Budget Issues: Alternative Approaches to Finance Federal Capital 
(21-AUG-03, GAO-03-1011).					 
                                                                 
In an era of limited resources and growing mission demands, many 
agencies have turned to approaches other than full up-front	 
funding to finance capital. GAO was asked to inventory examples  
of alternative approaches that agencies have employed to finance 
the capital used in their operations.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-1011					        
    ACCNO:   A08162						        
  TITLE:     Budget Issues: Alternative Approaches to Finance Federal 
Capital 							 
     DATE:   08/21/2003 
  SUBJECT:   Capital						 
	     Federal funds					 
	     Agency missions					 
	     Budget authority					 
	     Funds management					 
	     Financial management				 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Product.                                                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO-03-1011

                                       A

Letter

August 21, 2003 The Honorable Don Nickles Chairman Committee on the Budget
United States Senate Dear Mr. Chairman: In your March 11, 2003 letter you
asked us to report on approaches federal agencies have employed to finance
capital projects. On June 25, 2003, we briefed Committee staff on the
preliminary results of our work. As agreed with your office, this letter
summarizes and transmits the information

provided in that briefing. For purposes of this work, capital projects
include land, improvement projects, and buildings or equipment used in
federal operations. It excludes investments in high technology assets,
such as information technology, and assets owned by state and local
governments, such as

highways. We identified alternative financing approaches based on both
prior GAO work and more current research. Specifically, we queried
analysts throughout GAO about alternative approaches they had found during
the course of their work. In addition, we did web- based research on
publications issued by the Congressional Research Service (CRS),
Congressional Budget Office (CBO), General Services Administration (GSA),
and professional research organizations such as RAND. To a very limited
extent, we obtained clarification on specific examples from knowledgeable
federal officials. While this work was not intended to result

in a comprehensive list of all capital financing approaches, we believe we
identified the major approaches used. For each approach we identified, we
provide a brief description, examples of how it has been used, and the

project*s benefits from an agency*s perspective. We did not independently
verify the accuracy of this information. Moreover, the nature of our
review did not result in the identification of additional financing costs
incurred by the government as a whole due to the use of an approach other
than full, up- front budget authority. Indepth reviews of individual
contracts would be necessary to identify such costs. Our work was done in
Washington, D. C., from November 2002 through June 2003, in accordance
with generally accepted government auditing standards.

Capital assets usually cost large amounts of money. In fiscal year 2002
alone, the federal government invested close to $100 billion in major

physical capital used in its operations. 1 The high cost of capital assets
creates challenges for budgeting in an era of resource constraints.

The requirement that an agency have adequate budget authority before it
enters into a contract or other obligation for payment was established
over 100 years ago in the Adequacy of Appropriations Act, 41 U. S. C. S:
11, and the Antideficiency Act, 31 U. S. C. S: 1341. The financing
approach known as full

funding has broader requirements than those found in these two acts and is
enforced by policy rather than statute. 2 We have advocated the financing
approach known as full funding as the best way to ensure recognition of
commitments embodied in budgetary decisions and to maintain

governmentwide fiscal control. However, agencies have been authorized to
use an array of approaches to obtain capital assets without full, up-
front budget authority. In an era of limited resources and growing mission
demands, many agencies have turned to these alternative approaches as a
practical way to finance capital, even though over the long run they may
result in a higher cost to the taxpayer. 3

Summary We identified 10 capital financing approaches that have been used
by one or more of 13 federal agencies (see table 1). From an agency*s
perspective, meeting capital needs through alternative financing
approaches (i. e., not

full funding) can be very attractive because the agency can obtain the
capital asset without first having to secure sufficient appropriations to
cover the full cost of the asset. Depending on the financing approach, an
agency may spread the asset cost over a number of years or may never even
incur a monetary cost that is recognized in the budget. In other words,
alternative financing approaches can make it easier for agencies to meet 1
This amount includes investments in such assets as buildings, equipment,
and information

technology. However, we did not include investments in information
technology within the scope of this report.

2 The difference between these two acts and full, up- front funding is
that the acts apply to individual contracts while full, up- front funding
applies to a useful segment or an entire project, which may involve
several contracts. As described by CBO, full funding would require budget
authority for the construction of a whole ship, even though the
construction may involve several contracts, while the Adequacy of
Appropriations and Antideficiency

Acts would require budget authority for a single contract, for example, to
construct the hull of the ship.

3 Because the federal government*s financing costs are always less than
the private sector*s, acquiring assets with private sector financing may
result in a higher cost of capital to the taxpayer.

mission capital demands within the constraints of their appropriation. As
we have reported in the past, however, from a governmentwide perspective
the costs associated with these financing approaches may be greater than
with full, up- front budget authority. Regardless of the financing
approach

used to obtain the capital, agencies would receive the same program
benefits.

Table 1 below shows an array of approaches that agencies have used to
finance capital.

Table 1: Alternative Financing Approaches Incremental

Real property Agency funding Operating lease Retained fees swaps

GSA PTO building; Phillip Burton Albuquerque, DOT

Conf. Center NM, federal headquarters building and parking; L. Mendel
Rivers Building

DOD CVN- 21 Aircraft USAF Mid- air Army Reserves Carriers ; Atlantic

Refueling facilities;

Intracoastal

Tankers; USAF LAAFB

Waterway Bridge

Operational Support Aircraft

VA Interior Recreation fee

Georgetown -

demonstration

Foxhall

program ( NPS,

(proposed)

FWS, BLM)

USDA Recreation fee demonstration program ( Forest Service)

TVA Coast Guard Deepwater

Program; CGC Alex Haley

DOE DOT Northern CA air

traffic control system

USPS State USAID Annex

(Kampala, Uganda)

Smithsonian Castle Commerce

Public private Debt

Sale- leaseback Lease- leaseback partnerships Outlease Share- in- savings
issuance

Charleston, WV

Southeast Federal Center; Tariff Bldg. ; McCormack Energy savings Federal
Building El Paso border station;

PO Courthouse; performance

Ronald Reagan Building;

Galveston contracts ( $ 100s of

Atlanta Food Court

customhouse; RRB millions in total)

bldg. ; Metcalfe Building

Family housing on bases; Ft. Sam Houston,

Portsmouth Shipyard Ft. Leonard Wood, Brooks

Prison (Navy); Army AFB; NAVSEA field utilities privatization activities

At least 27 enhanced- use leases

Ft. Mason Foundation; Thoreau Center/ Presidio

Combustion Capital

turbines acquisitions Maine lights , Coast Guard stations

Oak Ridge National Laboratory

New Brunswick, NJ Civic Square ; Rincon Center; Grand Central Station

HVAC upgrade

Note: Italics and bold type indicate where details of specific projects
are included in this document.

The 10 alternative financing approaches we identified are briefly
described below. In parentheses, we have included a measure of the
magnitude of the use of each approach based on our research. These must be
interpreted cautiously, however, since our methodology would not identify
every instance where alternative financing approaches were used.

Incremental funding (about 1/ 3 of about $92 billion provided for civilian
capital projects funded through fiscal year 2000) * Incrementally funded
projects are those for which budget authority is provided for only part of
the estimated costs of a capital acquisition or for part of a usable
asset. Operating leases (about 5 percent of GSA*s leases are for 20 years
or

longer) * An operating lease gives the federal government the use of an
asset for a specified period of time, but the ownership of the asset
remains with the lessor. The Office of Management and Budget (OMB)
identifies six criteria (presented in the enclosed briefing) that a lease
must meet to be considered an operating lease.

Retained fees (5 organizations) * In some cases, agencies have been
authorized to finance capital projects and improvements with fees earned
through business- type or market- oriented activities with the public.
Real property swaps (7 agreements) * A real property swap is an exchange
of property owned by the federal government for another

property owned by either a private entity or a state or local government.

Sale- leaseback (1 case) * Under a sale- leaseback agreement, a federal
agency sells an asset and then leases back some or all of the asset from
the purchaser. Lease- leaseback (1 case) * A lease- leaseback agreement
between a government agency and a private entity may consist of three
stages: the

government agency purchases an asset; the agency then leases out the same
asset to a private entity for a fixed time period in return for a lump sum
payment; finally the agency leases back the use of the same asset.

Public private partnerships (54 arrangements) * Public private
partnerships tap the capital and expertise of the private sector to
improve or redevelop federal real property assets. Ideally, the
partnerships are designed so that each participant makes complementary
contributions that offer benefits to all parties.

Outleases (36 cases) * Excess or underused properties are outleased to
shift the cost of maintenance and restoration to the private sector
lessee, thus relieving the federal government of these expenses.

Share- in- savings contracts (hundreds of millions of dollars) * Some
federal agencies work with contractors who purchase and install new energy
systems in federal buildings. Agencies then pay back the contractors over
time for the equipment plus a percentage of the energy costs saved as a
result of the more efficient energy systems and relief of inhouse

maintenance costs.

Debt issuance (1 agency) *A few federal organizations, such as the
Tennessee Valley Authority, have authority to borrow from the public. This
authority can be used to finance capital acquisitions.

Organization of Report The remainder of this report consists of sections
on each of the above financing approaches. Each section begins with a
brief description of the

approach, followed by examples of specific projects financed by using the
approach.

Additional Work To Be As agreed with your staff, we will further examine
examples of some of

Done these alternative approaches. A report on this follow- on work will
be sent

to you. We will send copies of this letter to the Ranking member of the
Senate Committee on the Budget, the Chair and Ranking Member of the House
Committee on the Budget, and other committees as appropriate. Copies will
be made available to others on request. In addition, the report will be
available at no charge on the GAO Web site at http:// www. gao. gov.

We appreciate the opportunity to be of assistance. If you or your staff
have any questions regarding the briefing or this letter, please contact
me at (202) 512- 9142 (irvings@ gao. gov) or Christine Bonham, Assistant
Director, at (202) 512- 9576 (bonhamc@ gao. gov). Other key contributors
to this

briefing were Carol Henn, Maria Edelstein, David Eisenstadt, and Dewi
Djunaidy.

Sincerely yours, Susan J. Irving Director, Federal Budget Analysis
Strategic Issues

Appendi Appendi xes x I

Full Funding A fully- funded capital project receives budget authority up
front, before a commitment is made, for the project*s full estimated cost
or for a standalone stage if the project is divisible into stages and the
result of that stage is a usable asset. 1 We and others have advocated
full funding for capital

asset acquisition as the best way to ensure recognition of commitments
embodied in budgetary decisions and maintain governmentwide fiscal
control. The requirement that an agency have adequate budget authority
before it enters into a contract or other obligation for payment was
established over 100 years ago in the Adequacy of Appropriations Act, 41
U. S. C. S: 11, and the Antideficiency Act, 31 U. S. C. S: 1341. The
financing approach known as full funding has broader requirements than
those found in these two acts and is enforced by policy rather than
statute.

Fully- funded projects can take the form of new construction, renovations,
or purchases. New construction of federal buildings is generally done
through the General Services Administration (GSA). Over the last 10 years,
GSA*s new construction program has focused on courthouses and border
stations. Purchases typically are not used for facilities.

There are two types of leases for which up- front funding is now required:
lease- purchases and capital leases. A lease- purchase is a lease in which
the federal government contracts to make annual lease payments to a
developer and to take ownership of the building at the end of the lease
period. During the 1980s, Congress authorized agencies to enter into
leasepurchase agreements in which the annual lease payments were recorded
in the budget over the lease period. Because this is generally more costly
to the government than outright purchase and because the government is
obligated to take ownership of the building, the House and Senate Budget
Committees, the Office of Management and Budget (OMB), and the

Congressional Budget Office (CBO), in connection with the Omnibus Budget
Reconciliation Act of 1990, changed the budget scoring rules so lease-
purchase budget authority and obligations are now scored up front rather
than on an annual basis. Capital leases are those that do not meet the six
criteria for an operating

lease. (See operating leases.) Generally the present value of the minimum
lease payments over the life of the lease exceeds 90 percent of the fair

1 For more information on this, see U. S. General Accounting Office,
Budget Issues: Incremental Funding of Capital Asset Acquisitions, GAO- 01-
432R (Washington, D. C.: Feb. 26, 2001).

market value of the asset at the beginning of the lease term. For capital
leases, budget authority must be available for the net present value of
the total cost of the lease before it can be signed. Agencies may be
reluctant to use capital leases because of this scoring requirement.

Appendi x II

Incremental Funding Incrementally funded projects are those for which
budget authority is provided for only part of the estimated cost of a
capital acquisition or part of a usable asset. It erodes future fiscal
flexibility for programs because funding is needed to complete
procurements begun in previous years. In addition, it limits cost
visibility and accountability. However, incremental funding can be
attractive to agencies that request a particular acquisition in an era of
tight budgets when the full amount of funding needed may be difficult to
obtain. Distortions in the allocation of resources can result when the
full costs of proposed commitments are not recognized at the time budget
decisions are

made. Incremental funding can be justified, however, for high technology
capital projects because such projects are often closer in nature to
research and development, where useful knowledge can be obtained even if
no additional funding is provided. Space exploration equipment would be an
example of such a project.

As we reported in February 2001, of the nearly $92 billion provided for
civilian capital projects funded through fiscal year 2000, about $31
billion was incrementally funded. 1 At that point in time, at least $45
billion in additional funds would have been needed to complete these
projects.

Following are a few examples of incrementally funded projects.  Northern
California Terminal Radar Approach Control facilities,  Alex Haley
Conversion Project- Phase II,  Deepwater, and  Navy CVN- 21 Aircraft
Carrier Program.

1 GAO- 01- 432R.

Northern California Terminal Radar Approach Control

Financing approach: Incremental funding

Facilities

Capital project: Northern California Terminal Radar Approach Control
facilities

Department/ agency: Federal Aviation Administration

Description of project Terminal air traffic in northern California
increased 89 percent from 1982 to 1998 and is projected to further
increase another 42 percent from 1998 to 2015. The infrastructure of the
Federal Aviation Administration*s (FAA) air traffic control system*
Terminal Radar Approach Control (TRACON)* in the northern California area
requires modernization and expansion to meet the increased traffic
demands. For example, the Bay, Sacramento, and Stockton TRACONs are in
aging buildings without sufficient space to grow or transition to modern
equipment. The Northern California TRACON program constructed a facility
in Sacramento to consolidate and integrate the approach control functions
of four northern California TRACONs and some Oakland airspace.

Description of financing From fiscal years 1996 through 2000, funds were
appropriated for the

approach consolidated facility. Specifically, funds were used for
environmental and

airspace impact studies, site adaptation, building design and
construction, air traffic control equipment procurement and installation,
and program management. However, an estimated $6.7 million was needed to
complete installation and implementation activities, program management,
new building services, ancillary maintenance equipment, and the
telecommunications network required to consolidate the four TRACON
facilities.

Benefits claimed FAA projects that the full northern California TRACON
consolidation will reduce operation and maintenance costs for consolidated
facilities, reduce locality pay, and lower costs associated with employee
turnover. Other potential benefits include fuel and time savings resulting
from efficient airspace management and route design.

Source Federal Aviation Administration*s FY 2001 President*s Budget
Submission.

Alex Haley Conversion Project- Phase II

Financing approach: Incremental funding Capital project: Alex Haley
Conversion Project- Phase II Department/ agency: U. S. Coast Guard

Description of project Coast Guard Cutter Alex Haley was recently
converted to operate in the harsh Alaska/ Bering Sea. Its primary mission
is homeland security, search and rescue, and international domestic
fisheries enforcement. Continuing improvements are being made for crew
habitability, operation capability, and machinery and personal safety. For
example, a helicopter hangar was installed to allow deployment of an HH-
65 helicopter. Description of financing

Funding for project start- up was provided in fiscal year 1998, with
approach completion estimated in fiscal year 2005. Although $23.2 million
had been provided as of fiscal year 2001, estimates of the amount needed
to complete the project had not been provided as of February 2001.

Benefits claimed The improvements provide a safer environment for the
professional men and women that serve on the Alex Haley. In addition, the
new helicopter hangar enables the cutter to launch and recover aircraft
and better manage conditions in the Gulf of Alaska and the Bering Sea.

Source U. S. General Accounting Office, Budget Issues: Incremental Funding
of Capital Asset Acquisitions, GAO- 01- 432R (Washington, D. C.: Feb. 26,
2001).

Deepwater Program

Financing approach: Incremental funding Capital project: Deepwater Program
Department/ agency: U. S. Coast Guard

Description of project The Coast Guard is working to modernize its aging
fleet of deepwater ships and aircraft. Rather than using the traditional
approach of replacing an individual class of ships or aircraft, the Coast
Guard adopted a *system- ofsystems* approach intended to integrate ships,
aircraft, sensors, and communication links together as a system to
accomplish mission objectives more effectively. Description of financing

The Coast Guard chose a contracting approach that depends on a sustained
approach funding stream of over $500 million each year (in 1998 dollars)
for at least the next 20 years. Already, the funding provided for the
project is less than the amount the Coast Guard had planned. The fiscal
year 2002 and 2003 appropriations for the project were about $28 million
and about $90 million below the planned levels, respectively. Further, the
President*s fiscal year 2004 budget request for the Coast Guard is not
consistent with the

Deepwater funding plan. If the requested amount of $500 million for fiscal
year 2004 is appropriated, it would represent another shortfall of $83
million, making the cumulative shortfall about $202 million in the
project*s first 3 years. If appropriations hold steady at $500 million (in
nominal dollars) through fiscal year 2008, the Coast Guard estimates that
the cumulative shortfall will reach $626 million. 2

Benefits claimed By replacing its deepwater fleet through an integrated
approach, the Coast Guard expects to improve the effectiveness of its
operations and reduce operating costs. However, delays in the project,
which have already occurred, could jeopardize the Coast Guard*s future
ability to effectively and efficiently carry out its mission.

2 The $28 million shortfall is expressed in 2002 dollars, the $90 million
shortfall in 2003 dollars, and the $202 million shortfall in 2004 dollars.
The $626 million shortfall is expressed in 2008 dollars.

Sources U. S. General Accounting Office, Coast Guard: Challenges during
the Transition to the Department of Homeland Security, GAO- 03- 594T
(Washington, D. C.: Apr. 1, 2003). Coast Guard: Actions Needed to Mitigate
Deepwater Project Risks, GAO01-

659T (Washington, D. C.: May 3, 2001).

Navy CVN- 21 Aircraft Carrier Program

Financing approach: Incremental funding Capital project: Navy CVN- 21
Aircraft Carrier Program Department/ agency: Department of Defense/ Navy

Description of project The Navy plans to procure the CVN- 21 aircraft
carrier in fiscal year 2007 and commission it into service in 2014. The
CVN- 21 is an evolved version of the Nimitz- class design that will
replace the Enterprise (CVN- 65), which will then be 53 years old.

Description of financing For fiscal year 2004, the administration proposed
continued advanced and

approach incremental funding to procure and perform research and
development

work on the ship. The proposed funding for the CVN- 21 would spread the
appropriations over 8 fiscal years, presumably to ease the strain on any
one year*s budget. Benefits claimed Compared to prior aircraft carriers,
the CVN- 21 would require significantly fewer sailors to operate and would
feature an entirely new and less

expensive nuclear reactor plant, a new electrical distribution system, and
an electromagnetic (as opposed to steam- powered) aircraft catapult
system. In addition, the CVN- 21 is projected to have lower life- cycle
operation and support costs.

Source Congressional Research Service, Navy CVN- 21 (Formerly CVNX)
Aircraft Carrier Program: Background and Issues for Congress, RS20643
(Washington, D. C.: Mar. 21, 2003).

Appendi x III

Operating Leases An operating lease gives the federal government the use
of an asset for a specified period of time, but the ownership of the asset
does not change. The Office of Management and Budget (OMB) identifies six
criteria that a lease must meet to be considered an operating lease. 
Ownership of the asset remains with the lessor and is not transferred to
the government at or shortly after the lease.

 Lease does not contain a bargain- price purchase option.  The lease
term does not exceed 75 percent of the estimated economic

life of the asset.  The asset is a general- purpose asset and is not
built to unique

specifications of the government lessee.  There is a private sector
market for the asset.  The present value of the lease payments does not
exceed 90 percent of

the fair market value.  A lease not meeting any one of the six criteria
is considered a capital

lease. Operating leases are generally intended to be used for assets that
are needed for a specified period of time. For self- insuring entities
like GSA, an operating lease requires that only 1 year*s amount of budget
authority be obtained annually to fund the lease. As the federal
government*s real property manager, GSA provides leased space for most
agencies. GSA and we agree that ownership is more cost- effective than
leasing if (1) GSA has a

justifiable need for a property over a 20- year term, (2) the space
requirement is large enough, and (3) the property is located in an
appropriate market. We have previously reported that the budget scoring
rules have the effect of

favoring operating leases and, given current budget constraints, there is
a concern that capital assets are being obtained through operating leases
rather than through the generally more cost- effective ownership option.
In 2001, we reported on 12 GSA lease projects in which the lease term was

affected by budget scoring. 1 While in the short run operating leases may
appear less costly than ownership options such as construction or
purchase, for long- term needs construction is generally less expensive
than leasing. We have previously reported that one option to improve
scorekeeping would be to treat operating leases that are used for long-
term needs on the same basis as purchases or construction in the budget.
This change would require an increase in available budget authority.
Following are examples of operating leases used for long- term needs:

 Patent and Trademark Office building in Washington, D. C.,  Department
of Transportation headquarters in Washington, D. C. ,  Air Force lease of
737 Operational Support Aircraft, and  Air Force lease of Boeing 767
tankers.

1 U. S. General Accounting Office, Budget Scoring: Budget Scoring Affects
Some Lease Terms, but Full Extent Is Uncertain, GAO- 01- 929 (Washington,
D. C.: Aug. 31, 2001).

Patent and Trademark Office (PTO) Lease in Washington, D. C.

Financing approach: Operating lease Capital project: Patent and Trademark
Office (PTO) lease in Washington, D. C. Department/ agency: General
Services Administration (GSA)

Description of project In 1989, the Patent and Trademark Office (PTO)
began working with GSA on approaches to meet its long- term space
requirements. In August 1995, OMB authorized GSA to seek congressional
approval to consolidate PTO operations at a single location in new leased
space. That same year, the appropriate Senate and House committees
approved the prospectus for the lease. The committees authorized the
competitive procurement of a 20year operating lease for about 2 million
square feet for the purpose of consolidating PTO.

On June 1, 2000, GSA signed a 20- year lease for approximately 2.2 million
rentable square feet, which were to be built to suit GSA/ PTO needs and to
house 7,100 staff in Alexandria, Virginia. The lease was valued at $1. 24
billion over 20 years, plus operating expenses and taxes. PTO plans to
begin moving into the new building in late 2003.

Description of financing GSA entered into a 20- year operating lease that
only required the annual

approach payments to be scored in each year of the lease. Thus PTO*s
yearly rent of

$62 million would need to be appropriated for each of the 20 years as an
operating lease. Benefits claimed GSA will be able to consolidate and
collocate PTO staff that had previously

been located in 18 different buildings under 33 different leases.
Budgetary observations Had the PTO lease been considered a capital lease,
the net present value of

the $1. 2 billion in total lease costs would have needed to be
appropriated to GSA in fiscal year 2003. The Federal Buildings Fund would
not have been able to absorb the cost of this construction project without
additional

appropriations. We reported that while construction would have been an
estimated $48 million less costly than leasing space for PTO, the award of
the PTO lease as an operating lease was in accordance with OMB*s scoring
criteria. We also reported that construction was not a viable alternative
at the time GSA made the decision for the PTO facility because funds were

not available to provide for government ownership. A PTO official stated
that the administration and PTO*s appropriation committees agreed that a
competitive lease was the only viable option because neither user fees nor
taxpayer funding were available to construct or purchase a new PTO
facility.

Source U. S. General Accounting Office, Acquisition of Leased Space for
the U. S. Patent and Trademark Office, GAO- 01- 578R (Washington, D. C.:
June 5, 2001).

Department of Transportation (DOT) Headquarters Building

Financing approach: Operating lease Capital project: Department of
Transportation (DOT)

Headquarters Building Department/ agency: General Services Administration
(GSA)

Description of project In 2002, GSA reached a deal to sell 11 acres of
land at the federally owned Southeast Federal Center in Washington, D. C.
for $40 million to the JBG Companies partnership for the development of a
new DOT complex. The complex may have multiple buildings and up to 1.35
million rentable square feet of office space that GSA will lease for 15
years for DOT headquarters operations. DOT is seeking to replace its
current leased space for which the lease expired March 31, 2000, and to
consolidate some of its field operations. The DOT locations to be
consolidated are the Nassif Building (400 7th Street, SW) and the
Transpoint Building (2100 2nd Street, SW). DOT currently occupies
approximately 1.1 million occupiable square feet of office and related
space at the Nassif Building and approximately 450,000 occupiable square
feet of office and related space at the Transpoint

Building. Description of financing

GSA entered into a 15- year operating lease for a new DOT headquarters
approach complex to be built with up to 1.35 million rentable square feet
of office space. GSA will convey 11 acres of federally owned land at the
Southeast Federal Center to the private partnership building the new
office complex.

Benefits claimed This lease will replace DOT*s current lease and allow it
to consolidate some of its field offices at one location within current
budget constraints. Budgetary observations According to GSA officials,
during the planning for the Department of

Transportation lease, it was realized that due to the rental rates in
Washington, D. C., a 20- year lease would probably not satisfy the 90
percent scoring criterion for being an operating lease. To address this
issue, GSA reduced the lease term to 15 years. In addition, OMB encouraged
GSA to consider financing above- standard items through the Federal
Buildings Fund or DOT rather than through the lease to reduce the lease
costs and thus help it meet the requirements for an operating lease. The
President*s 2003 and 2004 budgets included $25 million and $45 million
respectively for the new DOT headquarters building.

Sources U. S. General Accounting Office, Budget Scoring: Budget Scoring
Affects Some Lease Terms, but Full Extent Is Uncertain, GAO- 01- 929
(Washington, D. C.: Aug. 31, 2001).

Washington Business Forward, April 2002. January 19, 2001, letter from OMB
to GSA regarding DOT headquarters lease; and July 17, 2001, letter from
GSA to OMB regarding DOT headquarters lease.

Related questions  How was the $40 million from the land purchase used? 
Was the $25 million used to buy down the lease so it qualified as an

operating lease?  How will the $45 million in the President*s 2004 Budget
be used if appropriated?

Lease of 737 Operational Support Aircraft

Financing approach: Operating lease Capital project: Lease of 737
Operational Support Aircraft Department/ agency: DOD/ Air Force

Description of project The Air Force plans to award a firm, fixed price,
multiyear contract to Boeing for four leased C- 40 aircraft (the military
variant of the commercial 737). Because the aircraft take 18 to 24 months
to build, the Air Force plans to lease two used 737 aircraft to provide an
interim capability. After two new C- 40 aircraft are delivered, the used
737 aircraft would be returned to Boeing to be reconfigured to C- 40s and
then returned to the Air Force.

Description of financing Under this arrangement, the Air Force would lease
three aircraft for 6 years

approach and the fourth for 5 years. At the end of the lease period, the
Air Force

would have the option to purchase the aircraft for a specified negotiated
price. It appears that the leases would be operating leases and thus the
negotiated purchase price would have to reflect the value of the planes.
If the lease contained a bargain purchase price, it would be a lease-
purchase and budget authority for the entire cost of the lease and
purchase would have to be provided up front.

Benefits claimed The Air Force estimated that it would save $3.9 million
(net present value) from leasing these four Boeing 737 aircraft compared
to the outright purchase of the aircraft. This is a savings of about 1
percent.

Budgetary observations The Air Force complied with the OMB criteria in
making its case that leasing was more advantageous than purchasing.
However, relatively small changes in assumptions can reduce claimed
savings or make leasing more expensive. The Congressional Budget Office
(CBO) questioned the estimated cost to purchase the aircraft, which is a
key assumption in computing the cost of purchase. The Air Force did not
negotiate a purchase price and CBO believes it could have negotiated a
lower purchase price than it used in its analysis, just as it negotiated a
lower lease price than the initial estimate. Using the Air Force*s lease
data, CBO used a model to

work backwards and determine a purchase price. CBO found that based on the
lease agreement the purchase price could be $5 million less per aircraft
than the purchase price used in the Air Force*s analysis. If the Air Force
could negotiate a purchase price $5 million less than the estimate

used, the purchase would save about $15 million in net present value terms
over the lease. CBO also questioned the assumptions for the residual value
of the aircraft and the cost of self- insurance. Small changes in these
assumptions could result in leasing being more costly.

Sources U. S. General Accounting Office, Discussion points and August 1,
2002 Congressional Relations memo related to the Air Force lease of 737
operational support aircraft.

Congressional Budget Office review of report on leasing Boeing 737
aircraft, July 23, 2002.

Related questions  Has this lease been signed?  What is the negotiated
purchase price at the end of the lease?

Leasing of Boeing 767 Tankers

Financing approach: Operating lease Capital project: Leasing of Boeing 767
tankers Department/ agency: DOD/ Air Force

Description of project The Air Force has determined that it needs to
replace its KC- 135 mid- air refueling tankers. The Air Force thought it
might be able to accelerate its refueling tanker replacement efforts in
the aftermath of September 11, 2001, because commercial aircraft
manufacturers were faced with the prospect of reduced or canceled orders.
Congress included language in

section 8159 of the fiscal year 2002 Defense Appropriations Act allowing
the Air Force to establish a multiyear pilot program for leasing Boeing
767 aircraft. The Air Force is considering leasing Boeing 767 aircraft and
converting them to serve as tankers. At the end of the lease period, the
Air Force would have the option to purchase the aircraft for a specified,
negotiated price.

Description of financing The Air Force plans to obtain refueling tankers
through an operating lease

approach in which budget authority will be scored in each year of the
lease.

Benefits claimed KC- 135 tankers will be replaced earlier than expected.
GAO reported that although there is a long- term requirement to replace
the aging fleet of KC135 tankers, the urgency of the need in the short
term is unclear.

Budgetary observations If the aircraft were returned at the end of the 6-
year lease period, the Air Force tanker fleet would be reduced and the Air
Force would have to find some way to replace the lost capability even
though lease payments would have paid almost the full cost of the
aircraft. For this and other reasons, we have reported that returning the
aircraft would probably make little sense and the Congress would almost
certainly be asked to fund the purchase of the aircraft at their residual
value when the leases expire. In a July 10, 2003, report to the Senate
Committee on Armed Services, the Air Force estimated that purchasing the
aircraft would be about $150 million less than leasing, on a net present
value basis.

Sources U. S. General Accounting Office, Military Aircraft: Considerations
in Reviewing the Air Force Proposal to Lease Aerial Refueling Aircraft,

GAO- 03- 1048T (Washington, D. C.: July 23, 2003).

U. S. General Accounting Office, Air Force Aircraft: Preliminary
Information on Air Force Tanker Leasing, GAO- 02- 724R (Washington, D. C.:
May 15, 2002).

U. S. General Accounting Office, U. S. Combat Air Power: Aging Refueling
Aircraft Are Costly to Maintain and Operate, GAO/ NSIAD- 96- 160
(Washington, D. C.: August 8, 1996).

Appendi x IV

Retained Fees Proceeds that result from business- type or market- oriented
activities with the public, such as the sale or lease of property, are
known as offsetting collections. The legislation authorizing these
collections may earmark them for a specific purpose or require them to be
appropriated in annual appropriation acts before they can be spent. In
some cases, agencies have been authorized to retain earned fees to fund
capital projects and improvements.

While retaining fees enables agencies to obtain the funding needed to make
capital improvements, repairs, and maintenance, it also raises questions
of equity. International experience with departments retaining asset sale
proceeds has shown that those that were asset- rich continued as such and
those that were asset- poor continued to run down their asset bases. Since
the ability to retain fees results in a shift of control over the use of
monies from Congress to the agencies, Congress would have limited ability
to direct the collections to higher priority needs.

Following are examples of a few projects funded through retained fees. 
Capital improvements, repairs, and maintenance by federal land

management agencies and  Phillip Burton Conference Center.

Capital Improvements, Repairs, and Maintenance

Financing approach: Retained fees Capital project: Capital improvements,
repairs, and

maintenance Department/ agency: Federal land management agencies

Description of project Since 1996, federal land management agencies 1 have
collected over $900 million in recreation fees from the public under an
experimental initiative called the Recreational Fee Demonstration Program.
Congress first authorized the program in 1996 for 3 years and has extended
it four times. The authority to collect these fees expires at the end of
fiscal year 2004. Description of financing

The Recreational Fee Demonstration Program permits four land approach

management agencies to use new or increased fees collected from visitors
to help address deteriorating conditions at many federal recreation areas,
among other things. At least 80 percent of the revenues are to be spent at
the site that collects the fees; the remaining 20 percent can be spent at
other sites at the discretion of each agency. To ensure that fee revenues
remain available for improvements after 2004, the administration has
indicated it will propose legislation providing permanent fee authority.

Benefits claimed For many sites, the additional fee revenues increased
their annual budgets by 20 percent or more. With this infusion of
revenues, some units with maintenance backlogs could address their unmet
needs in relatively few years. Other units with small or nonexistent
backlogs could undertake further development and enhancement.

Sources U. S. General Accounting Office, Recreation Fees: Information on
Forest Service Management of Revenue from the Fee Demonstration Program,
GAO- 03- 470 (Washington, D. C.: Apr. 25, 2003).

1 The four land management agencies include the National Park Service,
Fish and Wildlife Service, Bureau of Land Management, and Forest Service.
Together, the Park Service and Forest Service collect over 90 percent of
the fees under the Recreational Fee Demonstration Program. In fiscal year
2001, the Park Service collected $126 million and the Forest Service
collected $35 million.

U. S. General Accounting Office, Recreation Fees: Demonstration Fee
Program Successful in Raising Revenues but Could Be Improved, GAO/ RCED-
99- 7 (Washington, D. C.: Nov. 20, 1998).

Related question  What is the effect of inequities between relatively
high revenue producing National Parks and those that earn relatively less?

Phillip Burton Conference Center

Financing approach: Retained fees Capital project: Phillip Burton
Conference Center Department/ agency: General Services Administration
(GSA)

Description of project To increase the use of underused space in the
Phillip Burton Federal Building and U. S. Courthouse in San Francisco, 2
GSA established a Government Conference and Training Center to operate as
a self- sustaining center. Facilities are available to both the federal
community and the public. Benefits claimed The income received from the
conference center has been used to further

enhance the conference center and the tenant agencies in the building.
Underused space was converted into space that could more effectively be
used by the federal government and the community.

Source General Services Administration, Real Property Policysite, Office
of Governmentwide Policy, Best Practices: News and Views on Real Property
Policy, Special Edition, Washington, D. C., February 1999, 10 - 11.

Related questions  How was the original construction financed?  Do the
fees charged cover those costs or just operating costs?  Under what
authority may fees be retained?  Can all the fees be retained or just a
portion* what constraints are on

this?  Did any tenants need to be relocated as a result of the
construction?  Is there any connection between the construction of the
conference

center and the funding of the plaza in front of the building (plaza work
done in 1996 through 1999)?

2 The Phillip Burton Federal Building was built in 1962. GSA owns and
manages the building, which houses several agencies.

 Were original financing costs repaid?

Appendi x V

Real Property Swaps A real property swap is an exchange of property owned
by the federal government with either a private entity or a state or local
government for another property. In many cases, the property exchanged by
the federal government has been underused because it is deteriorating.
Despite a federal property*s poor condition, a private entity may consider
the same property valuable for future development and enter into a
property swap with the federal government. Under such an arrangement, the
federal government receives another existing property, or the private
entity constructs a new facility for the federal government equal in value
to the land received in exchange.

Property swaps can relieve the federal government of maintenance and/ or
renovation costs and result in a real asset that may be used immediately
with no additional appropriations required. However, determining fair
value for the properties exchanged is not always a clear- cut process and
congressional oversight of these exchanges is limited.

While Congress may receive notification of pending swaps, these
transactions are not reflected in the budget since there are no federal
government cash flows involved. Congressional budget decisionmakers
therefore do not have an opportunity to consider whether the value of the
exchanged property should be reallocated to other competing resource
needs.

Examples of real property swaps include:  Los Angeles Air Force Base, 
Albuquerque, NM, federal building and parking,  Army Reserves fire
station,  Army Reserves Fort Snelling, MN, and  L. Mendel Rivers
Building, Charleston, SC.

Los Angeles Air Force Base Systems Acquisition

Financing method: Real property swap

Management Support

Capital project: Los Angeles Air Force Base Systems

Project

Acquisition Management Support project Department/ agency: Department of
Defense/ Air Force

Description of project The Air Force traded government- owned land on the
Los Angeles Air Force Base to a private developer in exchange for the
design and construction of a new 560,000 square foot facility on the base
for the Space and Missile Systems Center. The new office space will
replace the use of buildings constructed in 1957 and 1966 that are
outdated and vulnerable to earthquakes.

Description of financing The National Defense Authorization Act of 2001
(Pub. L. 106- 398)

approach authorized the Secretary of the Air Force to sell or lease all or
part of the

real property at Los Angeles Air Force Base (LAAFB). The statute also
provided that the only consideration that the Air Force could receive for
the property was *the design and construction on [unconveyed] property* of
one or more facilities to consolidate the Space and Missile Systems Center
mission and support functions.* Furthermore, the Act provided that if the
value of the new facility received by the Air Force exceeded the value of
the property it conveyed, then the Air Force should *lease back* the new
facility from the developer for a period up to 10 years,

with the Air Force taking title to the facility at the end of the lease
period. As of October, 2002, the Air Force still was negotiating the final
terms of the contract, which includes a property swap and the probability
of a leasepurchase agreement to make up the difference in value between
the new facility and the property conveyed by the Air Force.

Benefits claimed The Air Force gains a new office complex at a fraction of
the cost of independently contracting for a new office complex while the
Los Angeles area communities gain land for potential development. The Air
Force is able to dispose of up to 865,000 square feet of substandard
buildings and

eliminate requirements for $130 million to $150 million in military
construction projects. Furthermore, reduction of the base size lowers
ongoing operations and maintenance costs by more than $3 million per year.

Sources Comptroller General decisions in the matter of SAMS El Segundo,
LLC, B- 291620 and B- 291620. 2, February 3, 2003.

Albuquerque, NM, Federal Building and Parking

Financing method: Real property swap Capital project: Albuquerque, NM,
federal building and

parking Department/ agency: General Services Administration (GSA)

Description of project and The General Services Administration acquired a
large city parking garage financing approach

near federal buildings in exchange for two smaller parking areas and a
partially vacant historic building that was in need of repair. GSA had
been operating the historic federal building, which was 30 to 40 percent
vacant,

at an annual loss of $200,000 and had faced building modernization costs
of $3 million. Because the exchanges are non- cash, it cannot be known
whether the exchanged property could have been sold competitively for a
different value than the properties received in exchange.

Benefits claimed GSA reports that it improved its real estate portfolio
performance. GSA will meet a projected federal tenant demand for 450
additional parking spaces. The agency relieved itself of a money- losing
property and millions of dollars in building renovation costs. Money that
would have been lost or spent on repairs for this building can be
reinvested in property retained in GSA*s portfolio.

Source General Services Administration, Real Property Policysite, Office
of Governmentwide Policy, Best Practices: News and Views on Real Property
Policy, Special Edition, Washington, D. C., December 2000, 25- 26.

Related questions  Do existing federal buildings have enough space to
absorb the employees that will move from the historic building? If not,
where will the employees move and at what cost?

 Was this transaction compared to costs of GSA restoring the building
either by itself or through some other kind of partnership and maintaining
existing office space? Were competing offers considered?

 How much could the building have sold for independent of this
arrangement?

 What were the parking arrangements for federal employees prior to
obtaining the large garage? How do parking costs now compare to the prior
situation?

 Were the $3 million in repairs already budgeted for in GSA*s accounts? 
Was any statutory authority required to make this transaction (e. g.,
Historic Building Preservation Act)?

Parks Reserve Forces Training Area Fire Station

Financing method: Real property swap Capital project: Parks Reserve Forces
Training Area fire

station Department/ agency: Department of Defense/ Army Reserves

Description of project The Army Reserves entered into a real property
exchange agreement with a private land developer. The Army Reserves
conveyed about 11 acres of training area land to the developer in exchange
for construction of a new fire station.

Description of financing The developer receives land appraised at $1.8
million to construct an

approach access road into its new housing development. The Army Reserves

receives a new fire station valued at $3. 9 million. The appraisal process
is meant to determine the fair market value of the property to be conveyed
by the Army Reserves. The property received in exchange must be at least
of

equal value and must meet minimal requirements that have changed since the
old facility was constructed. In order to meet this second requirement,
the value of the property received may be higher than the appraised value
of the property conveyed by the Army Reserves. Nonetheless the size of

the discrepancy raises questions about the appraisal process. The initial
appraisal of the Army Reserves* 11- acres was $75,500 because the land*s
current condition was assessed rather than the most valuable use of the
property by a developer.

Benefits claimed The Army Reserves receives a new fire station without
paying out any money up front in military construction costs to replace an
older, less modern station.

Source U. S. General Accounting Office, Defense Infrastructure: Changes in
Funding Priorities and Management Processes Needed to Improve Condition
and Reduce Costs of Guard and Reserve Facilities, GAO- 03- 516
(Washington, D. C.: May 15, 2003).

Related questions  What are the locations of the old and new fire
stations?  How does the Army Reserves explain the size of the discrepancy
in the

exchanged values?

 What is the appraisal process used to determine the value of the
property exchanged?

Army Reserves Facilities at Fort Snelling, MN

Financing method: Real property swap Capital project: Army Reserves
facilities at Fort Snelling,

MN Department/ agency: Department of Defense/ Army Reserves

Description of project The Army Reserves entered into two real property
exchange agreements: first with the Metropolitan Airport Commission in
August 2002; and then with the Minnesota Department of Transportation and
the Metropolitan Council in November 2002. In the first agreement, the
Army Reserves conveyed 11 acres of property that will be used to expand
the runway at the Minneapolis- St. Paul International Airport. In return,
the Army Reserves received a newly constructed maintenance facility in St.
Joseph, Minnesota. In the second agreement, the Army Reserves conveyed
seven acres of property in exchange for a 38,000 square foot addition to
its permanent facility.

Description of financing In the August 2002 agreement, the Army Reserves
conveyed property approach

appraised at $1.4 million in exchange for a new maintenance facility
valued at $1.7 million. In the November 2002 agreement, the Army Reserves
conveyed property appraised at $2 million in exchange for a building
addition worth about $5.1 million. Because the exchanges are non- cash, it
cannot be known whether the exchanged property could have been sold for a
different value than the properties received in exchange.

Benefits claimed The Army Reserves receives new building space without
having to draw on the Defense Department*s military construction budget
and at a greater appraised value than the property given up.

Source U. S. General Accounting Office, Defense Infrastructure: Changes in
Funding Priorities and Management Processes Needed to Improve Condition
and Reduce Costs of Guard and Reserve Facilities, GAO- 03- 516
(Washington, D. C.: May 15, 2003).

Related questions  How does the Army Reserves explain the size of the
discrepancy in the exchanged values?

 What is the appraisal process used to determine the value of the
property exchanged?

L. Mendel Rivers Building, Charleston, SC

Financing method: Real property swap Capital project: L. Mendel Rivers
Building, Charleston, SC Department/ agency: General Services
Administration (GSA)

Description of project The seven- story L. Mendel Rivers building was
constructed in 1965 with almost 100, 000 rentable square feet of space. It
has a surface parking lot and sits on over two acres of land. Since
Hurricane Floyd damaged the building in October 1999, it has been totally
vacant and its tenants have relocated to leased space. The building is
contaminated with asbestos and

GSA has determined that it would be too costly to rehabilitate or replace
the building. While the Rivers building is vacant, GSA still incurs
expenses for its basic maintenance and utilities. In fiscal years 2002 and
2003, GSA spent about $28,000 to operate and maintain the building.
Occasionally, GSA rents out the parking lot and uses the rental income to
help offset

some of the building expenses. Description of financing

For a number of years, GSA has been engaged in discussions with the City
approach

of Charleston to exchange the L. Mendel Rivers site for a new building.
Under the proposed agreement, the city would construct a new building with
about 27,000 useable square feet next to the federal court complex and a
parking garage in which GSA would have 60 parking spaces in exchange for
the L. Mendel Rivers site. While the building to be constructed is much
smaller than the L. Mendel Rivers building, the new building is in the
historic downtown business area where land values are higher; appraisals
show that the exchange sites are of equal value. According to a GSA
official, the mayor of Charleston has signed a memorandum of understanding
with GSA that sets forth the terms and conditions for the exchange and the
GSA Administrator is expected to sign the memorandum in early July. The
exchange will not occur until independent appraisals show the value of the
properties to be exchanged are equal in value. Benefits claimed GSA would
be relieved of a money- losing property and in return it would

obtain new office space without needing an appropriation. Sources GSA*s
Asset Business Plan and interviews with GSA officials.

Appendi x VI

Sale- Leaseback Under a sale- leaseback agreement, a federal agency sells
an asset and then leases back some or all of the asset from the purchaser.
Agencies might consider such an arrangement when the property they are
using needs renovation or when they need only a fraction of the total
building space. When building renovations are necessary, sale- leaseback
agreements may transfer renovation costs to the purchaser of the property.
The government

may then lease back after improvements have been made. Federal agencies
generally are not permitted to retain the proceeds from the sale of assets
unless specific legislation states otherwise. In at least one instance,
Congress has authorized GSA to credit the Federal Buildings Fund with
proceeds from the sale of a federal building. GSA then leased back a
portion of the sold building.

The potential drawback of sale- leaseback agreements is that over the long
term they may be more expensive, particularly in cases when the federal
government occupies the entire building. Renovations financed by the
private sector will always cost more than those financed by Treasury
borrowing. As a result, the share of the building to be used by the
federal government can be an important determinant of the value.

We identified one example of a sale- leaseback arrangement in a
transaction involving a federal building in Charleston, West Virginia.

Charleston, WV, Federal Building

Financing method: Sale- leaseback Capital project: Charleston, WV, Federal
Building Department/ agency: General Services Administration (GSA)

Description of project The construction of the Robert C. Byrd U. S.
Courthouse in Charleston, WV enabled tenants of the federal building at
500 Quarrier Street to relocate. Originally, GSA had planned to excess the
Quarrier Street building after the move but the Social Security
Administration (SSA) contacted GSA with a space request to consolidate
their functions with West Virginia*s Disability Determination Agency. GSA
entered into an agreement to sell the 130,000 square foot Quarrier Street
building to a developer and lease back about

82, 000 square feet in the same building so that SSA could collocate with
the state government agency.

Congress included language in the appropriation bill 1 for the Byrd
Courthouse that approved the sale and leaseback of the federal building
and allowed GSA to retain funds from the sale of the building for the
Federal Buildings Fund.

Description of financing In September 1998, GSA sold the federal building
on Quarrier Street to a

approach developer for $3.5 million. The developer committed to investing
$11 million to upgrade the facility from Class C to Class A. In exchange,

GSA committed to lease back a portion of the facility for 20 years.
Benefits claimed SSA and GSA both claim benefits from this arrangement.
SSA maintains a

presence in Charleston*s central business district and can increase
productivity by consolidating functions and collocating with West
Virginia*s social service agency. GSA retains funds from the building sale
and does

not directly incur the estimated $11 million cost of upgrading the
building. Source General Services Administration, Real Property
Policysite, Office of Governmentwide Policy, Best Practices: News and
Views on Real Property Policy, Special Edition, Washington, D. C.,
December 1999, 7.

1 101 st Congress, HR 5241, 1991 Treasury, Postal Service and General
Government appropriations bill.

Related questions  What kind of cost benefit analysis did GSA do to
compare costs of leasing two- thirds of the building vs. doing the repairs
itself and outleasing the remaining 48,000 square feet to the private
sector?

 Where were the SSA employees working before?  How long does SSA believe
it will require the leased space? What are the terms of the lease?

 What efficiencies are gained from the new space that is shared with the
state agency?  Are there other cases of GSA receiving permission to
retain sale

proceeds?

Appendi x VII

Lease- Leaseback A lease- leaseback agreement between a government agency
and a private entity may consist of three stages: the government agency
purchases an asset; the agency then leases out the same asset to a private
entity for a fixed time period in return for a lump sum payment; finally,
the agency leases back the use of the same asset over the same time period
via incremental payments. For this type of arrangement, the net result is
similar to the agency entering into a lease- purchase contract since the
asset is privately financed and paid for incrementally. The agency
maintains ownership and control of the asset and thus retains both the
economic benefits and risks related to asset ownership.

We identified three Tennessee Valley Authority (TVA) lease- leaseback
contracts for combustion turbine units. TVA signed the respective
contracts in fiscal years 2000, 2002, and 2003.

Combustion Turbines

Financing method: Lease- leaseback Capital project: Combustion turbines
Department/ agency: Tennessee Valley Authority (TVA)

Description of project and TVA, a wholly- owned government corporation,
entered into contracts in financing approach

fiscal years 2000, 2002, and 2003 to outlease combustion turbine units to
private investors in exchange for a lump- sum payment. At the same time
TVA agreed to lease back the same assets by making regular incremental

payments over the term of the contract. TVA maintains ownership of the
generators but it can relinquish the property to the private sector at the
end of the term. Thus, according to TVA, the private sector bears the
*residual value* risk of the asset.

Benefits claimed According to TVA, entering into the fiscal year 2000 and
2002 leaseleaseback arrangements could, over time, save the agency
approximately $50 million. Lease- leasebacks provide financial flexibility
to TVA because of early buyout and termination options in the contract.
TVA may terminate its lease if the economic conditions of operating the
combustion turbine units change at some point during the term of the
lease. For example, the turbine units may become obsolete, or TVA may
decide to sell the units because they no longer meet TVA*s load
requirements. Furthermore, TVA can relinquish the property to the private
entity at the

end of the lease term, so that the private entity bears the *residual
value* risk of the asset. The $50 million benefit claimed by TVA does not
necessarily mean that the lease- leaseback was the best financial deal for
the government as a whole. For example, tax preferences used by the
private entity represent a cost to

the government but not to TVA. Source U. S. General Accounting Office,
Tennessee Valley Authority: Information

on Lease- Leaseback and Other Financing Arrangements, GAO- 03- 784
(Washington, D. C.: June 30, 2003).

Appendi x VIII

Public Private Partnerships Given today*s budget constraints, evolving
private sector markets and the expansion of creative real property
development alternatives, several agencies have established public private
partnerships as a means of leveraging the intrinsic equity value of real
property. Ideally, the

partnerships are designed such that each participant makes complementary
contributions that offer benefits to all parties. Public private
partnerships tap the capital and expertise of the private sector to
improve or redevelop federal real property assets. 1 They are considered
most appropriate where excess capacity exists within the asset and where
existing government facilities do not adequately satisfy the current or

potential future needs. OMB Circular A- 76 describes the federal
government*s longstanding policy to rely on the private sector for needed
commercial services. Public private partnerships are consistent with this
policy so long as the product

or service provided by the private partner cannot be procured more
economically by the federal government. Partnerships raise questions about
what functions are most appropriately performed by the federal government.

Proponents of public private partnerships argue that this approach
provides a realistic, less costly alternative to leasing when planning and
budgeting for real property needs. Proponents also note that federal
partners benefit from improved, modernized, and/ or new facilities plus a
minority share of the income stream generated by the partnership or use of
the asset at a lower cost than a commercial lease. Critics of public
private partnerships caution that these ventures are not

the least expensive means of meeting capital needs, although they may
appear to be in the short- term. They remind decisionmakers that up- front
payment of appropriated funds is the least expensive way to obtain assets.
Although partnerships may be more costly, it is possible that they could
make sense from a mission perspective. However, the full costs should be
transparent to decisionmakers through inclusion in primary budget data.

1 Public private partnerships take a variety of forms. In addition to some
of the partnerships described in this section, other types of partnerships
might include outleases of real property and share- in- savings contracts.
These partnerships are described in greater detail in other sections.

Following are examples of a few public private partnerships.  Civic
Square II Project,  Houston Regional Office Collocation,  Veterans
Affairs Office Collocation and Parking Garage, Chicago, and  Oak Ridge
National Laboratory.

Civic Square II Project

Financing approach: Public private partnership Capital project: Civic
Square II project Department/ agency: U. S. Postal Service

Description of project The main post office in the city of New Brunswick,
NJ, which was constructed in 1936, had been underused and had accumulated
an increasing amount of deferred maintenance. Accordingly, the Postal
Service negotiated a public private partnership that resulted in a newly
restored Post Office and a facility housing the Middlesex County
Prosecutor*s Office, the New Brunswick Police Department, and an
underground parking garage. The Post Office leased its land to the local
government, which contracted for the restoration of the Post Office and
construction of additional facilities for its own use.

Benefits claimed The Postal Service now has a restored Post Office along
with significant revenue from the ground lease. All federal, city, and
county offices have benefited from the building through improved
operations, higher customer satisfaction, and greater employee morale.

Source General Services Administration, Real Property Policysite, Office
of Governmentwide Policy, Best Practices: News and Views on Real Property
Policy, Special Edition, Washington, D. C., December 1999, 20.

Related questions  Who fronted the construction funds?  Who makes lease
payments to whom?  How long is the life of lease arrangement?  Was a
comparison made between the cost of the federal government

doing it all and forming the partnership?

Houston Regional Office Collocation

Financing approach: Public private partnership Capital project: Houston
Regional Office Collocation Department/ agency: Veterans Benefits
Administration

Description of project The Veterans Benefits Administration (VBA) needed
to relocate its regional office in order to better serve veterans and
their beneficiaries throughout southern Texas. The Department of Veterans
Affairs (VA) negotiated an enhanced- use lease of underused VA medical
center land to a local developer, which constructed a 140,000 square foot
state- of- the- art regional office. As part of this arrangement, VA
signed short- term operating leases to obtain use of the newly developed
space. The developer also financed, built, owns, and operates businesses
on the balance of the site.

Benefits claimed VA states that this project saved taxpayers over $6
million in construction costs and generated an additional $10 million
savings in operating costs. VA also receives a small share of the
developer*s profits.

Source VA*s briefing packet on enhanced- use leasing. Related questions 
How many years does the lease cover?

 Does VA maintain the master ground lease?  What happens to the
developer- owned businesses at the end of the lease

life?

Veterans Affairs Office Collocation and Parking Garage,

Financing approach: Public private partnership

Chicago

Capital project: Veterans Affairs Office Collocation and Parking Garage,
Chicago Department/ agency: Veterans Benefits Administration

Description of project The Veterans Benefits Administration sought to
avoid high- cost leased office space and improve service delivery and
accessibility to veterans. Moreover, VA Medical Center Westside needed
relief from the lack of available parking. Accordingly, VA negotiated a
long- term outlease of six acres of flat parking space to a developer that
then built and managed a 95,000 square foot office building and a 1,565
car parking garage. VA then established short- term operating leases to
obtain use of the newly developed space.

Benefits claimed The average annual cost to VA for the new office space
and parking is expected to be 50 percent less than comparable market
rates.

Source VA*s briefing packet on enhanced- use leasing. Related questions 
What happened to the space that employees used to be in?

 How much is what they are paying compared to what they were paying? 
How long is the term of the outlease?

Oak Ridge National Laboratory

Financing approach: Public private partnership Capital project: Oak Ridge
National Laboratory Department/ agency: Department of Energy

Description of project The Department of Energy (DOE) needed to replace
deteriorating buildings constructed during World War II with modern
facilities at the Oak Ridge National Laboratory (ORNL). However, it lacked
adequate funding to do this.

Description of financing DOE designated federal land next to ORNL as
excess and conveyed it to a

approach developer who would process the construction phase requirements
from

bid solicitation through construction completion, on the land conveyed by
DOE. Although the land in its current state is excess to the needs of DOE,
the resulting building space to be constructed is needed to accomplish
DOE*s missions. The private developer would finance construction and then
lease the new buildings to DOE*s prime contractor for DOE missions.

At the end of the 30- year *payback plus profit* term, the quitclaim deed
2 conveying the land requires that the private party offer no- cost
repurchase or reacquisition rights to the federal government for the land
and facilities. Ultimately, the government must reimburse lease payments
to DOE*s prime contractor. The quitclaim deed also contains restrictive
language that

specifies use of the property so as not to compromise the integrity of
ORNL by the possible bankruptcy of the private developer or by DOE*s
possible cancellation of the lease. Benefits claimed DOE was able to
obtain the needed space for its contractors without having to obtain up-
front funding or special legislation.

Source General Services Administration, Real Property Policysite, Office
of Governmentwide Policy, Best Practices: News and Views on Real Property
Policy, Special Edition, Washington, D. C., Fall 2002, 6.

2 A legal instrument used to release one party's right, title, or interest
to another without providing a guarantee or warranty of title.

Related questions  Are DOE*s lease reimbursement payments included as
part of the negotiated payments to the *prime* contractor?

 Why would DOE not claim the property back after the 30- year period is
completed?

Appendi x IX

Outleases Federal asset managers are confronted with numerous challenges
in managing their multibillion dollar real estate portfolio, such as a
large backlog of deferred maintenance and obsolete, underused properties.
In response, some agencies have outleased excess or underused properties
to shift the cost of maintenance and restoration to their private sector
partners, thus relieving the federal government of these expenses.

Historic but run- down properties are prime candidates for outleasing.
This is because the National Historic Preservation Act authorizes agencies
to use the lease proceeds of these historic properties to defray the costs
of maintaining and repairing other historic properties they own.

Outleasing historic properties promotes the restoration, repair, and
maintenance of important national buildings. However, it is unclear
whether the outright sale of such properties is possible and whether
selling would accomplish the same purpose with greater economic benefit to
the taxpayer.

Following are examples of a few outleased projects.  Cooperative Use
Outlease for Food Court;  Galveston, Texas Customhouse;  Maine Lights
Program;  U. S. Tariff Building; and  McCormack Post Office- U. S.
Courthouse.

Cooperative Use Outlease for Food Court

Financing approach: Outlease Capital project: Cooperative use outlease for
food court Department/ agency: General Services Administration (GSA)

Description of project Under the National Historic Preservation Act and
the Public Buildings Cooperative Use Act, 1 GSA outleased 17,600 square
feet of underused space for a restaurant and retail center in the Railroad
Retirement Board (RRB) building located in Chicago, Illinois. The lease
had a fixed term of 15 years, with three 5- year renewal options. GSA,
RRB, the City of Chicago, and the developer also will upgrade the
sidewalks surrounding the building (new pavers, planters, trees, and lamp
posts) under GSA*s Good Neighbor policy. A similar outlease was negotiated
at Chicago*s Metcalfe Federal Building.

Description of financing Construction costs of about $10 million were paid
by the project developer, approach

who is also responsible for the utility, maintenance, permits, taxes, and
insurance costs for the project. The developer*s revenue is derived solely
from sublease proceeds.

Benefits claimed The outlease generates a substantial revenue stream to
the Federal Buildings Fund *about $10 million over the term of the lease.

Source General Services Administration, Real Property Policysite, Office
of Governmentwide Policy, Best Practices: News and Views on Real Property
Policy, Special Edition, Washington, D. C., December 1999, 18.

1 The National Historic Preservation Act authorizes agencies to lease or
exchange federal historic properties and retain the proceeds to defray the
costs of maintaining other federal historic properties. The Public
Buildings Cooperative Use Act encourages the government to develop the
highest and best use of pedestrian access areas to federal facilities.

Galveston, Texas Customhouse

Financing approach: Outlease Capital project: Galveston, Texas Customhouse
Department/ agency: General Services Administration

Description of project The Galveston Customhouse is one of the oldest
federal buildings west of the Mississippi River. While the exterior of the
building was in good condition, the interior had fallen in disrepair and
housed only six people. However, it was decided that because of its
historic significance, the customhouse was not a good candidate for
disposal. Instead, the building was outleased to the Galveston Historical
Foundation (GHF) for 60 years. The GHF will preserve and restore the
customhouse to ensure its historic

integrity. Once repairs are made, the customhouse will house both the GHF
headquarters and a visitor center for the historic Strand District of
Galveston.

Benefits claimed The 60- year lease removes GSA*s estimated $162, 000 per
year cost of operating an underused asset. The customhouse also benefits
from $1 million that the GHF has invested in restoration and repair work.
Finally, the city and Historic Strand District also benefit by the
continued use and preservation of one of its most significant buildings.

Source General Services Administration, Real Property Policysite, Office
of Governmentwide Policy, Best Practices: News and Views on Real Property
Policy, Special Edition, Washington, D. C., December 1999, 17.

Related questions  Was any cost analysis done to consider having GSA
renovate the building and then move federal employees currently leasing
elsewhere into the building?

 Has any thought been given to what will happen when the lease expires at
the end of the 60- year period?

 What happened to the six employees that had been working in the
customhouse?

Maine Lights Program

Financing approach: Outlease Capital project: Maine Lights Program
Department/ agency: Coast Guard

Description of project With the development of technological aids to
navigate merchant and sailing vessels, the need for lighthouses has
greatly diminished. The Coast Guard owns many lighthouses that deteriorate
without day- to- day upkeep. Moreover, the Coast Guard has become unable
to maintain the properties at the standards of the state historic
preservation guidelines given the level of funding for repairs and
alterations. The Maine Lights Program outleased and divested 28 historic
lighthouses to organizations that will ensure the maintenance, repair, and
care of these historically significant properties.

Description of financing Under the National Historic Preservation Act, the
proceeds of these leases approach

may be used to offset expenses associated with other historic properties
owned by the Coast Guard.

Benefits claimed This program ensures the lighthouses will maintain their
historic integrity while allowing the Coast Guard to avoid between $3 to
$5 million in annual repair and maintenance costs. Moreover, lease
payments defray the costs of other historic preservation efforts.

Source General Services Administration, Real Property Policysite, Office
of Governmentwide Policy, Best Practices: News and Views on Real Property
Policy, Special Edition, Washington, D. C., December 1999, 5.

U. S. Tariff Building

Financing approach: Outlease Capital project: U. S. Tariff Building
Department/ agency: General Services Administration (GSA)

Description of project GSA leased the U. S. Tariff Building, which had
been vacant for a number of years, to the Kimpton Hotel and Restaurant
Group, Inc. (Kimpton Group) for 60 years. The Kimpton Group restored the
building, converting it into a luxury hotel that includes restaurants,
retail space, and meeting rooms. GSA retains ownership of the 1839- built
structure under the National

Historic Preservation Act, which encourages adaptive reuse of public
buildings that are no longer needed by federal agencies.

Description of financing GSA contributed $5 million to clean the historic
building*s exterior, repair

approach windows, and install a handicapped accessible elevator. The
Kimpton Group paid $32 million to renovate the interior of the building,
using the 20

percent federal historic rehabilitation tax credit to finance a portion of
the rehabilitation costs.

Benefits claimed Rents paid to GSA under the lease support the
preservation of other historic properties in GSA*s inventory. In addition,
GSA is relieved of the burden of maintaining an unproductive property.
Finally, the restoration contributes to the revitalization of the
surrounding neighborhood.

Sources GSA press releases. U. S. General Services Administration Signs
Lease with Kimpton Group on Tariff Building (Nov. 23, 1999) and GSA
Celebration for Opening of Hotel Monoco (July 2002). Paper issued by the
Heritage Consulting Group, 2002; Preservation Online,

Hotel Opens in Historic D. C. Building, June 13, 2002.

McCormack Post Office- U. S. Courthouse

Financing approach: Outlease Capital project: McCormack Post Office- U. S.
Courthouse Department/ agency: General Services Administration (GSA)

Description of project In the fall of 1998, the federal courts in Boston
relocated from the John W. McCormack Post Office- U. S. Courthouse to the
new U. S. Courthouse, leaving a large amount (228, 000 square feet) of
courtroom and courtrelated space vacant. The Massachusetts State Trials
Courts agreed to a 5- year lease of this space, in *as is* condition, so
that it could renovate its own courthouse. With the common functions of
the federal and state courts, little build out of space was required.

Description of financing This outlease of space was done under Section 111
of the National Historic

approach Preservation Act, which allow funds from outleasing to be used to
preserve

historical properties in the GSA inventory. Benefits claimed This outlease
maintains the viability of a historic asset and ensures a safe and
productive work environment for the State Court of Massachusetts. Source
General Services Administration, Real Property Policysite, Office of

Governmentwide Policy, Best Practices: News and Views on Real Property
Policy, Special Edition, Washington, D. C., December 1999, 5.

Related questions  Since the 5 years are just about up, what plans does
GSA have for this space next? (GSA received $76 million in fiscal year
2002 and $73 million in fiscal year 2003 for major renovations of this
building.)

 What specifically were the funds used for (i. e., what *preservation*
work was performed other than routine maintenance?)

 Is the post office still located in the building?

Appendi x X

Share- In- Savings Contracts Energy savings performance contracts, a type
of share- in- savings contract, finance energy- saving capital
improvements for federal facilities without an up- front cost to the
government. First authorized in 1986, these share- insavings contracts
have been used to finance hundreds of millions of dollars of energy system
upgrades and installations. Federal agencies may enter into contracts for
as long as 25 years with contractors who purchase and install new energy
systems in federal buildings. Agencies then pay back the contractors for
the equipment plus a percentage of the energy costs saved

as a result of the more efficient energy systems and relief of in- house
maintenance costs. Agencies have some flexibility in determining when they
take ownership of the energy systems. When a contract expires, the federal
government owns the equipment and retains all of the future savings.

Agencies other than the Department of Defense 1 may retain 50 percent of
the energy savings realized from energy savings performance contracts
(after paying the contractor). The remaining 50 percent saved is

transferred to the Treasury. Savings retained by the agency are available
for specified energy and water conservation projects until expended.
However, according to one Department of Commerce official, only about 1
per cent of the total energy savings has been split between the agencies
and the Treasury thus far. This is because agencies devote most savings to
paying off the cost of equipment as soon as possible to reduce financing
costs. Without share- in- savings contracts, Congress would have to
appropriate

hundreds of millions of dollars today to meet currently required energy
consumption standards. 2 Direct purchase of more efficient energy systems
would allow all future savings to accrue to the government, rather than
paying out a percentage of the savings to private contractors. Also,
because a private contractor* which will have a higher cost of capital
than the federal government* finances the capital improvements, share-
insavings

contracts are likely to be more expensive over the long term than direct
federal purchase. There could be an additional cost to the

1 The Department of Defense is authorized to retain two- thirds of the
amount of savings realized from contracted services for energy or water
conservation. DOD contracts do not tie the amount of payment to the
contractor to the amount of savings realized as a result of the contract
activity.

2 Consumption standards were defined in the Energy Policy Act of 1992 and
then updated in Executive Orders 12902 and 13123.

government of reduced tax revenues when contractors maintain ownership of
energy equipment that may be amortized. However, such an arrangement
usually results in lower interest rates for the cost of equipment,
according to a Commerce Department official.

Examples of Energy Savings Performance Contracts include: Eisenhower
Center;  Tucson, AZ, Courthouse; and  Department of Commerce HVAC system
upgrade.

Eisenhower Center

Financing approach: Share- in- savings contract Capital project:
Eisenhower Center Department/ agency: General Services Administration,

Department of Energy, and National Archives and Records Administration

Description of project and The Eisenhower Center is comprised of the
Eisenhower family home, financing approach

Dwight D. Eisenhower Presidential Library, and the Dwight D. Eisenhower
Museum. A contractor installed $300,000 of new equipment to provide more
efficient management of energy and special lighting with ultra violet lens
shielding for archive records protection. The contractor will be
reimbursed for the equipment and its financing costs and also receive 50
percent of the energy savings.

Benefits claimed With no up- front costs to the government, the Eisenhower
Center gets a modern energy management and lighting system that will
better preserve documents.

Source General Services Administration, Real Property Policysite, Office
of Governmentwide Policy, Best Practices: News and Views on Real Property
Policy, Special Edition, Washington, D. C., December 1999, 8.

Related questions  When does ownership of the energy equipment transfer
to the government?

 How long does the contract run? Is there a plan for maintenance and
repairs when this contract expires?

 How was the contract*s value to the government determined? How does this
play out in the agency*s budget?

 What would it have cost the government to purchase and install the new
systems?

Tucson, AZ, Courthouse

Financing approach: Share- in- savings contract Capital project: Tucson,
AZ, Courthouse Department/ agency: General Services Administration (GSA)

Description of project The General Services Administration awarded an
energy savings performance contract for the new Courthouse in Tucson,
Arizona before the building was constructed. This is one of the first
times that GSA used an energy savings performance contract in the
construction of a new facility. The original courthouse plans would have
cost more to implement than Congress had appropriated. Thus, GSA was faced
with either reducing the size (and functionality) of the building by 1 or
2 floors or finding a way to finance an integral part of the structure
outside of the appropriations process. The winning bidder of the 25- year
energy maintenance contract purchased and installed a heating and cooling
system that was more efficient than the

system in the original building plans. Energy savings were determined
according to the kilowatts per hour used by the installed system compared
to the energy system that was initially planned for. GSA took ownership of
the energy systems along with the rest of the building. Out of the money

saved on energy costs, GSA is repaying the contractor for the energy
systems and then sharing the money saved on energy costs with the
contractor. Benefits claimed The energy savings performance contract
reduced the initial funds needed to construct the new courthouse. Source
General Services Administration, Real Property Policysite, Office of

Governmentwide Policy, Best Practices: News and Views on Real Property
Policy, Special Edition, Washington, D. C., December 1999, 9.

Related questions  When does ownership of the energy equipment transfer
to the government?

 How long does the contract run? Is there a plan for maintenance and
repairs when this contract expires?

 How was the contract*s value to the government determined? How does this
play out in the agency*s budget?

 What would it have cost the government to purchase and install the new
systems?

Heating, Ventilation, and Air Conditioning System Upgrade

Financing approach: Share- in- savings contract Capital project: Heating,
ventilation, and air conditioning

system upgrade Department/ agency: Department of Commerce

Description of project and The Department of Commerce entered into an
agreement with the Potomac financing approach

Electric Power Company (PEPCO) to improve the heating, ventilation, and
air conditioning system, install energy motors, and retrofit chilled water
pumps. The project costs will be repaid from future energy savings.

Benefits claimed Commerce gains a more energy- efficient system without
any initial costs to the government.

Source General Services Administration, Real Property Policysite, Office
of Governmentwide Policy, Best Practices: News and Views on Real Property
Policy, Special Edition, Washington, D. C., 1997, 4.

Related questions  When does ownership of the energy equipment transfer
to the government?

 How long does the contract run? Is there a plan for maintenance and
repairs when this contract expires?

 How was the contract*s value to the government determined? How does this
play out in the agency*s budget?

 What would it have cost the government to purchase and install the new
systems?

Appendi x XI

Debt Issuance The federal government funds its operations in part by
borrowing through the issuance of securities to the public. Several
federal organizations, such as the Tennessee Valley Authority (TVA),
Federal Housing Administration, and Farm Credit System Financial
Assistance Corporation issue their own agency debt.

The reasons for issuing debt differ considerably from one agency to
another. The predominant issuer of agency debt is TVA. As of the end of
2002, TVA had issued 94 percent of the total debt issued by agencies. TVA

uses the borrowings primarily to finance capital expenditures. As a
government corporation, TVA operated according to a different set of rules
than most federal agencies.

Debt Issuance

Financing Approach: Debt issuance Department/ Agency: Tennessee Valley
Authority

Description of project TVA is a wholly- owned U. S. government corporation
and the nation*s largest public power system. It was created to develop
the resources of the Tennessee Valley region in order to strengthen the
regional and national economy and national defense by providing (1) an
ample supply of power within the region, (2) navigable channels and flood
control for the Tennessee River System, and (3) agricultural and
industrial development and improved forestry in the region. TVA*s
operations have typically been divided into the power and nonpower
programs. Substantially all TVA revenues and assets are attributable to
the power program. TVA is authorized to issue debt and has primarily
financed its capital construction by selling bonds and notes to the
public. TVA*s power program is required to be self- supporting from power
revenues and the issuance of debt. Description of financing

During the Korean War and the late 1950s, Congress cut back on public
approach

funding for TVA, and in 1959 Congress authorized TVA to sell bonds on the
public markets so that it could finance its own power operations. TVA has
been working to reduce its debt by buying back its bonds. TVA has reduced
its debt balance from $27.7 billion in 1997 to about $25 billion in 2002

through the exchange of lower interest bonds for outstanding higher
interest bonds and redeeming other outstanding bonds. TVA continues to buy
back its bonds. TVA*s borrowing authority is limited to $30 billion.

Benefits claimed The ability to issue bonds allowed TVA*s power system to
operate as a business, made it responsible for its own financial
operations, and freed the power operations from dependence on
congressional appropriations. TVA bonds are backed solely by the revenues
of the TVA power system; they are not obligations of the U. S. government,
nor are they guaranteed by the

government. Sources Office of Management and Budget, Analytical
Perspectives, Budget of the

United States Government, Fiscal Year 2004.

TVA*s Fiscal Year 2002 Annual Report.

(450172)

Report to the Chairman, Committee on the Budget, U. S. Senate

August 2003 BUDGET ISSUES Alternative Approaches to Finance Federal
Capital

GAO- 03- 1011

Contents Letter 1 Appendixes

Appendix I: Full Funding 9

Appendix II: Incremental Funding 11

Appendix III: Operating Leases 17

Appendix IV: Retained Fees 27

Appendix V: Real Property Swaps 32

Appendix VI: Sale- Leaseback 42

Appendix VII: Lease- Leaseback 45

Appendix VIII: Public Private Partnerships 47

Appendix IX: Outleases 54

Appendix X: Share- In- Savings Contracts 60

Appendix XI: Debt Issuance 66 Table Table 1: Alternative Financing
Approaches 4

This is a work of the U. S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

a

GAO United States General Accounting Office

Capital projects are fully funded when Congress provides budget authority
for the full cost of an asset up front. Such up- front funding provides
recognition for commitments that are embodied in budgetary decisions and
maintains governmentwide fiscal control. However, providing budget
authority for the large up- front costs of capital assets creates
challenges in an era of resource constraints. Agencies have been
authorized to use an array of approaches to obtain capital assets without
full, up- front budget authority. Our work identified 10 alternative
financing approaches used by one or more of 13 agencies. These approaches,
which are described in our letter, are: * incremental funding,

 operating leases,  retained fees,  real property swaps,  sale-
leasebacks,  lease- leasebacks,  public private partnerships, 
outleases,  share- in- savings contracts, and  debt issuance.

From an agency*s perspective, meeting capital needs through alternative
financing approaches (i. e., not full funding) can be very attractive
because the agency can obtain the capital asset without first having to
secure sufficient appropriations to cover the full cost of the asset.
Depending on the financing approach, an agency may spread the asset cost
over a number of years or may never even incur a monetary cost that is
recognized in the budget. From a governmentwide perspective, however, as
we have reported in the past, the costs associated with these financing
approaches may be greater than with full, up- front budget authority.
Regardless of the financing approach* up- front budget authority or any of
the other approaches* agencies would receive the same program benefits.
This document summarizes how these approaches are typically structured as
well as examples of projects financed through these approaches. It notes

the claimed project benefits from an agency*s perspective and some
questions associated with each. In an era of limited resources and growing
mission demands, many agencies have turned to approaches other than full
up- front

funding to finance capital. GAO was asked to inventory examples of
alternative approaches that agencies have employed to finance the capital
used in their operations.

www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 1011. To view the full product,
including the scope and methodology, click on the link above. For more
information, contact Susan J. Irving, (202) 512- 9142, irvings@ gao. gov.
Highlights of GAO- 03- 1011, a report to Chairman, Committee on the
Budget,

U. S. Senate

August 2003

BUDGET ISSUES

Alternative Approaches to Finance Federal Capital

Page i GAO- 03- 1011 Alternative Financing Approaches

Page 1 GAO- 03- 1011 Alternative Financing Approaches United States
General Accounting Office Washington, D. C. 20548

Page 1 GAO- 03- 1011 Alternative Financing Approaches

A

Page 2 GAO- 03- 1011 Alternative Financing Approaches

Page 3 GAO- 03- 1011 Alternative Financing Approaches

Page 4 GAO- 03- 1011 Alternative Financing Approaches

Page 5 GAO- 03- 1011 Alternative Financing Approaches

Page 6 GAO- 03- 1011 Alternative Financing Approaches

Page 7 GAO- 03- 1011 Alternative Financing Approaches

Page 8 GAO- 03- 1011 Alternative Financing Approaches

Page 9 GAO- 03- 1011 Alternative Financing Approaches

Appendix I

Appendix I Full Funding Page 10 GAO- 03- 1011 Alternative Financing
Approaches

Page 11 GAO- 03- 1011 Alternative Financing Approaches

Appendix II

Appendix II Incremental Funding

Page 12 GAO- 03- 1011 Alternative Financing Approaches

Appendix II Incremental Funding

Page 13 GAO- 03- 1011 Alternative Financing Approaches

Appendix II Incremental Funding

Page 14 GAO- 03- 1011 Alternative Financing Approaches

Appendix II Incremental Funding

Page 15 GAO- 03- 1011 Alternative Financing Approaches

Appendix II Incremental Funding

Page 16 GAO- 03- 1011 Alternative Financing Approaches

Page 17 GAO- 03- 1011 Alternative Financing Approaches

Appendix III

Appendix III Operating Leases

Page 18 GAO- 03- 1011 Alternative Financing Approaches

Appendix III Operating Leases

Page 19 GAO- 03- 1011 Alternative Financing Approaches

Appendix III Operating Leases

Page 20 GAO- 03- 1011 Alternative Financing Approaches

Appendix III Operating Leases

Page 21 GAO- 03- 1011 Alternative Financing Approaches

Appendix III Operating Leases

Page 22 GAO- 03- 1011 Alternative Financing Approaches

Appendix III Operating Leases

Page 23 GAO- 03- 1011 Alternative Financing Approaches

Appendix III Operating Leases

Page 24 GAO- 03- 1011 Alternative Financing Approaches

Appendix III Operating Leases

Page 25 GAO- 03- 1011 Alternative Financing Approaches

Appendix III Operating Leases

Page 26 GAO- 03- 1011 Alternative Financing Approaches

Page 27 GAO- 03- 1011 Alternative Financing Approaches

Appendix IV

Appendix IV Retained Fees

Page 28 GAO- 03- 1011 Alternative Financing Approaches

Appendix IV Retained Fees

Page 29 GAO- 03- 1011 Alternative Financing Approaches

Appendix IV Retained Fees

Page 30 GAO- 03- 1011 Alternative Financing Approaches

Appendix IV Retained Fees

Page 31 GAO- 03- 1011 Alternative Financing Approaches

Page 32 GAO- 03- 1011 Alternative Financing Approaches

Appendix V

Appendix V Real Property Swaps

Page 33 GAO- 03- 1011 Alternative Financing Approaches

Appendix V Real Property Swaps

Page 34 GAO- 03- 1011 Alternative Financing Approaches

Appendix V Real Property Swaps

Page 35 GAO- 03- 1011 Alternative Financing Approaches

Appendix V Real Property Swaps

Page 36 GAO- 03- 1011 Alternative Financing Approaches

Appendix V Real Property Swaps

Page 37 GAO- 03- 1011 Alternative Financing Approaches

Appendix V Real Property Swaps

Page 38 GAO- 03- 1011 Alternative Financing Approaches

Appendix V Real Property Swaps

Page 39 GAO- 03- 1011 Alternative Financing Approaches

Appendix V Real Property Swaps

Page 40 GAO- 03- 1011 Alternative Financing Approaches

Appendix V Real Property Swaps

Page 41 GAO- 03- 1011 Alternative Financing Approaches

Page 42 GAO- 03- 1011 Alternative Financing Approaches

Appendix VI

Appendix VI Sale- Leaseback

Page 43 GAO- 03- 1011 Alternative Financing Approaches

Appendix VI Sale- Leaseback

Page 44 GAO- 03- 1011 Alternative Financing Approaches

Page 45 GAO- 03- 1011 Alternative Financing Approaches

Appendix VII

Appendix VII Lease- Leaseback

Page 46 GAO- 03- 1011 Alternative Financing Approaches

Page 47 GAO- 03- 1011 Alternative Financing Approaches

Appendix VIII

Appendix VIII Public Private Partnerships

Page 48 GAO- 03- 1011 Alternative Financing Approaches

Appendix VIII Public Private Partnerships

Page 49 GAO- 03- 1011 Alternative Financing Approaches

Appendix VIII Public Private Partnerships

Page 50 GAO- 03- 1011 Alternative Financing Approaches

Appendix VIII Public Private Partnerships

Page 51 GAO- 03- 1011 Alternative Financing Approaches

Appendix VIII Public Private Partnerships

Page 52 GAO- 03- 1011 Alternative Financing Approaches

Appendix VIII Public Private Partnerships

Page 53 GAO- 03- 1011 Alternative Financing Approaches

Page 54 GAO- 03- 1011 Alternative Financing Approaches

Appendix IX

Appendix IX Outleases

Page 55 GAO- 03- 1011 Alternative Financing Approaches

Appendix IX Outleases

Page 56 GAO- 03- 1011 Alternative Financing Approaches

Appendix IX Outleases

Page 57 GAO- 03- 1011 Alternative Financing Approaches

Appendix IX Outleases

Page 58 GAO- 03- 1011 Alternative Financing Approaches

Appendix IX Outleases

Page 59 GAO- 03- 1011 Alternative Financing Approaches

Page 60 GAO- 03- 1011 Alternative Financing Approaches

Appendix X

Appendix X Share- In- Savings Contracts

Page 61 GAO- 03- 1011 Alternative Financing Approaches

Appendix X Share- In- Savings Contracts

Page 62 GAO- 03- 1011 Alternative Financing Approaches

Appendix X Share- In- Savings Contracts

Page 63 GAO- 03- 1011 Alternative Financing Approaches

Appendix X Share- In- Savings Contracts

Page 64 GAO- 03- 1011 Alternative Financing Approaches

Appendix X Share- In- Savings Contracts

Page 65 GAO- 03- 1011 Alternative Financing Approaches

Page 66 GAO- 03- 1011 Alternative Financing Approaches

Appendix XI

Appendix XI Debt Issuance

Page 67 GAO- 03- 1011 Alternative Financing Approaches

GAO*s Mission The General Accounting Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting its
constitutional responsibilities

and to help improve the performance and accountability of the federal
government for the American people. GAO examines the use of public funds;
evaluates federal programs and policies; and provides analyses,
recommendations, and other assistance to help Congress make informed
oversight, policy, and funding decisions. GAO*s commitment to good
government is reflected in its core values of accountability, integrity,
and reliability.

Obtaining Copies of GAO Reports and Testimony

The fastest and easiest way to obtain copies of GAO documents at no cost
is through the Internet. GAO*s Web site (www. gao. gov) contains abstracts
and fulltext files of current reports and testimony and an expanding
archive of older products. The Web site features a search engine to help
you locate documents using key words and phrases. You can print these
documents in their entirety, including charts and other graphics.

Each day, GAO issues a list of newly released reports, testimony, and
correspondence. GAO posts this list, known as *Today*s Reports,* on its
Web site daily. The list contains links to the full- text document files.
To have GAO e- mail this

list to you every afternoon, go to www. gao. gov and select *Subscribe to
e- mail alerts* under the *Order GAO Products* heading. Order by Mail or
Phone The first copy of each printed report is free. Additional copies are
$2 each. A check

or money order should be made out to the Superintendent of Documents. GAO
also accepts VISA and Mastercard. Orders for 100 or more copies mailed to
a single address are discounted 25 percent. Orders should be sent to:

U. S. General Accounting Office 441 G Street NW, Room LM Washington, D. C.
20548 To order by Phone: Voice: (202) 512- 6000 TDD: (202) 512- 2537 Fax:
(202) 512- 6061

To Report Fraud, Waste, and Abuse in Federal Programs

Contact: Web site: www. gao. gov/ fraudnet/ fraudnet. htm E- mail:
fraudnet@ gao. gov Automated answering system: (800) 424- 5454 or (202)
512- 7470

Public Affairs Jeff Nelligan, Managing Director, NelliganJ@ gao. gov (202)
512- 4800 U. S. General Accounting Office, 441 G Street NW, Room 7149
Washington, D. C. 20548

United States General Accounting Office Washington, D. C. 20548- 0001
Official Business Penalty for Private Use $300 Address Service Requested

Presorted Standard Postage & Fees Paid

GAO Permit No. GI00

Full Funding Incremental Funding Operating Leases Retained Fees Real
Property Swaps Sale Leasebacks Lease- Leasebacks Publice Private
Partnerships Outleases Share- in- Savings Contracts Debt Issuance
*** End of document. ***