    Federal Real Property: Actions Needed to Address Long-standing
    and Complex Problems (01-OCT-03, GAO-04-119T).

    The federal government faces longstanding problems with excess
    and underutilized real property, deteriorating facilities,
    unreliable real property data, and costly space. These problems
    have multibillion-dollar cost implications and can seriously
    jeopardize agencies' missions. In addition, federal agencies face
    many challenges securing real property due to the threat of
    terrorism. This testimony discusses long-standing, complex
    problems in the federal real property area and what actions are
    needed to address them.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-04-119T
        ACCNO:   A08634
      TITLE:     Federal Real Property: Actions Needed to Address
    Long-standing and Complex Problems
         DATE:   10/01/2003
      SUBJECT:   Congressional/executive relations
    	     Federal property
    	     Federal property management
    	     Financial management
    	     Real property
    	     Strategic planning

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    GAO-04-119T

    United States General Accounting Office

    GAO Testimony

    Before the Committee on Governmental Affairs, United States Senate

    For Release on Delivery

    Expected at 9:30 a.m. EDT FEDERAL REAL

    Wednesday, October 1, 2003

    PROPERTY

              Actions Needed to Address Long-standing and Complex Problems

    Statement of David M. Walker Comptroller General of the United States

    GAO-04-119T

    Highlights of GAO-04-119T, a testimony before the Committee on
    Governmental Affairs, United States Senate

    The federal government faces long-standing problems with excess and
    underutilized real property, deteriorating facilities, unreliable real
    property data, and costly space. These problems have multibillion-dollar
    cost implications and can seriously jeopardize agencies' missions. In
    addition, federal agencies face many challenges securing real property due
    to the threat of terrorism. This testimony discusses long-standing,
    complex problems in the federal real property area and what actions are
    needed to address them.

    This testimony discusses recommendations that GAO has previously made.
    There is a need for a comprehensive and integrated transformation strategy
    that could identify how to realign real property and dispose of unneeded
    assets; address repair and restoration needs; develop reliable data;
    reduce the reliance on costly leasing; and protect assets from terrorism.

    An independent commission or governmentwide task force may be needed to
    develop this strategy, and legislative actions are needed to provide
    agencies with tools and incentives to help them address the problems. If
    resulting actions address the problems, agencies will be better able to
    recover asset values, reduce operating costs, improve facility conditions,
    enhance security, and achieve mission effectiveness.

    www.gao.gov/cgi-bin/getrpt?GAO-04-119T.

    To view the full product, click on the link above. For more information,
    contact Bernard Ungar at (202) 512-2834 or ungarb@gao.gov.

    October 2003

    FEDERAL REAL PROPERTY

    Actions Needed to Address Long-standing and Complex Problems

    Government data show that over 30 agencies control hundreds of thousands
    of real property assets worldwide, including facilities and land, which
    are worth hundreds of billions of dollars. Unfortunately, much of this
    vast, valuable portfolio reflects an infrastructure based on the business
    model and technological environment of the 1950s. Many of the assets are
    no longer effectively aligned with, or responsive to, agencies' changing
    missions and are therefore no longer needed. Further, many assets are in
    an alarming state of deterioration; agencies have estimated that
    restoration and repair needs are in the tens of billions of dollars.
    Compounding these problems are the lack of reliable governmentwide data
    for strategic asset management, a heavy reliance on costly leasing instead
    of ownership to meet new space needs, and the cost and challenge of
    protecting these assets against potential terrorism.

    Given the persistence of these problems and related obstacles, we
    designated federal real property as a new high-risk area in January 2003.
    Resolving these problems will require high-level attention and effective
    leadership by both Congress and the administration. Also, current
    structures and processes may not be adequate to address the problems.
    Thus, as we have reported, there is a need for a comprehensive, integrated
    transformation strategy for real property that will focus on some of the
    underlying causes that contribute to these problems, such as competing
    stakeholder interests in real property decisions, various legal and
    budget-related disincentives to businesslike outcomes, inadequate capital
    planning, and the lack of governmentwide focus on real property issues. It
    is equally important that Congress and the administration work together to
    develop and enact needed reform legislation to give real property-holding
    agencies incentives and tools they need to achieve better outcomes. This
    would also foster a more businesslike real property environment and
    provide for greater accountability.

    Madam Chairman and Members of the Committee:

    We welcome the opportunity to testify on the executive and legislative
    branch actions that are needed to address the long-standing and complex
    problems that led to our designation of federal real property as a
    high-risk area. As you know, at the start of each new Congress since 1999,
    we have issued a special series of reports, entitled the Performance and
    Accountability Series: Major Management Challenges and Program Risks. In
    January 2003, we designated federal real property a high-risk area as part
    of this series.1 My testimony is based on our January 2003 high-risk
    report; work we have done to update information on some of the example
    properties from our January 2003 high-risk report; and other GAO reports
    on real property issues, including public-private partnerships.2 My
    testimony focuses on the problems with federal real property and what
    needs to be done to address them.

    Summary

    Data from the General Services Administration (GSA) show that over 30
    agencies control hundreds of thousands of real property assets worldwide,
    including facilities and land. According to the U.S. government's
    financial statements for fiscal year 2002, these assets are worth hundreds
    of billions of dollars. Unfortunately, much of this vast, valuable
    portfolio reflects an infrastructure based on the business model and
    technological environment of the 1950s. Many of the assets are no longer
    effectively aligned with, or responsive to, agencies' changing missions
    and are therefore no longer needed. Further, many assets are in an
    alarming state of deterioration; agencies estimate that restoration and
    repair needs are in the tens of billions of dollars. Compounding these
    problems are the lack of reliable governmentwide data for strategic asset
    management, a heavy reliance on

    1U.S. General Accounting Office, High-Risk Series: Federal Real Property,
    GAO-03-122 (Washington, D.C.; Jan. 2003); the report on real property is a
    companion to GAO's 2003 high-risk update, U.S. General Accounting Office,
    High-Risk Series: An Update, GAO-03-119 (Washington, D.C.: Jan. 2003);
    these reports are intended to help the new Congress focus its attention on
    the most important issues and challenges facing the federal government.

    2Under a public-private partnership, a contractual arrangement is formed
    between public and private sector partners that can include a variety of
    activities that involve the private sector in the development, financing,
    ownership, and operation of a public facility or service. In the case of
    real property, the federal government typically would contribute the
    property and a private sector entity contributes financial capital and
    borrowing ability to redevelop or renovate the property.

    costly leasing instead of ownership to meet new space needs, and the cost
    and challenge of protecting these assets against potential terrorism.

    Resolving these long-standing problems will require high-level attention
    and effective leadership by both Congress and the administration. Also,
    because of the breadth and complexity of the issues, the long-standing
    nature of the problems, and the intense debate that will likely ensue,
    current structures and processes may not be adequate to address the
    problems. Thus, there is a need for a comprehensive, integrated
    transformation strategy for real property and an independent commission or
    governmentwide task force may be needed to develop the strategy. This
    strategy should reflect lessons learned and leading practices of public
    and private organizations. In addition to the strategy, it is critical
    that all key stakeholders-Congress, the Office of Management and Budget
    (OMB), and real property-holding agencies-continue to work diligently on
    efforts already planned and under way that are intended to promote better
    real property capital decisionmaking. These include assessing
    infrastructure and human capital needs and examining viable funding
    options.

    If actions resulting from the transformation strategy and other efforts
    address the long-standing problems and are effectively implemented,
    agencies will be better able to recover asset values, reduce operating
    costs, improve facility conditions, enhance security and safety, recruit
    and retain employees, and achieve mission effectiveness. Realigning the
    government's real property, taking into consideration the future federal
    role and workplace needs, will be critical to improving the government's
    performance and ensuring accountability within expected resource limits.

    The federal real property environment has many stakeholders and involves a
    vast and diverse portfolio of assets that are used for a wide variety of
    missions. Real property is generally defined as facilities; land; and
    anything constructed on, growing on, or attached to land. The U.S.
    government's fiscal year 2002 financial statements show an acquisition
    cost of more than $335 billion for real property assets held by the
    federal government on September 30, 2002.3 In terms of facilities, the
    latest

      The Federal Real Property Environment

    3This value does not include stewardship assets, which are not reported on
    the government's balance sheet as of September 30, 2002. These assets
    include wilderness areas, scenic river systems, monuments, and national
    defense assets. Also, real property data contained in the financial
    statements of the U.S. government have been problematic. As discussed in
    more detail later, we were unable to express an opinion on the U.S.
    government's consolidated financial statements for fiscal year 2002.

      The Federal Government Has Many Assets it Does Not Need

    available governmentwide data from GSA indicated that as of September 30,
    2002, the federal government owned and leased approximately 3.4 billion
    square feet of building floor area worldwide.4 The Department of Defense
    (DOD), U.S. Postal Service (USPS), GSA, and the Department of Veterans
    Affairs (VA) hold the majority of the owned facility space.

    Federal real property managers operate in a complex and dynamic
    environment. Numerous laws and regulations govern the acquisition,
    management, and disposal of federal real property. The Federal Property
    and Administrative Services Act of 1949, as amended (Property Act), and
    the Public Buildings Act of 1959, as amended, are the laws that generally
    apply to real property held by federal agencies; and GSA is responsible
    for the acts' implementation.5 Agencies are subject to these acts, unless
    they are specifically exempted from them, and some agencies may also have
    their own statutory authority related to real property. Agencies must also
    comply with numerous other laws related to real property.

    Despite significant changes in the size and mission needs of the federal
    government in recent years, the federal portfolio of real property assets
    in many ways still largely reflects the business model and technological
    environment of the 1950s and faces serious security challenges. In the
    last decade alone, the federal government has reduced its workforce by
    several hundred thousand personnel, and several federal agencies have had
    major mission changes. With these personnel reductions and mission
    changes, the need for existing space, including general-purpose office
    space, has declined overall and necessitated the need for different kinds
    of space. At the same time, technological advances have changed workplace
    needs, and many of the older buildings are not configured to accommodate
    new technologies. The advent of electronic government is starting to
    change how the public interacts with the federal government. These changes
    will have significant implications for the type and location of property
    needed in the 21st century. Furthermore, changes in the overall domestic
    security environment have presented an additional range of challenges to
    real property management that must be addressed.

    4U.S. General Services Administration, Federal Real Property Profile, as
    of September 30, 2002 (Washington, D.C.).

    5For the Property Act, see 40 U.S.C. S: 101 et. seq.; the Property Act
    excludes certain types of property, such as public domain assets and land
    reserved or dedicated for national forest or national park purposes; for
    the Public Buildings Act, see 40 U.S.C. S: 3301 et. seq.

    One reason the government has many unneeded assets is that some of the
    major real property-holding agencies have undergone significant mission
    shifts that have affected their real property needs. For example, after
    the Cold War, DOD's force structure was reduced by 36 percent. Despite
    four rounds of base closures, DOD projects that it still has considerably
    more property than it needs. The National Defense Authorization Act for
    Fiscal Year 2002,6 which became law in December 2001, gave DOD the
    authority for another round of base realignments and military installation
    closures in 2005. Various factors may significantly reduce the need for
    real property held by USPS. These factors include new technologies,
    additional delivery options, and the opportunity for greater use of
    partnerships and retail colocation arrangements. A July 2003 Presidential
    Commission report on USPS stated, among other things, that USPS had vacant
    and underutilized facilities that had little, if any, value to the
    modern-day delivery of the nation's mail.7 According to testimony by the
    Co-Chair of the Commission, rightsizing of the postal network would be
    crucial to USPS's transformation into a modern, 21st century institution8.

    In the mid-1990s, VA began shifting its role from being a traditional
    hospital-based provider of medical services to an integrated delivery
    system that emphasizes a full continuum of care with a significant shift
    from inpatient to outpatient services. Subsequently, VA has struggled to
    reduce its large inventory of buildings, many of which are underutilized
    or vacant. Although the Department of Energy (DOE) is no longer producing
    new nuclear weapons, it still maintains a facilities infrastructure
    largely designed for this purpose.

    The magnitude of the problem with underutilized or excess federal property
    puts the government at significant risk for wasting taxpayers' money and
    missed opportunities. First, underutilized or excess property is costly to
    maintain. DOD estimates that it is spending $3 billion to $4 billion each
    year maintaining facilities that are not needed. In July 1999, we reported
    that vacant VA space was costing as much as $35 million to

    6P.L. 107-107, 115 Stat. 1012, 1342 (2001).

    7President's Commission on the United States Postal Service, Embracing the
    Future: Making the Tough Choices to Preserve Universal Mail Service
    (Washington, D.C.: July 31, 2003).

    8Statement of James A. Johnson, before the Senate Committee on
    Governmental Affairs, U.S. Postal Service: What Can Be Done to Ensure Its
    Future Viability? (Washington, D.C.: Sept. 17, 2003).

    maintain each year.9 Costs associated with excess DOE facilities,
    primarily for security and maintenance, exceed $70 million annually.10 It
    is likely that other agencies that continue to hold excess or
    underutilized property are also incurring significant costs for staff time
    spent managing the properties and on maintenance, utilities, security, and
    other building needs. Second, in addition to day-to-day operational costs,
    holding these properties has opportunity costs for the government, because
    these buildings and land could be put to more cost-beneficial uses,
    exchanged for other needed property, or sold to generate revenue for the
    government. Finally, continuing to hold property that is unneeded does not
    present a positive image of the federal government in local communities.
    Instead, it presents an image of waste and inefficiency that erodes
    taxpayers' confidence in government. It also can have a negative impact on
    local economies if the property is occupying a valuable location and is
    not used for other purposes, sold, redeveloped, or used in a
    public-private partnership.

    Appendix I discusses some examples of vacant, highly visible properties
    that are in the federal inventory- the former main VA hospital building at
    the Milwaukee, Wisconsin, health facility campus; St. Elizabeths Hospital
    in Washington, D.C.; and the former main post office building in downtown
    Chicago, Illinois. These examples demonstrate the range of challenges
    agencies face in disposing of unneeded property.

    Restoration, repair, and maintenance backlogs in federal facilities are
    significant and reflect the federal government's ineffective stewardship
    over its valuable and historic portfolio of real property assets. The
    state of deterioration is alarming because of the magnitude of the repair
    backlog- current estimates show that tens of billions of dollars will be
    needed to restore these assets and make them fully functional. This
    problem has accelerated in recent years because much of the federal
    portfolio was constructed over 50 years ago, and these assets are reaching
    the end of their useful lives. As with the problems related to
    underutilized or excess property, the challenges of addressing facility
    deterioration are also prevalent at major real property-holding agencies.
    For example:

    9U.S. General Accounting Office, VA Health Care: Challenges Facing VA in
    Developing an Asset Realignment Process, GAO/T-HEHS-99-173 (Washington,
    D.C.: July 22, 1999).

    10DOE Office of the Inspector General, Disposition of the Department's
    Excess Facilities, DOE/IG-0550 (Washington, D.C.: Apr. 3, 2002).

      The Federal Portfolio Is in an Alarming State of Deterioration

    o  	Over the last decade, DOD reports that it has been faced with the
    major challenge of adequately maintaining its facilities to meet its
    mission requirements. Although DOD no longer reports data on backlog of
    repairs and maintenance, it reported in 2001 that the cost of bringing its
    facilities to a minimally acceptable condition was estimated at $62
    billion; the cost of correcting all deficiencies was estimated at $164
    billion.11

    o  	The Department of the Interior (Interior) has a significant deferred
    maintenance backlog that the Interior Inspector General (IG) estimated in
    April 2002 to be as much as $8 billion to $11 billion. This backlog has
    affected numerous national treasures, such as Ellis Island, Yellowstone
    National Park, and Mount Rushmore, just to name a few.

    o  	GSA has struggled over the years to meet the repair and alteration
    requirements identified at its buildings. In March 2000, we reported that
    GSA data showed that over half of GSA's approximately 1,700 buildings
    needed repairs estimated to cost about $4 billion.12 More recently, in

    August 2002, we reported that this estimated backlog of identified repair
    and alteration needs was up to $5.7 billion.13

    Other agencies with repair backlogs that we highlighted in our high-risk
    report include the Department of State (State), DOE, the Smithsonian
    Institution, and USPS. Since issuing our high-risk report, we have updated
    our assessment of facility conditions at DOD and State.

    o  	In February 2003, we reported that although the amount of money the
    active forces have spent on facility maintenance had increased recently,
    DOD and service officials said that these amounts had not been sufficient
    to halt the deterioration of facilities.14 Too little funding to
    adequately maintain facilities is also aggravated by DOD's acknowledged
    retention of facilities in excess of its needs. Furthermore, the
    information that the

    11U.S. Department of Defense, Report to Congress: Identification of the
    Requirements to Reduce the Backlog of Maintenance and Repair of Defense
    Facilities (Washington, D.C.: Apr. 2001).

    12U.S. General Accounting Office, Federal Buildings: Billions Are Needed
    for Repairs and Alterations, GAO/GGD-00-98 (Washington, D.C.: Mar. 30,
    2000).

    13U.S. General Accounting Office, Financial Condition of Federal Buildings
    Owned by the General Services Administration, GAO-02-854R (Washington,
    D.C.: Aug. 8, 2002).

    14U.S. General Accounting Office, Defense Infrastructure: Changes in
    Funding Priorities and Strategic Planning Needed to Improve the Condition
    of Military Facilities,

    GAO-03-274 (Washington, D.C.: Feb. 19, 2003).

    services have on facility conditions is not consistent, making it
    difficult for Congress, DOD, and the services to direct funds to
    facilities where they are most needed and to accurately gauge facility
    conditions. And, although DOD has a strategic plan for facilities, it
    lacks comprehensive information on the specific actions, time frames,
    responsibilities, and funding needed to reach its goals. In May 2003, we
    also reported on a similar problem with National Guard and Reserve
    facilities.15

    o  In March 2003, we reported that many of the primary office buildings at

    overseas embassies and consulates were in poor condition.16 In 2002, State
    estimated that its repair backlog was $736 million. In addition, the
    primary office buildings at more than half of the posts do not meet
    certain fire/life safety standards. State officials stated that
    maintenance costs would increase over time because of the age of many of
    the buildings, and overcrowding has become a problem at several posts.

    Our work over the years has shown that the deterioration problem leads to
    increased operational costs, has health and safety implications that are
    worrisome, and can compromise agency missions. In addition, we have
    reported that the ultimate cost of completing delayed repairs and
    alterations may escalate because of inflation and increases in the
    severity of the problems caused by the delays.17 As discussed above, the
    overall cost could also be affected by government realignment. That is, to
    the extent that unneeded property is also in need of repair, disposing of
    such property could reduce the repair backlog. Another negative effect,
    which is not readily apparent but nonetheless significant, is the effect
    that deteriorating facilities have on employee recruitment, retention, and
    productivity. This human capital element is troublesome because the
    government is often at a disadvantage in its ability to compete in the job
    market in terms of the salaries agencies are able to offer. Poor physical
    work environments exacerbate this problem and can have a negative impact
    on potential employees' decisions to take federal positions. Furthermore,
    research has shown that quality work environments make

    15U.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).

    16U.S. General Accounting Office, Overseas Presence: Conditions of
    Overseas Diplomatic Facilities, GAO-03-557T (Washington, D.C.: Mar. 20,
    2003).

    17U.S. General Accounting Office, Federal Buildings: Funding Repairs and
    Alterations Has Been a Challenge-Expanded Financing Tools Needed,
    GAO-01-452 (Washington, D.C.: Apr. 12, 2001).

      Key Decisionmakers Lack Reliable and Useful Data on Real Property Assets

    employees more productive and improve morale. Finally, as with excess or
    underutilized property, deteriorated property presents a negative image of
    the federal government to the public. This is particularly true when many
    of the assets the public uses and visits the most-such as national parks
    and museums-are deteriorated and in generally poor condition.

    Compounding the problems with excess and deteriorated property is the lack
    of reliable and useful real property data that are needed for strategic
    decisionmaking. GSA's worldwide inventory database and related reports are
    the only central sources of descriptive data on the makeup of the real
    property inventory, such as property address, square footage, acquisition
    date, and property type. However, in April 2002, we reported that the
    worldwide inventory contained data that were unreliable and of limited
    usefulness.18 GSA agreed with our findings and has revamped this database
    and produced a new report on the federal inventory, as of September 30,
    2002.19 We have not evaluated GSA's revamped database and related report.

    In addition to problems with the worldwide inventory, real property data
    contained in the financial statements of the U.S. government have been
    problematic.20 In April 2003, we reported that-for the sixth consecutive
    year-we were unable to express an opinion on the U.S. government's
    consolidated financial statements for fiscal year 2002.21 We have reported
    that because the government lacked complete and reliable information to
    support asset holdings-including real property-it could not satisfactorily
    determine that all assets were included in the financial statements,
    verify that certain reported assets actually existed, or substantiate the
    amounts at which they were valued. Aside from the

    18U.S. General Accounting Office, Federal Real Property: Better
    Governmentwide Data Needed for Strategic Decisionmaking, GAO-02-342
    (Washington, D.C.: Apr. 16, 2002).

    19U.S. General Services Administration, Federal Real Property Profile as
    of September 30, 2002 (Washington, D.C.).

    20The Chief Financial Officers Act of 1990 (CFO Act), as expanded by the
    Government Management Reform Act, required the annual preparation and
    audit of individual financial statements for the federal government's 24
    major agencies. The Department of the Treasury was also required to
    compile consolidated financial statements for the U.S. government
    annually, which we audit.

    21U.S. General Accounting Office, Fiscal Year 2002 U.S. Government
    Financial Statements: Sustained Leadership and Oversight Needed for
    Effective Implementation of Financial Management Reform, GAO-03-572T
    (Washington, D.C.: Apr. 8, 2003).

    problematic financial data, some of the major real property-holding
    agencies-including DOD, State, GSA, and Interior-have faced challenges in
    developing quality management data on their real property assets. The
    problems at these agencies are discussed in more detail in our high-risk
    report.

      Reliance on Costly Leasing

    As a general rule, building ownership options through construction or
    purchase are the least expensive ways to meet agencies' long-term and
    recurring requirements for space. Lease-purchases-under which payments are
    spread out over time and ownership of the asset is eventually transferred
    to the government- are generally more expensive than purchase or
    construction but are generally less costly than using ordinary operating
    leases to meet long-term space needs.22 However, over the last decade, we
    have reported that GSA-as the central leasing agent for most
    agencies-relies heavily on operating leases to meet new long-term needs
    because it lacks funds to pursue ownership. In 1999, we reported that for
    nine major operating lease acquisitions that GSA had proposed,
    construction would have been the least-cost option in eight cases and
    would have saved an estimated $126 million. Lease-purchase would have
    saved an estimated $107 million, compared with operating leases but would
    have cost $19 million more than construction.23 A prime example of this
    problem was the Patent and Trademark Office's long-term requirements in
    northern Virginia, where the cost of meeting this need with an operating
    lease was estimated to be $48 million more than construction and $38
    million more than lease-purchase. In August 2001, we also reported that
    GSA reduced the term of a proposed 20-year lease for the Department of
    Transportation headquarters building to 15 years so that it could meet the
    definition of an operating lease. GSA's fiscal year 1999 prospectus for
    constructing a new facility for this need showed the cost of construction
    was estimated to be $190 million less than an operating lease.

    Operating leases have become an attractive option in part because they
    generally look cheaper in any given year. Pursuant to the scoring rules

    22In an operating lease, the government makes periodic lease payments over
    the specified length of the lease in exchange for the use of the property.

    23U.S. General Accounting Office, General Services Administration:
    Comparison of Space Acquisition Alternatives-Leasing to Lease-Purchase and
    Leasing to Construction, GAO/GGD-99-49R (Washington, D.C.: Mar. 12, 1999).

    adopted as a result of the Budget Enforcement Act of 1990, the budget
    authority to meet the government's real property needs is to be scored-
    meaning recorded in the budget-in an amount equal to the government's
    total legal commitment. For example, for lease-purchase arrangements, the
    net present value of the government's legal obligations over the life of
    the lease contract is to be scored in the budget in the first year. For
    construction or purchase, the budget authority for the estimated legal
    obligation related to the construction costs or purchase price is to be
    scored in the first year. However, for many of the government's operating
    leases-including GSA leases, which, according to GSA, account for over 70
    percent of the government's leasing expenditures and are self-insured in
    the event of cancellation-only the budget authority to cover the
    government's commitment for an annual lease payment is required to be
    scored in the budget.24 Given this, although operating leases are
    generally more costly over time, compared with other options, they add
    much less to a single year's appropriation total than these other
    arrangements, making an operating lease a more attractive option from an
    annual budget perspective, particularly when funds for ownership are not
    available. Although the policy requirement for full "up-front funding"
    permits disclosure of the full costs to which the government is being
    committed, the budget scorekeeping rules allow costly operating leases to
    "look cheaper" in the short term and have encouraged an overreliance on
    them for satisfying long-term space needs.

    Decisionmakers have struggled with this matter since the scoring rules
    were established and the tendency for agencies to choose operating leases
    instead of ownership became apparent. We have suggested the alternative of
    scoring all operating leases up-front on the basis of the underlying time
    requirement for the space so that all options are treated equally.25
    Although this could be a viable alternative, there would be implementation
    challenges if this were pursued, including the need to evaluate the
    validity of agencies' stated space requirements. Another option-which was
    recommended by the President's Commission to Study Capital Budgeting in
    1999 and discussed by GAO-would be to allow agencies to establish

    24According to the scoring rules (OMB Circular A-11, app. B), in cases
    where the operating lease does not have a cancellation clause or is not
    paid for with federal funds that are self-insuring, budget authority to
    cover the total costs expected over the life of the lease is to be scored
    in the first year of the lease.

    25U.S. General Accounting Office, Supporting Congressional Oversight:
    Budgetary Implications of Selected GAO Work for Fiscal Year 2003,
    GAO-02-576 (Washington, D.C.: Apr. 26, 2002).

      Security Against Terrorism Is an Overarching Concern

    capital acquisition funds to pursue ownership where it is advantageous,
    from an economic perspective. 26 To date, none of these options have been
    implemented, and debate continues among decisionmakers about what should
    be done. Finding a solution for this problem has been difficult; however,
    change is needed because the current practice of relying on costly leasing
    to meet long-term space needs results in excessive costs to taxpayers and
    does not reflect a sensible or economically rational approach to capital
    asset management.

    Terrorism is a major threat to federally owned and leased real property
    assets, the civil servants and military personnel who work in them, and
    the public who visits them. This was evidenced by the 1995 Oklahoma City
    bombing; the 1998 embassy bombings in Africa; the September 11, 2001,
    attacks on the World Trade Center and Pentagon; and the anthrax attacks in
    the fall of 2001. Since the Oklahoma City bombing, the federal government
    has spent billions of dollars on security upgrades within the country and
    overseas. A study of federal facilities done by the Justice Department in
    1995 resulted in minimum-security standards and an evaluation of security
    conditions in the government's facilities. In October 1995, the President
    signed Executive Order 12977, which established an Interagency Security
    Committee (ISC) to enhance the quality and effectiveness of security in
    nonmilitary federal facilities.

    Since the attacks on the World Trade Center and the Pentagon, the focus on
    security in federal buildings has been heightened considerably. Real
    property-holding agencies are employing such measures as searching
    vehicles that enter federal facilities, restricting parking, and
    installing concrete barricades. As the government's security efforts
    intensify, the government will be faced with important questions regarding
    the level of security needed to adequately protect federal facilities and
    how the security community should proceed. Furthermore, the 1995 Justice
    study placed an emphasis on increasing security where large numbers of
    personnel are located. However, a risk-based approach-which GSA is using
    for the federal buildings it controls-appears to be more desirable in
    light of this new round of threats. In September 2001, we reported that
    DOD uses a risk-based approach to reduce installation vulnerabilities, but
    this approach was applied primarily to installations with 300 or more

    26U.S. General Accounting Office, Accrual Budgeting: Experiences of Other
    Nations and Implications for the United States, GAO/AIMD-00-57
    (Washington, D.C.: Feb. 18, 2000).

    personnel assigned on a daily basis.27 We recommended that DOD improve
    this approach by ensuring all critical military facilities receive a
    periodic vulnerability assessment conducted by their higher headquarters
    regardless of the number of personnel assigned. DOD concurred and began
    taking action.

    Since 1996, we have produced more than 60 reports and testimonies on the
    federal government's efforts to combat terrorism. Several of these reports
    have recommended that the federal government use risk management as an
    important element in developing a national strategy.28 We have also
    reported extensively on the security problems and challenges at individual
    real property-holding agencies. Our high-risk report identifies the
    problems and challenges faced by State, DOD, Interior, GSA, USPS, and ISC.
    More recently, we testified on security conditions of overseas diplomatic
    facilities.29 We found that State has done much over the last 4 years to
    improve physical security at overseas posts by, for example, constructing
    perimeter walls, anti-ram barriers, and access controls at many
    facilities. However, even with these improvements, most office facilities
    do not meet security standards. As a result, thousands of U.S. government
    employees may be more vulnerable to terrorist attacks. Furthermore, our
    work has shown that agency coordination is critical to addressing security
    challenges. In our February 2003 report on threats to selected agencies'
    critical computer and physical infrastructures, selected agencies
    identified challenges, including coordinating security efforts with GSA.
    GSA may often be responsible for protecting facilities that house these
    critical assets.30 We recommended that steps be taken to complete the
    identification and analysis of their critical assets and their
    dependencies, including setting milestones, developing plans to address
    vulnerabilities, and monitoring progress.

    27U.S. General Accounting Office, Combating Terrorism: Actions Needed to
    Improve DOD Antiterrorism Program Implementation and Management,
    GAO-01-909 (Washington, D.C.: Sept. 19, 2001).

    28U.S. General Accounting Office, Homeland Security: A Risk Management
    Approach Can Guide Preparedness Effort, GAO-02-208T (Washington, D.C.:
    Oct. 31, 2001).

    29GAO-03-557T.

    30U.S. General Accounting Office, Critical Infrastructure Protection:
    Challenges for Selected Agencies and Industry Sectors, GAO-03-233
    (Washington, D.C.: Feb. 28, 2003); the agencies reviewed were the
    Departments of Health and Human Services, Energy, and Commerce, and the
    Environmental Protection Agency.

    In addition to the clear challenges agencies will continue to face in
    securing real property assets, the security issue has an impact on the
    other problems that we have discussed. To the extent that more funding
    will be needed to increase security, funding availability for repair and
    restoration, preparing excess property for disposal, and improving real
    property data systems may be further constrained. Furthermore, real
    property managers will have to dedicate significant staff time and other
    human capital resources to security issues and thus may have less time to
    manage other problems. Another broader effect is the impact that increased
    security will have on the public's access to government offices and other
    assets. Debate arose in the months after September 11, 2001, and continues
    to this day on the challenge of providing the proper balance between
    public access and security.

    In November 2002, legislation was enacted establishing the Department of
    Homeland Security (DHS).31 The Federal Protective Service, which was part
    of GSA and which was responsible for protecting federal agencies under
    GSA's jurisdiction, was among those agencies whose functions and personnel
    were transferred to DHS. Accordingly, DHS became responsible for
    protecting buildings, grounds, and property owned, occupied, or secured by
    the federal government that are under GSA's jurisdiction. In addition, the
    act provided DHS with authority to protect the buildings, grounds, and
    property of any other agency whose functions were transferred to DHS under
    the act. In September 2002, we reported on the implications that the
    creation of DHS would have on ISC. We concluded that the need to address
    ISC's lack of progress in fulfilling its responsibilities should be taken
    into account in establishing this new department.32

    31P.L. 107-296; 116 Stat. 2135 (2002).

    32U.S. General Accounting Office, Building Security: Interagency Security
    Committee Has Had Limited Success in Fulfilling Its Responsibilities,
    GAO-02-1004 (Washington, D.C.: Sept. 17, 2002).

      Various Efforts Initiated, but Real Property Problems Persist Due to Factors
      that Require High-Level Attention

    Although the federal government faces significant, long-standing problems
    in the real property area, it is important to give Congress, OMB, GSA, and
    the major real property-holding agencies credit for proposing several
    reform efforts and other initiatives in recent years. Legislative
    proposals in the 108th Congress (H.R. 2548 and H.R. 257333) are aimed at
    enhancing real property management. H.R. 2548 would provide GSA with
    enhanced asset management tools, including the use of public-private
    partnerships for itself and other landholding agencies. This bill also
    provides incentives for better property management, such as allowing
    agencies to retain funds generated from the property to pay expenses
    associated with the property and fund other capital needs. In addition,
    the bill contains provisions aimed at improving real property data,
    establishing senior real property managers at agencies, developing asset
    management principles, and identifying specific conditions under which GSA
    can enter into real property partnerships with the private sector. H.R.
    2573 would provide GSA with the authority to enter into public-private
    partnerships for itself and other landholding agencies. In July 2001, we
    reported that public-private partnership authority could be an important
    management tool to address problems in deteriorating federal buildings,
    but further study of this tool was needed.34 Appendix II summarizes this
    report and discusses two examples of public-private partnership
    opportunities. In August 2003, we also reported on other methods agencies
    are using to finance federal capital in addition to public-private
    partnerships, such as incremental funding, real property swaps, and
    outleases.35 Another initiative in the National Defense Authorization Act
    for fiscal year 2002 gave DOD the authority for another round of base
    realignment and military installation closures in 2005. DOD officials
    testified that these actions could result in recurring annual net savings
    of about $3 billion.

    Despite these and other initiatives agencies have undertaken and the
    sincerity with which the federal real property community has embraced the
    need for reform, the problems have persisted and have been exacerbated by
    several factors that will require high-level attention from

    33The Federal Property Asset Management Reform Act of 2003 and the Public
    Private Partnership Act of 2003, respectively.

    34U.S. General Accounting Office, Public-Private Partnerships: Pilot
    Program Needed to Demonstrate the Actual Benefits of Using Partnerships,
    GAO-01-906 (Washington, D.C.: July 25, 2001).

    35U.S. General Accounting Office, Budget Issues: Alternative Approaches to
    Finance Federal Capital, GAO-03-1011 (Washington, D.C.: Aug. 21, 2003).

    Congress and the administration. These factors include competing
    stakeholder interests in real property decisions; various legal and
    budget-related disincentives to businesslike outcomes; the need for
    improved capital planning; and the lack of a strategic, governmentwide
    focus on federal real property issues. More specifically:

    o  	Competing Stakeholder Interests - In addition to Congress, OMB, and
    the real property-holding agencies themselves, several other stakeholders
    also have an interest in how the federal government carries out its real
    property acquisition, management, and disposal practices. These include
    foreign and local governments; business interests in the communities where
    the assets are located; private sector construction and leasing firms;
    historic preservation organizations; various advocacy groups; and the
    public in general, which often views the facilities as the physical face
    of the federal government in local communities. As a result of competing
    stakeholder interests, decisions about real property often do not reflect
    the most cost-effective or efficient alternative that is in the interests
    of the agency or the government as a whole but instead reflect other
    priorities.

    o  	Legal and Budgetary Disincentives -The complex legal and budgetary
    environment in which real property managers operate has a significant
    impact on real property decisionmaking and often does not lead to
    economically rational and businesslike outcomes. For example, we have
    reported that public-private partnerships might be a viable option for
    redeveloping obsolete federal property when they provide the best economic
    value for the government, compared with other options, such as federal
    financing through appropriations or sale of the property. However, most
    agencies are precluded from entering into such arrangements.36 Resource
    limitations, in general, often prevent agencies from addressing real
    property needs from a strategic portfolio perspective. When available
    funds for capital investment are limited, Congress must weigh the need for
    new, modern facilities with the need for renovation, maintenance, and
    disposal of existing facilities, the latter of which often gets deferred.
    In the disposal area, a range of laws intended to address other
    objectives-such as laws related to historic preservation and environmental
    remediation-

    36When agencies have additional flexibilities, we have found that they can
    still face impediments. For example, VA is required to use the proceeds
    from disposal of property for nursing home construction and DOD has lacked
    personnel with sufficient experience to undertake complex real estate
    transactions. See U.S. General Accounting Office, VA Health Care: Improved
    Planning Needed for Management of Excess Real Property, GAO-03-326
    (Washington, D.C.: Jan. 29, 2003); U.S. General Accounting Office, Defense
    Infrastructure: Greater Management Emphasis Needed to Increase the
    Services' Use of Expanded Leasing Authority, GAO-02-475 (Washington, D.C.:
    June 6, 2002).

    makes it challenging for agencies to dispose of unneeded property.

    o  	Need for Improved Capital Planning - Over the years, we have reported
    that prudent capital planning can help agencies to make the most of
    limited resources, and failure to make timely and effective capital
    acquisitions can result in increased long-term costs. GAO, Congress, and
    OMB have identified the need to improve federal decisionmaking regarding
    capital investment. Our Executive Guide,37 OMB's Capital Programming
    Guide, and its revisions to Circular A-11 have attempted to provide
    guidance to agencies for making capital investment decisions. However,
    agencies are not required to use the guidance. Furthermore, agencies have
    not always developed overall goals and strategies for implementing capital
    investment decisions, nor has the federal government generally planned or
    budgeted for capital assets over the long term.

    o  	Lack of a Strategic, Governmentwide Focus on Real Property Issues
    -Historically, there has not been a strategic, governmentwide focus on
    real property issues among decisionmakers. Although some efforts in recent
    years have attempted to address real property issues with some limited
    success, the problems have persisted and will continue to grow in
    magnitude unless they are adequately addressed from a governmentwide
    standpoint. Resolving the long-standing problems will require high-level
    attention and effective leadership by Congress and the administration and
    a governmentwide, strategic focus on real property issues. A strategic
    focus on real property would be rooted in having the appropriate
    incentives in place; ensuring transparency in the government's actions;
    and fostering a higher level of accountability to stakeholders, including
    taxpayers. Also, it is important that key stakeholders develop an
    effective system to measure results. Having quality data would be critical
    to evaluate the progress of various reforms as they evolve.

    The magnitude of real property-related problems and the complexity of the
    underlying factors that cause them to persist put the federal

                                    A Transformation

                                   Strategy Is Needed

    government at significant risk in this area. Real property problems
    related to unneeded property and the need for realignment, deteriorating
    conditions, unreliable data, costly space, and security concerns have
    multibillion-dollar cost implications and can seriously jeopardize mission

    37U.S. General Accounting Office, Executive Guide: Leading Practices in
    Capital Decision-Making, GAO/AIMD-99-32 (Washington, D.C.: Dec. 1998).

    accomplishment. Because of the breadth and complexity of the issues
    involved, the long-standing nature of the problems, and the intense debate
    about potential solutions that will likely ensue, current structures and
    processes may not be adequate to address the problems. Given this, we
    concluded in our high-risk report that a comprehensive and integrated
    transformation strategy for federal real property is needed, and an
    independent commission or governmentwide task force may be needed to
    develop this strategy. Such a strategy, based on input from agencies, the
    private sector, and other interested groups, could comprehensively address
    these long-standing problems with specific proposals on how best to

    o  	realign the federal infrastructure and dispose of unneeded property,
    taking into account mission requirements, changes in technology, security
    needs, costs, and how the government conducts business in the 21st
    century;

    o  	address the significant repair and restoration needs of the federal
    portfolio;

    o  	ensure that reliable governmentwide and agency-specific real property
    data-both financial and program related-are available for informed
    decisionmaking;

    o  resolve the problem of heavy reliance on costly leasing; and

    o  	consider the impact that the threat of terrorism will have on real
    property needs and challenges, including how to balance public access with
    safety.

    To be effective in addressing these problems, it would be important for
    the strategy to focus on

    o  	minimizing the negative effects associated with competing stakeholder
    interests in real property decisionmaking;

    o  	providing agencies with appropriate tools and incentives that will
    facilitate businesslike decisions-for example, consideration should be
    given to what financing options should be available; how disposal proceeds
    should be handled; what process would permit comparisons between
    rehabilitation/renovation and replacement and among construction,
    purchase, lease-purchase, and operating lease; and how public-private
    partnerships should be evaluated;

    o  	addressing federal human capital issues related to real property by
    recognizing that real property conditions affect the federal government's

    ability to attract and retain high-performing individuals and the
    productivity and morale of employees;

    o  	improving real property capital planning in the federal government by
    helping agencies to better integrate agency mission considerations into
    the capital decisionmaking process, make businesslike decisions when
    evaluating and selecting capital assets, evaluate and select capital
    assets by using an investment approach, evaluate results on an ongoing
    basis, and develop long-term capital plans; and

    o  	ensuring credible, rational, long-term budget planning for facility
    sustainment, modernization, or recapitalization.

    The transformation strategy should also reflect the lessons learned and
    leading practices of organizations in the public and private sectors that
    have attempted to reform their real property practices. Over the past
    decade, leading organizations in both the public and private sectors have
    been recognizing the impact that real property decisions have on their
    overall success. Better managing real property assets in the current
    environment calls for a significant departure from the traditional way of
    doing business. Solutions should not only correct the long-standing
    problems we have identified but also be responsive to and supportive of
    agencies' changing missions, security concerns, and technological needs in
    the 21st century. If actions resulting from the transformation strategy
    comprehensively address the problems and are effectively implemented,
    agencies will be better positioned to recover asset values, reduce
    operating costs, improve facility conditions, enhance safety and security,
    recruit and retain employees, and achieve mission effectiveness.

    In addition to developing a transformation strategy, it is critical that
    all the key stakeholders in government-Congress, OMB, and real
    property-holding agencies-continue to work diligently on the efforts
    planned and already under way that are intended to promote better real
    property capital decisionmaking, such as enacting reform legislation,
    assessing infrastructure and human capital needs, and examining viable
    funding options. Congress and the administration could work together to
    develop and enact reform legislation to give real property-holding
    agencies the tools they need to achieve better outcomes, foster a more
    businesslike real property environment, and provide for greater
    accountability for real property stewardship. These tools could include,
    where appropriate, the ability to retain a portion of the proceeds from
    disposal and the use of public-private partnerships in cases where they
    represent the best economic value to the government. Congress and the
    administration could

    also elevate the importance of real property in policy debates and
    recognize the impact that real property decisions have on agencies'
    missions. Solving the problems in this area will undeniably require a
    reconsideration of funding priorities at a time when budget constraints
    will be pervasive. However, experimenting with creative financing tools
    where they provide the best economic value for the government and
    allocating sufficient funding will likely result in long-term benefits.

    Without effective incentives and tools; top management accountability,
    leadership, and commitment; adequate funding; full transparency with
    regard to the government's real property activities; and an effective
    system to measure results, long-standing real property problems will
    continue and likely worsen. However, the overall risk to the government
    and taxpayers could be substantially reduced if an effective
    transformation strategy is developed and successfully implemented, reforms
    are made, and property-holding agencies effectively implement current and
    planned initiatives. Since our high-risk report was issued, OMB has
    informed us that it is taking steps to address the federal government's
    problems in the real property area. Specifically, it has formed a team
    within OMB to determine how to approach the resolution of these
    long-standing issues. To assist OMB with its efforts, we have agreed to
    meet regularly to discuss progress and have provided OMB with specific
    suggestions on the types of actions and results that could be helpful in
    justifying the removal of real property from the high-risk list.

    Madam Chairman, this concludes my prepared statement. I would be happy to
    respond to any questions you or other Members of the Committee may have at
    this time.

    Contacts and 	For further information on this testimony, please contact
    Bernard L. Ungar on (202) 512-2834 or at ungarb@gao.gov. Key contributions
    to this

    Acknowledgments 	testimony were made by Kevin Bailey, Christine Bonham,
    Casey Brown, John Brummett, Maria Edelstein, Anne Kidd, Mark Little, Susan
    Michal-Smith, David Sausville, and Gerald Stankosky.

    Appendix I: Examples of Vacant Federal Property

    Three examples of vacant, highly visible federal properties are the former
    main Department of Veterans Affairs (VA) hospital building in Milwaukee,
    Wisconsin; St. Elizabeths Hospital in Washington, D.C.; and the former
    main post office building in downtown Chicago, Illinois.

    Former Main VA Hospital Building in Milwaukee, Wisconsin

    A VA-owned building at a health care facility campus in Milwaukee,
    Wisconsin is an example of a long-held vacant federal property. This
    134,000 square foot building, which is shown in figure 1, has been vacant
    for about 14 years. The building had been used as the campus's main
    hospital but was vacated in 1989 primarily because a new main hospital was
    built on the campus. VA officials told us that in June 1999, a consulting
    firm-Economic Research Associates-issued a study in which it identified
    various options for VA to consider in trying to enhance the use of various
    vacant and underutilized buildings on the Milwaukee campus, including the
    former main hospital building.38 On the basis of the study's results, VA
    officials have told us that a substantial investment of capital would in
    all likelihood be needed to convert this building for alternate use. For
    example, to convert the building for use as housing for the elderly, the
    study estimated that about $8.4 million to $9.3 million would be needed.
    VA officials also mentioned that various organizations, such as the
    Salvation Army and the Knights of Columbus, expressed some interest in
    leasing the building; but thus far, VA has not received any firm offers
    from these organizations. VA officials told us that in fiscal year 2001,
    VA incurred about $348,000 in maintenance costs for this building, which
    included such expenses as utilities, pest management, and security. Also,
    the officials said that VA currently has no alternate use or disposal
    plans for this building. However, VA officials have told us that updated
    information on the planned disposal of its vacant and underutilized
    property would in all likelihood be available after the Secretary of
    Veterans Affairs approves the results of the Capital Asset Realignment for
    Enhanced Services process, expected after December 2003.

    38 Economic Research Associates, Report for Enhanced-Use Options, Zablocki
    VA Medical Center, Milwaukee, Wisconsin, Submitted to Department of
    Veterans Affairs, ERA Project Number: 12460 (Apr. 1998; Re-Issue June
    1999).

      Figure 1: The Former Main VA Hospital Building at the Milwaukee, Wisconsin,
                                 Health Facility Campus

                                      Source: VA.

    St. Elizabeths Hospital, Washington, D.C.

    The west campus of St. Elizabeths, which has 61 mostly vacant buildings
    containing about 1.2 million square feet of space on 182 acres, is held by
    the Department of Health and Human Services (HHS). During the Civil War,
    the hospital was used to house soldiers recuperating from amputations, and
    the property contains a civil war cemetery. In 1990, the property-which
    contains magnificent vistas of the rivers and the city- was designated a
    national historic landmark. This is the same designation given to the
    White House, the U.S. Capitol building, and other buildings that have
    historic significance. HHS has not needed the property for many years. In
    April 2001, we reported that the property had significantly deteriorated
    and had environmental and historic preservation issues that would need to
    be addressed in order for the property to be disposed of or transferred to
    another federal agency.39

    In the last year, the General Services Administration (GSA), the District
    of Columbia (the District), HHS, and various public interest groups have

    39U.S. General Accounting Office, St. Elizabeths Hospital: Real Property
    Issues Related to the West Campus, GAO-01-434 (Washington, D.C.: Apr. 16,
    2001).

    been working to resolve the situation at St. Elizabeths. In May 2002, the
    Urban Land Institute formed an advisory panel that reported on several
    options for redeveloping the site.40 The panel recommended that the
    federal government transfer the west campus to the District and that the
    District should identify a master developer for the site. The panel
    further recommended that the master developer consider redeveloping the
    site into four campus areas without changing the character of the
    surrounding neighborhoods and without displacing existing residents. The
    panel recommended preserving the historic buildings through adaptive use
    and sensitive addition of new buildings. In addition to the panel, an
    executive steering committee and a working group, each consisting of
    representatives from the District, HHS, GSA, and public interest groups,
    have been established and HHS and GSA have proceeded with a number of
    actions to prepare the property for disposal. These include preparing the
    property for "mothballing," which is work done to minimize further
    deterioration of the property while the disposal process proceeds;
    determining the extent of environmental remediation needed; and conducting
    community outreach. Figure 2 shows the vacant, boarded-up Center Building,
    which opened in 1855 and served as the main hospital building.

    40Urban Land Institute, An Advisory Services Panel Report: Saint.
    Elizabeths Campus, Washington, D.C. (Washington, D.C.: May 2002).

    Figure 2: The Vacant Center Building, St. Elizabeths Hospital, District of
                                        Columbia

    The former Chicago main post office building is a 2.5 million square foot
    facility that was vacated when it was replaced with a new facility in
    1997. The U.S. Postal Service (USPS) is incurring about $2 million in
    annual holding costs for the property. According to USPS, the property was
    listed for sale and publicly offered. About five offers were received and
    the property was placed under contract of sale for $17 million. According
    to USPS, completion of the sale has been delayed due to the weakness of
    the Chicago real estate market and the lack of an agreement between the

                        Note: Photograph taken in January 2001.

    Former Chicago Main Post Office

    developer and the city of Chicago that would abate real estate taxes on a
    portion of the redevelopment cost for a number of years. According to
    USPS, this has created a "chicken and egg" situation for the developer.
    Potential tenants are unwilling to commit to the project unless they are
    sure it will go ahead. The city appears unwilling to grant the tax
    abatement until the users of the building are known. USPS is hopeful that
    the city will begin to address the issue.

    In addition to the holding costs USPS is incurring, a deteriorating
    fac,ade will add additional repairs costs to USPS's annual budget.
    Furthermore, deterioration of the system that funnels train exhaust up
    through eight shafts to the roof of the building is a problem that will
    have to be addressed. The estimated cost of repair is about $10 million
    and is a condition of the sale. According to USPS, another factor, which
    bears on the cost of redevelopment, is that the State Historic
    Preservation Office wants to impose requirements on the redevelopment of
    the building. Currently, according to USPS, these requirements will add
    millions of dollars to the redevelopment costs, and the buyer and USPS are
    reviewing them. USPS said that this project is challenging because of the
    large amount of space that needs to be developed. According to USPS, a
    breakthrough in current market conditions will have to be achieved,
    together with an agreement with the city, before this project can move
    forward. Figure 3 shows downtown Chicago with the vacant post office
    building highlighted.

          Figure 3: The Former Main Post Office in Downtown Chicago, Illinois

    Appendix II: Use of Public-Private Partnerships to Redevelop Federal Property

    Under a public-private partnership, a contractual arrangement is formed
    between public and private sector partners that can include a variety of
    activities that involve the private sector in the development, financing,
    ownership, and operation of a public facility or service. In the case of
    real property, the federal government typically would contribute the
    property and a private sector entity contributes financial capital and
    borrowing ability to redevelop or renovate the property. Public-private
    partnerships can be a viable option for redeveloping obsolete federal
    property if they provide the best economic value for the government,
    compared with other options, such as federal financing through
    appropriations or sale of the property. However, most agencies are
    precluded from entering into such arrangements. The Department of Defense
    (DOD), Department of Veterans Affairs (VA), and U.S. Postal Service
    (USPS), however, have this authority. Proposed real property reform
    legislation in the 108th Congress (H.R. 2548 and H.R. 257341) is aimed at
    enhancing real property management. H.R. 2548 would provide GSA with
    enhanced asset management tools, including the use of public-private
    partnerships for itself and other landholding agencies. This bill also
    provides incentives for better property management, such as allowing
    agencies to retain funds generated through the use of the management tools
    to pay expenses associated with the property and fund other capital needs.
    H.R. 2573 would provide GSA with the authority to enter into
    public-private partnerships for itself and other landholding agencies.

    Public-private partnerships need to be carefully evaluated to determine
    whether they offer the best economic value for the government, compared
    with other available options. In July 2001,42 we reported that 8 of 10 GSA
    properties were strong to moderate candidates for a partnership because
    there were potential benefits for both the private sector and the
    government. The potential internal rates of return (IRR)43 for the private
    partner ranged from 13.7 to 17.7 percent. It should be noted that we did
    not calculate the IRR for the government if the government had financed
    the entire project. This comparison would need to be made to determine
    which financing option offers the best economic value for the government.

    41The Federal Property Asset Management Reform Act of 2003 and the Public
    Private Partnership Act of 2003, respectively.

    42GAO-01-906.

    43IRR is the present value interest rate received for an investment
    consisting of payments and income that occur at regular periods; IRR
    measures the return, expressed as an interest rate, that an investor would
    earn on an investment.

    IRS Service Center, Andover, Massachusetts

    Furthermore, public-private partnerships will not necessarily work or be
    the best option available to address the problems in all federal
    properties. Two examples of properties that were strong candidates for a
    partnership were the Internal Revenue Service (IRS) Service Center in
    Andover, Massachusetts and an office building in Portland, Oregon that
    houses the Immigration and Naturalization Service known as the 511
    Building. Since we profiled these properties in 2001, GSA officials said
    that they have been unable to pursue public-private partnerships for these
    properties because GSA continues to lack authority to enter into such
    arrangements. In August 2003, we also reported on other methods agencies
    are using to finance federal capital in addition to public-private
    partnerships, such as incremental funding, real property swaps, and
    outleases.44

    The Andover Service Center was a strong candidate for a partnership in
    terms of strong federal demand, moderate private sector interest in
    development, and strong nonfederal demand for use of the property. The
    property is a 375,000 square foot, single-story, highly secured building
    on 37 acres that is in need of capital repairs. At the time of our review,
    IRS was leasing about 336,000 square feet in additional space in the area.
    GSA and IRS would like to consolidate IRS's operations, and the property
    would be desirable for the city of Andover and local developers to
    develop. The redevelopment strategy involved a partnership to develop a
    small office park consisting of six, 5-acre pads. Under this plan, the
    project could progress as follows:

    o  	Year 1: Build a new 4-story, 700,000 square foot IRS facility and
    parking structure for current and expiring IRS leases; the complex would
    be at the rear of the site to allow for security and a phased development
    of the rest of the site.

    o  	Year 2: IRS moves into the new facility and the old building is
    demolished; the partnership constructs another 250,000 square foot federal
    office building for non-IRS expiring leases.

    o  	Years 3 and 4: Partnership constructs two more 250,000 square foot
    federal office buildings for compatible agency and private sector
    occupancy. The analysis of this strategy projected a 14.4 percent lifetime
    IRR for the private partner and a 9.4 percent lifetime IRR for the
    government. Figure 4 is an aerial view of the IRS Service Center in
    Andover, Massachusetts.

    44U.S. General Accounting Office, Budget Issues: Alternative Approaches to
    Finance Federal Capital, GAO-03-1011 (Washington, D.C.: Aug. 21, 2003).

                  Figure 4: IRS Service Center, Andover, Massachusetts

    The 511 building was also a strong candidate for a partnership in terms of
    strong federal demand, strong private sector interest in development, and
    moderate nonfederal demand for use of the property. The 511 building is an
    historic, 6-floor building in a desirable location between downtown
    Portland and the trendy "Pearl District" that housed offices of the
    Immigration and Naturalization Service. The property includes a parking
    lot that was sought by the city for a pedestrian mall. The redevelopment
    strategy included renovating the existing historic office building to
    include storage use in the basement and retail or restaurant on the first
    floor. In addition, the strategy included acquiring an additional site for
    construction of a 240,000 square foot, federal office building across the
    street. This strategy projected a 15.7 percent lifetime IRR for the
    private partner and a 12.7 percent lifetime IRR for the government. Figure
    5 shows the 511 building (building in center of the picture).

    Portland, Oregon, 511 Building

    Figure 5: 511 Building, Portland, Oregon

    If the federal government were to completely finance the Andover and
    Portland projects, it would not have to share returns with a private
    sector partner. However, we did not determine what the returns would be in
    such a situation and how the returns would compare with the returns under
    a partnership arrangement.

    (543050)

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