, government agencies have
proven they cannot properly manage their own real estate and
today, as we already referenced, both of us, that half a
billion dollars in leased space really will never be used
efficiently or properly. And not only did they enter into this
wasteful lease, but they--the SEC, as was referenced--but they
did so they could spend their workdays, quite frankly, in a
lavish building, complete with panoramic views of the city,
limestone floors, marble walls and a landscape courtyard that
was transformed into a one-acre private garden. I guess it is
nice if you can get it, especially when it is at the taxpayers'
expense.
That being said, I came to Washington to look at the way we
spend our dollars and to be a fiscal watchdog, Senator, to
address our fiscal challenges so we do not have to leave young
Americans with a tab that they just cannot afford anymore, Mr.
Chairman.
I am looking forward, as you are, to making those tough
decisions. We started already. We will continue to work in that
vein and hopefully gain the confidence of the American people
once again. I look forward to hearing from our witnesses.
Senator Carper. Thanks very much for that statement. Let me
just take a moment to introduce each of our witnesses, a Hokie
from Virginia Tech here to lead off. David Foley, appointed
Deputy Commissioner of the Public Building Services and U.S.
General Services Administration in 2010. He is responsible for
the real estate acquisition operations of the agency,
previously served as the Deputy Assistant Commissioner for
portfolio management at GSA and worked in a number of
leadership roles within GSA in offices in, get this, Dallas,
Kansas City and Atlanta.
Mr. Foley is a graduate of Missouri State University, has a
master's in business administration from the home of the
Hokies, Virginia Tech.
Mr. Jim Sullivan, also known as James, is the Director of
the Office of Asset Enterprise Management at the U.S.
Department of Veterans' Affairs (VA). It seems like we pick on
the VA a lot and we actually use them a lot of times as an
example of an agency that does things well.
Sometimes folks in these hearings, they like to conduct
these like gotcha hearings. What we like to do is when folks
are behaving in inappropriate ways, managing in inappropriate
ways, we like to put a spotlight on that. When agencies are
actually managing and behaving in more appropriate ways and
actually serve an example, we like to put a spotlight on them
and any number of times we have done that with the VA.
But Mr. Sullivan assumed this new leadership role in 2009,
after serving as a Deputy Director since 2000--I guess since
May 2002, something like that. But you are now the Director of
the Office of Asset Enterprise Management at VA. And Mr.
Sullivan has over 25 years of experience in capital budgeting
and planning and asset management. He plays a pivotal role in
managing one of the largest portfolios of property in the
Federal Government, including in Delaware.
The Honorable David Kotz has served as the Inspector
General for the U.S. Securities and Exchange Commission since
December 2007. Prior to joining the SEC, Mr. Kotz served as the
Inspector General for the Peace Corps and practiced Federal
administrative law for a decade in the private sector.
Inspector General Kotz is a graduate of the University of
Maryland, which makes him a Terrapin, and the Cornell Law
School.
Jeff Heslop was named the U.S. Securities and Exchange
Commission's first ever Chief Operating Officer (COO) in May
2010. He is responsible for the agency's information
technology, financial reporting and record management duties.
Prior to joining the SEC, Mr. Heslop was managing Vice
President at Capital One, which has just acted to acquire ING
Direct in Wilmington, Delaware, right in my hometown. And
there, at Capital One, Mr. Heslop was responsible for the
company's information and risk management operations.
He received his bachelor of arts degree from Davidson
College. When did you graduate?
Mr. Heslop. Seventy-six.
Senator Carper. Seventy-six. John Spratt, Congressman John
Spratt, who is one of your bachelorettes as well. Do you know
who the president is there, now?
Mr. Heslop. Carol Quillen.
Senator Carper. She is from Delaware. Delaware. Yes, she
just became your president the 1st of this month, and I think
the first woman in the history of the college.
You have your master's in business administration from
College of William and Mary, where our youngest son has started
his senior year this fall. Great school.
David Wise is Director for Fiscal Infrastructure Issues at
the U.S. Government Accountability Office, affectionately known
as GAO. He specializes in transportation and communication and
Federal real property issues.
His career at GAO dates back to 1981. Mr. Wise has a
bachelor of arts in political science from the University of
Pittsburgh and a master's in public administration's degree
from Pitts Graduate School of Public and International Affairs.
And now that the National Football Leagure (NFL) strike has
been averted, or lockout has been averted, I was going to ask
my first question of you.
What NFL football team will you be rooting for this fall
with that kind of bio?
Mr. Wise. Patriots.
Senator Carper. All right. Welcome one and all. Your entire
statement will be made part of the record. If you like to
summarize, that would be great. We are asking you keep remarks
to roughly 5 minutes. If you go a little beyond that, that is
OK. If you go way beyond that, that is not OK. Just go ahead
and once you all are finished, Senator Brown and I will take
turns just asking questions of you.
Mr. Foley, please proceed. Thank you all for coming.
STATEMENT OF DAVID FOLEY,\1\ DEPUTY COMMISSIONER, PUBLIC
BUILDINGS SERVICE, U.S. GENERAL SERVICES ADMINISTRATION
Mr. Foley. Thank you. Good afternoon, Chairman Carper,
Ranking Member Brown. I appreciate being invited here today to
discuss GSA's efforts to reduce our reliance on leased space,
our approach to lease acquisition, and how we manage
delegations of authority.
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\1\ The prepared statement of Mr. Foley appears in the appendix on
page 43.
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GSA searches for the most cost-effective ways to provide
space for Federal agencies to help them achieve their missions.
Our first priority is to use existing government-owned space
and then lease space already under contract to the government.
When existing space is not available, GSA determines the best
method to acquire new space, whether through leasing or new
construction.
We consider the size, duration, cost and complexity of the
requirement. For most long-term needs, especially those with
unique requirements, like courthouses or land ports of entry,
it is more cost-effective for the government to build and own
these facilities. For small short-term general office
requirements, leasing from the private sector is typically more
economical.
GSA currently manages an inventory of over 370 million
square feet of space, of which roughly 191 million is leased
from the private sector. Approximately 80 percent of our 9,000-
plus leases are for the smaller short-term needs that are less
than 20,000 square feet. Our lease acquisition process entails
carefully sequenced steps to ensure adequate competition and a
fair rental rate for taxpayers, which are outlined in my
written statement.
GSA has multiple internal controls in place for our largest
leases with annual rental payments that exceed $2.8 million.
These leases require additional reviews within the GSA and the
Office of Management and Budget (OMB), along with prospectus
approval by GSA's congressional authorizing committees. This
process ensures any growth and cost from staffing or space
increases are supported in the President's budget and are
transparent to Congress and the public.
Since real property was identified as a high-risk area by
GAO in 2003, GSA has worked closely with Federal agencies to
maximize the utilization of leased space. At the end of fiscal
year 2010, the vacancy rate in GSA's leased inventory was less
than 1 percent.
GSA and the Administration have also made it a priority to
reduce the cost of leasing by minimizing the need for build-to-
suit projects, adjusting requirements to maximize competition
for existing space, purchasing leased assets to create Federal
ownership, and converting costly lease proposals into Federal
building renovations or new construction projects.
For instance, in 2010, GSA exercised a purchase option for
Columbia Plaza, a long-term lease here in Washington, DC. The
fiscal year 2010 budget also provided funding for the FBI field
office in Miami. This project had previously been authorized as
a lease proposal.
In fiscal year 2012, GSA's budget request contained funding
that would retrofit the Phillip Burton Federal Building in San
Francisco, California. This would satisfy an FBI requirement
and avoid a costly lease proposal, saving taxpayers almost $100
million over the next 30 years. Congressional cuts to the
President's budget threaten this progress. In fiscal year 2011
alone, several key projects in the President's budget were not
funded, including the next phase of the Department of Homeland
Security (DHS) consolidation at St. Elizabeth's and a purchase
option for an Internal Revenue Service (IRS) lease in
Martinsburg, West Virginia. Failing to move forward with these
projects will result in the government's continued leasing of
space, costing taxpayers millions more in the long run.
Additional cuts in fiscal year 2012 would only make the
situation worse. GSA has been aggressive with another
opportunity for savings by improving the efficiency of the
Federal inventory to facilitate consolidation of leases into
government-owned space. Our GSA headquarters is a good example.
By renovating the building and opening up the floor plan, we
can increase the number of occupants from approximately 2,500
to 6,000 people. This will allow us to eliminate multiple
leases, saving taxpayers millions of dollars annually.
GSA, as you mentioned, is not the only agency that leases
on behalf of the Federal Government. More than 25 agencies and
commissions, like the VA and SEC, have their own statutory
authority to hold land and acquire leasehold interest. GSA is
not usually involved in these transactions.
Some agencies also lease space under a delegation of
authority from GSA. Agencies using this delegation must abide
by the same laws and controls that govern GSA and certify that
they have a properly warranted lease contracting officer to
conduct the procurement and execute the lease. We are involved
in these transactions to provide the appropriate levels of
oversight.
In conclusion, GSA strives to maximize space utilization
and minimize the cost associated with leasing. We are
continually looking for ways to streamline, standardize and
simplify our leasing process with the appropriate controls to
maximize competition and find the optimal solution for
taxpayers, while helping agencies achieve their missions
effectively.
Thank you for inviting me to appear before you today. I
appreciate the opportunity to discuss GSA's leasing practices
and expertise and I welcome your questions.
Senator Carper. Thanks so much for your testimony. Mr.
Sullivan, please proceed. Thank you.
STATEMENT OF JAMES M. SULLIVAN,\1\ DIRECTOR, OFFICE OF ASSET
ENTERPRISE MANAGEMENT, U.S. OFFICE OF VETERANS' AFFAIRS
Mr. Sullivan. Thank you, Chairman Carper and Ranking Member
Brown. Thank you for the opportunity to appear today to discuss
the Department of Veterans' Affairs' management of its capital
asset portfolio, and more specifically its leased property
portfolio.
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\1\ The prepared statement of Mr. Sullivan appears in the appendix
on page 50.
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At the outset, let me say, VA evaluates all of its capital
decisions, including leasing, based on three following critical
principles. First, does it directly benefit veterans and their
families? Second, does it improve the operations of the VA? And
third and last, does it allow us to be a good member of the
local community?
VA is the operator of one of the largest healthcare real
estate portfolios in the country. VA also maintains facilities
for the Veterans Benefits Administration (VBA), and the
National Cemetery Administration (NCA) as well. Leasing has
been and continues to be an essential part of VA's capital
portfolio management practice.
VA is authorized to acquire facilities, including leased
facilities, for medical and non-medical purposes, which include
hospitals, community based clinics, cemeteries, medical
research space, and other medical related functions. VA enters
into leases to meet veteran needs across the Nation. One of
VA's primary goals is to provide services to veterans and their
families where they live, not where old hospitals are, but
where veterans need the care.
In many cases, leasing provides more flexibility in lieu of
construction to meet demographic shifts, changing service
demands, technology improvements in terms of medical care and
benefit care delivery to our Nation's veterans. The need for
space is supported by VA's mission as identified through the
Strategic Capital Investment Planning (SCIP) process at VA.
Through SCIP, VA systematically evaluates all proposed
capital investments based on how well they address identified
performance gaps. These gaps identify infrastructure or
services needed to enhance or to meet needs of current and more
importantly, future veterans. Only investments that have scored
well against these performance gaps are presented to Congress
for funding and authorization.
VA considers the size and mission criticality when deciding
between building and leasing. New construction of large
inpatient and specialty care facilities that we will be in for
many years, in most cases will be the most cost-effective
solution to our need. Smaller facilities, such as outpatient or
ambulatory care centers, can generally be acquired for more
efficiently using leasing, as they provide more flexibility to
meet changing demands in technology.
VA does follow GSA regulation and complies with all
competition and contracting act requirements and the Federal
Acquisition Regulation (FAR) in conducting its lease
procurements. VA's real property service has years of
experience in managing the department's robust leasing program,
employing skilled workers comprised of highly trained realty
specialists and certified contracting officers.
Oversight of VA's leasing program is provided internally
through an extensive series of checks and balances in VA.
Externally, all leases in excess of $1 million require
congressional notification and more importantly, authorization.
Congress also is notified of any significant change in the cost
or scope of any authorized lease, or for that matter,
authorized construction projects.
In addition, VA has been granted by Congress enhanced-use
leasing (EUL) authority. This tool provides VA with an
innovative process to partner with public and private sector
entities for up to 75 years. In return, VA receives negotiated
monetary or in-kind consideration. The leased property is then
developed, used and maintained for uses that support VA's
mission.
Enhanced-use leases allow VA to reuse properties to meet
mission-related needs such as veterans' homeless housing. EUL
program results have included significant cost savings and
substantial private investment in the department's capital
infrastructure. In the last 6 years, VA has received in
consideration more than $216 million from this program.
VA's authority to enter into this program will expire on
December 31 of this year. Without reinstatement, VA will lose a
well-needed tool to help us manage our property more
effectively.
Mr. Chairman, the department understands the importance of
a balanced real estate portfolio to address its needs. VA has a
rigorous capital planning process that takes into account
current and future needs of America's veterans. VA strives to
maintain the optimal mix of investments, both owned and leased
assets, to achieve its strategic goals and to assure the
highest level of performance of our assets.
I thank you and the Subcommittee for the opportunity to be
here today and will be happy to answer any questions. Thank
you.
Senator Carper. The pleasure is ours. Thanks so much. Mr.
Kotz, please proceed.
STATEMENT OF HON. DAVID KOTZ,\1\ INSPECTOR GENERAL, U.S.
SECURITIES AND EXCHANGE COMMISSION
Mr. Kotz. Thank you for the opportunity to testify before
this Subcommittee. I appreciate the interest of the Chairman,
the Ranking Member, the SEC, and the Office of Inspector
General (OIG).
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\1\ The prepared statement of Mr. Kotz appears in the appendix on
page 55.
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On November 16, 2010, we opened an investigation as a
result of receiving numerous written complaints concerning the
SEC's decisions and actions relating to the leasing of space at
the Constitution Center office building in Washington, DC. As
part of our investigative efforts, we analyzed thousands of
pages of documents and interviewed 29 witnesses with knowledge
of facts or circumstances surrounding the SEC's leasing of the
space.
We also searched over 1.5 million e-mails from various time
periods pertinent to the investigation. On May 16, 2011, we
issued a comprehensive report of our investigation containing
over 90 pages of analysis and 150 exhibits. Our investigation
concluded that based upon estimates of increased funding and
staffing, primarily to meet the requirements of the Dodd-Frank
Act, between June and July 2010, the SEC's Office of
Administrative Services (OAS), conducted a deeply flawed and
unsound analysis to justify the need for the SEC to lease
900,000 square feet of space at the Constitution Center
facility.
We found that OAS grossly overestimated the amount of space
needed for the SEC's expansion by more than 300 percent and
used these groundless and unsupportable figures to justify the
SEC committing to an expenditure of over $557 million over 10
years. We found that OAS used a standard of 400 square feet per
person to calculate how much space would be needed for the
additional positions it believed it was gaining.
This standard was an all-inclusive number that included
common space and amenities and an additional 10 percent for
contractors, 10 percent for interns and temporary staff, and 5
percent of future growth. We found that the 400 square feet per
person standard was described as a back-of-an-envelope
calculation. Moreover, notwithstanding this all-inclusive
number, when OAS later did its calculations to justify the
lease, it added even more unnecessary space by double counting
for contractors, interns and temporary staff.
We also found that each one of these estimates was widely
inflated and unsupported by the data being used by OAS. After
the SEC committed itself to the 10-year lease term at a cost of
over $556 million, it entered into a justification and approval
for other than full and open competition, a document required
by the Federal Acquisition Regulation.
The FAR permits other than full and open competition when
the agency's need is of such an unusual and compelling urgency
that the agency would be seriously injured unless the agency is
permitted to limit the number of sources from which it solicits
bids. We found the justification and approval to lease space at
Constitution Center without competition was inadequate, not
properly reviewed and backdated.
The OAS official who signed the justification and approval
as the SEC's competition advocate, acknowledged in testimony
that the SEC would in fact not be seriously injured if it lost
the opportunity to rent the Constitution Center space. She
further admitted that she took no substantive steps to verify
that the information in the justification and approval was
accurate and that when she signed the document she was unaware
that the funding had not been appropriated and that she did not
have an understanding of when the projected personnel were
expected to be hired.
The FAR also requires that the justification and approval
be posted publicly within 30 days after contract award. As the
letter contract for Constitution Center was signed on July 28,
the deadline for publication of the justification and approval
was August 27. However, the SEC did not post the justification
and approval until September 3, although the document was
signed by four individuals as dated August 2.
The investigation found that the justification and approval
was in fact not finalized until September 2, 2010, and
substantial revisions were being made up to that date. We found
that three of the four signatories executed the signature page
on August 2, 2010, before a draft even remotely close to the
final version existed.
We found that the SEC's competition advocate executed the
signature page on August 31, initially backdated her signature
to August 27. She then subsequently whited out the 7 to make it
appear that she had signed the document on August 2. The
actions of the signatories for justification and approval gave
the public a false impression that the document was finalized a
few days after the letter contract was signed.
In light of our findings, we recommended that the SEC's
chief operating officer conduct a thorough and comprehensive
review and assessment of all matters currently under the
purview of OAS. We further recommended that the chief operating
officer determine the appropriate disciplinary actions to be
taken.
We specified that such disciplinary actions should include,
at a minimum, action up and to and including dismissal against
two senior individuals and disciplinary action against a third
individual. Finally, we recommended that the SEC request a
formal opinion from the comptroller general as to whether the
commission violated the Anti-Deficiency Act by failing to
obligate funds for the Constitution Center lease.
Subsequent to the issuance of our report of investigation,
we received a corrective action plan with regard to the
substantive recommendations we made for improvements. We will
monitor the planned activities carefully to ensure that the
necessary improvements are made and to ensure that the
individuals who we identified as being responsible for the
failures and improprieties in our report are held accountable
for their actions.
Thank you, and I would be happy to answer any questions.
Senator Carper. Just add a comment. I leaned over to
Senator Brown when you were going through that litany and I
said to him, what were they thinking about? My Lord.
Mr. Heslop, please proceed.
STATEMENT OF JEFF HESLOP,\1\ CHIEF OPERATING OFFICER, U.S.
SECURITIES AND EXCHANGE COMMISSION
Mr. Heslop. Thank you for the opportunity to testify today
on behalf of the Chairman of the SEC regarding the lease of
office space at Constitution Center and the steps we are taking
going forward.
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\1\ The prepared statement of Mr. Heslop appears in the appendix on
page 79.
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The report by the Commission's Office of Inspector General
concerning Constitution Center identified a number of
significant flaws in the SEC's leasing process. We are
extremely disappointed by the failures that have been
identified and regret that they have taken us all away from our
primary mission of protecting investors, facilitating capital
formation, and ensuring stability in the financial markets.
The fact that the SEC has not paid any rent to date for
this property and that the bulk of the space has been leased to
other tenants does not adequately address a situation that
should never have occurred. The only appropriate response by
the SEC is to resolve the remaining space issues, to correct
the deficiencies in our leasing process by working with GSA and
OMB with respect to future space needs, and to ensure
accountability for the events surrounding this lease.
By way of background, in the spring of 2010, the SEC
correctly anticipated that it would receive significant new
responsibilities under the Dodd-Frank Act for derivatives,
hedge fund advisors, credit rating agencies and much more. This
was, of course, on top of our longstanding core
responsibilities. As a result, we believed--and continue to
believe--that the SEC needed additional staff to fulfill its
mission and help further restore investor confidence in our
markets.
At the time the agency was considering the leasing
decisions, Chairman Schapiro indicated her preference for
hiring new staff in the regions rather than in the
headquarters, and she indicated to staff her preference that
any new space in Washington be within walking distance of the
Commission's Station Place building to eliminate the need for
expensive shuttle services.
In July 2010, the then executive director, who was
responsible for the agency's leasing activities, informed the
chairman that all of our leasing options no longer existed,
that the space at Constitution Center was our only option given
our space needs, that the pricing was advantageous, and that we
had to move quickly as there was competition for the space.
Given the previous discussions with the staff, the chairman
assumed the proposal was consistent with both our budget
projections, future employee growth, and her preference for the
staff to be housed, where possible, in the regions. When it
subsequently became clear that the SEC would not receive the
funding necessary to implement its new responsibilities, we
took immediate steps to release the space to others and to
reduce the SEC's exposure.
My written testimony details what we have learned from the
flaws in our recent process and how we intend to address them.
I would like to emphasize a few of these. First, we are
promptly implementing the IG's recommendations and have already
submitted, as he indicated, a written corrective action plan to
him.
Second, in light of the failure identified, the SEC
recognizes the benefits of having GSA manage the Commission's
future lease acquisitions. Leasing is not part of the
Commission's core mission and as an agency we cannot allow it
to impede that mission. GSA, by contrast, has long experience
in leasing.
In a recent meeting at GSA, Chairman Schapiro and I
discussed with the GSA Administrator ways in which GSA could
assist the Commission on our leasing efforts going forward. GSA
indicated that it was open to playing a significant role in
these efforts, and following that meeting, Commission staff has
had further multiple discussions with the GSA staff. Earlier
this week, the SEC and the GSA entered into a Memorandum of
Understanding (MOU) that contemplates an immediate role for the
GSA in managing upcoming SEC leasing activities, as well as all
other future leasing needs as they arrive.
Third, the OIG report recommended that the SEC initiate
disciplinary proceedings for three individuals involved in the
Constitution Center leasing process, and we have begun that
process. Chairman Schapiro has expressed a desire for this
process to move forward as quickly as the laws and regulations
permit, consistent with fundamental fairness, to assess and
implement remedial measures and discipline as appropriate.
In the meantime, the individuals for whom the OIG report
recommend a disciplinary review have been reassigned. Their
current duties do not involve any leasing or any other
authority that could bind the Commission, nor do they involve
activities that relate to the expenditure of appropriated
funds.
As our chairman indicated, the true test of an organization
is not whether things go wrong, but how an organization
responds to problems and whether its leaders take such
opportunities to make necessary improvements. We are committed
to doing that.
I would be happy to answer your questions.
Senator Carper. Thanks, Mr. Heslop. Mr. Wise, you want to
wrap it up and then we will go to Q and A's?
STATEMENT OF DAVID J. WISE,\1\ DIRECTOR, PHYSICAL
INFRASTRUCTURE ISSUES, U.S. GOVERNMENT ACCOUNTABILITY OFFICE
Mr. Wise. Chairman Carper, Ranking Member Brown and Members
of the Subcommittee, thank you for the opportunity to testify
today on our work related to real property leasing among
civilian Federal agencies. The Federal real property portfolio
is vast and diverse, totaling over 900,000 buildings and
structures worth billions.
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\1\ The prepared statement of Mr. Wise appears in the appendix on
page 87.
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My testimony today will address three topics. First, the
factors that contribute to the government's reliance on costly
leasing; second, how the Administration's proposed Civilian
Property Realignment Act may provide an opportunity to reduce
reliance on leasing; and third, Federal agencies' independent
leasing authorities and GSA delegations of those authorities.
One of the primary reasons we designated Federal real
property management as high risk was the Federal Government's
overreliance on costly leased space to meet new space needs.
Our work over the years has shown that operating leases often
cost more than ownership, especially for long-term needs.
Increasing ownership, when appropriate, could save millions
of dollars over the long term. Federal agencies rely
extensively on leasing and leased buildings. At the end of
fiscal year 2010, for example, GSA's leased square footage
exceeded owned footage 191 million to 179 million. GSA has
relied heavily on operating leases to meet new long-term needs
because it lacks funds to pursue ownership.
The decision to lease rather than own space for Federal
operations is often influenced by factors other than cost-
effectiveness, including budget issues and operational
requirements. The Budget Enforcement Act of 1990 directs that
the budget authority to meet the government's real property
needs is to be scored, meaning, recorded in the budget in an
amount equal to the government's total legal commitment.
If GSA buys or constructs a building, the budget authority
for the full cost must be recorded upfront to reflect the
government's financial commitment. However, for operating
leases, GSA is only required to record the government's
commitment for an annual lease payment and any potential fees
for canceling the lease.
This reduces the upfront funding commitment, but generally
costs the Federal Government more over time. We have raised the
scorekeeping issue as a challenge that needs to be addressed in
several reports and testimonies in the past. We believe that if
the issue is not addressed, the reliance on leasing will likely
persist.
Accordingly, in 2007 and 2008, we recommended that OMB
develop a strategy to reduce agencies' reliance on costly
leasing where ownership could result in long-term savings. OMB
agreed that a strategy was needed, but has not yet implemented
one.
Agency operational requirements are among the reasons why
leasing is often preferred by agencies. For example, officials
said that more than 200 GSA-owned and leased buildings were
damaged by Hurricane Katrina, necessitating the relocation of
2,600 Federal employees from 28 Federal agencies, many of which
were GSA tenant agencies. To meet this emergency need, GSA
expanded its use of leases to house agencies in temporary space
to fulfill a short-term need.
In May 2011, the Administration proposed CPRA, which may
have provided an opportunity to reduce overreliance on leasing.
While CPRA does not explicitly address this issue, one of
CPRA's purposes, to realign civilian real property by
consolidating, co-locating and reconfiguring space to increase
efficiency, could help to reduce the government's reliance on
leasing.
CPRA also provides for the potential co-location of Federal
civilian offices and postal properties, many of which are
already owned. We are currently examining the potential for
consolidating leased facilities into federally owned sites for
this Subcommittee.
Congress has authorized many agencies independent statutory
leasing authority, allowing them to acquire leased space. The
authority may be for a particular type of space or for general
leasing authority. Agencies with such authority and their
respective authority types are listed in Appendix 1\1\ of my
written statement.
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\1\ The Appendix referenced by Mr. Wise appears in the appendix on
page 97.
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GSA may also delegate leasing authority to agencies. For
example, all Federal agencies may acquire a specific type of
space, such as antennas, depots, piers and greenhouses.
Thirteen Federal agencies are authorized to lease their own
special purpose space, subject to limitations. For example, the
Commerce Department has delegated authority to lease space to
conduct the decennial census.
In November 2007, GSA amended its delegation of leasing
authority to increase oversight after audits found instances in
which agencies failed to meet the conditions of their leasing
delegation. Although GSA's goal is to cover the administrative
cost of private sector leases with fees it charges the tenant
agencies, it has been unable to do so in recent years, losing
more than $100 million in fiscal year 2009, raising concerns
about the agency's management of its leased properties. We have
an ongoing engagement examining this issue, among others, for
your Subcommittee.
Mr. Chairman, this concludes my statement. I will be
pleased to answer questions from you and other Members of the
Subcommittee. Thank you.
Senator Carper. Yes, thanks, Mr. Wise, and I have asked
Senator Brown if he would like to lead off and he has agreed to
do so.
Senator Brown. Thank you, Mr. Chairman. So Mr. Kotz, I
appreciate your initial opening. During the time period where
you made the recommendations of disciplining three people, what
in fact has been done at this point; do you know?
Mr. Kotz. I have been told that there is a process in
place, but I do not believe anybody has been disciplined as of
yet or any proposal for discipline has been made.
Senator Brown. So it has been over a year now since they
entered into this lease arrangement, and I guess my question
is, what does it take to get fired or disciplined at an agency
when you enter into a lease that is basically a half a billion,
no half--yes, billion we are talking about, a billion dollars?
And I guess I should ask you, Mr. Heslop, what does it take
to get disciplined and fired at your agency when something like
this happens?
Mr. Heslop. Sir, the disciplinary process, essentially our
IG's report was issued I believe on May 17 of this year and
since that time, we have followed Mr. Kotz's guidance. We have
reviewed that report. Our general counsel has analyzed it in
great detail.
We have conducted supplementary investigations and
supplementary interviews. There was a slight hold when we--
basically when Mr. Kotz referred to the Department of Justice
(DOJ) the individuals mentioned in the report. As a matter of
practice, we do not complete investigations or interview the
individuals named until the Department of Justice comes back to
us and gives us their OK that we can, so that it does not
interfere with their investigation. We received that OK. The
investigation then began to proceed.
As the investigation unfolded, it became apparent that in
the interest of objectivity and fairness, it would be in our
best interest to hire an external party to help us conduct that
investigation, and we are in the process right now of employing
that external party.
Senator Brown. So what about fairness to the taxpayers? It
is like fairness for the individual. What about fairness to the
taxpayers in getting the best bang for our dollar? You were in
that--you were with the SEC back then when this all happened,
right?
Mr. Heslop. I was hired in the SEC on May 17, 2010.
Senator Brown. OK. So you had no knowledge of any of this
stuff?
Mr. Heslop. No, and this was not under my purview.
Senator Brown. Mr. Kotz, based on these types of failures,
and we seem to hear it over and over, I mean, let's just talk
about the SEC, for example. Do you think that Congress should
simply revoke their independent leasing authority?
Mr. Kotz. I think that certainly Congress should give very
serious consideration to that. I mean, I have thought
previously that perhaps if the SEC completely revamped its
leasing area it might be given another opportunity. But I do
understand now that Chairman Schapiro and Mr. Heslop have said
that they intend to get out of the leasing business, that they
do not feel that there is enough competence at the SEC to
handle that.
So I do think at this point it would be prudent to take
away the independent leasing authority, yes.
Senator Brown. Thank you. Mr. Wise, thank you for your
testimony as well, your introduction. As you know, I am filing
and have filed a bill that basically mirrors the President's
idea on how to address these issues when it comes to leasing
and buying and the like.
I was wondering if you could describe how one of the CPRA's
purposes, which is realignment of civilian real property by
consolidating, co-locating and reconfiguring space to increase
efficiency, do you think that could help reduce the
government's overreliance on leasing? I think you kind of
hinted on it in your initial opening.
Mr. Wise. Senator Brown, thank you for your question. And
actually, to be perfectly honest with you, the CPRA does not
explicitly discuss leasing, but as I think we point out in our
testimony, it certainly has a provision in it that we think
could be very useful to help alleviate some of the reliance on
leasing that the government has, especially with the discussion
about consolidation, co-location and realignment of the Federal
footprint.
So we think, as we go forward, if CPRA does become
codified, that there is a very good possibility that it could
be a contributing factor toward helping to reduce the
government's reliance on costly leases.
Senator Brown. I remember your testimony when you said it
takes about $1.66 billion annually to operate and basically
keep open some of the underutilized buildings. I found that
really fascinating. I went back to the office. We talked about
it. As a result, we are trying to come up with ways to address
it and get those properties out the door and get them back on
the tax rolls and the like.
One of my goals in my legislation is to address these. How
do you think we could unlock these savings for the taxpayers?
Mr. Wise. Well, I think the--as you allude to it in your
statement, the key thing for the Federal Government is to get
out from under costly leases that are not really very useful
for the government. Because, as you noted, the operations and
maintenance costs are costs that keep recurring year after year
after year. So, as we move forward and the CPRA does become a
law, hopefully this will lead toward the government's ability
to get out from under leases that are not useful and be able to
shed property that is not being utilized in various ways.
Senator Brown. I know in Massachusetts when we were having
some financial difficulty, a lot of the registries and motor
vehicles were actually closed and a lot of the leases were
canceled at the government's convenience and we were able to
find spaces that were already owned by the Commonwealth of
Massachusetts to put them in, whether it would be at a city
hall or a State-owned building or work out an arrangement with
the Federal Government. So I would hope that we could do the
same thing. There is plenty of Federal buildings around where
we could co-locate and combine.
And Mr. Foley, how would the GSA leverage its expertise in
asset management to support the CPRA process and specifically
lease consolidation, do you think?
Mr. Foley. Sure, Senator Brown. Thank you for the question.
GSA is a leader in asset management for the Federal Government,
and as I outlined, we have a strong leasing process. I think we
are already working with client agencies as a part of helping
them shape----
Senator Brown. Can I just interrupt for one second?
Mr. Foley. Sure.
Senator Brown. So if you have such a strong leasing
process, I do not understand how we get into these messes with
the SEC and others. Where is the breakdown, if you could, and
please finish your statement.
Mr. Foley. Sure.
Senator Brown. And then if you could say like where is the
breakdown? Why are we even here? Why are we even having this
hearing today? Because if you have such a great process, how
come we are not doing it right?
Mr. Foley. Let me finish.
Senator Brown. Yes.
Mr. Foley. And then I will come back and address that.
Senator Brown. Yes.
Mr. Foley. I think one of the key things is working with
agencies upfront to make sure that we appropriately shape the
requirement so that we know how many people--we ensure that we
are getting the most utilization out of it and that we can make
sure that we can fit it into existing Federal space wherever
possible, or minimize the amount of space that we have to lease
from the private sector.
So we are working with agencies on that. I thank you for
your support of the CPRA bill and we look forward to working
with you on that. I think that will do several key things that
can really help us with consolidation. One, it incentivizes
agencies to get rid of property, and two, probably more
critically, it provides a source of funding to deal with some
of the upfront costs.
And I know a lot of people think that is toward getting a
property ready for sale, but one of the intents is also to help
with existing Federal property, to let us retrofit those, make
them more efficient and allow us to consolidate out of leases,
or perhaps build or buy a new facility to consolidate and
shrink the Federal footprint. So I think we have a real
opportunity under the CPRA legislation and we look forward to
working with you on that.
As far as your question of if we have a solid process in
place, how do we end up in these situations, as I mentioned in
my testimony, there are multiple agencies with multiple
different authorities. The SEC lease was done outside of GSA's
authority under their own independent authority, and so we were
not involved in that transaction. We are working closely with
them moving forward and willing to lend our expertise.
And as Mr. Heslop indicated, we signed an MOU with them
earlier this week where we will then be doing their leasing
action for them moving forward and following the transparent
process that we currently use at GSA.
Senator Brown. Great. Thank you, Mr. Chairman.
Senator Carper. Thank you for those questions. Thanks for
the responses as well.
I spent a little bit of time this week talking, in light of
the deal to avoid default on the Nation's debt, I spent a fair
amount of time talking with my colleagues and to the American
people and the people of Delaware through the press, about how
we have a tendency around here to focus on addressing symptoms
rather than addressing underlying, if you would, using a health
analogy, underlying cause of disease.
In a situation where the Federal Government, the symptom is
the debt crisis, debt ceiling crisis, the cause, and that is
the sick patient. The cause of the illness, the sickness is the
fact that we do not spend money wisely, we do not collect,
frankly, all the money that is owed, and so what we ended up
doing is not addressing the underlying cause, unfortunately.
But we addressed the symptom by raising the debt ceiling and
leave to another day addressing the real underlying cause.
In reading through the testimony, especially GAO's
testimony, I came back to the question--let me just back up.
One of the things that when we look at Federal agencies, some
of whom do a pretty good job at disposing of surplus
properties, unneeded properties, I think VA does an especially
good job, but there are others as well. One of the reasons why
some agencies do a better job than others is because we
actually incentivize them not to keep underutilized, unused
property around.
We actually allow them to sell them, keep some of the
proceeds to actually fund their operation. Here we have,
looking now at the situation with lease versus purchase, if you
look at the way the Congressional Budget Office (CBO), scores a
lease versus a purchase, we incentivize agencies to lease even
when they ought to be purchased. You only know they are going
to save money.
And I would ask you, Mr. Wise, I am going to ask you to
walk us through why we have this incentive, I think a
misincentive, disincentive? Why do we have the wrong incentive?
How do we actually fix it? What would it take to fix it? Does
it take CBO changing their scoring approach? Is it something
that we need to do legislatively to empower, direct CBO to
change the way that they score lease versus purchase? Please.
Mr. Wise. Senator, thanks for the question. You bring up a
really important point and we have recommended a couple
different times and we have also discussed in other testimonies
the really important--OMB is really a key player here because
they are kind of the orchestrator of the whole Federal property
environment and we have recommended that they really need to
work within the Federal Real Property Council to come up with a
strategy to take a look at how the entire Federal property
portfolio is managed.
While they have agreed that is a good idea that needs to be
done to kind of rationalize the entire process, they have yet
to implement such a strategy because as you mentioned in your
opening remarks and subsequent remarks--the issue having to do
with the scoring is a major issue for agencies to be able to
come up with the needed capital in order to take a look at a
rational process.
Another really important point is the necessary analyses
that need to be done in order to make sure that you are making
the right kind of decision. While, as you mentioned earlier,
generally building is a less expensive option in the long run
than is leasing, it is not always the case. But you need to do
the economic analyses in order to do that.
And so it is important to do the 30-year net present value
analysis so you see how things will play out over time, and the
scoring, and do the comparisons so that we can make the right
decisions. You look at the commercial real estate market. It
maybe makes sense to lease something where the real estate
market is say relatively soft compared to a Boston or a New
York or a Chicago versus a Dallas or Atlanta perhaps.
So it is a pretty complex formula that goes into making
these kinds of decisions, but in order to come up with the
right decision, you really need to approach it in a multi-
faceted way so that at the end of the day you are making the
best call for the taxpayer.
Senator Carper. Let me just ask you to cut through all
that. I appreciate what you said. What do we need to do? What
needs to be done so that CBO in the future will not say almost
routinely that even when it makes economic sense to purchase,
we are not going to score it that way, instead, we are going to
score it in a way that almost mandates that agencies lease? How
do we change that?
Mr. Wise. Well, it gets into a policy area that is really
not so much our purview, but as we have discussed, or as we
noted, we make recommendations to OMB that they need to come up
with a strategy in order to rationalize this process and so
agencies can make the right kind of decision of whether to
lease or to build. And we really believe that OMB is the key
player that needs to address this scorekeeping issue,
otherwise, the reliance on leasing, as we noted in our
testimony, is likely to persist.
Senator Carper. All right, let me turn to others on the
panel. Same question. What I would like for you to do is give
Senator Brown and me and others on our Subcommittee, our
colleagues in the Senate, give us a to-do list. Put something
on our to-do list. Is there something we ought to be doing to
change this? It is really to change the culture. We are always
looking for a culture. Anybody have a good idea?
Mr. Sullivan. Mr. Chairman.
Senator Carper. Go ahead, Mr. Sullivan.
Mr. Sullivan. Mr. Chairman, I will maybe swim a little up
river here. VA's position is a little bit different, I think,
than other Federal agencies. Part of our portfolio, only about
11 percent is leasing, so out of 165 million square feet, we
lease about 12 million square feet. Three of it GSA does for
it. The rest we do it ourselves.
Our real problem is our existing infrastructure, not
leases. What do we do to consolidate? What do we do to get rid
of the old infrastructure that cannot be fixed easily? In some
places we do not need it.
Right now we have an estimate to fix our current portfolio
based upon the needs projected for veterans in 2020. We will
need $60 billion to invest in our infrastructure. Clearly, that
is not going to be able to be provided for in direct
appropriation. I think the key to unlock that problem is to be
able to tap private sector financing in working with public/
private ventures or joint ventures or with localities or other
non-profits to be able to find uses for the repurposing for
Federal property, to get it off the Federal rolls, to put it
potentially back on the tax rolls and to relieve agencies of
the large operation and maintenance (O&M) costs.
The biggest drag for VA is, and I imagine for some other
agencies, is the O&M costs that we have to maintain facilities
that could be made more efficient, and/or consolidate. So I
think it is a little bit different and the big issue about
third-party financing or private sector money is the other side
of the score.
CBO's scoring treatment of the use of third-party funds,
even if it is for non-profits or for non-government entities,
they scored as if it was direct Federal spending, which
basically turns off the third-party spigot of trying to utilize
them to unload unneeded inventory.
Senator Carper. All right, I am going to go back to Senator
Brown. Before I do, one of the things that I may ask this in
our next round of questions, but I spoke earlier of a need for
a comprehensive bipartisan approach on deficit reduction along
the lines of that recommended by the Deficit Commission co-
chaired by Erskine Bowles and Alan Simpson.
My sense in listening to your testimony and earlier
hearings that we have had is that we also need a comprehensive
approach with respect to real property management, not just to
deal with the lease versus purchase issue, but to deal with all
this underutilized or unutilized Federal properties that we do
have.
One of the things that I want to do maybe at this hearing,
if not we will certainly do a followup in writing, is get your
input on what should be the components of that comprehensive
approach. And to the extent that we can craft a comprehensive
approach where we harness market values, we change incentives
which I think are misaligned toward more appropriate alignment.
I would appreciate your input on that. Senator Brown.
Senator Brown. Thank you, Mr. Chairman. Mr. Sullivan, just
to followup, I remember your hearing--actually, as a result of
your testimony telling about some of the challenges with some
of the prime VA properties that potentially could be sold and
taken off your rolls and put you back having more money for the
veterans that need our help, instead of using it to keep
buildings open and the like, you testified as to how CPRA was a
welcome addition to the toolkit that you would need in reducing
unneeded assets.
Could you just elaborate on that, as to how that will
compliment your existing tools? And also, what role does
politics, do politicians have in interfering with you doing
your job? I mean, if you have some assets and you want to sell
them, how often does State or local--State or Federal
Government come up and kind of put a monkey wrench in the plan?
Mr. Sullivan. Senator, I will try and answer that in a
couple of different ways. The first way would be our toolkit
right now is to use our enhanced lease authority and in those
cases where we can develop, if you will, a win-win strategy
with the local community, the veterans, the veteran service
organizations and the private interest in that area we can
forge outlease with a public/private venture under that
authority.
We have done that in many places and it works where we can
reach consensus. Where we cannot reach consensus at the local
level with all the interested parties, especially local
communities, the CPRA process would be a welcomed addition to
be able to deal with those hard-to-do properties around the
country.
So I think we should use both of these approaches where we
have something that works and can continue to flourish and
shrink our footprint and deal with our underutilized properties
we want to maintain, that authority but there are some places
that CPRA would assist us in addressing those issues.
There are a lot of stakeholders involved in real property
in VA. As other agency and GSA has experienced, stakeholders
have different interests and when we cannot align those
interests, that is when things stop. So those are constant
challenges in dealing with them and we face it every day. And
as we move down this track, there needs to be a way to deal
with those interests.
Senator Brown. So getting back to my final question, I
think you kind of answered it without wanting to really say it,
but what role does State or Federal politicians and politics
affect it? Do they specifically call and/or stop your efforts
when you are trying to do some things for the benefit of the
VA?
Mr. Sullivan. In some cases, yes. When we cannot get
alignment of interests, we have local interests that may not
have the same interests that VA has, and in cases that happens
and things come to a grinding halt.
Senator Brown. Very smooth. It was a good answer. Very,
very nice. And that is unfortunate, because Chairman Carper
just asked for recommendations. I mean, I would think one of
the recommendations is to let--you leave the politics out of it
and let us do our jobs based on fact and based on the necessity
to deal with these issues without any type of outside
influence. And I would hope if you make that recommendation you
would include that, very frankly, so we do not really beat
around the bush in that regard.
Mr. Wise, generally in larger prospectus level projects
over 2.7 million and lasting over 10 years, the net present
value analysis indicates it is more advantageous to purchase
rather than lease. So I was wondering in the CPRA legislation
that I am filing, it requires a net present value analysis of
the cost of the lease compared to the cost of constructing new
space.
How important is it to provide this information to
Congress, do you think?
Mr. Wise. I think it is very important, Senator, because
through using analyses like net present value and scoring, you
can then be comparing basically apples to apples, because this
is something that GSA had done previously and it then enables
you to--it enables the agency or enables the decisionmakers to
be able to come up with a decision based on where the dollar
value is today versus what it will be 30 years onwards,
including any potential inflation returns and other factors
that get put into the mix.
So we believe that a net present value analysis is
certainly a key aspect of the entire economic analysis picture
in order to make these kinds of decisions.
Senator Brown. Thank you. Mr. Foley, what steps does GSA
take to ensure that the leases contracted on behalf of the
Federal clients achieve the best value for the taxpayer while
also supporting the mission critical requirements?
Mr. Foley. Sure. We do a couple of things and we do perform
a net present value analysis, so we compare the cost of
building a new Federal facility, renovating an existing
facility and the cost of leasing, so we do the 30-year net
present value analysis to evaluate the financial aspects.
Again, as I mentioned earlier, one of the key things is
making sure that we have a firm understanding of the
requirements and we work with the agencies to understand how
they may be able to adjust their requirements slightly to get a
better deal for the taxpayer. So for instance, instead of
having to be in one building of a particular size, might drive
construction of a new building or limit competition to one or
two buildings that have a certain amount of space available. If
they can be in two proximate buildings within a block of each
other or right next door or perhaps on the same campus, that
opens up the competition and drives down the cost of leasing.
So there are a lot of simple things that we can do working
with client agencies to make sure that we can still find a way
to meet their mission requirement, but leverage our expertise
in the real estate market to make sure we get the best value
for the taxpayer.
Senator Brown. In previous testimony, I note you said that
you are continually assessing your performance against other
rental rates in same or similar markets to a lease cost
relative to market measure. So how is the GSA doing in
comparison to the commercial market in various sectors?
Mr. Foley. We continue to lease at a cost below the market.
I believe at the end of last year it was somewhere around 10
percent below the private sector benchmarks we were using.
Senator Brown. And is that geographically driven? Is this
just overall?
Mr. Foley. Yes, we do it based upon a geographic market and
a submarket. So we look at where we are leasing and then we
find comparable rental rates from the private sector in that
particular market.
Senator Brown. I will just defer to you, Mr. Chairman.
Senator Carper. OK, we will have a third round, so feel
free.
I have been jotting down some questions as you all
testified and responded to questions from Senator Brown and
myself. I just want to kind of walk through this list briefly
if I could. One of the areas of jurisdiction that we also have
is the U.S. Postal Service. We face a situation with the Postal
Service literally running out of money, running out of cash
later this year, if not later this year, then next year. It
will be unable to make payroll. It will create a huge mess,
economic mess in our country. I think about eight million jobs
that depend on the mailing industry.
So we are looking hard for ways to help the Postal Service
right itself in a twitter, e-mail, Facebook age, to be able to
meet our needs, mailing needs, but do so in a way that they
cover their costs. There has been some discussion here today
about consolidation, consolidating property and consolidating
activities in ways that make sense. We do that through the Base
Realignment and Closure Commissions and Department of Defense
(DOD) about every half dozen years.
Think out loud for me. Think out loud for us, about how the
U.S. Postal Service might play a role here that would enable us
to kill two birds with one stone. One is to meet the property
needs of a number of Federal agencies that have nothing to do
with the Postal Service, and yet, help the Postal Service
with--to better meet its revenue obligations in order to free
themselves of support from the Federal Government, Federal
taxpayers.
OK, whoever wants to take a first shot at that, go right
ahead, please. Mr. Foley.
Mr. Foley. I will start first. GSA, we worked with the
Postal Service for a number of years. They are a tenant in many
of our Federal buildings and we also lease space from the
Postal Service. So we have many Federal agencies that are
located in Postal Service Buildings.
We have worked with them closely as they have been
disposing of properties to identify where it makes sense for us
to acquire those where we have existing Federal needs, as well
as we worked with them to figure out where we are disposing of
properties or where we have available underutilized properties
where they might be able to utilize that.
Several years ago, going back as far as 1985, we set up an
MOU at the Postal Service that allowed for an exchange of
properties and basically a netting of the fair market value of
that. And it has been very effective, I think, for both
agencies.
Another area where we have been able to partner with them,
Mr. Sullivan mentioned sort of the enhanced use leasing
authorities. They have some authorities that we do not at GSA
and so we have been able to lease from them and develop
properties too specific for the IRS for service centers in
Philadelphia and Kansas City, where we have been able to use a
former Postal Service facility, renovate that and use their
authority to create modern, efficient space for the IRS and
help find a good value for the taxpayer.
Senator Carper. Well, that is very encouraging. Anyone else
on this? That is good stuff. Thank you. Anybody else?
Mr. Sullivan. I am sure Senator, if the Post Office had
sites that become available due to a downsizing and they were
available and for us what would be key, would they be located
in the place where we need space? That would be the critical
point, of how close they would be to where veterans' needs are.
And if they could be easily adapted to deliver healthcare, I am
sure we would look at those and see if there was a match and
take advantage of any economies that were there.
Senator Carper. Oh, good. Thanks. I will just ask our
staffs, both Democratic and Republican staff, to please note
that. I think this is a scenario where we could help the Postal
Service help themselves and if we are smart about it, could
help the Federal agencies get better value for their space
needs.
Anybody else have a comment before I ask another question?
OK. We have had some discussion, delegation of lease authority,
some instances where it is done well and some instances, most
certainly SEC, was not done well.
Let me just ask Mr. Heslop, you used to work at Capital
One, correct?
Mr. Heslop. That is correct.
Senator Carper. If you had employees at Capital One who
were, I will use the term ``guilty'' for the kind of gross bad
judgment in terms of preparing the SEC for meeting its space
needs going forward, how would those employees be dealt with;
what kind of accountability would have been brought to them?
Mr. Heslop. I think in a relatively similar manner.
Obviously, there are not the same level of rules and
regulations that the Federal Government has as it relates to
their employment practices, but there definitely are rules and
procedures that apply.
And so employees in a situation like that would be--they
would have some availability of due process and it would not be
an arbitrary summarial dismissal, if you will. But there would
be an investigation and upon the conclusion of that
investigation, appropriate disciplinary action would be taken.
Senator Carper. I would hope at the end of the day
appropriate disciplinary action--I think I speak for both of
us--that appropriate disciplinary action be taken. One of the
things that really frosts citizens of this country, taxpayers,
and those of us who are privileged to represent them, is when
we have bad behavior, grossly bad behavior, on the part of
Federal employees or others who are using Federal--contractors,
and there is just little, if any, accountability. And that is
not right. I would just ask you keep that in mind.
We want to be fair, but we also want--it is tough love. It
is like a tough love situation. I think we need to be tough. We
need to provide the example.
At the beginning, I think, of your testimony, Mr. Sullivan,
I think you may have asked, there were three questions that the
VA asked. Would you just say those questions again for us,
please? I looked through your testimony to see if I could find
them. I did not see them.
Mr. Sullivan. Sure. When we make capital decisions, real
property decisions whether to keep something, to renovate it,
to sell it, to do whatever, our primary priority is how will
that impact that decision to affect veterans and veteran
families, first, and we will not be doing anything that will
negatively impact them.
Our second priority is to make sure that decision improves
the operational efficiency and cost-effectiveness of VA
operations, whether it is consolidating, whether it is building
a new building or whether it is buying a piece of property.
The third one is we want to be a good neighbor. We are
located in 165 communities around this country with major
presence and sometimes we are the largest presence in that
community and we do to the extent possible want to be a good
neighbor to the community and reach a decision that helps us,
but helps the local community.
We take them in that priority, first for veterans and
families, efficiency and then to try and be a good neighbor.
Senator Carper. All right. Let me just ask your other
panelists, are those three pretty good questions that we could
use, not just in the VA, but with a little bit of modification,
use outside of the VA?
Mr. Foley. It is very similar to the process GSA uses and
we have a broad range. But first we consider is there--what is
the requirement? Is there a Federal need for the asset? And so
if it is the VA, it is looking at how does it serve the VA and
their customers? If it is the IRS, how does it serve the IRS
and their customers or Social Security?
And so the first consideration is the operational piece.
The second piece that we look at is again the efficiency, the
cost-effectiveness, as Mr. Sullivan said. And then the third,
we do look at being a good neighbor in the community. We are in
over 2,000 communities in all 50 States and 6 U.S. territories
with government-owned or leased facilities and so we have a
critical role across the country that we play, and particularly
are focused on transit-oriented development and sustainability
as well.
Senator Carper. OK. Any other thoughts? Please. OK. I want
to go back to the issue of delegation of lease authority, some
instances where it is done well, some instances where it is
done badly.
As I understand it, correct me if I am wrong, but in your
testimony, have you asserted that we actually lease more--
through GSA we actually lease more space than we own; is that
correct?
Mr. Foley. Yes, that is correct.
Senator Carper. And has that always been the case or is
that something that has happened in recent years?
Mr. Foley. It is relatively recent. I believe 2008 was the
first year where we crossed over to having more leased space
than government-owned.
Senator Carper. Why do you think that changed?
Mr. Foley. I think a couple of things. Some of it is just
purely shifting demographics and where we had Federal
buildings, populations have shifted. Agency missions and needs
to serve the public have moved and for a lot of the smaller
locations, leasing has become the default mechanism to meet
those requirements, because you would not build a 5,000-square
foot building in a small community with Federal construction
dollars.
We put our focus toward building land ports of entry,
courthouses, the major headquarters agencies and
consolidations, like the Food and Drug Administration (FDA) at
White Oak, the St. Elizabeth's for the Department of Homeland
Security here in Washington, DC.
And so it is about prioritizing the limited dollars and
then for the more generic requirements that are basic vanilla
office space, they often do end up in leased space instead of
Federal buildings.
Senator Carper. All right, thanks. Thanks very much.
Senator Brown.
Senator Brown. Thanks Chairman. Just a couple more. So Mr.
Heslop, can you explain--I am still having trouble wrapping my
arms around the whole concept of having the SEC in kind of a--I
mean, here the SEC is being used to regulate Wall Street, and
in fact it looks like Wall Street with the lavish surroundings,
the fact that they would even take up in an area like this.
Gosh, I would think they would want to go to a blighted
area in Washington and bring some economic development, get a
good value for the taxpayers and kind of it is a win-win-win
all around. So I guess I know you were not there per se, but I
mean, you are still there now, right?
Mr. Heslop. I am there now, yes, sir.
Senator Brown. I mean, how do you explain those kind of
lavish surroundings when we are in a period of austerity?
Mr. Heslop. It is my understanding that the situation that
occurred was this. I do not believe that the lavish
surroundings was as much of a motivator as a very flawed
process to develop a space estimate and then a very flawed
process to get the decision made to take the building.
You have to remember that at the time, Dodd-Frank had just
passed. The SEC was given a significant amount of new
responsibilities, derivatives oversight of a trillion dollar
industry, registration of hedge funds, as I mentioned in my
testimony, a number of new responsibilities. It was going to
drive the hiring of a significant number of new employees, and
those new employees needed space to be housed.
There is a housing versus hiring mismatch. We typically can
bring employees on in about 90 days. As you know, it takes
significantly longer to house them and so I think, it is my
understanding, but I believe the people at the time felt very
much under the gun to try to obtain space sufficient for the
resources we were bringing in.
Because they used a flawed space estimate, we were
originally looking at four properties in the D.C. area, oh by
the way, against the chairman's guidance. She wanted them to
look in the regions for housing for our enforcement----
Senator Brown. What chairman?
Mr. Heslop. Chairman Schapiro. She wanted them to look in
the regions for both our enforcement and our examination staff,
because that is where a lot of the activity occurs. For
whatever reason in this broken process, the staff and the
facilities group disregarded that directive and then tried to
look for space and when they went through the estimate process
that Mr. Kotz has described and it was grossly inflated, they
arrived at a number of 900,000 square feet.
Once they hit that number and landed on that, the other
three properties that were being considered were suddenly out
of the equation. And so they believed they were left with one
and only one property. It was an emergency situation and they
felt at the time, I think, that they were getting a good deal
because the rental rate received was below the market rate at
the time. And so that is the way it was presented.
Senator Brown. OK. I am just wondering if that type of
office space is appropriate for a Federal agency, quite
honestly. That is top-of-the-line space and I guess I am
wondering, I think it would be probably Mr. Foley then, what is
the square footage rent for the clients that I guess are now
subletting? Are we subletting with clients in there now? How
does it work, because they are in the space, but they are not
obviously, occupying it? So you have other Federal agencies in
that space, right?
Mr. Foley. We are working with the SEC to take that on, but
we have not come to agreement on a lease and a term with them.
We are still trying to figure out which agencies we might
align.
I understand that they have subleased some space directly
with other agencies, but we were not a party to that.
Senator Brown. Other Federal agencies. What are you getting
for rent on those?
Mr. Heslop. I do not know what they are getting. I do know
it is at a higher rent than we had originally been on the hook
for.
Senator Brown. So another Federal agency is paying a higher
rent?
Mr. Heslop. Yes. It is not a sublease. Yes, another Federal
agency, as I understand it, is paying a higher rate.
Senator Brown. So you guys are paying basically a half a
billion dollars and then you are subletting it.
Mr. Heslop. We are not subletting it, sir. We have been
completely released from two-thirds of the space.
Senator Brown. OK, so that entity is now paying the
landlord a higher rent, has nothing to do with you. Another
Federal agency is now paying a higher rent that you are
ultimately paying; is that right?
Mr. Heslop. That is my understanding, yes, sir.
Senator Brown. So how does that happen? Have you been
working with those other agencies if it is a higher rent?
Mr. Foley. We have not. As I mentioned, for large leases,
we have a number of controls in place and particularly for the
District of Columbia and the National Capital Region, we
actually have prospectus rent caps that we put in place for all
of our leasing actions to ensure that we get a good deal and we
stay at or below the market.
Senator Brown. Right. So let me just make sure I understand
this. So you entered into a lease. I understand all the
background. You have been released from two-thirds and now that
two-thirds is now being rented to another Federal agency, at
now a higher amount than the half a billion dollars that you
ultimately were paying.
Are we just repeating what we just went through with other
agencies? Do we need to find out who those are? I mean, this is
like Groundhog Day, you guys. I mean, really, thank you for
laughing, because I do not even know how to respond. I did not
even realize that in my line of questioning, but I guess if you
keep digging like we are doing, we find more and more and more.
I would like to find out, Mr. Chairman, whether we do it--I
do not know who to ask here. Like who is the new entity? Did
they go through the process that we have been talking about
here? Are we doing the same exact thing that the SEC did? I
mean, I would love to have those answers, because it is just
not passing the smell test today. Maybe because we are the only
hearing here today that we are on top of this, because I think
that is so critical.
If you are developing and you have in place appropriate
leasing guidelines based on all the formulas and everything and
you are entered into an MOU with the SEC, correct?
Mr. Foley. The MOU is for all leasing actions going
forward.
Senator Brown. Right, going forward on other things that
they may want to lease?
Mr. Foley. Yes.
Senator Brown. So basically I understand that.
Mr. Foley. Yes.
Senator Brown. How about the entities that are now taking
over; you do not even know who they are, right?
Mr. Foley. That was done under their own independent
authorities, I believe.
Mr. Heslop. Senator Brown, if I might. The Federal Housing
Finance Agency (FHFA) and the Comptroller of the Currency
(OCC), both self-funded agencies, are in that property now.
Senator Brown. Oh.
Mr. Foley. So we are working with them to take, I believe,
it is 350,000 square feet and we are working through our
typical process to find a tenant and make sure that the rent is
appropriate.
Senator Brown. Great. Well, listen, thank you, Mr.
Chairman, for holding this. Again, it is another area--I mean,
every time you hold a hearing, I learn more and more about
where we are wasting money and I am hopeful that the President
and both houses are listening to what we are doing, because we
have given them great, great things to just go and fix.
Executive Order (EO) No. 1, fix it.
Senator Carper. As I have said before, GAO gives us a to-do
list and you do it through your high-risk list and it is not
just a high risk for this Subcommittee or for the Senate or the
House. It is a high risk for all of us, including OMB,
including the President, his folks, Federal agencies and
certainly all of us.
I want to just followup on Senator Brown's line of
questioning and just ask, for the space that I guess the SEC is
now occupying or about to occupy at Constitution Center, it
sounds like they are going to be occupying about one-third as
much space as was originally thought; is that correct?
Mr. Heslop. Senator, we are on the hook for one-third of
the space. We have no intent to occupy that space.
Senator Carper. At all?
Mr. Heslop. At all.
Senator Carper. If you look at the----
Mr. Heslop. Rent will be due in January 2013, and we firmly
believe and are very optimistic in terms of our partnership
with GSA that we will be able to find a tenant between now and
January 2013.
Senator Carper. That is good. Give us some idea what the
cost per square foot of that space would be if the SEC were
occupying the space on January 1, 2013; what would we be
talking about?
Mr. Foley. At the time we were talking about cost per
square foot of $44, which would have jumped to $47 per square
foot 6 years later.
Senator Carper. Somebody here at the table has better
than--I know what $44 and $47 per square foot, how that would
be regarded in Wilmington, Delaware. It would be pretty steep,
maybe not so much here.
But give us some idea how does that number jive with the
rest of the real estate industry around here, real estate, the
market, particularly in this area, this area of----
Mr. Foley. I mean, all real estate is local and there are a
number of submarkets in the Washington, DC. area and so rent is
fairly extreme. But our rent cap for the District of Columbia
is $49 a square foot, so $44 is below the prevailing market
rates.
That said, there are some submarkets and locations within
the District where you can get rents below that.
Senator Carper. So for the other agencies, which OCC, what
was the other one?
Mr. Heslop. FHFA.
Senator Carper. OK--that are going to come in and lease
space at Constitution Center, if they come in at the same rate,
$44 or $47, are you saying they would be under the overall rate
for this kind of office space in D.C.?
Mr. Foley. For the governmentwide prospectus rent cap yes.
Now, we have seen deals that are below that, as I said, in some
locations, north of Massachusetts Avenue and some of the
developing areas we have received better rates than that. But
for that part of town, it is----
Senator Carper. All right, a different question and one
that deals with the corrective activities.
Mr. Heslop you outlined for us on the corrective activities
that have taken place at the SEC in light of this, what I would
say is scandalous behavior on the part of some employees there.
But what, if any, is the applicability of the corrective action
the SEC has taken; how does that apply potentially to other
Federal agencies. Mr. Foley.
Mr. Foley. I mean, I think it is an example of how
important it is to get the checks and balances correct. One of
the advantages we have at GSA is we work with the Office of
Management and Budget and so I think one of the big issues that
SEC had in hearing their testimony and working with them was in
developing that upfront requirement, figuring out how many
people they had, what the right utilization rate for the space
should be and were they going to be fully funded for all of
that.
And so for all of our leasing actions, we not only work
with the agency to make sure we understand that, but we also
work with our budget examiner and their budget examiner, as I
mentioned in my opening testimony, to make sure that the
staffing levels are supported and the rental payment will be
supported in the President's budget so we know that the people
are going to materialize and the funding will be there to pay
for it before we proceed on a acquisition like this.
Senator Carper. Thank you. Mr. Heslop, the SEC was granted,
I believe, independent leasing authority in 1990. However, as
the IG has pointed out, it took the SEC 19 years to establish a
centralized asset management office to handle its leasing
activities; is that correct?
Mr. Heslop. That is my understanding, yes, sir.
Senator Carper. The SEC established a leasing branch within
its Office of Administrative Service in, I believe, April 2009
and did not put into place leasing policies and procedures
until August 2010.
Let me just ask you, if I could, sir, how many leases do
you think might have been awarded over that 19-year period of
time? You can do this with 20/20 hindsight, be a Monday morning
quarterback, but why did it take the SEC so long to put a
system in place that would allow the organization to
effectively manage its leasing activity?
Mr. Heslop. Yes, sir. To the first question, it is my
understanding that we have entered into 32 total leases over
the course of the last 20 years. I really cannot speculate as
to why they would not put one in place. I suppose because 32
leases in 20 years might cause some to say ``do you need a
full-time leasing staff, a dedicated leasing staff? ''
But again, I cannot really speculate. What I can say, sir,
it is very apparent to us that this is not a core competency
that the SEC needs to be engaged in, and that is exactly why we
are moving into a partnership with GSA. I would say to my----
Senator Carper. You are the master of understatement. That
sure is not the----
Mr. Heslop. The GSA, by the way, sir, has just been
terrific in terms of partnering with us and helping us out of
the situation, so I would like to thank them for that.
Senator Carper. Good. That is good to hear. Mr. Heslop, do
you have any idea how many leases the SEC currently manages?
Mr. Heslop. We currently have 15 in the portfolio. We have
11 regional offices. We have the Constitution Center space
that, as we know, we are still on the hook for. And we have the
Station Place facility, which is where our headquarters is. We
have an operation center in Northern Virginia, and then we
share space with other Federal agencies in a very small COOP
site. It is in Southern Virginia.
Senator Carper. How long did you work at Capital One?
Mr. Heslop. I worked at Capital One for approximately 12
years.
Senator Carper. Taking your private sector experience at
Capital One and then putting it sort of side by side with
your--what are you in about a year or so now with the SEC?
Mr. Heslop. It is about 14 months.
Senator Carper. It probably seems longer. But what kind of
lessons learned would you like to impart to the rest of our
Federal Government given what you have seen at the SEC in terms
of real property management?
Mr. Heslop. In terms of real property management, I would
say the lesson learned, I think, for small agencies, especially
like ours--we are a very small agency, 3,900 people and on any
given day 700 contractors in a very limited real estate
footprint. But I would say it is about determining what your
core competencies are and what they are not and divesting
yourself of those that are not.
I was hired to be a change agent, similar to your remarks
earlier today. I am a taxpayer at heart and I was brought in to
try to create change and move the SEC to a more well-managed
environment, and one of the things that I have tried to do is
move us out of those areas that are not our core competencies
and giving those to agencies that can do them better.
We are doing the same thing with our financial management
reporting system, moving them to the Department of
Transportation (DOT) as a Federal shared service provider, and
I would say going in directions like that for small agencies,
at least, I think is good advice.
Senator Carper. Thanks for those comments. Given the size
of the Constitution Center lease, both in terms of square
footage and funding, why didn't the SEC seek assistance from
GSA before entering into the lease? You mention they have a
pretty good partnership now with GSA. Why do you suppose they
did not seek the consultation or assistance from GSA in the
first place?
Mr. Heslop. Sir, I wish I could answer that. I really
cannot Monday morning quarterback that one.
Senator Carper. Mr. Wise, in your testimony, I think you
indicated the roughly 36 agencies that have independent leasing
authority. Generally do some of these other agencies with
independent leasing authority have adequate expertise and
internal controls to ensure that they are not--that they are
getting the best possible terms for themselves and for their
clients who they serve and for taxpayers?
Mr. Wise. Senator, we do not have a large body of work
looking at exactly that question, but we did have a look at
where the National Transportation Safety Board (NTSB), had some
issues with a lease for its training facility out in Dulles
where they mischaracterized or misconstrued a lease as an
operating lease when it should have been a capital lease, which
resulted in an anti-deficiency issue and caused some real
issues with the agency in terms of its accounting and getting
its fiscal house in order.
That leads to the larger point that Mr. Heslop has talked
about, as well as what you mention in your opening remarks, is
that for smaller agencies, especially that are not heavily
engaged in real estate activities, as you know better than
anyone, I guess, it is a very complicated environment to deal
with leases and construction and if it is not a core mission or
it is not even a significant one for a small agency, I think it
is logical that they need to tread very carefully in this area
because it is easy to fall into problems when you have capacity
issues or it is a challenge for the administrative side of an
agency to deal with these things.
Senator Carper. On the one hand, agencies can purchase
space. On the other hand, they can get this designation,
independent designation that some have and then they can lease
or they can go through GSA and lease. How prevalent is the
notion of lease purchase and is that something that agencies do
from time to time? Is it rare? Is it more common? Is it a
smarter approach in certain instances? Anyone?
Mr. Foley. I will jump in with that. Lease purchase is
something that GSA has done in the past, but that was prior to
the Budget Enforcement Act. It is one of those things that
triggers capital lease treatment if you have a bargain purchase
option. So in essence, leasing to own is prohibited because all
the funds get scored upfront.
That said, some of our leases done prior to 1990, like the
Columbia Plaza example that I mentioned, we were able to
acquire that. We had a purchase option in the lease for $100
million. As it turned out at the time we exercised it, the
building was worth about $200 million and we are saving rent of
somewhere in the ballpark of $45 to $50 a square foot that we
are no longer going to have to pay once we take ownership of
the building.
So there are a lot of advantages to being able to do
something like that, but it is an area where similar to what
Mr. Sullivan said, that the Budget Enforcement Act and the
budget scorekeeping rules limit some of the flexibility that we
have had in the past.
Senator Carper. That is good to know. Not actually good
that it exists, but it is good to know. That is helpful.
Couple more. Senator Brown, do you want to jump in here? I
think you said you only had those others.
Senator Brown. Just one more. Mr. Heslop, I do not want to
beat a dead horse, but I just want to understand. So when you
say we are on the hook for this space, but we are not using it,
so you are not physically in the space, right?
Mr. Heslop. That is correct; we are not in the space.
Senator Brown. When you say we are on the hook, you mean
the taxpayers are on the hook?
Mr. Heslop. The SEC is funded by fees. However, we get our
appropriation from Congress and basically there is a mixed
tradeoff. So it is not direct taxpayer dollars, but----
Senator Brown. Someone is paying.
Mr. Heslop. There is an obligation that will come due in
January 2013 if we are unable to find a tenant. However, I
think our conversation with GSA is they are very optimistic
that between now and then we will----
Senator Brown. So you are not in that space, but you are
already in another space which you are paying for right now, a
couple of spaces you indicated, throughout the region; is that
right?
Mr. Heslop. Right. We have 11 regional offices, our
headquarters.
Senator Brown. I just want to make sure I understand that.
OK, that is it, Mr. Chairman. Thank you.
Senator Carper. Mr. Kotz, in your May 2011 report you
indicated the SEC grossly overestimated the amount of office
space it needed. It might have violated Federal law when it
signed a $556.8 million 10-year lease last year at Constitution
Center.
Based on your findings, what internal controls did the SEC
have in place to ensure that it was leasing the appropriate
amount of space in the most advantageous location and at the
best rate?
Mr. Kotz. Yes, I do not think they had any significant
internal controls. I think that was part of the problem. I know
that they are making efforts to put controls in now.
Senator Carper. Let me just ask, what were they thinking?
Mr. Kotz. I do not know. I do not know exactly what they
were thinking, but----
Senator Carper. Did you ever ask? Did you ever ask----
Mr. Kotz. Yes.
Senator Carper [continuing]. What are you guys thinking?
Mr. Kotz. No, we did and I think what it came down to was
they had a misunderstanding of whether they needed this space.
I think some folks did fall in love with the space and decided
that was where they wanted to be. They wanted to make sure that
they could all be in one building and they wanted to have as
much of the building as possible.
It was a process that moved forward in relatively quick
time without a lot of thorough review or analysis. It ended up
with a very flawed process.
Senator Carper. Let me followup to that if I could. As part
of the authorization process for new leasing proposals,
agencies are required to receive congressional approval for
releases, I think, valued at about $2.8 million or more.
How is the SEC able to enter into the Constitution lease
without Congress being aware of the potential problems
associated with the lease of this magnitude and did the SEC's
independent leasing authority preclude them from having to
receive congressional approval prior to executing the lease?
Mr. Kotz. Yes, I believe that there were a couple reasons.
One is the independent leasing authority. I think the other
issue is the one that you have mentioned several times, the so-
called scoring issue. So when you have a lease, you can sort of
allocate a certain amount for each year. If you allocate a
certain amount for the first year, you do not get over a
particular threshold, while if you purchase, you allocate the
whole thing in one year and you get over thresholds.
So by using a lease, you cannot be subject to certain
notifications and I think in this case, that was a very big
negative factor because had there been notifications to OMB,
Congress, there have been communications with GSA, I think
somebody would have looked at this more carefully and come to a
different conclusion.
Senator Carper. And two more questions, Mr. Kotz, if I
could, of you. What would be the consequences if the SEC were
required to go through GSA for all future lease acquisitions?
Mr. Kotz. I think there would be someone looking at the
leases who was competent, ensured that the taxpayer got the
most value, I think would be a very good thing.
Senator Carper. OK. And was the Constitution Center lease
an anomaly or does the SEC lack the necessary expertise and
internal controls to ensure they are getting the best possible
term when it leases space? I think I know the answer to the
question. You do not have to answer it.
Mr. Kotz. OK.
Senator Carper. Mr. Foley, when GSA acquires a leased space
for many Federal agencies, as you have testified, has delegated
that authority to many others, how many agencies do you think
have delegated authority to enter into lease agreements, any
idea?
Mr. Foley. Delegated from GSA?
Senator Carper. Hmm-hmm.
Mr. Foley. I have that list here. Just a second. It looks
like it is probably 15. The largest user is USDA and they have
probably two-thirds of the lease delegations from GSA. Many of
the others are much smaller in terms of one or two specific
transactions.
Senator Carper. All right. What criteria does GSA use to
determine whether an agency should have delegated authority?
Mr. Foley. Sure. We have a number of different criteria.
The first is we look at the size of the requirement and for the
most part, we do not delegate anything over 20,000 square feet
that comes into our agency. For the smaller requirements, we
look at their management plan. We make sure that they have a
warranted contracting officer, as I mentioned, who can execute
the lease in the procurement. We make sure that they have a
plan to follow all the appropriate procurement rules and
regulations that would be under GSA's, and then we provide
oversight to make sure that they are following through with
that.
Senator Carper. What type of oversight does GSA perform
after agencies with delegated authority enter into lease
contracts and that said, how does GSA verify that an agency did
not lease more space than it needed?
Mr. Foley. That is an issue for us and so we do work with
the agencies post-award and we look at the lease contract to
make sure that it is in line with what we delegated.
Senator Carper. One of the things I like to do when we come
to the end of a hearing, sometimes and I am going to do it
today--I do not always do this, but today I would like to do
it--is just to ask--you have all had the opportunity to prepare
for today, had the opportunity to present your testimony, to
respond to our questions, to hear what your fellow panelists
have to say.
Let me just ask you to take maybe a minute a piece and just
give us any concluding remarks. We always ask you to do opening
remarks. Sometimes I find the most valuable input that we
receive is actually sort of the retrospect and concluding
remarks. Let's see, if you do not mind doing this, we will just
start with Mr. Wise, please.
Mr. Wise. Senator, thank you.
Senator Carper. What I focus on around here is how do we
build, how do we develop consensus? How do we develop consensus
within the Executive, Legislative Branch, bipartisan, how do we
do that in order to get better results for less money?
I am just interested in getting things done. I think you
are as well. But keep that in mind. That is what my goal is,
consensus, how do we get things done? How do we do it in a way
that gets better results for less money? Please.
Mr. Wise. Senator, I would conclude with two points. One,
when you talk about building consensus and bipartisanship, I
think CPRA is a promising start in that direction that will
hopefully lead to some efficiencies and some cost savings for
the taxpayers.
So I think that is a good start moving, or a good thought
process to be developing as this moves toward--the legislation
moves forward and the differences are reconciled between the
sort of three different versions.
And the second point is that we think it is very important
that in terms of looking at the whole issue of leasing,
purchasing and score keeping that OMB continues to work toward
developing and implementing the strategy that will help
rationalize this process.
Senator Carper. OK, thanks. Mr. Heslop.
Mr. Heslop. Thank you, Senator, for the opportunity. I
would say two things. One, as a taxpayer, I would certainly be
supportive of the CPRA type approach as well. As a previous
former Army officer, I can tell you, I have seen BRAC work its
way through and seen the benefit that has added. I also would
come back to the comments I made earlier, at least for small
agencies, determining what your core competencies are and what
they are not and finding a home for those things that are not
and hopefully that would hit your agenda about savings tax
dollars.
Senator Carper. Good. What did you do in the Army?
Mr. Heslop. I had a variety of assignments. I had an
eclectic career as an Army officer. It ranged from a troop
leader through an operations research analyst through working
as the chief of staff to the chief of staff for the Army at one
time, so I had a wide variety.
Senator Carper. How long did you serve?
Mr. Heslop. Twenty-two years.
Senator Carper. Twenty-two. Thanks for that service as
well. Mr. Kotz.
Mr. Kotz. Yes, I think the one thing that struck me was
what you, Mr. Chairman, were saying about disincentives in the
beginning of the hearing. There should not be an incentive in
place to lease versus purchasing. The incentives should be with
respect to maximizing value for the taxpayer. I mean, that is
where the incentive needs to be, whether it is purchasing or
leasing, and perhaps we have gone away from that by focusing on
one particular type of effort.
So if something was done to put the appropriate incentives
in place, I think we would all be in better shape.
Senator Carper. Good. There might be an exception when
leasing actually does make more sense. And a classic example
Census need a lot of space every 10 years, but not before 10
years.
Mr. Kotz. Right. So if the incentive was to maximum value,
the incentive in that case would be to lease. In other cases it
would be to buy.
Senator Carper. All right, thanks. Mr. Sullivan, please.
Mr. Sullivan. Sure. A couple items, Mr. Chairman. No. 1, I
think we heard today is the critical nature, having good
internal controls on a professionally groomed, if you will,
contracting and project management staff. VA is spending
significant amount of effort, time and resources to make sure
our leasing staff is fully trained, meets all the requirements
and also has strict internal controls.
Every lease at VA more than 10,000 square feet is reviewed
by numerous offices, including our general counsel, including
our secretary personally signs them all. I can assure you that
if anything, at VA most of the folks think there is too much
review. I do not agree with that, but that is the groundswell.
We have strict internal controls.
The other item is in terms of leasing for providing medical
services, is very different from providing office space.
Medical leases really work well because No. 1, the population
may shift of who we provide services to. And No. 2, which has
become more apparent over time is the technology of providing
medical services changes.
So if we do a 10-year lease, the way we provided magnetic
resonance imaging (MRIs) 10 years ago, radiology, oncology
treatment, all of those things have changed. The building needs
to be updated for the latest medical technology and radiology
and other telemedicine, teleradiology as well. Leasing works
well for that.
And No. 3, I think is the key to this in the end is to find
some way to incentivize the scoring process to be more rational
on leases, but also to help us disinvest where we need to
disinvest.
Senator Carper. OK, thanks. Mr. Foley, you get the last
word, well the next to last.
Mr. Foley. Thank you, Senator. I appreciate your comments
about consensus. And like the VA, GSA has a well-trained
professional staff of leasing folks across the country.
I think the area where everyone seems to be in agreement,
there is a little--varying approaches on how to deal with this,
but it is clear there needs to be some reform in terms of real
property. I think we need to give agencies the tools to manage
their property effectively. The Administration's proposal for
CPRA, we estimate as much as $15 billion in potential savings
that could be achieved.
So by giving agencies an incentive to get rid of property
they do not need by finding a way to help them fund some of
those upfront costs to better utilize existing space or dispose
of property they do not need, and by creating an independent
panel that sort of offsets some of those competing stakeholder
interests that you yourself mentioned and that we spoke about
here in the hearing today, I think there are ways to streamline
the process and make it much more effective for the taxpayers
and help save those billions of dollars.
Senator Carper. All right, thanks. Let me ask a question of
our staff over here. How long do Members have to submit
questions for our witnesses? Two weeks, all right. And what
period of time is there for submitting additional like
statements or materials for the record? All right, maybe 2
weeks. We will double check that.
All right, let me say to our Republican staff, anything
else you guys have for our witnesses? How did they do? Pretty
good, huh? These guys grade on a curve; so do we. Anything else
here?
All right, well, on behalf of Senator Brown and myself and
those who have fled our Nation's Capital and did not join us
today, were unable to, we appreciate your testimony.
I was talking with our staff yesterday about this hearing.
We actually were talking on Tuesday about whether actually to
go forward with the hearing since a lot of Members, House
Members, Senators had left. I think the House left us on
Monday. Some Senators are still around, but a lot are gone.
But the questions, this is not the sexiest topic to be
holding a hearing on. We are delighted to have the kind of
media coverage that is demonstrated here today, appreciate
that. We are talking about a lot of money here. We are talking
about a lot of money that is not being spent wisely.
And going forward, we are going to have to--and almost
everything we do in this government of ours, we got to find
ways to get better results for less money. And whether in this
case the leases are paid for by user fees or whether they are
paid by appropriated dollars, we just got to find ways to do
almost everything, whether it is defense or non-defense,
discretionary, entitles, all that stuff, got to find ways to
get better results for less money.
And this is an area that has cried out to be addressed for
years. And for one reason or the other, we have not risen to
the occasion and addressed it. Maybe we talk about being on
watch and I am on watch here for at least until the end of next
year as the Chairman of this Subcommittee that a number of
colleagues serve on.
But on my watch, we are going to fix this. We are going to
fix this problem. We are going to put in place a comprehensive
solution to fixing this problem. And we appreciate your help
today toward maybe getting us heading in the right direction.
We appreciate your willingness to help us going forward to make
sure we get to the destination the taxpayers would have us
arrive at.
And with that having been said, thank you all for joining
us today, for your testimony, for your preparation, for your
responses and for your willingness to help make sure we get
that ship headed to the right port. And that is what we are
going to do. Thanks so much.
[Whereupon, at 4:24 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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